<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, For Use of the
/X/ Definitive Proxy Statement Commission Only (as permitted
/ / Definitive Additional Materials by Rule 14a-6(e)(2))
/ / Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
COVAD COMMUNICATIONS GROUP, INC.
-----------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials:
-----------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[GRAPHIC OMITTED]
COVAD COMMUNICATIONS GROUP, INC.
4250 BURTON DRIVE
SANTA CLARA, CALIFORNIA 95054
May 23, 2000
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Covad Communications Group, Inc. ("Covad"), to be held at the Sheraton San Jose
Hotel, Milpitas, California on Friday, June 30, 2000 at 2:00 p.m. local time. At
the Annual Meeting, you will be asked to vote upon five proposals: the election
of three Class I directors to serve until the third succeeding annual meeting;
an amendment to Covad's Amended and Restated Certificate of Incorporation to
increase the aggregate number of shares of authorized common stock; amendment
and ratification of Covad's 1997 Stock Plan to limit the number of shares
subject to the Plan and to increase shares eligible under the Plan for the Years
2000 and 2001; and the ratification of Covad's independent auditors for 2000.
Accompanying this letter is the formal Notice of Annual Meeting, Proxy
Statement and Proxy Card relating to the meeting, as well as Covad's Annual
Report to Stockholders for the year ended December 31, 1999. The Proxy Statement
contains important information concerning the proposals up for vote at the
Annual Meeting. We hope you will take the time to study it carefully.
Your vote is very important, regardless of how many shares you own. We hope
you can attend the Annual Meeting in person. Whether or not you plan to attend
the Annual Meeting, however, please complete, sign, date and return the Proxy
Card in the enclosed envelope. If you attend the Annual Meeting, you may vote in
person if you wish, even though you have previously returned your proxy.
However, if you plan to attend the meeting and your shares are held in the name
of a broker or other nominee, please bring with you a proxy or letter from the
broker or nominee to confirm your ownership of shares.
Sincerely,
/s/ ROBERT E. KNOWLING, JR.
Robert E. Knowling, Jr.
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
4250 BURTON DRIVE
SANTA CLARA, CALIFORNIA 95054
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of Covad
Communications Group, Inc., a Delaware corporation (the "Company"), will be held
on Friday, June 30, 2000, at 2:00 p.m. local time, at the Sheraton San Jose
Hotel, Milpitas, California (the "Annual Meeting"). At the Annual Meeting, the
Company's stockholders will be asked to consider and vote upon:
1. The election of three Class I directors to serve on the
Company's Board of Directors for a term to expire at the third succeeding
annual meeting (expected to be the 2003 annual meeting) and until their
successors are elected and qualified.
2. An amendment to the Company's Amended and Restated Certificate
of Incorporation to increase the number of authorized shares of common
stock from 200 million to 600 million.
3. An amendment to the annual increase provisions of the Company's
1997 Stock Plan to limit the eligible shares under the Plan and to add 5
million shares to the total number of shares eligible to be optioned or
granted for the Year 2000, and to ratify the Plan as amended.
4. An amendment to the annual increase provisions of the Company's
1997 Stock Plan to limit the eligible shares under the Plan and to add 10
million shares to the total number of shares eligible to be optioned or
granted for the Year 2001, and to ratify the Plan as amended.
5. Ratification of independent auditors, Ernst & Young LLP, for the
2000 fiscal year.
6. Such other business as may properly come before the Annual
Meeting or before any adjournments or postponements thereof.
Only stockholders of record of the Company's Common Stock (including the
Class B Common Stock with respect to the proposal to increase the authorized
number of shares) at the close of business on May 5, 2000 are entitled to notice
of and to vote at the Annual Meeting or any adjournments or postponements
thereof.
TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, YOU ARE
URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN
THE POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS
VOTED.
BY ORDER OF THE BOARD OF DIRECTORS.
/s/ DHRUV KHANNA
Dhruv Khanna
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
Santa Clara, California
May 23, 2000
IMPORTANT NOTICE
PLEASE VOTE YOUR SHARES PROMPTLY
<PAGE>
COVAD COMMUNICATIONS GROUP, INC.
4250 BURTON DRIVE
SANTA CLARA, CALIFORNIA 95054
PROXY STATEMENT
This Proxy Statement is being furnished to the stockholders of Covad
Communications Group, Inc., a Delaware corporation ("Covad" or the "Company"),
in connection with the solicitation of proxies by the Company's Board of
Directors for use at the Annual Meeting of the Company's Stockholders ("Annual
Meeting") to be held on Friday, June 30, 2000, at 2:00 p.m. local time, at the
Sheraton San Jose Hotel, Milpitas, California, and at any adjournments or
postponements thereof. At the Annual Meeting, holders of the Company's Common
Stock (excluding the non-voting Class B Common Stock), $.001 par value ("Common
Stock"), will be asked to vote upon: (i) the election of three Class I directors
to serve for a term to expire at the third succeeding annual meeting (expected
to be in 2003); (ii) an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the aggregate number of shares of
authorized common stock (the "Charter Amendment Proposal"); (iii) two amendments
to the Company's 1997 Stock Plan to add a fixed number of shares to the total
number of shares eligible to be optioned or granted under such Plan for years
2000 and 2001, subject to a maximum number of shares to be added each year, and
a ratification of such Plan as amended; (iv) the ratification of the Company's
independent auditors for 2000; and (v) any other business that properly comes
before the Annual Meeting. At the Annual Meeting, holders of the Class B Common
Stock will vote together as a single class with the holders of Common Stock on
the Charter Amendment Proposal, but will not be entitled to vote with respect to
any other matter.
This Proxy Statement and the accompanying Proxy Card are first being
mailed to the Company's stockholders on or about May 30, 2000. The address of
the principal executive offices of the Company is 4250 Burton Drive, Santa
Clara, California 95054.
VOTING RIGHTS AND PROXIES
RECORD DATE; OUTSTANDING SHARES; QUORUM
Only holders of record of Common Stock (and, with respect to the Charter
Amendment Proposal, the holders of the Class B Common Stock) at the close of
business on May 5, 2000 (the "Record Date") will be entitled to notice of and to
vote at the Annual Meeting. ALL COMMON STOCK SHARE FIGURES IN THIS PROXY
STATEMENT, UNLESS OTHERWISE SPECIFIED, HAVE BEEN ADJUSTED TO REFLECT THE 3-FOR-2
STOCK SPLIT, EFFECTED IN THE FORM OF A STOCK DIVIDEND, WHICH TOOK EFFECT MARCH
31, 2000. As of the close of business on the Record Date, there were 144,469,713
post-split shares of Common Stock outstanding and entitled to vote, held of
record by 510 stockholders. As of the close of business on the Record Date,
there were 1,594,794 shares of Class B Common Stock outstanding and entitled to
vote on the Charter Amendment Proposal, held of record by one stockholder. The
outstanding shares of Class B Common Stock are not entitled to vote on any
matters expected to be considered at the Annual Meeting other than the Charter
Amendment Proposal.
Pursuant to the Company's Bylaws, a majority of the outstanding shares of
Common Stock, or 72,234,857 of these shares, present in person or represented by
proxy, will constitute a quorum for the transaction of business, except that,
with respect to the Charter Amendment Proposal, a majority of the outstanding
shares of Common Stock and Class B Common Stock, taken together, or 73,032,255
shares, present in person or represented by proxy, will constitute a quorum for
that proposal only. Each of the Company's stockholders is entitled to one vote
for each share of Common Stock and, with respect to the Charter Amendment
Proposal only, one vote for each share of Class B Common Stock held as of the
Record Date.
VOTING OF PROXIES; REVOCATION OF PROXIES; VOTES REQUIRED
Stockholders are requested to complete, date, sign and return the
accompanying Proxy Card in the enclosed postage paid envelope. All properly
executed, returned and unrevoked proxies will be voted in accordance with the
instructions indicated thereon. EXECUTED BUT UNMARKED PROXIES WILL BE VOTED FOR
EACH DIRECTOR NOMINEE LISTED ON THE PROXY CARD AND FOR THE APPROVAL OF ALL THE
PROPOSALS DESCRIBED HEREIN. The Company's Board of Directors does not know of,
and does not presently intend to bring, any business before the Annual Meeting
other than that referred to in this Proxy Statement and specified in the Notice
of the Annual Meeting. As to any other
2
<PAGE>
business that may properly come before the Annual Meeting, including any motion
made for adjournment of the Annual Meeting (including for purposes of soliciting
additional votes for election of directors and/or for any other proposal), the
Proxy Card will confer discretionary authority on the proxies (who are persons
designated by the Board) to vote all shares covered by the Proxy Cards in their
discretion. Any stockholder who has given a proxy may revoke it at any time
before it is exercised at the Annual Meeting by (i) filing a written revocation
with, or delivering a duly executed proxy bearing a later date to, the Secretary
of the Company, 4250 Burton Drive, Santa Clara, California 95054, or (ii)
attending the Annual Meeting and voting in person (although attendance at the
Annual Meeting will not, by itself, revoke a proxy).
Director elections are determined by a plurality of shares of Common
Stock represented in person or by proxy and voting at the Annual Meeting. The
approval of the Charter Amendment Proposal to increase the authorized shares
requires the affirmative vote of a majority of the outstanding shares of the
Common Stock and Class B Common Stock, voting together as a single class, as
well as the affirmative vote of a majority of the outstanding shares of Common
Stock alone. In such vote, each share of outstanding Class B Common Stock shall
be entitled to one vote. The approval of the proposals to amend the Company's
1997 Stock Plan and ratification of the Company's independent auditors requires
the affirmative vote of a majority of the shares of Common Stock represented in
person or by proxy and voting at the Annual Meeting.
ABSTENTIONS; BROKER NON-VOTES
If an executed proxy is returned and the stockholder has specifically
abstained from voting on any matter, the shares represented by such proxy will
be considered present at the Annual Meeting for purposes of determining a quorum
and for purposes of calculating the vote, but will not be considered to have
been voted in favor of such matter. If an executed proxy is returned by a broker
holding shares in street name that indicates that the broker does not have
discretionary authority as to certain shares to vote on one or more matters,
such shares will be considered present at the meeting for purposes of
determining a quorum on all matters, but will not be considered to be
represented at the meeting for purposes of calculating the votes cast with
respect to such matter. Thus, while abstentions and broker non-votes will have
no effect on the outcome of the election of directors, abstentions will have the
same effect as negative votes on all other proposals. Broker non-votes will have
the same affect as negative votes on the proposal to amend the Company's Amended
and Restated Certificate of Incorporation and will have no effect on the vote on
the proposals to amend and ratify the 1997 Stock Plan or to ratify the
independent auditors.
SOLICITATION OF PROXIES AND EXPENSES
The Company will bear the cost of the solicitation of proxies from its
stockholders in the enclosed form. The directors, officers and employees of the
Company may solicit proxies by mail, telephone, letter, facsimile,
electronically or in person. Following the original mailing of the proxies and
other soliciting materials, the Company will request that brokers, custodians,
nominees and other record holders forward copies of the proxy and other
soliciting materials to persons for whom they hold shares of Common Stock and
request authority for the exercise of proxies. In such cases, the Company will
reimburse such record holders for their reasonable expenses. In addition, the
Company has retained Georgeson Shareholder Communications, Inc. to assist in the
solicitation of proxies at a cost of $9,500.00, plus certain out-of-pocket
expenses.
3
<PAGE>
ELECTION OF DIRECTORS
(ITEM NO. 1 ON THE PROXY CARD)
The Board of Directors of the Company currently consists of eight
directors. The Company's Amended and Restated Certificate of Incorporation and
Bylaws provide for a classified board of directors, divided into three classes.
At each annual meeting of stockholders, successors to the class of directors
whose term expires at that annual meeting will be elected for a term to expire
at the third succeeding annual meeting, i.e., essentially a three-year term. The
individuals so elected will serve until their successors are elected and
qualified. This year the terms of the Company's Class I directors, currently
consisting of Messrs. Daniel Lynch, Richard Shapero, and Larry Irving will
expire at the Annual Meeting.
At the Annual Meeting, holders of Common Stock will be asked to vote on
the election of three directors as Class I directors, who shall serve until the
Company's 2003 annual meeting. The Board of Directors has nominated Daniel
Lynch, Richard Shapero and Larry Irving for the Class I directors for a
three-year term that is expected to expire at Covad's annual meeting in 2003
("Board's Nominees"). You can find the principal occupation and other
information about the Board's Nominees, as well as other Board members, below.
Of the continuing directors, (i) two of the directors are Class II
directors, who shall serve until the Company's 2001 annual meeting and (ii)
three of the directors are Class III directors, who shall serve until the
Company's 2002 annual meeting.
The election of Class I directors will be determined by the three
nominees receiving the greatest number of votes from shares eligible to vote.
Unless a stockholder signing a proxy withholds authority to vote for one or more
of the Board's Nominees in the manner described on the proxy, each proxy
received will be voted for the election of each of the Board's Nominees.
Although it is not contemplated that any nominee will decline or be unable to
serve as a director, in the event any nominee declines or is unable to serve as
a director, the proxies will be voted by the proxy holders as directed by the
Board of Directors.
There are no family relationships between any director, nominee or
executive officer and any other director, nominee or executive officer of the
Company. Except as described below, there are no arrangements or understandings
between any director, nominee or executive officer and any other person pursuant
to which he has been or will be selected as a director and/or executive officer
of the Company. See "--Information Regarding the Directors of the Company."
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ELECTION OF
DANIEL LYNCH, RICHARD SHAPERO AND LARRY IRVING AS CLASS I DIRECTORS.
4
<PAGE>
INFORMATION REGARDING THE NOMINEES AND DIRECTORS OF THE COMPANY
The following table lists the nominees and current members of the Board
of Directors by class and provides their ages (as of March 15, 2000) and current
positions with the Company. Biographical information for each nominee and/or
director is provided below.
<TABLE>
<CAPTION>
NOMINEES FOR CLASS I DIRECTORS
<S> <C> <C>
NAME AGE POSITION
------------------------------------------------------------------ --- -------------------------------------
Class I Directors (whose terms will expire (if elected) at the 2003
annual meeting):
Daniel Lynch.................................................... 58 Director
Rich Shapero(b)(c).............................................. 51 Director
Larry Irving.................................................... 43 Director
</TABLE>
<TABLE>
<CAPTION>
CONTINUING DIRECTORS
<S> <C> <C>
NAME AGE POSITION
------------------------------------------------------------------ --- -------------------------------------
Class II Directors (whose terms expire at the 2001 annual meeting):
Frank Marshall (c)(d)........................................... 53 Director
Hellene Runtagh(a)(b)........................................... 51 Director
Class III Directors (whose terms expire at the 2002 annual meeting):
Robert E. Knowling, Jr.(c)...................................... 44 Chairman of the Board of Directors,
President and Chief Executive
Officer
Robert Hawk(a).................................................. 60 Director
Debra Dunn...................................................... 44 Director
</TABLE>
--------------
(a) Member of the Audit Committee
(b) Member of the Compensation Committee
(c) Member of the Pricing Committee
(d) Alternate Member of the Compensation Committee
5
<PAGE>
BIOGRAPHIES
NOMINEES FOR CLASS I DIRECTORS
RICH SHAPERO has served as a member of the Company's 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., which is a provider of real-time eBusiness
intelligence, and several privately held companies.
DANIEL LYNCH has served as a member of the Company's Board of Directors
since April 1997. Mr. Lynch is also a founder of CyberCash, Inc. and has served
as Chairman of its Board of Directors since August 1994. From December 1990 to
December 1995, he served as Chairman of the Board of Directors of Softbank
Forums, Inc., 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, Inc. 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.
LARRY IRVING has served as a member of the Company's 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.
CONTINUING DIRECTORS
FRANK MARSHALL has served as a member of the Company's 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.
HELLENE RUNTAGH has served as a member of the Company's 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,
6
<PAGE>
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.
ROBERT E. KNOWLING, JR. has been the Company's President, Chief Executive
Officer and a member of Covad's Board of Directors since July 1998. As of
September 1999, he also became Chairman of the Board of Directors of the
Company. 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.
ROBERT HAWK has served as a member of the Company's Board of Directors
since April 1998. Mr. Hawk is President of Hawk Communications, Inc. and
recently retired as President and Chief Executive Officer of U S WEST Multimedia
Communications, Inc., where he headed the cable, data and telephony
communications business from May 1996 to April 1997. He was president of the
Carrier Division of U S WEST Communications, 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 Board of Directors of PairGain Technologies, Inc., COM21, Inc.,
Concord Communications, Inc., Radcom, Ltd., Efficient Networks, Inc. and several
privately held companies.
DEBRA DUNN has served as a member of the Company's 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.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company had 13 formal meetings in 1999.
During 1999, each incumbent director of the Company attended at least 75% of the
aggregate of (i) the meetings of the Board of Directors, and (ii) the total
number of meetings of the committees on which he or she served (during the
periods that he or she served).
In April 1998, the Board of Directors established an Audit Committee and a
Compensation Committee. The Audit Committee currently consists of two of the
Company's outside directors, Mr. Hawk and Ms. Runtagh.
The Audit Committee's primary responsibilities include:
o conducting a post-audit review of the financial statements and audit
findings;
o reviewing the Company's independent auditors' proposed audit scope and
approach; and
o reviewing, on a continuous basis, the adequacy of the Company's system
of internal accounting controls.
The Audit Committee neither met nor acted by unanimous written consent during
the 1999 fiscal year.
7
<PAGE>
The Compensation Committee currently consists of two of the Company's
outside directors, Mr. Shapero and Ms. Runtagh. Mr. Marshall, also an outside
director, serves as an alternate on the committee.
The primary responsibilities of the Compensation Committee include:
o reviewing and determining the compensation policy for the Company's
executive officers and directors, and other employees as directed by
the Board of Directors;
o administering the Company's 1997 Stock Plan;
o reviewing and determining all forms of compensation to be provided to
the Company's executive officers; and
o reviewing and making recommendations to the Company's Board of
Directors regarding general compensation goals and guidelines for the
Company's employees and the criteria by which bonuses to the Company's
employees are determined.
The Compensation Committee met once during the 1999 fiscal year and acted by
unanimous written consent on 13 occasions.
The Company has a Pricing Committee, which currently consists of two
outside directors, Messrs. Shapero and Marshall, and one inside director, Mr.
Knowling. The function of the Pricing Committee is to set the price for the sale
of the Company's Common Stock to third-parties. The Pricing Committee met three
times during the 1999 fiscal year.
DIRECTOR COMPENSATION
Except for grants of stock options subject to vesting and restricted stock
subject to repurchase, directors of the Company generally do not receive
compensation for services provided as a director or committee member. New
directors will receive a stock option grant to purchase 60,000 shares of Common
Stock which will vest over four years. The Company does not pay additional
amounts for committee participation or special assignments of the Board of
Directors, except for reimbursement of expenses in attending Board and committee
meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Board of Directors or the
Compensation Committee and the Board of Directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. Mr. Shapero is affiliated with Crosspoint Venture Partners L.P., which was
a party along with the Company, to a Series C Preferred Stock and Warrant
Subscription Agreement dated February 23, 1998. See "--Certain Relationships and
Related Transactions."
8
<PAGE>
EXECUTIVE OFFICERS
The current executive officers of the Company, and their respective ages as
of March 15, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------ -------- ----------------------------------------------------------------------
<S> <C> <C>
Robert E. Knowling, Jr....... 44 Chairman, Board of Directors, 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
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 Grant................. 48 Interim Executive Vice President, Sales and Marketing
</TABLE>
Officers serve at the discretion of the Board of Directors, subject to
rights, if any, under contracts of employment. See "--Executive Compensation."
Biographical information for Mr. Knowling is provided above. See "--Information
Regarding Directors of the Company."
TIMOTHY LAEHY joined the Company in August 1997. He served as the Company's
Chief Financial Officer, Treasurer and Vice President, Finance until February
1999, served as the Company's Chief Financial Officer until April 2000 and has
served as Executive Vice President and Chief Financial Officer since that date.
Prior to joining the Company, 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.
ROBERT R. DAVENPORT, III joined the Company in January 1999. He served as
the Company's Vice President, Business Development until February 1999 and has
served as the Company's Executive Vice President, Business Development since
that date. Prior to joining the Company, 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 the Company in August 1998. She served as the
Company's Vice President, Operations until February 1999 and served as the
Company's President, Network Services from February 1999 to September 1999. From
September 1999 to April 2000, she has served as Chief Operating Officer and
since April 2000 she has served as 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.
JOSEPH DEVICH joined the Company in August 1998. He served as Vice
President and General Manager of the Company's 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 the Company, 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
9
<PAGE>
business market, service reliability within custom business services, process
improvement of network operations and network provisioning.
DHRUV KHANNA is one of the Company's founders. He served as the Company's
Vice President, General Counsel and Secretary from October 1996 until February
1999 and has served as the Company's 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 regional bell
operating companies 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 the Company in April 1999 as the Company's Senior Vice
President, Human Resources and, in March 2000, became the Executive Vice
President, Human Resources. Prior to joining the Company, 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 Data General Corporation, a
provider of enterprise hardware and software solutions.
TERRY MOYA joined the Company in July 1999 as the Company's Senior Vice
President, External Affairs and, in March 2000, became the Executive Vice
President, External Affairs. Prior to joining the Company, from January 1999 to
July 1999, Mr. Moya served as Vice President and Chief Financial Officer,
Capital Management, Network/Operations and Technologies at U S WEST
Communications, Inc. From August 1998 to January 1999, Mr. Moya 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, Mr. Moya
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, Mr. Moya 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,
Mr. Moya was at KPMG Peat Marwick, LLP in New Orleans.
MICHAEL LACH joined the Company in January 2000 as the Company's Executive
Vice President, Business Integration. Prior to joining the Company, 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 products 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 the Company 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.
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<PAGE>
ROBERT GRANT joined us in August 1998. He served as our Regional Vice
President and Regional General Manager until November 1999 and served as our
President and General Manager, Western Sales Region from November 1999 to May
2000. Since May 2000, he has served on an interim basis as our Executive Vice
President, Sales and Marketing. Prior to joining us, he was Vice President and
General Manager of U S WEST Communications, Inc. from June 1997 to August 1998.
From June 1996 to June 1997, he was an idependent consultant with iCON.COM
Corporation, a competitive local exchange carrier. From January 1996 to May
1996, he was Vice President Worldwide Sales for XYLAN Corporation, a data
networking company. From March 1994 to December 1995, he was President and CEO
of Interactive Video Enterprises, which he established as a subsidiary of U S
WEST Communications, Inc. From 1988 to 1994, he served in various management
roles with U S WEST Communications, Inc.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation awarded to, earned by or paid to each person who served as the
Company's Chief Executive Officer or was one of the Company's four other most
highly compensated executive officers (collectively, the "Named Executive
Officers") during the fiscal 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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- --------------------------
RESTRICTED SECURITIES
FISCAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS($) OPTIONS/SARS(#) COMPENSATION
------------------------------ --------- --------- --------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert Knowling, Jr.......... 1999 $399,996 $500,000 -- -- $750,420(8)
Chairman, Board of 1998 $180,768(2) $250,000 -- 4,725,000 $750,343(9)
Directors, President and 1997 -- -- -- -- --
Chief Executive Officer(1)
Robert Roblin................ 1999 $232,692 $140,250 $882,500(7) -- $405(10)
Executive Vice President, 1998 $ 21,154(3) $9,493 -- 562,500 $74(10)
Sales and Marketing (13) 1997 -- -- -- -- --
Catherine Hemmer............. 1999 $180,769 $109,500 $882,500(7) -- $240(10)
Chief Operating Officer 1998 $ 58,359(4) $ 56,000 -- 437,713 $84,363(11)
1997 -- -- -- -- --
Joseph Devich................ 1999 $167,308 $101,250 $882,500(7) -- $210(10)
Executives Vice President, 1998 $ 52,981(5) $ 20,137 -- 380,622 $76,961(12)
Corporate Services 1997 -- -- -- -- --
Robert Davenport, III........ 1999 $183,077(6) $ 91,667 -- 450,001 $171(10)
Executive Vice President, 1998 -- -- -- -- --
Business Development 1997 -- -- -- -- --
--------------
</TABLE>
(1) In September 1999, Mr. Knowling became Chairman of the Company's Board of
Directors.
(2) Pro rated based on an annual salary of $400,000 from hiring date of July 8,
1998.
(3) Pro rated based on an annual salary of $220,000 from hiring date of
November 16, 1998.
(4) Pro rated based on an annual salary of $150,000 from hiring date of August
10, 1998.
(5) Pro rated based on an annual salary of $150,000 from hiring date of August
13, 1998.
(6) Pro rated based on an annual salary of $200,000 from hiring date of January
20, 1999.
(7) This value is based upon the split-adjusted closing price of $29.416 for
30,000 post-split shares granted on November 3, 1999 to Mr. Roblin, Ms.
Hemmer and Mr. Devich. As of December 31, 1999, all of these shares were
unvested and valued at $1,118,750 based on a split-adjusted closing price
of $37.29. Twenty-five percent of these shares will vest on the four
consecutive anniversaries of the grant date.
(8) Includes $750,000 for the final installment of Mr. Knowling's sign-on bonus
as well as $420 for term life insurance premium.
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<PAGE>
(9) Includes $750,000 for the first installment of Mr. Knowling's sign-on bonus
as well as $343 for term life insurance premium.
(10) The dollar amount in this column represents premium payments the Company
made for executive's term life insurance policies.
(11) Includes a payment of $84,275 as a sign-on bonus as well as $88 for term
life insurance premium.
(12) Includes a payment of $76,883 as a sign-on bonus as well as $78 for term
life insurance premium.
(13) On May 12, 2000, we announced the resignation of Robert Roblin. Robert
Grant, president and general manager of our Western Sales Region, will
assume Mr. Roblin's role on an interim basis.
OPTION / SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
to Named Executive Officers during the fiscal year ended December 31, 1999.
During the last fiscal year, Mr. Davenport was the only Named Executive Officer
to receive any option grant and none of the Named Executive Officers received
stock appreciation rights during the year ended December 31, 1999. All share
numbers have been adjusted in light of the 3-for-2 stock split, effected in the
form of a stock dividend, effective March 31, 2000.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- ------------------------
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN PRICE OPTION TERM($)(3)
OPTIONS FISCAL 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.
AGGREGATED OPTION / SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION /
SAR VALUES
The following table sets forth information with respect to the exercise of
stock options during the year ended December 31, 1999 and the number and
year-end value of shares of the Company's Common Stock underlying the
unexercised options held by the Named Executive Officers. None of the Named
Executive Officers exercised or held 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>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS EXERCISED DURING OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
1999 1999 DECEMBER 31, 1999($)(1)
----------------------------- -------------------------- ----------------------------------
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------- ----------- --------------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert Knowling, Jr.... 491,250 $14,324,166.56 1,088,437 3,145,312 $40,105,898.20 $115,896,027.95
Robert Roblin.......... 22,500 $ 582,575.00 129,843 410,152 $4,384,437.41 $ 13,849,862.47
Catherine Hemmer....... 54,000 $ 1,588,502.00 91,902 291,811 $3,192,316.10 $ 10,136,396.75
Joseph Devich.......... 54,129 $ 2,146,621.00 39,800 177,862 $2,073,745.85 $ 9,267,351.35
Robert Davenport, III.. -- -- 68,750 231,251 $3,066,536.48 $ 10,314,758.22
</TABLE>
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<PAGE>
--------------
(1) Value represents the fair market value at exercise minus the exercise
price.
(2) Value represents the difference between the exercise price and the market
value (i.e., split-adjusted closing price) of Common Stock of $37.29 on
December 31, 1999. An option is "in-the-money" if the market value of the
Common Stock exceeds the exercise price.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
In 1998, the Company 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 the Company, and the remaining half
of which was paid once he worked for the Company for one full year (July 1999),
and (ii) stock options to purchase 4,725,000 post-split shares of the Company's
Common Stock at a split-adjusted exercise price of $ .45 per share. If the
Company terminates 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), the Company 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 the Company's direct competitors. Mr. Knowling has agreed to be bound by
customary confidentiality provisions. As provided in the agreement, in August
1998 the Company 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 the Company's 1997 Stock Plan, in
the event that the Company merges with or into another corporation resulting in
a change of control involving a shift in 50% or more of the voting power of the
Company's capital stock, or the sale of all or substantially all of the
Company's 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."
The Company has 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."
1997 STOCK PLAN
See "Amendment to the 1997 Stock Plan--Summary Description of 1997 Stock
Plan" for a description of the 1997 Stock Plan.
1998 EMPLOYEE STOCK PURCHASE PLAN
The 1998 Employee Stock Purchase Plan was adopted by the Company's Board of
Directors in December 1998, and approved by the stockholders in January 1999. A
total of 2,250,000 post-split shares of the Company's Common Stock have been
reserved for issuance under this plan, plus annual increases equal to the lesser
of (i) 2% of the outstanding shares on such date or (ii) an amount determined by
the Board of Directors. To date, 334,776 post-split shares have been issued
under the 1998 Employee Stock Purchase Plan.
The 1998 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"),
contains consecutive, overlapping, twenty-four month offering periods. Each
offering period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first offering period which commenced on the first
trading day after the Company's initial public offering (January 22, 1999) and
ends on the last trading day on or before October 31, 2000.
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<PAGE>
Employees are eligible to participate if they are customarily employed by
the Company or any of the Company's participating subsidiaries for at least 30
hours per week and more than five months in any calendar year. However, no
employee may be granted a right to purchase stock under the 1998 Employee Stock
Purchase Plan (i) to the extent that, immediately after the grant of the right
to purchase stock, the employee would own stock possessing 5% or more of the
total combined voting power or value of all classes of the Company's capital
stock, or (ii) to the extent that his or her rights to purchase stock under all
the Company's employee stock purchase plans accrues at a rate which exceeds
$25,000 worth of stock for each calendar year. The 1998 Employee Stock Purchase
Plan permits participants to purchase the Company's Common Stock through payroll
deductions of up to 12% of the participant's "compensation." Compensation is
defined as the participant's base straight time gross earnings and commissions
but excludes payments for overtime, shift premium, incentive compensation,
incentive payments, bonuses and other compensation. The maximum number of shares
a participant may purchase during a single purchase period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of the Company's Common Stock at the end of each purchase period. The
price of stock purchased under the 1998 Employee Stock Purchase Plan is
generally 85% of the lower of the fair market value of the Company's Common
Stock (i) at the beginning of the offering period or (ii) at the end of the
purchase period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, the participants will be withdrawn from the current offering period
following exercise and automatically re-enrolled in a new offering period. The
new offering period will use the lower fair market value as of the first date of
the new offering period to determine the purchase price for future purchase
periods. Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment.
Rights to purchase stock granted under the 1998 Employee Stock Purchase
Plan are not transferable by a participant other than by will, the laws of
descent and distribution, or as otherwise provided under the plan. The 1998
Employee Stock Purchase Plan provides that, in the event the Company merges with
or into another corporation or sell substantially all of the Company's assets,
each outstanding right to purchase stock may be assumed or substituted for by
the successor corporation. If the successor corporation refuses to assume or
substitute for the outstanding rights to purchase stock, the offering period
then in progress will be shortened and a new exercise date will be set.
The Company's Board of Directors has the authority to amend or terminate
the 1998 Employee Stock Purchase Plan, except that no such action may adversely
affect any outstanding rights to purchase stock under the Employee Stock plan.
The Company's Board of Directors may terminate an offering period on any
exercise date if it determines that the termination of the plan is in the
Company's best interests and the best interest of the Company's stockholders.
The Board of Directors may in its sole discretion amend the plan to the extent
necessary and desirable to avoid unfavorable financial accounting consequences
by altering the purchase price for any offering period, shortening any offering
period or allocating remaining shares among the participants. Unless sooner
terminated by the Company's Board of Directors, the plan will automatically
terminate ten years from the effective date of the Company's initial public
offering.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation limits the
liability of the Company's directors to the maximum extent permitted by Delaware
law, and the Company's Bylaws provide that the Company will indemnify the
Company's directors and officers and may indemnify the Company's other employees
and agents to the fullest extent permitted by law. The Company also entered into
agreements to indemnify the Company's directors and executive officers, in
addition to the indemnification provided for in the Company's Bylaws. The Board
of Directors believe that these provisions and agreements are necessary to
attract and retain qualified directors and executive officers. At present, there
is no pending litigation or proceeding involving any of the Company's directors,
officers, employees or agents in which indemnification will be required or
permitted. The Company is not aware of any threatened litigation or proceeding
that might result in a claim for such indemnification.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is comprised of Mr. Shapero
and Ms. Runtagh, each of whom is a non-employee director, and Mr. Marshall, also
a non-employee director, as an alternate. The Committee
14
<PAGE>
sets, reviews and administers the Company's executive compensation program. The
role of the Committee is to establish and recommend salaries and other
compensation paid to executive officers of the Company and to administer the
Company's 1997 Stock Plan and 1998 Employee Stock Purchase Plan. The Committee
approves and recommends all stock option grants to executive officers, all
executive officer base salaries and any cash bonus payments to executive
officers and reviews all stock option grants to executives.
COMPENSATION PHILOSOPHY
The Company's overall compensation philosophy is to build a leading
broadband company by linking total compensation to the long-term performance of
the Company. Since the Company operates in an extremely competitive and rapidly
changing technology and telecommunications industry, the Compensation Committee
believes that compensation programs for the executive officers should be
designed to attract, motivate and retain talented executives responsible for the
success of the Company.
The Company's compensation programs link compensation to performance by
first surveying the competitive market for executive pay. Payouts are then
assessed based on whether quantitative and strategic targets are met. Also taken
into consideration are individual performance and the Company's performance
relative to other broadband competitors and the broader NASDAQ technology
market. In general, it is the intention for base salary and performance bonuses
to reward near-term operating success while using stock options to provide
executives with a significant stake in the long-term performance and success of
the Company. In light of this, the total compensation positioning of the
Company's executive officers is routinely compared with those of other similar
technology and telecommunications companies and is adjusted to be highly
competitive.
BASE SALARY
The Company's policy is to target base salary levels at the median of the
technology and telecommunications market. Initially, the base salaries of
executive officers are determined by evaluating the responsibilities of the
position held and the experience and performance of the individual, with
reference to the competitive marketplace for executive talent, including a
comparison to base salaries for comparable positions in high growth, technology
and telecom companies. The Committee reviews executive salaries annually and
adjusts them as appropriate to reflect changes in the market conditions and
individual performance and responsibility.
In establishing 1999 base salary levels for executive officers, the
Compensation Committee approved base salaries of the executive officers based on
(i) competitive market data and (ii) recommendations from Mr. Knowling and the
Human Resources Department.
BONUSES
Bonus targets are set for executive officers based on targets for
comparable positions in the technology and telecom market. The Company's
executive officers were eligible for annual bonuses which were approved by the
Compensation Committee based on (i) individual achievement of year-end
objectives and (ii) recommendations from Mr. Knowling and the Human Resources
Department.
LONG-TERM INCENTIVE AWARDS
Under the Company's 1997 Stock Plan, stock options may be granted and
restricted stock awarded to executive officers and other employees of the
Company. Upon joining the Company, an individual's initial option grant or
restricted stock award is based upon the individual's responsibilities and
position. The size of subsequent stock option awards or restricted stock grants,
if any, are based primarily on an individual's performance and responsibilities.
Because of the competitive nature of the technology and telecommunications
industry in which the Company's competes, the Committee believes stock option
grants or restricted stock awards are an effective method of structuring
executive compensation to focus on a longer term view of the Company's
performance and to ensure that the executives' and the stockholders' interests
are in alignment. See "Security Ownership of Certain Beneficial Owners and
Management"
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND PRESIDENT COMPENSATION.
The 1999 compensation paid to Mr. Knowling was determined by his 1998
employment agreement with the Company. Accordingly, Mr. Knowling's salary of
$400,000 remained unchanged in 1999 pursuant to the terms of
15
<PAGE>
his employment agreement. In addition, Mr. Knowling received a $500,000 annual
bonus, half of which was required by his employment agreement and half of which
was awarded, pursuant to his employment agreement, based on his performance.
This year Mr. Knowling also received $750,000 which represents the second-half
of his sign-on bonus pursuant to his employment agreement. See "Executive
Compensation--Employment Agreements and Change in Control Arrangements."
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
The Compensation Committee has considered the potential impact of Section
162(m) of the Code and the regulations thereunder (the "Section"). The Section
disallows a tax deduction for any publicly-held corporation for individual
compensation exceeding $1 million in any taxable year for any of the Named
Executive Officers, unless such compensation is performance-based.
The Committee believes that compensation paid to Mr. Knowling in 1999 is
not subject to the limitations of the Section because it was paid pursuant to an
agreement that was entered into before the Company became a public company, and
such agreement has not been materially modified. Similarly, the Committee
believes that stock options and restricted stock granted pursuant to the Plan
before the date of the annual meeting are not subject to the Section because the
Company adopted the Plan before it became a public company, and such grants have
not been materially modified.
The Committee believes that awards of stock options granted pursuant to the
Plan, as amended by the proposals herein and ratified by the shareholders, will
qualify as performance-based compensation under the Section. The Committee
believes that grants of restricted stock will not qualify as performance-based
compensation under the Section.
The Company's policy is to qualify, to the extent reasonable, its executive
officers' compensation for deductibility under the Section. However, the
Committee believes that its primary responsibility is to provide a compensation
program that will attract, retain and reward the executive talent necessary to
the Company's success. Consequently, the Committee recognizes that the loss of a
tax deduction could be necessary in some circumstances.
COMPENSATION COMMITTEE
Rich Shapero
Hellene Runtagh
16
<PAGE>
PERFORMANCE GRAPH
The graph below provides an indicator of cumulative total stockholder
returns for Covad as compared with the NASDAQ National Market and Dow Jones
Telecommunications Index weighted by market value at each measurement point.
This graph covers the period of time beginning January 22, 1999, when Covad's
common shares were first traded on the NASDAQ National Market, through December
31, 1999.
[PERFORMANCE GRAPH]
COMPARISON OF 11 MONTH CUMULATIVE TOTAL RETURN*
AMONG COVAD COMMUNICATIONS GROUP, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE DOW JONES TELECOMMUNICATIONS INDEX
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-----------------------------------------
1/22/99 3/99 6/99 9/99 12/99
<S> <C> <C> <C> <C> <C>
COVAD COMMUNICATIONS GROUP, INC. 100.00 547.92 666.41 544.92 699.23
NASDAQ STOCK MARKET (U.S.) 100.00 104.69 114.54 117.15 169.08
DOW JONES TELECOMMUNICATIONS 100.00 95.30 108.06 100.19 109.19
* $100 INVESTED ON 1/22/99 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
</TABLE>
The comparisons shown in the graph are based upon historical data and the
Company cautions that the stock price performance shown in the graph is not
indicative of, nor intended to forecast, potential future performance of the
Company's Common Stock. Information used in the graph was obtained from Research
Data Group, Inc., a source believed to be reliable, but the Company is not
responsible for any errors or omissions in such information.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
On February 20, 1998, the Company 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 5,764,143
shares of the Company's Series C
17
<PAGE>
Preferred Stock and warrants to purchase an aggregate of 4,729,500 shares of the
Company's Series C Preferred Stock for an aggregate purchase price of $16.0
million at a date that the Company was to determine but, in any event, not later
than March 11, 1999. The Company agreed to either call this commitment or
complete an alternate equity financing of at least $16.0 million by March 11,
1999. A proposed alternate equity financing providing for a price per share
greater than or equal to $2.7767 and including securities that were equal in
right with, or more favorable to the Company than, the Company's Series C
Preferred Stock as set forth in the Company's Amended and Restated Certificate
of Incorporation required unanimous approval by a majority of the Company's
disinterested directors. In consideration of this commitment, the Company issued
to Warburg and Crosspoint warrants to purchase an aggregate of 2,541,222
post-split shares of the Company's 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, the Company did not issue and sell the
Company's Series C Preferred Stock to Warburg and Crosspoint. Messrs. Henry
Kressel and Joseph Landy, two of the Company's former directors, are affiliated
with Warburg, and Mr. Shapero, one of the Company's current directors, is
affiliated with Crosspoint.
On April 24, 1998, the Subscription Agreement was amended pursuant to an
Assignment and Assumption Agreement to which the Company was a party along with
Warburg, Crosspoint and Mr. Hawk. By the terms of this agreement, Warburg and
Crosspoint assigned to Mr. Hawk their obligation to purchase 36,015 shares of
the Company's Series C Preferred Stock and 29,559 warrants to purchase Series C
Preferred Stock for an aggregate purchase price of $100,001.65. On the same
date, Mr. Hawk purchased 36,015 shares of the Company's Series C Preferred Stock
at a price per share of $2.7767. As a result of this amendment, the aggregate
obligation of Warburg and Crosspoint to purchase the Company's Series C
Preferred Stock and warrants to purchase Series C Preferred Stock was reduced
from 5,764,143 shares to 5,728,128 shares and from 4,729,500 shares to 4,699,941
shares, respectively, for an aggregate purchase price of $15.9 million (reduced
from $16.0 million). On the same date, the Amended and Restated Stockholder
Rights Agreement dated March 11, 1998 (the "Stockholder Rights Agreement") was
amended to add Mr. Hawk as a party.
The warrants to purchase the Company's Common Stock issued upon the signing
of the Subscription Agreement had five-year terms (but had to be exercised prior
to the closing of the Company's initial public offering), had split-adjusted
purchase prices of $0.0015 per share, were immediately exercisable and contained
net exercise provisions. Prior to the Company's initial public offering, Warburg
and Crosspoint exercised their warrants to purchase Series C Preferred Stock for
2,032,605 and 762,364 post-split shares of the Company's Common Stock.
On March 11, 1998, the Company amended the Stockholder Rights Agreement, to
extend the rights held by Warburg, Crosspoint, and Intel to the Company's
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 360,144 shares
of the Company's Series C Preferred Stock and warrants to purchase 295,500
shares of the Company's Series C Preferred Stock for an aggregate purchase price
of $1.0 million concurrently with the closing of the issuance of the 1998 13
1/2% Senior Discount Notes in March 1998. The Company 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 the Company's initial
public offering constituted an alternate equity financing and, therefore, the
Company 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, the Company issued to
Intel warrants to purchase an aggregate of 238,167 post-split shares of the
Company's Common Stock at a split-adjusted purchase price of $0.0015 per share.
Prior to the Company's initial public offering, Intel exercised its warrants for
238,167 post-split shares of the Company's Common Stock.
TRANSACTIONS IN CONNECTION WITH THE FORMATION OF THE DELAWARE HOLDING
COMPANY
The Company was originally incorporated in California as Covad
Communications Company ("Covad California") in October 1996. In July 1997, the
Company was incorporated in Delaware as part of the Company's strategy to
operate through a holding company structure and to conduct substantially all of
the Company's operations through subsidiaries. To effect the holding company
structure, in July 1997 the Company entered into an
18
<PAGE>
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 the Company's common and preferred stock, so that
after giving effect to the exchange Covad California became the Company's
wholly-owned subsidiary. In addition, the Company entered into an Assumption
Agreement pursuant to which the Company 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 the Company's consultants.
In connection with the Exchange Agreement, two of the Company's former
officers, Messrs. Charles McMinn and Charles Haas, and one of the Company's
current officers, Mr. Khanna, each exchanged 3,000,000 shares of Common Stock of
Covad California, originally purchased for $0.0042 per share, for a like number
of the Company's pre-split shares of Common Stock pursuant to restricted stock
purchase agreements. In addition, Mr. Lynch, one of the Company's directors,
exchanged 144,000 shares of Common Stock of Covad California, originally
purchased for $0.0333 per share, for a like number of the Company's 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 the Company's assets or a shift in 50% or more of the voting
power of the Company's capital stock. The Company's 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, the Company issued 2,531,250 post-split shares of the
Company's Common Stock to Mr. Rex Cardinale, one of the Company's former
officers, for a split-adjusted purchase price of $0.015 per share. On August 30,
1997, the Company issued 776,250 post-split shares of the Company's Common Stock
to Mr. Laehy, one of the Company's officers, for a split-adjusted purchase price
of $0.0222 per share. On October 14, 1997, the Company issued 324,000 post-split
shares of the Company's Common Stock to Mr. Marshall, one of the Company's
directors, for a split-adjusted purchase price of $0.0222 per share. On April
24, 1998, the Company issued 216,000 post-split shares of the Company's Common
Stock to Mr. Hawk, one of the Company's directors, for a split-adjusted purchase
price of $0.296 per share. On August 28, 1998, the Company issued 90,000
post-split shares of the Company's Common Stock to Mr. Hawk for a split-adjusted
purchase price of $2.555 per share. The shares of the Company's Common Stock
issued to Messrs. Cardinale, Laehy, Marshall, and Hawk were issued pursuant to
restricted stock purchase agreements which contain vesting and change of control
provisions similar to those contained in the above-described restricted stock
purchase agreements of Messrs. McMinn, Khanna, Haas and Lynch.
ISSUANCE OF SERIES A PREFERRED STOCK
On June 30, 1997 Covad California issued 150,000 shares of Series A
Preferred Stock to each of Messrs. McMinn, Khanna and Haas and 300,000 shares of
Series A Preferred Stock to Mr. Lynch for a purchase price of $0.3333 per share.
In July 1997, these shares were exchanged for a like number of the Company's
shares of Series A Preferred Stock pursuant to the Exchange Agreement.
ISSUANCE OF SERIES B PREFERRED STOCK
In July 1997, the Company sold an aggregate of 17,000,001 shares of the
Company's Series B Preferred Stock, of which 12,000,000 shares were sold to
Warburg, 3,000,000 shares were sold to Crosspoint and 2,000,001 shares were sold
to Intel. The purchase price of the Company's Series B Preferred Stock was $0.50
per share. A portion of the purchase price of the Series B Preferred Stock was
paid by cancellation of a $500,000 demand note issued to Warburg in June 1997.
Messrs. Kressel and Landy, each of whom formerly served as members of the
Company's Board of Directors, are affiliated with Warburg. Mr. Shapero, who
currently serves on the Company's Board of Directors, is affiliated with
Crosspoint. On February 12, 1998, the Company sold an additional 100,002 shares
of Series B Preferred Stock at a purchase price of $1.00 per share to Mr.
Marshall, one of the Company's directors.
19
<PAGE>
THE STRATEGIC INVESTMENTS AND RELATIONSHIPS
In January 1999, the Company received equity investments from AT&T
Ventures, NEXTLINK Communications Inc. and Qwest Communications International,
Inc. AT&T Ventures purchased an aggregate of 1,500,583 shares of the Company's
Series C-1 Preferred Stock at $2.7767 per share and an aggregate of 1,157,408
shares of the Company's Series D-1 Preferred Stock at $18.00 per share. These
purchases represent an aggregate investment of $25 million, of which $11 million
was invested by AT&T Venture Fund II, LP and $14 million was invested by two
affiliated funds. NEXTLINK Communications Inc. purchased 1,200,466 shares of the
Company's Series C-1 Preferred Stock at $2.7767 per share and 925,926 shares of
the Company's Series D-1 Preferred Stock at $18.00 per share, representing an
investment of $20 million. Qwest Communications International, Inc. purchased
900,349 shares of the Company's Series C-1 Preferred Stock at $2.7767 per share
and 694,445 shares of the Company's Series D-1 Preferred Stock at $18.00 per
share, representing an aggregate investment of $15 million. At the completion of
the Company's initial public offering, the Company's Series C-1 Preferred Stock
converted into the Company's Class B Common Stock on a one-for-one basis. The
Series D-1 Preferred Stock also converted into the Company's Class B Common
Stock at that time on a one-for-one basis. These strategic investors have agreed
not to transfer any of the Company's 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 the
Company's voting stock without the Company's consent until January 2002. In
addition, until January 2002, they have agreed to vote any voting securities
they hold as recommended by the Company's Board of Directors.
Concurrently with these strategic equity investments, the Company 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 the Company's services at volume discounts,
the Company's 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. The Company 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 the Company's 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 the Company's services entirely.
EQUIPMENT LEASE FINANCING
Through December 31, 1999, the Company 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, the Company made total payments of
approximately $525,000 to Charter Financial on these obligations. Warburg, a
principal stockholder of the Company at the time this transaction was entered
into, owns a majority of the capital stock of Charter Financial. The Company
believes that the terms of the lease financing with Charter Financial were
completed at rates similar to those available from alternative providers. The
Company's 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
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 the Company's principal stockholders, previously
owned approximately 12% of the capital stock of Diamond Lane, one of the
Company's vendors. Payments to Diamond Lane in 1999 totaled approximately
$51,539,000. The Company believes that the terms of its transactions with
Diamond Lane were completed at rates similar to those available from alternative
vendors. This belief is based on our management team's experience in obtaining
vendors and the fact that the Company sought competitive bidders before entering
into the relationship with Diamond Lane.
REGISTRATION RIGHTS
Certain holders of the Company's 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
20
<PAGE>
registration under the Securities Act of the shares of Common Stock held by them
or issuable upon conversion of the Class B Common Stock. Commencing January
2000, the Class B Common Stock became convertible into Common Stock at the
election of the holder.
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 the Company's
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 the Company and Bear, Stearns & Co. Inc. and BT Alex. Brown
Incorporated, holders of the warrants that were issued in connection with the
Company's 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 the Company 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
The Company has entered into employment agreements with certain of the
Company's officers. See "Executive Compensation--Employment Agreements and
Change in Control Arrangements."
EMPLOYEE LOANS
In August 1998, the Company loaned Robert Knowling, Jr., the Company's
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, the Company loaned Joseph Devich, one of the Company's
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, the Company loaned Catherine Hemmer, the Company's Vice
President, Operations, 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, the Company loaned Jane Marvin, one of the Company's
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, the Company
loaned Ms. Marvin $80,705.46 pursuant to a note secured by a pledge of shares of
the Company's Common Stock. The entire principal balance of this note becomes
due and payable in one lump sum
21
<PAGE>
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, the Company loaned Robert Davenport, one of the Company's
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, the Company committed to extend a loan to Michael Lach,
one of the Company's 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of reports received by the Company during or
with respect to the year ended December 31, 1999 pursuant to Rule 16a-3(e) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), all
required reports on Form 3, Form 4 and Form 5 were timely filed by the Company's
directors, officers and 10% stockholders.
22
<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, which excludes
1,594,794 outstanding shares of the Company's non-voting Class B Common Stock
which are convertible into 3,588,286 split-adjusted shares of Common Stock.
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>
<S> <C> <C>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED
------------------------------------------------------------------------------- -------------- -------------
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.
23
<PAGE>
(12) Includes 7,498 shares of Common Stock subject to options exercisable within
60 days of April 1. 2000.
AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
(ITEM NO. 2 ON THE PROXY CARD)
Under the Company's present capital structure, the Company is authorized to
issue 200,000,000 shares of Common Stock, par value $.001 per share, of which
10,000,000 shares have been designated as non-voting Class B Common Stock, and
5,000,000 shares of Preferred Stock, $.001 par value per share. As of May 5,
2000, 144,469,713 shares of Common Stock and 1,594,794 shares of Class B Common
Stock were issued and outstanding. Of the remaining authorized common shares,
approximately 40,702,365 shares were reserved for issuance in connection with
the Company's stock-based compensation plans or for conversion and exchange of
the Company's convertible and exchangeable securities. There are no outstanding
shares of Preferred Stock, but under the recently adopted Stockholder Protection
Rights Plan rights have issued which, if triggered, would relate to up to
700,000 shares of Participating Preferred Stock.
PURPOSE AND EFFECT OF THE PROPOSED AMENDMENT
The Board believes the number of authorized shares of Common Stock is
inadequate for the present and future needs of the Company and, in particular,
limits the Company's ability to effect future stock splits in the form of a
stock dividend. Since the Company's initial public offering, the Company has
declared two stock dividends, one in May 1999 and the other in March 2000.
Therefore, the Board has unanimously approved the amendment to Article IV of the
Company's Amended and Restated Certificate of Incorporation to increase the
aggregate number of shares of Common Stock authorized for issuance from
200,000,000 to 600,000,000, of which 10,000,000 would remain designated as
non-voting Class B Common Stock. There would be no change in the number of
authorized shares of the Class B Common Stock.
The Board believes this capital structure more appropriately reflects the
present and future needs of the Company and recommends that the stockholders
approve such amendment. The authorization of additional shares of Common Stock
would give the Board the ability to issue such shares of Common Stock from time
to time as the Board deems necessary. The Board believes it needs to have the
ability to issue such additional shares for any proper corporate purpose, such
as stock splits and stock dividends, future acquisitions, stock and option
grants, and convertible debt and equity financings.
The Board believes that if an increase in the authorized number of shares
of Common Stock were postponed until a specific need arose, the delay and
expense incident to obtaining the approval of the Company's stockholders at that
time could significantly impair the Company's ability to consummate an
acquisition, to meet financing objectives or other objectives or to effect a
stock dividend or stock split.
The additional Common Stock would be available for issuance by the Board
without any future action by the stockholders, unless such action were
specifically required by the Company's Amended and Restated Certificate of
Incorporation, applicable law or the rules of any stock exchange or quotation
system on which the Company's securities may then be listed.
The proposed increase in the authorized number of shares of Common Stock
could have a number of effects on the Company's stockholders, depending upon the
exact nature and circumstances of any actual issuances of the authorized shares.
The increase could have an anti-takeover effect, in that additional shares could
be issued (within the limits imposed by applicable law) in one or more
transactions that could make a change in control or takeover of the Company more
difficult. For example, additional shares could be issued by the Company to
dilute the stock ownership or voting rights of persons seeking to obtain control
of the Company. Similarly, the issuance of additional shares to certain persons
allied with the Company's management could have the effect of making it more
difficult to remove the Company's current management by diluting the stock
ownership or voting rights of persons seeking to cause such removal. The Company
has previously adopted certain measures that may have the effect of helping to
resist an unsolicited takeover attempt, including the adoption of the Company's
Stockholder Protection Rights Plan. In addition, an issuance of additional
shares by the Company could have an effect on the potential realizable value of
a stockholder's investment. In the absence of a proportionate increase in the
Company's earnings and book value, an increase in the aggregate number of the
Company's outstanding shares of Common Stock caused by the issuance of the
additional shares would dilute the earnings per share and book value per share
of all outstanding shares of the
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Company's capital stock. If such factors were reflected in the price per share
of Common Stock, the potential realizable value of a shareholder's investment
could be adversely affected.
REQUIRED VOTE
Approval of the proposed amendment will require the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock and Class B
Common Stock, voting together as a single class, as well as an affirmative vote
of the holders of a majority of the outstanding shares of Common Stock alone. In
such vote, each share of outstanding Class B Common Stock shall be entitled to
one vote. The Board of Directors has unanimously adopted resolutions setting
forth the proposed amendment to the Amended and Restated Certificate of
Incorporation, declaring its advisability and directing that the proposed
amendment be submitted to the stockholders for their approval at the Annual
Meeting. If approved by the stockholders, the amendment will become effective
upon filing of an appropriate certificate with the Secretary of State of the
State of Delaware.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE AMENDMENT TO
THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK.
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AMENDMENT AND RATIFICATION OF THE 1997 STOCK PLAN
(ITEM NOS. 3 AND 4 ON THE PROXY CARD)
The Company's stockholders are being asked to amend and ratify the
Company's 1997 Stock Plan (the "1997 Plan" or "Plan"). The Plan currently
provides that, on the first day of each fiscal year, there is added to the
maximum number of shares which may be optioned and sold under the Plan, a number
of shares equal to 3% of the outstanding shares on such date or such lesser
amount as may be determined by the Board ("Annual Increase"). The proposals
being submitted to stockholders would amend the Plan by placing a fixed-share
limit on the total shares added to the Plan annually and would add a fixed
number of additional shares to the Annual Increase of shares for the Years 2000
and 2001. The ratification of the Plan as amended is simultaneously being
submitted to the stockholders to preserve the Company's tax deduction for
compensation under Section 162 (m) of the Code.
PROPOSAL 3: LIMITING THE ANNUAL INCREASE UNDER THE PLAN, ADDING 5,000,000
ELIGIBLE SHARES TO THE 2000 ANNUAL INCREASE AND RATIFYING THE PLAN AS
AMENDED
The first proposed amendment to the 1997 Plan would (a) limit the Annual
Increase of shares which may be optioned and sold under the Plan to 20,000,000
shares; (b) add 5,000,000 shares to the Annual Increase for fiscal year 2000 and
(c) approve and ratify the Plan, as amended. If this proposal is approved, it
will be retroactive to January 1, 2000 and Section 3 of the 1997 Stock Plan will
be amended to read as follows:
"3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Section 13 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is 35,092,635 Shares (split-adjusted for
the March 31, 2000 3-for-2 stock split effected as a stock dividend), plus
(a) an annual increase to be added on the first day of the Company's fiscal
year equal to the lesser of 3% of the outstanding Shares on such date, or
an amount determined by the Board, and (b) an additional 5,000,000 Shares
for the Year 2000. The Shares may be authorized, but unissued, reacquired
Common Stock. In no event shall the aggregate annual increase in the number
of Shares which may be optioned and sold under the Plan exceed 20,000,000
Shares of Common Stock. All share numbers in this section will be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Common Stock,
or any other increase or decrease in the number of issued shares of Common
Stock effected without receipt of consideration by the Company."
PROPOSAL 4: LIMITING THE ANNUAL INCREASE UNDER THE PLAN, ADDING 10,000,000
ELIGIBLE SHARES TO THE 2001 ANNUAL INCREASE AND RATIFYING THE PLAN AS
AMENDED
The second proposed amendment to the 1997 Plan would (a) limit the Annual
Increase of shares which may be optioned and sold under the Plan to 20,000,000
shares; (b) add 10,000,000 shares to the Annual Increase for fiscal year 2001
and (c) approve and ratify the Plan, as amended. If this proposal is approved,
it will be retroactive to January 1, 2000 and Section 3 of the 1997 Stock Plan
will be amended to read as follows:
"3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Section 13 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is 35,092,635 Shares (split-adjusted for
the March 31, 2000 3-for-2 stock split effected as a stock dividend), plus
(a) an annual increase to be added on the first day of the Company's fiscal
year equal to the lesser of 3% of the outstanding Shares on such date, or
an amount determined by the Board, and (b) an additional 10,000,000 Shares
for the Year 2001. The Shares may be authorized, but unissued, reacquired
Common Stock. In no event shall the aggregate annual increase in the number
of Shares which may be optioned and sold under the Plan exceed 20,000,000
Shares of Common Stock. All share numbers in this section will be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Common Stock,
or any other increase or decrease in the number of issued shares of Common
Stock effected without receipt of consideration by the Company."
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If both proposals are approved, Section 3 of the 1997 Stock Plan will be
amended to read as follows:
"3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Section 13 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is 35,092,635 Shares (split-adjusted for
the March 31, 2000 3-for-2 stock split effected as a stock dividend), plus
(a) an annual increase to be added on the first day of the Company's fiscal
year equal to the lesser of 3% of the outstanding Shares on such date, or
an amount determined by the Board, and (b) an additional 5,000,000 Shares
for the Year 2000 and 10,000,000 Shares for the Year 2001. The Shares may
be authorized, but unissued, reacquired Common Stock. In no event shall the
aggregate annual increase in the number of Shares which may be optioned and
sold under the Plan exceed 20,000,000 Shares of Common Stock. All share
numbers in this section will be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company."
PURPOSE OF THE PROPOSED AMENDMENTS
ATTRACTING AND RETAINING TALENTED EMPLOYEES
The Board believes equity incentives are necessary for the Company to
remain competitive in the marketplace for executive talent and other key
employees. Covad's growth and achievements this past year have required the
Company to offer attractive equity compensation, like stock options and
restricted stock grants, to attract and retain the caliber of necessary
professionals to enable those results. The continued growth of the business will
necessitate increases in the option and restricted stock grant pool to provide
adequate incentives to hire new employees and retain current ones.
MEETING THE DEMANDS OF INCREASED GROWTH
The Board believes the number of optionable shares under the existing 1997
Plan does not provide adequate shares for the Company to implement its intended
growth strategy. In the first quarter of this year the Company had almost
doubled its work force and, by the end of 2000, the Company intends to triple
its work force in response to the current and projected demands in the market
for its services. Consistent with the Company's philosophy of making its
employees stakeholders, which has now become the rule (rather than the
exception) in the Company's industry, all new Covad employees receive an initial
stock option grant and are eligible for additional grants based upon their
ongoing performance. However, if the Company achieves its hiring goals for
fiscal year 2000, significantly more options will be granted to new employees in
connection with their hiring than to existing employees based upon their ongoing
performance.
RATIFICATION OF THE PLAN TO PRESERVE THE COMPANY'S TAX DEDUCTION FOR
COMPENSATION
Section 162(m) of the Code generally disallows tax deductions to a
publicly-traded corporation for compensation paid to certain executive officers
in excess of $1,000,000 per officer per year. Grants of stock options and stock
purchase rights under the Plan have been exempt from the limitation of Section
162(m) because the Company was not a publicly-traded corporation when it adopted
the Plan. The amendment to the Plan to increase the aggregate number of shares
of Common Stock available for issuance thereunder, however, will render this
exemption unavailable. Accordingly, to make grants of stock options qualify as
"performance-based compensation," and so preserve the Company's tax deductions,
the stockholders are being asked to ratify the Plan as amended by either or both
of the Plan amendment proposals described above.
SUMMARY DESCRIPTION OF 1997 STOCK PLAN
The following is a summary of the principal features of the Plan, as
amended. This summary is not intended to be a complete description of all the
terms of the Plan and is subject to and qualified in its entirety by the full
text of the current version of the Plan, which is attached as Appendix A to this
Proxy Statement.
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STRUCTURE
The 1997 Plan consists of three types of equity incentive programs: (i)
qualifying stock options ("Incentive Stock Options") intended to qualify within
the meaning of Section 422 of the Code; (ii) non-qualifying stock options (or
"Non-Statutory Stock Options") not intended to qualify within the meaning of
Section 422 of the Code; and (iii) stock purchase rights ("SPRs") for shares of
Common Stock.
ADMINISTRATION
The Plan is administered by the Company's Board of Directors or a committee
appointed by the Board of Directors and consisting of non-employee directors
within the meaning of Section 16(b) of the Exchange Act and outside directors
within the meaning of Section 162(m) of the Code (referred to as the
"Administrator"). Subject to the provisions of the Plan, the Administrator has
the authority, in its discretion: (i) to determine the fair market value of the
Company's Common Stock; (ii) to select the employees, directors or consultants
to whom options and SPRs may be granted under the Plan; (iii) to determine the
number of shares of Common Stock to be covered by each option and SPR granted
under the Plan; (iv) to approve forms of agreement for use under the Plan; (v)
to determine the terms and conditions of any option or SPR granted under the
Plan such as the exercise price, the time or times when options or SPRs may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions; (vi) to reduce the exercise price of any
option or SPR to the then current fair market value; (vii) to institute an
option exchange program; (viii) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind
rules and regulations relating to the Plan; (x) to modify or amend each option
or SPR; (xi) to allow optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the shares to be issued upon exercise
of an option or SPR that number of shares having a fair market value equal to
the amount required to be withheld; (xii) to authorize any person to execute on
behalf of the Company any instrument required to effect the grant of an option
or SPR previously granted by the Administrator; and (xiii) to make all other
determinations deemed necessary or advisable for administering the Plan.
ELIGIBILITY
All employees, directors and consultants are eligible to participate in the
1997 Plan. Incentive Stock Options may be granted only to employees (including
officers and directors). Non-Statutory Stock Options and SPRs may be granted to
employees, directors and consultants of the Company. To the extent that the
aggregate fair market value of the shares with respect to which Incentive Stock
Options are exercisable for the first time by an optionee during any calendar
year (under all plans of the Company and any parent or subsidiary) exceed
$100,000, such options are treated as Non-Statutory Stock Options. No optionee
may be granted, in any fiscal year of the Company, options to purchase more than
2,000,000 shares; provided that, in connection with his or her initial service,
an optionee may be granted options to purchase up to an additional 2,000,000
shares that shall not count against such limit.
SECURITIES SUBJECT TO THE PLAN
Presently, the number of shares of the Company's Common Stock which are
reserved for issuance under the Plan is 35,092,635 post-split shares, plus an
annual increase beginning in January 2000, equal to the lesser of (i) 3% of the
outstanding shares on such date or (ii) an amount determined by the Company's
Board of Directors. As of January 1, 2000, there were 7,425,857 post-split
shares available for issuance under the Plan, which includes the 3% annual
increase of 4,400,533 post-split shares. If Proposal 3 is approved by the
stockholders, a total of 12,425,857 post-split shares will be available for
issuance under the Plan for the Year 2000.
These shares may be authorized, but unissued, or reacquired Common Stock.
If an option or SPR expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an option exchange program, the
unpurchased shares that were subject thereto may become available for future
grant or sale under the Plan.
TERMS AND CONDITIONS OF OPTIONS
Each option granted pursuant to the Plan is evidenced by a written stock
option agreement (an "Option Agreement") between the optionee and the Company
and is subject to the following terms and conditions:
TERM OF OPTIONS. The term of each option is stated in each Option
Agreement. In the case of an Incentive Stock Option, the term is ten years from
the date of grant or such shorter terms as may be provided in the Option
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Agreement. In the case of an Incentive Stock Option granted to an optionee who,
at the time the Incentive Stock Option is granted, owns stock representing more
than ten percent of the total combined voting power of all classes of stock of
the Company or any parent or subsidiary, the term of the Incentive Stock Option
is five years from the date of grant or such shorter term as may be provided in
the Option Agreement.
EXERCISE PRICE. The per share exercise price for the shares to be issued
pursuant to the exercise of an option is determined by the Administrator,
subject to the following: (i) in the case of an Incentive Stock Option (A)
granted to an employee who, at the time the Incentive Stock Option is granted,
owns stock representing more than ten percent of the voting power of all classes
of stock of the Company or any parent or subsidiary, the per share exercise
price may be no less than 110% of the fair market value per share on the date of
grant and (B) granted to any employee other than an employee described in (A)
immediately preceding, the per share exercise price may be no less than 100% of
the fair market value per share on the date of grant; (ii) in the case of a
Non-Statutory Stock Option, the per share exercise price maybe determined by the
Administrator; and (iii) in the case of a Non-Statutory Stock Option intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Code, the per share exercise price may be no less than 100% of the fair
market value per share on the date of grant. Notwithstanding the foregoing,
options may be granted with a per share exercise price of less than 100% of the
fair market value per share on the date of grant pursuant to a merger or other
corporate transaction.
WAITING PERIOD AND EXERCISE DATES. At the time an option is granted, the
Administrator fixes the period within which the option may be exercised (i.e.,
vests) and determines any conditions that must be satisfied before the option
may be exercised. Options generally vest at a rate of 12.5% of the shares
subject to the option on the date six months following the grant date and 1/48th
of the shares subject to the option at the end of each one-month period
thereafter and generally expire eight years from the date of grant. Unless the
Administrator provides otherwise, vesting of options granted under the 1997 Plan
are tolled during any unpaid leave of absence.
FORM OF CONSIDERATION. The Administrator determines the acceptable form of
consideration for exercising an option, including the method of payment. In the
case of an Incentive Stock Option, the Administrator determines the acceptable
form of consideration at the time of grant. Such consideration may consist
entirely of (a) cash; (b) check; (c) promissory note; (d) other shares that (i)
in the case of shares acquired upon exercise of an option, have been owned by
the optionee for more than six months on the date of surrender, and (ii) have a
fair market value on the date of surrender equal to the aggregate exercise price
of the shares as to which such option is exercised, consideration received by
the Company under a cashless exercise program implemented by the Company in
connection with the Plan, a reduction in the amount of any Company liability to
the optionee, including any liability attributable to the optionee's
participation in any Company-sponsored deferred compensation program or
arrangement, any combination of the foregoing methods of payment; or (e) any
other consideration and method of payment for the issuance of shares to the
extent permitted by applicable laws.
EXERCISE OF OPTION. Any option granted under the Plan is exercisable
according to the terms of the Plan and at such times and under such conditions
as determined by the Administrator and set forth in the Option Agreement.
Exercise of an option in any manner shall result in a decrease in the number of
shares thereafter available, both for purposes of the Plan and for sale under
the option, by the number of shares as to which the option is exercised.
TERMINATION OF RELATIONSHIP. If an optionee ceases to be an employee,
director or consultant, other than upon the optionee's death or disability, the
optionee may exercise his or her option within such period of time as is
specified in the Option Agreement to the extent that the option is vested on the
date of termination (but in no event later than the expiration of the term of
such option as set forth in the Option Agreement). In the absence of a different
specified time in the Option Agreement, the option remains exercisable for three
months following the optionee's termination. If, on the date of termination, the
optionee is not vested as to his or her entire option, the shares covered by the
unvested portion of the option revert to the Plan. If, after termination, the
optionee does not exercise his or her option within the time specified by the
Administrator, the option terminates, and the shares covered by such option
revert to the Plan.
DISABILITY OF OPTIONEE. If an optionee ceases to be an employee, director
or consultant as a result of the optionee's disability, the optionee may
exercise his or her option within such period of time as is specified in the
Option Agreement to the extent the option is vested on the date of termination
(but in no event later than the expiration of the term of such option as set
forth in the Option Agreement). In the absence of a different specified time in
the Option Agreement, the option will remain exercisable for twelve months
following the optionee's termination. If, on the date of termination, the
optionee is not vested as to his or her entire option, the shares covered
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by the unvested portion of the option revert to the Plan. If, after termination,
the optionee does not exercise his or her option within the time specified, the
option will terminate, and the shares covered by such option revert to the Plan.
DEATH OF OPTIONEE. If an Optionee dies while an employee, director or
consultant, the option may be exercised within such period of time as is
specified in the Option Agreement (but in no event later than the expiration of
the term of such option as set forth in the Option Agreement), by the optionee's
estate or by a person who acquires the right to exercise the option by bequest
or inheritance, but only to the extent that the option is vested on the date of
death. In the absence of a specified time in the Option Agreement, the option
will remain exercisable for twelve months following the optionee's termination.
If, at the time of death, the optionee is not vested as to his or her entire
option, the shares covered by the unvested portion of the option will revert to
the Plan. The option may be exercised by the executor or Administrator of the
optionee's estate or, if none, by the person(s) entitled to exercise the option
under the optionee's will or the laws of descent or distribution. If the option
is not so exercised within the time specified, the option terminates, and the
shares covered by such option revert to the Plan.
BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a
payment in cash, shares or otherwise an option previously granted based on such
terms and conditions as the Administrator establishes and communicates to the
optionee at the time that such offer is made.
STOCK PURCHASE RIGHTS
RIGHTS TO PURCHASE. Stock purchase rights may be issued either alone, in
addition to, or in tandem with other awards granted under the Plan and/or cash
awards made outside of the Plan. After the Administrator determines that it will
offer SPRs under the Plan, it will advise the offeree in writing or
electronically, by means of a Notice of Grant, of the terms, conditions and
restrictions related at the offer, including the number of shares that the
offeree will be entitled to purchase, the price to be paid, and the time within
which the offeree must accept such offer. The offer will be accepted by
execution of a restricted stock purchase agreement in the form determined by the
Administrator.
REPURCHASE OPTION. Unless the Administrator determines otherwise, the
restricted stock purchase agreement will grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with the Company for any reason (including death or disability). The
purchase price for shares repurchased pursuant to the restricted stock purchase
agreement will be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The repurchase
option will lapse at a rate determined by the Administrator.
OTHER PROVISIONS. The restricted stock purchase agreement will contain such
other terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Administrator in its sole discretion.
RIGHTS AS A STOCKHOLDER. Once the SPR is exercised, the purchaser will have
the rights equivalent to those of a stockholder, and will be a stockholder when
his or her purchase is entered upon the records of the duly authorized transfer
agent of the Company.
NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS
Unless determined otherwise by the Administrator, an option or SPR may not
be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the optionee, only by the optionee.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET
SALE
CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding option and SPR, and the number of shares of Common Stock that
have been authorized for issuance under the Plan but as to which no options or
SPRs have yet been granted or that have been returned to the Plan upon
cancellation or expiration of an option or SPR, as well as the price per share
of Common Stock covered by each such outstanding option or SPR, will be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company.
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DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or
liquidation of the Company, the Administrator will notify each optionee as soon
as practicable prior to the effective date of such proposed transaction. The
Administrator in its discretion may provide for an optionee to have the right to
exercise his or her option until ten days prior to such transaction as to all of
the optioned stock covered thereby, including shares as to which the option
would not otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any shares purchased upon
exercise of an option or SPR will lapse as to all such shares, provided the
proposed dissolution or liquidation take place at the time and in the manner
contemplated. To the extent it has not been previously exercised, an option or
SPR will terminate immediately prior to the consummation of such proposed
action.
MERGER OR ASSET SALE. In the event of a merger of the Company with or into
another corporation, or the sale of substantially all of the assets of the
Company, each outstanding option and SPR will be assumed or an equivalent option
or right substituted by the successor corporation or a parent or subsidiary of
the successor corporation. In the event that the successor corporation refuses
to assume or substitute for the option or SPR, the optionee will fully vest in
and have the right to exercise the option or SPR as to all of the optioned
stock, including shares as to which it would not otherwise be vested or
exercisable. If an option or stock repurchase right becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator will notify the Optionee in writing or
electronically that the option or SPR shall be fully vested and exercisable for
a period of fifteen days from the date of such notice, and the option or SPR
shall terminate upon the expiration of such period.
ACCELERATION IN CONNECTION WITH CHANGE OF CONTROL. All stock options and
SPRs to officers, employees, directors and consultants provide that in the event
the Company merges with or into another corporation resulting in a change of
control involving a shift in 50% or more of the voting power of the Company's
capital stock, or the sale of all or substantially all of the Company's assets,
the options will fully vest and become exercisable one year after the change of
control. In the event the individual is constructively terminated or terminated
without cause or in the event that the successor corporation refuses to assume
or substitute the options, the options or SPRs will fully vest and become
exercisable at that time.
AMENDMENT AND TERMINATION OF THE PLAN
The Board may at any time amend, alter, suspend or terminate the Plan;
provided that the Company is required to obtain stockholder approval of any Plan
amendment to the extent necessary and desirable to comply with applicable laws.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion of federal income tax consequences does not
purport to be a complete analysis of all of the potential tax effects of the
Plan. It is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. No information is provided with respect to
persons who are not citizens or residents of the United States, or foreign,
state or local tax laws, or estate, gift and excise tax considerations. In
addition, the tax consequences to a particular participant may be affected by
matters not discussed herein.
NON-STATUTORY STOCK OPTIONS
Under current federal income tax law, the grant of a Non-Statutory Stock
Option has no tax effect on the Company or the optionee to whom it is granted.
If the shares of Common Stock received on the exercise of a Non-Statutory Stock
Option are not subject to restrictions on transfer or risk of forfeiture, the
exercise of the Non-Statutory Stock Option will result in ordinary income to the
optionee equal to the excess of the fair market value of the shares at the time
of exercise over the option price. The optionee's tax basis in the shares will
be equal to the aggregate exercise price paid by the optionee plus the amount of
taxable income recognized upon the exercise of the option. Upon any subsequent
disposition of the shares, any gain or loss recognized by the optionee will be
treated as capital gain or loss and will be long-term capital gain or loss if
the shares are held for more than one year after exercise. At the time of
recognition of ordinary income by the optionee upon exercise, the Company will
normally be allowed to take a deduction for federal income tax purposes in an
amount equal to such recognized income.
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INCENTIVE STOCK OPTIONS
The federal income tax consequences associated with Incentive Stock Options
are generally more favorable to the optionee and less favorable to the Company
than those associated with Non-Statutory Stock Options. Under current federal
income tax law, the grant of an Incentive Stock Option does not result in income
to the optionee or in a deduction for the Company at the time of the grant.
Generally, the exercise of an Incentive Stock Option will not result in income
for the optionee if the optionee does not dispose of the shares within two years
after the date of grant nor within one year after the date of exercise. If these
requirements are met, the basis of the shares of Common Stock upon a later
disposition will be the option price, any gain on the later disposition will be
taxed to the optionee as long-term capital gain, and the Company will not be
entitled to a deduction. The excess of the market value on the exercise date
over the option price is an adjustment to regular taxable income in determining
alternative minimum taxable income, which could cause the optionee to be subject
to the alternative minimum tax. If the optionee disposes of the shares before
the expiration of either of the holding periods described above (a
"Disqualifying Disposition"), the optionee will have compensation taxable as
ordinary income, and the Company will normally be entitled to a deduction, equal
to the lesser of (a) the fair market value of the shares on the exercise date
minus the option price, or (b) the amount realized on the disposition minus the
option price. If the price realized in any such Disqualifying Disposition of the
shares exceeds the fair market value of the shares on the exercise date, the
excess will be treated as long-term or short-term capital gain, depending on the
optionee's holding period for the shares.
STOCK PURCHASE RIGHTS
Under current federal income tax law, the grant of an SPR has no tax effect
on the Company or the individual to whom it is granted. The income tax
consequences resulting from a purchase of restricted stock pursuant to the
exercise of a stock purchase right will vary depending on whether the purchaser
makes an election under Section 83(b) of the Code. Such election maybe made
within 30 days of the date the restricted stock is purchased with respect to
some or all of the shares of restricted stock purchased. If no election is made,
the participant will not recognize any income as a result of the purchase of
shares subject to the transfer restrictions and forfeiture provisions (i.e., the
Company's repurchase right) described above. The participant will recognize
compensation income when the transfer restrictions or forfeiture provisions
lapse or are otherwise removed in an amount equal to the difference between the
purchase price paid for such shares and the fair market value of such shares
when such restrictions lapse or are otherwise removed. In addition, any
dividends paid on any shares while such shares are subject to transfer
restrictions and forfeiture provisions will be considered compensation income
and not dividend income.
If the participant makes an election under Section 83(b) of the Code, the
participant recognizes compensation income when he or she purchases the shares
in an amount equal to the difference between the fair market value of such
shares at the time of purchase (determined without regard to the transfer
restrictions) and the purchase price paid for such shares. The participant
recognizes no additional income upon the subsequent lapse or removal of the
transfer restrictions or forfeiture provisions with respect to such shares, and
any dividends paid on the shares while such shares are subject to the transfer
restrictions and forfeiture provisions will be taxed as dividend (rather than
compensation) income.
In general, the Company is entitled to a deduction in the amount of the
compensation income recognized by the participant at the time the participant
recognizes such income, provided certain reporting requirements are timely met.
If and to the extent any shares are forfeited (i.e., repurchased by the
Company), the participant will be allowed to deduct--as an ordinary deduction if
no Section 83(b) election was made or as a capital loss if such an election was
made--an amount equal to the difference, if any, between the purchase price paid
for the shares and the amount received as a result of the forfeiture. The
participant will recognize a capital gain or loss upon the subsequent sale or
other taxable disposition of such shares (other than a sale to the Company as a
result of the forfeiture provisions), in an amount equal to the difference
between the proceeds realized from the sale or other disposition and the sum of
(a) the purchase price paid for such shares plus (b) in the case of a gain
taxable to a participant who made a Section 83(b) election, the amount of gross
income taxable as compensation to such participant as a result of the purchase
of the shares.
The Company is not entitled to any deduction corresponding to any capital
gains realized by a participant.
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$1,000,000 LIMIT ON DEDUCTIBLE COMPENSATION
Section 162(m) of the Code provides that any publicly-traded corporation
will be denied a deduction for compensation paid to certain executive officers
to the extent that the compensation exceeds $1,000,000 per officer per year.
However, the deduction limit does not apply to "performance-based compensation,
"as defined in Section 162(m). Compensation is performance-based compensation if
(i) the compensation is payable on account of the attainment of one or more
performance goals; (ii) the performance goals are established by a compensation
committee of the board of directors consisting of "outside directors"; (iii) the
material terms of the compensation and the performance goals are disclosed to
and approved by the stockholders in a separate vote; and (iv) the compensation
committee certifies that the performance goals have been satisfied. The Company
believes that, if the stockholders ratify the Plan, as amended, the stock
options granted thereunder (unless granted for purchase prices below the fair
market value of the stock subject to the options) will satisfy the requirements
to be treated as performance-based compensation, and accordingly will not be
subject to the deduction limit of Section 162(m) of the Code. The Company
believes, however, that it is unlikely that SPRs granted under the Plan, or the
purchase of restricted stock thereunder, will qualify as performance-based
compensation. The Company's ability to deduct compensation attributable to the
purchase of restricted stock under stock purchase rights will therefore probably
be subject to the limit of Section 162(m) of the Code.
EXCESS PARACHUTE PAYMENTS
Under Section 4999 of the Code, certain officers, stockholders, or
highly-compensated individuals ("Disqualified Individuals") will be subject to
an excise tax (in addition to federal income taxes) of 20% of the amount of
certain "excess parachute payments" which they receive as a result of a change
in control of the Company. Furthermore, Section 280G of the Code prevents the
Company from taking a deduction for any "excess parachute payments." The cashout
or acceleration of the vesting of stock options or restricted stock upon a
change in control may cause the holders of such stock options and restricted
stock who are Disqualified Individuals to recognize certain amounts as "excess
parachute payments" on which they must pay the 20% excise tax, and for which the
Company will be denied a tax deduction.
SPECIAL RULES; WITHHOLDING OF TAXES
Special tax rules may apply to a participant who is subject to Section 16
of the Exchange Act. Other special tax rules will apply if a participant
exercises a stock option by delivering shares of Common Stock which he or she
already owns, or through a "cashless exercise."
PARTICIPATION IN THE PLAN
As of April 1, 2000, 27,612,094 split-adjusted shares of Common Stock were
subject to outstanding options and SPRs under the Plan, 37,202,627
split-adjusted options had been issued under the Plan, and 2,290,541
split-adjusted shares of Common Stock remained available for future issuance. In
April 2000, the Company's Board of Directors approved amendments to the Plan to
increase the number of shares eligible for future grant, subject to stockholder
approval of these proposals.
The actual benefits, if any, to the holders of stock options issued under
the Plan are not determinable as all grants to be made under the Plan are
discretionary and, prior to exercise, the value, if any, of such stock options
to their holders is represented by the difference between the market price of a
share of the Company's Common Stock on the date of exercise and the exercise
price of a holder's stock option. During the fiscal year ended December 31,
1999: (i) options to purchase 8,750,826 split-adjusted shares of Common Stock
were issued pursuant to the Plan; (ii) options to purchase 163,500
split-adjusted shares of Common Stock were issued pursuant to the Plan to the
current directors who are not executive officers, as a group (5 persons); (iii)
options to purchase 1,060,500 split-adjusted shares of Common Stock were issued
to current executive officers, as a group (9 persons); and (iv) options to
purchase 7,526,826 split-adjusted shares of Common Stock were issued pursuant to
the Plan to all other employees and consultants, including current officers who
are not executive officers, as a group (approximately 800 persons). The
split-adjusted closing price of the Common Stock on December 31, 1999 was $37.29
per share.
The Plan is not a qualified deferred compensation plan under Section 401(a)
of the Code, and is not subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended.
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REQUIRED VOTE
Approval of the proposed amendment will require the affirmative vote of the
majority of shares of Common Stock represented in person or by proxy and voting
at the Annual Meeting. The Board of Directors has unanimously adopted
resolutions setting forth the proposed amendments to the Plan, subject to
stockholder approval, declaring their advisability and directing that the
proposed amendments be submitted to the stockholders for their approval at the
Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE AMENDMENTS TO
AND RATIFICATION OF THE 1997 STOCK PLAN.
RATIFICATION OF INDEPENDENT AUDITORS
(ITEM NO. 5 ON THE PROXY CARD)
The Board of Directors has selected, subject to ratification by the
stockholders, the firm of Ernst & Young LLP to serve as the independent
accountants of the Company for the fiscal year ending December 31, 2000 and
until their successors are appointed. Ernst & Young LLP served as the Company's
independent public accountants for the fiscal year ended December 31, 1999.
Representatives of Ernst & Young LLP are expected to be present at the Annual
Meeting and will be available to respond to appropriate questions and to make
any statements they desire.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE RATIFICATION OF
ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
FORM 10-K ANNUAL REPORT
UPON WRITTEN REQUEST TO THE CORPORATE SECRETARY, COVAD COMMUNICATIONS
GROUP, INC., 4250 BURTON DRIVE, SANTA CLARA, CALIFORNIA 95054, THE COMPANY WILL
PROVIDE WITHOUT CHARGE TO EACH PERSON SOLICITED A COPY OF COVAD'S 1999 ANNUAL
REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES FILED THEREWITH. THE COMPANY WILL FURNISH A REQUESTING SECURITYHOLDER
WITH ANY EXHIBIT NOT CONTAINED THEREIN UPON PAYMENT OF A REASONABLE FEE.
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STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
Under the Company's Bylaws, stockholders who wish to present proposals for
action, or to nominate directors, at the next annual meeting of stockholders of
the Company (that is, the next annual meeting following the Annual Meeting to
which this Proxy Statement relates) must give written notice thereof to the
Secretary of the Company at the address set forth on the cover page of this
Proxy Statement in accordance with the then current provisions of the Company's
Bylaws. The Bylaws currently require that such notice be given not more than 60
days nor less than 30 days prior to the meeting, except where less than 35 days
notice of the meeting is given to stockholders, then such notice of proposals
must have been received by the Secretary not later than the close of business on
the seventh day following the day on which the notice of meeting was mailed.
Stockholder notices must contain the information required by the then current
provisions of the Company's Bylaws. The Company reserves the right to reject,
rule out of order, or take other appropriate action with respect to any proposal
that does not comply with these and other applicable requirements.
In order for proposals to be eligible for inclusion in the Company's proxy
statement and Proxy Card for the next annual meeting pursuant to Rule 14a-8
under the Exchange Act, stockholder proposals would have to be received by the
Secretary of the Company no later than March 11, 2001. However, the Company may
elect to hold its next annual meeting at a different time of year than the time
of year of this Annual Meeting, in which event, if the date of the next annual
meeting changes by more than 30 days from the date of this Annual Meeting, then
such stockholder proposals would have to be received by the Company a reasonable
time before the Company's solicitation is made. Further, in order for such
stockholder proposals to be eligible to be brought before the stockholders at
the next annual meeting, the stockholder submitting such proposals must also
comply with the procedures, including the deadlines, required by the Company's
then current Bylaws, as referenced in the preceding paragraph. Stockholder
nominations of directors are not stockholder proposals within the meaning of
Rule 14a-8 and are not eligible for inclusion in the Company's proxy statement.
Any such nominations should comply with the Company's Bylaws.
Very truly yours,
/s/ ROBERT E. KNOWLING, JR.
Robert E. Knowling, Jr.
CHAIRMAN OF THE BOARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Covad Communications Group, Inc.
May 23, 2000
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APPENDIX A
COVAD COMMUNICATIONS GROUP, INC.
1997 STOCK PLAN
(AMENDED EFFECTIVE AS OF THE EFFECTIVE DATE OF THE COMPANY'S INITIAL PUBLIC
OFFERING)
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to Employees, Directors and Consultants and to
promote the success of the Company's business. Options granted under the Plan
may be Incentive Stock Options or Nonstatutory Stock Options, as determined by
the Administrator at the time of grant. Stock Purchase Rights may also be
granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as shall
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any foreign country or jurisdiction where Options or
Stock Purchase Rights are, or will be, granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the Board
in accordance with Section 4 of the Plan.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means Covad Communications Group, Inc., a Delaware
corporation.
(h) "CONSULTANT" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "DIRECTOR" means a member of the Board.
(j) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any
leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. For purposes of Incentive Stock Options, no
such leave may exceed ninety days, unless reemployment upon expiration of
such leave is guaranteed by statute or contract. If reemployment upon
expiration of a leave of absence approved by the Company is not so
guaranteed, on the 181st day of such leave any Incentive Stock Option held
by the Optionee shall cease to be treated as an Incentive Stock Option and
shall be treated for tax purposes as a Nonstatutory Stock Option. Neither
service as a Director nor payment of a director's fee by the Company shall
be sufficient to constitute "employment" by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq
Stock Market, its Fair Market Value shall be the closing sales price
for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or system for the last market trading day
prior to the time of determination, as reported in THE WALL STREET
JOURNAL or such other source as the Administrator deems reliable;
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(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean between the high
bid and low asked prices for the Common Stock on the last market
trading day prior to the day of determination, as reported in THE WALL
STREET JOURNAL or such other source as the Administrator deems
reliable; or
(iii)In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(o) "INSIDE DIRECTOR" means a Director who is an Employee.
(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(q) "NOTICE OF GRANT" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase
Right grant. The Notice of Grant is part of the Option Agreement.
(r) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means a stock option granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(u) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise
price.
(v) "OPTIONED STOCK" means the Common Stock subject to an Option or
Stock Purchase Right.
(w) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(x) "OUTSIDE DIRECTOR" means a Director who is not an Employee.
(y) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(z) "PLAN" means this 1997 Stock Plan.
(aa) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(bb) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted
Stock Purchase Agreement is subject to the terms and conditions of the Plan
and the Notice of Grant.
(cc) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised
with respect to the Plan.
(dd) "SECTION 16(B)" means Section 16(b) of the Exchange Act.
(ee) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(ff) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(gg) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(hh) "SUBSIDIARY" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
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3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 15,596,727 post-split Shares, [this figure does not give
effect to post-IPO stock splits; giving effect to such stock splits, this number
is 35,092,635] plus an annual increase to be added on the first day of the
Company's fiscal year beginning in 2000 equal to the lesser of (i) 3% of the
outstanding shares on the first day, or (ii) an amount determined by the Board.
The Shares may be authorized, but unissued, or reacquired Common Stock.
[If Proposal 3 is approved, Section 3 will be amended as follows:
"3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 35,092,635 Shares (split-adjusted for the March 31,
2000 3-for-2 stock split effected as a stock dividend), plus (a) an annual
increase to be added on the first day of the Company's fiscal year equal to
the lesser of 3% of the outstanding Shares on such date, or an amount
determined by the Board, and (b) an additional 5,000,000 Shares for the
Year 2000. The Shares may be authorized, but unissued, reacquired Common
Stock. In no event shall the aggregate annual increase in the number of
Shares which may be optioned and sold under the Plan exceed 20,000,000
Shares of Common Stock. All share numbers in this section will be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Common Stock,
or any other increase or decrease in the number of issued shares of Common
Stock effected without receipt of consideration by the Company."
If Proposal 4 is approved, Section 3 will be amended as follows:
"3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 35,092,635 Shares (split-adjusted for the March 31,
2000 3-for-2 stock split effected as a stock dividend), plus (a) an annual
increase to be added on the first day of the Company's fiscal year equal to
the lesser of 3% of the outstanding Shares on such date, or an amount
determined by the Board, and (b) an additional 10,000,000 Shares for the
Year 2001. The Shares may be authorized, but unissued, reacquired Common
Stock. In no event shall the aggregate annual increase in the number of
Shares which may be optioned and sold under the Plan exceed 20,000,000
Shares of Common Stock. All share numbers in this section will be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Common Stock,
or any other increase or decrease in the number of issued shares of Common
Stock effected without receipt of consideration by the Company."
If both Proposals 3 and 4 are approved, Section 3 will be amended as
follows:
"3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 35,092,635 Shares (split-adjusted for the March 31,
2000 3-for-2 stock split effected as a stock dividend), plus (a) an annual
increase to be added on the first day of the Company's fiscal year equal to
the lesser of 3% of the outstanding Shares on such date, or an amount
determined by the Board, and (b) an additional 5,000,000 Shares for the
Year 2000 and 10,000,000 Shares for the Year 2001. The Shares may be
authorized, but unissued, reacquired Common Stock. In no event shall the
aggregate annual increase in the number of Shares which may be optioned and
sold under the Plan exceed 20,000,000 Shares of Common Stock. All share
numbers in this section will be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of issued shares of Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company."]
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); PROVIDED, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
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4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be administered
by different Committees with respect to different groups of Service
Providers.
(ii) SECTION 162(M). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m)
of the Code, the Plan shall be administered by a Committee of two or
more "outside directors" within the meaning of Section 162(m) of the
Code.
(iii) RULE 16B-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.
(iv) OTHER ADMINISTRATION. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to,
the exercise price, the time or times when Options or Stock Purchase
Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right
or the shares of Common Stock relating thereto, based in each case on
such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value
of the Common Stock covered by such Option or Stock Purchase Right
shall have declined since the date the Option or Stock Purchase Right
was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax
treatment under foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary
authority to extend the post-termination exercisability period of
Options longer than is otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued
upon exercise of an Option or Stock Purchase Right that number of
Shares having a Fair Market Value equal to the amount required to be
withheld. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined. All elections by an Optionee to have Shares withheld for
this purpose shall be made in such form and under such conditions as
the Administrator may deem necessary or advisable;
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(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions,
determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. LIMITATIONS.
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options
are exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 6(a), Incentive Stock Options shall be taken into
account in the order in which they were granted. The Fair Market Value of
the Shares shall be determined as of the time the Option with respect to
such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they
interfere in any way with the Optionee's right or the Company's right to
terminate such relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 2,000,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional
2,000,000 Shares which shall not count against the limit set forth in
subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a
transaction described in Section 13), the canceled Option will be
counted against the limits set forth in subsections (i) and (ii)
above. For this purpose, if the exercise price of an Option is
reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall become
effective upon its adoption by the Board. It shall continue in effect for a term
of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
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9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the per Share exercise price
shall be no less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any Employee other than an Employee described
in paragraph (A) immediately above, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case
of a Nonstatutory Stock Option intended to qualify as
"performance-based compensation" within the meaning of Section 162(m)
of the Code, the per Share exercise price shall be no less than 100%
of the Fair Market Value per Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value
per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions which must be satisfied
before the Option may be exercised.
(c) FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at the
time of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than
six months on the date of surrender, and (B) have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the
Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program
or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of the Plan
and at such times and under such conditions as determined by the
Administrator and set forth in the Option Agreement. Unless the
Administrator provides otherwise, vesting of Options granted hereunder
shall be tolled during any unpaid leave of absence. An Option may not be
exercised for a fraction of a Share.
A-6
<PAGE>
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized
by the Administrator and permitted by the Option Agreement and the Plan.
Shares issued upon exercise of an Option shall be issued in the name of the
Optionee or, if requested by the Optionee, in the name of the Optionee and
his or her spouse. Until the Shares are issued (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Company shall issue
(or cause to be issued) such Shares promptly after the Option is exercised.
No adjustment will be made for a dividend or other right for which the
record date is prior to the date the Shares are issued, except as provided
in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period
of time as is specified in the Option Agreement to the extent that the
Option is vested on the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for three (3) months following the
Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by
the Administrator, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may
exercise his or her Option within such period of time as is specified in
the Option Agreement to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified
time in the Option Agreement, the Option shall remain exercisable for
twelve (12) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider,
the Option may be exercised within such period of time as is specified in
the Option Agreement (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant), by the Optionee's
estate or by a person who acquires the right to exercise the Option by
bequest or inheritance, but only to the extent that the Option is vested on
the date of death. In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If, at the time of death, the
Optionee is not vested as to his or her entire Option, the Shares covered
by the unvested portion of the Option shall immediately revert to the Plan.
The Option may be exercised by the executor or administrator of the
Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If
the Option is not so exercised within the time specified herein, the Option
shall terminate, and the Shares covered by such Option shall revert to the
Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy
out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it
shall advise the offeree in writing or electronically, by means of a Notice
of Grant, of the terms, conditions and restrictions related to the offer,
including the number of Shares that the offeree shall be entitled to
purchase, the price to be paid, and
A-7
<PAGE>
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company for any reason (including death
or Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate
determined by the Administrator.
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 13 of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and Stock Purchase Right, and the number of
shares of Common Stock which have been authorized for issuance under the
Plan but as to which no Options or Stock Purchase Rights have yet been
granted or which have been returned to the Plan upon cancellation or
expiration of an Option or Stock Purchase Right, as well as the price per
share of Common Stock covered by each such outstanding Option or Stock
Purchase Right, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made
by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of
Common Stock subject to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide for
an Optionee to have the right to exercise his or her Option until ten (10)
days prior to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not otherwise be
exercisable. In addition, the Administrator may provide that any Company
repurchase option applicable to any Shares purchased upon exercise of an
Option or Stock Purchase Right shall lapse as to all such Shares, provided
the proposed dissolution or liquidation takes place at the time and in the
manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or
A-8
<PAGE>
substitute for the Option or Stock Purchase Right, the Optionee shall fully
vest in and have the right to exercise the Option or Stock Purchase Right
as to all of the Optioned Stock, including Shares as to which it would not
otherwise be vested or exercisable. If an Option or Stock Purchase Right
becomes fully vested and exercisable in lieu of assumption or substitution
in the event of a merger or sale of assets, the Administrator shall notify
the Optionee in writing or electronically that the Option or Stock Purchase
Right shall be fully vested and exercisable for a period of fifteen (15)
days from the date of such notice, and the Option or Stock Purchase Right
shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered
assumed if, following the merger or sale of assets, the option or right
confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders
of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the
outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon
the exercise of the Option or Stock Purchase Right, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common
Stock in the merger or sale of assets.
14. DATE OF GRANT. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) STOCKHOLDER APPROVAL. The Company shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the
Optionee and the Company. Termination of the Plan shall not affect the
Administrator's ability to exercise the powers granted to it hereunder with
respect to Options granted under the Plan prior to the date of such
termination.
16. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person
exercising such Option or Stock Purchase Right to represent and warrant at
the time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation
is required.
17. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. STOCKHOLDER APPROVAL. The Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
A-9
<PAGE>
1828-PS-00
<PAGE>
-----------
PROXY
-----------
COVAD COMMUNICATIONS GROUP, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JUNE 30, 2000
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders of Covad Communications Group, Inc. (the "Company")
dated May 23, 2000 and the accompanying Proxy Statement relating to the
above-referenced annual meeting, and hereby appoints Robert E. Knowling, Jr. or
Timothy Laehy, or either of them, with full power to each of substitution and
resubstitution in each, as attorneys and proxies of the undersigned.
Said proxies are hereby given authority to vote all shares of Common
Stock of the Company which the undersigned may be entitled to vote at the Annual
Meeting of Stockholders of the Company, to be held at 2:00 p.m. local time, on
Friday, June 30, 2000, at the Sheraton San Jose Hotel, Milpitas, California and
at any and all adjournments or postponements thereof (the "Annual Meeting") on
behalf of the undersigned on the matters set forth on the reverse side hereof
and in the manner designated thereon.
This proxy is solicited by the Board of Directors of the Company, and
when properly executed, the shares represented hereby will be voted in
accordance with the instructions in this proxy. If no direction is made, this
proxy will be voted FOR all of the nominees listed herein (or substitute
nominees selected by the Board of Directors) and FOR all the proposals listed
herein, and in the discretion of the proxies on such other matters as may
properly come before the Annual Meeting, including, among other things,
consideration of any motion made for adjournment or postponement of the Annual
Meeting.
PLEASE DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY
IN THE ENCLOSED ENVELOPE
(SEE REVERSE SIDE)
<PAGE>
- DETACH HERE -
<TABLE>
<CAPTION>
Please mark
[ X ] votes as in
this example
<S>
<C> <C>
1. Election of Class I Directors: FOR WITHHELD
ALL FROM ALL
Nominees: Daniel Lynch Richard Shapero NOMINEES NOMINEES
---------------------, ---------------------------- / / / /
and Larry Irving
--------------------
[ ]__________________________________________________________________________
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THAT NOMINEE'S NAME IN THE SPACE PROVIDED:
2. Amendment to the Amended and Restated Certificate of Incorporation FOR AGAINST ABSTAIN
to Increase the Number of Authorized Shares of Common Stock / / / / / /
to 600,000,000:
3. Amendment to the 1997 Stock Plan to Limit the Annual Increase Under FOR AGAINST ABSTAIN
the Plan, Adding 5,000,000 Eligible Shares to the 2000 Annual / / / / / /
Increase And Ratification of the Plan as Amended:
4. Amendment to the 1997 Stock Plan to Limit the Annual Increase Under FOR AGAINST ABSTAIN
the Plan, Adding 10,000,000 Eligible Shares to the 2001 Annual / / / / / /
Increase And Ratification of the Plan as Amended:
5. Ratification of Independent Auditors for the Year Ended FOR AGAINST ABSTAIN
December 31, 2000: / / / / / /
</TABLE>
MARK HERE MARK HERE
FOR ADDERSS IF YOU PLAN [ ]
CHANGE AND TO ATEEND
NOTE BELOW THE MEETING
Note: Please date and sign exactly as your
name(s) appear on this Proxy Card. If shares
are registered in more than one name, all
such persons should sign. A corporation
should sign in its full corporate name
by a duly authorized officer, stating his
title. When signing as attorney, executor,
administrator, trustee or guardian, please
sign in your official capacity and give your
full title as such. If a partnership, please
sign in the partnership name by an authorized
person.
Signature:
---------------------------------
Date:
---------------------------------
Signature:
---------------------------------
Date:
---------------------------------
<PAGE>
