<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
NOTE EXCHANGE OFFER
ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COVAD COMMUNICATIONS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 77-0461529
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2330 CENTRAL EXPRESSWAY
SANTA CLARA, CALIFORNIA 95050
(408) 490-4500
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
ROBERT E. KNOWLING, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COVAD COMMUNICATIONS GROUP, INC.
2330 CENTRAL EXPRESSWAY
SANTA CLARA, CALIFORNIA 95050
(408) 844-7500
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
MEREDITH S. JACKSON, ESQ.
ASHOK MUKHEY, ESQ.
GEOFF TRACHTENBERG, ESQ.
IRELL & MANELLA LLP
1800 AVENUE OF THE STARS
LOS ANGELES, CA 90067
(310) 277-1010
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G. check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
12% Senior Notes due 2010............... $425,000,000 100% $425,000,000 $118,150
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 14, 2000
LOGO
COVAD COMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
12% SENIOR NOTES DUE 2010, SERIES A (UNREGISTERED)
FOR 12% SENIOR NOTES DUE 2010, SERIES B (REGISTERED)
We currently have outstanding $425.0 million in principal amount of 12%
Senior Notes due 2010, Series A. We are offering to exchange new registered 12%
Senior Notes due 2010, Series B for any and all of the old notes.
TO EXCHANGE YOUR UNREGISTERED OLD NOTES FOR REGISTERED NEW NOTES, YOU MUST
TENDER YOUR OLD NOTES NO LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON
, 2000, UNLESS EXTENDED.
-------------------------
No public market currently exists for the new notes. We do not expect that
an active public market in the new notes will develop. We do not intend to list
the new notes on any securities exchange or on the Nasdaq National Market.
-------------------------
SEE THE "RISK FACTORS" SECTION ON PAGE 9 FOR INFORMATION THAT YOU SHOULD
CONSIDER BEFORE YOU DECIDE TO PARTICIPATE IN THIS EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 1
Summary consolidated financial
data.............................. 7
Risk Factors........................ 9
Use of proceeds..................... 25
Capitalization...................... 26
Selected consolidated financial
data.............................. 28
Management's discussion and analysis
of financial condition and results
of operations..................... 30
Business............................ 39
Management.......................... 58
Security ownership of certain
beneficial owners and
management........................ 62
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain relationships and related
transactions...................... 63
The exchange offer.................. 68
Description of certain
indebtedness...................... 76
Certain terms of the new notes...... 77
Description of notes................ 78
Certain federal income tax
considerations.................... 112
Plan of distribution................ 113
Where you can find more
information....................... 113
Legal matters....................... 114
Experts............................. 114
Index to financial statements.......
</TABLE>
------------------------
You should rely only on the information provided in this prospectus. We
have authorized no one to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus or the
prospectus supplement is accurate as of any date other than the date on the
front of the document.
i
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" beginning on
page 9, carefully before investing in the notes.
COVAD COMMUNICATIONS GROUP, INC.
OUR COMPANY
We are a leading provider of broadband communications services to Internet
service provider, enterprise and telecommunications carrier customers. These
services include a range of high-speed, high-capacity Internet and network
access services using digital subscriber line (DSL) technology, and related
value-added services. Internet service providers purchase our services in order
to provide high-speed Internet access to their business and consumer end-users.
Enterprise customers purchase our services directly or indirectly from us to
provide employees with high-speed remote access to the enterprise's local area
networks (RLAN access), which improves employee productivity and reduces network
connection costs. Telecommunications carrier customers purchase our services for
resale to their Internet service provider affiliates, Internet users and
enterprise customers.
We believe we have the nation's largest DSL network with 1,100 operational
central offices passing over 29 million homes and businesses. As of December 31,
1999, we had installed 57,000 DSL-based high-speed access lines and received
orders for our services from 295 Internet service provider, enterprise and
telecommunications carrier customers, including AT&T, Concentric Network,
Flashcom, MindSpring, Oracle, Prodigy, PSINet, Qwest, Stanford University, Sun
Microsystems, UUNET and Verio.
We had planned to deploy our services in 51 metropolitan statistical areas
by the end of the first quarter 2000. By August 1999 we had begun offering our
services in each of these 51 metropolitan statistical areas and, in September
1999, we announced plans to roll out our services in 49 additional metropolitan
statistical areas. To date, we have deployed our networks in a total of 62
metropolitan statistical areas. When this build-out is completed, which we
expect to be by the end of 2000, our network will pass a total of 46 million
homes and businesses, representing 40% of homes and 45% of businesses in the
United States.
We plan to continue to pursue rapid network expansion and installation of
high-speed access lines, and to develop a variety of services that are enhanced
or enabled by our broadband network, such as voice over DSL and e-commerce
applications. We expect to leverage our network by entering into business
arrangements with broadband-related service providers in order to bring a
variety of value-added service offerings to our customers and their end-users.
OUR MARKET OPPORTUNITY
We believe that we have a substantial business opportunity for the
following reasons:
- There is a growing market demand for broadband communications services.
- Broadband communications services are enabling new applications for
businesses and consumers.
- DSL is a cost-effective technology for broadband communications.
- The current regulatory environment facilitates the provision of
competitive broadband communications service offerings.
OUR COMPETITIVE STRENGTHS
We offer an attractive value proposition compared to alternative
technologies. For business Internet users, our high-end services offer
bandwidth comparable to that offered by T1 and frame relay circuits (which are
up to 25 times the speed of most analog modems) at a substantially lower cost
than traditional T1 service. For the RLAN market, our mid-range services are
three to six times the speed of ISDN lines
1
<PAGE> 5
and up to ten times the speed of most analog modems at monthly rates similar to
or lower than those for heavily-used ISDN lines. For consumer Internet users,
our consumer services are comparably priced to other services, such as cable
modem services, but offer significant advantages in security, network
performance and speed.
We have leveraged our first-mover advantage to rapidly expand our network
and grow our number of installed lines. We were the first to widely roll out
DSL services on a commercial basis, making DSL service available for purchase in
the San Francisco Bay Area in December 1997. We believe that we have leveraged
our first-mover advantage to rapidly expand our network into our targeted
metropolitan regions and grow our number of line installations.
Our services are widely available, continuously connected and secure. Our
strategy of providing blanket coverage in each region we serve is designed to
ensure that our services are available to the vast majority of our customers'
end-users. Our networks provide a 24-hour continuous connection, unlike ISDN
lines and analog modems which require customers to dial-up each time for
Internet or RLAN access. Also, because we use dedicated connections from each
end-user to the Internet service provider or enterprise network, our customers
can reduce the risk of unauthorized access.
Our management team has extensive industry experience. Our management team
includes individuals with extensive experience in the data communications,
telecommunications and personal computer industries. In July 1998, we hired as
our Chief Executive Officer Robert Knowling, Jr., who formerly served as the
Executive Vice President of Operations and Technologies at U S WEST
Communications and as Vice President of Network Operations at Ameritech. Mr.
Knowling also serves as our President and the Chairman of our board of
directors.
OUR BUSINESS STRATEGY
Our objective is to become the leading nationwide provider of broadband
services and a critical element in the proliferation of e-commerce and other
applications that are enabled or enhanced by broadband communications. The key
elements of our strategy to achieve this objective are to:
- expand our network and roll out our service rapidly in our targeted
metropolitan statistical areas;
- provide pervasive coverage in each of our 100 targeted metropolitan
statistical areas;
- establish and maintain sales and marketing relationships with leading
Internet service providers, telecommunications carriers and DSL
resellers;
- develop a high level of national brand recognition for our name;
- develop and commercialize additional value-added services such as voice
over DSL; and
- take advantage of new regulatory developments to facilitate the
deployment of our network.
RECENT DEVELOPMENTS
On January 25, 2000, we announced our preliminary operating results for the
three and twelve months ended December 31, 1999. We recorded revenues of $30.9
million, representing a 62% increase over the quarter ended September 30, 1999,
a net loss of $70.5 million, and an EBITDA deficit of $52.0 million for the
three months ended December 31, 1999. We recorded revenues of $66.5 million, a
net loss of $195.4 million, and an EBITDA deficit of $129.5 million for the
twelve months ended December 31, 1999. We also announced that, during the fourth
quarter, our subscriber lines increased 84% to 57,000 lines, and homes and
businesses passed increased to 29 million.
2
<PAGE> 6
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
Registration rights
agreement.................. You are entitled under the registration agreement
to exchange your unregistered notes for registered
notes with substantially identical terms. We are
now offering to exchange your unregistered old
notes for registered new notes with substantially
the same terms in the exchange offer. The exchange
offer is intended to satisfy our obligations under
the registration rights agreement. After the
exchange offer is completed, you will no longer be
entitled to any exchange or registration rights
with respect to your old notes.
The registration rights agreement requires us to
file a registration statement for a continuous
offering in accordance with Rule 415 under the
Securities Act for your benefit if you would not
receive freely tradeable registered notes in the
exchange offer or you are ineligible to participate
in the exchange offer and indicate that you wish to
have your old notes registered under the Securities
Act. See "The exchange offer -- Procedures for
tendering."
The exchange offer......... We are offering to exchange $1,000 principal amount
of new notes, our Series B 12% Senior Notes due
2010 which have been registered under the
Securities Act, for each $1,000 principal amount of
old notes, our Series A 12% Senior Notes due 2010
which were issued on January 28, 2000 in a private
placement. In order to be exchanged, an old note
must be properly tendered and accepted. All old
notes that are validly tendered and not validly
withdrawn will be exchanged for new notes.
As of this date, there is $425.0 million aggregate
principal amount of old notes outstanding.
We will issue the new notes promptly after the
expiration of the exchange offer.
Resales of the registered
notes.................... We believe that the new notes may be offered for
resale, resold and otherwise transferred by you
without compliance with the registration and
prospectus delivery provisions of the Securities
Act if you meet the following conditions:
- The new notes to be acquired by you in the
exchange offer are acquired by you in the
ordinary course of your business;
- you are not engaging in and do not intend to
engage in a distribution of the new notes;
- you do not have an arrangement or understanding
with any person to participate in the
distribution of the registered notes; and
- you do not control us, you are not controlled by
us, and you are not under common control with us,
either directly or indirectly.
If you do not meet the above conditions, you may
incur liability under the Securities Act if you
transfer any new note without delivering a
prospectus meeting the requirements of the
Securities Act. We do not assume or indemnify you
against that liability.
Each broker-dealer that receives new notes in the
exchange offer for its own account in exchange for
old notes which were acquired by that
3
<PAGE> 7
broker-dealer as a result of market-making
activities or other trading activities must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in
connection with any resales of the registered
notes. A broker-dealer may use this prospectus for
an offer to resell or to otherwise transfer these
registered notes.
Expiration date............ The exchange offer will expire at 5:00 p.m., New
York City time, on [ ], 2000, unless we
decide to extend the exchange offer. We do not
intend to extend the exchange offer, although we
reserve the right to do so.
Conditions to the exchange
offer.................... The only conditions to completing the exchange
offer are that the exchange offer not violate
applicable law or any applicable interpretation of
the staff of the Securities and Exchange Commission
and no injunction, order or decree has been issued
which would prohibit, prevent or materially impair
our ability to proceed with the exchange offer. See
"The exchange offer -- Conditions."
Withdrawal................. You may withdraw the tender of your old notes at
any time prior to 5:00 p.m., New York City time, on
the expiration date. We will return to you any old
notes not accepted for exchange for any reason
without expense to you as promptly as we can after
the expiration or termination of the exchange
offer.
Exchange agent............. United States Trust Company of New York is serving
as the exchange agent in connection with the
exchange offer.
Consequences of failure to
exchange................. If you do not participate in the exchange offer,
upon completion of the exchange offer, the
liquidity of the market for your old notes could be
adversely affected. If the liquidity of the market
for your old notes is adversely affected, you may
be unable to sell or transfer your old notes and
the value of your old notes may decline. See "Risk
factors -- The value of your old notes may decline
if you fail to exchange your old notes for new
notes."
Federal income tax
consequences............. The exchange of the old notes should not be a
taxable event for federal income tax purposes. See
"Certain United States Federal Income Tax
Considerations."
4
<PAGE> 8
SUMMARY OF THE TERMS OF THE NEW NOTES
THE NEW NOTES................. $425.0 million principal amount of 12% Senior
Notes due 2010, Series B.
MATURITY...................... February 15, 2010.
INTEREST...................... The new notes will pay interest in cash at a
fixed annual rate of 12%, payable every six
months on February 15 and August 15 of each
year, beginning on August 15, 2000.
RANKING....................... The new notes will be our senior obligations.
The new notes will rank equal in right of
payment with all of our existing and future
senior debt and will rank senior in right of
payment to any of our future subordinated debt,
but will be effectively subordinated to our
subsidiaries' existing and future debt and
other liabilities (including our subsidiaries'
subordinated debt and trade payables). We and
our subsidiaries may incur substantial
additional debt under the indenture, subject to
certain restrictions.
Assuming we had completed the exchange offer
December 31, 1999, the new notes:
- would have ranked equally with $374.7 million
of our senior debt; and
- would have been effectively subordinated to
$82.5 million of debt and other liabilities
(including trade payables) of our
subsidiaries.
SINKING FUND.................. None.
OPTIONAL REDEMPTION........... On or after February 15, 2005, we may redeem
some or all of the new notes at any time at the
redemption prices listed in "Description of the
notes -- optional redemption."
On or prior to February 15, 2003, we may redeem
up to 35% of the new notes with the proceeds of
certain public offerings of equity in our
Company at the price listed in "Description of
the notes -- optional redemption."
MANDATORY OFFER TO
REPURCHASE.................... If we sell certain assets or experience
specific kinds of changes of control, we must
offer to repurchase the new notes at the prices
listed in "Description of the notes."
BASIC COVENANTS OF
INDENTURE..................... We will issue the new notes under an indenture
with United States Trust Company of New York.
The indenture will, among other things,
restrict our ability and the ability of our
subsidiaries to:
- borrow money;
- pay dividends on stock or purchase stock;
- make investments;
- use assets as security in other transactions;
and
- sell certain assets or merge with or into
other companies.
For more details, see the section "Description
of the notes" under the heading "Certain
Covenants."
5
<PAGE> 9
We are not currently in default of any of the
covenants in the old notes. These covenant
limitations are subject to significant
qualifications and exceptions. See "Description
of the notes -- Covenants."
USE OF PROCEEDS............... We will not receive any proceeds from the
exchange offer.
RISK FACTORS
An investment in the new notes includes a high degree of risk. You should
carefully consider all the information in this prospectus. In particular, you
should evaluate the specific risk factors set forth under "Risk Factors,"
beginning on page 9.
6
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------------
1997 1998 1998 1999
---------- ---------- ---------- -----------
(UNAUDITED)
(DOLLARS)IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ 26 $ 5,326 $ 2,560 $ 35,570
Operating expenses:
Network and product costs........................ 54 4,562 2,316 32,219
Sales, marketing, general and administrative..... 2,374 31,043 17,231 80,786
Amortization of deferred compensation............ 295 3,997 2,695 3,895
Depreciation and amortization.................... 70 3,406 1,348 23,911
---------- ---------- ---------- -----------
Total operating expenses.................. 2,793 43,008 23,590 140,811
---------- ---------- ---------- -----------
Income (loss) from operations...................... (2,767) (37,682) (21,030) (105,241)
Net interest income (expense).................... 155 (10,439) (7,231) (19,620)
---------- ---------- ---------- -----------
Net income (loss).................................. (2,612) 48,121) (28,261) (124,861)
---------- ---------- ---------- -----------
Preferred dividends................................ -- -- -- (1,146)
---------- ---------- ---------- -----------
Net income (loss) available to common
stockholders..................................... $ (2,612) $ (48,121) $ (28,261) $ (126,007)
========== ========== ========== ===========
OTHER FINANCIAL DATA:
EBITDA(1).......................................... $ (2,402) $ (30,154) $ (16,987) $ (77,435)
Deficiency of earnings available to cover fixed
charges(2)....................................... (2,612) (48,121) (28,261) (126,007)
CONSOLIDATED CASH FLOW DATA:
Provided by (used in) operating activities......... $ (1,895) $ (9,054) $ (4,196) $ (65,721)
Provided by (used in) investing activities......... (2,494) (61,252) (33,464) (233,877)
Provided by (used in) financing activities......... 8,767 130,378 130,358 416,951
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
AS OF ------------------------------------------
DECEMBER 31, PRO FORMA
1998 ACTUAL PRO FORMA(3) AS ADJUSTED(4)
------------ ---------- ------------ --------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 64,450 $ 181,803 751,345 $ 1,164,614
Net property and equipment.......................... 59,145 187,376 187,376 187,376
Total assets........................................ 139,419 543,790 1,113,332 1,538,332
Long-term obligations, including current portion.... 142,879 369,304 369,304 794,304
Total stockholders' equity (net capital
deficiency)....................................... (24,706) 111,825 681,367 681,367
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------ -------------------------
1997 1998 1998 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
OTHER OPERATING DATA:
Homes and businesses passed........................ 278,000 6,000,000 3,302,002 25,000,000
Lines installed.................................... 26 3,900 1,948 31,000
</TABLE>
- ---------------
(1) EBITDA consists of net loss excluding net interest, taxes, depreciation and
amortization, non-cash stock-based compensation expense and other
non-operating income or expenses. We have provided EBITDA because it is a
measure of financial performance commonly used in the telecommunications
industry as well as to enhance an understanding of our operating results.
EBITDA should not be construed as either:
- an alternative to operating income (as determined in accordance with
generally accepted accounting principles) as an indicator of our operating
performance, or
- an alternative to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) as a measure of
liquidity.
EBITDA as calculated by us may be calculated differently than EBITDA for other
companies. See our consolidated financial statements and the related notes
thereto contained elsewhere in this prospectus.
(2) For purposes of determining the deficiency of earnings available to cover
fixed charges, "earnings" included pre-tax loss from operations adjusted for
fixed charges. "Fixed charges" included interest expense, capitalized
interest,
7
<PAGE> 11
amortization of debt discount and financing costs, and that portion of rent
expense which we believe to be representative of interest. In view of our
limited operating history and due to additional interest charges (including
amortization of debt discount and debt issuance costs) with respect to our
existing debt securities, the deficiency of earnings available to cover
fixed charges should not be considered indicative of the deficiency of
earnings available to cover fixed charges in the future.
(3) The pro forma balance sheet data includes the receipt of:
- $568.8 million of net proceeds from the sale of 13.7 million shares of
common stock sold by us in the November 1999 offering; and
- $702,000 of proceeds from the issuance of 430,000 shares of common stock
subject to outstanding options held by selling stockholders who sold
shares in the November 1999 offering.
(4) The pro forma as adjusted balance sheet data includes the receipt of $413.3
million of net proceeds from the issuance of the old notes.
8
<PAGE> 12
RISK FACTORS
The new notes, like the old notes, entail high degree of risk. You should
carefully consider the following factors, as well as other information in this
prospectus, before deciding to tender old notes for new notes. This prospectus
contains forward-looking statements that involve risks and uncertainties. We use
words such as "anticipates," "believes," "plans," "expects," "future," "intends"
and similar expressions to identify forward-looking statements. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including the risks described below
and elsewhere in this prospectus. We disclaim any obligation to update
information contained in any forward-looking statement.
RISKS RELATED TO COVAD
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY
We were incorporated in October 1996 and introduced our services
commercially in the San Francisco Bay Area in December 1997. Because of our
limited operating history, you have limited operating and financial data upon
which to evaluate our business. You should consider that we have the risks of an
early stage company in a new and rapidly evolving market. To overcome these
risks, we must:
- rapidly expand the geographic coverage of our services;
- attract and retain customers within our existing and in new metropolitan
statistical areas;
- increase awareness of our services;
- respond to competitive developments;
- continue to attract, retain and motivate qualified persons;
- continue to upgrade our technologies in response to competition and
market factors;
- manage our traditional telephone company suppliers;
- rapidly install high-speed access lines;
- effectively manage the growth of our operations; and
- deliver additional value-added services to our customers.
WE HAVE A HISTORY OF LOSSES AND EXPECT INCREASING LOSSES IN THE FUTURE
We have incurred substantial losses and experienced negative cash flow each
fiscal quarter since our inception. As of September 30, 1999, we had an
accumulated deficit of approximately $175.6 million. We intend to increase our
capital expenditures and operating expenses in order to expand our business. As
a result, we expect to incur substantial additional net losses and substantial
negative cash flow for at least the next several years.
We expect to experience substantial negative cash flow from operating
activities and negative cash flow before financing activities for at least the
next several years due to continued development, commercial deployment and
expansion of our networks. We may also make investments in and acquisitions of
businesses that are complementary to ours to support the growth of our business.
Our future cash requirements for developing, deploying and enhancing our
networks and operating our business, as well as our revenues, will depend on a
number of factors including:
- the number of regions entered, the timing of entry and services offered;
- network development schedules and associated costs;
- the rate at which customers and end-users purchase our services and the
pricing of such services;
9
<PAGE> 13
- the level of marketing required to acquire and retain customers and to
attain a competitive position in the marketplace;
- the rate at which we invest in engineering and development and
intellectual property with respect to existing and future technology; and
- unanticipated opportunities.
In addition, we expect our net losses to increase in the future due to the
interest and amortization charges related to the 13 1/2% Senior Discount Notes
due 2008 issued in March 1998 (the "1998 notes"), the 12 1/2% Senior Notes due
2009 issued in February 1999 (the "1999 notes") and the notes, and the
amortization charges related to our issuance of preferred stock to AT&T Ventures
and two affiliated funds ("AT&T Ventures"), NEXTLINK and Qwest in January 1999.
For example:
- Interest and amortization charges relating to the 1998 notes were
approximately $16.0 million during the year ended December 31, 1998.
These charges will increase each year until the year ending December 31,
2004, during which period the interest and amortization charges will be
approximately $36.9 million. This increase is due to the accretion of the
1998 notes to $260 million through March 2003.
- Interest and amortization charges relating to the 1999 notes were
approximately $24.8 million during the year ending December 31, 1999 and
will increase slightly each year to approximately $29.3 million during
the year ending December 31, 2008.
- Interest and amortization charges relating to the Notes will be
approximately $48.2 million during the year ending December 31, 2000 and
will be $52.1 million each following year through the maturity of the
Notes in February 2010.
- We recorded intangible assets of $28.7 million associated with the
issuance of our preferred stock to AT&T Ventures, NEXTLINK and Qwest.
These amounts will result in an annual amortization charge of
approximately $8.4 million in each of the years in the three year period
ending December 31, 2001.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE IN FUTURE PERIODS AND, THEREFORE,
ARE DIFFICULT TO PREDICT
Our annual and quarterly operating results are likely to fluctuate
significantly in the future as a result of numerous factors, many of which are
outside of our control. These factors include:
- the timing and willingness of traditional telephone companies to provide
us with central office space and the prices, terms and conditions on
which they make available the space to us;
- the amount and timing of capital expenditures and other costs relating to
the expansion of our networks and the marketing of our services;
- delays in the commencement of operations in new regions and the
generation of revenue because certain network elements have lead times
that are controlled by traditional telephone companies and other third
parties;
- the ability to develop and commercialize new services by us or our
competitors;
- the ability to deploy on a timely basis our services to adequately
satisfy end-user demand;
- our ability to successfully operate our networks;
- the rate at which customers subscribe to our services;
- decreases in the prices for our services due to competition, volume-based
pricing and other factors;
- our ability to retain Internet service provider, enterprise and
telecommunications carrier customers and limit end-user churn rates;
10
<PAGE> 14
- the mix of line orders between consumer end-users and business end-users
(which typically have higher margins);
- the success of our relationships with AT&T, NEXTLINK, Qwest and WebMD and
other potential third parties in generating significant end-user demand;
- the development and operation of our billing and collection systems and
other operational systems and processes;
- the rendering of accurate and verifiable bills by our traditional
telephone company suppliers and resolution of billing disputes;
- the incorporation of enhancements, upgrades and new software and hardware
products into our network and operational processes that may cause
unanticipated disruptions; and
- the interpretation and enforcement of regulatory developments and court
rulings concerning the 1996 Telecommunications Act, interconnection
agreements and the anti-trust laws.
As a result, it is likely that in some future quarters our operating
results will be below the expectations of securities analysts and investors.
WE CANNOT PREDICT WHETHER WE WILL BE SUCCESSFUL BECAUSE OUR BUSINESS STRATEGY IS
LARGELY UNPROVEN
We believe that we were the first competitive telecommunications company to
widely provide high-speed Internet and network access using DSL technology. To
date, our business strategy remains largely unproven. To be successful, we must
develop and market services that achieve broad commercial acceptance by Internet
service provider, enterprise and telecommunications carrier customers in our
targeted metropolitan statistical areas. Because our business and the demand for
high-speed digital communications services are in the early stages of
development, we are uncertain whether our services will achieve broad commercial
acceptance.
It is uncertain whether our strategy of selling and providing our service
through the Internet service providers and telecommunication service providers
will be successful. This strategy creates marketing, operational and other
challenges and complexities that are less likely to appear in the case of a
single entity providing integrated DSL and ISP services. For example, cable
modem service providers, such as Excite@Home and Time Warner, market, sell and
provide both high-speed services, Internet access and content services on an
integrated basis.
Two recently-announced mergers and acquisitions -- between America Online
and Time Warner, and between NEXTLINK and Concentric Network -- highlight a
growing trend among service providers and telecommunications carriers to combine
the marketing, selling and provision of high-speed data transmission services,
Internet access and content services. While we do not believe that such combined
entities providing integrated services will adversely affect our business, no
assurance can be given that such combinations will not ultimately have such an
adverse effect. Further, no assurance can be given that additional acquisitions
of Internet service providers by traditional and local competitive
telecommunications carriers, and other strategic alliances between such
entities, will not harm our business.
WE MAY EXPERIENCE DECREASING PRICES FOR OUR SERVICES, WHICH MAY IMPAIR OUR
ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW
We may experience decreasing prices for our services due to competition,
volume-based pricing, an increase in the proportion of our revenues generated by
our consumer services and other factors. Currently, we charge higher prices for
some of our services than some of our competitors do for their similar services.
As a result, we cannot assure you that our customers and their end-user
customers will select our services over those of our competitors. In addition,
prices for digital communications services in general have fallen historically,
and we expect this trend to continue. We have provided and expect in the future
to provide price discounts to customers that commit to sell our services to a
large number of their end-user customers. Our consumer grade services have lower
prices than our business grade services. As a result,
11
<PAGE> 15
expected increases in the percentage of our revenues which we derive from our
consumer services will likely reduce our overall profit margins. We also expect
to reduce prices periodically in the future to respond to competition and to
generate increased sales volume. As a result, we cannot predict whether demand
for our services will exist at prices that enable us to achieve profitability or
positive cash flow.
OUR BUSINESS WILL SUFFER IF OUR INTERNET SERVICE PROVIDERS, TELECOMMUNICATIONS
CARRIERS AND OTHER THIRD PARTIES ARE NOT SUCCESSFUL IN MARKETING AND SELLING OUR
SERVICES
We market our Internet access services through Internet service providers
and telecommunications carriers for resale to their business and consumer
end-users. To date, a limited number of Internet service providers have
accounted for the significant majority of our revenues. As a result, a
significant reduction in the number of end-users or revenues provided by one or
more of our key Internet service providers could materially harm our operating
results in any given period. We expect that our Internet service provider
customers and telecommunications carriers will account for the majority of our
future market penetration and revenue growth. Our agreements with our customers
are generally non-exclusive. Many of our customers also resell services offered
by our competitors. In addition, a number of our customers have committed to
provide large numbers of end-users in exchange for price discounts. If our
customers do not meet their volume commitments or otherwise do not sell our
services to as many end users as we expect, our business will suffer.
In addition, we entered into commercial agreements with each of AT&T,
NEXTLINK and Qwest and more recently with WebMD. Our agreements with AT&T,
NEXTLINK and Qwest provide for the purchase and resale of our services,
primarily to their small business and enterprise customers. Our agreement with
WebMD provides that we will be WebMD's preferred provider of broadband
connectivity offering physician subscribers web-based multimedia and
communication services designed to enhance their practices. To date, these
relationships have not generated significant line orders. We cannot predict the
number of line orders that AT&T, NEXTLINK, Qwest or WebMD will generate, if any,
or whether line orders will be below our expectations. In addition, these and
future relationships we may establish with other third parties may not result in
significant line orders or revenues.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY MAY DELAY OUR NETWORK EXPANSION AND
SERVICE ROLLOUT
Our strategy is to significantly expand our networks within our existing
metropolitan statistical areas and to deploy our networks in substantially all
of our 100 targeted metropolitan statistical areas by the end of 2000. The
execution of this strategy involves:
- obtaining the required government authorizations;
- identifying, accessing and initiating service in key central offices
within existing and target regions;
- designing, maintaining and upgrading adequate operational support,
billing and collection systems;
- obtaining central office space and maintaining connections between
central offices;
- obtaining phone lines and electronic ordering facilities from our
traditional telephone company suppliers on a timely basis; and
- entering into and renewing interconnection agreements with the
appropriate traditional telephone companies on satisfactory terms and
conditions.
To accomplish this strategy, we must, among other things:
- market to and acquire a substantial number of customers and end-users;
- continue to implement and improve our operational, financial and
management information systems, including our client ordering,
provisioning, dispatch, trouble ticketing and other operational systems
as well as our billing, accounts receivable and payable tracking,
collection, fixed assets and other financial management systems;
12
<PAGE> 16
- hire and train additional qualified management and technical personnel;
- manage and resolve any disputes which may arise with our traditional
telephone company suppliers;
- establish and maintain relationships with third parties to market and
sell our services, install network equipment and provide field service;
and
- continue to expand and upgrade our network infrastructure.
We may be unable to do these things successfully. As a result, we may be
unable to deploy our networks as scheduled or achieve the operational growth
necessary to achieve our business strategy.
Our growth has placed, and is expected to continue to place, significant
demands on our management and operational resources. We expect to continue to
significantly increase our employee base to support the deployment of our
networks. We also expect to implement system upgrades, new software systems and
other enhancements, which could cause disruption and dislocation in our
business. If we are successful in implementing our marketing strategy, we may
have difficulty responding to demand for our services and technical support in a
timely manner and in accordance with our customers' expectations. We expect
these demands to require the addition of new management personnel and the
increased outsourcing of company functions to third parties. We may be unable to
do this successfully, in which case we could experience a reduction in the
growth of our line orders and therefore our revenues.
REJECTIONS OF OUR APPLICATIONS FOR CENTRAL OFFICE SPACE BY TRADITIONAL TELEPHONE
COMPANIES ARE LIKELY TO DELAY THE EXPANSION OF OUR NETWORKS AND THE ROLLOUT OF
OUR SERVICES
We must secure physical space from traditional telephone companies for our
equipment in their central offices in order to provide our services in our
targeted metropolitan statistical areas. In the past, we have experienced
rejections of our applications to secure this space in many central offices, and
we continue to receive rejections in some central offices.
We expect that as we proceed with our deployment, we will face additional
rejections of our applications for central office space in our other targeted
metropolitan statistical areas. These rejections have in the past resulted, and
could in the future result, in delays and increased expenses in the rollout of
our services in our targeted metropolitan statistical areas, including delays
and expenses associated with engaging in legal proceedings with the traditional
telephone companies. This has harmed our business and is likely to continue to
harm our business in future periods.
We face other challenges in dealing with the traditional telephone
companies:
- there may be real limitations on the availability of central office space
in certain central offices;
- they frequently claim lack of available facilities when asked by us to
provide connections between central offices and telephone wires to
end-users;
- they frequently fail to promise delivery of, and actually deliver,
properly connected telephone wires to our end-users on time;
- they frequently do not cooperate in providing us with relevant telephone
wire information such as the length of the wire;
- they frequently do not deploy and provide us with integrated software
systems that allow us to seamlessly place large volumes of orders for
telephone lines; and
- they frequently do not cooperate in maintaining and resolving problems
relating to delivery of telephone lines.
We are engaged in a variety of negotiations, regulatory disputes and legal
actions to resolve these situations. We may be unable to resolve these matters
successfully.
The Federal Communications Commission (FCC) has been reviewing the policies
and practices of the traditional telephone companies with the goal of
facilitating the efforts of competitive telecommunica-
13
<PAGE> 17
tions companies to obtain central office space and telephone wires more easily
and on more favorable terms. On March 31, 1999, the FCC adopted rules to make it
easier and less expensive for competitive telecommunications companies to obtain
central office space and to require traditional telephone companies to make new
alternative arrangements for obtaining central office space. However, the FCC's
new rules have not been uniformly implemented in a timely manner and may not
ultimately enhance our ability to obtain central office space.
CHARGES FOR UNBUNDLED NETWORK ELEMENTS ARE OUTSIDE OF OUR CONTROL BECAUSE THEY
ARE PROPOSED BY THE TRADITIONAL TELEPHONE COMPANIES AND ARE SUBJECT TO COSTLY
REGULATORY APPROVAL PROCESSES
Traditional telephone companies provide the unbundled DSL-capable lines or
telephone wires that connect each end-user to our equipment located in the
central offices. The 1996 Telecommunications Act generally requires that charges
for these unbundled network elements be cost-based and nondiscriminatory. The
nonrecurring and recurring monthly charges for DSL-capable lines (telephone
wires) that we require vary greatly. These rates are subject to the approval of
the state regulatory commissions. The rate approval processes for DSL-capable
lines and other unbundled network elements typically involve a lengthy review of
the rates proposed by the traditional telephone companies in each state. The
ultimate rates approved typically depend on the traditional telephone company's
initial rate proposals and the policies of the state public utility commission.
These rate approval proceedings are time-consuming and expensive. Consequently,
we are subject to the risk that the non-recurring and recurring charges for
DSL-capable lines and other unbundled network elements will increase based on
rates proposed by the traditional telephone companies and approved by state
regulatory commissions from time to time, which would harm our operating
results.
THE FAILURE OF TRADITIONAL TELEPHONE COMPANIES TO ADEQUATELY PROVIDE
TRANSMISSION FACILITIES AND PROVISION TELEPHONE WIRES IS LIKELY TO IMPAIR OUR
ABILITY TO INSTALL LINES AND ADVERSELY AFFECT OUR GROWTH RATE
We interconnect with and use traditional telephone companies' networks to
service our customers. This presents a number of challenges because we depend on
traditional telephone companies:
- to use their technology and capabilities to meet certain
telecommunications needs of our customers and to maintain our service
standards;
- to cooperate with us for the provision and maintenance of transmission
facilities; and
- to provide the services and network components that we order, for which
they depend significantly on unionized labor. Labor issues have in the
past and may in the future hurt the telephone companies' performance.
Our dependence on the traditional telephone companies has caused and could
continue to cause us to encounter delays in establishing our networks and
providing higher speed DSL services. We rely on the traditional telephone
companies to provision telephone wires to our customers and end-users. We must
establish efficient procedures for ordering, provisioning, maintaining and
repairing large volumes of DSL-capable lines from the traditional telephone
companies. We must also establish satisfactory electronic billing and payment
arrangements with the traditional telephone companies. We may not be able to do
these things in a manner that will allow us to retain and grow our customer and
end-user base. It has been and continues to be our experience that, at any given
time, one or more of those companies will be failing to deliver the central
office space, transmission facilities, telephone wires or other elements,
features and functions that our business requires. For example, the traditional
telephone companies currently are significantly impairing our ability to
efficiently install our services, and this has adversely affected the growth in
the volume of orders we receive. The failure of the traditional telephone
companies to consistently and adequately deliver operable telephone wires to us
on time has significantly contributed to an increase in the backlog of
uninstalled orders. The continued inadequate performance of the traditional
telephone companies could slow the growth in our revenues and reduce the growth
in orders placed by our customers, which could materially harm our business.
14
<PAGE> 18
On November 18, 1999, the FCC decided that the traditional local telephone
companies must provide us and other competitive local exchange carriers with
access to "line sharing." This would allow us to provide our services over the
same telephone wire used by the traditional telephone companies to provide
analog voice services. The FCC has directed the traditional local telephone
companies to enter into agreements with competitors such as ourselves and take
the necessary steps to provide us with such access within the next six months.
However, it is entirely unclear whether the traditional telephone companies will
provide us with such access in a meaningful way this year.
The rates, terms and conditions of "line sharing" access have not yet been
mutually agreed to between the traditional local phone companies and us. State
commissions have not yet arbitrated disputes or set "line sharing" rates in
connection with failed negotiations between traditional local phone companies
and us. The efforts of traditional local telephone companies to provide us with
line sharing may inadvertently or purposefully cause disruption and dislocation
to our existing processes for obtaining full telephone lines.
WE DEPEND ON THE TRADITIONAL TELEPHONE COMPANIES FOR THE QUALITY AND
AVAILABILITY OF THE TELEPHONE WIRES THAT WE USE
We depend significantly on the quality and availability of the traditional
telephone companies' telephone wires, shared lines and the traditional telephone
companies' maintenance of such wires. We may not be able to obtain the telephone
wires and the services we require from the traditional telephone companies at
satisfactory quality levels, rates, terms and conditions. Our inability to do so
could delay the expansion of our networks and degrade the quality of our
services to our customers.
OUR BUSINESS WILL SUFFER IF OUR INTERCONNECTION AGREEMENTS ARE NOT RENEWED OR IF
THEY ARE RENEWED OR MODIFIED ON UNFAVORABLE TERMS
We are required to enter into and implement interconnection agreements in
each of our targeted metropolitan statistical areas with the appropriate
traditional telephone companies in order to provide service in those regions. We
have not yet entered into all of the interconnection agreements we require to
complete our 100 metropolitan statistical area buildout. We may be unable to
timely enter into these agreements, which is prerequisite for us to provide
service in those areas. Many of our existing interconnection agreements have a
maximum term of three years. Therefore, we will have to renegotiate these
agreements with the traditional telephone companies when they expire. We may not
succeed in extending or renegotiating them on favorable terms or at all.
Additionally, disputes have arisen and will continue to arise in the future
as a result of differences in interpretations of the interconnection agreements.
For example, we are in litigation proceedings with certain of the traditional
telephone companies. These disputes have delayed our deployment of our networks,
and resolution of the litigated matters will take time and cause us ongoing
expenditure of money and management time. They may have also negatively affected
our service to our customers and our ability to enter into additional
interconnection agreements with the traditional telephone companies in other
states. In addition, the interconnection agreements are subject to state
commission, FCC and judicial oversight. These government authorities may modify
the terms of the interconnection agreements in a way that harms our business.
THE MARKETS WE FACE ARE HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY, ESPECIALLY
AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH SIGNIFICANTLY GREATER FINANCIAL
RESOURCES
The markets we face for business and consumer Internet access and RLAN
access services are intensely competitive. We expect that these markets will
become increasingly competitive in the future. In addition, the traditional
telephone companies dominate the current market and have a monopoly on telephone
wires. We pose a competitive risk to the traditional telephone companies and, as
both our competitors and our suppliers, they have the ability and the motivation
to harm our business. We also face competition from cable modem service
providers, competitive telecommunications companies, traditional
15
<PAGE> 19
and new national long distance carriers, Internet service providers, on-line
service providers and wireless and satellite service providers. Many of these
competitors have longer operating histories, greater name recognition, better
strategic relationships and significantly greater financial, technical or
marketing resources than we do. As a result, these competitors:
- may be able to develop and adopt new or emerging technologies and respond
to changes in customer requirements or devote greater resources to the
development, promotion and sale of their products and services more
effectively than we can;
- may form new alliances and rapidly acquire significant market share; and
- may be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing high-speed digital services.
The intense competition from our competitors, including the traditional
telephone companies, the cable modem service providers and the competitive
telecommunications companies could harm our business.
The traditional telephone companies represent the dominant competition in
all of our target service areas. We expect this competition to intensify. For
example, they have an established brand name and reputation for high quality in
their service areas, possess sufficient capital to deploy DSL equipment rapidly,
have their own telephone wires and can bundle digital data services with their
existing analog voice services to achieve economies of scale in serving
customers. Certain of the traditional telephone companies have aggressively
priced their consumer DSL services as low as $19-$29 per month, placing pricing
pressure on our TeleSurfer services. While we may be allowed to provide our data
services over the same telephone wires that they provide analog voice services,
we may be unable to obtain this ability. Even if we do obtain this ability,
there is no assurance that we will be permitted to provide our services in this
manner without running into operational or technical obstacles; including those
created by the traditional telephone companies. Further, they can offer service
to end-users from certain central offices where we are unable to secure central
office space and offer service. Accordingly, we may be unable to compete
successfully against the traditional telephone companies.
Cable modem service providers such as Excite@Home and MediaOne (and their
respective cable partners) are deploying high-speed Internet access services
over cable networks. Where deployed, these networks provide similar and in some
cases higher-speed Internet access and RLAN access than we provide. They also
offer these services at lower price points than our TeleSurfer services. As a
result, competition with the cable modem service providers may have a
significant negative effect on our ability to secure customers and may create
downward pressure on the prices we can charge for our services.
Many competitive telecommunications companies offer high-speed data
services using a business strategy similar to ours. Some of these competitors
have begun offering DSL-based access services and others are likely to do so in
the future. In addition, some competitive telecommunications companies have
extensive fiber networks in many metropolitan areas primarily providing
high-speed digital and voice circuits to large corporations, and have
interconnection agreements with traditional telephone companies pursuant to
which they have acquired central office space in many of our markets. Further,
certain of our customers have made investments in our competitors. As a result
of these factors, we may be unsuccessful in generating a significant number of
new customers or retaining existing customers.
OUR LEVERAGE IS SUBSTANTIAL AND WILL INCREASE, MAKING IT MORE DIFFICULT TO
RESPOND TO CHANGING BUSINESS CONDITIONS
After giving effect to the issuance of the notes, as of December 31, 1999
on a pro forma basis, we would have had approximately $800.1 million of
long-term obligations (including current portion), consisting primarily of the
1998 notes, the 1999 notes and the Notes. Because the 1998 notes accrete to $260
million through March 2003, we will become increasingly leveraged until then,
whether or not we incur new indebtedness in the future. We may also incur
additional indebtedness in the future, subject to certain restrictions contained
in the indentures governing the 1998 notes, the 1999 notes and the notes, to
16
<PAGE> 20
finance the continued development, commercial deployment and expansion of our
networks and for funding operating losses or to take advantage of unanticipated
opportunities. The degree to which we are leveraged could have important
consequences to you. For example, it could:
- materially limit or impair our ability to obtain additional financing or
refinancing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes;
- require us to dedicate a substantial portion of our cash flow to the
payment of principal and interest on our indebtedness, which reduces the
availability of cash flow to fund working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes;
- limit our ability to redeem the 1998 notes, the 1999 notes and the notes
in the event of a change of control; and
- increase our vulnerability to economic downturns, limit our ability to
withstand competitive pressures and reduce our flexibility in responding
to changing business and economic conditions.
WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS; OUR
ABILITY TO GENERATE
CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL
We expect to continue to generate substantial net losses and negative cash
flow for at least the next several years. We may be unable to maintain a level
of cash flow from operations sufficient to permit us to pay the principal and
interest on our current indebtedness and the notes, and any additional
indebtedness we may incur. The 1998 notes accrete to $260 million through March
2003 and we must begin paying cash interest on those notes in September 2003. In
addition, we began paying cash interest on the 1999 notes in August 1999. We
have provided for the first six payments on the 1999 notes by setting aside
approximately $74.1 million in government securities to fund such payments.
Our ability to make scheduled payments with respect to indebtedness will
depend upon, among other things:
- our ability to achieve significant and sustained growth in cash flow;
- the rate and success of the commercial deployment of our networks;
- successful operation of our networks;
- the market acceptance, customer demand, rate of utilization and pricing
for our services;
- our ability to successfully complete development, upgrades and
enhancements of our networks; and
- our ability to complete additional financings, as necessary.
Each of these factors is affected by economic, financial, competitive and
other factors, many of which are beyond our control. If we are unable to
generate sufficient cash flow to service our indebtedness, we may have to reduce
or delay network deployments, restructure or refinance our indebtedness or seek
additional equity capital, strategies that may not enable us to service and
repay our indebtedness. Any failure to satisfy our obligations with respect to
the 1998 notes, the 1999 notes or the notes at or before maturity would be a
default under the related indenture and could cause a default under agreements
governing our other indebtedness. If such defaults occur, the holders of the
indebtedness would have enforcement rights, including the right to accelerate
payment of the entire amount of the debt and the right to commence an
involuntary bankruptcy proceeding against us.
OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS
We regard certain aspects of our products, services and technology as
proprietary. We attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. These methods
may not be sufficient to protect our technology. We also generally enter into
confidentiality or license agreements with our employees and consultants, and
generally control access to
17
<PAGE> 21
and distribution of our documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use our products, services or technology without authorization, or to
develop similar technology independently.
Currently we have a number of patent applications. We intend to prepare
additional applications and to seek patent protection for our systems and
services. These patents may not be issued to us. If issued, they may not protect
our intellectual property from competition. Competitors could seek to design
around or invalidate these patents.
Effective patent, copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. The global nature of the
Internet makes it virtually impossible to control the ultimate destination of
our proprietary information. The steps that we have taken may not prevent
misappropriation or infringement of our technology. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and could harm our business.
In addition, we may be sued by others with respect to infringement of their
intellectual property rights. We were recently sued by Bell Atlantic for an
alleged infringement of a patent issued to them in September 1998 entitled
"Variable Rate and Variable Mode Transmission System." This case is scheduled to
proceed to trial in March 2000. We believe that we do not infringe the Bell
Atlantic patent and have defenses to infringement and liability. However,
litigation is inherently unpredictable and there is no guarantee that we will
prevail. An unfavorable outcome in this, or in any other lawsuit that may be
brought against us, could limit our ability to provide all our services and
require us to pay damages, which could significantly harm our business.
WE WILL NEED ADDITIONAL FUNDS IN THE FUTURE IN ORDER TO CONTINUE TO GROW OUR
BUSINESS
We believe our current capital resources combined with the proceeds of this
offering will be sufficient for our funding and working capital requirements for
the deployment and operation of our networks for at least the next twelve
months. Thereafter, we will be required to raise additional capital through the
issuance of debt or equity financings. We may choose to raise additional capital
sooner, depending on market conditions. The actual amount and timing of our
future capital requirements will depend upon a number of factors, including:
- the number of geographic areas targeted and entered and the timing of
entry and services offered;
- network deployment schedules and associated costs;
- the rate at which customers and end-users purchase our services and the
pricing of such services;
- the level of marketing required to acquire and retain customers and to
attain a competitive position in each region we enter;
- the rate at which we invest in engineering and development and
intellectual property with respect to existing and future technology; and
- investment opportunities in complementary businesses, acquisitions or
other opportunities.
We also may be unsuccessful in raising sufficient capital at all or on
terms that we consider acceptable. If this happens, our ability to continue to
expand our business or respond to competitive developments would be impaired.
In addition, our indentures contain covenants that restrict our business
activities and our ability to raise additional funds. As a result, we may not be
able to undertake certain activities which management believes are in our best
interest to develop our business. We also may be unable to raise as much
additional funding through the issuance of debt securities as we may need in the
future. This could require us to raise funding through the issuance of equity
securities or amend our indentures, which we may be unable to do on acceptable
terms.
18
<PAGE> 22
THE SCALABILITY AND SPEED OF OUR NETWORKS REMAIN LARGELY UNPROVEN
To date, we have deployed our networks in a total of 59 metropolitan
statistical areas, most of which have been deployed only in the last several
months. As a result, the ability of our DSL networks and operational support
systems to connect and manage a substantial number of online end-users at high
speeds is still unknown. Consequently, there remains a risk that we may not be
able to scale our network and operational support systems up to our expected
end-user numbers while achieving superior performance. Peak digital data
transmission speeds currently offered across our DSL networks are 1.5 megabits
per second downstream. However, the actual data transmission speeds over our
networks could be significantly slower and will depend on a variety of factors,
including:
- the type of DSL technology deployed;
- the distance an end-user is located from a central office;
- the configuration of the telecommunications line being used;
- quality of the telephone wires provisioned by traditional telephone
companies; and
- our operational support systems which manage our networks.
As a result, our networks may be unable to achieve and maintain the highest
possible digital transmission speed. Our failure to achieve or maintain
high-speed digital transmissions would significantly reduce customer and
end-user demand for our services.
INTERFERENCE IN THE TRADITIONAL TELEPHONE COMPANIES' COPPER PLANT COULD DEGRADE
THE PERFORMANCE OF OUR SERVICES
Certain tests indicate that some types of DSL technology may cause
interference with and be interfered with by other signals present in a
traditional telephone company's copper plant, usually with lines in close
proximity. In addition, if and when we obtain line sharing from the traditional
local telephone companies, our deployment of our ADSL data services could
interfere with the voice services of the traditional local telephone companies
carried over the same line or adjacent lines. If it occurs, such interference
could cause degradation of performance of our services or the services of the
traditional local telephone companies and render us unable to offer our services
on selected lines. The amount and extent of such interference will depend on the
condition of the traditional telephone company's copper plant and the number and
distribution of DSL and other signals in such plant and cannot now be
ascertained. When interference occurs, it is difficult to detect. The procedures
to resolve interference issues between competitive telecommunications companies
and traditional telephone companies are still being developed and may not be
effective. In the past we have agreed to interference resolution procedures with
certain traditional telephone companies. However, we may be unable to
successfully negotiate similar procedures with other traditional telephone
companies in future interconnection agreements or in renewals of existing
interconnection agreements. In addition, the failure of the traditional
telephone companies to take timely action to resolve interference issues could
harm the provision of our services. If our TeleSpeed and TeleSurfer services
cause widespread network degradation or are perceived to cause that type of
interference, actions by the traditional telephone companies or state or federal
regulators could harm our reputation, brand image, service quality, customer
satisfaction and retention, and overall business. Moreover, ostensible
interference concerns have in the past been, continue to currently and may in
the future be used by the traditional telephone companies as a pretext to delay
the deployment of our services and otherwise harm our business.
A SYSTEM FAILURE COULD DELAY OR INTERRUPT SERVICE TO OUR CUSTOMERS
Our operations depend upon our ability to support our highly complex
network infrastructure and avoid damage from fires, earthquakes, floods, power
losses, excessive sustained or peak user demand, telecommunications failures,
network software flaws, transmission cable cuts and similar events. The
occurrence of a natural disaster or other unanticipated problem at our network
operations center or any of
19
<PAGE> 23
our regional data centers could cause interruptions in our services.
Additionally, failure of a traditional telephone company or other service
provider, such as competitive telecommunications companies, to provide
communications capacity that we require, as a result of a natural disaster,
operational disruption or any other reason, could cause interruptions in our
services. Any damage or failure that causes interruptions in our operations
could harm our business.
A BREACH OF NETWORK SECURITY COULD DELAY OR INTERRUPT SERVICE TO OUR CUSTOMERS
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Internet service provider, telecommunications carrier
and corporate networks have in the past experienced, and may in the future
experience, interruptions in service as a result of accidental or intentional
actions of Internet users, current and former employees and others. Unauthorized
access could also potentially jeopardize the security of confidential
information stored in the computer systems of our customers and the customers'
end-users. This might result in liability to our customers and also might deter
potential customers. We intend to implement security measures that are standard
within the telecommunications industry and newly developed security measures. We
have not done so yet and may not implement such measures in a timely manner. If
and when implemented, such measures may be circumvented. Eliminating computer
viruses and alleviating other security problems may require interruptions,
delays or cessation of service to our customers and such customers' end-users,
which could harm our business.
WE DEPEND ON A LIMITED NUMBER OF THIRD PARTIES FOR EQUIPMENT SUPPLY AND
INSTALLATION
We rely on outside parties to manufacture our network equipment. This
equipment includes:
- digital subscriber line access multiplexers;
- customer premise equipment modems;
- network routing and switching hardware;
- network management software;
- systems management software; and
- database management software.
As we sign additional service contracts, we will need to increase
significantly the amount of manufacturing and other services supplied by third
parties in order to meet our contractual commitments. For example, we have a
service arrangement with Lucent Technologies Inc. to increase our ability to
install our central office facilities and associated equipment. We have in the
past experienced supply problems with certain of our vendors. These vendors may
not be able to meet our needs in a satisfactory and timely manner in the future.
In addition, we may not be able to obtain additional vendors when and if needed.
We have identified alternative suppliers for technologies that we consider
critical. However, it could take us a significant period of time to establish
relationships with alternative suppliers for critical technologies and
substitute their technologies into our networks.
Our reliance on third-party vendors involves a number of additional risks,
including:
- the absence of guaranteed capacity; and
- reduced control over delivery schedules, quality assurance, production
yields and costs.
The loss of any of our relationships with these suppliers could harm our
business.
OUR SUCCESS DEPENDS ON OUR RETENTION OF CERTAIN KEY PERSONNEL, OUR ABILITY TO
HIRE ADDITIONAL KEY PERSONNEL AND THE MAINTENANCE OF GOOD LABOR RELATIONS
We depend on the performance of our executive officers and key employees.
In particular, our senior management has significant experience in the data
communications, telecommunications and personal
20
<PAGE> 24
computer industries, and the loss of any of them could negatively affect our
ability to execute our business strategy. Additionally, we do not have "key
person" life insurance policies on any of our employees.
Our future success also depends on our continuing ability to identify,
hire, train and retain other highly qualified technical, sales, marketing, legal
and managerial personnel in connection with our expansion within our existing
regions and the deployment, legal and marketing of our networks into targeted
regions. Competition for such qualified personnel is intense. This is
particularly the case in software development, network engineering and product
management. We also may be unable to attract, assimilate or retain other highly
qualified technical, operations, sales, marketing and managerial personnel. Our
business will be harmed if we cannot attract the necessary technical, sales,
marketing and managerial personnel. In addition, in the event that our employees
unionize, we could incur higher ongoing labor costs and disruptions in our
operations in the event of a strike or other work stoppage.
WE MAY MAKE ACQUISITIONS OF COMPLEMENTARY TECHNOLOGIES OR BUSINESSES IN THE
FUTURE, WHICH MAY DISRUPT OUR BUSINESS AND BE DILUTIVE TO OUR EXISTING
STOCKHOLDERS
We intend to consider acquisitions of businesses and technologies in the
future on an opportunistic basis. Acquisitions of businesses and technologies
involve numerous risks, including the diversion of management attention,
difficulties in assimilating the acquired operations, loss of key employees from
the acquired company, and difficulties in transitioning key customer
relationships. In addition, these acquisitions may result in dilutive issuances
of equity securities, the incurrence of additional debt, large one-time expenses
and the creation of goodwill or other intangible assets that result in
significant amortization expense. Any of these factors could materially harm our
business or our operating results in a given period.
OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code filed and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates form 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.
We have reviewed our internally developed information technology systems
and programs and believe that our systems are Year 2000 compliant and that there
are not significant Year 2000 issues within our systems or services. We have not
reviewed our non-information technology systems for Year 2000 issues relating to
embedded microprocessors. To the extent that such issues exist, these systems
may need to be replaced or upgraded to become Year 2000 compliant. We believe
that our non-information technology systems will not present any significant
Year 2000 issues, although there can be no assurance in this regard. In
addition, we utilize third-party equipment and software and interact with
traditional telephone companies that have equipment and software that may not be
Year 2000 compliant. Failure of such third-party or traditional telephone
company equipment or software to operate properly with regard to the year 2000
and thereafter could require us to incur unanticipated expenses to remedy any
problems, which could have a material adverse effect on our business, prospects,
operating results and financial condition.
To date, we have not experienced any problems in complying with Year 2000
requirements, nor have we experienced any operational difficulties related to
Year 2000 issues.
21
<PAGE> 25
RISKS RELATED TO OUR INDUSTRY
THE BROADBAND COMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGES,
AND NEW TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE
The broadband communications industry is subject to rapid and significant
technological change, including continuing developments in DSL technology, which
does not presently have widely accepted standards, and alternative technologies
for providing broadband communications such as cable modem technology. As a
consequence:
- we will rely on third parties, including some of our competitors and
potential competitors, to develop and provide us with access to
communications and networking technology;
- our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and
- we expect that new products and technologies will emerge that may be
superior to, or may not be compatible with, our products and
technologies.
If we fail to adapt successfully to technological changes or fail to obtain
access to important technologies, our business will suffer.
OUR STRATEGY DEPENDS ON GROWTH IN DEMAND FOR DSL-BASED SERVICES
The demand for high-speed Internet and RLAN access is in the early stages
of development. As a result, we cannot predict the rate at which this demand
will grow, if at all, or whether new or increased competition will result in
satisfying all demand. Various providers of high-speed digital communications
services are testing products from various suppliers for various applications.
We do not know whether DSL will offer the same or more attractive
price-performance characteristics. Critical issues concerning commercial use of
DSL for Internet and RLAN access, including security, reliability, ease and cost
of access and quality of service, remain unresolved and may impact the growth of
such services. If the demand for our services grows more slowly than we
anticipate or is satisfied by competitors, our ability to achieve revenue growth
and positive cash flow will be harmed.
WE MUST COMPLY WITH FEDERAL AND STATE TAX AND OTHER SURCHARGES ON OUR SERVICES,
THE LEVELS OF WHICH ARE UNCERTAIN
Telecommunications providers pay a variety of surcharges and fees on their
gross revenues from interstate services and intrastate services. Interstate
surcharges include Federal Universal Service Fees, Common Carrier Regulatory
Fees and TRS Fund fees. In addition, state regulators impose similar surcharges
and fees on intrastate services. The division of our services between interstate
services and intrastate services is a matter of interpretation and may in the
future be contested by the FCC or relevant state commission authorities. A
change in the characterization of their jurisdictions could cause our payment
obligations pursuant to the relevant surcharges to increase. In addition,
pursuant to periodic revisions by state and federal regulators of the applicable
surcharges, we may be subject to increases in the surcharges and fees currently
paid.
OUR SERVICES ARE SUBJECT TO GOVERNMENT REGULATION, AND CHANGES IN CURRENT OR
FUTURE LAWS OR REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS
Our services are subject to federal, state and local government regulation.
The 1996 Telecommunications Act, which became effective in February 1996,
introduced widespread changes in the regulation of the telecommunications
industry, including the digital access services segment in which we operate. The
1996 Telecommunications Act eliminates many of the pre-existing legal barriers
to competition in the telecommunications services business and sets basic
criteria for relationships between telecommunications providers.
22
<PAGE> 26
Among other things, the 1996 Telecommunications Act removes barriers to
entry in the local exchange telephone market by preempting state and local laws
that restrict competition by providing competitors interconnection, access to
unbundled network elements and retail services at wholesale rates. The FCC's
primary rules interpreting the 1996 Telecommunications Act, which were issued on
August 8, 1996, have been reviewed by the U.S. Court of Appeals for the Eighth
Circuit, which has overruled certain of the FCC's rules. However, the U.S.
Supreme Court overruled the Eighth Circuit in January of 1999 and upheld the FCC
rules. We have entered into competitive interconnection agreements using the
federal guidelines established in the FCC's first interconnection order. In
September 1999, the FCC, in response to the Supreme Court decision in January
1999, issued new definitions of unbundled network elements. We have not entered
into interconnection agreements that take advantage of these new federal
guidelines. We anticipate that traditional and local telephone companies will
challenge these new definitions in regulatory proceedings. In addition, the
FCC's pricing method for unbundled network elements is under review at the
Eighth Circuit. Any unfavorable decisions by the Eighth Circuit, the FCC or
state telecommunications regulatory commissions could harm our business.
In August 1998, the FCC proposed new rules that would allow traditional
telephone companies to provide their own DSL services free from traditional
telephone company regulation through a separate affiliate. The provision of DSL
services by an affiliate of an traditional telephone company not subject to such
regulation could harm our business.
Changes to current regulations, the adoption of new regulations by the FCC
or state regulatory authorities, court decisions or legislative initiatives,
such as changes to the 1996 Telecommunications Act, could harm our business. For
further details of the government regulation to which we are subject see
"Business -- Government Regulation."
RISKS RELATED TO THIS OFFERING
CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES
Upon consummation of the exchange offer, we will have no further obligation
to register the old notes. Thereafter, any holder of old notes who does not
tender its old notes in the exchange offer, including any holder which is an
"affiliate" of ours which cannot tender its old notes in the exchange offer,
will continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of securities,
provided that an opinion of counsel is furnished to us that such an exemption is
available. These restrictions may limit the trading market and price for the old
notes.
THERE IS NO PUBLIC MARKET FOR THE NEW NOTES
The new notes are being offered to the holders of the old notes. Prior to
this exchange offer, there has been no existing trading market for any of the
old notes and there can be no assurance that a trading market will develop for
the new notes. We do not intend to apply for listing of the notes on any
securities exchange or on the Nasdaq National Market. Although the new notes are
eligible for trading in the PORTAL Market, the new notes may trade at a discount
from their initial offering price, depending upon prevailing interest rates, the
market for similar securities, our performance and other factors. In connection
with the old note issuance, we were advised by the Initial Purchasers that they
intended to make a market in the new notes. However, the Initial Purchasers are
not obligated to do so and any such market-making activities may be discontinued
at any time without notice. Therefore, we cannot assure you that an active
market for the new notes will develop.
23
<PAGE> 27
WE RELY UPON DISTRIBUTIONS FROM OUR SUBSIDIARIES TO SERVICE OUR
INDEBTEDNESS AND OUR INDEBTEDNESS IS EFFECTIVELY SUBORDINATED TO THE
INDEBTEDNESS OF OUR SUBSIDIARIES.
We are a holding company. As such, we conduct substantially all of our
operations through our subsidiaries. As of December 31, 1999, we had
approximately $800.1 million total indebtedness (including the current portion
but net of debt discount and after giving pro forma effect to the issuance of
the notes). Our indentures permit us and our subsidiaries to incur substantial
additional indebtedness in the future. In addition, the notes will not be
guaranteed by any of our subsidiaries. Consequently, the notes will be
effectively subordinated in right of payment to all indebtedness and other
liabilities of our subsidiaries, including subordinated indebtedness and trade
payables.
Our cash flow and ability to service our indebtedness, including the notes,
will depend upon the cash flow of our subsidiaries and payments of funds by
those subsidiaries to us in the form of repayment of loans, dividends or
otherwise. These subsidiaries are separate and distinct legal entities with no
legal obligation to pay any amounts due on the notes or to make any funds
available therefor. In addition, our subsidiaries may become parties to
financing arrangements which may contain limitations on the ability of our
subsidiaries to pay dividends or to make loans or advances to us or otherwise
make cash flow available to us.
In addition, if we caused a subsidiary to pay a dividend in order to enable
us to make payments in respect of the notes, and such transfer were deemed a
fraudulent transfer or unlawful distribution, the holders of the notes could be
required to return the payment.
If we were unable to generate sufficient cash flow or are otherwise unable
to obtain funds necessary to meet required payments of principal, premium, if
any, and interest on our indebtedness, including the notes, we would be in
default under the terms of the agreements governing such indebtedness, including
the indentures. In that case, the holders of our other indebtedness could elect
to declare all of the funds borrowed to be due and payable together with accrued
and unpaid interest. If an acceleration occurs and we do not have sufficient
funds to pay the accelerated indebtedness, the holders could initiate
enforcement action against us.
In addition, in the event of any distribution or payment of our assets in
any foreclosure, dissolution, winding-up, liquidation or reorganization, holders
of any secured indebtedness will have a secured claim to our assets that
constitute their collateral, prior to the satisfaction of any unsecured claim
from such assets. Our indentures permit the incurrence of indebtedness secured
by our assets and our subsidiaries' assets. In the event of our bankruptcy,
liquidation or reorganization, holders of the notes will be entitled to payment
from the remaining assets only after payment of, or provision for, all secured
indebtedness. In any of the foregoing events, we may not have sufficient assets
to pay amounts due on the notes.
Under certain circumstances, our subsidiaries will be required to guarantee
our obligations under the indenture and the notes. If any subsidiary enters into
such a guarantee and bankruptcy or insolvency proceedings are initiated by or
against that subsidiary within 90 days (or, possibly, one year) after that
subsidiary issued a guarantee or that subsidiary incurred obligations under its
guarantee in anticipation of insolvency, then all or a portion of the guarantee
could be avoided as a preferential transfer under federal bankruptcy or
applicable state law. In addition, a court could require holders of the notes to
return all payments pursuant to any such guarantee made within any such 90 day
(or, possibly, one year) period as preferential transfers.
OUR MANAGEMENT MAY NOT USE THE PROCEEDS OF THIS OFFERING EFFECTIVELY
Our management will retain broad discretion over the use of the net
proceeds of this offering. Accordingly, it is possible that our management may
allocate the proceeds differently than investors in this offering would have
preferred, or that we will fail to maximize our return on the proceeds.
24
<PAGE> 28
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of new notes in the
exchange offer. In consideration for issuing the new notes, we will receive an
equivalent principal amount of old notes. The old notes surrendered in exchange
for new notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the new notes will not result in any increase in our indebtedness.
The net proceeds to us from the sale of the old notes by us were
approximately $413.3 million after deducting the offering expenses.
We anticipate that the net remaining proceeds we received from the issuance
of the old notes will be used:
- to fund capital expenditures to be incurred in the deployment of our
network in existing and new regions,
- for expenses associated with our continued development and sales and
marketing activities,
- to fund other operating expenses,
- to support possible strategic investments and strategic acquisitions, and
- for working capital and other general corporate purposes.
The amounts that we actually expend will vary depending upon a number of
factors, including future revenue growth, capital expenditures and the amount of
cash generated by our operations. Additionally, if we determine it would be in
our best interest, we may increase or decrease the number, selection and timing
of entry of our targeted regions. Accordingly, our management will retain broad
discretion in the allocation of such net proceeds. We may also use a portion of
the net proceeds of this offering to pursue possible strategic investments in or
acquisitions of businesses, technologies or products complementary to ours in
the future. We actively investigate strategic investment and acquisition
opportunities. Pending use of such net proceeds for the above purposes, we
intend to invest such funds primarily in United States Treasury securities.
25
<PAGE> 29
CAPITALIZATION
The following table sets forth (i) our capitalization as of September 30,
1999, (ii) our capitalization as of September 30, 1999 on a pro forma basis to
reflect the net proceeds from the issuance of common stock sold in the November
3, 1999 offering and (iii) our capitalization as of September 30, 1999 on a pro
forma as adjusted basis to reflect the estimated net proceeds from the sale of
the Notes in this offering after deducting the estimated offering expenses
payable by us.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
----------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 181,803 $ 751,345 $1,164,614
Pledged securities(3)..................................... 63,473 63,473 63,473
--------- ---------- ----------
Total cash, cash equivalents and pledged
securities....................................... 245,276 814,818 1,228,087
========= ========== ==========
LONG-TERM OBLIGATIONS:
Capital lease obligations (including current portion)..... 382 382 382
13 1/2% Senior Discount Notes due 2008, net(4)............ 158,115 158,115 158,115
12 1/2% Senior Notes due 2009, net(5)..................... 210,807 210,807 210,807
12% Senior Notes due 2010................................. -- -- 425,000
--------- ---------- ----------
Total long-term obligations (including current
portion)......................................... 369,304 369,304 794,304
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding actual, pro
forma and pro forma as adjusted......................... -- -- --
Common Stock, $0.001 par value; 190,000,000 shares
authorized, 72,919,240 shares issued and outstanding
actual; 87,004,240 shares issued and outstanding pro
forma and pro forma as adjusted(6)(7)................... 73 87 87
Common Stock -- Class B, $0.001 par value; 10,000,000
shares authorized, 6,379,177 shares issued and
outstanding actual, pro forma and pro forma as
adjusted(8)............................................. 6 6 6
Additional paid-in capital................................ 274,092 843,620 843,620
Deferred compensation..................................... (3,450) (3,450) (3,450)
Accumulated other comprehensive income.................... 16,698 16,698 16,698
Accumulated deficit....................................... (175,594) (175,594) (175,594)
--------- ---------- ----------
Total stockholders' equity......................... 111,825 681,367 681,367
--------- ---------- ----------
Total capitalization............................. $ 481,129 $1,050,671 1,475,671
========= ========== ==========
</TABLE>
- ---------------
(1) The pro forma amount includes:
- $568.8 million of net proceeds from the sale of shares of common stock
sold by us in the November 1999 offering; and
- $702,000 of proceeds from the issuance of 430,000 shares of common stock
subject to outstanding options held by selling shareholders who sold
shares in the November 1999 offering.
(2) The pro forma as adjusted amount includes $413.3 million of net proceeds
from the issuance of the old notes.
(3) Represents the portion of the net proceeds from the issuance of the 1999
notes used to purchase government securities held in a pledge account.
Amount includes accrued interest on the securities.
(4) The 1998 notes accrete in value through March 15, 2003 at a rate of 13 1/2%
per annum, compounded semi-annually. No cash interest will be payable on the
1998 notes prior to that date. An additional unamortized debt discount of
$7.4 million at September 30, 1999, which represents the unamortized value
ascribed to the warrants issued in connection with the 1998 notes, is being
amortized to interest expense over the term of the 1998 notes.
26
<PAGE> 30
(5) The 1999 notes are presented net of unamortized debt discount of
approximately $4.2 million at September 30, 1999, which represents the
unamortized additional original issue discount to be amortized to interest
expense over the term of the 1999 notes.
(6) Excludes:
- an aggregate of 17,092,869 shares subject to outstanding options at
September 30, 1999 at a weighted average exercise price of $11.05 per
share,
- an aggregate of 1,724,842 shares of common stock reserved for future
issuance under our 1997 Stock Plan,
- an aggregate of 1,500,000 shares of common stock reserved for issuance
under our 1998 Employee Stock Purchase Plan,
- 272,904 shares of common stock issuable upon exercise of warrants issued
in connection with our 1998 notes at an exercise price of $0.0022 per
share, and
- 200,277 shares of common stock that were issued to a consultant on July
20, 1999 upon exercise of a warrant at an exercise price of $0.6667 per
share.
(7) Includes 13,655,000 shares issued in the November 1999 common stock offering
and 430,000 shares of common stock subject to outstanding options held by
selling stockholders that were exercised immediately prior to the closing of
the November 1999 offering at a weighted average exercise price of $1.63 per
share.
(8) Beginning in January 2000, the 6,379,177 shares of class B common stock are
convertible into 9,568,765 shares of common stock.
27
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for the years
ended December 31, 1997 and December 31, 1998 has been derived from our audited
consolidated financial statements and the related notes, which are included
elsewhere in this prospectus. The consolidated financial data as of and for the
nine months ended September 30, 1998 and September 30, 1999 were derived from
our unaudited financial statements which, except for the consolidated balance
sheet as of September 30, 1998, are included elsewhere in this prospectus. These
unaudited financial statements include, in the opinion of management, all
adjustments, consisting only of normal, recurring adjustments, necessary for a
fair presentation set forth therein. You should read the following selected
consolidated financial data together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- ------------------------
1997 1998 1998 1999
---------- ---------- ---------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 26 $ 5,326 $ 2,560 $ 35,570
Operating expenses:
Network and product costs.................... 54 4,562 2,316 32,219
Sales, marketing, general and
administrative............................ 2,374 31,043 17,231 80,786
Amortization of deferred compensation........ 295 3,997 2,695 3,895
Depreciation and amortization................ 70 3,406 1,348 23,911
---------- ---------- ---------- -----------
Total operating expenses............. 2,793 43,008 23,590 140,811
---------- ---------- ---------- -----------
Income (loss) from operations.................. (2,767) (37,682) (21,030) (105,241)
Net interest income (expense)................ 155 (10,439) (7,231) (19,620)
---------- ---------- ---------- -----------
Net income (loss).............................. (2,612) (48,121) (28,261) (124,861)
========== ========== ========== ===========
Preferred dividends............................ -- -- -- (1,146)
---------- ---------- ---------- -----------
Net income (loss) available to common
stockholders................................. $ (2,612) $ (48,121) $ (28,261) $ (126,007)
---------- ---------- ---------- -----------
OTHER FINANCIAL DATA:
EBITDA(1)...................................... $ (2,402) $ (30,154) $ (16,987) $ (77,435)
Deficiency of earnings available to cover fixed
charges(2)................................... (2,612) (48,121) (28,261) (126,007)
CONSOLIDATED CASH FLOW DATA:
Provided by (used in) operating activities..... $ (1,895) $ (9,054) $ (4,196) $ (65,721)
Provided by (used in) investing activities..... (2,494) (61,252) (33,464) (233,877)
Provided by (used in) financing activities..... 8,767 130,378 130,358 416,951
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
AS OF ----------------------------------------
DECEMBER 31, PRO FORMA
1998 ACTUAL PRO FORMA(3) AS ADJUSTED(4)
------------ -------- ------------ --------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 64,450 $181,803 $ 751,345 $1,164,614
Net property and equipment.................... 59,145 187,376 187,376 187,376
Total assets.................................. 139,419 543,790 1,113,332 1,538,332
Long-term obligations, including current
portion..................................... 142,879 369,304 369,304 794,304
Total stockholders' equity (net capital
deficiency)................................. (24,706) 111,825 681,367 681,367
</TABLE>
28
<PAGE> 32
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
----------------------- ------------------------
1997 1998 1998 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
OTHER OPERATING DATA:
Homes and businesses passed.................... 278,000 6,000,000 3,302,000 25,000,000
Lines installed................................ 26 3,900 1,948 31,000
</TABLE>
- ---------------
(1) EBITDA consists of net loss excluding net interest, taxes, depreciation and
amortization, non-cash stock-based compensation expense and other
non-operating income or expenses. We have provided EBITDA because it is a
measure of financial performance commonly used in the telecommunications
industry as well as to enhance an understanding of our operating results.
EBITDA should not be construed as either:
- an alternative to operating income (as determined in accordance with
generally accepted accounting principles) as an indicator of our
operating performance, or
- an alternative to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) as a measure of
liquidity.
EBITDA as calculated by us may be calculated differently than EBITDA for other
companies. See our consolidated financial statements and the related notes
thereto contained elsewhere in this prospectus.
(2) For purposes of determining the deficiency of earnings available to cover
fixed charges, "earnings" included pre-tax loss from operations adjusted for
fixed charges. "Fixed charges" included interest expense, capitalized
interest, amortization of debt discount and financing costs, and that
portion of rent expense which we believe to be representative of interest.
In view of our limited operating history and due to additional interest
charges (including amortization of debt discount and debt issuance costs)
with respect to our existing debt securities, the deficiency of earnings
available to cover fixed charges should not be considered indicative of the
deficiency of earnings available to cover fixed charges in the future.
(3) The pro forma balance sheet data reflects the receipt of:
- $568.8 million of net proceeds from the sale of 13.7 million shares of
common stock sold by us in the November 1999 offering; and
- $702,000 of proceeds from the issuance of 430,000 shares of common stock
subject to outstanding options held by selling stockholders who sold
shares in the November 1999 offering.
(4) The pro forma as adjusted balance sheet data reflects the receipt of $413.3
million of net proceeds from the issuance of the old notes.
29
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this prospectus.
This discussion contains forward-looking statements the accuracy of which
involves risks and uncertainties. Our actual results could differ materially
from those anticipated in the forward-looking statements for many reasons
including, but not limited to, those discussed in "Risk Factors" and elsewhere
in this prospectus. We disclaim any obligation to update information contained
in any forward-looking statement. See "-- Forward Looking Statements."
OVERVIEW
We are a leading provider of broadband communications services to Internet
service provider, enterprise and telecommunications carrier customers. Since
March 1998, we have raised $1,155.4 million of gross proceeds from debt and
equity financings to fund the deployment and expansion of our networks. To date,
we offer our services in 62 metropolitan statistical areas. We plan to build our
networks and offer our services in a total of 100 metropolitan statistical areas
nationwide. As of December 31, 1999, our networks passed 29 million homes and
businesses, and we had installed 57,000 end-user lines.
In connection with our expansion within existing metropolitan statistical
areas and into new metropolitan statistical areas, we expect to significantly
increase our capital expenditures, as well as our sales and marketing
expenditures, to deploy our networks and support additional end-users in those
regions. Accordingly, we expect to incur substantial and increasing net losses
for at least the next several years.
We derive revenue from:
- monthly recurring service charges for connections from the end-user to
our facilities and for backhaul services from our facilities to the
Internet service provider or enterprise customer,
- service order set-up and other non-recurring charges, and
- the sale of customer premise equipment that we provide to our customers
due to the general unavailability of customer premise equipment through
retail channels.
We expect prices for the major components of both recurring and
non-recurring revenues to decrease each year in part due to the effects of
competitive pricing and future volume discounts. We believe our revenues from
the sale of customer premise equipment will decline over time as customer
premise equipment becomes more generally available. We expect that the prices we
charge to customers for customer premise equipment will decrease each year.
The following factors comprise our network and service costs:
- Monthly non-recurring and recurring circuit fees. We pay traditional
telephone companies and other competitive telecommunications companies
non-recurring and recurring fees for services including installation,
activation, monthly line costs, maintenance and repair of circuits
between and among our digital subscriber line access multiplexers and our
regional data centers, customer backhaul, and end-user lines. As our
end-user base grows, we expect that the largest element of network and
product cost will be the traditional telephone companies' charges for our
leased telephone wires; and
- Other costs. Other costs that we incur include those for materials in
installation and the servicing of customers and end-users, and the cost
of customer premise equipment.
The development and expansion of our business will require significant
expenditures. The principal capital expenditures incurred during the buildup
phase of any metropolitan statistical area involve the procurement, design and
construction of our central office cages, end-user DSL line cards, and
expenditures for other elements of our network design. Currently, the average
capital cost to deploy our facilities in a central office, excluding end-user
line cards, is approximately $85,000 per central office
30
<PAGE> 34
facility. This cost may vary in the future due to the quantity and type of
equipment we initially deploy in a central office facility as well as regulatory
limitations imposed on the traditional phone companies relative to pricing of
central office space, including cageless physical collocation. Following the
buildout of our central office space, the major portion of our capital
expenditures is the purchase of DSL line cards to support incremental end-users.
We expect that the average cost of such line cards will decline over the next
several years. Network expenditures will continue to increase with the number of
end-users. However, once an operating region is fully built out, a substantial
majority of the regional capital expenditures will be tied to incremental
customer and end-user growth. In addition to developing our networks, we will
use our capital for marketing our services, acquiring Internet service provider,
enterprise, and telecommunication carrier customers, and funding our customer
care and field service operations.
In connection with rolling out service on a national basis we have
commenced a branding campaign to differentiate our service offerings in the
marketplace. As a result, we expect our selling, general and administrative
expenses to increase significantly in future periods as we implement increased
marketing efforts as part of the campaign.
RECENT DEVELOPMENTS
On January 25, 2000, we announced our preliminary operating results for the
three and twelve months ended December 31, 1999. We recorded revenues of $30.9
million, representing a 62% increase over the quarter ended September 30, 1999,
a net loss of $70.5 million, and an EBITDA deficit of $52.0 million for the
three months ended December 31, 1999. We recorded revenues of $66.5 million, a
net loss of $195.4 million, and an EBITDA deficit of $129.5 million for the
twelve months ended December 31, 1999. We also announced that, during the fourth
quarter, our subscriber lines increased 84% to 57,000 lines, and homes and
businesses passed increased to 29 million.
RESULTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1999 Compared to Three Months
and Nine Months Ended September 30, 1998
Revenues
We recorded revenues of $19.1 million for the three months ended September
30, 1999 compared to $1.6 million for the three months ended September 30, 1998.
Revenue was $35.6 million for the nine months ended September 30, 1999 compared
to $2.6 million for the nine months ended September 30, 1998. This increase is
attributable to growth in the number of customers and end-users resulting from
our increased sales and marketing efforts and the expansion of our national
network. We expect revenues to increase in future periods as we expand our
network within our existing regions, deploy networks in new regions and increase
our sales and marketing efforts in all of our regions.
Network and Product Costs
We recorded network and product costs of $16.7 million for the three months
ended September 30, 1999 and $1.4 million for the three months ended September,
1998. Network and product costs were $32.2 million for the nine months ended
September 30, 1999 and $2.3 million for the nine months ended September 30,
1998. This increase is attributable to the expansion of our networks and
increased orders resulting from our sales and marketing efforts. We expect
network and product costs to increase significantly in future periods due to
increased sales activity and expected revenue growth.
Sales, Marketing, General and Administrative Expenses
Sales, marketing, general and administrative expenses consist primarily of
salaries, expenses for the development of our business, the development of
corporate identification, promotional and advertising materials, expenses for
the establishment of our management team, and sales commissions. Sales,
marketing, general and administrative expenses were $37.7 million for the three
months ended September 30, 1999 and $10.7 million for the three months ended
September 30, 1998. Sales, marketing, general and administrative expenses were
$80.8 million for the nine months ended September 30, 1999 and $17.2 million for
the nine months ended September 30, 1998.
31
<PAGE> 35
This increase is attributable to growth in headcount in all areas of our
company, continued expansion of our sales and marketing efforts, deployment of
our networks and building of our operating infrastructure. Sales, marketing,
general and administrative expenses are expected to increase significantly as we
continue to expand our business.
Deferred Compensation
Through September 30, 1999, we recorded a total of approximately $11.6
million of deferred compensation, with an unamortized balance of approximately
$3.5 million on our September 30, 1999 consolidated balance sheet. Deferred
compensation is a result of us granting stock options to our employees, certain
of our directors, and certain contractors with exercise prices per share below
the fair values per share for accounting purposes of our common stock at the
dates of grant. We are amortizing the deferred compensation over the vesting
period of the applicable option using a graded vesting method. Amortization of
deferred compensation was $1.0 million for the three months ended September 30,
1999 and $1.8 million for the three months ended September 30, 1998.
Amortization of deferred compensation was $3.9 million for the nine months ended
September 30, 1999 and $2.7 million for the nine months ended September 30,
1998.
Depreciation and Amortization
Depreciation and amortization includes:
- depreciation of network costs and related equipment;
- depreciation of information systems, furniture and fixtures;
- amortization of improvements to central offices, regional data centers
and network operations center facilities and corporate facilities;
- amortization of capitalized software costs; and
- amortization of intangible assets.
In January 1999, we recorded intangible assets of $28.7 million from the
issuance of preferred stock to AT&T Ventures, NEXTLINK and Qwest. Amortization
of these assets was $2.1 million and $6.1 million during the three and nine
months ended September 30, 1999, respectively, and is included in depreciation
amortization on the accompanying consolidated statement of operations. Annual
amortization of these assets will be approximately $8.4 million in each of the
years in the three year period ending December 31, 2001, decreasing to
approximately $1.2 million per year for each subsequent year through the year
ending December 31, 2004.
Depreciation and amortization was approximately $10.6 million for the three
months ended September 30, 1999 and $738,000 for the three months ended
September 30, 1998. Depreciation and amortization was approximately $23.9
million for the nine months ended September 30, 1999 and $1.3 million for the
nine months ended September 30, 1998. This increase was due to the increase in
equipment and facilities placed in service throughout the period as well as
amortization of intangible assets. We expect depreciation and amortization to
increase significantly as we increase our capital expenditures to expand our
networks.
Net Interest Income and Expense
Net interest income and expense consists primarily of interest income on
our cash balance and interest expense associated with our debt. Net interest
expense for the three and nine months ended September 30, 1999, was $7.3 million
and $19.6 million, respectively. Net interest expense during these periods
consisted primarily of interest expense on the 1998 notes and the 1999 notes and
capital lease obligations partially offset by interest income earned primarily
from the investment of the proceeds raised from the issuance of the 1998 notes
and the 1999 notes as well as our initial public offering and our issuance of
preferred stock to AT&T Ventures, NEXTLINK and Qwest. Net interest expense for
the
32
<PAGE> 36
three and nine months ended September 30, 1998, was $3.5 million and $7.2
million, respectively. Net interest expense during these periods consisted
primarily of interest expense on the 1998 notes and capital lease obligations,
partially offset by interest income earned primarily from the investment of the
proceeds raised from the issuance of the 1998 notes. We expect interest expense
to increase significantly over time, primarily because the 1998 notes accrete to
$260 million by March 15, 2003.
Income Taxes
Income taxes consist of federal, state and local taxes, when applicable. We
expect significant consolidated net losses for the foreseeable future which
should generate net operating loss carryforwards. However, our ability to use
net operating losses may be subject to annual limitations. In addition, income
taxes may be payable during this time due to operating income in certain tax
jurisdictions. In the future, if we achieve operating profits and the net
operating losses have been exhausted or have expired, we may experience
significant tax expense. We made no provision for taxes because we operated at a
loss for the years ended December 31, 1997 and December 31, 1998 and the three,
six and nine months ended March 31, 1999, June 30, 1999, and September 30, 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
We recorded revenues of $26,000 for the year ended December 31, 1997 and
$5.3 million for the year ended December 31, 1998. This increase is attributable
to growth in the number of customers and end-users resulting from our increased
sales and marketing efforts and the expansion of our networks in the San
Francisco Bay Area and to a lesser extent in the Los Angeles, New York and
Boston metropolitan areas.
Network and Product Costs
We recorded network and product costs of $54,000 for the year ended
December 31, 1997 and $4.6 million for the year ended December 31, 1998. This
increase is attributable to the expansion of our networks and increased orders
resulting from our sales and marketing efforts.
Sales, Marketing, General and Administrative Expenses
Sales, marketing, general and administrative expenses increased from $2.4
million for the year ended December 31, 1997 to $31.0 million for the year ended
December 31, 1998. This increase is attributable to growth in headcount in all
areas of our company as we expanded our sales and marketing efforts, expanded
the deployment of our networks and built our operating infrastructure.
Deferred Compensation
Through December 31, 1998, we recorded a total of $9.0 million of deferred
compensation, with an unamortized balance of $4.7 million on our December 31,
1998 balance sheet. This deferred compensation is a result of us granting stock
options to our employees with exercise prices per share subsequently determined
to be below the fair values per share for accounting purposes of our common
stock at the dates of grant. We are amortizing the deferred compensation over
the vesting period of the applicable option using a graded vesting method.
Amortization of deferred compensation was $295,000 during the year ended
December 31, 1997 and $4.0 million during the year ended December 31, 1998.
Depreciation and Amortization
Depreciation and amortization was $70,000 for the year ended December 31,
1997 and $3.4 million for the year ended December 31, 1998. The increase was due
to the increase in equipment and facilities placed in service throughout the
period.
33
<PAGE> 37
Net Interest Income and Expense
For the year ended December 31, 1997, net interest income was $155,000, and
was primarily attributable to the interest income earned from the proceeds
raised in our preferred stock financing in July 1997. Interest income was $4.8
million for the year ending December 31, 1998. This interest income was earned
primarily from the investment of the proceeds raised in the issuance of our 1998
discount notes in March 1998. Interest expense for the year ended December 31,
1998 was $15.2 million and consisted primarily of interest on the 1998 discount
notes and capital lease obligations.
Income Taxes
For the years ended December 31, 1997 and December 31, 1998 we recognized
no provision for taxes because we operated at a loss for both years.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain consolidated statements of
operations data for our most recent eight quarters. This information has been
derived from our unaudited consolidated financial statements. In our opinion,
this unaudited information has been prepared on the same basis as the annual
consolidated financial statements and includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
information for the quarters presented. This information should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this Offering Memorandum. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1998 1998 1998 1998 1999 1999 1999
--------- -------- -------- -------- --------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $ -- $ 26 $ 186 $ 809 $ 1,565 $ 2,766 $ 5,596 $ 10,833 $ 19,141
Operating expenses:
Network and product
costs................... 10 44 203 758 1,355 2,246 4,960 10,565 16,694
Sales, marketing, general
and administrative...... 783 1,334 1,944 4,606 10,681 13,812 18,113 24,976 37,697
Amortization of deferred
compensation............ 134 161 227 631 1,837 1,302 1,653 1,234 1,008
Depreciation and
amortization............ -- 70 164 446 738 2,058 4,647 8,671 10,593
----- ------- ------- ------- -------- -------- -------- -------- --------
Total operating
expenses.............. 927 1,609 2,538 6,441 14,611 19,418 29,373 45,446 65,992
----- ------- ------- ------- -------- -------- -------- -------- --------
Income (loss) from
operations................ (927) (1,583) (2,352) (5,632) (13,046) (16,652) (23,777) (34,613) (46,851)
Net interest income
(expense)................. 80 75 (429) (3,291) (3,511) (3,208) (5,127) (7,239) (7,254)
----- ------- ------- ------- -------- -------- -------- -------- --------
Net income (loss)....... $(847) $(1,508) $(2,781) $(8,923) $(16,557) $(19,860) $(28,904) $(41,852) $(54,105)
===== ======= ======= ======= ======== ======== ======== ======== ========
</TABLE>
We have generated increasing revenues in each of the last eight quarters,
reflecting increases in the number of customers and end-users. Our network and
product costs have increased in every quarter, reflecting costs associated with
customer and end-user growth and the deployment of our networks in existing and
new regions. Our selling, marketing, general and administrative expenses have
increased in every quarter and reflect sales and marketing costs associated with
the acquisition of customers and end-users, including sales commissions, and the
development of regional and corporate infrastructure. Depreciation and
amortization has increased in each quarter, primarily reflecting the purchase of
equipment associated with the deployment of our networks. We have experienced
increasing net losses on a quarterly basis as we increased operating expenses
and increased depreciation as a result of increased capital expenditures, and we
expect to sustain increasing quarterly losses for at least the next several
years. See "Risk Factors -- We have a history of losses and expect increasing
losses in the future."
34
<PAGE> 38
Our annual and quarterly operating results may fluctuate significantly in
the future as a result of numerous factors. Factors that may affect our
operating results include:
- the willingness, timing and ability of traditional telephone companies to
provide us with central office space;
- the rate at which traditional telephone companies can provide us
telephone wires over which we sell our service;
- the rate at which customers subscribe to our services;
- decreases in the prices for our services due to competition, volume-based
pricing and other factors;
- our ability to retain Internet service provider, enterprise and
telecommunications carrier customers and end-user churn rates;
- the success of our relationships with strategic partners, and other
potential third parties in generating significant subscriber demand;
- the ability to deploy on a timely basis our services to adequately
satisfy end-user demand;
- delays in the commencement of operations in new regions and the
generation of revenue because certain network elements have lead times
that are controlled by traditional telephone companies and other third
parties;
- the mix of line orders between consumer end-users and business end-users
(which typically have higher margins);
- the amount and timing of capital expenditures and other costs relating to
the expansion of our networks;
- the ability to develop and commercialize new services by us or our
competitors;
- the impact of regulatory developments, including interpretations of the
1996 Telecommunications Act; and
- our ability to successfully operate our networks.
Many of these factors are outside of our control. In addition, we plan to
increase operating expenses to fund operations, sales, marketing, general and
administrative activities and infrastructure, including increased expenses
associated with our relationships with strategic partners. If these expenses are
not accompanied by an increase in revenues, we could experience a material
adverse effect on our business, prospects, operating results and financial
condition and our ability to service and repay our indebtedness. See "Risk
Factors -- Our operating results are likely to fluctuate in future periods and,
therefore, are difficult to predict."
LIQUIDITY AND CAPITAL RESOURCES
Our operations have required substantial capital investment for the
procurement, design and construction of our central office cages, the purchase
of telecommunications equipment and the design and development of our networks.
Capital expenditures were approximately $145.6 million for the nine months ended
September 30, 1999. We expect that our capital expenditures will be
substantially higher in future periods in connection with the purchase of
infrastructure equipment necessary for the development and expansion of our
networks and the development of new regions. We have also recently begun a
branding campaign to increase recognition of our name which we expect will incur
substantial additional expenses over the next 12 months.
From our inception through September 30, 1999, we financed our operations
primarily through private placements of $10.6 million of equity securities,
$129.3 million in net proceeds raised from the issuance of the 1998 notes,
$150.2 million in net proceeds raised from our initial public offering, $60.0
million in net proceeds raised from strategic investors and $205.1 million in
net proceeds raised from the issuance of the
35
<PAGE> 39
1999 notes. As of September 30, 1999, we had an accumulated deficit of $175.6
million, and cash and cash equivalents of $181.8 million.
On November 3, 1999, we completed a public offering of 14,950,000 shares of
common stock at a price of $43.00 per share, 13,655,000 shares of which were
sold by the Company and the remaining 1,295,000 shares by certain stockholders
of the Company. We received net proceeds of $568.8 million after deducting
underwriting commissions and expenses.
Net cash used in our operating activities was $65.7 million for the nine
months ended September 30, 1999. The net cash used for operating activities
during this period was primarily due to net losses and increases in current
assets, offset by non-cash expenses and increases in accounts payable and
accrued liabilities. Net cash used in our investing activities was $233.9
million for the nine months ended September 30, 1999. The net cash used for
investing activities during this period was primarily due to purchases of
property and equipment, the purchase of $74.1 million of restricted investments
which were pledged as collateral for the payment of the first six scheduled
interest payments on the 1999 notes, and an aggregate of $20 million in equity
investments made in WebMD, Inc. and Efficient Networks, Inc.
Net cash provided by financing activities for the nine months ended
September 30, 1999 was $417.0 million which primarily related to the following:
- Equity investments of $25 million from AT&T Ventures, $20 million from
NEXTLINK and $15 million from Qwest, representing an aggregate equity
investment of $60 million.
- Net proceeds of $150.2 million from our initial public offering of
13,455,000 split-adjusted shares of our common stock at a split-adjusted
initial public offering price of $12.00 per share.
- Net proceeds of $205.1 million from the issuance of the 1999 notes with
an aggregate principal amount of $215.0 million.
Net cash provided by financing activities was partially offset by an
estimated $680,000 in offering costs applicable to our secondary offering of
7,500,000 shares in June 1999 for which we received no proceeds.
Upon completion of this offering, we believe that our current cash, cash
equivalents and short-term investments, including the proceeds received from our
recently completed secondary offering in November 1999, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next twelve months.
We expect to experience substantial negative cash flow from operating
activities and negative cash flow before financing activities for at least the
next several years due to continued development, commercial deployment and
expansion of our networks. We may also make investments in and acquisitions of
businesses that are complementary to ours to support the growth of our business.
Our future cash requirements for developing, deploying and enhancing our
networks and operating our business, as well as our revenues, will depend on a
number of factors including:
- the number of regions entered, the timing of entry and services offered;
- network development schedules and associated costs;
- the rate at which customers and end-users purchase our services and the
pricing of such services;
- the level of marketing required to acquire and retain customers and to
attain a competitive position in the marketplace;
- the rate at which we invest in engineering and development and
intellectual property with respect to existing and future technology; and
- unanticipated opportunities.
We will be required to raise additional capital, the timing and amount of
which we cannot predict. We expect to raise additional capital through debt or
equity financings, depending on market conditions, to finance
36
<PAGE> 40
the continued development, commercial deployment and expansion of our networks
and for funding operating losses or to take advantage of unanticipated
opportunities. If we are unable to obtain required additional capital or are
required to obtain it on terms less satisfactory than we desire, we may be
required to delay the expansion of our business or take or forego actions, any
or all of which could harm our business.
In addition, we may wish to selectively pursue possible acquisitions of or
investments in businesses, technologies or products complementary to ours in the
future in order to expand our geographic presence and achieve operating
efficiencies. We may not have sufficient liquidity, or we may be unable to
obtain additional debt or equity financing on favorable terms or at all, in
order to finance such an acquisition or investment.
YEAR 2000 ISSUES
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.
We have reviewed our internally developed information technology systems
and programs and believe that our systems are Year 2000 compliant and that there
are no significant Year 2000 issues within our systems or services. We have not
reviewed our non-information technology systems for Year 2000 issues relating to
embedded microprocessors. To the extent that such issues exist, these systems
may need to be replaced or upgraded to become Year 2000 compliant. We believe
that our non-information technology systems will not present any significant
Year 2000 issues, although there can be no assurance in this regard. In
addition, we utilize third-party equipment and software and interact with
traditional telephone companies that have equipment and software that may not be
Year 2000 compliant. Failure of such third-party or traditional telephone
company equipment or software to operate properly with regard to the year 2000
and thereafter could require us to incur unanticipated expenses to remedy any
problems, which could have a material adverse effect on our business, prospects,
operating results and financial condition.
To date, we have not experienced any problems in complying with Year 2000
requirements, nor have we experienced any operational difficulties related to
Year 2000 issues.
FORWARD-LOOKING STATEMENTS
The statements contained in this prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in Section 27A of the
Securities Act and Section 21E of the Exchange Act), which can be identified by
the use of forward-looking terminology such as "estimates," "projects,"
"anticipates," "expects," "intends," "believes," or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Examples of such forward-looking
statements include but are not limited to:
- our plans to expand our existing networks or to commence service in new
metropolitan statistical areas;
- estimates regarding the timing of launching our service in new
metropolitan statistical areas;
- expectations regarding the time frames, rates, terms and conditions for
implementing "line sharing;"
- expectations regarding the extent to which enterprise customers roll out
our service;
- expectations regarding our relationships with our strategic partners and
other potential third parties;
- expectations as to pricing for our services in the future;
- expectations as to the impact of our TeleSurfer service offerings on our
margins;
- the possibility that we may obtain significantly increased sales volumes;
- the impact of our national advertising campaign on brand recognition and
operating results;
37
<PAGE> 41
- plans to make strategic investments and acquisitions and the affect of
such investments and acquisitions;
- estimates of future operating results;
- plans to develop and commercialize value-added services;
- our anticipated capital expenditures;
- plans to enter into business arrangements with broadband-related service
providers;
- expectations regarding the commencement of our voice service;
- the effect of regulatory reform and regulatory litigation; and
- other statements contained in this prospectus regarding matters that are
not historical facts.
These statements are only estimates or predictions and cannot be relied
upon. We can give you no assurance that future results will be achieved. Actual
events or results may differ materially as a result of risks facing us or actual
results differing from the assumptions underlying such statements. Such risks
and assumptions that could cause actual results to vary materially from the
future results indicated, expressed or implied in such forward-looking
statements include our ability to:
- successfully market our services to current and new customers;
- generate customer demand for our services in the particular regions where
we plan to market services;
- achieve favorable pricing for our services;
- respond to increasing competition;
- manage growth of our operations; and
- access regions and negotiate suitable interconnection agreements with the
traditional telephone companies, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions consistent with
regulatory, legislative and judicial developments.
All written and oral forward-looking statements made in connection with
this prospectus which are attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the "Risk Factors" and other cautionary
statements included in this prospectus. We disclaim any obligation to update
information contained in any forward-looking statement.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio and outstanding debt obligations. We typically do not attempt to
reduce or eliminate our market exposure on our investment securities because a
substantial majority of our investments are in fixed-rate, short-term
securities. We do not have any derivative instruments. The fair value of our
investments portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due mainly to
the fixed-rate, short-term nature of the substantial majority of our investment
portfolio. In addition, substantially all of our outstanding indebtedness at
September 30, 1999 including our 1998 notes and our 1999 notes, is fixed-rate
debt.
38
<PAGE> 42
BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors
including, but not limited to, those discussed in "Risk Factors" and elsewhere
in this prospectus. We disclaim any obligation to update information contained
in any forward-looking statement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Forward Looking Statements."
OVERVIEW
We are a leading provider of broadband communications services to Internet
service provider, enterprise and telecommunications carrier customers. These
services include a range of high-speed, high-capacity Internet and network
access services using digital subscriber line (DSL) technology, and related
value-added services. Internet service providers purchase our services in order
to provide high-speed Internet access to their business and consumer end-users.
Enterprise customers purchase our services directly or indirectly from us to
provide employees with high-speed remote access to the enterprise's local area
networks (RLAN access), which improves employee productivity and reduces network
connection costs. Telecommunications carrier customers purchase our services for
resale to their Internet service provider affiliates, Internet users and
enterprise customers.
We believe we have the nation's largest DSL network with 1,100 operational
central offices passing over 29 million homes and businesses. As of December 31,
1999, we had installed 57,000 DSL-based high-speed access lines and received
orders for our services from 295 Internet service provider, enterprise and
telecommunications carrier customers, including AT&T, Concentric Network,
Flashcom, MindSpring, Oracle, Prodigy, PSINet, Qwest, Stanford University, Sun
Microsystems, UUNET and Verio.
We had planned to deploy our services in 51 metropolitan statistical areas
by the end of the first quarter 2000. By August 1999 we had begun offering our
services in each of these 51 metropolitan statistical areas, and in September
1999, we announced our plans to roll out our service in 49 additional
metropolitan statistical areas. To date, we have deployed our networks in a
total of 62 metropolitan statistical areas. When this build-out is completed,
which we expect to be by the end of 2000, our network will pass a total of 46
million homes and businesses, representing 40% of homes and 45% of businesses in
the United States.
We plan to continue to pursue rapid network expansion and installation of
high-speed access lines, and to develop a variety of services that are enhanced
or enabled by our broadband network, such as voice over DSL and e-commerce
applications. We expect to leverage our expanding network by entering into
business arrangements with broadband-related service providers in order to bring
a variety of value-added service offerings to our customers and their end-users.
INDUSTRY BACKGROUND
Growing Market Demand for Broadband Communications Services
High-speed connectivity has become important to small- and medium-sized
businesses and consumers due to the dramatic increase in Internet usage.
According to International Data Corporation, the number of Internet users
worldwide reached approximately 142 million in 1998 and is forecasted to grow to
approximately 502 million by 2003. The popularity of the Internet with consumers
has driven the rapid proliferation of the Internet as a commercial medium.
Businesses are increasingly establishing Web sites and corporate intranets and
extranets to expand their customer reach and improve their communications
efficiency. Consumers are increasingly using the Internet to carry out
commercial transactions. International Data Corporation also estimates that the
value of goods and services sold worldwide via the Internet will increase from
$50 billion in 1998 to over $1.3 trillion in 2003. Accordingly, to remain
competitive, small- and medium-sized businesses increasingly need high-speed
Internet connections to maintain complex Web sites, access critical business
information and communicate more effectively with
39
<PAGE> 43
employees, customers and business partners. Broadband connections are also
becoming increasingly important to businesses and consumers as on-line consumer
transactions and e-commerce become more widespread.
The demand for broadband communications services for RLAN access is also
growing rapidly. Over the past ten years, high-speed local area networks have
become increasingly important to enterprises to enable employees to share
information, send e-mail, search databases and conduct business. We believe that
a large majority of personal computers used in enterprises are connected to
local area networks. Enterprises are now seeking to extend this same high-speed
connectivity to employees accessing the local area networks from home to improve
employee productivity and reduce operating costs. The number of home office
households on the Internet grew from 12.0 million at the end of 1997 to an
estimated 19.7 million by the end of 1999 and is expected to grow to 30.2
million households by 2002. Only 3.7% of these users currently access the
Internet through a broadband connection of any type.
As use of the Internet, intranets and extranets increases, we expect the
market size for both small-and medium-sized business and consumer Internet and
RLAN access to continue to grow rapidly causing the demand for broadband
communications services to also grow rapidly. However, the full potential of
Internet and local area network applications cannot be realized without removing
the performance bottlenecks of the existing public switched telephone network.
Increases in telecommunications bandwidth have significantly lagged improvements
in microprocessor performance over the last ten years. Since 1988,
microprocessor performance has improved nearly 80-fold, while the fastest
consumer modem connection has improved from 9.6 kilobits per second to 56.6
kilobits per second, a factor of six. According to industry analysts, there are
nearly 40 million personal computers in U.S. homes today, and most of them can
only connect to the Internet or their corporate local area network by low-speed
analog lines. Higher speed connections are available, including:
- Integrated Services Digital Networks -- An ISDN provides standard
interfaces for digital communication networks and is capable of carrying
data, voice, and video over digital circuits. ISDN protocols are used
worldwide for connections to public ISDN networks or to attach ISDN
devices to compatible PBX systems.
- T1 Line and Fractional T1 -- These are telephone industry terms for a
digital transmission link with a capacity of 1.544 megabits per second or
portions thereof.
- Frame Relay -- A high-speed packet-switched data communications protocol.
While these services have recently experienced dramatic growth in the U.S.,
they are frequently expensive and complex to order, install and maintain.
Emergence of DSL Technology
DSL technology emerged in the 1990s and is commercially available today to
address the performance bottlenecks of the public switched telephone network.
DSL equipment, when deployed at each end of standard copper telephone lines,
increases the data carrying capacity of these lines from analog modem speeds of
56.6 kilobits per second for the fastest consumer modems and ISDN speeds of 128
kilobits per second to DSL speeds of up to 6 megabits per second depending on
the length and condition of the copper line. Recent advances in semiconductor
technology and digital signal processing algorithms and falling equipment prices
have made the widespread deployment of DSL technology more economical over time.
We anticipate that equipment prices will continue to fall as a result of
continued advances in semiconductor technologies and increases in equipment
production volumes.
Because DSL technology reuses the existing copper plant, it is
significantly less expensive to deploy on a broad scale than alternative
technologies, such as cable modems, wireless data and satellite data. As a
result, a significant portion of the investment in a DSL network is
success-based, requiring a comparatively lower initial fixed investment.
Subsequent variable investments in DSL technology are directly related to the
number of paying customers.
40
<PAGE> 44
Impact of Regulatory Developments
The passage of the 1996 Telecommunications Act created a legal framework
for competitive telecommunications companies to provide local analog and digital
communications services in competition with the traditional telephone companies.
The 1996 Telecommunications Act eliminated a substantial barrier to entry for
competitive telecommunications companies by enabling them to leverage the
existing infrastructure built by the traditional telephone companies, which
required a $200 billion investment by these telephone companies and their
ratepayers, rather than constructing a competing infrastructure at significant
cost. The 1996 Telecommunications Act requires traditional telephone companies,
among other things:
- to allow competitive telecommunications companies to lease telephone
wires on a line by line basis;
- to provide central office space for the competitive telecommunications
companies' DSL and other equipment used to connect to the leased
telephone wires;
- to lease access on their inter-central office fiber backbone to link the
competitive telecommunications companies' equipment; and
- to allow competitive telecommunications companies to use their
operational support systems to place orders and access their databases.
The 1996 Telecommunications Act, as interpreted by the FCC, in particular
emphasized the need for competition-driven innovations in the deployment of
advanced telecommunications services, such as DSL services.
OUR COMPETITIVE STRENGTHS
We were formed to capitalize on the substantial business opportunity
created by the growing demand for Internet and network access, the commercial
availability of low cost DSL technology and the passage of the 1996
Telecommunications Act. Key aspects of our solution to provide broadband
communications services include:
- an attractive value proposition that provides high-speed connections at
similar or lower prices than alternative high-speed technologies
currently available to customers;
- a rapid network deployment and service rollout with significant increases
in line installations to date;
- a widely available, continuously connected, secure network that
facilitates deployment of Internet and intranet applications; and
- a management team experienced in the data communications,
telecommunications and personal computer industries.
Attractive Value Proposition. We offer higher bandwidth digital
connections than alternative services at similar or lower prices that do not
vary with usage. For business Internet users, our high-end services offer
bandwidth comparable to that offered by T1 and frame relay circuits at
approximately 25% of the cost. For the RLAN market, our mid-range services are
three to six times the speed of ISDN and up to ten times the speed of analog
modems at monthly rates similar to or lower than those for heavily used ISDN
lines. We believe that many of our enterprise customers can justify deploying
lines to their employees if productivity improves by only a few hours per month
based on increases in the number of hours worked and decreases in commute time
and time spent waiting for information. For consumer Internet users, our
consumer services are comparably priced to current cable modem services. Unlike
cable modems, the speed of our service does not decrease when more users are
added.
We have leveraged our first-mover advantage to rapidly expand our networks
and grow our number of lines installed. We were the first to widely roll out
DSL services on a commercial basis, making DSL service available for purchase in
the San Francisco Bay Area in December 1997. We believe that we have
41
<PAGE> 45
leveraged our first-mover advantage to rapidly expand our networks into our
targeted metropolitan regions and grow our number of line installations. We
believe we have the nation's largest DSL network with 1,100 operational central
offices passing over 29 million homes and businesses. As of December 31, 1999,
we had installed a total of 57,000 lines nationwide.
Widely Available, Always-Connected, Secure Network. Our strategy of
providing blanket coverage in each region we serve is designed to ensure that
our services are available to the vast majority of our customers' end-users. Our
network provides 24-hour, always-on connectivity, unlike ISDN lines and analog
modems which require customers to dial-up each time for Internet or RLAN access.
Also, because we use dedicated connections from each end-user to the Internet
service provider or enterprise network, our customers can reduce the risk of
unauthorized access. These factors are important to our customers because any
Internet service they market to their end-users must actually be available for
them to purchase and be secure enough to not risk their own reputation or
business with any security lapses.
Experienced Management Team. Our management team includes individuals with
extensive experience in the data communications, telecommunications and personal
computer industries, including Robert Knowling, Jr., Chairman of the Board,
President and Chief Executive Officer (former Executive Vice President of
Operations and Technology at U S WEST Communications), Catherine Hemmer, Chief
Operations Officer (former Vice President, Network Reliability and Operations at
U S WEST Communications, Inc., former General Manager, Network Provisioning at
Ameritech Corporation and former Vice President, Network Services at MFS),
Robert Roblin, Executive Vice President, Sales and Marketing (former Executive
Vice President of Marketing at Adobe Systems, Inc. and former Vice President and
General Manager of Marketing, Consumer Division at IBM Corporation), Timothy
Laehy, Chief Financial Officer (former Vice President of Corporate Finance and
Treasurer of Leasing Solutions, Inc.), Rex Cardinale, Chief Technology Officer
and Vice President of Engineering (former General Manager of the cc:Mail
division of Lotus Development Corporation), Robert Davenport, III, Executive
Vice President, Business Development (former Senior Vice President and Chief
Operating Officer of Tele-Communication, Inc.'s Internet Services subsidiary
TCI.NET), Joseph Devich, Executive Vice President, Corporate Services (former
Vice President, Operations and Technologies Staff of US WEST Communications),
Charles Haas, Senior Vice President of Sales Development, Dhruv Khanna,
Executive Vice President, General Counsel and Secretary, Jane Marvin, Senior
Vice President of Human Resources (former Vice President of Human Resources for
the General Business Services unit of Ameritech Corporation), and Michael Lach,
Executive Vice President, Business Integration (former Vice President, Customer
Provisioning and Maintenance of Ameritech Corporation).
BUSINESS STRATEGY
Our objective is to become the leading nationwide provider of broadband
services and a critical element in the proliferation of e-commerce and other
applications that are enabled or enhanced by broadband communications. The key
elements of our strategy to achieve this objective are as follows:
Expand our Network and Roll Out Service Rapidly in Our Targeted
Metropolitan Statistical Areas. To date, we have introduced our services in 59
of the top metropolitan statistical areas nationwide. We have recently announced
our plan to expand our services to a total of 100 metropolitan statistical areas
by the end of 2000. In the aggregate, these 100 metropolitan statistical areas
cover 40% of homes and 50% of businesses in the United States. In addition, we
have recently begun to assess the regulatory and competitive environments in
other countries.
Provide Pervasive Coverage in Each Metropolitan Statistical Area. We are
pursuing a blanket coverage strategy of providing service in a substantial
majority of the central offices in each region that we enter since our Internet
service provider customers desire to market their Internet access services on a
region-wide basis. Blanket coverage is also important to our enterprise
customers since most of them desire to offer RLAN access to all employees
regardless of where they reside. In addition, we believe our presence in 100
metropolitan statistical areas will allow us to better serve our Internet
service provider,
42
<PAGE> 46
enterprise and telecommunications carrier customers which are increasingly
seeking a single supplier in multiple metropolitan areas.
Establish and Maintain Sales and Marketing Relationships with Leading
Internet Service Providers, Telecommunications Carriers and DSL Resellers. We
principally target Internet service providers, telecommunications carriers and
DSL resellers that can offer their end-users cost and performance advantages for
Internet access using our services. We do not provide Internet access directly
to any of our customers. Instead, we provide connections to Internet service
providers, which in turn offer high-speed Internet access using our networks. In
this way, we:
- carry the traffic of multiple Internet service providers and
telecommunications carriers in any region, increasing our volume and
reducing our costs;
- leverage our selling efforts through the sales and support staff of these
Internet service providers and telecommunications carriers;
- offer Internet service providers and telecommunications carriers a
transport alternative, since the traditional telephone company typically
provides its own Internet access services in competition with Internet
service providers; and
- provide Internet service providers and telecommunications carriers a
high-speed service offering to compete with cable-based Internet access.
Develop a National Brand. We believe that we can enhance our competitive
position and increase demand for our services by actively developing a positive
brand and image for our company and our services through a combination of
television, print and radio advertisements on both a national and regional
basis. In October 1999, we commenced a significant advertising campaign in
pursuit of this strategy.
Develop and Commercialize Value-Added Services. We intend to introduce
value-added services to our customers and leverage the value of the network
access we offer today. Offering services such as voice over DSL, among others,
will allow for us to bundle service offerings to our customers and improve the
quality of content delivery to their end users. We believe this is an important
part of our strategy and will allow us to build upon our success to date in
adding and retaining subscribers.
Enter Into Business Arrangements With Network and Broadband-Related Service
Providers. We believe that the pace of deployment of our network can be
increased by entering into business arrangements with other network service
providers some of which may be located outside of the United States. We also
believe our network deployment will enable the delivery of a variety of
broadband-related services and content that are desired by our customers. We
expect to make these services available to our customers through entering into
business arrangements with leading providers of broadband-related services or
content.
Take Advantage of New Regulatory Developments. The FCC has recently
required the major local phone companies to provide us, and other competitive
local carriers, with "line sharing." This would allow us to provide our service
over the same telephone wire used by the traditional telephone companies to
provide analog voice services. In addition, some of the Ameritech/SBC merger
conditions adopted by the FCC in October 1999 also contain provisions on line
sharing and provide for reductions in costs for telephone wires in certain
circumstances. In many cases, line sharing would allow us to provision our
asymmetric services on the same telephone wire as the existing local phone
companies' voice service. Currently, we provision our DSL services over a
separate additional telephone wire. Asymmetric and standard telephone service
can exist on a single line and most, if not all, of the traditional telephone
companies provision their own asymmetric services on the same line as existing
voice services.
We see line sharing as an extremely important opportunity for us for three
primary reasons. First, line sharing should significantly reduce the monthly
recurring charges we incur for telephone wires. Second, line sharing should
reduce the time it takes traditional telephone companies to deliver telephone
wires because the telephone wire will already exist. Third, line sharing should
resolve lack of telephone wire
43
<PAGE> 47
problems that we have encountered when ordering telephone wires in some areas of
the country. We expect the traditional local phone companies to implement line
sharing this year.
OUR SERVICE OFFERINGS
We offer six business grade services under the TeleSpeed brand to connect
our customers' end-users to our regional data centers and two consumer grade
service offerings called TeleSurfer and TeleSurfer Pro. We also offer business
consumers Virtual Private Network (VPN) technology over DSL. In addition,
Internet service provider and enterprise customers may purchase backhaul
services from us to connect their facilities to our regional data centers.
TeleSpeed Services
Our TeleSpeed services connect individual end-users on conventional
telephone wires to our DSL equipment in their serving central office and from
there to our network serving that metropolitan area. A traditional telephone
company's infrastructure consists of numerous central offices which are
connected by a fiber optic backbone to a regional office that routes local and
long distance traffic. Each central office collects the individual telephone
wires from end-users' premises in the neighborhood.
The particular TeleSpeed service available to an end-user depends on the
user's distance to the central office. We believe that substantially all of our
potential end-users in our target markets generally can be served with one of
our services. We estimate that approximately 70% of end-users are within 18,000
feet of a central office and can be served by at least our TeleSpeed 384
service. We also believe at least a majority of potential end-users will be able
to obtain our highest speed service offering. However, the specific number of
potential end-users for the higher speeds will vary by central office and by
region and will be affected by line quality. The chart below compares the
performance and markets for each of our intraregional end-user services as of
September 30, 1999.
<TABLE>
<CAPTION>
SPEED TO SPEED FROM RANGE*
INTRAREGIONAL SERVICES END-USER END-USER (FEET) MARKET/USAGE
---------------------- -------- ---------- ------ -----------------------
<S> <C> <C> <C> <C>
TeleSpeed 144..................... 144 Kbps 144 Kbps 35,000 ISDN replacement
TeleSpeed 192..................... 192 Kbps 192 Kbps 18,000 Business Internet, RLAN
TeleSpeed 384..................... 384 Kbps 384 Kbps 18,000 Business Internet, RLAN
TeleSpeed 768..................... 768 Kbps 768 Kbps 13,500 Business Internet
TeleSpeed 1.1..................... 1.1 Mbps 1.1 Mbps 12,000 Business Internet
TeleSpeed 1.5..................... 1.5 Mbps 384 Kbps 15,000 High-speed Web access
</TABLE>
- ---------------
* Estimated maximum distance from the end-user to the central office.
Prices for our end-user services may vary depending upon the performance
level of the service. For example, our TeleSpeed 144 and 192 services are our
lowest priced end-user services and our TeleSpeed 1.1 and 1.5 services are our
highest priced end-user services. Our prices also vary across regions and for
high volume customers that are eligible for volume discounts. See "Risk
Factors -- We may experience decreasing prices for our services, which may
impair our ability to achieve profitability or positive cash flow" for a
discussion of the risks associated with our ability to sustain current price
levels in the future.
TeleSpeed 144. Our TeleSpeed 144 service operates at up to 144 kilobits
per second in each direction, which is similar to the performance of an ISDN
line. This service, which can use existing ISDN equipment at the end-user site,
is targeted at the ISDN replacement market where its per month flat rate can
compare favorably to ISDN services from the traditional telephone company when
per-minute usage charges apply. It is also the service that we offer on
telephone wires that are either too long to carry our higher speed services or
are served by digital loop carrier systems or similar equipment where a
continuous copper connection is not available from the end-user site to the
central office.
TeleSpeed 192. This service provides one and a half to three times the
performance of ISDN lines at similar or lower price points to heavily-used ISDN
lines.
44
<PAGE> 48
TeleSpeed 384. This service provides three to six times the performance of
ISDN lines at similar price points to heavily-used ISDN lines.
TeleSpeed 768. This service provides one-half the bandwidth of a T1 data
circuit at substantially less than one-half of the monthly price that we
estimate is typical for T1 service. The target market for the TeleSpeed 768
service is small businesses needing moderate speed access to the Internet but
who have previously been unable to afford the price of such service. The service
also competes favorably from a price/performance standpoint with traditional
fractional T1 and frame relay services for these same customers.
TeleSpeed 1.1. This service provides over two-thirds the bandwidth of a T1
data circuit at substantially less than one-half of the monthly price that we
estimate is typical for T1 service. The target market for the TeleSpeed 1.1
service is small businesses needing T1-level access to the Internet which have
previously been unable to afford the price of such service. The service also
competes favorably from a price/performance standpoint with traditional
fractional T1 and frame relay services for these same customers.
TeleSpeed 1.5. TeleSpeed 1.5 is an asymmetric service, i.e., with
different speeds to and from the end-user. This service is intended for
end-users who consume more bandwidth than they generate, and is especially
useful for accessing Web sites. The service also provides the highest
performance of any TeleSpeed service to stream video or other multimedia content
to end-user locations.
TeleSpeed Remote. TeleSpeed Remote provides high-speed network access for
end-users located in remote regions to their corporate networks. This service is
targeted at businesses that want high-speed remote office connections at a lower
cost than ISDN or frame-relay services. For example, this service can provide a
corporation's employees located in Boston high-speed access to their corporate
network located in San Francisco.
TeleSurfer Services
<TABLE>
<CAPTION>
SPEED TO SPEED FROM RANGE*
INTRAREGIONAL SERVICES END-USER END-USER (FEET) MARKET/USAGE
---------------------- -------- ---------- ------ ------------
<S> <C> <C> <C> <C>
TeleSurfer.................................... 384 Kbps 128 Kbps 12,000 Consumer
TeleSurfer Pro................................ 768 Kbps 384 Kbps 12,000 Consumer
</TABLE>
- ---------------
* Estimated maximum distance from the end-user to the central office.
TeleSurfer. This consumer grade service is an asymmetric service, offering
384 kilobits per second downstream and 128 kilobits per second upstream. This
service is the base consumer service. The target market for this service is
consumers using either dial-up analog or ISDN connections for web browsers.
TeleSurfer Pro. This is a premium consumer grade asymmetric service,
offering 768 kilobits per second downstream and 386 kilobits per second
upstream. The target market for this service is consumers using either dial-up
analog or ISDN connections for web browsers.
VPN Over DSL
In August 1999 we introduced our VPN over DSL service. This service uses
the public Internet backbone or a private data network, combined with DSL
connections, as a channel for sharing information and applications within a
closed circle of users in different locations. We offer two levels of VPN over
DSL service.
Covad Branch Office. This service is available for remote or branch
offices that require high-speed inter-office connectivity across multiple
locations.
Covad Teleworker. This service is available for telecommuters and other
remote users who secure access to their corporate network and the Internet from
home.
45
<PAGE> 49
Other Services
We also provide a DS3 backhaul service from our regional network to an
Internet service provider or enterprise customer site. This service aggregates
all individual end-users in a metropolitan area and transmits the packet
information to the customer on a single high-speed line. The service utilizes an
asynchronous transfer mode protocol that efficiently handles the high data rates
involved and operates at up to 45 megabits per second. In addition to monthly
service charges, we impose non-recurring order setup charges for Internet
service provider and RLAN end-users for our DS3 backhaul service. Customers must
also purchase a DSL modem from us or a third party for each end-user of our
services.
CUSTOMERS
We offer our services to Internet service providers, enterprises,
telecommunications carriers and other DSL resellers. According to Claritas,
Inc., a leading provider of diagnostic databases, there are over 169,000
businesses in the U.S. with over 100 employees, of which we estimate
approximately 85,000 are in our 100 targeted metropolitan statistical areas. As
of December 31, 1999, we had installed 57,000 DSL lines and received orders for
our services from 295 Internet service provider, enterprise and
telecommunications carrier customers. The following is a list of selected
Internet service provider, enterprise and telecommunications carrier customers:
<TABLE>
<CAPTION>
SELECTED INTERNET SERVICE PROVIDER CUSTOMERS SELECTED ENTERPRISE CUSTOMERS SELECTED TELECOMMUNICATIONS CARRIERS
- -------------------------------------------- ----------------------------- ------------------------------------
<S> <C> <C>
Concentric Network Corporation Apple Computer AT&T
Flashcom Inktomi GST Telecommunications
MindSpring Intel RCN Corporation
PSINet Oracle Corporation e.spire
Prodigy Stanford University Qwest
UUNET Sun Microsystems ICG
Verio WebTV
</TABLE>
Our agreements with Internet service providers and other DSL resellers
generally have terms of one year and are nonexclusive. We do not require the
Internet service providers to generate a minimum number of end-users and
generally grant volume discounts based on order volume.
Our practice with respect to our enterprise customers has been to enter
into an arrangement for a negotiated price to install the service initially to a
small number of end-users. An enterprise customer decides whether to implement a
broad rollout of our services after evaluating the results of this initial phase
of deployment. To date, an enterprise customer's initial phase of deployment and
its decision to roll out our service to additional end users has taken at least
six months, and has generally taken longer than we originally expected. As of
September 30, 1999, a substantial majority of our enterprise customers had not
yet rolled out our services broadly to their employees. We will not receive
significant revenue from an enterprise customer until and unless these rollouts
occur. During the lengthy sales cycle for an enterprise customer, we incur
significant expenses in advance of the receipt of revenues.
We also enter into customer agreements with telecommunications carriers,
including competitive telecommunications companies and interexchange carriers.
Under these agreements our telecommunication carrier customers typically resell
our services to their new and existing customers. These carriers currently
market our Internet and RLAN services primarily to small, medium and enterprise
businesses that purchase voice services from them.
SALES AND MARKETING
Business and Consumer Internet. For the business and consumer Internet
access markets, we sell our service to Internet service providers and
telecommunications carriers that combine our lines with their Internet access
services and resell the combination to their existing and new end-users. We
address these markets through sales and marketing personnel dedicated to the
Internet service provider sales channel. We supplement our sales efforts to
Internet service providers through training programs and marketing
46
<PAGE> 50
programs that include promotions and sales incentives designed to encourage the
Internet service providers to sell our services instead of those of our
competitors. As of September 30, 1999, we had more than 225 Internet service
provider and telecommunications carrier customers with their own sales personnel
marketing Internet services.
Remote Local Area Network. We market our RLAN services to businesses
through a direct sales force, augmented by marketing programs with value-added
resellers and interexchange carriers. The direct sales force is organized by
region. The sales force is directed to deal directly with the chief information
officer and the telecommunications manager responsible for remote access within
an enterprise. We augment our sales efforts to RLAN customers through
partnerships with value-added resellers, including systems integrators that can
offer our TeleSpeed service as part of a complete work-at-home solution to
businesses.
Third-Party Relationships. A key element of our strategy is to enter into
relationships with leading telecommunications companies, including competitive
telecommunications carriers and interexchange carriers, pursuant to which those
companies resell our TeleSpeed and TeleSurfer services to their customers. For
example, we have entered into commercial agreements with each of AT&T, GST,
Qwest and RCN providing for the purchase and resale of our services, primarily
to their small business and enterprise customers. In addition, in May 1999 we
entered into a strategic relationship with WebMD in which we will be WebMD's
preferred provider of broadband connectivity offering physician subscribers
web-based multimedia and communication services designed to enhance their
practices. We believe that these indirect sales channels will enable us to
penetrate our target markets more rapidly and eventually will generate the
majority of sales of our services.
Branding and Marketing Programs. We have recently commenced a branding and
advertising effort to educate the market about our broadband service offerings
and increase recognition of our brand. This program, which utilizes television,
print and radio advertisings on both a national and regional basis, is intended
to inform the market about the availability of Covad service, differentiate the
products and services offered by Covad and simplify the process through which
these products and services are ordered today.
We are also pursuing several types of joint marketing arrangements with our
Internet service provider, telecommunications carrier customers and other DSL
resellers. In addition, certain of our equipment suppliers have promoted our
services through seminars to corporate information technology managers in the
San Francisco Bay Area. We also support our sales efforts with marketing efforts
that include advertising programs through radio and other popular media,
attendance at trade shows and presentations at industry conferences. See "Risk
Factors -- Our business will suffer if our Internet service providers,
telecommunications carriers and other third parties are not successful in the
marketing and sale of our services."
SERVICE DEPLOYMENT AND OPERATIONS
Internet service providers, telecommunications carriers and corporate
information technology managers typically have had to assemble their digital
communications connections using multiple service and equipment suppliers,
leading to additional work, cost and coordination problems. With our services,
we emphasize a one-stop service solution for our customers. This service
solution includes:
- extending our networks to customers and end-users with various needs and
configuration requirements;
- end-user premise wiring and DSL modem configuration;
- ongoing network monitoring, customer reporting;
- customer service and technical support; and
- operational support system.
Extending our Networks to Customers and End-Users. We work with our
Internet service provider, enterprise and telecommunications carrier customers
to extend our networks to each customer premise and each end-user premise by
ordering circuits from the traditional telephone company or a competitive
telecommunications company, interconnecting the customers and end-users to our
networks, testing the
47
<PAGE> 51
circuits, configuring customer routers or switches and end-user routers and
monitoring the circuits from the network operations center.
End-User Premises Wiring and DSL Modem Configuration. We use our own and
subcontracted field service crews and trucks to perform any required inside
wiring and to configure DSL modems at each end-user site.
Network Monitoring. We monitor our networks from our network operations
center, which helps us to identify and correct network problems. We have also
developed network capability to provide Internet service provider, enterprise
and telecommunications carrier customers direct monitoring access of their
end-users for more efficient monitoring of their own network performance.
Customer Reporting. We communicate regularly with our customers about the
status of their end-users. We also operate a toll-free customer care help line.
Additionally, we provide Web-based tools to allow individual Internet service
providers and enterprise information technology managers and telecommunications
carriers to monitor their end-users directly, to place orders for new end-users,
to enter trouble tickets on end-user lines and to communicate with us on an
ongoing basis.
Customer Service and Technical Support. We provide 24X7 on-line support to
our Internet service provider customers and enterprise information technology
managers. The Internet service provider and information technology manager and
telecommunications carriers serve as the initial contact for service and
technical support, and we provide the second level of support.
Operational Support System. We have developed what we believe to be the
industry-leading operational support system for DSL networks. Our operational
support system is based on web interfaces and is highly automated. These
features allow us to scale our businesses rapidly because they eliminate many
manual processes such as line testing, network path configuration, equipment
configuration, order taking and verification, billing and telephone wire
supplier management.
NETWORK ARCHITECTURE AND TECHNOLOGY
The key design principles of our network attempt to provide the following
attributes which we believe are important requirements of our existing and
potential customers:
Robust Network Security. Modem access to enterprise networks presents
significant security risks, since any telephone can be used to attempt to access
such a network simply by dialing the telephone number. As a result, enterprises
expend significant effort and resources to prevent unauthorized access.
Enterprises also typically limit remote access users to reading e-mail or other
non-sensitive applications. Our networks are designed to ensure secure
availability of all internal applications and information for remote locations.
Our permanent virtual circuit network architecture connects individual end-users
at fixed locations to a single enterprise, which reduces the possibility of
unauthorized access and allows our customers to safely transmit sensitive
information and applications over our TeleSpeed lines.
Consistent and Scalable Performance. We believe that eventually public
packet networks will evolve to replace the over 40 million modems currently
connected to circuit switched networks that have been deployed in the U.S. As
such, we designed our networks for scalability and consistent performance to all
users as the networks grow. We have designed a "star topology" network similar
to the most popular local area network networking architecture currently used in
high performance enterprise networks. In this model, new capacity is added
automatically as each new user receives a new line. We also use asynchronous
transfer mode equipment in our networks that implements packet switching
directly in silicon circuits rather than slower router-based designs that
implement switching in router software.
Intelligent End-to-End Network Management. Because the customers' and
end-users' lines are continuously connected, they can also always be monitored.
We have visibility from the Internet service provider or enterprise site across
the network and into the end-user's home or business. Because our networks are
centrally managed, we can identify and dynamically enhance network quality,
service and performance and address network problems promptly.
48
<PAGE> 52
Flexibility. We have designed our networks to be flexible in handling
various types of network traffic, starting with data, but able to accommodate
voice and video. This flexibility will allow us to offer or enter into
arrangements with other entities to offer not only value-added services such as
voice over DSL, but also control the prioritization of content delivery within
our national network.
The primary components of our networks are the network operations center,
our high-speed private metropolitan networks, central office spaces, including
digital subscriber line access multiplexers (DSLAMs), copper telephone lines and
DSL modems.
Network Operations Center. Our entire network is managed from the network
operations center. We provide end-to-end network management using advanced
network management tools on a 24X7 basis, which enhances our ability to address
performance or connectivity issues before they affect the end-user experience.
From the network operations center, we can monitor the equipment and circuits in
each metropolitan network (including the asynchronous transfer mode equipment),
each central office (including DSLAMs) and potentially individual end-user lines
(including the DSL modems). Currently, the network operations center is located
in the San Francisco Bay Area. We are currently in the process of building a
second network operations center on the East Coast.
Private Metropolitan Network. We operate our own private metropolitan
network in each region that we enter. The network consists of high-speed
asynchronous transfer mode communications circuits that we lease to connect our
asynchronous transfer mode hubs, our equipment in individual central offices and
our Internet service provider, enterprise and telecommunications carrier
customers. This network operates at a speed of 45 to 155 megabits per second.
Central Office Spaces. Through our interconnection agreements with the
traditional telephone companies, we seek to secure space in every central office
where we intend to offer service. These central office spaces are designed to
offer the same high reliability and availability standards as the traditional
telephone company's other central office space. We require access to these
spaces for our equipment and for persons employed by, or under contract with,
us. We place DSLAMs in our central office spaces to provide the high-speed DSL
signals on each copper line to our end-users. We expect to deploy up to 80
central office spaces in any metropolitan area that we enter. As of December 31,
1999, we had 1,100 central office spaces operational. In addition, we have a
significant number of additional spaces under construction as well as other
spaces on order from various traditional telephone companies. In December 1998,
we entered into a professional service arrangement with Lucent Technologies to
augment and accelerate our ability to deploy our central office facilities.
Telephone Wires. We lease the telephone wires running to end-users from
the traditional telephone companies under terms specified in our interconnection
agreements. We lease lines that, in numerous cases, must be specially
conditioned by the traditional telephone companies to carry digital signals,
usually at an additional charge relative to that for voice grade telephone
wires. The price we are obligated to pay for these lines currently varies from
$4 to $43 per month per line with additional one-time charges in some cases for
installation, modification or removal of lines.
DSL Modems and On-Site Connection. We buy our DSL modems from our
suppliers for resale to our Internet service provider or enterprise customers
for use by their end-users. We configure and install these modems along with any
required on-site wiring needed to connect the modem to the copper line leased
from the traditional telephone company. For the most part, the DSL modem and
DSLAM equipment used must come from the same vendor for all services, since
there are not yet interoperability standards for the equipment used in our
higher-speed services.
We are also pursuing a program of ongoing network development. Our service
development and engineering efforts focus on the design and development of new
technologies and services to increase the speed, efficiency, reliability and
security of our networks and to facilitate the development of network
applications by third parties that will increase the use of our networks. See
"Risk Factors -- The scalability and speed of our networks remain largely
unproven."
49
<PAGE> 53
COMPETITION
The markets for business and consumer Internet access and network access
services are intensely competitive. We expect that these markets will become
increasingly competitive in the future. The principal bases of competition in
our markets include:
- price/performance;
- breadth of service availability;
- reliability of service;
- network security;
- ease of access and use;
- content bundling;
- customer support;
- brand recognition;
- operating experience;
- relationships with Internet service providers and other third parties;
and
- capital resources.
We face competition from traditional telephone companies, cable modem
service providers, competitive telecommunications companies, traditional and new
national long distance carriers, Internet service providers, on-line service
providers and wireless and satellite service providers.
Traditional Telephone Companies. All of the largest traditional telephone
companies in our target markets have begun offering DSL services or have
announced their intention to provide DSL services in the near term. As a result,
the traditional telephone companies represent strong competition in all of our
target service areas, and we expect this competition to intensify. The
traditional telephone companies have an established brand name and reputation
for high quality in their service areas, possess sufficient capital to deploy
DSL equipment rapidly, own the telephone wires themselves and can bundle digital
data services with their existing voice services to achieve economies of scale
in serving their customers. Certain of the traditional telephone companies have
aggressively priced their consumer DSL services as low as $19 - $29 per month,
placing pricing pressure on our TeleSurfer services. The traditional telephone
companies are also in a position to offer service from central offices where we
are unable to secure space and offer service because of asserted or actual space
restrictions.
Cable Modem Service Providers. Cable modem service providers such as AT&T,
Excite@Home, Road Runner and MediaOne (and their respective cable partners) are
deploying high-speed Internet access services over hybrid fiber coaxial cable
networks. Hybrid fiber coaxial cable is a combination of fiber optic and coaxial
cable, and has become the primary architecture utilized by cable operators in
recent and ongoing upgrades of their systems. Where deployed, these networks
provide similar and in some cases higher-speed Internet access than we provide.
They also offer these services at lower price points than our TeleSurfer
services. We believe the cable modem service providers face a number of
challenges that providers of DSL services do not face. For example, different
regions within a metropolitan area may be served by different cable modem
service providers, making it more difficult to offer the blanket coverage
required by potential business customers. Also, much of the current cable
infrastructure in the U.S. must be upgraded to support cable modems, a process
which we believe is significantly more expensive and time-consuming than the
deployment of DSL-based networks.
Competitive Telecommunications Companies. Many competitive
telecommunications companies such as NorthPoint Communications, Rhythms
NetConnections and Network Access Solutions offer high-speed digital services
using a business strategy similar to ours. Some of these competitors have begun
offering DSL-based access services and others are likely to do so in the future.
Companies such as Teleport Communications Group, Inc. (acquired by AT&T), Brooks
Fiber Properties, Inc. (acquired by MCI WorldCom), MFS (acquired by MCI
WorldCom) and NEXTLINK Communications have extensive
50
<PAGE> 54
fiber networks in many metropolitan areas, primarily providing high-speed
digital and voice circuits to large corporations. They also have interconnection
agreements with the traditional telephone companies pursuant to which they have
acquired central office space in many markets targeted by us. Further, certain
of our customers have made investments in our competitors.
National Long Distance Carriers. Interexchange carriers, such as AT&T,
Sprint, MCI WorldCom and Qwest, have deployed large-scale Internet access
networks and ATM networks, sell connectivity to businesses and residential
customers, and have high brand recognition. They also have interconnection
agreements with many of the traditional telephone companies and a number of
spaces in central offices from which they are currently offering or could begin
to offer competitive DSL services.
Internet Service Providers. Internet service providers such as BBN
(acquired by GTE), UUNET Technologies (acquired by MCI WorldCom), EarthLink
Network, Concentric Network Corporation, MindSpring Enterprises, Netcom On-Line
Communication Services and PSINet provide Internet access to residential and
business customers, generally using the existing public switched telephone
network at integrated services digital network speeds or below. Some Internet
service providers such as UUNET Technologies in California and New York,
HarvardNet Inc. and InterAccess have begun offering DSL-based services. To the
extent we are not able to recruit Internet service providers as customers for
our service, Internet service providers could become competitive DSL service
providers.
On-line Service Providers. On-line service providers include companies
such as AOL, Excite@Home, Compuserve (acquired by AOL), MSN (a subsidiary of
Microsoft Corp.) and WebTV (a subsidiary of Microsoft Corp.) that provide, over
the Internet and on proprietary online services, content and applications
ranging from news and sports to consumer video conferencing. These services are
designed for broad consumer access over telecommunications-based transmission
media, which enable the provision of digital services to the significant number
of consumers who have personal computers with modems. In addition, they provide
Internet connectivity, ease-of-use and consistency of environment. Many of these
on-line service providers have developed their own access networks for modem
connections. If these on-line service providers were to extend their access
networks to DSL or other high-speed service technologies, they would become
competitors of ours.
Wireless and Satellite Data Service Providers. Wireless and satellite data
service providers are developing wireless and satellite-based Internet
connectivity. We may face competition from terrestrial wireless services,
including two Gigahertz (Ghz) and 28 Ghz wireless cable systems (Multi-channel
Microwave Distribution System (MMDS) and Local Multi-channel Distribution System
(LMDS)), and 18 Ghz and 39 Ghz point-to-point microwave systems. For example,
the FCC is currently considering new rules to permit MMDS licensees to use their
systems to offer two-way services, including high-speed data, rather than solely
to provide one-way video services. The FCC also recently auctioned spectrum for
LMDS services in all markets. This spectrum is expected to be used for wireless
cable and telephony services, including high-speed digital services. In
addition, companies such as Teligent Inc., Advanced Radio Telecom Corp. and
WinStar Communications, Inc., hold point-to-point microwave licenses to provide
fixed wireless services such as voice, data and videoconferencing.
We also may face competition from satellite-based systems. Motorola
Satellite Systems, Inc., Hughes Communications (a subsidiary of General Motors
Corporation), Teledesic and others have filed applications with the FCC for
global satellite networks which can be used to provide broadband voice and data
services, and the FCC has authorized several of these applicants to operate
their proposed networks.
INTERCONNECTION AGREEMENTS WITH TRADITIONAL TELEPHONE COMPANIES
A critical aspect of our business is our interconnection agreements with
the traditional telephone companies. These agreements cover a number of aspects
including:
- the price we pay to lease access to the traditional telephone company's
telephone wires;
- the special conditioning the traditional telephone company provides on
certain of these lines to enable the transmission of digital signals;
51
<PAGE> 55
- the price and terms of central office space for our equipment in the
traditional telephone company's central offices;
- the price we pay and access we have to the traditional telephone
company's transport facilities;
- the operational support systems and interfaces that we can use to place
orders, report network problems and monitor the traditional telephone
company's response to our requests;
- the dispute resolution process that we use to resolve disagreements on
the terms of the interconnection contract; and
- the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of the
traditional telephone company relationship.
As of December 31, 1999, we have entered into interconnection agreements
with or otherwise obtained interconnection rights from the different major
traditional telephone companies in all the states covering our existing 59
metropolitan statistical areas. Traditional telephone companies do not in many
cases agree to our requested provisions in interconnection agreements and we
have not consistently prevailed in obtaining all of our desired provisions in
such agreements either voluntarily or through the interconnection arbitration
process. We cannot be sure that we will be able to continue to sign
interconnection agreements with existing or other traditional telephone
companies. We are currently negotiating agreements with several traditional
telephone companies in order to expand our services into 100 targeted
metropolitan statistical areas. The traditional telephone companies are also
permitting competitive telecommunications companies to adopt previously signed
interconnection agreements. In certain instances, we have adopted the
interconnection agreement of another competitive telecommunications company.
Other competitive telecommunications companies have also adopted the same or
modified versions of our interconnection agreements, and may continue to do so
in the future.
Many of our interconnection agreements have a term of three years. We will
have to renegotiate these agreements when they expire. Although we expect to
renew the interconnection agreements that require renewal and believe the 1996
Telecommunications Act and the agreements themselves limit the ability of
traditional telephone companies not to renew such agreements, we may not succeed
in extending or renegotiating our interconnection agreements on favorable terms.
Additionally, disputes have arisen and will likely arise in the future as a
result of differences in interpretations of the interconnection agreements. For
example, we are in litigation proceedings with certain of the traditional
telephone companies. These disputes have delayed our deployment of our networks.
They have also adversely affected our service to our customers and our ability
to enter into additional interconnection agreements with the traditional
telephone companies in other states. Finally, the interconnection agreements are
subject to state commission, FCC and judicial oversight. These government
authorities may modify the terms of the interconnection agreements in a way that
hurts our business.
GOVERNMENT REGULATION
Overview. Our services are subject to a variety of federal regulations.
With respect to certain activities and for certain purposes, we have submitted
our operations to the jurisdiction of state and local authorities who may also
assert more extensive jurisdiction over our facilities and services. The FCC has
jurisdiction over all of our services and facilities to the extent that we
provide interstate and international services. To the extent we provide
identifiable intrastate services, our services and facilities are subject to
state regulations. In addition, local municipal government authorities also
assert jurisdiction over our facilities and operations. The jurisdictional reach
of the various federal, state and local authorities is subject to ongoing
controversy and judicial review, and we cannot predict the outcome of such
review.
Federal Regulation. We must comply with the requirements of the
Communications Act of 1934, as amended by the 1996 Telecommunications Act, as
well as the FCC's regulations under the statute. The 1996 Telecommunications Act
eliminates many of the pre-existing legal barriers to competition in the
telecommunications and video programming communications businesses, preempts
many of the state barriers to local telecommunications service competition that
previously existed in state and local laws and
52
<PAGE> 56
regulations, and sets basic standards for relationships between
telecommunications providers. The law delegates to the FCC and the states broad
regulatory and administrative authority to implement the 1996 Telecommunications
Act.
Among other things, the 1996 Telecommunications Act removes barriers to
entry in the local telecommunications market. It does this by preempting certain
state and local laws that are barriers to competition and by requiring
traditional telephone companies to provide nondiscriminatory access and
interconnection to potential competitors, such as cable operators, wireless
telecommunications providers, interexchange carriers and competitive
telecommunications companies such as us.
Regulations promulgated by the FCC under the 1996 Telecommunications Act
specify in greater detail the requirements of the 1996 Telecommunications Act
imposed on the traditional telephone companies to open their networks to
competition by providing competitors interconnection, central office space,
access to unbundled network elements, retail services at wholesale rates and
nondiscriminatory access to telephone poles, ducts, conduits, and rights-of-way.
The requirements enable companies such as us to interconnect with the
traditional telephone companies in order to provide local telephone exchange
services and to use portions of the traditional telephone companies' existing
networks to offer new and innovative services such as our TeleSpeed and
TeleSurfer services. In January 1999, the U.S. Supreme Court ruled on challenges
to the FCC regulations. Although the U.S. Supreme Court upheld most of the FCC's
authority and its regulations, it required the FCC to reexamine and redefine
which unbundled networks elements the traditional telephone companies must
offer. The FCC issued its revised list of unbundled network elements in
September 1999.
The 1996 Telecommunications Act also allows the regional bell operating
companies (RBOCs), which are the traditional telephone companies created by
AT&T's divestiture of its local exchange business, to enter the long distance
market within their own local service regions upon meeting certain requirements.
The remaining RBOCs include BellSouth, Bell Atlantic Corporation, Ameritech
Corporation, U S WEST Communications, Inc. and SBC Communications, Inc. The
timing of the various RBOCs' entry into their respective in-region long distance
service businesses is extremely uncertain. In December 1999, Bell Atlantic's
application to provide in-region long distance services in New York state was
granted by the FCC. Given the FCC's grant of Bell Atlantic's application, the
FCC is likely to thereafter grant similar applications by Bell Atlantic and the
other RBOCs in other states. On January 10, 2000, Southwestern Bell Telephone
Company, a subsidiary of SBC, filed its application for FCC approval to provide
in-region long distance service in Texas. The FCC is expected to act on the
application before May 2000. The timing of the various RBOCs' in-region long
distance entry will likely affect the level of cooperation we receive from each
of the RBOCs. The approval of such entry will likely adversely affect the level
of cooperation.
In addition, the 1996 Telecommunications Act provides relief from the
earnings restrictions and price controls that have governed the local telephone
business for many years. Traditional telephone company tariff filings at the FCC
have been subjected to increasingly less regulatory review. However, precisely
when and to what extent the traditional telephone companies will secure pricing
flexibility or other regulatory freedom for their services is uncertain. For
example, under the 1996 Telecommunications Act, the FCC is considering
eliminating certain regulations that apply to the traditional telephone
companies' provision of services that are competitive with ours. The timing and
the extent of regulatory freedom and pricing flexibility and regulatory freedom
granted to the traditional telephone companies will affect the competition we
face from the traditional telephone companies' competitive services.
Further, the 1996 Telecommunications Act provides the FCC with the
authority to forbear from regulating entities such as us who are classified as
"non-dominant" carriers. The FCC has exercised its forbearance authority. As a
result, we are not obligated to obtain prior certificate approval from the FCC
for our interstate services or file tariffs for such services. We have
determined not to file tariffs for our interstate services. We provide our
interstate services to our customers on the basis of contracts rather than
tariffs. We believe that it is unlikely that the FCC will require us to file
tariffs for our interstate services in the future.
53
<PAGE> 57
On March 18, 1999, the FCC announced that it was adopting rules to make it
easier and less expensive for competitive telecommunications companies to obtain
central office space and to require traditional telephone companies to make new
alternative arrangements for obtaining central office space. New entrants will
be able to locate all equipment necessary for interconnection, whether or not
such equipment has a switching function. The FCC's rules have not been uniformly
implemented. In the same announcement, the FCC provided notice of proposed
rule-making to determine whether carriers should be able to provide asymmetric
DSL over the same line over which traditional telephone companies provide voice
service. The notice sought comments on the operational, pricing, legal and
policy ramifications of mandating such line sharing. On November 18, 1999, the
FCC required the traditional local phone companies to provide us and other
competitive local carriers with line sharing access. If implemented by the
traditional local phone companies these rules could materially lower the price
we pay to lease access to the traditional telephone company's telephone wires.
While we believe that these rules are advantageous to us, the traditional
telephone companies may balk at, delay, or thwart the implementation of such
rules.
Any changes in applicable federal law and regulations, in particular,
changes in its interconnection agreements with traditional telephone companies,
the prospective entry of the RBOCs into the in-region long distance business and
grant of regulatory freedom and pricing flexibility to the traditional telephone
companies, could harm our business.
State Regulation. To the extent we provide identifiable intrastate
services or have otherwise submitted ourselves to the jurisdiction of the
relevant state telecommunications regulatory commissions, we are subject to such
jurisdiction. In addition, certain states have required prior state
certification as a prerequisite for processing and deciding an arbitration
petition for interconnection under the 1996 Telecommunications Act. As of
December 31, 1999, we were authorized under state law to operate as a
competitive local exchange carrier in 34 states, and intend to obtain
authorization in the other states necessary to cover our 100 targeted
metropolitan statistical areas. We have pending arbitration proceedings in
different states for interconnection arrangements with the relevant traditional
telephone companies. We have concluded arbitration proceedings in a number of
states by entering into interconnection agreements with the relevant traditional
telephone companies. We have filed tariffs in certain states for intrastate
services as required by state law or regulation. We are also subject to periodic
financial and other reporting requirements of these states with respect to our
intrastate services.
The different state commissions have various proceedings to determine the
rates, charges and terms and conditions for unbundled network elements
(unbundled network elements are the various portions of a traditional telephone
company's network that a competitive telecommunications company can lease for
purposes of building a facilities-based competitive network, including telephone
wires, central office collocation space, inter-office transport, operational
support systems, local switching and rights of way), as well as the discount for
wholesale services that we purchase from the relevant traditional telephone
company. The rates set forth in our interconnection agreements are interim rates
and will be prospectively, and, in some cases, retroactively, affected by the
permanent rates set by the various state commissions for such unbundled network
elements as unbundled loops and interoffice transport. We have participated in
unbundled network element rate proceedings in several states in an effort to
reduce these rates. If any state commission decides to increase unbundled
network element rates our operating results could suffer.
The applicability of the various state regulations on our business and
compliance requirements will be further affected by the extent to which our
services are determined to be intrastate services. Jurisdictional determinations
of our services as intrastate services could harm our business.
Local Government Regulation. We may be required to obtain various permits
and authorizations from municipalities in which we operate our own facilities.
The issue of whether actions of local governments over the activities of
telecommunications carriers, including requiring payment of franchise fees or
other surcharges, pose barriers to entry for competitive telecommunications
companies which may be preempted by the FCC is the subject of litigation.
Although we rely primarily on the unbundled network elements of the traditional
telephone companies, in certain instances we deploy our own facilities,
including fiber optic cables, and therefore may need to obtain certain municipal
permits or other authorizations. The actions of municipal
54
<PAGE> 58
governments in imposing conditions on the grant of permits or other
authorizations or their failure to act in granting such permits or other
authorizations could harm our business.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation affecting the
telecommunications industry. Other existing federal regulations are currently
the subject of judicial proceedings, legislative hearings and administrative
proposals, which could change, in varying degrees, the manner in which
communications companies operate in the U.S. The ultimate outcome of these
proceedings, and the ultimate impact of the 1996 Telecommunications Act or any
final regulations adopted pursuant to the 1996 Telecommunications Act or our
business cannot be determined at this time but may well be adverse to our
interests. We cannot predict the impact, if any, that future regulation or
regulatory changes may have on our business and we can give you no assurance
that such future regulation or regulatory changes will not harm our business.
See "Risk Factors -- Rejections of our applications for central office space by
traditional telephone companies are likely to delay the expansion of our
networks and the rollout of our services" and "-- Our services are subject to
government regulation, and changes in current or future laws or regulations
could adversely affect our business."
INTELLECTUAL PROPERTY
We regard certain aspects of our products, services and technology as
proprietary and attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. These methods
may not be sufficient to protect our technology. We also generally enter into
confidentiality or license agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our products, services or
technology without authorization, or to develop similar technology
independently.
Currently we have a number of patent applications and intend to prepare
additional applications and to seek patent protection for our systems and
services to the extent possible. These patents may not be issued to us, and if
issued, they may not protect our intellectual property from competition which
could seek to design around or invalidate these patents.
Further, effective patent, copyright, trademark and trade secret protection
may be unavailable or limited in certain foreign countries. The global nature of
the Internet makes it virtually impossible to control the ultimate destination
of our proprietary information. Steps taken by us may not prevent
misappropriation or infringement of our technology. In addition, litigation may
be necessary in the future to enforce our intellectual property rights to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources.
In addition, we may be sued by others with respect to infringement of their
intellectual property rights. We were recently sued by Bell Atlantic for an
alleged infringement of a patent issued to them in September 1998 entitled
"Variable Rate and Variable Mode Transmission System." The trial in this case
has been scheduled for March 2000. We believe that we do not infringe the Bell
Atlantic patent and have defenses to infringement and liability. However,
litigation is inherently unpredictable and there is no guarantee that we will
prevail. Such lawsuits, including the Bell Atlantic suit, could significantly
harm our business.
EMPLOYEES
As of September 30, 1999, we had 680 employees, excluding temporary
personnel and consultants. None of our employees are represented by a labor
union, and we consider our relations with our employees to be good. Our ability
to achieve our financial and operational objectives depends in large part upon
the continued service of our senior management and key technical, sales,
marketing, legal and managerial personnel, and our continuing ability to attract
and retain highly qualified technical, sales, marketing, legal and managerial
personnel. Competition for such qualified personnel is intense, particularly in
software development, network engineering and product management. In addition,
in the event that our employees unionize, we could incur higher ongoing labor
costs and disruptions in our operations in the event of a strike or other work
stoppage.
55
<PAGE> 59
PROPERTIES
We are headquartered in Santa Clara, California in facilities consisting of
approximately 62,000 square feet pursuant to a lease that will expire on or
before July 14, 2002. We also lease office space in many of the metropolitan
statistical areas in which we conduct operations. In addition, our San Francisco
Bay Area regional data center consists of approximately 2,000 square feet and is
located in San Jose, California, which we occupy under a ten-year lease with two
five-year renewal options. Currently, and until we finish building our west
coast network operations center, we utilize a portion of the San Francisco Bay
Area regional data center space to facilitate this operation. We have recently
expanded our headquarters space in Santa Clara by leasing additional office
space, and have expanded our operational space with a new facility lease in
Denver. Through a subsidiary, we have also acquired land and are currently
building a 100,000 square foot network operations center in Prince Williams
County, Virginia. We also lease central office space from the traditional
telephone company in each region that we operate or plan to operate under the
terms of our interconnection agreements and obligations imposed by state public
utilities commissions and the FCC. While the terms of these leases are
perpetual, the productive use of our central office space is subject to the
terms of our interconnection agreements which expire on or before March 2001. We
will increase our central office space as we expand our network geographically.
LEGAL PROCEEDINGS
We are engaged in a variety of negotiations, arbitrations and regulatory
and court proceedings with multiple traditional telephone companies. These
negotiations, arbitrations and proceedings concern the traditional telephone
companies' denial of physical central office space to us in certain central
offices, the cost and delivery of central office spaces, the delivery of
transmission facilities and telephone lines, billing issues and other
operational issues. For example, we are currently involved in commercial
arbitration proceedings with Pacific Bell over these issues. We have also filed
a lawsuit against Pacific Bell and certain of its affiliates, including SBC
Communications, in federal court. We are pursuing a variety of contract, tort,
antitrust and other claims, such as violations of the Telecommunications Act, in
these proceedings. In November 1998, we prevailed in our commercial arbitration
proceeding against Pacific Bell. The arbitration panel found that Pacific Bell
breached its interconnection agreement with us and failed to act in good faith
on multiple counts. The arbitration panel ruled in favor of awarding us direct
damages, as well as attorneys fees and costs of the arbitration. Pacific Bell is
currently attempting to have the decision vacated. Meanwhile, the arbitration
panel is evaluating our claim for additional damages. We have also filed a
lawsuit against Bell Atlantic and its affiliates in federal court. We are
pursuing antitrust and other claims in this lawsuit. In addition, Bell Atlantic
has separately filed suit against us asserting infringement of a patent issued
to them in September 1998 entitled "Variable Rate and Variable Mode Transmission
System." The trial in this case has been scheduled for March 2000. We believe
that we do not infringe the Bell Atlantic patent and have defenses to
infringement and liability. However, litigation is inherently unpredictable and
there is no guarantee that we will prevail. Failure to resolve these various
legal disputes and controversies between us and the various traditional
telephone companies without excessive delay and cost and in a manner that is
favorable to us could significantly harm our business.
One of our former employees has filed a complaint against us in California
Superior Court, alleging that he was terminated wrongfully and is entitled to
commissions and other amounts arising from his employment with us. We believe
that we have valid reasons for his termination and that we do not owe him any
money, but litigation is unpredictable and there is no guarantee we will
prevail.
56
<PAGE> 60
We are not currently engaged in any other legal proceedings that we believe
could have a material adverse effect on our business, prospects, operating
results and financial condition. We are, however, subject to state commission,
FCC and court decisions as they relate to the interpretation and implementation
of the 1996 Telecommunications Act, the interpretation of competitive
telecommunications company interconnection agreements in general and our
interconnection agreements in particular. In some cases, we may be deemed to be
bound by the results of ongoing proceedings of these bodies or the legal
outcomes of other contested interconnection agreements that are similar to our
agreements. The results of any of these proceedings could harm our business.
57
<PAGE> 61
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, and their respective ages as of
October 31, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert Knowling, Jr....................... 44 Chairman of the Board, President and Chief
Executive Officer
Timothy Laehy............................. 43 Chief Financial Officer
Robert Davenport, III..................... 40 Executive Vice President, Business
Development
Catherine Hemmer.......................... 41 Chief Operating Officer
Robert Roblin............................. 47 Executive Vice President, Sales and
Marketing
Joseph Devich............................. 42 Executive Vice President, Corporate
Services
Dhruv Khanna.............................. 39 Executive Vice President, General Counsel
and Secretary
Jane Marvin............................... 40 Senior Vice President, Human Resources
Terry Moya................................ 41 Senior Vice President, External Affairs
Michael Lach.............................. 38 Executive Vice President, Business
Integration
Robert Hawk............................... 60 Director
Hellene Runtagh........................... 51 Director
Daniel Lynch.............................. 58 Director
Frank Marshall............................ 52 Director
Rich Shapero.............................. 51 Director
</TABLE>
ROBERT KNOWLING, JR. has been our President, Chief Executive Officer and a
member of our board of directors since July 1998. As of September 1999, he also
became Chairman of the Board of Directors. From October 1997 through July 1998,
Mr. Knowling served as the Executive Vice President of Operations and
Technologies at U S WEST Communications, Inc. In this capacity, Mr. Knowling was
responsible for planning, delivering and maintaining high-quality
telecommunications services for more than 25 million customers in 14 western and
midwestern states. From March 1996 through September 1997, he served as Vice
President of Network Operations at U S WEST Communications, Inc. From November
1994 through March 1996, he served as Vice President of Network Operations for
Ameritech Corporation. Mr. Knowling began his career in 1977 at Indiana Bell
where he progressed through a variety of assignments in operations, engineering
and marketing. When Indiana Bell became a part of Ameritech Corporation, Mr.
Knowling assumed positions of increasing responsibility in marketing, product
development, large business marketing and network operations, including service
on Ameritech Corporation's re-engineering breakthrough development team. As lead
architect of the Ameritech Corporation transformation, Mr. Knowling reported
directly to the Chairman.
TIMOTHY LAEHY joined us in August 1997. He served as our Chief Financial
Officer, Treasurer and Vice President, Finance until February 1999 and has
served as our Chief Financial Officer since that date. Prior to joining us, Mr.
Laehy served as Vice President, Corporate Finance and Treasurer of Leasing
Solutions, Inc., a computer equipment leasing company, from February 1991 to
August 1997. From 1990 to 1991, Mr. Laehy served as a senior associate with
Recovery Equity Partners, a private venture capital investment fund. From 1985
to 1990, he served in various capacities at Guarantee Acceptance Capital
Corporation, an investment bank, Liberty Mutual Insurance Company and Union
Carbide Corporation.
ROBERT R. DAVENPORT, III joined us in January 1999. He served as our Vice
President, Business Development until February 1999 and has served as our
Executive Vice President, Business Development since that date. Prior to joining
us, Mr. Davenport was Senior Vice President and Chief Operating Officer at
Tele-Communications, Inc.'s Internet Services subsidiary, TCI.NET from 1997 to
1999. Between 1995 and 1997, Mr. Davenport was with Tele-Communications, Inc.,
as Vice President, Finance and
58
<PAGE> 62
Development for the Telephony Services subsidiary. From 1992 to 1995, he was
Managing Partner of RD Partners, LLC, a private investment firm focused on
leveraged equity investments.
CATHERINE HEMMER joined us in August 1998. She served as our Vice
President, Operations until February 1999 and served as our President, Network
Services from February 1999 to September 1999. Since September 1999, she has
served as 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 providing management information systems support for the network
operations organization.
ROBERT ROBLIN joined us in November 1998. He served as our Vice President,
Marketing until February 1999 and has served as our Executive Vice President,
Sales and Marketing since that date. Prior to joining us, he was Executive Vice
President of Marketing at Adobe Systems, Inc. from 1996 to November 1998. From
1994 to 1996, Mr. Roblin served as Vice President and General Manager of
Marketing of the Consumer Division of IBM Corporation. Between 1992 and 1994,
Mr. Roblin was the Vice President of Marketing of Pensoft, a start-up pen-based
software company that produced a database-driven personal information manager.
JOSEPH DEVICH joined us in August 1998. He served as Vice President and
General Manager of our Western Region until February 1999 and served as
President and General Manager of the Western Region from February 1999 to
September 1999. Since September 1999, he has served as Executive Vice President,
Corporate Services. Prior to joining us, from November 1996 to August 1998, Mr.
Devich was Vice President, Operations and Technologies Staff of U S WEST
Communications, where he served on the strategic leadership council and was
responsible for leading staff support functions, methodical and procedural
process support, results reporting and analysis, systems planning and
integration, customer value analysis, disaster recovery/business continuity
planning, network security, supplier management and operations strategy
planning. From August 1986 to November 1996, Mr. Devich worked in several
capacities at Ameritech Corporation, including Manager of Product
Management -- Technical Support, and Director in the areas of customer support
in the large business market, service reliability within custom business
services, process improvement of network operations and network provisioning.
DHRUV KHANNA is one of our founders. He served as our Vice President,
General Counsel and Secretary from October 1996 until February 1999 and has
served as our Executive Vice President, General Counsel and Secretary since that
date. He was an in-house counsel for Intel'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 where his clients
included Teleport Communications Group (now AT&T), McCaw Cellular
Communications, Inc. (now AT&T Wireless), and Southern Pacific Telecom (now
Qwest). Mr. Khanna has extensive experience with regulatory matters, litigation
and business transactions involving the RBOCs and other telecommunications
companies. While at Intel, he helped shape the computer industry's positions on
the Telecommunications Act of 1996 and the FCC's rules implementing the 1996
Act.
JANE MARVIN joined us in April 1999 as our Senior Vice President, Human
Resources. Prior to joining us, from August 1995 to April 1999, Ms. Marvin was
Vice President, Human Resources for the General Business, Small Business and
Enhanced Business Services units and Director, Leadership and Executive
Development of Ameritech Corporation. In these capacities, she re-engineered and
streamlined multiple HR processes and drove corporate-wide change initiatives.
From 1991 to 1995, Ms. Marvin was Human Resources Director with the Pepsi Cola
Company, a division of Pepsico Inc., where she improved business processes in
the areas of recruitment, selection, training, and compensation. From 1984 to
1991, Ms. Marvin worked in progressively broader HR leadership roles at Data
General Corporation, a provider of enterprise hardware and software solutions.
59
<PAGE> 63
TERRY MOYA joined us in July 1999 as our Senior Vice President, External
Affairs. Prior to joining us, from January 1999 to July 1999, Terry served as
Vice President & Chief Financial Officer, Capital Management, Network/Operations
and Technologies at U S WEST Communications, Inc. From August 1998 to January
1999, Terry served as Vice President, Operations for U S WEST Communications,
Inc., where he managed over $2 billion in capital expenditures and over $320
million in engineering and construction transaction costs. From February 1997 to
August 1998, Terry served as Vice President, Construction, Operations and
Technologies and led the outside plant construction contracting organization for
U S WEST Communications, Inc. From August 1992 to February 1997, Terry spent
time in over a half dozen foreign countries establishing and improving several
different lines of business for U S WEST Communications, Inc. These countries
include Poland, Russia, the Czech Republic, Hungary, Brazil and the United
Kingdom. Prior to August 1992, Terry was at KPMG Peat Marwick in New Orleans.
MICHAEL LACH joined us in January 2000 as our Executive Vice President,
Business Integration. Prior to joining us, from May 1997 to December 1999, Mr.
Lach was Vice President, Customer Provisioning and Maintenance of Ameritech
Corporation, where he was responsible for the installation and repair of
residential phone lines across a five-state region. From October 1995 to May
1997, Mr. Lach was General Manager, Network Operations West of Ameritech
Corporation, where he was responsible for provisioning and maintaining central
offices and the transport network in a three state region. From September 1994
to October 1995, Mr. Lach was Division Manager, Technical Support of Ameritech
Corporation, where he supported the development and implementation of new
product for residential and business customers. From March 1993 to August 1994,
Mr. Lach was Director, Business Development for Siemens Stromberg-Carlson. From
January 1984 to February 1993, Mr. Lach served in various management roles with
Ameritech Corporation relating to its network.
ROBERT HAWK has served as a member of our board of directors since April
1998. Mr. Hawk is President of Hawk Communications and recently retired as
President and Chief Executive Officer of U S WEST Multimedia Communications,
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, a regional telecommunications service provider, from September
1990 to May 1996. Prior to that time, Mr. Hawk was Vice President of Marketing
and Strategic Planning for CXC Corporation. Prior to joining CXC Corporation,
Mr. Hawk was director of Advanced Systems Development for AT&T/American Bell. He
currently serves on the boards of PairGain Technologies, COM21, Concord
Communications, Radcom, Efficient Networks and several privately held companies.
DANIEL LYNCH has served as a member of our board of directors since April
1997. Mr. Lynch is also a founder of CyberCash, Inc. and has served on its board
of directors since August 1994. From December 1990 to December 1995, he served
as chairman of the board of directors of Softbank Forums, a provider of
education and conference services for the information technology industry. Mr.
Lynch founded Interop Company in 1986, which is now a division of ZD Comdex and
Forums. Mr. Lynch is a member of the Association for Computing Machinery and the
Internet Society. He is also a member of the Board of Trustees of the Santa Fe
Institute, the Bionomics Institute and CommerceNet. He previously served as
Director of the Information Processing Division for the Information Sciences
Institute in Marina del Rey, where he led the Arpanet team that made the
transition from the original NCP protocols to the current TCP/IP based
protocols. He has served as a member of the board of directors of Exodus
Communications since January 1998. Mr. Lynch previously served as a member of
the board of directors at UUNET Technologies from April 1994 until August 1996.
FRANK MARSHALL has served as a member of our board of directors since
October 1997. Mr. Marshall currently serves on the board of directors of
PMC-Sierra Inc. and several private companies. Mr. Marshall also serves on the
technical advisory board of several high technology private companies. He is a
member of the InterWest Partners Advisory Committee and a Venture Partner at
Sequoia Capital. From 1992 to 1997, Mr. Marshall served as Vice President of
Engineering and Vice President and General Manager, Core Business Unit of Cisco
Systems Inc. From 1982 to 1992, he served as Senior Vice President, Engineering
at Convex Computer Corporation.
60
<PAGE> 64
RICH SHAPERO has served as a member of our board of directors since July
1997. Mr. Shapero has been a general partner of Crosspoint Venture Partners,
L.P., a venture capital investment firm, since April 1993. From January 1991 to
June 1992, he served as Chief Operating Officer of Shiva Corporation, a computer
network company. Previously, he was a Vice President of Sun Microsystems, Senior
Director of Marketing at AST, 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.
and several privately held companies.
HELLENE RUNTAGH has served as a member of our board of directors since
November 3, 1999. Ms. Runtagh has served as Executive Vice President of
Universal Studios since January 1999. In this capacity, she is responsible for
overseeing the activities of the Universal Studios Operations Group, Universal
Studios Consumer Products Group, Universal Studios Corporate Marketing and
Sponsorships, and the Spencer Gift retail operations, Universal Studios'
worldwide information technology, and Seagram's global sourcing and real estate
operations. From February 1997 to January 1999, she held the position of senior
vice president of reengineering effort at Universal. Previously, Ms. Runtagh
spent 25 years at General Electric, where she served as President and Chief
Executive Officer of GE Information Services from 1989 to 1996 and held general
management roles with GE's capital and software businesses.
61
<PAGE> 65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of
our common stock as of January 21, 2000 by:
(i) our Chief Executive Officer and each of our four other most highly
compensated executive officers (the "Named Executive Officers") in terms of
salary and bonus for 1999,
(ii) each of our directors, and
(iii) all of our executive officers and directors as a group.
Except as otherwise indicated, the address of each of the persons in this
table is as follows: c/o Covad Communications Group, Inc., 2330 Central
Expressway, Santa Clara, CA 95050. As of December 31, 1999, there were
88,220,877 shares of common stock outstanding, which excludes 6,379,177
outstanding shares of our non-voting class B common stock which are convertible
into 9,568,765 shares of common stock beginning January 2000. Share ownership in
each case includes shares issuable upon exercise of outstanding options and
warrants that are exercisable within 60 days of January 21, 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. To our knowledge, there are currently
no persons who directly own 5% or more of our common stock.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED(1) OWNED
---------------- ------------ ------------
<S> <C> <C>
Robert Knowling, Jr.(1)............................... 1,034,999 1.2%
Dhruv Khanna(2)....................................... 4,250,429 4.8
Catherine Hemmer(3)................................... 99,507 *
Robert Roblin(4)...................................... 130,000 *
Jane Marvin(5)........................................ 59,311 *
Robert Hawk(6)........................................ 15,999 *
Daniel Lynch(7)....................................... 29,499 *
Frank Marshall(8)..................................... 29,499 *
Rich Shapero(9)....................................... 2,499 *
Hellene Runtagh(10)................................... 1,666 *
All executive officers and directors as a group....... 6,284,235 7.1%
</TABLE>
- ---------------
* Represents ownership of less than 1%.
(1) Consists of 1,034,999 shares of common stock subject to options exercisable
within 60 days of January 21, 2000.
(2) Includes 562,520 shares of common stock held by a limited partnership of
which Mr. Khanna is a general partner and a limited partner and 150,000
shares held by charitable remainder unitrusts for which Mr. Khanna and his
spouse act as trustees. Mr. Khanna disclaims beneficial ownership of the
shares of common stock held by such limited partnership and such charitable
remainder unitrusts except to the extend of his pecuniary interest therein.
(3) Includes 79,507 shares of common stock subject to options exercisable
within 60 days of January 21, 2000.
(4) Includes 110,000 shares of common stock subject to options exercisable
within 60 days of January 21, 2000.
(5) Includes 47,311 shares of common stock subject to options exercisable
within 60 days of January 21, 2000.
(6) Consists of 15,999 shares of common stock subject to options exercisable
within 60 days of January 21, 2000.
(7) Consists of 29,499 shares of common stock subject to options exercisable
within 60 days of January 21, 2000.
(8) Consists of 29,499 shares of common stock subject to options exercisable
within 60 days of January 21, 2000.
(9) Consists of 2,499 shares of common stock subject to options exercisable
within 60 days of January 21, 2000.
(10) Consists of 1,666 shares of common stock subject to options exercisable
within 60 days of January 21, 2000.
62
<PAGE> 66
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES C PREFERRED STOCK AND WARRANT SUBSCRIPTION AGREEMENT
On February 20, 1998, we entered into a Series C Preferred Stock and
Warrant Subscription Agreement (the "Subscription Agreement") with Warburg and
Crosspoint. Under this agreement, Warburg and Crosspoint unconditionally agreed
to purchase an aggregate of 5,764,143 shares of our series C preferred stock and
warrants to purchase an aggregate of 4,729,500 shares of our series C preferred
stock for an aggregate purchase price of $16.0 million at a date that we were to
determine but, in any event, not later than March 11, 1999. We agreed to either
call this commitment or complete an alternate equity financing of at least $16.0
million by March 11, 1999. A proposed alternate equity financing providing for a
price per share greater than or equal to $2.7767 and including securities that
are equal in right with, or more favorable to us than, our series C preferred
stock as set forth in our Amended and Restated Certificate of Incorporation
required approval by a majority of our disinterested directors. A proposed
alternate equity financing providing for a price per share of less than $2.7767
or involving securities whose terms are less favorable to us than our series C
preferred stock required unanimous approval by our entire board of directors. In
consideration of this commitment, we issued to Warburg and Crosspoint warrants
to purchase an aggregate of 1,694,148 shares of our common stock at a purchase
price of $0.0033 per share. The parties have agreed that the stock purchases by
AT&T Ventures and NEXTLINK constitute an alternate equity financing. As a
result, we did not issue and sell our series C preferred stock and warrants to
purchase series C preferred stock to Warburg and Crosspoint.
On April 24, 1998, the Subscription Agreement was amended pursuant to an
Assignment and Assumption Agreement to which we were a party along with Warburg,
Crosspoint and Mr. Hawk. By the terms of this agreement, Warburg and Crosspoint
assigned to Mr. Hawk their obligation to purchase 36,015 shares of our series C
preferred stock and 29,559 warrants to purchase series C preferred stock for an
aggregate purchase price of $100,000. On the same date, Mr. Hawk purchased
36,015 shares of our 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 our 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 was
amended to add Mr. Hawk as a party.
The warrants to purchase our common stock issued upon the signing of the
Subscription Agreement had five-year terms (but had to be exercised prior to the
closing of our initial public offering), had purchase prices of $0.0022 per
share, were immediately exercisable and contained net exercise provisions. Prior
to our initial public offering, Warburg and Crosspoint exercised their warrants
to purchase series C preferred stock for 2,032,605 and 508,243 shares of our
common stock.
On March 11, 1998, we amended the Stockholder Rights Agreement, to extend
the rights held by Warburg, Crosspoint and Intel to our warrants to purchase
common stock, series C preferred stock and warrants to purchase series C
preferred stock issued or issuable to Warburg, Crosspoint and Intel pursuant to
the Subscription Agreement.
THE INTEL STOCK PURCHASE
As provided in the Subscription Agreement, Intel purchased 360,144 shares
of our series C preferred stock and warrants to purchase 295,500 shares of our
series C preferred stock for an aggregate purchase price of $1.0 million
concurrently with the closing of the issuance of the 1998 notes in March 1998.
We did not have any obligation to issue the warrants to purchase series C
preferred stock to Intel until such time as Warburg and Crosspoint funded their
respective commitments under the Subscription Agreement. The parties agreed that
our initial public offering constituted an alternate equity financing and,
therefore, we did not issue the warrants to purchase series C preferred stock to
Intel. In connection with its agreement to purchase such series C preferred
stock and warrants to purchase series C preferred stock, we
63
<PAGE> 67
issued to Intel warrants to purchase an aggregate of 158,778 shares of our
common stock at a purchase price of $0.0022 per share. Prior to our initial
public offering, Intel exercised their warrants for 158,778 shares of our common
stock.
TRANSACTIONS IN CONNECTION WITH THE FORMATION OF THE DELAWARE HOLDING COMPANY
We were originally incorporated in California as Covad Communication
Company ("Covad California") in October 1996. In July 1997, we were incorporated
in Delaware as part of our strategy to operate through a holding company
structure and to conduct substantially all of our operations through
subsidiaries. To effect the holding company structure, in July 1997 we entered
into an Exchange Agreement with the existing holders of the common stock and
series A preferred stock of Covad California to acquire all of such stock in
exchange for a like number of shares of our common and preferred stock, so that
after giving effect to the exchange Covad California became our wholly-owned
subsidiary. In addition, we entered into an Assumption Agreement pursuant to
which we assumed certain outstanding obligations of Covad California, including
a $500,000 demand note issued to Warburg and certain commitments to issue stock
options to two of our consultants.
In connection with the Exchange Agreement, three of our officers, Messrs.
McMinn, Khanna and Haas, each exchanged 4,500,000 shares of common stock of
Covad California, originally purchased for $0.0028 per share, for a like number
of our shares of common stock pursuant to restricted stock purchase agreements.
In addition, Mr. Lynch, one of our directors, exchanged 216,000 shares of common
stock of Covad California, originally purchased for $0.0222 per share, for a
like number of our shares of common stock pursuant to a restricted stock
purchase agreement. The common stock issued to Messrs. McMinn, Khanna, Haas and
Lynch are generally subject to vesting over a period of four years. This vesting
is subject to acceleration upon a change of control involving a merger, sale of
all or substantially all our assets or a shift in 50% or more of the voting
power of our capital stock. Our repurchase rights lapse one year after the
change of control or earlier in the event the individual is constructively
terminated or terminated without cause, or in the event the successor
corporation refuses to assume the agreements.
ISSUANCE OF COMMON STOCK
On July 15, 1997, we issued 1,687,500 shares of our common stock to Mr.
Cardinale, one of our officers, for a purchase price of $0.0222 per share. On
August 30, 1997, we issued 517,500 shares of our common stock to Mr. Laehy, one
of our officers, for $0.0333 per share. On October 14, 1997, we issued 216,000
shares of our common stock to Mr. Marshall, one of our directors, for a purchase
price of $0.0333 per share. On April 24, 1998, we issued 144,000 shares of our
common stock to Mr. Hawk, one of our directors, for a purchase price of $0.444
per share. On August 28, 1998, we issued 60,000 shares of our common stock to
Mr. Hawk for a purchase price of $3.8333 per share. On November 3, 1999 we
issued 20,000 shares of our common stock to Cathy Hemmer, one of our officers,
for a purchase price of $.001 per share. On November 3, 1999, we issued 20,000
shares of our common stock to Rob Roblin, one of our officers, for a purchase
price of $.001 per share. On April 15, 1999, we issued 12,000 shares of our
common stock to Jane Marvin, one of our officers, for a purchase price of $.001
per share. The shares of our common stock issued to Messrs. Cardinale, Laehy,
Marshall, Roblin and Hawk and Ms. Hemmer and Ms. Marvin 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 our shares of
series A preferred stock pursuant to the Exchange Agreement.
64
<PAGE> 68
ISSUANCE OF SERIES B PREFERRED STOCK
In July 1997, we sold an aggregate of 17,000,001 shares of our 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 our 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 our board of directors, are
affiliated with Warburg. Mr. Shapero, who currently serves on our board of
directors, is affiliated with Crosspoint.
On February 12, 1998, we sold an additional 100,002 shares of series B
preferred stock at a purchase price of $1.00 per share to Mr. Marshall, one of
our directors.
THE STRATEGIC INVESTMENTS AND RELATIONSHIPS
In January 1999, we received equity investments from AT&T Ventures,
NEXTLINK and Qwest. AT&T Ventures purchased an aggregate of 1,500,583 shares of
our series C-1 preferred stock at $2.7767 per share and an aggregate of
1,157,408 shares of our 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 the two
affiliated funds. NEXTLINK purchased 1,200,466 shares of our series C-1
preferred stock at $2.7767 per share and 925,926 shares of our series D-1
preferred stock at $18.00 per share, representing an investment of $20 million.
Qwest purchased 900,349 shares of our series C-1 preferred stock at $2.7767 per
share and 694,445 shares of our series D-1 preferred stock at $18.00 per share,
representing an aggregate investment of $15 million. At the completion of our
initial public offering, our series C-1 preferred stock converted into our class
B common stock on a one-for-one basis. The series D-1 preferred stock also
converted into our class B common stock at that time on a one-for-one basis.
These strategic investors have each agreed not to transfer any of our series C-1
preferred stock, series D-1 preferred stock or class B common stock to any
non-affiliated third party until January 2000. They have also each agreed not to
acquire more than 10% of our voting stock without our consent until January
2002. In addition, until January 2002, they have agreed to vote any voting
securities they hold as recommended by our board of directors.
Concurrently with these strategic equity investments, we entered into
commercial agreements with AT&T, NEXTLINK and Qwest. These agreements provide
for the purchase, marketing and resale of our services at volume discounts, our
purchase of fiber optic transport bandwidth at volume discounts, collocation of
network equipment and development of new DSL services. These agreements have
terms ranging from six months to several years subject to earlier termination in
certain circumstances. We cannot predict the number of line orders that AT&T,
NEXTLINK or Qwest will generate, if any, whether line orders will be below our
expectations or the expectations of, AT&T, NEXTLINK or Qwest or whether AT&T,
NEXTLINK or Qwest will discontinue selling our services entirely.
EQUIPMENT LEASE FINANCING
The Company incurred a total of $860,000 of equipment lease financing
obligations (including principal and interest) through a sale lease-back
transaction with Charter Financial, Inc. ("Charter Financial"), some of which
has been repaid. 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.
65
<PAGE> 69
REGISTRATION RIGHTS
Certain holders of our common stock are entitled to registration rights.
Pursuant to the Stockholder Rights Agreement holders of 20,075,285 shares of
common stock and holders of 6,379,177 shares of class B common stock
(collectively, the "Rights Holders") are entitled to certain rights with respect
to the registration under the Securities Act of the shares of common stock held
by them or issuable upon conversion of the class B common stock. The class B
common stock may be converted into common stock at the election of the holder
commencing January 2000. The Rights Holders are entitled to demand, "piggy-back"
and S-3 registration rights, subject to certain limitations and conditions. The
number of securities requested to be included in a registration involving the
exercise of demand and "piggy-back" rights are subject to a pro rata reduction
based on the number of shares of common stock held by each Rights Holder and any
other security holders exercising their respective registration rights to the
extent that the managing underwriter advises that the total number of securities
requested to be included in the underwriting is such as to materially and
adversely affect the success of the offering. The registration rights terminate
as to any Rights Holder at the later of (i) three years after our initial the
offering made hereby 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, 1998,
between us and Bear, Stearns & Co. Inc. and BT Alex. Brown Incorporated, holders
of the warrants that were issued in connection with our 1998 note offering in
March 1998 are entitled to certain registration rights with respect to the
shares of common stock issuable upon exercise of such warrants. The warrant
holders are entitled to demand and "piggy-back" registration rights, subject to
certain limitations and conditions. Like the Rights Holders, the number of
securities that a warrant holder may request to be included in a registration
involving an exercise of its demand or "piggy-back" rights is subject to a pro
rata reduction. Such a reduction will be based upon the number of shares held by
each warrant holder and any other security holders exercising their respective
registration rights to the extent that the managing underwriter advises us that
the total number of securities requested to be included in the underwriting is
such as to materially and adversely affect the success of the offering.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with certain of our officers.
See "Executive Compensation--Employment Agreements and Change in Control
Arrangements."
EMPLOYEE LOANS
In August 1998, we loaned Robert Knowling, Jr., our President and Chief
Executive Officer, the principal amount of $500,000 pursuant to a Note Secured
by Deed of Trust, which was secured by certain real property of Mr. Knowling.
The entire principal balance of this note becomes due and payable in one lump
sum on August 14, 2002. No interest is charged on the note. This note has
provisions for forgiveness based on continued employment and is subject to
acceleration in certain events.
In August 1998, we loaned Joseph Devich, one of our officers, the principal
amount of $200,000 pursuant to a note secured by Deed of Trust, which was
secured by certain real property of Mr. Devich. The outstanding principal
balance of this note becomes due and payable in four equal installments
commencing August 13, 1999, with the last installment due on August 13, 2002. No
interest is charged on the note. This note has provisions for forgiveness based
on continued employment and is subject to acceleration in certain events.
In October 1998, we loaned Catherine Hemmer, our Vice President,
Operations, and her husband, one of our 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.
66
<PAGE> 70
In April 1999, we committed to extend a loan to Jane Marvin, one of our
officers, in the principal amount of $510,000 for the purchase of a principal
residence. The loan, at Ms. Marvin's discretion, may or may not be secured by
such principal residence. When extended to Ms. Marvin, 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 Ms.
Marvin's employment, and, if secured by her principal residence, 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 May 1999, we loaned Robert Davenport, one of our officers, the principal
amount of $600,000 for the purchase of a principal residence. The loan is
secured by such principal residence. The outstanding principal balance of this
note becomes due in four equal installments commencing January 20, 2000, with
the last installment due on January 20, 2003. No interest is charged on the
note. The note has provisions for forgiveness based upon continued employment
and is subject to acceleration in certain events.
In December 1999, we loaned Jane Marvin, one of our officers, $80,705.46
pursuant to a note secured by a pledge of shares of our common stock. The entire
principal balance of this note becomes due and payable in one lump sum on the
earlier to occur of October 2000 or the sale of the pledged shares. Interest is
payable on the note at a rate of 5.89% per annum, compounded semiannually.
In January 2000, we committed to extend a loan to Michael Lach, one of our
officers, in the principal amount of $200,000, for the purchase of a principal
residence. The loan will be secured by such principal residence. The loan will
provide that the principal balance will be due and payable in four equal annual
installments, beginning at the first year anniversary of the commencement of Mr.
Lach's employment. No interest will be charged on this loan. The loan will have
provisions for forgiveness based on continued employment and is subject to
acceleration in certain events.
STOCK OPTIONS
In 1999, the following stock options were granted to the Named Executive
Officers and became 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. All the options have a term
of eight years, subject to earlier termination in certain situations related to
termination of employment.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES EXERCISE PRICE OFFICER/
NAME DATE OF GRANT UNDERLYING OPTIONS GRANTED PER SHARE DIRECTOR
- ---- ------------- -------------------------- -------------- --------
<S> <C> <C> <C> <C>
Jane Marvin...................... 4/15/99 150,001 56.50 Officer
Jane Marvin...................... 8/3/99 75,000 42.25 Officer
</TABLE>
67
<PAGE> 71
THE EXCHANGE OFFER
PURPOSE AND EFFECT
We issued the old notes on January 28, 2000 in a private placement. In
connection with this issuance, we entered into the indenture and the
registration rights agreement. These agreements require that we file a
registration statement under the Securities Act for the new notes, the
registered notes to be issued in the exchange offer and, upon the effectiveness
of the registration statement, offer to you the opportunity to exchange your old
notes for a like principal amount of new notes. The new notes will be issued
without a restrictive legend and, except as set forth below, may be reoffered
and resold by you without registration under the Securities Act. After we
complete the exchange offer, our obligations with respect to the registration of
the old notes will terminate, except as provided in the last paragraph of this
section. A copy of the indenture and the registration rights agreement have been
filed as exhibits to the registration statement of which this prospectus is a
part.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, if you are not our "affiliate" within
the meaning of Rule 405 under the Securities Act or a broker-dealer referred to
in the next paragraph, we believe that new notes to be issued to you in the
exchange offer may be offered for resale, resold and otherwise transferred by
you, without compliance with the registration and prospectus delivery provisions
of the Securities Act. We have not received our own no-action letter as to this
interpretation. This interpretation, however, is based on your representation to
us that:
- the new notes to be issued to you in the exchange offer are acquired in
the ordinary course of your business; and
- your are not engaging in and do not intend to engage in a distribution of
the new notes to be issued to you in the exchange offer; and
- you have no arrangement or understanding with any person to participate
in the distribution of the new notes to be issued to you in the exchange
offer.
If you tender in the exchange offer for the purpose of participating in a
distribution of the new notes to be issued to you in the exchange offer, you
cannot rely on this interpretation by the staff of the Commission. Under those
circumstances, you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Each broker-dealer that receives new notes in the exchange offer
for its own account, in exchange for old notes that were acquired by the
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of those new
notes. See "Plan of Distribution."
If you will not receive freely tradeable registered notes in the exchange
offer or are not eligible to participate in the exchange offer, you can elect,
by indicating on the letter of transmittal and providing certain additional
necessary information, to have you old notes registered in a "shelf"
registration statement on an appropriate form pursuant to Rule 415 under the
Securities Act. In the event that we are obligated to file a shelf registration
statement, we will be required to keep the shelf registration statement
effective for a period of two years or such shorter period that will terminate
when all of the old notes covered by the shelf registration statement have been
sold pursuant to the shelf registration statement Other than as set forth in
this paragraph, you will not have the right to require us to register your old
notes under the Securities Act. See "-- Procedures for tendering."
CONSEQUENCES OF FAILURE TO EXCHANGE
After we complete the exchange offer, if you have not tendered your old
notes, you will not have any further registration rights, except as set forth
above. Your old notes will continue to be subject to certain restrictions on
transfer. Therefore, the liquidity of the market for your old notes could be
adversely affected upon completion of the exchange offer if you do not
participate in the exchange offer. If the liquidity of
68
<PAGE> 72
the trading market for the old notes is adversely affected, you may be unable to
sell or transfer your old notes and the value of your old notes may decline.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date. We will issue $1,000 principal amount of new notes in exchange
for each $1,000 principal amount of old notes accepted in the exchange offer.
You may tender some or all of your old notes in the exchange offer. However, old
notes may be tendered only in integral multiples of $1,000 in principal amount.
The form and terms of the new notes are substantially the same as the form
and terms of the old notes, except that the new notes to be issued in the
exchange offer will have been registered under the Securities Act and will not
bear legends restricting their transfer. The new notes will be issued pursuant
to, and entitled to the benefits of, the indenture. The indenture also governs
the old notes. The new notes and the old notes will be deemed one issue of notes
under the indenture.
As of the date of this prospectus, $425.0 million aggregate principal
amount of the old notes were outstanding. This prospectus, together with the
letter of transmittal, is being sent to all registered holders of old notes as
of , 2000 and to others believed to have beneficial interests in
the old notes. You do not have any appraisal or dissenters, rights in connection
with the exchange offer under the General Corporation Law of the State of
Delaware or the indenture. We intend to conduct the exchange offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission promulgated under the Exchange Act.
We will be deemed to have accepted validly tendered old notes when, as, and
if we have given oral or written notice of our acceptance to the exchange agent.
The exchange agent will act as our agent for the tendering holders for the
purpose of receiving the new notes from us. If we do not accept any tendered
notes because o an invalid tender, the occurrence of certain other events set
forth in this prospectus or otherwise, we will return certificates for any
unaccepted old notes without expense to the tendering holder as promptly as
practicable after the expiration date.
You will not be required to pay brokerage commissions or fees or, except as
set forth below under "-- Transfer taxes," transfer taxes with respect to the
exchange of your old notes in the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "-- Fees and expenses" below.
EXPIRATION DATE; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
2000, unless we determine, in our sole discretion, to extend the
exchange offer. If we extend the exchange offer, it will expire at the later
date and time to which it is extended. We do not intend to extend the exchange
offer, although we reserve the right to do so. If we extend the exchange offer,
we will give oral or written notice of the extension to the exchange agent and
give each registered holder notice by means of a press release or other public
announcement of any extension prior to 9:00 a.m., New York City time, on the
next business day after the scheduled expiration date.
We also reserve the right, in our sole discretion,
- to delay accepting any old notes or, if any of the conditions set forth
below under "-- Conditions" have not been satisfied or waived, to
terminate the exchange offer or
- to amend the terms of the exchange offer in any manner, by giving oral or
written notice of such delay or termination to the exchange agent, and by
complying with Rule 14e-1(d) under the Exchange Act to the extent that
rule applies.
69
<PAGE> 73
We acknowledge and undertake to comply with the provisions of Rule 14e-1(c)
under the Exchange Act, which requires us to pay the consideration offered, or
return the old notes surrendered for exchange, promptly after the termination or
withdrawal of the exchange offer. We will notify you as promptly as we can of
any extension, termination or amendment.
INTEREST ON THE NOTES
The old notes will continue to accrue interest through (but not including)
the date of issuance of the new notes. Any old notes not tendered or accepted
for exchange will continue to accrue interest at the rate of 12% per annum in
accordance with their terms. From and after the date of issuance of the new
notes, the new notes will accrue interest at the rate of 12% per annum, payable
in arrears on February 15 and August 15 of each year, commencing on August 15,
2000.
PROCEDURES FOR TENDERING
To tender in the exchange offer, you must follow these steps:
(a) complete, sign and date the letter of transmittal, or a facsimile
of it;
(b) have the signatures on the letter guaranteed if required by
Instruction 3 of the letter of transmittal; and
(c) mail or otherwise deliver such letter of transmittal or such
facsimile, together with the old notes and any other required documents, to
the exchange Agent before to 5:00 p.m., New York City time, on the
Expiration Date.
If delivery of the old notes is to be made through book-entry transfer into
the exchange Agent's account at DTC, you must tender the old notes in accordance
with DTC's Automated Tender offer Program ("ATOP") procedures. See
"-- Book-Entry Transfer; Delivery and Form."
Your tender of old notes will constitute an agreement between us in
accordance with the terms and subject to the conditions set forth in this
Prospectus and in the letter of transmittal.
You must deliver all documents for tender to the Exchange Agent at its
address set forth below. You may also request your brokers, dealers, commercial
banks, trust companies or nominees to effect the above transactions for you.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT YOUR OPTION AND YOUR SOLE RISK. DOCUMENTS ARE
DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY
MAIL, WE RECOMMEND REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED,
OR AN OVERNIGHT DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME
TO INSURE TIMELY DELIVERY.
Only a Holder of old notes may tender such old notes in the exchange offer.
The term "Holder" with respect to the exchange offer means any person in whose
name old notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered Holder.
If your old notes are registered in the name of your broker, dealer,
commercial bank, trust company or other nominee and you wish to tender, you
should contact such registered Holder promptly and instruct such registered
Holder to tender on your behalf. If your old notes are so registered and you
wish to tender on your own behalf, you must, prior to completing and executing
the letter of transmittal and delivering your old notes, either make appropriate
arrangements to register ownership of the old notes in your name or obtain a
properly completed bond power from the registered Holder. The transfer of record
ownership may take considerable time.
Signatures on a letter of transmittal or notice of withdrawal must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., or a commercial bank or
trust company having an office or correspondent in the U.S. (an "Eligible
Institution"). Signatures do not need to be guaranteed if the old notes are
tendered (i) by a registered
70
<PAGE> 74
Holder who has not completed the box entitled "Special Payment Instructions" or
"Special Delivery Instructions" on the letter of transmittal or (ii) for the
account of an Eligible Institution.
If the letter of transmittal is signed by a person other than the
registered Holder of any old notes listed on the letter, such old notes must be
endorsed or accompanied by appropriate bond powers signed as the name of the
registered Holder or Holders appears on the old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons must indicate their capacity when signing. Unless waived by the Company,
you must then submit evidence satisfactory to us of their authority to so act
with the letter of transmittal.
We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt) and acceptance of tendered old
notes and withdrawal of tendered old notes. Our determination will be final and
binding. We reserve the absolute right to reject any and all old notes not
properly tendered or any old notes of which would, in the opinion of our
counsel, be unlawful for us to accept. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer (including the
instructions in the letter of transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within such time as we determine. No one is under any
duty to give notification of defects or irregularities with respect to tenders
of old notes, nor will any person incur any liability for failure to give such
notification. Old notes are not properly tendered until such irregularities have
been cured or waived. Any old notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders
of old notes, unless otherwise provided in the letter of transmittal, as soon as
practicable after the Expiration Date.
In addition, we reserve the right in our sole discretion:
- to purchase or make offers for any old notes that remain outstanding
after the Expiration Date;
- to terminate the exchange offer as described in "-- Conditions"; and
- to the extent permitted by applicable law, purchase old notes in the open
market, in privately negotiated transactions or otherwise. The terms of
any such purchases or offers could differ from the terms of the exchange
offer.
By tendering, you will represent to us, among other things, that:
- the new notes you acquire in the exchange offer are being obtained in the
ordinary course of your business;
- you have no arrangement with any person to participate in the
distribution of such new notes; and
- you are not an "affiliate," as defined under Rule 405 of the Securities
Act, of us.
If you are a Participating Broker-Dealer that will receive new notes for
your own account in exchange for old notes that were not acquired directly from
the Company, by tendering you will acknowledge that you will deliver a
prospectus in connection with any resale of such new notes. See "Plan of
Distribution."
BOOK-ENTRY TRANSFER; DELIVERY AND FORM
The old notes were initially represented:
- if initially purchased by "qualified institutional buyers" (as such term
is defined in Rule 144A under the Securities Act), by three global old
notes in fully registered form, all registered in the name of a nominee
of the DTC; and
71
<PAGE> 75
- if initially purchased by persons other than U.S. persons relying upon
Regulation S under the Securities Act, by one global Regulation S old
note in fully registered form, all registered in the name of a nominee of
DTC for the accounts of Euroclear and Cedel Bank.
The new notes exchanged for the old notes represented by the global old
notes and global Regulation S old note will be represented:
- in the case of "qualified institutional buyers", by three global new
notes in fully registered form, registered in the name of the nominee of
DTC; and
- in the case of persons outside of the U.S., by one global Regulation S
new note in fully registered form, registered in the name of the nominee
of DTC for the accounts of Euroclear and Cedel Bank.
The global new notes and global Regulation S new note will be exchangeable
for definitive new notes in registered form, in denominations of $1,000
principal amount at maturity and integral multiples of $1,000. The new notes in
global form will trade in The Depository Trust Company's Same-Day Funds
Settlement System, and secondary market trading activity in such new notes will
therefore settle in immediately available funds.
We understand that the Exchange Agent will make a request promptly after
the date of this prospectus to establish an account with respect to the old
notes at DTC for the purpose of facilitating the exchange offer. Subject to the
establishment of this account, any financial institution that is a participant
in DTC's system may make book-entry delivery of old notes by causing DTC to
transfer such old notes into the Exchange Agent's account with respect to the
old notes in accordance with DTC's ATOP procedures for such book-entry
transfers. Although delivery of the old notes may be effected through book-
entry transfer into the Exchange Agent's account at DTC, the exchange for old
notes so tendered will be made only after two conditions are met. First, the DTC
must timely confirm (a "Book-Entry Confirmation") such book-entry transfer of
the old notes into the Exchange Agent's account. Second, the Exchange Agent must
timely receive a Book-Entry Confirmation with a message, transmitted by DTC and
received by the Exchange Agent and forming part of the Book-Entry Confirmation,
which states that DTC has received express acknowledgment from a participant
tendering old notes that such participant has received and agrees to be bound by
the terms of the letter of transmittal, and that such agreement may be enforced
against such participant.
GUARANTEED DELIVERY PROCEDURES
If your old notes are not immediately available or if you cannot deliver
your old notes, the letter of transmittal or any other required documents to the
Exchange Agent prior to the Expiration Date, you may effect a tender if:
(1) the tender is made through an Eligible Institution;
(2) before the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the old notes, the
certificate number or numbers of such old notes and the principal amount at
maturity of old notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three New York Stock Exchange trading
days after the Expiration Date, the letter of transmittal (or facsimile of
such letter) together with the certificate(s) representing the old notes to
be tendered in proper form for transfer and any other documents required by
the letter of transmittal, or a Book-Entry Confirmation, as the case may
be, will be delivered by the Eligible Institution to the Exchange Agent;
and
(3) such properly completed and executed letter of transmittal (or
facsimile of such letter), as well as the certificate(s) representing all
tendered old notes in proper form for transfer and all other documents
required by the letter of transmittal, or a Book-Entry Confirmation, as the
case may be,
72
<PAGE> 76
are received by the Exchange Agent within three New York Stock Exchange
trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise described in this prospectus, tenders of old notes may
be withdrawn at any time before 5:00 p.m., New York City time, on the Expiration
Date. To withdraw a tender of old notes in the Exchange Offer, the Exchange
Agent must receive a written or facsimile transmission notice of withdrawal at
its address set forth in this prospectus before 5:00 p.m., New York City time,
on the Expiration Date. Any such notice of withdrawal must:
(1) specify the name of the person having deposited the old notes to
be withdrawn (the "Depositor");
(2) identify the old notes to be withdrawn (including the certificate
number or numbers and principal amount at maturity of such old notes);
(3) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such old notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
old notes register the transfer of such old notes into the name of the
person withdrawing the tender; and
(4) specify the name in which any such old notes are to be registered,
if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by us. Our determination will be
final and binding on all parties. Any old notes so withdrawn will be deemed not
to have been validly tendered for purposes of the exchange offer and no new
notes will be issued with respect thereto unless the old notes so withdrawn are
validly retendered. Any old notes which have been tendered but which are not
accepted for exchange will be returned to their Holder without cost to such
Holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures, described above under
"-- Procedures for Tendering" at any time before the Expiration Date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange new notes for, any old notes not
accepted for exchange, and may terminate or amend the exchange offer as provided
in this prospectus before the acceptance of such old notes, if any of the
following conditions exist:
(1) the exchange offer, or the making of any exchange by a Holder,
violates applicable law or any applicable interpretation of the SEC;
(2) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might impair our ability to proceed with the
exchange offer;
(3) any law, statute, rule or regulation is adopted or enacted which,
in our sole judgment, might materially impair our ability to proceed with
the exchange offer;
(4) a banking moratorium is declared by U.S. federal or California or
New York state authorities which, in our judgment, would reasonably be
expected to impair our ability to proceed with the exchange offer;
73
<PAGE> 77
(5) trading on the New York Stock Exchange or generally in the U.S.
over-the-counter market is suspended by order of the SEC or any other
governmental authority which, in our judgment, would reasonably be expected
to impair our ability to proceed with the exchange offer; or
(6) a stop order is issued by the SEC or any state securities
authority suspending the effectiveness of the Registration Statement or
proceedings are initiated or, to our knowledge, threatened for that
purpose.
If any such conditions exist, we may
- refuse to accept any old notes and return all tendered old notes to
exchanging Holders;
- extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
Holders to withdraw such old notes (see "-- Withdrawal of Tenders"); or
- waive certain of such conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn or
revoked.
If such waiver constitutes a material change to the exchange offer, we will
promptly disclose such waiver in a manner reasonably calculated to inform
Holders of old notes of such waiver.
The conditions described above are for our sole benefit. We may assert any
condition regardless of the circumstances giving rise to any such condition. We
may waive any condition in whole or in part at any time and from time to time in
our sole discretion. We are not waiving these rights by failing to exercise
them. These rights are ongoing and may be asserted at any time and from time to
time.
EXCHANGE AGENT
We appointed the United States Trust Company of New York as Exchange Agent
for the exchange offer. Send letters of transmittal and Notices of Guaranteed
Delivery to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Courier:
United States Trust Company of New York Attention:
P.O. Box 844, Cooper Station United States Trust Company of New York
Attention: Corporate Trust Services and by Hand delivery after 4:30 PM on
New York, New York 10276-0844 Expiration Date:
United States Trust Company of New York
By Hand: 770 Broadway, 13th Floor
Attn: Corporate Trust Services
Attention: Corporate Trust Window New York, New York 10003
United States Trust Company of New York
Delivery to 4:30 PM: Facsimile Information:
United States Trust Company of New York
111 Broadway, Lower Level Attention:
Attn: Corporate Trust Window Corporate Trust Services
New York, New York 10006 212-780-0582 or 212-420-6211
Confirm by telephone:
800-548-6565
</TABLE>
FEES AND EXPENSES
We will pay the expenses of soliciting tenders. The principal solicitation
is being made by mail. Additional solicitation may be made by telegraph,
telephone or in person by officers and regular employees of the Company and its
affiliates.
We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. We may also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in
74
<PAGE> 78
forwarding copies of this Prospectus and related documents to the beneficial
owners of the old notes, and in handling or forwarding tenders for exchange.
We will pay the cash expenses to be incurred in connection with the
exchange offer. We estimate these cash expenses will aggregate approximately
$ , including fees and expenses of the exchange agent and the Trustee
under the indenture and accounting and legal fees.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes in the exchange offer. The amount of any such transfer taxes (whether
imposed on the registered Holder or any other persons) will be payable by the
tendering Holder if:
(1) certificates representing new notes or old notes for principal
amounts at maturity no tendered or accepted for exchange are to be
delivered to, or are to be registered in the name of, any person other than
the registered Holder of the old notes tendered;
(2) tendered old notes are registered in the name of any person other
than the person signing the Letter of Transmittal; or
(3) a transfer tax is imposed for any reason other than the exchange
of old notes in the Exchange Offer.
In such circumstances, you must submit satisfactory evidence of payment of
such taxes or exception from such taxes with the Letter of Transmittal or the
amount of such transfer taxes will be billed directly to you.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the old notes,
which is face value as reflected in the Company's accounting records on the date
of the exchange offer. Accordingly, no gain or loss for accounting purposes will
be recognized upon completion of the exchange offer. The issuance costs incurred
in connection with the exchange offer will be capitalized and amortized over the
term of the new notes.
75
<PAGE> 79
DESCRIPTION OF CERTAIN INDEBTEDNESS
1998 NOTES
The Company has outstanding $260.0 million in aggregate principal amount at
maturity of its 1998 notes. These 1998 notes mature on March 15, 2008 and are
accreting in value through March 15, 2003 at a rate of 13 1/2% per annum,
compounded semi-annually. After March 15, 2003, the Notes will bear interest at
a rate of 13 1/2% per annum, payable in cash semi-annually in arrears on March
15 and September 15 of each year until maturity commencing September 15, 2003.
The 1998 notes may be redeemed at the option of the Company, in whole or in
part, at any time on or after March 15, 2003, at a premium declining to par on
March 15, 2006, plus accrued and unpaid interest through the redemption date. In
the event of a change of control, the holders of the 1998 notes will have the
right to require the Company to purchase the 1998 notes at a price equal to 101%
of the aggregate principal amount or accreted value thereof, as applicable, plus
accrued and unpaid interest, if any, to the date of purchase.
The covenants set forth in the indenture relating to the 1998 notes are
similar to, but more restrictive in some instances than, those in the indenture
relating to the notes, including with respect to the covenant described below
under the caption "Description of Notes -- Certain Covenants -- Incurrence of
Debt and Issuance of Disqualified Stock." The indenture relating to the 1998
notes contains certain covenants, that, among other things, limit the ability of
the Company and its Subsidiaries to make certain restricted payments, incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, engage
in sale and leaseback transactions, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its Subsidiaries,
conduct certain lines of business, issue or sell equity interests of the
Company's Subsidiaries or enter into certain mergers and consolidations. In
addition, under certain circumstances, the Company is required to offer to
purchase the 1998 notes at a price equal to 100% of the principal amount or
accreted value thereof, as applicable, plus accrued and unpaid interest, if any,
to the date of purchase, with the proceeds of certain asset sales.
1999 NOTES
The Company has outstanding $215.0 million in aggregate principal amount of
its 1999 notes. These 1999 notes mature on February 15, 2009 and bear interest
at a rate of 12 1/2% per annum, payable in cash semi-annually in arrears on
February 15 and August 15 of each year until maturity commencing August 15,
1999. The 1999 notes may be redeemed at the option of the Company, in whole or
in part, at any time on or after February 15, 2004, at a premium declining to
par on February 15, 2007, plus accrued and unpaid interest through the
redemption date. In the event of a change of control, the holders of the 1999
notes will have the right to require the Company to purchase the 1999 notes at a
price equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase.
The covenants set forth in the indenture relating to the 1999 notes are
similar to, but more restrictive in certain instances than, those in the
indenture relating to the notes, including with respect to the covenants
described below under the captions "Description of Notes -- Certain
Covenants -- Incurrence of Debt and Issuance of Disqualified Stock,"
"-- Restricted Payments" and "-- Liens." The indenture relating to the 1999
notes contains certain covenants, that, among other things, limit the ability of
the Company and its Subsidiaries to make certain restricted payments, incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, engage
in sale and leaseback transactions, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its Subsidiaries,
conduct certain lines of business, issue or sell equity interests of the
Company's Subsidiaries or enter into certain mergers and consolidations. In
addition, under certain circumstances, the Company is required to offer to
purchase the 1999 notes at a price equal to 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase, with
the proceeds of certain asset sales.
76
<PAGE> 80
CERTAIN TERMS OF THE NEW NOTES
The terms of the new notes will be identical in all material respects to
those of the old notes described below, except that the new notes (i) will have
been registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the old notes and (ii) will not
be entitled to certain registration rights under the registration rights
agreement, including the provision for Additional Interest of up to 2.00% on the
old notes. Holders of old notes should review the information set forth below in
this section for terms common to the new notes and the old notes.
Upon consummation of the exchange offer, the Company will have no further
obligation to register the old notes. Thereafter, any holder of old notes who
does not tender its old notes in the exchange offer, including any holder which
is an "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company which cannot tender its old notes in the exchange offer, will
continue to hold restricted securities which may not be offered, sold or
otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and
Rule 144A under the Securities Act or pursuant to any other exemption from
registration under the Securities Act relating to the disposition of securities,
provided that an opinion of counsel is furnished to TVN that such an exemption
is available.
The new notes are 12% Senior Notes and have a principal amount of $425.0
million. The new notes will mature on February 15, 2010. The new notes will pay
interest in cash at the rate of 12% per annum, payable on February 15 and August
15 of each year, commencing August 15, 2000.
77
<PAGE> 81
DESCRIPTION OF NOTES
GENERAL
You can find the definitions of certain terms used in this description
under the subheading "-- Certain Definitions." In this description, the word
"Company" refers only to Covad Communications Group, Inc. and not to any of its
Subsidiaries.
The Company issued the old notes under an Indenture (the "Indenture")
between itself and United States Trust Company of New York, as trustee (the
"Trustee"). The terms of the notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(the "Trust Indenture Act"). The new notes and the old notes are referred to
collectively as the notes.
The following description is a summary of the material provisions of the
Indenture and the Registration Rights Agreement. It does not restate those
agreements in their entirety. We urge you to read the Indenture and the
Registration Rights Agreement because they, and not this description, define
your rights as holders of these Notes. You can find out how to obtain copies of
the Indenture and the Registration Rights Agreement under the subheading
"-- Additional Information."
BRIEF DESCRIPTION OF THE NOTES
The notes:
- are senior obligations of the Company;
- rank equal in right of payment with all existing and future senior Debt
of the Company;
- rank senior in right of payment to any future subordinated Debt of the
Company; and
- are effectively subordinated to existing and future Debt and other
liabilities (including subordinated Debt and trade payables) of its
Subsidiaries.
The Indenture permits the Company and its Subsidiaries to incur substantial
additional Debt, subject to certain restrictions. See "Risk Factors -- We rely
upon distributions from our subsidiaries to service our indebtedness, and our
indebtedness is effectively subordinated to the indebtedness of our
subsidiaries."
Assuming we had completed this offering on December 31, 1999 and applied
the proceeds as intended, these notes:
- would have ranked equally with $374.7 million of our senior Debt; and
- would have been effectively subordinated to $82.5 million of Debt and
other liabilities (including trade payables) of our subsidiaries.
The Company's operations are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Notes. See "Risk
Factors -- We rely upon distributions from our subsidiaries to service our
indebtedness, and our indebtedness is effectively subordinated to the
indebtedness of our subsidiaries."
The Company currently has three Subsidiaries, two of which will be
designated as Restricted Subsidiaries under the Indenture. Under certain
circumstances, the Company will be permitted to designate certain of its
Subsidiaries, including Subsidiaries that it creates or acquires in the future,
to be Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject
to many of the restrictive covenants in the Indenture. See " -- Certain
Covenants -- Restricted Payments."
PRINCIPAL, MATURITY AND INTEREST
The Company will limit the aggregate principal amount of the notes to
$475.0 million, of which $425.0 million aggregate principal amount of old notes
have been issued and $50.0 million aggregate
78
<PAGE> 82
principal amount of notes is available for issuance in the future, subject to
the covenant described under "-- Certain Covenants -- Incurrence of Debt and
Issuance of Disqualified Stock." We issued the old notes in denominations of
$1,000 and integral multiples of $1,000. The notes will mature on February 15,
2010.
Interest on the notes accrues at the rate of 12% per annum and is payable
in cash semi-annually in arrears on February 15 and August 15, commencing on
August 15, 2000, to the Holders of record of the Notes on the immediately
preceding February 1 and August 1.
Interest on the notes accrues from the date interest was most recently paid
or, if no interest has been paid, then the date the notes were issued. Interest
is computed on the basis of a 360-day year comprised of twelve 30-day months.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
If a Holder has given wire transfer instructions to the Company, we will
make all principal, premium and interest payments on those Notes in accordance
with those instructions. All other payments on the Notes will be made at the
office or agency of the Paying Agent and Registrar within the City and State of
New York unless we elect to make interest payments by check mailed to the
Holders at their address set forth in the register of Holders.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee is initially acting as Paying Agent and Registrar. We may
change the Paying Agent or Registrar without prior notice to the Holders of the
Notes, and we or any of our Subsidiaries may act as Paying Agent or Registrar.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and we may require a
Holder to pay any taxes and fees required by law or permitted by the Indenture.
We are not required to transfer or exchange any note selected for redemption.
Also, we are not required to exchange or register the transfer of any note for a
period of 15 days before a selection of old notes to be redeemed.
The registered Holder of a note will be treated as its owner for all
purposes.
OPTIONAL REDEMPTION
At any time on or prior to February 15, 2003, we may on any one or more
occasions redeem up to an aggregate of 35% of the notes originally issued under
the Indenture at a redemption price of 112.00% of the aggregate principal amount
of the notes, plus accrued and unpaid interest to the redemption date, with the
net cash proceeds (but only to the extent such proceeds consist of cash or Cash
Equivalents) of one or more Public Equity Offerings; provided that
(1) at least $276.25 million of the aggregate principal amount of the
Notes remains outstanding immediately after the occurrence of such
redemption (excluding Notes held by us and our Subsidiaries); and
(2) we must mail a notice of redemption no later than 30 days after
the related Public Equity Offering and must consummate the redemption
within 60 days of the closing of such Public Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at our option prior to February 15, 2005.
On and after February 15, 2005, we may redeem all or a part of the notes
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set
79
<PAGE> 83
forth below, plus accrued and unpaid interest thereon, if any, to the applicable
redemption date, if redeemed during the twelve-month period beginning on
February 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2005...................................................... 106.000%
2006...................................................... 104.000%
2007...................................................... 102.000%
2008 and thereafter....................................... 100.000%
</TABLE>
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the Trustee
will select old notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of
the principal national securities exchange on which the notes are listed;
or
(2) if the notes are not so listed, on a pro rata basis, by lot or by
such other method as the Trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the Holder thereof upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
MANDATORY REDEMPTION
We will not be required to make mandatory redemption or sinking fund
payments with respect to the notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs, each Holder of notes will have the right to
require the Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of that Holder's notes pursuant to the Change of
Control Offer. In the Change of Control Offer, the Company will offer a Change
of Control Payment equal to 101% of the aggregate principal amount of notes
repurchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase. Within ten days following any Change of Control, the Company will mail
a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase notes on the date
specified in such notice, pursuant to the procedures required by the Indenture
and described in such notice. The Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all notes or portions thereof so tendered;
and
80
<PAGE> 84
(3) deliver or cause to be delivered to the Trustee the notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of notes or portions thereof being purchased by the
Company.
The Paying Agent will promptly mail to each Holder of notes so tendered the
Change of Control Payment for such Notes. The Trustee will promptly authenticate
and mail (or cause to be transferred by book entry) to each Holder a new note
equal in principal amount to any unpurchased portion of the notes surrendered,
if any; provided that each such new note will be in a principal amount of $1,000
or an integral multiple thereof.
We will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
The provisions described above that require us to make a Change of Control
Offer following a Change of Control will be applicable regardless of whether or
not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the notes to require that the Company
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
We will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by the Company and
purchases all notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a limited body of case law interpreting the phrase "substantially all,"
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a Holder of notes to require the Company to
repurchase such notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
ASSET SALES
We will not, and will not permit any of our Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by the Company's board of
directors and evidenced by a resolution of the board of directors set forth
in an Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by the Company
or such Restricted Subsidiary is in the form of any combination of cash or
Cash Equivalents. For purposes of this provision, each of the following are
considered cash:
(a) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet) of the Company or such
Restricted Subsidiary (other than contingent liabilities and liabilities
that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant
to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by the
Company or such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by
the Company or such Restricted Subsidiary into cash (to the extent of
the cash received in that conversion).
81
<PAGE> 85
The Company and its Restricted Subsidiaries will be permitted to consummate
an Asset Sale without complying with clause (3) of the immediately proceeding
paragraph if:
(1) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the assets or other property sold, issued or otherwise
disposed of; and
(2) at least 75% of the consideration for such Asset Sale constitutes
any combination of cash, Cash Equivalents and Productive Assets. Each of
the following shall be deemed to be Net Cash Proceeds subject to the
provisions of this paragraph:
(a) any cash consideration;
(b) any non-cash consideration not constituting Productive Assets
received by the Company or any of its Restricted Subsidiaries in
connection with such Asset Sale that is converted into or sold or
otherwise disposed of for cash or Cash Equivalents at any time within
365 days after such Asset Sale; and
(c) any Productive Assets constituting cash or Cash Equivalents
received by the Company or any of its Restricted Subsidiaries in
connection with such Asset Sale.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company (or such Restricted Subsidiary, as the case may be) may apply such
Net Proceeds to:
(1) permanently reduce the amounts permitted to be borrowed by the
Company or such Restricted Subsidiary under the terms of any of its Debt
that is not subordinated Debt; or
(2) the purchase of Telecommunications Related Assets or Voting Stock
of any Person engaged in the Telecommunications Business in the U.S.
(provided that such Person concurrently becomes a Restricted Subsidiary of
the Company).
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce revolving credit borrowings or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds the greater of $10.0 million or 10%
of the Consolidated Tangible Net Worth of the Company, the Company will make an
Asset Sale Offer to all Holders of notes to repurchase the maximum principal
amount of notes that may be purchased out of the Excess Proceeds. The offer
price in any Asset Sale Offer will be equal to 100% of the principal amount of
the notes to be purchased, plus accrued and unpaid interest thereon, if any, to
the date of purchase, and will be payable in cash. If any Excess Proceeds remain
after consummation of an Asset Sale Offer, the Company may use such Excess
Proceeds for any purpose not otherwise prohibited by the Indenture. If the
aggregate principal amount of notes tendered pursuant to such Asset Sale Offer
exceeds the amount of Excess Proceeds, the Trustee shall select the notes to be
purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable to the repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
Indenture, the Company shall comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
Asset Sale provisions of the Indenture by virtue thereof.
82
<PAGE> 86
CERTAIN COVENANTS
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company or any
of its Restricted Subsidiaries) or to the direct or indirect holders of the
Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or to the Company
or a Restricted Subsidiary of the Company);
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company (other than any such Equity
Interests owned by the Company or any Restricted Subsidiary of the
Company);
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value, any Debt that is
subordinated to the notes, except a payment of interest or principal at
Stated Maturity; or
(4) make any Restricted Investment (all such payments and other
actions set forth in clauses (1) through (4) above being collectively
referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence thereof; and
(2) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable two-quarter Measurement
Period, have been permitted to incur at least $1.00 of additional Debt
pursuant to the Debt to Annualized Cash Flow Ratio test set forth in the
first paragraph of the covenant described below under the caption
" -- Incurrence of Debt and Issuance of Disqualified Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Closing Date (excluding Restricted Payments
permitted by clauses (2), (3), (4) and (6) of the next succeeding
paragraph), is less than the sum, without duplication, of
(a) 100% of the Consolidated Cash Flow of the Company for the
period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the issue date of the 1999 notes to the
end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Cash Flow for such period
is a deficit, less 100% of such deficit), minus 150% of consolidated
interest expense for the period (treated as one accounting period) from
the issue date of the 1999 notes to the end of the most recent fiscal
quarter for which internal financial statements are available; plus
(b) 100% of the aggregate net cash proceeds received by the Company
since the issue date of the 1999 notes as a contribution to its common
equity capital or from the issue or sale of Equity Interests of the
Company (other than Disqualified Stock) or from the issue or sale of
Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary
of the Company); plus
83
<PAGE> 87
(c) to the extent that any Restricted Investment that was made
after the issue date of the 1999 notes is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (i) the cash return of
capital with respect to such Restricted Investment (less the cost of
disposition, if any) and (ii) the initial amount of such Restricted
Investment.
The preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Debt or Equity Interests of the Company in
exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of, other
Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized
for any such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (3)(b) of the preceding
paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Debt with the net cash proceeds from an incurrence of
Permitted Refinancing Debt;
(4) the payment of any dividend by a Restricted Subsidiary of the
Company to the holders of its common Equity Interests on a pro rata basis;
(5) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any Restricted Subsidiary
of the Company held by any member of the Company's or any of its Restricted
Subsidiaries' management; provided, that (a) the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests shall
not exceed $250,000 in any twelve-month period and (b) no Default or Event
of Default shall have occurred and be continuing immediately after such
transaction; and
(6) other Restricted Payments not to exceed $10.0 million in the
aggregate at any time outstanding.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment will be determined by the board
of directors whose resolution with respect thereto shall be delivered to the
Trustee. The board of directors' determination must be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
national standing if the fair market value exceeds $5.0 million. Not later than
the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this "Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
Designation of Restricted and Unrestricted Subsidiaries
The board of directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments by the Company and its Restricted Subsidiaries (except
to the extent repaid in cash or Cash Equivalents) in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of the
designation and will reduce the amount available for Restricted Payments under
the "Restricted Payments" covenant. All such outstanding Investments will be
valued at their fair market value at the time of such designation. That
designation will be permitted only if such Restricted Payment would be permitted
at that time and if the Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary. Any designation by the board of directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to the
84
<PAGE> 88
designation and an Officers' Certificate certifying that the designation
complied with these conditions and was permitted by the "Restricted Payments"
covenant.
If, at any time, any Unrestricted Subsidiary would fail to meet the
requirements of the definition of an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Debt of the Subsidiary will be deemed to be incurred by a Restricted
Subsidiary of the Company as of that date (and, if such Debt is not permitted to
be incurred as of that date under the covenant described under the caption
"Incurrence of Debt and Issuance of Disqualified Stock," the Company will be in
default of such covenant).
The board of directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation will be deemed to be an incurrence of Debt by a Restricted
Subsidiary of the Company of any outstanding Debt of such Unrestricted
Subsidiary and such designation will be permitted only if (i) such Debt is
permitted under the covenant described under the caption "Incurrence of Debt and
Issuance of Disqualified Stock," calculated on a pro forma basis as if the
designation had occurred at the beginning of the two-quarter Measurement Period,
and (ii) no Default or Event of Default would be in existence following the
designation.
Incurrence of Debt and Issuance of Disqualified Stock
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Debt (including Acquired Debt) and
the Company will not issue any Disqualified Stock; provided, however, that the
Company may incur Debt (including Acquired Debt) or issue shares of Disqualified
Stock if the Company's Debt to Annualized Cash Flow Ratio is no greater than 6.0
to 1.0.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of Debt (collectively, "Permitted Debt"):
(1) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Debt under Credit Facilities; provided that the aggregate
principal amount (with letters of credit being deemed to have a principal
amount equal to the maximum reimbursement obligations of the Company and/or
any of its Restricted Subsidiaries thereunder) does not exceed the greater
of $250.0 million or the Borrowing Base, at any one time outstanding, less
the aggregate amount of all Net Proceeds of Asset Sales applied to
permanently reduce the commitments with respect to such Debt pursuant to
the covenant described above under the caption "-- Asset Sales;"
(2) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Vendor Debt, provided that the aggregate amount of Vendor
Debt incurred does not exceed the total cost of the Telecommunications
Related Assets acquired and financed by such Vendor Debt (including
acquisitions of Capital Stock of a Person engaged in a Telecommunications
Business that is or becomes a Restricted Subsidiary of the Company);
(3) the incurrence by the Company and its Restricted Subsidiaries of
Existing Debt;
(4) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Debt in an aggregate principal amount that does not exceed
$50.0 million at any one time outstanding;
(5) the incurrence by the Company of Debt (other than secured Acquired
Debt) in an aggregate principal amount that does not exceed 2.5 times the
sum of the net cash proceeds received by the Company after the issue date
of the 1999 notes in connection with any issuance and sale of Equity
Interests (other than Disqualified Stock), plus the fair market value of
Equity Interests (other than Disqualified Stock) issued after consummation
of a Public Equity Offering in connection with an acquisition of a
Telecommunications Business or Telecommunications Related Assets; provided
that such Debt does not mature prior to the Stated Maturity of the notes or
has an Average Life to Stated Maturity at least equal to the notes;
85
<PAGE> 89
(6) the incurrence by the Company of Debt represented by the principal
amount of notes originally issued under the Indenture;
(7) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Debt in exchange for, or the net
proceeds of which are used to refund, refinance or replace Debt (other than
intercompany Debt) that was permitted by the Indenture to be incurred under
the first paragraph hereof or clauses (3) or (6) of this paragraph;
(8) the incurrence by the Company or any of its Wholly Owned
Restricted Subsidiaries of intercompany Debt; provided, however, that:
(a) any subsequent issuance or transfer of Equity Interests that
results in any such Debt being held by a Person other than the Company
or a Wholly Owned Restricted Subsidiary of the Company; and
(b) any sale or other transfer of any such Debt to a Person that is
not either the Company or a Wholly Owned Restricted Subsidiary of the
Company shall be deemed, in each case, to constitute an incurrence of
such Debt by the Company or such Restricted Subsidiary, as the case may
be, that was not permitted by this clause (8);
(9) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate Debt
that is permitted by the terms of the Indenture to be outstanding; and
(10) the incurrence by the Company or any of its Restricted
Subsidiaries of Purchase Money Debt, in each case incurred for the purpose
of financing all or any part of the purchase price or cost of development,
construction, maintenance, enhancement or improvement of Productive Assets;
provided, however, that the aggregate principal amount of Purchase Money
Debt shall not exceed $25.0 million at any one time outstanding, less the
aggregate amount of all Net Proceeds of Asset Sales applied to permanently
reduce the commitments with respect to such Debt pursuant to the covenant
described above under the caption "-- Asset Sales."
For purposes of determining compliance with this "Incurrence of Debt and
Issuance of Disqualified Stock" covenant, in the event that an item of Debt
meets the criteria of more than one of the categories of Permitted Debt
described in clauses (1) through (10) above, or is entitled to be incurred
pursuant to the first paragraph of this covenant, the Company will be permitted
to classify such item of Debt on the date of its incurrence in any manner that
complies with this covenant. Accrual of interest and accretion or amortization
of original issue discount will not be deemed to be an incurrence of Debt for
purposes of this covenant.
Liens
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries on its Capital Stock, or with respect to
any other interest or participation in, or measured by, its profits, or pay
any indebtedness owed to the Company or any of its Restricted Subsidiaries;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
86
<PAGE> 90
(3) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Debt as in effect on the Closing Date;
(2) the Indenture and the notes;
(3) applicable law;
(4) any instrument governing Debt or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Debt was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired, provided that, in the case of Debt,
such Debt was permitted by the terms of the Indenture to be incurred;
(5) customary non-assignment provisions in contracts entered into in
the ordinary course of business;
(6) customary restrictions on encumbrance, transfer or disposition of
financed assets pursuant to agreements governing Purchase Money Debt and
Vendor Debt permitted by the Indenture on the property so acquired;
(7) any agreement for the sale of a Restricted Subsidiary that
restricts distributions by that Restricted Subsidiary pending its sale;
(8) Permitted Refinancing Debt, provided that the restrictions
contained in the agreements governing such Permitted Refinancing Debt are
no more restrictive, taken as a whole, than those contained in the
agreements governing the Debt being refinanced;
(9) secured Debt otherwise permitted to be incurred pursuant to the
provisions of the covenant described above under the caption " -- Liens"
that limits the right of the debtor to dispose of the assets securing such
Debt;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
and
(12) the terms of any Credit Facility if (A) the encumbrance limits,
but does not prohibit, the payment of dividends, (B) the encumbrance or
restriction is not more disadvantageous to the holders of the Notes than is
customary in comparable Credit Facilities, as determined by the board of
directors and (C) the board of directors of the Company determines that any
such encumbrance or restriction is not reasonably expected to materially
affect the Company's ability to satisfy any payment obligations on the
notes, the 1999 notes or the 1998 notes, when the same may become due and
payable, whether including payments made in respect of principal, interest,
premium, if any, repayment or Change of Control.
Merger, Consolidation, or Sale of Assets
The Company and any of its Restricted Subsidiaries may not: (1) consolidate
or merge with or into another Person (whether or not the Company or such
Restricted Subsidiary is the surviving corporation); or (2) sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets, in one or more related transactions, to another
corporation, Person or entity unless:
(1) either: (a) the Company or such Restricted Subsidiary is the
surviving corporation; or (b) the entity or the Person formed by or
surviving any such consolidation or merger (if other than
87
<PAGE> 91
the Company or such Restricted Subsidiary) or to which such sale,
assignment, transfer, lease, conveyance or other disposition was made is a
corporation organized or existing under the laws of the United States, any
state thereof or the District of Columbia;
(2) the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company or such Restricted Subsidiary) or the
entity or Person to which such sale, assignment, transfer, lease,
conveyance or other disposition was made assumes all the obligations of the
Company under the notes, the Indenture, and the Registration Rights
Agreement pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) except in the case of a merger of the Company with or into a
Wholly Owned Restricted Subsidiary of the Company, the Company or the
entity or Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition was made:
(a) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the
Company immediately preceding the transaction; and
(b) will have a Debt to Annualized Cash Flow Ratio of the Company
immediately after the transaction and after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the
applicable two-quarter Measurement Period equal to or less than the Debt
to Annualized Cash Flow Ratio of the Company immediately preceding the
transaction.
Alternatively, clause (4) of the preceding sentence may be satisfied by any
other Person which:
(1) assumes or guarantees the obligations of the Company under the
notes, the Indenture and the Registration Rights Agreement pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee;
(2) would, as a result of the applicable transaction, properly
classify the Company or such Restricted Subsidiary as a consolidated
subsidiary in accordance with generally accepted accounting principles; and
(3) would, if the conditions set forth in clauses (a) and (b) of the
preceding sentence were tested substituting such Person for the Company,
satisfy such conditions.
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable
to the Company or such Restricted Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person; and
(2) the Company delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the board of directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction
complies with clause (1) above and that such Affiliate Transaction has
been approved by a majority of the disinterested members of the board of
directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to the fairness to the
88
<PAGE> 92
holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of
national standing.
The following items will not be deemed to be Affiliate Transactions:
(1) any employment agreement and related arrangement entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business;
(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
(3) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company; and
(4) Restricted Payments that are permitted by the provisions of the
Indenture described above under the caption " -- Restricted Payments."
Limitations on Issuances of Guarantees of Debt
The Company will not permit any Subsidiary, directly or indirectly, to
guarantee, assume or in any other manner become liable with respect to any Pari
Passu Debt or Subordinated Debt of the Company unless such Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a guarantee of the notes on the same terms as the guarantee of
such Debt except that:
(1) such guarantee need not be secured unless required pursuant to the
caption "-- Liens" above; and
(2) if such Debt is by its terms expressly subordinated to the notes,
any such assumption, guarantee or other liability of such Subsidiary with
respect to such Debt shall be subordinated to such Subsidiary's guarantee
of the notes at least to the same extent as such Debt is subordinated to
the notes; provided, that this paragraph does not apply to any guarantee or
assumption of liability of Debt permitted under the Indenture described in
clauses (1), (6), (7), (8) and (9) of the second paragraph under
"-- Incurrence of Debt and Issuance of Disqualified Stock."
Notwithstanding the preceding paragraph, any guarantee by a Subsidiary of
the notes will provide by its terms that it (and all Liens securing the same)
will be automatically and unconditionally released and discharged upon any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's Capital Stock in, or all or substantially all of the assets of,
such Subsidiary, which transaction is in compliance with the terms of the
Indenture and such Subsidiary is released from its guarantees of other Debt of
the Company or any of its Subsidiaries.
Limitations on Issuances and Sales of Equity Interests in Wholly Owned
Restricted Subsidiaries
The Company will not, and will not permit any of its Wholly Owned
Restricted Subsidiaries to, transfer, convey, sell, lease or otherwise dispose
of any Equity Interests in any Wholly Owned Restricted Subsidiary of the Company
to any Person (other than the Company or another Wholly Owned Restricted
Subsidiary), unless:
(1) such transfer, conveyance, sale, lease or other disposition is of
all of the Equity Interests in such Wholly Owned Restricted Subsidiary; and
(2) the Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described
above under the caption " -- Repurchase at the Option of Holders -- Asset
Sales."
In addition, the Company will not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or another Wholly Owned
Restricted Subsidiary.
89
<PAGE> 93
Business Activities
The Company and its Restricted Subsidiaries may not, directly or
indirectly, engage in any business other than the Telecommunications Business.
Limitations on Sale and Leaseback Transactions
The Company and its Restricted Subsidiaries will not, directly or
indirectly, enter into, assume, guarantee or otherwise become liable with
respect to any Sale and Leaseback Transactions; provided, that the Company or
any Restricted Subsidiary of the Company may enter into any such transaction if:
(1) the Company or such Restricted Subsidiary would be permitted under
the covenants described above under " -- Incurrence of Debt and Issuance of
Disqualified Stock" and " -- Liens" to incur secured Debt in an amount
equal to the Attributable Debt with respect to such transaction;
(2) the consideration received by the Company or such Restricted
Subsidiary from such transaction is at least equal to the Fair Market Value
of the property being transferred; and
(3) the Net Proceeds received by the Company or such Restricted
Subsidiary from such transaction are applied in accordance with the
covenant described above under the caption " -- Asset Sales."
Payments for Consent
Neither the Company nor any of its Affiliates will, directly or indirectly,
pay or cause to be paid any consideration, whether by way of interest, fee or
otherwise, to any Holder of any Notes for or as an inducement to any consent,
waiver or amendment of any of the terms or provisions of the Indenture or the
Notes unless such consideration is offered to be paid or agreed to be paid to
all Holders of the Notes that consent, waive or agree to amend in the time frame
set forth in the solicitation documents relating to such consent, waiver or
agreement.
Reports
Whether or not required by the rules and regulations of the Commission, so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes and file with the Commission, in each case within the time periods
specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
footnotes thereto and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the financial condition and results
of operations of the Company and its Restricted Subsidiaries separate from
the financial condition and results of operations of the Unrestricted
Subsidiaries of the Company) and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants;
and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports.
In addition, for so long as any Notes are outstanding, the Company will
furnish to the Holders of the Notes, securities analysts, prospective investors
and beneficial owners of the Notes, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
90
<PAGE> 94
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the
notes (including any Additional Interest);
(2) default in payment when due of the principal of or premium, if
any, on the notes;
(3) failure by the Company or any of its Restricted Subsidiaries to
comply with the provisions described under the captions " -- Change of
Control," "-- Asset Sales," "-- Restricted Payments," "-- Incurrence of
Debt and Issuance of Disqualified Stock" or "-- Merger, Consolidation, or
Sale of Assets;"
(4) failure by the Company or any of its Restricted Subsidiaries for
30 days after receiving notice to comply with any of its other agreements
in the Indenture or the notes;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any Debt
for money borrowed by the Company or any of its Restricted Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries), whether such Debt or guarantee now exists or is created
after the Closing Date, if that default
(a) is caused by a failure to pay principal of or premium, if any,
or interest on such Debt prior to the expiration of the grace period
provided in such Debt on the date of such default (a "Payment Default");
or
(b) results in the acceleration of such Debt prior to its express
maturity, and, in each case, the principal amount of any such Debt,
together with the principal amount of any other such Debt under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more;
(6) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $5.0 million, which judgments
are not paid, discharged or stayed for a period of 60 days; and
(7) certain events of bankruptcy or insolvency with respect to the
Company or any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company, any Significant Subsidiary
or any group of Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding notes will become due and payable
without further action or notice. If any other Event of Default occurs and is
continuing, the Trustee or the Holders of at least 25% in aggregate principal
amount at maturity of the then outstanding notes may declare all the notes to be
due and payable immediately.
Holders of the notes may not enforce the Indenture or the notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
notes, waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the notes pursuant to the
91
<PAGE> 95
optional redemption provisions of the Indenture, an equivalent premium will also
become and be immediately due and payable to the extent permitted by law upon
the acceleration of the notes. If an Event of Default occurs prior to February
15, 2005 by reason of any willful action (or inaction) taken (or not taken) by
or on behalf of the Company with the intention of avoiding the prohibition on
redemption of the notes prior to February 15, 2005, then the premium specified
in the Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture. Upon becoming aware of any Default or
Event of Default, the Company is required to deliver to the Trustee a statement
specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, will have any liability for any obligations of the Company under the
notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of notes by accepting a note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations under the notes discharged ("Legal Defeasance") except for:
(1) the rights of Holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest on such notes
when such payments are due from the trust referred to below;
(2) the Company's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations will not constitute a Default or Event
of Default with respect to the notes. If Covenant Defeasance occurs, certain
events (not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "Events of Default" will no longer constitute
an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding notes on the stated maturity or on
the applicable redemption date, as the case may be, and the Company must
specify whether the notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, the Company must deliver to the
Trustee an opinion of counsel in the United States confirming that (a) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (b) since the date of the Indenture, there has
92
<PAGE> 96
been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel will confirm
that, the holders of the outstanding notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company must deliver to
the Trustee an opinion of counsel in the United States confirming that the
Holders of the outstanding notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(4) no Default or Event of Default will have occurred and be
continuing either: (a) on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to
such deposit); or (b) insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(6) the Company must deliver to the Trustee an opinion of counsel to
the effect that (assuming that no Holder of any notes would be considered
an insider of the Company under applicable bankruptcy or insolvency law)
after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors rights generally;
(7) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of notes over any other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors
of the Company or others; and
(8) the Company must deliver to the Trustee an Officers' Certificate
and an opinion of counsel, each stating that all conditions precedent
provided for relating to the Legal Defeasance or the Covenant Defeasance
have been satisfied.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes), and any existing default or Event of
Default or compliance with any provision of the Indenture or the notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting holder):
(1) reduce the principal amount of notes whose Holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the provisions with respect to the redemption of the notes (other
than provisions relating to the covenants described above under the caption
" -- Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on
any Note;
93
<PAGE> 97
(4) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the notes (except a rescission of
acceleration of the notes by the Holders of at least a majority in
aggregate principal amount at maturity of the notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of notes to receive
payments of principal of or premium, if any, or interest on the Notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the caption
" -- Repurchase at the Option of Holders"); or
(8) make any change in the preceding amendment and waiver provisions.
Notwithstanding the provisions described above, without the consent of any
Holder of notes, the Company and the Trustee may amend or supplement the
Indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of the Company's obligations to
Holders of notes in the case of a merger or consolidation or sale of all or
substantially all of the Company's assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder;
(5) to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture
Act or otherwise to comply with applicable law; or
(6) to provide for the issuance of additional notes in accordance with
the limitations provided in the Indenture.
CONCERNING THE TRUSTEE
If the Trustee becomes a creditor of the Company, the Indenture limits its
right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
Trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(which is not cured or waived), the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
Holder of notes, unless such Holder offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Offering Memorandum may obtain a copy of the
Indenture and Registration Rights Agreement without charge by writing to Covad
Communications Group, Inc., 2330 Central Expressway, Santa Clara, California
95050, Attention: General Counsel.
94
<PAGE> 98
REGISTRATION RIGHTS RELATING TO OLD NOTES; ADDITIONAL INTEREST
Pursuant to the Registration Rights Agreement, we agreed to file with the
Commission the Exchange Offer Registration Statement on the appropriate form
under the Securities Act for a registered offer to exchange registered notes for
the old notes. The terms of the registered notes will be substantially identical
in all material respects to the terms of the old notes (except that the
registered notes will not contain terms with respect to transfer restrictions,
registration rights or payment of Additional Interest).
When the Exchange Offer Registration Statement is declared effective by the
Commission, the Company will offer to the Holders of Transfer Restricted
Securities who are able to make certain representations the opportunity to
exchange their Transfer Restricted Securities for registered notes pursuant to
the exchange offer. If:
(1) the Company is not required to file the Exchange Offer
Registration Statement or permitted to consummate the exchange offer
because the exchange offer is not permitted by applicable law or Commission
policy;
(2) for any reason the exchange offer is not consummated within 210
days after the Closing Date;
(3) any Holder of Transfer Restricted Securities notifies the Company
prior to the 20th day following consummation of the exchange offer that:
(a) it is prohibited by law or Commission policy from participating
in the exchange offer; or
(b) that it may not resell the registered notes acquired by it in
the exchange offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales; or
(c) that it is a broker-dealer and owns old notes acquired directly
from the Company or an affiliate of the Company,
the Company will file with the Commission a Shelf Registration Statement to
cover resales of the Transfer Restricted Securities by the Holders thereof who
satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. The Company will use its best
efforts to cause the applicable registration statement to be declared effective
as promptly as possible by the Commission on or before the 180th day after such
obligation arises.
For purposes of the preceding paragraph, "Transfer Restricted Securities"
means each old note until:
(1) the date on which such old note has been exchanged by a person
other than a broker-dealer for a new note in the exchange offer;
(2) following the exchange by a broker-dealer in the exchange offer of
a Note for a new note, the date on which such new note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement;
(3) the date on which such old note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement; or
(4) the date on which such old note is distributed to the public
pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that:
(1) we will file an Exchange Offer Registration Statement with the
Commission on or prior to 60 days after the Closing Date;
(2) we will use its best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to
180 days after the Closing Date;
95
<PAGE> 99
(3) unless the exchange offer would not be permitted by applicable law
or Commission policy, we will commence the exchange offer and use its best
efforts to issue, on or prior to 30 business days after the date on which
the Exchange Offer Registration Statement was declared effective by the
Commission, new notes in exchange for all Notes tendered prior thereto in
the exchange offer; and
(4) if obligated to file the Shelf Registration Statement, we will use
in our best efforts to file the Shelf Registration Statement with the
Commission on or prior to 30 days after such filing obligation arises and
to cause the Shelf Registration Statement to be declared effective by the
Commission on or prior to 180 days after such obligation arises.
Additional Interest will accrue on the old notes (in addition to the stated
interest on the old notes) if:
(1) the Company fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date
specified for such filing;
(2) any of such Registration Statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness
(the "Effectiveness Target Date");
(3) the Company fails to consummate the exchange offer within 30
business days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement; or
(4) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Registration Rights
Agreement.
Each such event referred to in clauses (1) through (4) in the preceding
sentence is a Registration Default. Additional Interest will begin accruing on
the date on which any such Registration Default shall occur, excluding the date
on which all Registration Defaults have been cured. Additional Interest will
accrue at a rate of 0.50% per annum during the 90-day period immediately
following the occurrence of any Registration Default and shall increase by 0.25%
per annum at the end of each subsequent 90-day period, but in no event shall
such Additional Interest exceed 2.00% per annum. Additional Interest will be
payable in cash, semiannually in arrears on each February 15 and August 15. All
references in this description and in the Indenture to "interest" on the old
notes and the new notes include any Additional Interest that may become payable
thereon according to the provisions of this paragraph.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the exchange offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Additional Interest set forth above.
BOOK-ENTRY; DELIVERY AND FORM
Notes sold in reliance on Rule 144A under the Securities Act are
represented by one or more permanent global notes in definitive, fully
registered form without interest coupons (each a "Restricted Global Note"). The
Restricted Global Note is registered in the name of Cede & Co., as nominee of
the Depositary (the "Global Note Holder"), and has been deposited with the
Trustee as custodian for Cede & Co.
Notes sold in offshore transactions in reliance on Regulation S under the
Securities Act are represented by one or more permanent global Notes in
definitive, fully registered form without interest coupons (each an
"Unrestricted Global Note"). The Unrestricted Global Notes are registered in the
name of a nominee of DTC for the accounts of Euroclear and Cedel Bank, and have
been deposited with the Trustee as custodian for such nominee. On or prior to
the 40th day after the later of commencement of the Offering and the Closing
Date (the "Restricted Date"), beneficial interests in the Unrestricted Global
Notes may be held only through Euroclear or Cedel Bank.
96
<PAGE> 100
Notes transferred after the Closing Date to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7)) who are not
"qualified institutional buyers" (as defined in Rule 144A) will be represented
by an interest in one or more permanent global notes in definitive, fully
registered form without interest coupons (each an "Accredited Investor Global
Note" and together with the Restricted Global Notes and the Unrestricted Global
Notes, the "Global Notes") and will be registered in the name of Cede & Co., as
nominee of the Depositary, and will be deposited with the Trustee as custodian
for Cede & Co.
Interests in the Global Notes are subject to certain restrictions on
transfer. On or prior to the Restricted Date, an interest in an Unrestricted
Global Note may be transferred to a person who takes delivery in the form of an
interest in a Restricted Global Note only upon receipt by the Trustee of (A)
instructions from DTC directing the Trustee to effect the exchange or transfer
of an interest in an Unrestricted Global Note and (B) a written certification
(in the form provided for in the Indenture) from the transferor to the effect
that such transfer is being made to a person whom the transferor reasonably
believes to be a "qualified institutional buyer" within the meaning of Rule 144A
under the Securities Act and in accordance with any applicable securities law of
any state of the United States or any other jurisdiction. After the Restricted
Date, such certification from the transferor will no longer be required by
purposes of such transfers. Interests in a Restricted Global Note may be
transferred to a person who takes delivery in the form of an interest in an
Unrestricted Global Note, whether before, on or after the Restricted Date, only
upon receipt by the Trustee of, among other things, a written certification (in
the form provided for in the Indenture) from the transferor. Any interest in a
Global Note will, upon transfer, cease to be an interest in such Global Note and
become an interest in the other Global Note and, accordingly, will thereafter be
subject to all transfer restrictions and other procedures applicable to
beneficial interest in such other Global Note for as long as it remains such an
interest. Interests in the Notes represented by such Global Notes will be shown
on, and transfers thereof will be effected only through, records maintained by
DTC and its direct and indirect participants, including Euroclear and Cedel.
Except as set forth below regarding "Certificated Notes," owners of beneficial
interests in the Global Notes will not be entitled to receive physical delivery
of Certificated Notes (as defined below).
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers, banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants" or the
Depositary's Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by or on behalf of the
Depositary only through the Depositary's Participants or the Depositary's
Indirect Participants.
We expect that pursuant to procedures established by the Depositary:
(1) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions
of the principal amount of the Global Notes; and
(2) ownership of the Notes evidenced by the Global Notes will be shown
on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the
Depositary's Indirect Participants.
We advise you that the laws of some states require that certain persons
take physical delivery in definitive form of securities that they own.
Consequently, your ability to transfer Notes evidenced by the Global Notes may
be limited.
So long as the Global Note Holder is the registered owner of any notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
notes evidenced by the Global Notes. Beneficial
97
<PAGE> 101
owners of any notes evidenced by the Global Notes under the Indenture will not
be considered the owners or holders thereof under the Indenture for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. Neither we nor the Trustee will have any
responsibility or liability for any aspect of the Depositary's records or for
maintaining, supervising or reviewing any of the Depositary's records relating
to the notes.
The Trustee will make payments of the principal of, premium, if any and
interest on any notes registered in the name of the Global Note Holder on the
applicable record date to or at the direction of the Global Note Holder in its
capacity as the registered Holder under the Indenture. We and the Trustee may
treat the persons in whose names notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither we nor the Trustee has or will have any responsibility or
liability for the payment of such amounts to beneficial owners of Notes. We
believe, however, that it is currently the Depositary's practice to immediately
credit the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant Note as shown on the Depositary's records. Payments by the Depositary's
Participants and the Depositary's Indirect Participants to the beneficial owners
of notes will be governed by standing instructions and customary practice and
will be the responsibility of the Depositary's Participants or the Depositary's
Indirect Participants.
CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global Notes may, upon request to the trustee, exchange such beneficial
interest for Notes in registered form without interest coupons ("Certificated
Notes"). Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof).
(1) we notify the Trustee in writing that the Depositary is no longer
willing or able to act as a depositary and we are unable to locate a
qualified successor within 90 days; or
(2) we, at our option, notify the Trustee in writing that we elect to
cause the issuance of notes in the form of Certificated Notes under the
Indenture, then, upon surrender by the Global Note Holder of its Global
Notes, Certificated Notes will be issued to each person that the Global
Note Holder and the Depositary identify as being the beneficial owner of
the related notes.
Neither we nor the Trustee will be liable for any delay by the Global Note
Holder or the Depositary in identifying the beneficial owners of notes and we
and the Trustee may conclusively rely on, and will be protected in relying on,
instructions from the Global Note Holder or the Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
We must make payments in respect of the notes represented by the Global
Notes (including principal, premium, if any, and interest, if any) by wire
transfer of immediately available funds to the accounts specified by the Global
Note Holder. We will make all payments of principal, premium, if any, interest,
if any, with respect to Certificated Notes by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. The notes represented by the Global Notes are expected to trade in the
Depositary's Same Day Funds Settlement System, and any permitted secondary
market trading activity in such notes will therefore be required by the
Depositary to be settled in immediately available funds. We expect that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
Subject to compliance with the transfer restrictions applicable to the
notes described above and under "Notice to Investors" below, cross-market
transfers between DTC, on the one hand, and direct or indirect Euroclear or
Cedel accountholders, on the other, will be effected in DTC, in accordance with
DTC's rules. Such cross-market transactions will require delivery of
instructions to Euroclear or Cedel by the counterparty in such system in
accordance with its rules and procedures and within its established
98
<PAGE> 102
deadlines. Euroclear or Cedel will, if the transaction meets its settlement
requirements, deliver instructions to its respective depository to take action
to effect final settlement on its behalf by delivering or receiving beneficial
interests in the relevant Global Note in DTC and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Euroclear accountholders and Cedel accountholders may not deliver
instructions directly to the depositories for Euroclear or Cedel.
Because of time-zone differences, credits of securities received in
Euroclear or Cedel as a result of a transaction with a Depository participant
will be made during the securities settlement processing day dated the business
day following DTC's settlement date and such credits will be reported to the
relevant Euroclear or Cedel participant on such business day. Cash received in
Euroclear or Cedel as a result of sales of securities by or through a Euroclear
accountholders or a Cedel accountholders to a Depository participant will be
received with value on DTC's settlement date but will be available in the
relevant Euroclear or Cedel cash account only as of the business day following
DTC's settlement date. Settlement between Euroclear or Cedel accountholders and
Depository participants cannot be made on a delivery versus payment basis. The
arrangements for transfer of payments must be established separately from the
arrangements for transfer of securities, the latter being effected on a free
delivery basis. The customary arrangements for delivery versus payment between
Euroclear and Cedel accountholders or between Depository participants are not
affected.
Although DTC, Euroclear and Cedel have agreed to the procedures described
above in order to facilitate transfers of securities among participants of DTC,
Euroclear and Cedel, they are under no obligation to perform or continue to
perform such procedures and such procedures may be modified or discontinued at
any time. Neither we nor the Trustee will have any responsibility for the
performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTAIN DEFINITIONS
Set forth below are certain defined terms which are used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Debt of any other Person existing at the time such other Person is
merged with or into or becomes a Restricted Subsidiary of such specified
Person, including, without limitation, Debt incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person; and
(2) Debt secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights (including, without limitation, by way of a sale and leaseback)
other than sales of services in the ordinary course of business; provided
that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "-- Change of Control" and/or
the
99
<PAGE> 103
provisions described above under the caption " -- Merger, Consolidation, or
Sale of Assets" and not by the provisions of the Asset Sale covenant; and
(2) the issue or sale by the Company or any of its Subsidiaries of
Equity Interests of any of the Company's Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that: (a)
involves assets having a fair market value of less than $1.0 million; or
(b) results in net proceeds to the Company and its Subsidiaries of less
than $1.0 million;
(2) a transfer of assets by the Company to a Wholly Owned Restricted
Subsidiary or by a Wholly Owned Restricted Subsidiary to the Company or to
another Wholly Owned Restricted Subsidiary;
(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary;
(4) a Restricted Payment that is permitted by the covenant described
above under the caption "-- Restricted Payments;"
(5) disposals or replacements of obsolete, uneconomical, negligible,
worn-out or surplus property in the ordinary course of business; or
(6) a conveyance constituting or pursuant to a Permitted Lien.
"Attributable Debt" in respect of any Sale and Leaseback Transaction,
means, at the time of determination, the present value (discounted at a rate
consistent with accounting guidelines, as determined in good faith by the
Company) of the payments during the remaining term of the lease included in such
Sale and Leaseback Transaction (including any period for which such lease has
been extended or may, at the option of the lessee, be extended) or until the
earliest date on which the lessee may terminate such lease without penalty or
upon payment of a penalty (in which case the rental payments shall be calculated
to include such penalty), after excluding all amounts required to be paid on
account of maintenance and repairs, insurance, taxes, assessments, water,
utilities and similar charges.
"Average Life to Stated Maturity" means, as of any date of determination
with respect to any Debt, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from the date of determination to the date
or dates of each successive scheduled principal payment of such Debt multiplied
by (b) the amount of each such principal payment; by (ii) the sum of all such
principal payments.
"Beneficial Owner" has the meaning assigned to such term in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules), including the provision
of such Rules that a Person shall be deemed to have beneficial ownership of all
securities that such Person has a right to acquire within 60 days; provided that
a Person will not be deemed a beneficial owner of, or to own beneficially, any
securities if such beneficial ownership:
(1) arises solely as a result of a revocable proxy delivered in
response to a proxy or consent solicitation made pursuant to, and in
accordance with, the Exchange Act; and
(2) is not also then reportable on Schedule 13D or Schedule 13G (or
any successor schedule) under the Exchange Act.
"Borrowing Base" means an amount equal to the sum of 85% of the value of
accounts receivable (before giving effect to any related reserves) shown on the
Company's most recent consolidated balance sheet in accordance with generally
accepted accounting principles not more than 60 days past due.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on the balance sheet of the lessee in
accordance with generally accepted accounting principles.
100
<PAGE> 104
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of (other than distributions of assets in respect of Debt), the
issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is pledged in
support thereof) having maturities of not more than six months from the
date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers
acceptances with maturities not continued exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500.0 million and a Thompson Bank
Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group and in each case
maturing within six months after the date of acquisition; and
(6) money market and mutual funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1) through
(5) of this definition.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, in one
or a series of related transactions, of all or substantially all of the
assets of the Company and its Restricted Subsidiaries, taken as a whole, to
any Person or group (as such term is used in Section 13(d)(3) and 14(d)(2)
of the Exchange Act);
(2) the adoption of a plan relating to the liquidation or dissolution
of the Company;
(3) the consummation of any transaction (including by way of merger,
consolidation or otherwise) the result of which is that any Person or group
(as defined above) becomes the Beneficial Owner, directly or indirectly, of
more than 50% of the total Voting Stock or Total Common Equity of the
Company; or
(4) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
"Closing Date" means the first date on which old notes are issued by the
Company.
"Closing Price" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange,
101
<PAGE> 105
on the principal national securities exchange on which such shares are listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, on the Nasdaq National Market or, if such shares are not
listed or admitted to trading on any national securities exchange or quoted on
Nasdaq National Market but the issuer is a Foreign Issuer (as defined in Rule
3b-4(b) under the Exchange Act) and the principal securities exchange on which
such shares are listed or admitted to trading is a Designated Offshore
Securities Market (as defined in Rule 902(b) under the Securities Act), the
average of the reported closing bid and asked prices regular way on such
principal exchange, or, if such shares are not listed or admitted to trading on
any national securities exchange or quoted on Nasdaq National Market and the
issuer and principal securities exchange do not meet such requirements, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any New York Stock Exchange member firm is selected from time to
time by the Company for that purpose and is reasonably acceptable to the
Trustee.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted.
"Common Stock" means the common stock, par value $0.001 per share, of the
Company.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale, to the extent such losses were
deducted in computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was included in computing such Consolidated Net Income;
plus
(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations), to the extent that any such expense was
deducted in computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding any
such non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period or amortization of a prepaid
cash expense that was paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, in each case, on a consolidated basis and determined in accordance
with generally accepted accounting principles.
Notwithstanding the preceding, the provision for taxes on the income or profits
of, and the depreciation and amortization and other non-cash expenses of, a
Restricted Subsidiary of the referent Person shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent that a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior governmental approval (that
has not been obtained), and without direct or indirect restriction pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
102
<PAGE> 106
"Consolidated Debt" means, with respect to any Person as of any date of
determination, the sum, without duplication, of:
(1) the total amount of Debt of such Person and its Restricted
Subsidiaries; plus
(2) the total amount of Debt of any other Person, to the extent that
such Debt has been guaranteed by the referent Person or one or more of its
Restricted Subsidiaries; plus
(3) the aggregate liquidation value of all preferred stock of
Restricted Subsidiaries of such Person, in each case, determined on a
consolidated basis in accordance with generally accepted accounting
principles.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with
generally accepted accounting principles; provided that:
(1) the Net Income (but not loss) of any Person that is not a Wholly
Owned Restricted Subsidiary shall be included only to the extent of the
percentage ownership interest in the Net Income of such Person owned on the
last day of such period by the referent Person or a Restricted Subsidiary
thereof; provided that the Net Income of any Person that is an Unrestricted
Subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted
Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded; and
(4) the cumulative effect of a change in accounting principles shall
be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of:
(1) the consolidated equity of the common stockholders of such Person
and its consolidated Restricted Subsidiaries as of such date; plus
(2) the respective amounts reported on such Person's balance sheet as
of such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only
to the extent of any cash received by such Person upon issuance of such
preferred stock; less
(a) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going
concern business made within 12 months after the acquisition of such
business) subsequent to the Closing Date in the book value of any asset
owned by such Person or a consolidated Restricted Subsidiary of such
Person;
(b) all investments as of such date in unconsolidated Subsidiaries
and in Persons that are not Restricted Subsidiaries; and
(c) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in
accordance with GAAP.
"Consolidated Tangible Net Worth" means, with respect to any Person as of
any date, Consolidated Net Worth, after deducting therefrom amounts attributable
to goodwill, trade names, patents, unamortized
103
<PAGE> 107
debt discount and expense and any other intangibles, all as set forth on the
most recent consolidated balance sheet of such Person.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of issuance;
or
(2) was nominated for election to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members
of such Board at the time of such nomination or election or who was elected
or appointed in the ordinary course by Continuing Directors or other
directors so elected or appointed.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities or commercial paper facilities with any
combination of banks, other institutional lenders and other Persons extending
financial accommodations or holding corporate debt obligations in the ordinary
course of their business, providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time
by the same or different institutional lenders.
"Debt" means, with respect to any Person, any indebtedness of such Person,
whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any
property or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP. In addition, the term "Debt"
includes all Debt of others secured by a Lien on any asset of such Person
(whether or not such Debt is assumed by such Person, valued, if not assumed, at
the lesser of the Fair Market Value of the encumbered assets or the amount of
Debt so secured) and, to the extent not otherwise included, the guarantee by
such Person of any indebtedness of any other Person.
The amount of any Debt outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Debt issued with
original issue discount; and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Debt.
"Debt to Annualized Cash Flow Ratio" means, as of any date of
determination, the ratio of:
(1) the Consolidated Debt of the Company as of such date to
(2) two times the Consolidated Cash Flow of the Company for the two
most recent full fiscal quarters ending immediately prior to such date for
which internal financial statements are available (the "Measurement
Period"),
determined on a pro forma basis after giving effect to all acquisitions or
dispositions of assets made by the Company and its Restricted Subsidiaries from
the beginning of such two-quarter period through and
104
<PAGE> 108
including such date of determination (including any related financing
transactions) as if such acquisitions and dispositions had occurred at the
beginning of such two-quarter period.
In addition, for purposes of calculating the Debt to Annualized Cash Flow
Ratio:
(1) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the two-quarter
Measurement Period or subsequent to such Measurement Period and on or prior
to the date of calculation shall be deemed to have occurred on the first
day of the two-quarter Measurement Period and Consolidated Cash Flow for
such Measurement Period shall be calculated without giving effect to clause
(3) of the proviso set forth in the definition of Consolidated Net Income;
and
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the notes mature. Notwithstanding the preceding sentence, any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require the Company to repurchase such Capital Stock
upon the occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "Certain Covenants -- Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or
any successor act), and the rules and regulations thereunder.
"Existing Debt" means Debt of the Company and its Restricted Subsidiaries
in existence on the Closing Date (including the 1999 notes and the accreted
value of the 1998 notes during the term such indebtedness is outstanding).
"Fair Market Value" means with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Closing Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means, with respect to any Person, without duplication, a
guarantee (other than by endorsement of negotiable instruments for collection in
the ordinary course of business), direct or indirect,
105
<PAGE> 109
in any manner (including, without limitation, by way of a pledge of assets or
through letters of credit or reimbursement agreements in respect thereof), of
all or any part of any Debt of another Person.
"Guarantor" means any Subsidiary which is a guarantor of the notes,
including any Person that is required after the date of the Indenture to execute
a guarantee of the notes pursuant to the "Limitations on Issuance of Guarantees
of Debt" covenant until a successor replaces such party pursuant to the
applicable provisions of the Indenture and, thereafter, shall mean such
successor.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Holder" means a person in whose name a note is registered.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Debt or other obligations), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Debt, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the Company
or any Restricted Subsidiary of the Company sells or otherwise disposes of any
Equity Interests of any direct or indirect Restricted Subsidiary of the Company
such that, after giving effect to any such sale or disposition, such Person is
no longer a Subsidiary of the Company, the Company shall be deemed to have made
an Investment on the date of any such sale or disposition equal to the fair
market value of the Equity Interests of such Subsidiary not sold or disposed of
in an amount determined as provided in the final paragraph of the covenant
described above under the caption "-- Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Measurement Period" shall have the definition set forth above under "Debt
to Annualized Cash Flow Ratio."
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a) any
Asset Sale (including, without limitation, dispositions pursuant to sale
and leaseback transactions); or (b) the disposition of any securities by
such Person or any of its Restricted Subsidiaries or the extinguishment of
any Debt of such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary or nonrecurring gain (but not loss), together
with any related provision for taxes on such extraordinary or nonrecurring
gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result
106
<PAGE> 110
thereof, in each case after taking into account any available tax credits or
deductions and any tax sharing arrangements, amounts required to be applied to
the repayment of Debt secured by a Lien on the asset or assets that were the
subject of such Asset Sale and any reserve for adjustment in respect of the sale
price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Debt:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Debt), (b) is
directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Debt of the Company or any of its Restricted Subsidiaries to
declare a default on such other Debt or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"Pari Passu Debt" means:
(1) any Debt of the Company that is equal in right of payment to the
Notes; and
(2) with respect to any guarantee, Debt which ranks equal in right of
payment to such guarantee.
"Permitted Investments" means:
(1) any Investment in the Company or in any Wholly Owned Restricted
Subsidiary of the Company;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Company or any Wholly Owned Restricted
Subsidiary of the Company in a Person if, as a result of such Investment:
(a) such Person becomes a Wholly Owned Restricted Subsidiary of the
Company; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its Debt, Equity
Interests or other securities to, or is liquidated into, the Company or
a Wholly Owned Restricted Subsidiary of the Company;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales;"
(5) any acquisition of assets to the extent acquired in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of the
Company;
(6) any Investment by the Company in joint ventures or one or more
Wholly Owned Unrestricted Subsidiaries of the Company; provided, however,
that the aggregate amount of Investments made pursuant to this clause (6)
shall not exceed the greater of $50.0 million and 10% of the Company's
Total Common Equity at any one time outstanding;
(7) accounts receivable created or acquired in the ordinary course of
business of the Company or any Restricted Subsidiary and on ordinary
business terms; and
107
<PAGE> 111
(8) Investments arising from transactions by the Company or any
Restricted Subsidiaries with trade creditors or customers in the ordinary
course of business (including any such Investment received pursuant to any
plan of reorganization or similar arrangement pursuant to the bankruptcy or
insolvency of such trade creditors or customers or otherwise in settlement
of a claim).
"Permitted Liens" means:
(1) Liens in favor of the Company or holders of the Notes;
(2) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company or any Restricted Subsidiary
of the Company; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company;
(3) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company; provided that such
Liens were in existence prior to the contemplation of such acquisition;
(4) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(5) Liens existing on the Closing Date;
(6) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(7) Liens securing Vendor Debt or Purchase Money Debt permitted by the
Indenture, in each case, on the property together with proceeds, product,
accessions, substitutions and replacements thereof;
(8) Liens created by "notice" or "precautionary" filings in connection
with operating leases or other transactions pursuant to which no Debt or
Attributable Debt is Incurred by the Company or any Restricted Subsidiary;
(9) Liens on securities constituting "margin stock" within the meaning
of Regulation T, U or X promulgated by the Board of Governors of the
Federal Reserve System, to the extent that the Investment by the Company or
any Restricted Subsidiary in such margin stock is not prohibited by the
Indenture;
(10) Liens on Capital Stock of Unrestricted Subsidiaries;
(11) Liens in favor of the Trustee arising under the Indenture;
(12) Liens incurred in the ordinary course of business of the Company
or any Subsidiary of the Company with respect to obligations that do not
exceed $2.0 million at any one time outstanding and that:
(a) are not incurred in connection with the borrowing of money or
the obtaining of advances or credit (other than trade credit in the
ordinary course of business); and
(b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of
business by the Company or such Restricted Subsidiary;
(13) Liens securing Debt and other obligations under Credit
Facilities, and related Hedging Obligations, and Liens on assets of
Restricted Subsidiaries securing Guarantees of such Debt, Hedging
Obligations and, in each case, other obligations relating thereto.
108
<PAGE> 112
(14) Liens on reserve or escrow accounts (including, without
limitations, interest reserved accounts and any cash, Cash Equivalents or
securities deposited therein) securing payment of interest on any
Indebtedness.
"Permitted Refinancing Debt" means any Debt of the Company or any of its
Restricted Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund other Debt of the
Company or such Restricted Subsidiary (other than intercompany Debt); provided
that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Debt does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the
Debt so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection
therewith);
(2) such Permitted Refinancing Debt has a final maturity date later than
the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Debt being extended, refinanced, renewed, replaced,
defeased or refunded;
(3) if the Debt being extended, refinanced, renewed, replaced, defeased
or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Debt has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to,
the Notes on terms at least as favorable to the holders of notes as
those contained in the documentation governing the Debt being
extended, refinanced, renewed, replaced, defeased or refunded; and
(4) such Debt is incurred either by the Company or by the Restricted
Subsidiary who is the obligor on the Debt being extended, refinanced,
renewed, replaced, defeased or refunded.
"Productive Assets" means assets, including assets owned directly or
indirectly through Capital Stock of a Restricted Subsidiary, of a kind used or
usable in the Telecommunications Business of the Company.
"Public Equity Offering" means an underwritten offering of Common Stock
with gross proceeds to the Company of at least $35.0 million pursuant to a
registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form S-8
or otherwise relating to equity securities issuable under any employee benefit
plan of the Company).
"Purchase Money Debt" means Debt of the Company (including Acquired Debt
and Debt represented by Capital Lease Obligations, mortgage financings and
purchase money obligations), including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time
incurred for the purpose of financing all or any part of the cost of
development, construction, acquisition or improvement by the Company or any
Restricted Subsidiary of the Company of any Productive Assets of the Company or
any Restricted Subsidiary of the Company.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary. If no referent Person is
identified, the term "Restricted Subsidiaries" shall be deemed to refer to
Restricted Subsidiaries of the Company.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which any property (other than
Capital Stock) is sold by such Person or a Subsidiary, or, in the case of the
Company, a Restricted Subsidiary of such Person and is thereafter leased back
from the purchaser or transferee thereof by such Person or one of its
Subsidiaries or, in the case of the Company, one of its Restricted Subsidiaries.
109
<PAGE> 113
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the Closing Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Debt, the date on which such payment of interest or
principal was scheduled to be paid in the original documentation governing such
Debt, and shall not include any contingent obligations to repay, redeem or
repurchase any such interest or principal prior to the date originally scheduled
for the payment thereof.
"Subordinated Debt" means Debt of the Company or a Guarantor subordinated
in right of payment to the Notes or the guarantee of such Guarantor, as the case
may be.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof); and
(2) any partnership, limited liability company or similar pass-through
entity, (a) the sole general partner or the managing general partner or
managing member of which is such Person or a Subsidiary of such Person or
(b) the only general partners, managing members, or Persons, however
designated in corresponding roles, of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Telecommunications Business" means, when used in reference to any Person,
that such Person is engaged primarily in the business of transmitting, or
providing services relating to the transmission of, voice or data through leased
transmission facilities (including facilities such as fiber, copper and
switches), and any business related, ancillary or complementary thereto (as
determined in good faith by the Board of Directors).
"Telecommunications Related Assets" means all assets, rights (contractual
or otherwise) and properties, whether tangible or intangible, real or personal,
used or to be used, in connection with a Telecommunications Business.
"Total Common Equity" of any Person means, as of any date of determination
the product of:
(1) the aggregate number of outstanding primary shares of Common Stock
of such Person on such day (which shall not include any options or warrants
on, or securities convertible or exchangeable into, shares of Common Stock
of such Person); and
(2) the average Closing Price of such Common Stock over the 20
consecutive Trading Days immediately preceding such day.
If no such Closing Price exists with respect to shares of any such class,
the value of such shares for purposes of clause (2) of the preceding sentence
shall be determined by the Board of Directors of the Company in good faith and
evidenced by a resolution of the Board of Directors filed with the Trustee.
"Trading Day", with respect to a securities exchange or automated quotation
system, means a day on which such exchange or system is open for a full day of
trading.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution,
but only to the extent that such Subsidiary:
(1) has no Debt other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary
110
<PAGE> 114
than those that might be obtained at the time from Persons who are not
Affiliates of the Company, unless such agreement, contract, arrangement or
understanding constitutes a Restricted Payment permitted by the Indenture;
(3) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Debt of the Company or any of its Restricted
Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries or has at least one executive officer that is not a director
or executive officer of the Company or any of its Restricted Subsidiaries.
"Vendor Debt" means any Debt of the Company or any Restricted Subsidiary
incurred in connection with the acquisition or construction of
Telecommunications Related Assets.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or Persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Weighted Average Life to Maturity" means, when applied to any Debt at any
date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Debt.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
(C) (a) are made solely with assets managed by a qualified
professional asset manager and (b) satisfy the requirements and conditions of
Prohibited Transaction Class Exemption 84-14 issued by the Department of Labor;
(D) are made solely with assets of a governmental plan, as defined in
Section 3(32) of ERISA, that is not subject to the provisions of Section 4975 of
the Tax Code;
(E) (a) are made solely with assets of an insurance company general
account and (b) satisfy the requirements and conditions of Prohibited
Transaction Class Exemption 95-60 issued by the Department of Labor;
(F) (a) are made solely with assets managed by an in-house asset
manager and (b) satisfy the requirements and conditions of Prohibited
Transaction Class Exemption 96-23 issued by the Department of Labor; or
(G) do not otherwise constitute a non-exempt prohibited transaction.
111
<PAGE> 115
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal
income tax considerations relating to the exchange offer and to the purchase,
ownership and disposition of the new notes. The discussion of the federal income
tax consequences set forth below is based upon the Internal Revenue Code of
1986, as amended (the "Code"), and judicial decisions and administrative
interpretations thereunder, as of the date hereof, and such authorities may be
repealed, revoked or modified or interpreted differently so as to result in
federal income tax consequences different from those discussed below. We cannot
assure you that the Internal Revenue Service will not successfully challenge one
or more of the tax consequences described herein, and we have not obtained, nor
do we intend to obtain, a ruling from the IRS or an opinion of counsel with
respect to the U.S. federal income tax consequences of acquiring or holding new
notes.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular holder in light of the
holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code). Also, it is not intended to be wholly applicable to
all categories of investors, such as foreign person, dealers in securities,
banks, insurance companies, tax-exempt organizations, and persons holding new
notes as part of a hedging or conversion transaction or straddle or persons
deemed to sell new notes under the constructive sale provisions of the Code,
some of which may be subject to special rules. The discussion below is premised
upon the assumption that the new notes and old notes are held (or would be held
if acquired) as capital assets within the meaning of Section 1221 of the Code.
The discussion also does not discuss any aspect of state, local or foreign law.
Each holder or prospective holder of new notes is strongly urged to consult
its own tax advisor with respect to its particular tax situation including the
tax effects of any state, local, foreign, or other tax laws and possible changes
in the tax laws.
EXCHANGE OF NOTES
The exchange of old notes for new notes pursuant to the exchange offer
should not be a taxable exchange for U.S. federal income tax purposes.
Accordingly, a holder should have the same adjusted issue price, adjusted basis
and holding period in the new notes as it had in the old notes immediately
before the exchange.
112
<PAGE> 116
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer receiving new notes for its own account in
connection with the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. Participating
Broker-Dealers may use this prospectus during the period referred to below in
connection with resales of the new notes received in exchange for old notes if
such old notes were acquired by such Participating Broker-Dealers for their own
accounts. We agreed that this prospectus may be used by a Participating
Broker-Dealer in connection with resales of such new notes for a period ending
150 days after the effective date of the registration statement (subject to
extension under certain limited circumstances described herein) or, if earlier,
when all such new notes have been disposed of by such Participating
Broker-Dealer. See "The exchange offer -- Terms of the exchange offer."
We will not receive any cash proceeds from the issuance of the new notes
offered by this prospectus. New notes received by participating Broker-Dealers
for their own accounts in connection with the exchange offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the new notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such new
notes. Any Participating Broker-Dealer that resells new notes that were received
by it for its own account in the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act. Any profit on any such
resale of new notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver any
by delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4, of which this prospectus is a part, under the Securities
Act with respect to the exchange offer contemplated hereby. Statements contained
in this prospectus concerning the provisions of any document are not necessarily
complete. You should refer to the copy of these documents filed as an exhibit to
the periodic reports filed by us with the SEC for a more complete understanding
of the matter involved. Each statement concerning these documents is qualified
in its entirety by such reference.
We are also subject to the informational requirements of the Securities
Exchange Act of 1934. In accordance with the Exchange Act, we file reports,
proxy statements and other information with the SEC. The registration statement,
including the attached exhibits and schedules, may be inspected and copied at
the public reference facilities maintained by the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, New York, New
York 10048, and 500 West Madison Street, Chicago, Illinois 60661. Please call
the SEC at 1-800-SEC-0330 for further information about the public reference
rooms. The SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. Copies of the registration statement and the reports, proxy and
information statements and other information that we file with the SEC may be
obtained from the SEC's Internet address at http://www.sec.gov.
The SEC allows us to "incorporate by reference" into the prospectus the
information we have filed with them. The information incorporated by reference
is an important part of this prospectus and the information that we file
subsequently with the SEC will automatically update this prospectus. The
information incorporated by reference is considered to be part of this
prospectus. We incorporate by reference the documents listed below and any
filings we make with the SEC under the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, after the initial
113
<PAGE> 117
filing of this registration statement that contains this prospectus and prior to
the time we issue all the new notes offered by this prospectus:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
- our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
- our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999;
and
- our Quarterly Report on Form 10-Q for the quarter ended September 30,
1999.
You may request a copy of these documents, at no cost, by writing or telephoning
us at the following address:
Covad Communications Group, Inc.
Attention: Investor Relations
2330 Central Expressway
Santa Clara, California 95050
(408) 844-7500
LEGAL MATTERS
The validity of the new notes offered hereby will be passed upon for us by
Irell & Manella LLP, Los Angeles, California.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998 and
for the years then ended included in this Offering Memorandum have been audited
by Ernst & Young LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
114
<PAGE> 118
COVAD COMMUNICATIONS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Annual Financial Statements
Report of Ernst & Young LLP, Independent Auditors......... F-2
Consolidated Balance Sheets at December 31, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998............................. F-4
Consolidated Statements of Stockholders' Equity (Net
Capital Deficiency) for the years ended December 31,
1997 and 1998.......................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998............................. F-6
Notes to Consolidated Financial Statements................ F-7
Interim Financial Statements (Unaudited)
Consolidated Balance Sheet at September 30, 1999.......... F-18
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1999...................... F-19
Consolidated Statement of Stockholders' Equity (Net
Capital Deficiency) for the nine months ended September
30, 1999............................................... F-20
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1999...................... F-21
Notes to Consolidated Financial Statements................ F-22
</TABLE>
F-1
<PAGE> 119
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Covad Communications Group, Inc.
We have audited the accompanying consolidated balance sheets of Covad
Communications Group, Inc. as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Covad
Communications Group, Inc. as of December 31, 1997 and 1998, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
February 15, 1999, except for the
fourth paragraph of Note 1.J. as
to which the date is May 4, 1999.
F-2
<PAGE> 120
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 4,378 $ 64,450
Accounts receivable, net of allowance for uncollectibles of
$220 in 1998.............................................. 25 1,933
Unbilled revenue............................................ 4 663
Inventories................................................. 43 946
Prepaid expenses............................................ 52 1,183
Other current assets........................................ 317 514
------- --------
Total current assets............................... 4,819 69,689
PROPERTY AND EQUIPMENT:
Networks and communication equipment........................ 2,185 55,189
Computer equipment.......................................... 600 4,426
Furniture and fixtures...................................... 185 1,119
Leasehold improvements...................................... 114 1,887
------- --------
3,084 62,621
Less accumulated depreciation and amortization.............. (70) (3,476)
------- --------
Net property and equipment......................... 3,014 59,145
OTHER ASSETS:
Restricted cash............................................. 210 225
Deposits.................................................... 31 337
Deferred debt issuance costs (net).......................... -- 8,112
Other long term assets...................................... -- 1,911
------- --------
Total other assets................................. 241 10,585
------- --------
Total assets....................................... $ 8,074 $139,419
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable............................................ $ 651 $ 14,975
Unearned revenue............................................ 7 551
Accrued network costs....................................... 58 1,866
Other accrued liabilities................................... 77 3,854
Current portion of capital lease obligations................ 229 263
------- --------
Total current liabilities.......................... 1,022 21,509
Long-term debt (net of discount)............................ -- 142,300
Long-term capital lease obligations......................... 554 316
------- --------
Total liabilities.................................. 1,576 164,125
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY):
Convertible preferred stock ($0.001 par value):
Authorized shares -- 30,000,000
Issued and outstanding shares -- 17,750,001 and 18,246,162
at December 31, 1997 and
December 31, 1998, respectively......................... 18 18
Common stock ($0.001 par value):
Authorized shares -- 65,000,000
Issued and outstanding shares -- 17,041,806 and 17,660,995
at December 31, 1997 and December 31, 1998,
respectively............................................ 17 18
Additional paid-in capital.................................. 9,686 30,679
Deferred compensation....................................... (611) (4,688)
Accumulated deficit......................................... (2,612) (50,733)
------- --------
Total stockholders' equity (net capital
deficiency)....................................... 6,498 (24,706)
------- --------
Total liabilities and stockholders' equity (net capital
deficiency)............................................. $ 8,074 $139,419
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 121
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Revenues.................................................... $ 26 $ 5,326
Operating expenses:
Network and product costs................................. 54 4,562
Sales, marketing, general and administrative.............. 2,374 31,043
Amortization of deferred compensation..................... 295 3,997
Depreciation and amortization............................. 70 3,406
---------- ----------
Total operating expenses.......................... 2,793 43,008
---------- ----------
Income (loss) from operations............................... (2,767) (37,682)
Interest income (expense):
Interest income........................................ 167 4,778
Interest expense....................................... (12) (15,217)
---------- ----------
Net interest income (expense).......................... 155 (10,439)
---------- ----------
Net income (loss)........................................... $ (2,612) $ (48,121)
========== ==========
Net income (loss) per common share.......................... $ (0.53) $ (5.62)
Weighted average shares used in computing net loss per
share..................................................... 4,907,319 8,562,802
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 122
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(AMOUNTS IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
---------- ------ ---------- ------ ---------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial issuance of
common stock........... -- $-- 18,000,000 $18 $ 32 $ -- $ --
Repurchase of common
stock.................. -- -- (3,615,444) (4) (6) -- --
Issuance of common
stock.................. -- -- 2,657,250 3 65 -- --
Issuance of Series A
Preferred Stock........ 750,000 1 -- -- 249 -- --
Issuance of Series B
Preferred Stock (net of
$43 of financing
costs)................. 17,000,001 17 -- -- 8,440 -- --
Deferred compensation.... -- -- -- -- 906 (906) --
Amortization of deferred
compensation........... -- -- -- -- -- 295 --
Net loss................. -- -- -- -- -- -- (2,612)
---------- --- ---------- --- ------- ------- --------
Balance at December 31,
1997................... 17,750,001 18 17,041,806 17 9,686 (611) (2,612)
Issuance of common
stock.................. -- -- 619,189 1 570 -- --
Issuance of Series B
Preferred Stock........ 100,002 -- -- -- 100 -- --
Issuance of Series C
Preferred Stock........ 396,159 -- -- -- 1,100 -- --
Issuance of common stock
warrants as part of
debt offering issuance
costs.................. -- -- -- -- 2,928 -- --
Issuance of common stock
warrants pursuant to
debt offering.......... -- -- -- -- 8,221 -- --
Deferred compensation.... -- -- -- -- 8,074 (8,074) --
Amortization of deferred
compensation........... -- -- -- -- -- 3,997 --
Net loss................. -- -- -- -- -- -- (48,121)
---------- --- ---------- --- ------- ------- --------
Balance at December 31,
1998................... 18,246,162 $18 17,660,995 $18 $30,679 $(4,688) $(50,733)
========== === ========== === ======= ======= ========
<CAPTION>
TOTAL STOCKHOLDERS'
EQUITY (NET CAPITAL
DEFICIENCY)
-------------------
<S> <C>
Initial issuance of
common stock........... $ 50
Repurchase of common
stock.................. (10)
Issuance of common
stock.................. 68
Issuance of Series A
Preferred Stock........ 250
Issuance of Series B
Preferred Stock (net of
$43 of financing
costs)................. 8,457
Deferred compensation.... --
Amortization of deferred
compensation........... 295
Net loss................. (2,612)
--------
Balance at December 31,
1997................... 6,498
Issuance of common
stock.................. 571
Issuance of Series B
Preferred Stock........ 100
Issuance of Series C
Preferred Stock........ 1,100
Issuance of common stock
warrants as part of
debt offering issuance
costs.................. 2,928
Issuance of common stock
warrants pursuant to
debt offering.......... 8,221
Deferred compensation.... --
Amortization of deferred
compensation........... 3,997
Net loss................. (48,121)
--------
Balance at December 31,
1998................... $(24,706)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 123
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(2,612) $(48,121)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization............................. 70 3,406
Amortization of deferred compensation..................... 295 3,997
Accreted interest and amortization of debt discount and
deferred debt issuance costs........................... -- 16,009
Net changes in current assets and liabilities:
Accounts receivable.................................... (25) (1,908)
Inventories............................................ (43) (903)
Other current assets................................... (373) (1,987)
Accounts payable....................................... 651 14,324
Unearned revenue....................................... 7 544
Other current liabilities.............................. 135 5,585
------- --------
Net cash used in operating activities....................... (1,895) (9,054)
INVESTING ACTIVITIES:
Purchase of restricted cash................................. (210) (15)
Deposits.................................................... (31) (306)
Other long-term assets...................................... -- (1,428)
Purchase of property and equipment.......................... (2,253) (59,503)
------- --------
Net cash used in investing activities....................... (2,494) (61,252)
FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt and warrants... -- 129,328
Principal payments under capital lease obligations.......... (48) (238)
Proceeds from common stock issuance, net of repurchase...... 108 571
Proceeds from preferred stock issuance...................... 8,707 1,200
Offering costs related to common stock offering............. -- (483)
------- --------
Net cash provided by financing activities................... 8,767 130,378
------- --------
Net increase in cash and cash equivalents................... 4,378 60,072
Cash and cash equivalents at beginning of year.............. -- 4,378
------- --------
Cash and cash equivalents at end of year.................... $ 4,378 $ 64,450
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest................. $ 9 $ 99
======= ========
Supplemental schedule of non-cash investing and financing
activities:
Equipment purchased through capital leases............. $ 831 $ 34
======= ========
Warrants issued for equity commitment.................. -- $ 2,928
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 124
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Covad Communications Group, Inc (the "Company") is a high-speed Internet
and network access provider offering Digital Subscriber Line ("DSL") services to
Internet Service Provider ("ISP") and enterprise customers. ISPs purchase the
Company's services in order to provide high-speed Internet access to their
business and consumer end-users. Enterprise customers purchase the Company's
services to provide employees with remote access to their Local Area Networks to
improve employee productivity and reduce operating costs. The Company's services
are provided over standard copper telephone lines at considerably faster speeds
than available through a standard modem.
The Company's operations are subject to significant risks and uncertainties
including competitive, financial, developmental, operational, growth and
expansion, technological, regulatory, and other risks associated with an
emerging business.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results may differ from those estimates.
The consolidated financial statements of the Company include the accounts
of all of its wholly-owned subsidiaries. There were no intercompany accounts and
transactions which required elimination.
The accompanying statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 1997 include $50,000 received during 1996
upon issuance of the initial capital stock of the Company and $2,000 expended in
1996 for general and administrative expenses. Due to the insignificance of
balances at December 31, 1996 and activity for the period from inception through
December 31, 1996, financial statements for 1996 have not been presented.
B. Revenue Recognition
Revenue related to installation of service and sale of customer premise
equipment is recognized when equipment is delivered and installation is
completed. Revenue from monthly recurring service is recognized in the month the
service is provided. Recognized revenue for which the customer has not been
billed is recorded as unbilled revenue until the period such billings are
provided. Amounts billed in advance of providing services are recorded as
unearned revenue until the period such services are provided. For the year ended
December 31, 1998, one customer accounted for approximately 17% of the Company's
revenue. For the year ended December 31, 1998, no other customer accounted for
more than 10% of the Company's revenue.
C. Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less from
the date of original issuance are considered to be cash equivalents.
D. Restricted Cash
As of December 31, 1997 and December 31, 1998, the Company had $210,000 and
$225,000, respectively, in commercial deposits held in the Company's name but
restricted as security for certain of the Company's capital lease arrangements.
F-7
<PAGE> 125
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. Inventories
Inventories are stated at the lower of cost or market and consist primarily
of customer premise equipment. Costs are based on the first-in first-out method.
F. Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Leasehold improvements..................................... 15 years or life of the lease
Electronic communication equipment......................... 2 to 5 years
Furniture and fixtures..................................... 3 to 7 years
Computer equipment......................................... 3 years
Office equipment........................................... 2 to 5 years
Computer software.......................................... 2 to 7 years
</TABLE>
The Company capitalizes costs associated with the design, deployment and
expansion of the Company's network including internally and externally developed
software. Capitalized external software costs include the actual costs to
purchase software from vendors. Capitalized internal software costs generally
include personnel and related costs incurred in the enhancement and
implementation of purchased software packages. Capitalized internal labor costs
for the years ending December 31, 1997 and December 31, 1998 were $139,000 and
$3,063,000, respectively. Capitalized interest cost for the year ending December
31, 1998 was $900,000.
G. Equipment Under Capital Leases
The Company leases certain of its equipment and other fixed assets under
capital lease agreements. The assets and liabilities under capital leases are
recorded at the lesser of the present value of aggregate future minimum lease
payments, including estimated bargain purchase options, or the fair value of the
assets under lease, whichever is less. Assets under capital lease are amortized
over the lease term or useful life of the assets.
H. Income Taxes
Due to the Company's overall loss position, there is no provision for
income taxes for 1997 or 1998. The reconciliation of income tax computed at the
US federal statutory rate to income tax expense is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
--------- ------------
<S> <C> <C>
Federal at 34%, statutory................................. $(757,000) $(16,363,000)
Non deductible interest................................... -- 911,000
Losses with no current benefit............................ 757,000 15,436,000
Other..................................................... -- 16,000
--------- ------------
Provision................................................. $ -- $ --
========= ============
</TABLE>
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $40,000,000. The net operating loss and
credit carryforwards will expire at various dates beginning in 2005 through
2018, if not utilized.
The utilization of the net operating loss is subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The
F-8
<PAGE> 126
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
annual limitation may result in the expiration of net operating losses and
credits before utilization. Significant components of the Company's deferred tax
assets and liabilities for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 820,000 $16,000,000
Depreciation............................................. -- 1,000,000
Other.................................................... -- 1,500,000
--------- -----------
Net deferred tax assets.................................. 820,000 18,500,000
Valuation allowance........................................ (820,000) (18,500,000)
--------- -----------
Net deferred tax assets.................................... -- --
========= ===========
</TABLE>
The net valuation allowance increased by $17,680,000 during the year ended
December 31, 1998.
I. Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Instruments," as amended by SFAS No. 119,
"Disclosures About Derivative Financial Instruments and Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available for identical or comparable financial instruments, fair values are
based on estimates using the present value of estimated cash flows or other
valuation techniques. The resulting fair values can be significantly affected by
the assumptions used, including the discount rate and estimates as to the
amounts and timing of future cash flows.
The following methods and assumptions were used to estimate the fair value
for financial instruments:
Cash and cash equivalents. The carrying amount approximates fair value.
Borrowings. The fair values of borrowings, including long-term debt,
capital lease obligations and other obligations, were estimated based on quoted
market prices, where available, or by discounting the future cash flows using
estimated borrowing rates at which similar types of borrowing arrangements with
the same remaining maturities could be obtained by the Company. For all
borrowings outstanding at December 31, 1997 and December 31, 1998, fair value
approximates recorded value.
J. Earnings (Loss) Per Share
Basic earnings per share is computed by dividing income or loss applicable
to common shareholders by the weighted average number of shares of the Company's
common stock ("Common Stock"), after giving consideration to shares subject to
repurchase, outstanding during the period.
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and conversion of the Company's convertible preferred stock ("Preferred Stock").
In addition, income or loss is adjusted for dividends and other transactions
relating to preferred shares for which conversion is assumed. The diluted
earnings per share amount has not been reported because the Company has a net
loss and the impact of the assumed exercise of the stock options and warrants
and the assumed preferred stock conversion is not dilutive.
F-9
<PAGE> 127
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the Company's Certificate of Incorporation, all outstanding Preferred
Stock converted into Common Stock on a one-for-one basis upon the completion of
the Company's initial public offering of Common Stock on January 27, 1999 (see
Note 9).
The consolidated financial statements applicable to the prior periods have
been restated to reflect a two-for-one stock split effective May 1998, a
three-for-two stock split effective August 1998 and a three-for-two split of the
Company's Common Stock effective May 1999.
The following table presents the calculation of basic and diluted net
income (loss) per share (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net income (loss)......................................... $ (2,612) $ (48,121)
Basic and diluted:
Weighted average shares of common stock outstanding..... 16,531,903 17,257,960
Less: Weighted average shares subject to repurchase..... 11,624,584 8,695,158
----------- -----------
Weighted average shares used in computing basic and
diluted net income (loss) per share..................... 4,907,319 8,562,802
=========== ===========
Basic and diluted net income (loss) per share............. $ (0.53) $ (5.62)
=========== ===========
</TABLE>
K. Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company's cash and investment policies limit
investments to short-term, investment grade instruments. Concentrations of
credit risk with respect to accounts receivable are limited due to the large
number of customers comprising the Company's customer base. In addition, the
Company typically offers its customers credit terms. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral.
L. Key Suppliers
The Company is dependant on limited source suppliers for certain equipment
used to provide its services. The Company has generally been able to obtain an
adequate supply of equipment. In addition, the Company believes that there are
alternative suppliers for the equipment used to provide its service. However, an
extended interruption in the supply of equipment currently obtained from limited
source suppliers could adversely affect the Company's business and results of
operations.
M. Accounts Receivable Allowance:
The Company established a reserve for uncollectible accounts receivable in
the amount of $220,000 at December 31, 1998. No significant charges were made
against this reserve as of December 31, 1998.
N. Recently Issued Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in quarterly and annual
financial statements. SFAS 131 changes segment reporting from an industry
segment basis to an operating segment basis defined based on how the business is
managed. The Company operates in only one
F-10
<PAGE> 128
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
segment, high-speed digital communications services, and hence, separate segment
reporting is not applicable.
2. DEBT
On March 11, 1998, the Company completed a private placement (the "1998
Private Offering") through the issuance of 260,000 units (the "Units"), each
unit consisting of $1,000 in principal amount at maturity of 13 1/2% Senior
Discount Notes due 2008 (the "Notes") and one warrant, initially exercisable to
purchase 29.1564 shares of common stock, $0.001 par value, of the Company (the
"Unit Warrants"). Net proceeds from the 1998 Private Offering were approximately
$129.3 million, after transaction costs of approximately $5.8 million.
The principal amount of the Notes will accrete from the date of issuance at
the rate of 13 1/2% per annum through March 15, 2003, compounded semi-annually,
and thereafter bear interest at the rate of 13 1/2% per annum, payable
semi-annually, in arrears on March 15 and September 15 of each year, commencing
on September 15, 2003. The Notes are unsecured senior obligations of the Company
that will mature on March 15, 2008. The Notes will be redeemable at the option
of the Company at any time after March 15, 2003 plus accrued and unpaid interest
thereon, if any, to the redemption date.
The Notes were originally recorded at approximately $126.9 million, which
represents the $135.1 million in gross proceeds less the approximate $8.2
million value assigned to the Unit Warrants, which is included in additional
paid-in capital. The value assigned to the Unit Warrants, representing debt
discount, is being amortized over the life of the Notes. Debt issuance costs
were incurred through the issuance of additional warrants associated with the
commitment of equity by certain investors. The debt issuance costs are also
being amortized over the life of the Notes. For the year ended December 31,
1998, the accretion of the Notes and the amortization of debt discount and debt
issuance costs was $16 million, of which $15.1 million is included in interest
expense and $900,000 is capitalized in property, plant and equipment.
The Unit Warrants have ten year terms, have exercise prices of $0.0022 per
share (subject to adjustment in certain events), contain net exercise provisions
and are currently exercisable.
3. CAPITAL LEASES
The Company has entered into capital lease arrangements to finance the
acquisition of certain operating assets, two of which have bargain purchase
options. The principal value of these leases totaled $831,000 and $865,000 as of
December 31, 1997 and December 31, 1998, respectively, and was equivalent to the
fair value of the assets leased.
Future minimum lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999...................................................... 335,000
2000...................................................... 294,000
2001...................................................... 44,000
2002...................................................... 4,000
2003...................................................... --
Thereafter.................................................. --
---------
677,000
Less amount representing interest........................... (98,000)
Less current portion........................................ (263,000)
---------
Total long-term portion..................................... $ 316,000
=========
</TABLE>
F-11
<PAGE> 129
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accumulated amortization for equipment under capital leases is reflected in
accumulated depreciation and amortization for property and equipment.
4. OPERATING LEASES
The Company leases vehicles, equipment, and office space under various
operating leases. Future minimum lease payments by year under operating leases
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999...................................................... 2,656,000
2000...................................................... 2,105,000
2001...................................................... 2,159,000
2002...................................................... 1,436,000
2003...................................................... 506,000
Thereafter................................................ 351,000
----------
Total............................................. $9,213,000
==========
</TABLE>
Rental expense on operating leases totaled $131,000 and $1,507,000 for the
year ended December 31, 1997 and December 31, 1998, respectively.
5. STOCKHOLDERS' EQUITY
COVAD COMMUNICATIONS GROUP, INC.
Common Stock:
The number of shares of Common Stock authorized for issuance by the Company
is 65,000,000 shares with a par value of $.001 per share. Shares of Common Stock
outstanding at December 31, 1997 and December 31, 1998, were 17,041,806 and
17,660,995 shares, respectively, of which 10,549,660 and 7,159,624 shares,
respectively, remain subject to repurchase provisions which generally lapse over
a four year period from the date of issuance.
Common Stock reserved for future issuance as of December 31, 1998 is as
follows:
<TABLE>
<S> <C>
Convertible preferred stock................................. 27,369,243
Outstanding and reserved options............................ 22,960,264
Outstanding warrants........................................ 10,483,146
----------
Total............................................. 60,812,653
==========
</TABLE>
F-12
<PAGE> 130
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Convertible Preferred Stock:
Convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Authorized shares -- 30,000,000
Series A preferred stock ($0.001 par value):
Authorized shares -- 750,000
Issued and outstanding shares -- 750,000 at December 31,
1997 and December 31, 1998............................. $ 1 $ 1
Series B preferred stock ($0.001 par value):
Authorized shares -- 17,100,003
Issued and outstanding shares -- 17,000,001 at December
31, 1997 and 17,100,003 at December 31, 1998........... 17 17
Series C preferred stock ($0.001 par value):
Authorized shares -- 11,149,287
Issued and outstanding shares -- None at December 31, 1997
and 396,159 at December 31, 1998....................... -- --
--- ---
$18 $18
=== ===
</TABLE>
In January 1999, all of the outstanding convertible Preferred Stock
converted into Common Stock (see Note 9).
Equity Commitment
On February 20, 1998, the Company entered into a Series C Preferred Stock
and Warrant Subscription Agreement (the "Subscription Agreement") with certain
of its investors (the "Series C Investors") pursuant to which the Series C
Investors have unconditionally agreed to purchase an aggregate of 5,764,143
shares of Series C Preferred Stock and warrants to purchase an aggregate of
4,729,500 shares of Series C Preferred Stock (the "Series C Warrants") for an
aggregate purchase price of $16.0 million at a date to be determined by the
Company but no later than March 11, 1999. The Company either has agreed to call
the Equity Commitment or to complete an alternate equity financing of at least
$16.0 million by March 11, 1999. In consideration of this commitment, the
Company has issued to the Series C Investors warrants to purchase an aggregate
of 2,541,222 shares of the Company's Common Stock at a purchase price of $0.0022
per share (the "Common Warrants"). In January 1999, the Company completed an
alternative equity financing and, as a result, the Equity Commitment will not be
called (see Note 9).
On April 24, 1998, the Subscription Agreement was amended pursuant to an
Assignment and Assumption Agreement between the Company, the Series C Investors,
and a director of the Company whereby the Series C Investors assigned to the
director of the Company their obligation to purchase 36,015 shares of Series C
Preferred Stock and 29,559 Series C Warrants for an aggregate purchase price of
$100,000. On the same date, the director purchased 36,015 shares of Series C
Preferred Stock. As a result of this amendment, the aggregate obligation of the
Series C Investors to purchase Series C Preferred Stock and Series C Warrants
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.
F-13
<PAGE> 131
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Stock Purchase
On March 11, 1998, an investor in the Company purchased 360,144 shares of
Series C Preferred Stock and Series C Warrants to purchase an aggregate of
295,500 shares of Series C Preferred Stock for an aggregate purchase price of
$1.0 million; provided, that the Company does not have any obligation to issue
such Series C Warrants to this investor until such time as the Equity Commitment
is called. In connection with its agreement to purchase such Series C Preferred
Stock and Series C Warrants, the Company issued to this investor Common Warrants
to purchase an aggregate of 158,778 shares of Common Stock at a purchase price
of $0.0022 per share.
Preferred Stock Dividends
The holders of Series A, Series B and Series C were entitled to receive in
any fiscal year, dividends at the rate of $0.0167 per share, $0.04 per share and
$0.2233 per share, respectively, payable in preference and priority to any
payment of dividends on Common Stock. The rights to such dividends were
cumulative and accrue to the holders to the extent they were not declared or
paid and were payable, in cash or Common Stock, only in the event of a
liquidation, dissolution or winding up of the Company, or other liquidity event
(as defined in the Certificate of Incorporation). The cumulative dividends at
December 31, 1997 and December 31, 1998 for Preferred Stock were $318,250 and
$1,084,740, respectively, none of which has been declared or paid.
6. STOCK OPTIONS
In 1997, the Company adopted the Covad Communications Group, Inc. 1997
Stock Plan (the "Plan"). The Plan provides for the grant of stock purchase
rights and options to purchase shares of Common Stock to employees and
consultants from time to time as determined by the Board of Directors. The
options expire from two to eight years after the date of grant. As of December
31, 1998 the Plan has reserved 23,280,513 shares of the Company's Common Stock
for sale and issuance under the Plan at prices to be determined by the Board of
Directors.
The following is a summary of the status of stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE LIFE AVERAGE NUMBER OF AVERAGE
EXERCISE PRICE RANGE SHARES REMAINING EXERCISE PRICE SHARES EXERCISE PRICE
-------------------- ----------- ------------ -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.022 - $0.445...................... 9,754,542 6.4 years $0.1783 2,663,751 $0.1115
$0.667 - $1.085...................... 4,173,748 7.5 years $0.7692 70,305 $1.0847
$3.83................................ 2,158,203 7.6 years $3.8333 6,558 $3.8333
$4.92 - $5.29........................ 1,967,941 7.7 years $5.1827 12,099 $5.1155
$5.44................................ 293,252 7.9 years $5.4400 750 $5.4400
</TABLE>
F-14
<PAGE> 132
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option activity for the year ended
December 31, 1997 and December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICE
OF COMMON STOCK PER SHARE
---------------- ---------------
<S> <C> <C>
Balance as of December 31, 1996..................... -- N/A
Granted........................................... 5,765,625 $0.022 - $0.033
Exercised......................................... (9,000) $0.022
Forfeited......................................... (49,500) $0.022 - $0.033
---------- ---------------
Balance as of December 31, 1997..................... 5,707,125 $0.022 - $0.033
Granted........................................... 14,038,467 $0.067 - $5.44
Exercised......................................... (311,248) $0.022 - $0.445
Forfeited......................................... (1,086,658) $0.022 - $5.29
---------- ---------------
Balance as of December 31, 1998..................... 18,347,686 $0.022 - $5.44
========== ===============
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its employee stock options and the disclosure
only provisions of SFAS No. 123, "Accounting and Disclosure of Stock-Based
Compensation," ("SFAS 123"). Under APB 25, compensation expense is recognized
based on the amount by which the fair value of the underlying common stock
exceeds the exercise price of stock options at the date of grant. During the
year ended December 31, 1997, the Company recorded deferred compensation of
$906,000 as a result of granting stock options and issuing restricted stock with
exercise or issue prices per share below the revised fair value per share of the
Company's common stock at the date of grant or issuance. This amount was
recorded as a reduction of stockholders' equity and is being amortized as a
charge to operations over the vesting period of the applicable options using a
graded vesting method. Such amortization was $295,000 for the year ended
December 31, 1997. During the year ended December 31, 1998, the Company recorded
additional deferred compensation of approximately $8.1 million. Amortization of
deferred compensation during this same period was approximately $4.0 million.
Stock-Based Compensation
Pro forma information regarding results of operations and loss per share is
required by SFAS 123 as if the Company had accounted for its stock-based awards
under the fair value method of SFAS 123. The fair value of the Company's
stock-based awards to employees has been estimated using the minimum value
option pricing model which does not consider stock price volatility. Because the
Company does not have actively traded equity securities, volatility is not
considered in determining the fair value of stock-based awards to employees.
For the year ended December 31, 1997 and December 31, 1998, the fair value
of the Company's stock-based awards to employees was estimated using the
following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Expected life of options in years........................... 4.0 4.0
Risk-free interest rate..................................... 7.0 % 7.0%
Expected dividend yield..................................... 0.00% 0.00%
</TABLE>
F-15
<PAGE> 133
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value of stock options granted during the years
ended December 31, 1997 and December 31, 1998 was $0.17 and $1.37 per share,
respectively. For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
which would result in an increase in net loss of approximately $12,000 and $1.7
million for the years ended December 31, 1997 and 1998, respectively. The result
of applying SFAS 123 to the Company's option grants was not material to the
results of operations or loss per share for the year ended December 31, 1997 and
would have increased the net loss per share by $0.20 per share for the year
ended December 31, 1998.
7. RELATED PARTY TRANSACTIONS
The Company purchases equipment from a supplier which is partially owned by
an investor in the Company. Purchases from this supplier totaled $85,000 and
$5.8 million for the years ending December 31, 1997 and December 31, 1998,
respectively.
8. LEGAL PROCEEDINGS
The Company is engaged in a variety of negotiations, arbitrations and
regulatory and court proceedings with incumbent local exchange carriers
("ILECs"). These negotiations, arbitrations and proceedings concern the ILECs'
denial of physical collocation space to the Company in certain central offices,
the cost and delivery of collocation spaces, the delivery of transmission
facilities and telephone lines, billing issues, alleged patent infringements and
other operational issues. Failure to resolve any of these matters without undue
delay or expense could have a material adverse effect on the Company's business,
prospects, operating results and financial condition. The Company is not
currently engaged in any other legal proceedings that it believes could have a
material adverse effect on the Company's business, prospects, operating results
and financial condition. The Company is, however, subject to state commission,
FCC and court decisions as they relate to the interpretation and implementation
of the Telecommunications Act of 1996, the interpretation of competitive local
exchange carrier interconnection agreements in general and the Company's
interconnection agreements in particular. In some cases, the Company may be
deemed to be bound by the results of ongoing proceedings of these bodies or the
legal outcomes of other contested interconnection agreements that are similar to
the Company's agreements. The results of any of these proceedings could have a
material adverse effect on the Company's business, prospects, operating results
and financial condition.
9. SUBSEQUENT EVENTS
In January 1999, the Company entered into strategic relationships with AT&T
Corp. ("AT&T"), NEXTLINK Communications, Inc. ("NEXTLINK") and Qwest
Communications Corporation ("QCC"). As part of these strategic relationships,
the Company received equity investments of $25 million from AT&T's venture
capital arm and two affiliated funds, $20 million from NEXTLINK and $15 million
from QCC's wholly owned subsidiary, U.S. Telesource, Inc. (as used herein,
"Qwest" refers to QCC or its subsidiary, as applicable). The Company intends to
record intangible assets of $28.7 million associated with these transactions.
Furthermore, AT&T, NEXTLINK and Qwest each entered into commercial agreements
with the Company providing for the purchase, marketing and resale of the
Company's services, the purchase by the Company of fiber optic transport
bandwidth, and collocation of network equipment. In addition, the equity
investments by AT&T, NEXTLINK and Qwest satisfied the conditions of an alternate
equity financing and thus the Equity Commitment will not be called.
On January 27, 1999, the Company completed the Initial Public Offering
("IPO") of 13,455,000 split-adjusted shares of Common Stock at a split-adjusted
initial public offering price of $12.00 per share. Net proceeds to the Company
from the IPO were $150.2 million after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company. As a result
of the IPO, all
F-16
<PAGE> 134
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shares of Preferred Stock, including shares issued in the above-mentioned
strategic transactions, were converted into Common Stock, all cumulative but
unpaid dividends on Series A and Series B were paid in Common Stock and the
Common Warrants were exercised.
On February 11, 1999 the Company issued 12 1/2% Senior Notes due February
15, 2009 through a private placement. Interest is due and payable in cash on
February 15 and August 15 of each year, beginning on August 15, 1999. Net
proceeds to the Company were approximately $205.1 million after discounts,
commissions and other transaction costs of approximately $9.9 million.
Approximately $74.1 million of the net proceeds will be used to purchase pledged
securities representing sufficient funds to pay the first six scheduled interest
payments on the notes.
F-17
<PAGE> 135
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
(UNAUDITED)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $181,803
Accounts receivable, net.................................... 10,996
Short term investments...................................... 36,698
Unbilled revenue............................................ 3,935
Inventories................................................. 7,753
Prepaid expenses............................................ 4,924
Other current assets........................................ 2,138
--------
Total current assets................................ 248,247
PROPERTY AND EQUIPMENT:
Networks and communication equipment........................ 187,321
Computer equipment.......................................... 15,616
Furniture and fixtures...................................... 2,206
Leasehold improvements...................................... 3,085
--------
208,228
Less accumulated depreciation and amortization.............. (20,852)
--------
Net property and equipment................................ 187,376
OTHER ASSETS:
Restricted investments...................................... 63,473
Deposits.................................................... 692
Deferred debt issuance costs (net).......................... 12,693
Deferred charge (net)....................................... 22,622
Other long term assets...................................... 8,687
--------
Total other assets.................................. 108,167
--------
Total assets........................................ $543,790
========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable............................................ $ 36,880
Unearned revenue............................................ 3,195
Accrued network costs....................................... 8,895
Other accrued liabilities................................... 13,691
Current portion of capital lease obligations................ 294
--------
Total current liabilities........................... 62,955
Long-term debt (net of discount)............................ 368,922
Long-term capital lease obligations......................... 88
--------
Total liabilities................................... 431,965
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY):
Convertible preferred stock ($0.001 par value):
Authorized shares -- 0 at September 30, 1999..............
Issued and outstanding shares -- 0 at September 30,
1999.................................................... --
Preferred stock ($0.001 par value):
Authorized shares -- 5,000,000 at September 30, 1999......
Issued and outstanding shares -- 0 at September 30,
1999.................................................... --
Common stock ($0.001 par value):
Authorized shares -- 190,000,000 at September 30, 1999....
Issued and outstanding shares -- 72,919,240 at September
30, 1999................................................ 73
Common stock -- Class B ($0.001 par value):
Authorized shares -- 10,000,000 September 30, 1999........
Issued and outstanding shares -- 6,379,177 at September
30, 1999................................................ 6
Additional paid-in capital.................................. 274,092
Deferred compensation....................................... (3,450)
Accumulated other comprehensive income...................... 16,698
Accumulated deficit......................................... (175,594)
--------
Total stockholders' equity (net capital
deficiency)......................................... 111,825
--------
Total liabilities and stockholders' equity (net
capital deficiency)................................. $543,790
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 136
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues................................ $ 19,141 $ 1,565 $ 35,570 $ 2,560
Operating expenses:
Network and product costs............. 16,694 1,355 32,219 2,316
Sales, marketing, general and
administrative..................... 37,697 10,681 80,786 17,231
Amortization of deferred
compensation....................... 1,008 1,837 3,895 2,695
Depreciation and amortization......... 10,593 738 23,911 1,348
----------- ---------- ----------- ----------
Total operating expenses...... 65,992 14,611 140,811 23,590
----------- ---------- ----------- ----------
Income (loss) from operations........... (46,851) (13,046) (105,241) (21,030)
Interest income (expense):
Interest income....................... 4,770 1,526 12,864 3,673
Interest expense...................... (12,024) (5,037) (32,484) (10,904)
----------- ---------- ----------- ----------
Net interest income (expense)......... (7,254) (3,511) (19,620) (7,231)
----------- ---------- ----------- ----------
Net income (loss)..................... $ (54,105) $ (16,557) $ (124,861) $ (28,261)
----------- ---------- ----------- ----------
Preferred dividends..................... -- -- (1,146) --
----------- ---------- ----------- ----------
Net income (loss) available to common
shareholders.......................... $ (54,105) $ (16,557) $ (126,007) $ (28,261)
=========== ========== =========== ==========
Basic and diluted net income (loss) per
common share.......................... $ (0.70) $ (1.84) $ (1.90) $ (3.51)
Weighted average shares used in
computing basic and diluted net loss
per share............................. 77,082,969 9,017,415 66,368,810 8,062,386
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 137
COVAD COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(AMOUNTS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
-------------------- -------------------- PAID-IN DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME
----------- ------ ----------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998...... 18,246,162 $ 18 17,660,995 $18 $ 30,679 $ (4,688) $ --
Issuance of common stock (net of
$11,926 of financing costs)..... -- -- 17,793,001 18 152,153 -- --
Issuance of series C1 and D1
preferred stock................. 6,379,177 6 -- -- 59,994 -- --
Deferred charge related to
issuance of series C1 and D1
preferred stock................. -- -- -- -- 28,700 -- --
Issuance of common stock upon
exercise of common warrants..... -- -- 10,006,943 10 (5) -- --
Conversion of Series A, series B,
and series C preferred stock.... (18,246,162) (18) 27,369,243 27 (9) -- --
Conversion of series C1 and D1
preferred stock................. (6,379,177) (6) 6,379,177 6 -- -- --
Preferred dividends............... -- -- 89,058 -- (77) -- --
Deferred compensation............. -- -- -- -- 2,657 (2,657) --
Amortization of deferred
compensation.................... -- -- -- -- -- 3,895 --
Unrealized gains on investments... -- -- -- -- -- -- 16,698
Net loss.......................... -- -- -- -- -- -- --
----------- ---- ----------- --- -------- -------- --------
Balance at September 30, 1999..... -- $ -- 79,298,417 $79 $274,092 $ (3,450) $ 16,698
=========== ==== =========== === ======== ======== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (NET
ACCUMULATED CAPITAL
DEFICIT DEFICIENCY)
----------- -------------
<S> <C> <C>
Balance at December 31, 1998...... $ (50,733) $ (24,706)
Issuance of common stock (net of
$11,926 of financing costs)..... -- 152,171
Issuance of series C1 and D1
preferred stock................. -- 60,000
Deferred charge related to
issuance of series C1 and D1
preferred stock................. -- 28,700
Issuance of common stock upon
exercise of common warrants..... -- 5
Conversion of Series A, series B,
and series C preferred stock.... -- --
Conversion of series C1 and D1
preferred stock................. -- --
Preferred dividends............... -- (77)
Deferred compensation............. -- --
Amortization of deferred
compensation.................... -- 3,895
Unrealized gains on investments... -- 16,698
Net loss.......................... (124,861) (124,861)
--------- ---------
Balance at September 30, 1999..... $(175,594) $ 111,825
========= =========
</TABLE>
F-20
<PAGE> 138
COVAD COMMUNICATIONS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
--------- --------
<S> <C> <C>
Net cash used in operating activities....................... $ (65,721) $ (4,196)
INVESTING ACTIVITIES:
Purchase of restricted investments.......................... (74,353) (23)
Redemption of restricted investments........................ 13,214 --
Purchase of investments..................................... (20,000) --
Deposits.................................................... (355) (251)
Other long-term assets...................................... (6,776) (887)
Purchase of property and equipment.......................... (145,607) (32,303)
--------- --------
Net cash used in investing activities....................... (233,877) (33,464)
FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt and warrants... -- 129,328
Net proceeds from issuance of long-term debt................ 205,049 --
Principal payments under capital lease obligations.......... (197) (183)
Proceeds from common stock issuance, net of offering
costs..................................................... 152,176 13
Proceeds from preferred stock issuance...................... 60,000 1,200
Preferred dividends......................................... (77) --
--------- --------
Net cash provided by financing activities................... 416,951 130,358
--------- --------
Net increase in cash and cash equivalents................... 117,353 92,698
Cash and cash equivalents at beginning of period............ 64,450 4,378
--------- --------
Cash and cash equivalents at end of period.................. $ 181,803 $ 97,076
========= ========
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 13,257 $ 78
Supplemental schedule of non-cash investing and financing
activities:
Equipment purchased through capital leases................ $ -- $ 34
Warrants issued for equity commitment....................... $ -- $ 2,928
Common stock issued for preferred dividends............... $ 1,069 --
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 139
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results may differ from those estimates. The consolidated financial statements
of the Company include the accounts of all of its wholly-owned subsidiaries.
There were no intercompany accounts and transactions which required elimination.
The consolidated financial statements at September 30, 1999 and for the
three and nine month periods ended September 30, 1999 and 1998 are unaudited,
but include all adjustments (consisting only of normal recurring adjustments)
that the Company considers necessary for a fair presentation of financial
position and operating results. Operating results for the three and nine month
periods ended September 30, 1999 and 1998 are not necessarily indicative of
results that may be expected for any future periods.
The information included in this report should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included in the Company's 1998 Annual Report on Form 10-K.
B. Earnings (Loss) Per Share
Basic earnings per share is computed by dividing income or loss applicable
to common shareholders by the weighted average number of shares of the Company's
common stock ("Common Stock"), after giving consideration to shares subject to
repurchase, outstanding during the period.
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and conversion of the Company's convertible preferred stock ("Preferred Stock").
In addition, income or loss is adjusted for dividends and other transactions
relating to preferred shares for which conversion is assumed. The diluted
earnings per share amount has not been reported because the Company has a net
loss and the impact of the assumed exercise of the stock options and warrants
and the assumed preferred stock conversion is not dilutive.
Under the Company's Certificate of Incorporation, all outstanding Preferred
Stock converted into Common Stock on a one-for-one basis upon the completion of
the Company's initial public offering of Common Stock (see Note 5).
The consolidated financial statements applicable to the prior periods have
been restated to reflect a two-for-one stock split effective May 1998, a
three-for-two stock split effective August 1998, and a three-for-two stock split
effective May 1999.
F-22
<PAGE> 140
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table presents the calculation of basic and diluted net
income (loss) per share (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss.................................... $ (54,105) $ (16,557) $ (124,861) $ (28,261)
Preferred dividends....................... -- -- (1,146) --
----------- ----------- ----------- -----------
Net loss available to common stockholders... $ (54,105) $ (16,557) $ (126,007) $ (28,261)
Basic and diluted:
Weighted average shares of common stock
outstanding............................ 81,835,344 17,383,540 72,020,379 17,169,006
Less: Weighted average shares subject
to repurchase........................ 4,752,375 8,366,125 5,651,569 9,106,620
----------- ----------- ----------- -----------
Weighted average shares used in computing
basic and diluted net income (loss) per
share..................................... 77,082,969 9,017,415 66,368,810 8,062,386
Basic and diluted net income (loss) per
share..................................... $ (0.70) $ (1.84) $ (1.90) $ (3.51)
=========== =========== =========== ===========
</TABLE>
2. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 1999
and 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net loss............................................. $(54,105) $(16,557) $(124,861) $(28,261)
Unrealized holding gains (losses).................. (8,940) -- 16,698 --
-------- -------- --------- --------
Comprehensive income................................. $(63,045) $(16,557) $(108,163) $(28,261)
======== ======== ========= ========
</TABLE>
3. SHORT-TERM INVESTMENTS
Short-term investments at September 30, 1999 consisted of the following (in
thousands):
<TABLE>
<S> <C>
Equity position in WebMD, Inc............................... $15,000
Equity position in Efficient Networks, Inc.................. 5,000
Unrealized holding gains (losses)........................... 16,698
-------
$36,698
=======
</TABLE>
The costs of these investments are reflected on the balance sheet along
with their related unrealized holding gain or loss in order to approximate fair
market value.
4. DEBT
On February 18, 1999, the Company completed a private placement of $215
million aggregate principal amount of the Company's 12 1/2% senior notes (the
"1999 Notes") due 2009. The 1999 Notes are unsecured senior obligations of the
Company maturing on February 15, 2009 and are redeemable at the option of the
Company any time after February 14, 2004 at stated redemption prices plus
accrued and unpaid interest thereon.
F-23
<PAGE> 141
COVAD COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Net proceeds from the 1999 Notes were approximately $205.1 million, after
discounts, commissions and other transaction costs of approximately $9.9
million. The discount and debt issuance costs are being amortized over the life
of the 1999 Notes. For the nine months ended September 30, 1999, the
amortization of debt discount and debt issuance costs was $277,000 and $316,000,
respectively.
Concurrently with the closing of the offering, approximately $74.1 million
of the net proceeds was used to purchase government securities representing
sufficient funds to pay the first six scheduled interest payments on the 1999
Notes. This reserve, along with earned interest, is recorded as restricted
investments on the accompanying balance sheet.
On June 1, 1999, the Company completed an offer to exchange all outstanding
12 1/2% Senior Notes due February 15, 2009 for 12 1/2% Senior Notes due February
15, 2009, which have been registered under the Securities Act of 1933.
5. STOCKHOLDERS' EQUITY
COVAD COMMUNICATIONS GROUP, INC.
Strategic Investment:
In January 1999, the Company entered into strategic relationships with AT&T
Corp. ("AT&T"), NEXTLINK Communications, Inc. ("NEXTLINK") and Qwest
Communications Corporation ("Qwest"). As part of these strategic relationships,
the Company received equity investments totaling approximately $60 million. The
Company recorded intangible assets of $28.7 million associated with these
transactions which will be amortized over periods of three to six years.
Initial Public Offering:
On January 27, 1999, the Company completed the IPO of 13,455,000
split-adjusted shares of the Company's common stock at a split-adjusted price of
$12.00 per share. Net proceeds to the Company from the IPO were $150.2 million
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. As a result of the IPO, 27,369,243
split-adjusted shares of Common Stock and 6,379,177 shares of Class B Common
Stock (which are convertible into 9,568,765 split-adjusted shares of Common
Stock) were issued upon the conversion of Preferred Stock, 89,058 split-
adjusted shares of Common Stock were issued for cumulative but unpaid dividends
on series A and series B Preferred Stock and 2,699,626 split-adjusted shares of
Common Stock were issued upon the exercise of common warrants.
Secondary Offering:
On June 23, 1999, the Company completed a public offering of 8,625,000
shares of Common Stock sold by certain stockholders of the Company. The Company
did not sell any shares in this offering. Accordingly, there were no net
proceeds to the Company from this offering. The Company incurred offering
expenses of approximately $600,000.
On November 3, 1999 the Company completed a public offering of 14,950,000
shares of common stock sold by the Company and certain stockholders of the
Company. The net proceeds to the Company from this offering are estimated to be
approximately $568.8 million after deducting underwriting discounts and
commissions and estimated offering expenses.
F-24
<PAGE> 142
APPENDIX I
COVAD COMMUNICATIONS GROUP, INC.
GLOSSARY OF TERMS
Access Line -- A circuit that connects a telephone end-user to the ILEC CO.
Analog Modem -- A telecommunications device that allows the communication
of digital information over analog telephone lines and through the public
switched telephone network by translating such information in a way that
simulates and uses only the bandwidth of normal voice transmissions.
Asynchronous Transfer Mode (ATM) -- A protocol that segments digital
information into 53-byte cells (5-byte header and 48-byte payload) that are
switched throughout a network over virtual circuits. Able to accommodate
multiple types of media (voice, video, data).
Bandwidth -- Refers to the maximum amount of data that can be transferred
through a computer's backplane or communication channel in a given time. It is
usually measured in Hertz for analog communications and bits per second for
digital communication.
CO (Central Office) -- ILEC facility where subscriber lines are joined to
switching equipment.
CLEC (Competitive Local Exchange Carrier) -- Category of telephone service
provider (carrier) that offers services similar to those of the ILEC, as allowed
by recent changes in telecommunications law and regulation. A CLEC may also
provide other types of services such as long distance, Internet access and
entertainment.
CLEC Certification -- Granted by a state public service commission or
public utility commission, this certification provides a telecommunications
services provider with the legal standing to offer telecommunications services
in direct competition with the ILEC and other CLECs. Such certifications are
granted on a state-by-state basis.
Communications Act of 1934 -- The federal legislation governing broadcast
and non-broadcast communications, including both wireless and wired telephone
service, and which established the FCC.
CPE -- Customer Premise Equipment.
Digital Service 3 (DS-3) -- In the digital hierarchy, this signaling
standard defines a transmission speed of 44,736 Mbps, equivalent to 28 T1
channels; this term is often used interchangeably with T3.
DSL -- Digital Subscriber Line.
DSLAM -- Digital Subscriber Line Access Multiplexers.
FCC (Federal Communications Commission) -- The U.S. government agency
charged with the oversight of communications originating in the U.S. and
crossing state lines.
Facilities-Based Provider -- A telecommunications provider that delivers
its services to the end-user via owned equipment and leased (or owned) transport
in contrast to a reseller of an ILEC's services.
Frame Relay -- A high-speed packet-switched data communications protocol.
G.lite -- A specification to define a standard for a mass market version of
ADSL which is interoperable with full rate ADSL but is not as fast. The
specification is intended to reduce the installation complexity and cost of a
consumer DSL solution.
HFC (Hybrid Fiber Coax) -- A combination of fiber optic and coaxial cable,
which has become the primary architecture utilized by cable operators in recent
and ongoing upgrades of their systems. An HFC architecture generally utilizes
fiber optic wire between the headend and the nodes and coaxial wire from nodes
to individual end-users.
I-1
<PAGE> 143
ILEC (Incumbent Local Exchange Carrier) -- The local exchange carrier that
was the monopoly carrier in a region, prior to the opening of local exchange
services to competition.
ILEC Collocation -- A location serving as the interface point for a CLEC
network's interconnection to that of the ILEC. Collocation can be (i) physical,
in which the CLEC places and directly maintains equipment in the ILEC CO, or
(ii) virtual, in which the CLEC leases a facility, similar to that which it
might build, to effect a presence in the ILEC CO.
Interconnection (Co-Carrier) Agreement -- A contract between an ILEC and a
CLEC for the interconnection of the two networks and CLEC access to ILEC UNEs.
These agreements set out the financial and operational aspects of such
interconnection and access.
ISP (Internet Service Provider) -- A vendor that provides subscribers
access to the Internet.
ISDN (Integrated Services Digital Network) -- ISDN provides standard
interfaces for digital communication networks and is capable of carrying data,
voice, and video over digital circuits. ISDN protocols are used worldwide for
connections to public ISDN networks or to attach ISDN devices to ISDN-capable
PBX systems (ISPBXs). Developed by the International Telecommunications Union,
ISDN includes two user-to-network interfaces: basic rate interface (BRI) and
primary rate interface (PRI). An ISDN interface contains one signaling channel
(D-channel) and a number of information channels ("bearer" or B channels). The
D-channel is used for call setup, control, and call clearing on the B-channels.
It also transports feature information while calls are in progress. The
B-channels carry the voice, data, or video information.
LXC (Interexchange Carrier) -- Facilities-based long distance/interLATA
carriers (e.g., AT&T, MCI WorldCom and Sprint), who also provide intraLATA toll
service and may operate as CLECs.
Kbps (Kilobits per second) -- One thousand bits per second.
LATA (Local Access and Transport Area) -- A geographic area inside of which
a local telephone company can offer switched telecommunications services,
including long distance (known as toll). There are 196 LATAs in the U.S.
Mbps (Megabits Per Second) -- One million bits per second.
RBOCs (Regional Bell Operating Companies) -- ILECs created by AT&T's
divestiture of its local exchange business. The remaining RBOCs include
BellSouth, Bell Atlantic Corporation, Ameritech Corporation, U S WEST
Communications, Inc. and SBC Communications, Inc.
T1 -- This is a Bell system term for a digital transmission link with a
capacity of 1.544 Mbps.
UNEs (Unbundled Network Elements) -- The various portions of an ILEC's
network that a CLEC can lease for purposes of building a facilities-based
competitive network, including copper lines, CO collocation space, inter-office
transport, operational support systems, local switching and rights of way.
I-2
<PAGE> 144
- ------------------------------------------------------
- ------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this offering memorandum. You
must not rely on any unauthorized information. This offering memorandum does not
offer to sell or buy any Notes in any jurisdiction where it is unlawful. The
information in this prospectus is current as of , 2000.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$425,000,000
LOGO
COVAD COMMUNICATIONS
GROUP, INC.
OFFER TO EXCHANGE ALL OUTSTANDING
12% SENIOR NOTES DUE 2010
FOR 12% SENIOR NOTES DUE 2010, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933
--------------------
PROSPECTUS
--------------------
, 2000
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 145
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article X of our Amended and Restated Certificate of Incorporation provides
for the indemnification of our directors to the fullest extent permissible under
Delaware law.
Article VI of our Bylaws provides for the indemnification of our officers,
directors, employees and agents if such person acted in good faith and in a
manner reasonably believed to be in and not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding the
indemnified party had no reason to believe his conduct was unlawful.
Section 145 of the Delaware General Corporation Law permits us to include
in its charter documents, and in agreements between the corporation and its
directors and officers, provisions expanding the scope of indemnification beyond
that specifically provided by the current law.
We have entered into indemnification agreements with our directors and
executive officers, and we intend to enter into indemnification agreements with
any new directors and executive officers in the future.
We maintain liability insurance coverage for all of our directors and
officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Purchase Agreement dated as of January 21, 2000, by and
among the Registrant, Bear, Stearns & Co., Inc. and Morgan
Stanley & Co., Inc.
4.1* Indenture dated as of March 11, 1998 between the Registrant
and The Bank of New York.
4.4* Warrant Registration Rights Agreement dated as of March 11,
1998 among the Registrant and Bear, Stearns & Co. Inc. and
BT Alex. Brown Incorporated.
4.5* Specimen 12% Senior Note Due 2010.
4.6* Amended and Restated Stockholders Rights Agreement dated
January 19, 1999 among the Registrant and certain of its
stockholders.
4.7** Indenture dated as of February 18, 1999 among the Registrant
and The Bank of New York, including form of 12 1/2% Senior
Note Due 2009.
4.8** Registration Rights Agreement dated as of February 18, 1999
among the Registrant and the Initial Purchasers.
4.9** Specimen 12 1/2% Senior Note Due 2009.
4.10 Indenture dated as of January 28, 2000, between the
Registrant and United States Trust Company of New York.
4.11 Registration Rights Agreement dated as of January 28, 2000,
between the Registrant and Bear, Stearns & Co., Inc.
4.12*** Specimen 12% Senior Note due 2010.
5.1*** Opinion of Irell & Manella LLP.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2*** Consent of Irell & Manella LLP (Included in Exhibit 5.1).
24.1 Power of Attorney (Included in II-3).
99.1*** Form of Letter of Transmittal.
99.2*** Form of Notice of Guaranteed Delivery.
99.3*** Exchange Agency Letter Agreement.
</TABLE>
- ---------------
* Incorporated by reference to the exhibit of corresponding number filed with
our registration statement on Form S-1 (No. 333-63899).
II-1
<PAGE> 146
** Incorporated by reference to exhibit of corresponding number filed with our
registration statement on Form S-4 (No. 333-75955).
*** To be filed by amendment.
(b) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(2) The undersigned registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report, to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information required to
be presented by Article 3 of Regulation S-X is not set forth in the
prospectus, to deliver, or cause to be delivered to each person to whom the
prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
in Item 15 or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer, or controlling person of
the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person of
the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(4) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed be part of this
registration statement as of the time it was declared effective.
(5) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 147
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California on February 14, 2000.
COVAD COMMUNICATIONS GROUP, INC.
By: /s/ TIMOTHY LAEHY
------------------------------------
Timothy Laehy
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert E. Knowling, Jr. and Timothy Laehy
and each of them his attorneys-in-fact, each with the power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto in all
documents in connection therewith, with the SEC, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons on the 14th day of February,
2000 in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ ROBERT E. KNOWLING, JR. Chairman, Chief Executive Officer and
- -------------------------------------------------------- President (Director and Principal Executive
(Robert E. Knowling, Jr.) Officer)
/s/ TIMOTHY LAEHY Chief Financial Officer
- -------------------------------------------------------- (Principal Financial and Accounting Officer)
(Timothy Laehy)
Director
- --------------------------------------------------------
(Robert Hawk)
Director
- --------------------------------------------------------
(Hellene Runtagh)
/s/ DANIEL LYNCH Director
- --------------------------------------------------------
(Daniel Lynch)
</TABLE>
II-3
<PAGE> 148
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ FRANK MARSHALL Director
- --------------------------------------------------------
(Frank Marshall)
/s/ RICH SHAPERO Director
- --------------------------------------------------------
(Rich Shapero)
</TABLE>
II-4
<PAGE> 149
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Purchase Agreement dated as of January 21, 2000, by and
among the Registrant, Bear, Stearns & Co., Inc. and Morgan
Stanley & Co., Inc.
4.1* Indenture dated as of March 11, 1998 between the Registrant
and The Bank of New York.
4.4* Warrant Registration Rights Agreement dated as of March 11,
1998 among the Registrant and Bear, Stearns & Co. Inc. and
BT Alex. Brown Incorporated.
4.5* Specimen 13 1/2% Senior Discount Note Due 2008.
4.6* Amended and Restated Stockholders Rights Agreement dated
January 19, 1999 among the Registrant and certain of its
stockholders.
4.7** Indenture dated as of February 18, 1999 among the Registrant
and The Bank of New York, including form of 12 1/2% Senior
Note Due 2009.
4.8** Registration Rights Agreement dated as of February 18, 1999
among the Registrant and the Initial Purchasers.
4.9** Specimen 12 1/2% Senior Note Due 2009.
4.10 Indenture dated as of January 28, 2000, between the
Registrant and United States Trust Company of New York.
4.11 Registration Rights Agreement dated as of January 28, 2000,
between the Registrant and Bear, Stearns & Co., Inc.
4.12*** Specimen 12% Senior Note due 2010.
5.1*** Opinion of Irell & Manella LLP.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2*** Consent of Irell & Manella LLP (Included in Exhibit 5.1).
24.1 Power of Attorney (Included in II-3).
99.1*** Form of Letter of Transmittal.
99.2*** Form of Notice of Guaranteed Delivery.
99.3*** Exchange Agency Letter Agreement.
</TABLE>
- ---------------
* Incorporated by reference to the exhibit of corresponding number filed with
our registration statement on Form S-1 (No. 333-63899).
** Incorporated by reference to exhibit of corresponding number filed with our
registration statement on Form S-4 (No. 333-75955).
*** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
EXECUTION COPY
COVAD COMMUNICATIONS GROUP, INC.
$425,000,000 Principal Amount of 12% Senior Notes due 2010
Purchase Agreement
January 21, 2000
BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO. INCORPORATED
<PAGE> 2
COVAD COMMUNICATIONS GROUP, INC.
$425,000,000 Principal Amount of 12% Senior Notes due 2010
PURCHASE AGREEMENT
January 21, 2000
New York, New York
Bear, Steams & Co. Inc.
Morgan Stanley & Co. Incorporated
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies & Gentlemen:
Covad Communications Group, Inc., a Delaware corporation (the "Company")
proposes to issue and sell to Bear, Stearns & Co. Inc. and Morgan Stanley & Co.
Incorporated (together, the "Initial Purchasers") $425,000,000 aggregate
principal amount of 12% Senior Notes due 2010 (the "Senior Notes"), subject to
the terms and conditions set forth herein. The Senior Notes will be issued
pursuant to an indenture (the "Indenture"), to be dated the Closing Date (as
defined below), between the Company and United States Trust Company of New York,
as trustee (the "Trustee"). The Senior Notes are more fully described in the
Offering Memorandum referred to below.
1. Issuance of Notes. The Company proposes to, upon the terms and
subject to the conditions set forth herein, issue and sell to the Initial
Purchasers the Senior Notes. The Senior Notes and the Exchange Notes (as defined
below) issuable in exchange therefore are hereinafter collectively referred to
as the Notes. Capitalized terms used but not otherwise defined herein shall have
the meanings given to such terms in the Indenture.
Upon original issuance thereof, and until such time as the same is no
longer required under the applicable requirements of the Securities Act of 1933,
as amended (the "Securities Act"), the Notes shall bear the legends required to
be set forth in the Indenture.
2. Offering. The Notes will be offered and sold to the Initial
Purchasers pursuant to an exemption from the registration requirements under the
Securities Act. The Company will prepare a final offering memorandum (the
"Offering Memorandum"), relating to the Company and the Notes.
The Initial Purchasers have advised the Company that the Initial
Purchasers will make offers to resell (the "Exempt Resales") the Notes on the
terms set forth in the Offering Memorandum, as amended or supplemented, solely
to (i) persons whom any of the Initial Purchasers reasonably believe to be
"qualified institutional buyers", as defined in Rule 144A under the Securities
Act ("QIBs"), (ii)
<PAGE> 3
persons who have represented to the Company that they are institutional
"Accredited Investors" referred to in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act ("Accredited Investors") and (iii) non-U.S. persons outside the
United States in reliance upon Regulation S ("Regulation S") under the
Securities Act ("Reg S Investors"). The QIBs, Accredited Investors and the Reg S
Investors are collectively referred to herein as the "Eligible Purchasers". Such
QIBs, Accredited Investors and Reg S Investors shall be collectively referred to
herein as the "Eligible Purchasers". The Initial Purchasers will offer the Notes
to such Eligible Purchasers initially at a purchase price equal to 100 % of the
amount thereof.
Holders (including subsequent transferees) of the Notes will have the
registration rights set forth in the registration rights agreement relating
thereto (the "Registration Rights Agreement"), to be dated the Closing Date, for
so long as such Notes constitute "Transfer Restricted Securities" (as defined in
such agreement). Pursuant to the Registration Rights Agreement, the Company will
agree to file with the Securities and Exchange Commission (the "Commission"),
under the circumstances set forth therein, (i) a registration statement under
the Securities Act (the "Exchange Offer Registration Statement") with respect to
an offer to exchange (the "Exchange Offer") the Notes for a new issue of debt
securities of the Company (the "Exchange Notes") to be offered in exchange for
the Notes and (ii) under certain circumstances, a shelf registration statement
pursuant to Rule 415 under the Securities Act (the "Shelf Registration
Statement") relating to the resale by certain holders of the Notes, and to use
its best efforts to cause such Registration Statements to be declared effective
and consummate the Exchange Offer. This Agreement, the Notes, the Indenture and
the Registration Rights Agreement are hereinafter sometimes referred to
collectively as the "Operative Documents".
3. Purchase, Sale and Delivery.
(a) On the basis of the representations, warranties and covenants
contained in this Agreement, and subject to its terms and conditions, the
Company agrees to issue and sell to each Initial Purchaser, and each Initial
Purchaser agrees severally and not jointly to purchase from the Company, the
aggregate principal amount of Notes set forth opposite such Initial Purchaser's
name on Schedule I hereto. The purchase price for the Notes shall be $973.75 per
$1,000 principal amount Note.
(b) Delivery of, and payment of the purchase price for, the Notes
shall be made at the offices of Covad Communications Group, Inc., 2330 Central
Expressway, Santa Clara, CA 95050, or such other location as may be mutually
acceptable. Such delivery and payment shall be made at 10:00 a.m., New York City
time, on January 28, 2000 or at such other time as shall be agreed upon by the
Initial Purchasers and the Company. The time and date of such delivery and
payment are herein called the "Closing Date".
(c) On the Closing Date, Notes sold by the Initial Purchasers to
QIBs and Reg S Investors will be represented by one or more Notes in definitive
global form, registered in the name of Cede & Co., as nominee of The Depository
Trust Company ("DTC"), having an aggregate principal amount corresponding to the
aggregate principal amount of the Notes sold to such QIBs and Reg S Investors
(collectively, the "Global Notes"). Notes sold by the Initial Purchasers to
Accredited Investors will be represented by one or more Notes in definitive
form, registered in the
<PAGE> 4
name of such Accredited Investors, having an aggregate principal amount
corresponding to the aggregate principal amount of the Notes sold to such
Accredited Investors (collectively, the "Accredited Investor Notes"). The Global
Notes and the Accredited Investor Notes shall be delivered by the Company to the
Initial Purchasers (or as the Initial Purchasers direct), against payment by the
Initial Purchasers of the purchase price therefor by wire transfer of
immediately available funds, to an account specified by the Company or as the
Company may direct in writing; provided that the Company shall give at least two
business days' prior written notice to the Initial Purchasers of the information
required to effect such wire transfer. The Global Notes and the Accredited
Investor Notes shall be made available to the Initial Purchasers for inspection
not later than 10:00 a.m., New York City time, on the business day immediately
preceding the Closing Date.
4. Agreements of the Company. The Company covenants and agrees with each
of the Initial Purchasers as follows:
(a) To advise the Initial Purchasers promptly and, if requested
by the Initial Purchasers, confirm such advice in writing, (i) of the issuance
by any state securities commission of any stop order suspending the
qualification or exemption from qualification of any Notes for offering or sale
in any jurisdiction, or the initiation of any proceeding for such purpose by any
state securities commission or other regulatory authority and (ii) of the
happening of any event that, in the reasonable opinion of counsel to the
Company, makes any statement of a material fact made in the Offering Memorandum
untrue in any material respect or that requires the making of any additions to
or changes in the Offering Memorandum in order to make the statements therein,
in the light of the circumstances under which they are made, not misleading in
any material respect. The Company shall use its best efforts to prevent the
issuance of any stop order or order suspending the qualification or exemption of
any Notes under any state securities or Blue Sky laws and, if at any time any
state securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption of any Notes under any state
securities or Blue Sky laws, the Company shall use its best efforts to obtain
the withdrawal or lifting of such order at the earliest possible time.
(b) To furnish the Initial Purchasers and those persons
identified by the Initial Purchasers to the Company, without charge, as many
copies of the Offering Memorandum, and any amendments or supplements thereto, as
the Initial Purchasers may reasonably request. The Company consents to the use
of the Offering Memorandum, and any amendments and supplements thereto required
pursuant hereto, by the Initial Purchasers in connection with Exempt Resales.
(c) Not to amend or supplement the Offering Memorandum prior to
the Closing Date unless the Initial Purchasers shall previously have been
advised thereof and shall not have objected thereto within a reasonable time
after being furnished a copy of the applicable amendment or supplement. The
Company shall promptly prepare, upon the Initial Purchasers' request, any
amendment or supplement to the Offering Memorandum that may be necessary or
advisable in connection with Exempt Resales.
(d) If, after the date hereof and prior to consummation of any
Exempt Resale, any event shall occur as a result of which, in the judgment of
the Company or in the reasonable opinion of either counsel to the Company or
counsel to the Initial Purchasers, it becomes necessary or
<PAGE> 5
advisable to amend or supplement the Offering Memorandum in order to make the
statements therein, in the light of the circumstances when such Offering
Memorandum is delivered to an Eligible Purchaser which is a prospective
purchaser, not misleading in any material respect, or if it is necessary or
advisable to amend or supplement the Offering Memorandum to comply with
applicable law, (i) to notify the Initial Purchasers of such occurrence and (ii)
forthwith to prepare an appropriate amendment or supplement to such Offering
Memorandum so that the statements therein as so amended or supplemented will
not, in the light of the circumstances when it is so delivered, be misleading in
any material respect, or so that such Offering Memorandum will comply with
applicable law.
(e) To cooperate with the Initial Purchasers and counsel to the
Initial Purchasers in connection with the qualification or registration of the
Notes under the securities or Blue Sky laws of such jurisdictions as the Initial
Purchasers may reasonably request and to continue such qualification in effect
so long as required for the Exempt Resales; provided, however that the Company
shall not be required in connection therewith to register or qualify as a
foreign corporation where it is not now so qualified or to take any action that
would subject it to service of process in suits or taxation, in each case, other
than as to matters and transactions relating to the Offering Memorandum or
Exempt Resales, in any jurisdiction where it is not now so subject.
(f) Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement becomes effective or is terminated,
to pay all costs, expenses, fees and taxes incident to the performance of the
obligations of the Company hereunder, including in connection with: (i) the
preparation, printing, filing and distribution of the Offering Memorandum
(including, without limitation, financial statements) and all amendments and
supplements thereto required pursuant hereto, (ii) the issuance, transfer and
delivery by the Company of the Notes to the Initial Purchasers, (iii) the
qualification or registration of the Notes for offer and sale under the
securities or Blue Sky laws of the several states (including, without
limitation, the cost of preparing, printing and mailing a preliminary and final
Blue Sky Memorandum and the reasonable fees and disbursements of counsel to the
Initial Purchasers relating thereto), (iv) furnishing such copies of the
Offering Memorandum, and all amendments and supplements thereto, as may be
requested by the Initial Purchasers for use in connection with Exempt Resales,
(v) the preparation of certificates for the Notes, (vi) the fees, disbursements
and expenses of the Company's counsel and accountants, (vii) all expenses and
listing fees in connection with the application for quotation of the Notes in
the National Association of Securities Dealers, Inc. ("NASD") Automated
Quotation System - PORTAL ("PORTAL"), (viii) all fees and expenses (including
fees and expenses of counsel to the Company) of the Company in connection with
the approval of the Notes by DTC for "book-entry" transfer, (ix) the reasonable
fees and expenses of the Trustee and its counsel in connection with the
Indenture and the Notes, (x) the performance by the Company of its other
obligations under this Agreement and the other Operative Documents and (xi)
"roadshow" travel and other expenses incurred in connection with the marketing
and sale of the Notes.
(g) To use the proceeds from the sale of the Notes in the manner
described in the Offering Memorandum under the caption "Use of Proceeds".
<PAGE> 6
(h) Not to voluntarily claim, and to resist actively any attempts
to claim, the benefit of any usury laws against the holders of any Notes.
(i) To do and perform all things required to be done and
performed under this Agreement by it prior to or after the Closing Date and to
satisfy all conditions precedent on its part to the delivery of the Notes.
(j) Not to sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in the Securities
Act) that would be integrated with the sale of the Notes in a manner that would
require the registration under the Securities Act of the sale to the Initial
Purchasers or the QIBs of the Notes or to take any other action that would
result in the Exempt Resales not being exempt from registration under the
Securities Act.
(k) For so long as any of the Notes remain outstanding and during
any period in which the Company is not subject to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to make
available upon request to any beneficial owner of Notes in connection with any
sale thereof and any prospective purchaser of such Notes from such beneficial
owner, the information required by Rule 144A(d)(4) under the Securities Act.
(l) To comply with all of its agreements set forth in the
Registration Rights Agreement and all agreements set forth in the representation
letters of the Company to DTC relating to the approval of the Notes by DTC for
"book-entry" transfer.
(m) To use its best efforts to effect the designation of the
Notes as eligible for PORTAL and to obtain approval of the Notes by DTC for
"book-entry" transfer.
(n) For so long as any of the Notes remain outstanding, to
deliver without charge to each of the Initial Purchasers, promptly upon request,
copies of (i) any reports or other publicly available information that the
Company shall mail or otherwise make available to its securityholders generally
and (ii) all reports, financial statements and proxy or information statements
filed by the Company with the Commission or any national securities exchange and
other information made publicly available by the Company, including without
limitation, press releases.
(o) Prior to the Closing Date, to furnish to each of the Initial
Purchasers, as soon as they have been prepared in the ordinary course by the
Company, copies of any consolidated financial statements or any unaudited
interim financial statements of the Company for any period subsequent to the
periods covered by the financial statements appearing in the Offering
Memorandum.
(p) Not to take, directly or indirectly, any action designed to,
or that might reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Notes.
(q) Not to distribute any Offering Memorandum or other offering
material in connection with the offering and sale of the Notes, except as
permitted by the Securities Act.
<PAGE> 7
(r) To comply with the agreements in the Indenture, the
Registration Rights Agreement and any other Operative Document.
(s) To cause each certificate for a Note to bear the legend
contained in the Indenture for the time period and upon the other terms stated
in the Indenture.
(t) To file with the Commission, not later than 15 days after the
Closing Date, five copies of a notice on Form D under the Securities Act (one of
which will be manually signed by a person duly authorized by the Company); to
otherwise comply with the requirements of Rule 503 under the Securities Act; and
to furnish promptly to the Initial Purchasers evidence of each such required
timely filing (including a copy thereof).
5. Representations and Warranties of the Company; Representations,
Warranties and Covenants of the Initial Purchasers.
(a) The Company represents and warrants to each of the Initial
Purchasers that:
(i) The Offering Memorandum is being prepared in connection with
the Exempt Resales. Such Offering Memorandum, in the form used by the Initial
Purchasers to confirm sales on the Closing Date, will not, and any supplement or
amendment to it will not, contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties contained in this
paragraph shall not apply to statements in or omissions from the Offering
Memorandum (or any supplement or amendment thereto) made in reliance upon and in
conformity with information relating to the Initial Purchasers furnished to the
Company in writing by the Initial Purchasers expressly for use therein. No stop
order preventing the use of the Offering Memorandum, or any amendment or
supplement thereto, or any order asserting that any of the transactions
contemplated by this Agreement are subject to the registration requirements of
the Securities Act, has been issued.
(ii) When the Notes are issued and delivered pursuant to this
Agreement, no Note will be of the same class (within the meaning of Rule 144A
under the Securities Act) as securities of the Company that are listed on a
national securities exchange registered under Section 6 of the Exchange Act or
that are quoted in a United States automated inter-dealer quotation system.
(iii) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and has corporate power and
authority to own, lease and operate its properties and to conduct its business
as it is currently being conducted and as will be described in the Offering
Memorandum. Each of the Company and each subsidiary is duly qualified as a
foreign corporation to transact business and is in good standing in the State of
California and each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except for such jurisdictions (other than the State of California)
where the failure to so qualify or to be in good standing would not,
individually or in the aggregate, result in a material adverse
<PAGE> 8
change, or any development that could reasonably be expected to result in a
material adverse change, in the condition, financial or otherwise, or in the
business, operations or prospects, whether or not arising from transactions in
the ordinary course of business, of the Company and its subsidiaries, considered
as one entity (any such change is called a "Material Adverse Change"). The
Company does not own or control, directly or indirectly, any corporation,
association or other entity other than Covad Communications Company, a
California corporation, DIECA Communications, Inc., a Virginia corporation, and
Covad Communications Investment Corp., a Delaware corporation. As of the date
hereof, (a) the Company has obtained CLEC regulatory approval in each of the
following States: Arizona, California, Colorado, Connecticut, Delaware, District
of Columbia, Florida, Georgia, Illinois, Indiana, Kansas, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, Montana, New Hampshire, New
Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Utah,
Virginia, Washington, West Virginia and Wisconsin and no such regulatory
approval has been withdrawn, and to the Company's knowledge no such regulatory
approval is the subject of any legal challenge (except as disclosed in the
Offering Memorandum) and (b) the Company has not received any notice of
rejection or denial, nor has it withdrawn, any of its applications for CLEC
approval in any of the 5 additional States where such applications, as of the
date hereof, are pending approval.
(iv) All of the outstanding shares of capital stock of the
Company have been duly authorized, validly issued, and are fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights. At September 30, 1999, after giving effect to the issuance and sale of
the Notes pursuant hereto and the application of the net proceeds therefrom, the
Company had the pro forma consolidated capitalization as will be set forth in
the Offering Memorandum under the caption "Capitalization", under the column
entitled "As Adjusted".
(v) All of the outstanding capital stock of each subsidiary of
the Company is owned, directly or indirectly, by the Company, free and clear of
any security interest, claim, lien, limitation on voting rights or encumbrance;
and all such securities have been duly authorized, validly issued, and are fully
paid and nonassessable and were not issued in violation of any preemptive or
similar rights.
(vi) The Company has all requisite corporate power and authority
to execute, deliver and perform its obligations under this Agreement and the
other Operative Documents and to consummate the transactions contemplated hereby
and thereby, including, without limitation, the corporate power and authority to
issue, sell and deliver the Notes as provided herein and therein and the power
to effect the Use of Proceeds as will be described in the Offering Memorandum.
(vii) This Agreement has been duly and validly authorized,
executed and delivered by the Company and is the legally valid and binding
agreement of the Company, enforceable against it in accordance with its terms,
except insofar as indemnification and contribution provisions may be limited by
applicable law or equitable principles and subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization or similar laws affecting the
rights of creditors generally and subject to general principles of equity.
(viii) The Indenture has been duly and validly authorized by the
Company and, when duly executed and delivered by the Company, will be the
legally valid and binding obligation
<PAGE> 9
of the Company, enforceable against the Company in accordance with its terms,
subject to (A) applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization or similar laws affecting the rights of creditors generally, (B)
general principles of equity (whether considered in a proceeding in equity or at
law) or (C) applicable public policy considerations. The Offering Memorandum
will contain a fair summary of the principal terms of the Indenture.
(ix) The Senior Notes have been duly and validly authorized by
the Company for issuance and sale to the Initial Purchasers by the Company
pursuant to this Agreement and, when issued and authenticated in accordance with
the terms of the Indenture and delivered against payment therefor in accordance
with the terms hereof and thereof, will be the legally valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms and entitled to the benefits of the Indenture, subject to (A)
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally, (B) general principles
of equity (whether considered in a proceeding in equity or at law) or (C)
applicable public policy considerations. The Offering Memorandum will contain a
fair summary of the terms of the Senior Notes.
(x) The Exchange Notes have been duly and validly authorized for
issuance by the Company and, when issued and authenticated in accordance with
the terms of the Exchange Offer and the Indenture, will be the legally valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the Indenture,
subject to (A) applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization or similar laws affecting the rights of creditors generally, (B)
general principles of equity (whether considered in a proceeding in equity or at
law) or (C) applicable public policy considerations. The Offering Memorandum
will contain a fair summary of the terms of the Exchange Notes.
(xi) The Registration Rights Agreement has been duly and validly
authorized by the Company and, when duly executed and delivered by the Company,
will be the legally valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to (A) applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or similar laws
affecting the rights of creditors generally, (B) general principles of equity
(whether considered in a proceeding in equity or at law) or (C) applicable
public policy considerations. The Offering Memorandum will contain a fair
summary of the principal terms of the Registration Rights Agreement.
(xii) Neither the Company nor any of its subsidiaries is, or,
after giving effect to the offering of the Notes, will be (A) in violation of
its charter or bylaws, (B) in default in the performance of any bond, debenture,
note, indenture, mortgage, deed of trust or other agreement or instrument to
which it is a party or by which it is bound or to which any of its properties is
subject, or (C) in violation of any local, state or federal law, statute,
ordinance, rule, regulation, requirement, judgment or court decree (including,
without limitation, the Communications Act and the rules and regulations of the
FCC and environmental laws, statutes, ordinances, rules, regulations, judgments
or court decrees) applicable to the Company, its subsidiaries or any of their
assets or properties (whether owned or leased) other than, in the case of
clauses (B) and (C), any default or violation that could not reasonably be
expected to (x) individually or in the aggregate, result in a material adverse
<PAGE> 10
effect on the properties, business, results of operations, condition (financial
or otherwise), affairs or prospects of the Company and its subsidiaries, taken
as a whole, (y) interfere with or adversely affect the sale of the Notes
pursuant hereto or (z) in any manner draw into question the validity of this
Agreement or any other Operative Document (any of the events set forth in
clauses (x), (y) or (z), a "Material Adverse Effect"). There exists no condition
that, with notice, the passage of time or otherwise, would constitute a default
under any such document or instrument, except as will be disclosed in the
Offering Memorandum, except for any such condition which would not reasonably be
expected to result in a Material Adverse Effect.
(xiii) None of (A) the execution, delivery or performance by the
Company of this Agreement and the other Operative Documents, (B) the issuance
and sale of the Notes and (C) consummation by the Company of the transactions
contemplated hereby violate, conflict with or constitute a breach of any of the
terms or provisions of, or a default under (or an event that with notice or the
lapse of time, or both, would constitute a default), or require consent which
has not been obtained under, or result in the imposition of a lien or
encumbrance other than a "Permitted Lien", as defined in the Indenture on any
properties of the Company or any of its subsidiaries, or an acceleration of any
indebtedness of the Company or any of its subsidiaries pursuant to, (i) the
charter or bylaws of the Company or any of its subsidiaries, (ii) any bond,
debenture, note, indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or its subsidiaries or their properties is or may be bound,
(iii) any statute, rule or regulation applicable to the Company or any of its
subsidiaries or any of their assets or properties or (iv) any judgment, order or
decree of any court or governmental agency or authority having jurisdiction over
the Company or any of its subsidiaries or any of their assets or properties,
except in the case of clauses (ii), (iii) and (iv) for such violations,
conflicts, breaches, defaults, consents, impositions of liens or accelerations
that (x) would not singly, or in the aggregate, have a Material Adverse Effect
or (y) which will be disclosed in the Offering Memorandum. Other than as will be
described in the Offering Memorandum, no consent, approval, authorization or
order of, or filing, registration, qualification, license or permit of or with,
(A) any court or governmental agency, body or administrative agency (including,
without limitation, the FCC) or (B) any other person is required for (1) the
execution, delivery and performance by the Company of this Agreement and the
other Operative Documents, (2) the issuance and sale of the Notes and the
transactions contemplated hereby and thereby, except (x) such as have been
obtained and made (or, in the case of the Registration Rights Agreement, will be
obtained and made) under the Securities Act, the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act" ) and state securities or Blue Sky laws and
regulations or such as may be required by the NASD or (y) where the failure to
obtain any such consent, approval, authorization or order of, or filing
registration, qualification, license or permit would not reasonably be expected
to result in a Material Adverse Effect.
(xiv) Except as will be set forth in the Offering Memorandum,
there are no legal or governmental actions, suits or proceedings pending or, to
Company's knowledge, threatened (i) against or affecting the Company or any of
its subsidiaries, (ii) which has as the subject thereof any officer or director
(in any such capacity) of, or property owned or leased by, the Company or any of
its subsidiaries or (iii) relating to environmental or discrimination matters,
where in any such case (A) there is a reasonable possibility that such action,
suit or proceeding might be determined
<PAGE> 11
adversely to the Company or such subsidiary and (B) any such action, suit or
proceeding, if so determined adversely, would reasonably be expected to result
in a Material Adverse Change or adversely affect the consummation of the
transactions contemplated by this Agreement. No material labor dispute with the
employees of the Company or any of its subsidiaries exists or, to the Company's
knowledge, is threatened or imminent.
(xv) No action has been taken and no statute, rule, regulation or
order has been enacted, adopted or issued by any governmental agency that
prevents the issuance of the Notes or prevents or suspends the use of the
Offering Memorandum; no injunction, restraining order or order of any nature by
a federal or state court of competent jurisdiction has been issued that prevents
the issuance of the Notes, prevents or suspends the sale of the Notes in any
jurisdiction referred to in Section 4(e) hereof or that could adversely affect
the consummation of the transactions contemplated by this Agreement, the
Operative Documents or the Offering Memorandum; and every request of any
securities authority or agency of any jurisdiction for additional information
has been complied with in all material respects.
(xvi) Except as would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Change, (i) to the
Company's knowledge, neither the Company nor any of its subsidiaries is in
violation of any federal, state, local or foreign law or regulation relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata) or wildlife, including without limitation, laws and regulations relating
to emissions, discharges, releases or threatened releases of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum and petroleum products (collectively, "Materials of Environmental
Concern" ), or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern (collectively, "Environmental Laws"), which violation
includes, but is not limited to, noncompliance with any permits or other
governmental authorizations required for the operation of the business of the
Company or its subsidiaries under applicable Environmental Laws, or
noncompliance with the terms and conditions thereof, nor has the Company or any
of its subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that alleges that
the Company or any of its subsidiaries is in violation of any Environmental Law;
(ii) there is no claim, action or cause of action filed with a court or
governmental authority, no investigation with respect to which the Company or
any of its subsidiaries has received written notice, and no written notice by
any person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental response costs, natural resources damages, property
damages, personal injuries, attorneys' fees or penalties arising out of, based
on or resulting from the presence, or release into the environment, of any
Material of Environmental Concern at any location owned, leased or operated by
the Company or any of its subsidiaries, now or in the past (collectively,
"Environmental Claims"), pending or, to the Company's knowledge, threatened
against the Company or any of its subsidiaries or any person or entity whose
liability for any Environmental Claim the Company or any of its subsidiaries has
retained or assumed either contractually or by operation of law; and (iii) to
the Company's knowledge, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the release, emission, discharge, presence or disposal of any Material of
Environmental Concern, that reasonably could result in a violation of any
Environmental Law or form the basis of a potential Environmental Claim against
the Company or any of its subsidiaries or against any person or entity whose
liability
<PAGE> 12
for any Environmental Claim the Company or any of its subsidiaries has retained
or assumed either contractually or by operation of law.
(xvii) The Company and each of its subsidiaries has (i) good and
marketable title to all of the properties and assets to be described in the
Offering Memorandum or the financial statements to be included in the Offering
Memorandum as owned by it, free and clear of all liens, charges, encumbrances
and restrictions, except such as will be described in the Offering Memorandum or
as would not have a Material Adverse Effect, (ii) peaceful and undisturbed
possession to the extent described in the Offering Memorandum under all material
leases to which it is a party as lessee, (iii) all licenses, certificates,
permits, authorizations, approvals, franchises and other rights from, and has
made all declarations and filings with, all federal, state and local authorities
(including, without limitation, the FCC), all self-regulatory authorities and
all courts and other tribunals (each an "Authorization") necessary to engage in
the business conducted by the Company and its subsidiaries in the manner as will
be described in the Offering Memorandum, except as will be described in the
Offering Memorandum and except insofar as the failure to obtain any such
Authorization would not reasonably be expected to have a Material Adverse
Effect, and no such Authorization contains a materially burdensome restriction
that will not be disclosed in the Offering Memorandum and (iv) not received any
notice that any governmental body or agency is considering limiting, suspending
or revoking any such Authorization. Except where the failure to be in full force
and effect would not have a Material Adverse Effect, all such Authorizations are
valid and in full force and effect and the Company and each of its subsidiaries
is in compliance in all material respects with the terms and conditions of all
such Authorizations and with the rules and regulations of the regulatory
authorities having jurisdiction with respect thereto. All material leases to
which the Company and each of its subsidiaries is a party are valid and binding
and no default by the Company or any of its subsidiaries has occurred and is
continuing thereunder and, to the Company's knowledge, no material defaults by
the landlord are existing under any such lease that could reasonably be expected
to result in a Material Adverse Effect.
(xviii)Except as will be set forth in the Offering Memorandum,
the Company and its subsidiaries own, possess or have the right to employ
sufficient patents, patent rights, licenses (including all FCC, state, local or
other jurisdictional regulatory licenses), inventions, copyrights, know-how
(including trade secrets and other unpatented, and/or unpatentable proprietary
or confidential information, software, systems or procedures), trademarks,
service marks and trade names, inventions, computer programs, technical data and
information (collectively, the "Intellectual Property Rights") reasonably
necessary to conduct their businesses as now conducted; and the expected
expiration of any of such Intellectual Property Rights would not result in a
Material Adverse Change. Except as will be disclosed in the Offering Memorandum,
the Intellectual Property Rights presently employed by the Company and its
subsidiaries in connection with the businesses now operated by them or which are
proposed to be operated by them are owned, to the Company's knowledge, free and
clear of and without violating any right, claimed right, charge, encumbrance,
pledge, security interest, restriction or lien of any kind of any other person
and neither the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to any
of the foregoing except as would not reasonably be expected to have a Material
Adverse Effect. The use of the Intellectual Property in connection with the
business and
<PAGE> 13
operations of the Company and its subsidiaries does not infringe on the rights
of any person, except as could not reasonably be expected to have a Material
Adverse Effect.
(xix) None of the Company or any of its subsidiaries, or, or to
the best knowledge of the Company, any of their respective officers, directors,
partners, employees, agents or affiliates or any other person acting on behalf
of the Company or any of its subsidiaries has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer,
supplier, employee or agent of a customer or supplier, official or employee of
any governmental agency (domestic or foreign), instrumentality of any government
(domestic or foreign) or any political party or candidate for office (domestic
or foreign) or other person who was, is or may be in a position to help or
hinder the business of the Company or any of its subsidiaries (or assist the
Company or any of its subsidiaries in connection with any actual or proposed
transaction) which (i) would reasonably be expected to subject the Company, or
any other individual or entity to any damage or penalty in any civil, criminal
or governmental litigation or proceeding (domestic or foreign), (ii) if not
given in the past, would reasonably be expected to have had a Material Adverse
Effect or (iii) if not continued in the future, would reasonably be expected to
have a Material Adverse Effect.
(xx) All material tax returns required to be filed by the Company
and its subsidiaries in all jurisdictions have been so filed. All taxes,
including withholding taxes, penalties and interest, assessments, fees and other
charges due or claimed to be due from such entities or that are due and payable
have been paid, other than those being contested in good faith and for which
adequate reserves have been provided or those currently payable without penalty
or interest. To the knowledge of the Company, there are no material proposed
additional tax assessments against the Company or any of its subsidiaries or the
assets or property of the Company or any of its subsidiaries. The Company has
made adequate charges, accruals and reserves in the applicable financial
statements to be included in the Offering Memorandum in respect of all federal,
state and foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its consolidated subsidiaries has not been
finally determined.
(xxi) The Company is not an "investment company" or a company "
controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "Investment Company Act").
(xxii) Except as will be disclosed in the Offering Memorandum,
there are no holders of securities of the Company or any of its subsidiaries
who, by reason of the execution by the Company of this Agreement or any other
Operative Document to which it is a party or the consummation by the Company or
any of its subsidiaries of the transactions contemplated hereby or thereby, have
the right to request or demand that the Company or any of its subsidiaries
register under the Securities Act or analogous foreign laws and regulations
securities held by them, other than such that have been duly waived.
(xxiii)The Company and its subsidiaries each maintain a system of
internal accounting controls sufficient to provide reasonable assurance that:
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as
<PAGE> 14
necessary to permit preparation of financial statements in conformity in all
material respects with generally accepted accounting principles and to maintain
accountability for assets; and (iii) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(xxiv) Each of the Company and its subsidiaries are insured by
recognized, financially sound institutions with policies in such amounts and
with such deductibles and covering such risks as are customary for similarly
situated businesses including but not limited to, policies covering real and
personal property owned or leased by the Company and its subsidiaries against
theft, damage, destruction and acts of vandalism. The Company has no reason to
believe that it or any subsidiary will not be able (i) to renew its existing
insurance coverage as and when such policies expire or (ii) to obtain comparable
coverage from similar institutions as may be necessary or appropriate to conduct
its business as now conducted and at a cost that would not result in a Material
Adverse Change.
(xxv) The Company has not (i) taken, directly or indirectly, any
action designed to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Notes or (ii) (A) sold, bid for, purchased
or paid any person any compensation for soliciting purchases of, the Notes or
(B) paid or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of the Company.
(xxvi) No registration under the Securities Act of the Notes is
required for the sale of the Notes to the Initial Purchasers as contemplated
hereby or for the Exempt Resales assuming (i) that the purchasers who buy the
Notes in the Exempt Resales are Eligible Purchasers and (ii) the accuracy of the
Initial Purchasers' representations contained herein. No form of general
solicitation or general advertising was used by the Company or any of its
representatives (other than the Initial Purchasers, their employees, agents or
any other persons acting on their behalf, as to which the Company makes no
representation or warranty) in connection with the offer and sale of any of the
Notes in connection with Exempt Resales, including, but not limited to,
articles, notices or other communications published in any newspaper, magazine,
or similar medium or broadcast over television or radio, or any seminar or
meeting whose attendees have been invited by any general solicitation or general
advertising. No securities of the same respective classes as the Notes have been
issued and sold by the Company within the six-month period immediately prior to
the date hereof.
(xxvii) The Company and its subsidiaries and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or a subsidiary, any member of any group of organizations described in
Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as
amended, and the regulations and published interpretations thereunder (the
"Code") of which the Company or such subsidiary is a member. No "reportable
event" (as defined under ERISA) has occurred or is reasonably expected to occur
with respect to any
<PAGE> 15
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates. No "'employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfunded benefit liabilities" (as defined under ERISA). Neither the
Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur any liability under (i) Title IV of ERISA with
respect to termination of, or withdrawal from, any "employee benefit plan" or
(ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the Code is
so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(xxviii) The Offering Memorandum, as of its date, and each
amendment or supplement thereto read in conjunction with the Offering
Memorandum, as of its date, will contain the information specified in, and will
meet the requirements of, Rule 144A(d)(4) under the Securities Act.
(xxix) Except as otherwise will be disclosed in the Offering
Memorandum, subsequent to the respective dates as of which information is given
in the Offering Memorandum: (i) there has been no Material Adverse Change; (ii)
the Company and its subsidiaries, considered as one entity, have not incurred
any material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company or,
except for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by the
Company or any of its subsidiaries of any class of capital stock; (iv) there has
been no capital expenditure or commitment by the Company or any of its
subsidiaries exceeding $1,000,000, either individually or in the aggregate
except in the ordinary course of business as generally contemplated by the
Offering Memorandum; (v) there has been no material change in accounting methods
or practices (including any change in depreciation or amortization policies or
rates) by the Company or any of its subsidiaries; (vi) there has been no
revaluation by the Company or any of its subsidiaries of any of their assets;
(vii) there has been no increase in the salary or other compensation payable or
to become payable by the Company or any of its subsidiaries to any of their
officers, directors, employees or advisors, nor any declaration, payment or
commitment or obligation of any kind for the payment by the Company or any of
its subsidiaries of a bonus or other additional salary or compensation to any
such person; (viii) there has been no amendment or termination of any material
contract, agreement or license to which the Company or any subsidiary is a party
or by which it is bound; (ix) there has been no waiver or release of any
material right or claim of the Company or any subsidiary, including any
write-off or other compromise of any material account receivable of the Company
or any subsidiary; and (x) there has been no change in pricing or royalties set
or charged by the Company or any subsidiary to their respective customers or
licensees or in pricing or royalties set or charged by persons who have licensed
Intellectual Property Rights to the Company or any of its subsidiaries.
(xxx) None of the execution, delivery and performance of this
Agreement, the issuance and sale of the Notes, the application of the proceeds
from the issuance and sale of the Notes and the consummation of the transactions
contemplated thereby as will be set forth in the Offering
<PAGE> 16
Memorandum, will violate Regulations T, U or X promulgated by the Board of
Governors of the Federal Reserve System or analogous foreign laws and
regulations.
(xxxi) Ernst & Young LLP, who will express their opinion with
respect to the financial statements (which term as used in this Agreement
includes the related notes thereto) and supporting schedules to be included in
the Offering Memorandum, are independent public or certified public accountants
within the meaning of Regulation S-X under the Securities Act and the Exchange
Act.
(xxxii) The financial statements, together with the related
notes, to be included in the Offering Memorandum present fairly in all material
respects the consolidated financial position of the Company and its subsidiaries
as of and at the dates indicated and the results of their operations and cash
flows for the periods specified. Such financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the periods involved, except as may be expressly stated in the
related notes thereto. The financial data to be set forth in the Offering
Memorandum under the captions "Offering Memorandum Summary--Summary Consolidated
Financial Data", "Selected Consolidated Financial Data" and "Capitalization"
fairly present the information set forth therein on a basis consistent with that
of the audited financial statements to be contained in the Offering Memorandum.
(xxxiii) The Company does not intend to, nor does it believe that
it will, incur debts beyond its ability to pay such debts as they mature. The
present fair salable value of the assets of the Company on a consolidated basis
exceeds the amount that will be required to be paid on or in respect of the
existing debts and other liabilities (including contingent liabilities) of the
Company on a consolidated basis as they become absolute and matured. The assets
of the Company on a consolidated basis do not constitute an unreasonably small
capital to carry out the business of the Company as conducted or as proposed to
be conducted. Upon the issuance of the Notes, the present fair salable value of
the assets of the Company on a consolidated basis will exceed the amount that
will be required to be paid on or in respect of the existing debts and other
liabilities (including contingent liabilities) of the Company on a consolidated
basis as they become absolute and matured. Upon the issuance of the Notes, the
assets of the Company on a consolidated basis will not constitute an
unreasonably small capital to carry out its businesses as now conducted,
including the capital needs of the Company on a consolidated basis.
(xxxiv) Except pursuant to this Agreement, there are no
contracts, agreements or understandings between the Company and any other person
that would give rise to a valid claim against the Company or either of the
Initial Purchasers for a brokerage commission, finder's fee or like payment in
connection with the issuance, purchase and sale of the Notes.
(xxxv) There are no business relationships or related-party
transactions involving the Company or any subsidiary or any other person that
would be required to be described in the Offering Memorandum were it to be filed
as a part of a Registration Statement on Form S-1 under the Securities Act,
which will not have been described as would have been so required.
<PAGE> 17
(xxxvi) The statements (including the assumptions described
therein) to be included in the Offering Memorandum under the heading "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" (i) are within the coverage of Rule 175(b) under the
Securities Act to the extent such data constitute forward looking statements as
defined in Rule 175(c) and (ii) will be made by the Company with a reasonable
basis and reflect the Company's good faith estimate of the matters described
therein.
(xxxvii) The Company and its affiliates and all persons acting on
their behalf (other than the Initial Purchasers, as to whom the Company makes no
representation) have complied with and will comply with the offering
restrictions requirements of Regulation S in connection with the offering of the
Notes outside the United States and, in connection therewith, the Offering
Memorandum will contain the disclosure required by Rule 902(g)(2).
(xxxviii) The Notes sold in reliance on Regulation S will be
represented upon issuance by a temporary global security that may not be
exchanged for definitive securities until the expiration of the 40-day
distribution compliance period referred to in Rule 903(c)(3) of the Securities
Act and only upon certification of beneficial ownership of such Notes by
non-U.S. persons or U.S. persons who purchased such Notes in transactions that
were exempt from the registration requirements of the Securities Act.
(xxxix) Each certificate signed by any officer of the Company and
delivered to the Initial Purchasers or counsel for the Initial Purchasers
pursuant to this Agreement shall be deemed to be a representation and warranty
by the Company to the Initial Purchasers as to the matters covered thereby.
The Company acknowledges that each of the Initial Purchasers and,
for purposes of the opinions to be delivered to the Initial Purchasers pursuant
to Section 8 hereof, counsel to the Company and counsel to the Initial
Purchasers, will rely upon the accuracy and truth of the foregoing
representations and hereby consents to such reliance.
(b) Each of the Initial Purchasers severally and not jointly
represents, warrants and covenants to the Company and agrees that:
(i) Such Initial Purchaser is a QIB, with such knowledge and
experience in financial and business matters as are necessary in order to
evaluate the merits and risks of an investment in the Notes.
(ii) Such Initial Purchaser is not acquiring the Notes with a
view to any distribution thereof that would violate the Securities Act or the
securities laws of any state of the United States or any other applicable
jurisdiction.
(iii) No form of general solicitation or general advertising has
been or will be used by either of the Initial Purchasers or any of their
representatives in connection with the offer and sale of any of the Notes,
including but not limited to, articles, notices or other communications
published
<PAGE> 18
in any newspaper, magazine, or similar medium or broadcast over television or
radio, or any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising.
(iv) Each of the Initial Purchasers agrees that, in connection
with the Exempt Resales, it will solicit offers to buy the Notes only from, and
will offer to sell the Notes only to, Eligible Purchasers. Such Initial
Purchaser further (A) agrees that it will offer to sell the Notes only to, and
will solicit offers to buy the Notes only from (1) Eligible Purchasers that the
Initial Purchaser reasonably believes are QIBs, (2) Accredited Investors who
make the representations contained in, and execute and return to the Initial
Purchaser, a certificate in the form of Annex A attached to the Offering
Memorandum and (3) Reg S Investors and (B) acknowledges and agrees that, in the
case of such QIBs, such Accredited Investors and such Reg S Investors, that such
Notes will not have been registered under the Securities Act and may be resold,
pledged or otherwise transferred only (x)(I) to a person whom the seller
reasonably believes is a QIB in a transaction meeting the requirements of Rule
144A, (II) in an offshore transaction (as defined in Rule 902 under the
Securities Act) meeting the requirements of Rule 904 under the Securities Act,
(III) in a transaction meeting the requirements of Rule 144 under the Securities
Act, (IV) to an Accredited Investor that, prior to such transfer, furnishes to
the Trustee a signed letter containing certain representations and agreements
relating to the Notes (the form of such letter can be obtained from the Trustee
or (V) in accordance with another exemption from the registration requirements
of the Securities Act (in the case of II, III, IV or V, based upon an opinion of
counsel if the Company or the Trustee, or the "Registrar" or "Transfer Agent"
(as such terms are defined in the Indenture) for the Notes so requests), (y) to
the Company or (z) pursuant to an effective registration statement under the
Securities Act and, in each case, in accordance with any applicable securities
laws of any state of the United States and (C) that the holder and each
subsequent holder will be required to notify any purchaser of the security
evidenced thereby of the resale restrictions set forth in (B) above.
(v) Such Initial Purchaser and its affiliates or any person
acting on its or their behalf have not engaged or will not engage in any
directed selling efforts within the meaning of Regulation S with respect to the
Notes.
(vi) The Notes offered and sold by such Initial Purchaser
pursuant hereto in reliance on Regulation S have been and will be offered and
sold only in offshore transactions.
(vii) The sale of Notes offered and sold by such Initial
Purchaser pursuant hereto in reliance on Regulation S is not part of a plan or
scheme to evade the registration provisions of the Securities Act.
(viii) Each of the Initial Purchasers agrees that it has not
offered or sold and will not offer or sell the Notes in the United States or to,
or for the benefit or account of, a U.S. Person (other than a distributor), in
each case, as defined in Rule 902 under the Securities Act (i) as part of its
distribution at any time and (ii) otherwise until 40 days after the later of the
commencement of the offering of the Notes pursuant hereto and the Closing Date,
other than in accordance with Regulation S of the Securities Act or another
exemption from the registration requirements of the Securities Act. Such Initial
Purchaser agrees that, during such 40-day distribution compliance period, it
will not cause any advertisement with respect to the Notes (including any
"tombstone" advertisement) to be
<PAGE> 19
published in any newspaper or periodical or posted in any public place and will
not issue any circular relating to the Notes, except such advertisements as
permitted by and include the statements required by Regulation S.
(ix) Each of the Initial Purchasers agrees that, at or prior to
confirmation of a sale of Notes by it to any distributor, dealer or person
receiving a selling concession, fee or other remuneration during the 40-day
distribution compliance period referred to in Rule 903(c)(3) under the
Securities Act, it will send to such distributor, dealer or person receiving a
selling concession, fee or other remuneration a confirmation or notice to
substantially the following effect:
"The Notes covered hereby have not been registered under
the U.S. Securities Act of 1933, as amended (the
"Securities Act"), and may not be offered and sold within
the United States or to, or for the account or benefit of,
U.S. persons (i) as part of your distribution at any time
or (ii) otherwise until 40 days after the later of the
commencement of the Offering and the Closing Date, except
in either case in accordance with Regulation S under the
Securities Act (or Rule 144A or to Accredited Institutions
in transactions that are exempt from the registration
requirements of the Securities Act), and in connection
with any subsequent sale by you of the Notes covered
hereby in reliance on Regulation S during the period
referred to above to any distributor, dealer or person
receiving a selling concession, fee or other remuneration,
you must deliver a notice to substantially the foregoing
effect. Terms used above have the meanings assigned to
them in Regulation S."
(x) Each of the Initial Purchasers agrees that the Notes offered
and sold in reliance on Regulation S will be represented upon issuance by a
global security that may not be exchanged for definitive securities until the
expiration of the 40-day distribution compliance period referred to in Rule
903(c)(3) of the Securities Act and only upon certification of beneficial
ownership of such Notes by non-U.S. persons or U.S. persons who purchased such
Notes in transactions that were exempt from the registration requirements of the
Securities Act.
(xi) Each of the Initial Purchasers understands that the Company
and, for purposes of the opinions to be delivered to the Initial Purchasers
pursuant to Section 8 hereof, counsel to the Company and counsel to the Initial
Purchasers will rely upon the accuracy and truth of the foregoing
representations and hereby consents to such reliance.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless (i) each of
the Initial Purchasers, (ii) each person, if any, who controls either of the
Initial Purchasers within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act and (iii) the respective officers, directors,
partners, employees, representatives and agents of any of the Initial Purchasers
or any controlling person to the fullest extent lawful, from and against any and
all losses, liabilities, claims, damages and expenses whatsoever (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any investigation
<PAGE> 20
or litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Offering Memorandum, or in any supplement thereto or amendment thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the Company will not be liable in any such
case to the extent, but only to the extent, that any such loss, liability,
claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of the Initial Purchasers expressly for use therein.
This indemnity agreement will be in addition to any liability which the Company
may otherwise have, including under this Agreement.
(b) Each Initial Purchaser, severally and not jointly, agrees to
indemnify and hold harmless the Company and each person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act, against any losses, liabilities, claims, damages and
expenses whatsoever (including but not limited to attorneys' fees and any and
all expenses whatsoever incurred in investigating, preparing or defending
against any investigation or litigation, commenced or threatened, or any claim
whatsoever and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Securities Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Offering Memorandum, or in any amendment thereof
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading in each case to the extent, but only
to the extent, that any such loss, liability, claim, damage or expense arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of either
Initial Purchaser expressly for use therein; provided, however, that in no case
shall either Initial Purchaser be liable or responsible for any amount in excess
of the discounts and commissions received by such Initial Purchaser, as set
forth on the cover page of the Offering Memorandum. This indemnity will be in
addition to any liability which either Initial Purchaser may otherwise have,
including under this Agreement.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 6 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may otherwise have). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will
<PAGE> 21
be entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ its
or their own counsel in any such case (and where the Initial Purchasers are the
indemnified parties, Bear, Stearns & Co. Inc. shall have the right to select
such counsel for the Initial Purchasers), but the fees and expenses of such
counsel shall be at the expense of such indemnified party or parties unless (i)
the employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action, (ii) the
indemnifying parties shall not have employed counsel to take charge of the
defense of such action within a reasonable time after notice of commencement of
the action, or (iii) such indemnified party or parties shall have reasonably
concluded that there may be defenses available to it or them which are different
from or additional to those available to one or all of the indemnifying parties
(in which case the indemnifying party or parties shall not have the right to
direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses of counsel shall be
borne by the indemnifying parties; provided, however, that the indemnifying
party under subsection (a) or (b) above, shall only be liable for the legal
expenses of one counsel (in addition to any local counsel) for all indemnified
parties in each jurisdiction in which any claim or action is brought. Anything
in this subsection to the contrary notwithstanding, an indemnifying party shall
not be liable for any settlement of any claim or action effected without its
prior written consent; provided, however, that such consent was not unreasonably
withheld.
7. Contribution. In order to provide for contribution in circumstances
in which the indemnification provided for in Section 6 is for any reason held to
be unavailable from the Company or is insufficient to hold harmless a party
indemnified thereunder, the Company and the Initial Purchasers shall contribute
to the aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting in the case of losses, claims, damages, liabilities and expenses
suffered by the Company, any contribution received by the Company from persons,
other than the Initial Purchasers, who may also be liable for contribution,
including persons who control the Company within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act) to which the Company
and one or both of the Initial Purchasers may be subject, in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Initial Purchasers from the offering of the Notes or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 6, in
such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and the Initial
Purchasers in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Initial Purchasers shall be deemed to be in the same proportion as (x) the total
proceeds from the offering of Notes (net of discounts but before deducting
expenses) received by the Company and (y) the discounts received by the Initial
Purchasers, respectively, in each case as set forth in the table on the cover
page of the Offering Memorandum. The relative fault of the Company and of the
Initial Purchasers shall be determined by reference to, among other things,
whether the
<PAGE> 22
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Initial Purchasers and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Initial Purchasers agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to above. Notwithstanding the provisions
of this Section 7, (i) in no case shall either of the Initial Purchasers be
required to contribute any amount in excess of the amount by which the discount
applicable to the Notes purchased by such Initial Purchaser pursuant to this
Agreement exceeds the amount of any damages which such Initial Purchaser has
otherwise been required to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 7, (A)
each person, if any, who controls either of the Initial Purchasers within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act
and (B) the respective officers, directors, partners, employees, representatives
and agents of any of the Initial Purchasers or any controlling person shall have
the same rights to contribution as such Initial Purchaser, and each person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) of
this Section 7. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect of which a claim for contribution may be made against another party
or parties under this Section 7, notify such party or parties from whom
contribution may be sought, but the failure to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 7 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its prior written consent; provided, however, that such written consent
was not unreasonably withheld.
8. Conditions of Initial Purchasers' Obligations. The several
obligations of the Initial Purchasers to purchase and pay for the Notes, if any,
as provided herein, shall be subject to the satisfaction of the following
conditions:
(a) All of the representations and warranties of the Company
contained in this Agreement shall be true and correct on the date hereof and on
the Closing Date with the same force and effect as if made on and as of the date
hereof and the Closing Date, respectively. The Company shall have performed or
complied with all of the agreements herein contained and required to be
performed or complied with by it at or prior to the Closing Date.
(b) The Offering Memorandum shall have been printed and copies
distributed to the Initial Purchasers not later than 10:00 a.m., New York City
time, on the fourth business day following the date of this Agreement or at such
later date and time as to which the Initial Purchasers may agree, and no stop
order suspending the qualification or exemption from qualification of the Notes
in any jurisdiction referred to in Section 4(e) shall have been issued and no
proceeding for that purpose shall have been commenced or shall be pending or
threatened.
<PAGE> 23
(c) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency which would, as of the Closing Date, prevent the issuance of
the Notes; no action, suit or proceeding shall have been commenced and be
pending against or affecting or, to the Company's knowledge, threatened against,
the Company before any court or arbitrator or any governmental body, agency or
official that (1) could reasonably be expected to result in a Material Adverse
Effect and (2) has not been disclosed in the Offering Memorandum; and no stop
order shall have been issued preventing the use of the Offering Memorandum, or
any amendment or supplement thereto, or which could reasonably be expected to
have a Material Adverse Effect.
(d) Since the dates as of which information is given in the
Offering Memorandum, (i) there shall not have been any Material Adverse Change,
or any development that is reasonably likely to result in a Material Adverse
Change, in the capital stock or the long-term debt, or material increase in the
short-term debt, of the Company or any of its subsidiaries from that set forth
in the Offering Memorandum, (h) no dividend or distribution of any kind shall
have been declared, paid or made by the Company or any of its subsidiaries on
any class of its capital stock, (iii) neither the Company nor any of its
subsidiaries shall have incurred any liabilities or obligations, direct or
contingent, that are material, individually or in the aggregate, to the Company
and its subsidiaries, taken as a whole, and, that are required to, be disclosed
in accordance with generally accepted accounting principles on the latest
balance sheet or notes thereto included in the Offering Memorandum and are not
so disclosed. Since the date hereof and since the dates as of which information
is given in the Offering Memorandum, there shall not have occurred any Material
Adverse Effect.
(e) The Initial Purchasers shall have received a certificate,
dated the Closing Date, signed on behalf of the Company by each of the Company's
Chief Executive Officer and Chief Financial Officer in form and substance
reasonably satisfactory to the Initial Purchasers, confirming, as of the Closing
Date, the matters set forth in paragraphs (a), (b), (c) and (d) of this Section
8 and that, as of the Closing Date, the obligations of the Company to be
performed hereunder on or prior thereto have been duly performed in all material
respects.
(f) The Initial Purchasers shall have received on the Closing
Date an opinion, dated the Closing Date, in form and substance satisfactory to
the Initial Purchasers and counsel to the Initial Purchasers, of Irell & Manella
LLP, counsel for the Company, to the effect set forth in Exhibit A hereto.
(g) The Initial Purchasers shall have received on the Closing
Date an opinion, dated the Closing Date, in form and substance satisfactory to
the Initial Purchasers and counsel to the Initial Purchasers, of Dhruv Khanna,
General Counsel of the Company, to the effect set forth in Exhibit B hereto.
(h) The Initial Purchasers shall have received an opinion, dated
the Closing Date, in form and substance reasonably satisfactory to the Initial
Purchasers, of Simpson Thacher & Bartlett, counsel to the Initial Purchasers,
covering such matters as are customarily covered in such opinions.
<PAGE> 24
(i) Prior to the printing of the Offering Memorandum and at the
Closing Date, the Initial Purchasers shall have received from Ernst & Young LLP,
independent public accountants for the Company, dated as of the date of this
Agreement and as of the Closing Date, customary comfort letters addressed to the
Initial Purchasers and in form and substance satisfactory to the Initial
Purchasers and counsel to the Initial Purchasers with respect to the financial
statements and certain financial information of the Company contained in the
Offering Memorandum.
(j) Simpson Thacher & Bartlett shall have been furnished with
such documents, in addition to those set forth above, as they may reasonably
require for the purpose of enabling them to review or pass upon the matters
referred to in this Section 8 and in order to evidence the accuracy,
completeness or satisfaction in all material respects of any of the
representations, warranties or conditions herein contained.
(k) Prior to the Closing Date, the Company shall have furnished
to the Initial Purchasers such further information, certificates and documents
as the Initial Purchasers may reasonably request.
(l) The Company and the Trustee shall have entered into the
Indenture and the Initial Purchasers shall have received counterparts, conformed
as executed, thereof.
All opinions, certificates, letters and other documents required
by this Section 8 to be delivered by the Company will be in compliance with the
provisions hereof only if they are reasonably satisfactory in form and substance
to the Initial Purchasers. The Company will furnish the Initial Purchasers with
such conformed copies of such opinions, certificates, letters and other
documents as it shall reasonably request.
9. Initial Purchasers' Information. The Company and the Initial
Purchasers severally acknowledge that the statements to be set forth (i) with
respect to the offering of the Notes in the last paragraph of the outside of the
front cover page; (ii) with respect to the stabilization language on page i; and
(iii) in the third paragraph, the fifth sentence of the fourth paragraph and the
fifth paragraph under the caption "Plan of Distribution" in such Offering
Memorandum will constitute the only information furnished in writing by the
Initial Purchasers expressly for use in the Offering Memorandum.
10. Survival of Representations and Agreements. All representations and
warranties, covenants and agreements of the Initial Purchasers and the Company
contained in this Agreement, including the agreements contained in Sections 4(f)
and 11(d), the indemnity agreements contained in Section 6 and the contribution
agreements contained in Section 7, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Initial
Purchasers or any controlling person thereof or by or on behalf of the Company
or any controlling person thereof, and shall survive delivery of and payment for
the Notes to and by the Initial Purchasers. The representations contained in
Section 5 and the agreements contained in Sections 4(f), 6, 7 and 11(d) shall
survive the termination of this Agreement, including any termination pursuant to
Section 11.
<PAGE> 25
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective upon execution and
delivery of a counterpart hereof by each of the parties hereto.
(b) The Initial Purchasers shall have the right to terminate this
Agreement at any time prior to the Closing Date by notice to the Company from
the Initial Purchasers, without liability (other than with respect to Sections 6
and 7) on the Initial Purchasers' part to the Company if, on or prior to such
date, (i) the Company shall have failed, refused or been unable to perform in
any material respect any agreement on its part to be performed hereunder, (ii)
any other condition to the obligations of the Initial Purchasers hereunder as
provided in Section 8 is not fulfilled when and as required in any material
respect, (iii) in the reasonable judgment of the Initial Purchasers any Material
Adverse Change shall have occurred since the respective dates as of which
information is given in the Offering Memorandum, other than as set forth in the
Offering Memorandum, (iv) any downgrading shall have occurred in the rating
accorded the Company's debt securities by any "nationally recognized statistical
rating organization", as that term is defined by the Commission for purposes of
Rule 436(g)(2) under the Securities Act, or any such organization shall have
publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Company's debt securities, or
(v)(A) any domestic or international event or act or occurrence has materially
disrupted, or in the opinion of the Initial Purchasers will in the immediate
future materially disrupt, the market for the Company's securities or for
securities in general; or (B) trading in securities generally on the New York
Stock Exchange or quotations on the Nasdaq National Market shall have been
suspended or materially limited, or minimum or maximum prices for trading shall
have been established, or maximum ranges for prices for securities shall have
been required, on such exchange, or by such exchange or other regulatory body or
governmental authority having jurisdiction; or (C) a banking moratorium shall
have been declared by federal or state authorities, or a moratorium in foreign
exchange trading by major international banks or persons shall have been
declared; or (D) there is an outbreak or escalation of armed hostilities
involving the United States on or after the date hereof, or if there has been a
declaration by the United States of a national emergency or war, the effect of
which shall be, in the Initial Purchasers' judgment, to make it inadvisable or
impracticable to proceed with the offering or delivery of the Notes on the terms
and in the manner contemplated in the Offering Memorandum; or (E) there shall
have been such a material adverse change in general economic, political or
financial conditions or if the effect of international conditions on the
financial markets in the United States shall be such as, in the Initial
Purchasers' judgment, makes it inadvisable or impracticable to proceed with the
delivery of the Notes as contemplated hereby.
(c) Any notice of termination pursuant to this Section 11 shall
be by telephone, telex, telephonic facsimile, or telegraph, confirmed in writing
by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof, or if the sale of the Notes provided for herein is not
consummated because any condition to the obligations of the Initial Purchasers
set forth herein is not satisfied or because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or comply
with any provision hereof, the Company will, subject to demand by the Initial
Purchasers, reimburse the Initial
<PAGE> 26
Purchasers for all out-of-pocket expenses (including the reasonable fees and
expenses of Initial Purchasers' counsel), incurred by the Initial Purchasers in
connection herewith.
12. Notice. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to the Initial
Purchasers shall be mailed, delivered, or telexed, telegraphed or telecopied and
confirmed in writing to Bear, Stearns & Co. Inc. and Morgan Stanley & Co.
Incorporated, c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York
10167, Attention: Corporate Finance Department, telecopy number: (212) 272-3092,
with a copy, which shall not constitute notice, to Simpson Thacher & Bartlett,
425 Lexington Avenue, New York, New York 10017, Attn: Gary L. Sellers, telecopy
number: (212) 455-2502; and if sent to the Company, shall be mailed, delivered
or telexed, telegraphed or telecopied and confirmed in writing to Covad
Communications Group, Inc., 2330 Central Expressway, Santa Clara, CA 95050,
Attention: Chief Financial Officer, telecopy number: (408) 844-7501, with a
copy, which shall not constitute notice, to Irell & Manella LLP, 1800 Avenue of
the Stars, Suite 900, Los Angeles, CA 90067, Attn: Meredith S. Jackson, telecopy
number: (310) 203-7199.
13. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Initial Purchasers and the Company and the
controlling persons and agents referred to in Sections 6 and 7, and their
respective successors and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained. The
term "successors and assigns" shall not include a purchaser, in its capacity as
such, of Notes from the Initial Purchasers.
14. Construction. This Agreement shall be construed in accordance with
the internal laws of the State of New York without giving any effect to any
provisions thereof relating to conflicts of law. TIME IS OF THE ESSENCE IN THIS
AGREEMENT.
15. Captions. The captions included in this Agreement are included
solely for convenience of reference and are not to be considered a part of this
Agreement.
16. Counterparts. This Agreement may be executed in various counterparts
which together shall constitute one and the same instrument.
[Signature pages to follow]
<PAGE> 27
If the foregoing correctly sets forth the understanding among the
Initial Purchasers and the Company, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.
Very truly yours,
COVAD COMMUNICATIONS GROUP, INC.
By:
-------------------------------------
Name:
Title:
[Signatures continue on next page]
<PAGE> 28
Accepted and agreed to as of
the date first above written:
BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO. INCORPORATED
By: BEAR, STEARNS & CO. INC.
By:
------------------------------------
Name:
Title:
<PAGE> 29
Schedule I
<TABLE>
<CAPTION>
Aggregate Principal
Amount of Notes to
Initial Purchasers be Purchased
- ------------------ -------------------
<S> <C>
Bear, Stearns & Co. Inc.................................... $362,500,000
Morgan Stanley & Co. Incorporated.......................... $ 62,500,000
Total: $425,000,000
</TABLE>
<PAGE> 30
Exhibit A
Form of Opinion of Irell & Manella LLP
1. The Company is duly incorporated and validly existing as a
corporation in good standing under the laws of the State of Delaware, has the
requisite corporate power and authority to carry on its business as it is
currently being conducted and as described in the Offering Memorandum and to
own, lease and operate its properties, and is duly qualified and in good
standing as a foreign corporation authorized to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a Material Adverse Effect on the
Company on a consolidated basis.
2. Each of the Company's subsidiaries is a corporation duly incorporated
and validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, has all requisite corporate power and authority
to carry on its business as it is currently being conducted and as described in
the Offering Memorandum and to own, lease and operate its properties, and is
duly qualified and in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not have
a Material Adverse Effect on the Company on a consolidated basis.
3. All of the outstanding shares of capital stock of the Company issued
since November 3, 1999 have been, to such counsel's knowledge, duly authorized
and validly issued, are fully paid and nonassessable and were not issued in
violation of any preemptive or similar rights. The authorized, issued and
outstanding capital stock of the Company conforms in all respects to the
description thereof set forth in the Offering Memorandum.
4. When the Notes are issued and delivered pursuant to this Agreement,
no Note will be of the same class (within the meaning of Rule 144A under the
Securities Act) as securities of the Company that are listed on a national
securities exchange registered under Section 6 of the Exchange Act or that are
quoted in a United States automated inter-dealer quotation system.
5. The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and the other
Operative Documents and to consummate the transactions contemplated thereby,
including, without limitation, the corporate power and authority to issue, sell
and deliver the Notes.
6. This Agreement has been duly and validly authorized, executed and
delivered by the Company and is the legally valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except
that such counsel need express no opinion as to the validity or enforceability
of rights of indemnity or contribution, or both and except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization or similar laws affecting the rights of creditors generally and
subject to general principles of equity.
<PAGE> 31
7. Each of the Indenture and the Registration Rights Agreement has been
duly and validly authorized, executed and delivered by the Company and assuming
due execution by the other parties thereto, is the legally valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except that such counsel need express no opinion as to the validity
or enforceability of rights of indemnity or contribution, or both and except as
such enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization or similar laws affecting the rights of creditors
generally and subject to general principles of equity.
8. The Notes are in the form contemplated by the Indenture, have been
duly and validly authorized for issuance and sale to the Initial Purchasers by
the Company pursuant to this Agreement and, when issued and authenticated in
accordance with the terms of the Indenture and delivered against payment
therefor in accordance with the terms of this Agreement and the Indenture, will
be the legally valid and binding obligations of the Company, enforceable against
the Company in accordance with their terms and entitled to the benefits of the
Indenture, except that such counsel need express no opinion as to the validity
or enforceability of rights of indemnity or contribution, or both, and except as
such enforceability may be limited by (i) bankruptcy, insolvency, fraudulent
conveyance, reorganization or similar laws affecting the rights of creditors
generally, (ii) to general principles of equity (whether considered in a
proceeding in equity or at law) or (iii) applicable public policy
considerations.
9. The Exchange Notes have been duly and validly authorized for issuance
by the Company and, when issued and authenticated in accordance with the terms
of the Indenture and delivered against payment therefor in accordance with the
terms of this Agreement and the Indenture, will be the legally valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms and entitled to the benefits of the Indenture, except that such
counsel need express no opinion as to the validity or enforceability of rights
of indemnity or contribution, or both, and except as such enforceability may be
limited by (i) bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally, (ii) general
principles of equity (whether considered in a proceeding in equity or at law) or
(iii) applicable public policy considerations.
10. The Offering Memorandum contains a fair summary of the principal
terms of each of the Notes, this Agreement, the Indenture and the Registration
Rights Agreement.
11. No registration under the Securities Act of the Notes is required
for the sale of the Notes to the Initial Purchasers as contemplated by this
Agreement or for the Exempt Resales, it being understood that no opinion is
expressed as to any subsequent resale of any Notes, assuming (A) that the
purchasers who buy such Notes in the initial resale thereof are Eligible
Purchasers, and (B) the accuracy of the Initial Purchasers' and the Company's
representations contained in this Agreement regarding the absence of general
solicitation in connection with the sale of Notes to the Initial Purchasers and
the Exempt Resales.
12. The Offering Memorandum, as of its date (except for the financial
statements and schedules and other financial or statistical data included
therein, as to which no opinion need be
<PAGE> 32
expressed), contains all the information specified in, and meets the
requirements of, Rule 144A(d)(4) under the Securities Act.
13. Prior to the effectiveness of the Exchange Registration Statement or
the Shelf Registration Statement, the Indenture is not required to be qualified
under the Trust Indenture Act.
14. None of (A) the execution, delivery or performance by the Company of
this Agreement and the other Operative Documents or (B) the issuance and sale of
the Notes violates, conflicts with or constitutes a breach of any of the terms
or provisions of, or a default under (or an event that with notice or the lapse
of time, or both, would constitute a default), or require consent or waiver
under, or result in the imposition of a lien or encumbrance on any properties of
the Company or any of its subsidiaries, or an acceleration of any indebtedness
of the Company or any of its subsidiaries pursuant to, (i) the charter or bylaws
of the Company or any of its subsidiaries, (ii) any agreement or instrument
filed with the SEC as an exhibit, or incorporated by reference as an exhibit,
pursuant to subparagraphs (b)(4) or (b)(10) of Item 601 of Regulation S-K, as
part of the Company's annual, quarterly or current reports on Forms 10K, 10Q or
8K, (iii) the Delaware General Corporation Law or any federal statute, rule or
regulation known to such counsel to be applicable to the Company (other than
federal or state securities laws, which are specifically addressed elsewhere
herein, and other than as are specifically addressed in the opinion of Dhruv
Khanna, General Counsel of the Company, separately delivered to you pursuant to
Section 8(g) of this Agreement, or (iv) any judgment, order or decree of any
court or governmental agency or authority having jurisdiction over the Company
or any of its subsidiaries or any of their assets or properties known to such
counsel, except in the case of clauses (ii), (iii) and (iv) for such violations,
conflicts, breaches, defaults, consents, impositions of liens or accelerations
that (x) would not, singly or in the aggregate, have a Material Adverse Effect
or (y) are disclosed in the Offering Memorandum. Assuming compliance with
applicable state securities and Blue Sky laws, as to which such counsel need
express no opinion, and except for the filing of a registration statement under
the Securities Act and qualification of the Indenture under the Trust Indenture
Act in connection with the Registration Rights Agreement, no consent, approval,
authorization or order of, or filing registration, qualification, license or
permit of or with, any court or governmental agency, body or administrative
agency is required for the execution, delivery and performance by the Company of
this Agreement, the Operative Documents or the issuance and sale of the Notes,
except such as have been obtained and made or have been disclosed in the
Offering Memorandum.
15. The Company is not and after giving effect to the offering and sale
of the Notes and the application of the proceeds thereof as described in the
Offering Memorandum, will not be an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
16. Except as set forth in this Agreement or the Registration Rights
Agreement, to such counsel's knowledge, there are no holders of securities of
the Company who, by reason of the execution by the Company of this Agreement or
any other Operative Document to which it is a party or the consummation by the
Company of the transactions contemplated thereby, have the right to request or
demand that the Company register under the Securities Act securities held by
them.
<PAGE> 33
17. None of the execution, delivery and performance of this Agreement,
the issuance and sale of the Notes, the application of the proceeds from the
issuance and sale of the Notes and the consummation of the transactions
contemplated thereby as set forth in the Offering Memorandum, will violate
Regulations T, U or X promulgated by the Board of Governors of the Federal
Reserve System.
18. To such counsel's knowledge, after reasonable inquiry, and except as
described in the Offering Memorandum, there is (i) no action, suit,
investigation or proceeding (other than proceedings with respect to pending
license applications) before or by any court, arbitrator or governmental agency,
body or official, domestic or foreign, now pending, or threatened or
contemplated to which the Company and any of its subsidiaries is or may be a
party or to which the business or property of the Company and any of its
subsidiaries is or may be subject and (ii) no injunction, restraining order or
order of any nature by a federal or state court of competent jurisdiction to
which the Company or any of its subsidiaries is or may be subject, or to which
the business, assets or property of the Company are or may be subject, has been
issued, except in the case of clauses (i) and (ii), those which (a) would not
singly or in the aggregate have a Material Adverse Effect upon the Company and
its subsidiaries taken as a whole or (b) which are disclosed in the Offering
Memorandum.
19. To such counsel's knowledge, there is no statute, rule, regulation
or order that has been enacted, adopted or issued by any governmental agency or
that has been proposed by any governmental body to which the Company or any of
its subsidiaries is or may be subject or to which the business, assets or
property of the Company or any of its subsidiaries are or may be subject, except
those which (a) would not singly or in the aggregate have a Material Adverse
Effect upon the Company and its subsidiaries taken as a whole or (b) which are
disclosed in the Offering Memorandum.
20. The statements contained in the Offering Memorandum under the
captions "Description of Notes", "Description of Certain Indebtedness", "Notice
to Investors"and "Plan of Distribution", in each case, insofar as such
statements constitute summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information required with respect to
such legal matters, documents and proceedings and fairly summarize the matters
referred to therein in all material respects.
Such counsel has participated in conferences with officers and other
representatives of the Company, representatives of the independent certified
public accountants of the Company and the Initial Purchasers and its
representatives at which the contents of the Offering Memorandum and related
matters were discussed and, although such counsel is not passing upon and
assumes no responsibility for, the accuracy, completeness or fairness of the
statements contained in the Offering Memorandum (except as indicated above), on
the basis of the foregoing, no facts have come to such counsel's attention which
led such counsel to believe that the Offering Memorandum, as of its date or the
Closing Date, contained or contains an untrue statement of a material fact or
omitted or omits to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (except as to financial statements and schedules and other financial
data, included therein, as to which such counsel need express no opinion).
<PAGE> 34
Exhibit B
Form of Opinion of Dhruv Khanna, General Counsel of the Company
1. Neither the execution and delivery of the Operative Documents nor the
sale of the Notes contemplated thereby violate (A) the Communications Act of
1934 (the "Communications Act") as interpreted as of this date, (B) the
Telecommunications Act of 1996 (the "Telecom Act of 1996") as interpreted as of
this date, (C) any rules of regulations of the Federal Communications Commission
(the "FCC") applicable to the Company and its subsidiaries as interpreted as of
this date, or (D) any rules or regulations of the California Public Utilities
Commission, New York Public Service Commission, Massachusetts Department of
Public Utilities, Washington Utilities and Transportation Commission, Illinois
Commerce Commission, the Oregon Public Utilities Commission or any other
jurisdiction where the Company has obtained CLEC regulatory approval
(collectively, the "State Telecommunications Agencies") as interpreted as of
this date.
2. The Company and its subsidiaries (A) have made all reports and
filings, and paid all fees, required by the FCC and any of the State
Telecommunications Agencies, and (B) have all certificates, orders, permits,
licenses, authorizations, consents and approvals of and from, and have made all
filings and registrations with, the FCC and any of the State Telecommunications
Agencies necessary to own, lease, license and use their respective properties
and assets and to conduct their respective businesses as described in the
Offering Memorandum; and, except as described in the Offering Memorandum, there
are no pending or, to my knowledge, threatened proceedings before the FCC or any
State Telecommunications Agencies relating to the revocation or modification of
any such certificates, orders, permits, licenses, authorizations, consents or
approvals which, if determined adversely, would have a Material Adverse Effect.
3. Except as described in the Offering Memorandum, (A) no decree or
order of the FCC or any of the State Telecommunications Agencies is outstanding,
(B) no litigation or proceeding has been commenced or, to my knowledge,
threatened, (C) to my knowledge, no inquiry or investigation has been commenced
or threatened and (D) no formal notice of violation or order to show cause has
been issued, against the Company or its subsidiaries before the FCC or any of
the State Telecommunications Agencies.
4. The statements in the Offering Memorandum under the headings of "Risk
Factors--Charges for unbundled network elements are outside of our control
because they are proposed by traditional telephone companies and are subject to
costly regulatory approval processes", "Risk Factors--The failure of traditional
telephone companies to adequately provide transmission facilities and provision
telephone wires is likely to impair our ability to install lines and adversely
affect our growth rate", "Risk Factors--We depend on the traditional telephone
companies for the quality and availability of the telephone wires that we use",
"Risk Factors--Our business will suffer if our interconnection agreements are
not renewed or if they are renewed or modified on unfavorable terms", "Risk
Factors--Our services are subject to government regulation, and changes in
current of future laws or regulations could adversely affect our business",
"Business--Industry Background--Impact of Regulatory Developments" and
"Business--Government Regulation", to the extent such statements constitute
summaries of the Telecommunications Act of 1996 or rules and
<PAGE> 35
regulations of the FCC or any of the State Telecommunications Agencies, fairly
and accurately summarize the matters therein described.
5. The Company and its subsidiaries have the consents, approvals,
authorizations, licenses, certificates, permits, or orders of the FCC or the
State Telecommunications Agencies, if any is required, for the consummation of
the transactions contemplated in the Offering Memorandum, except where the
failure to obtain the consents, approvals, authorizations, licenses,
certificates, permits or orders would not have a Material Adverse Effect.
6. Neither the execution and delivery of the Operative Documents nor the
sale of the Notes contemplated thereby will conflict with or result in a
violation of any bond, debenture, note, indenture (other than the indenture
relating to the Company's 13 1/2% Senior Discount Notes due 2008 and the
indenture relating to the Company's 12 1/2% Senior Notes due 2009), mortgage,
deed of trust or other material agreement or instrument to which the Company or
any of its subsidiaries is a party or by which any of them or their property is
or may be bound, except for such conflicts or violations which would not have a
Material Adverse Effect.
7. As of the date hereof, (A) the Company has obtained CLEC regulatory
approval in each of the following States: Arizona, California, Colorado,
Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois,
Indiana, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Missouri,
Montana, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon,
Pennsylvania, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin and
no such regulatory approval has been withdrawn, and no such regulatory approval
is the subject of any legal challenge (except as disclosed in the Offering
Memorandum) and (B) the Company has not received any notice of rejection or
denial, nor has it withdrawn, any of its applications for CLEC approval in any
of the 5 additional States where such applications, as of the date hereof, are
pending approval.
<PAGE> 1
EXHIBIT 4.10
EXECUTION COPY
- --------------------------------------------------------------------------------
COVAD COMMUNICATIONS GROUP, INC.
$425,000,000 AGGREGATE PRINCIPAL AMOUNT
OF
SERIES A AND SERIES B
12% SENIOR NOTES DUE 2010
INDENTURE
----------------------
Dated as of January 28, 2000
----------------------
United States Trust Company of New York
Trustee
- --------------------------------------------------------------------------------
<PAGE> 2
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
- --------------------------- -----------------
<S> <C>
310(a)(1).................................................................................7.10
(a)(2)....................................................................................7.10
(a)(3)....................................................................................N.A.
(a)(4)....................................................................................N.A.
(a)(5)....................................................................................7.10
(b).......................................................................................7.10
(c).......................................................................................N.A.
311(a)....................................................................................7.11
(b).......................................................................................7.11
(c).......................................................................................N.A.
312(a)....................................................................................2.05
(b)......................................................................................10.03
(c)......................................................................................10.03
313(a)....................................................................................7.06
(b)(1)...................................................................................10.03
(b)(2)....................................................................................7.07
(c)......................................................................................7.06;
10.02
(d).......................................................................................7.06
314(a)...................................................................................4.03;
10.05
(c)(1)....................................................................................N.A.
(c)(2)....................................................................................N.A.
(c)(3)....................................................................................N.A.
(e)......................................................................................10.05
(f).......................................................................................N.A.
315(a)....................................................................................7.01
(b).......................................................................................N.A.
(c).......................................................................................N.A.
(d).......................................................................................7.01
(e).......................................................................................6.11
316(a)(last sentence).....................................................................2.09
(a)(1)(A).................................................................................6.05
(A)(1)(B).................................................................................6.04
(a)(2)....................................................................................N.A.
(b).......................................................................................6.07
(c).......................................................................................N.A.
317(a)(1).................................................................................6.08
(a)(2)....................................................................................6.09
(b).......................................................................................2.04
318(a)....................................................................................N.A.
(b).......................................................................................N.A.
(c)......................................................................................10.01
</TABLE>
*This Cross-Reference Table is not part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE....................................... 1
SECTION 1.01. DEFINITIONS........................................................... 1
SECTION 1.02. OTHER DEFINITIONS..................................................... 16
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT..................... 16
SECTION 1.04. RULES OF CONSTRUCTION................................................. 17
ARTICLE 2. THE NOTES........................................................................ 17
Section 2.1. FORM AND DATING........................................................ 17
SECTION 2.02. EXECUTION AND AUTHENTICATION.......................................... 18
SECTION 2.03. REGISTRAR AND PAYING AGENT............................................ 19
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST................................... 19
SECTION 2.05. HOLDER LISTS.......................................................... 19
SECTION 2.06. TRANSFER AND EXCHANGE................................................. 19
SECTION 2.07. REPLACEMENT NOTES..................................................... 31
SECTION 2.08. OUTSTANDING NOTES..................................................... 31
SECTION 2.09. TREASURY NOTES........................................................ 31
SECTION 2.10. TEMPORARY NOTES....................................................... 32
SECTION 2.11. CANCELLATION.......................................................... 32
SECTION 2.12. DEFAULTED INTEREST.................................................... 32
SECTION 2.13. CUSIP NUMBERS......................................................... 32
ARTICLE 3. REDEMPTION AND PREPAYMENT........................................................ 33
SECTION 3.01. NOTICES TO TRUSTEE.................................................... 33
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED..................................... 33
SECTION 3.03. NOTICE OF REDEMPTION................................................. 33
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION........................................ 34
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE........................................... 34
SECTION 3.06. NOTES REDEEMED IN PART................................................ 34
SECTION 3.07. OPTIONAL REDEMPTION................................................... 35
SECTION 3.08. MANDATORY REDEMPTION.................................................. 35
SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS................... 35
ARTICLE 4. COVENANTS........................................................................ 37
SECTION 4.01. PAYMENT OF NOTES...................................................... 37
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY....................................... 37
</TABLE>
i
<PAGE> 4
<TABLE>
<S> <C>
SECTION 4.03. REPORTS............................................................... 38
SECTION 4.04. COMPLIANCE CERTIFICATE................................................ 38
SECTION 4.05. TAXES................................................................. 39
SECTION 4.06. STAY, EXTENSION AND USURY LAWS........................................ 39
SECTION 4.07. RESTRICTED PAYMENTS................................................... 39
SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES.......................................................... 41
SECTION 4.09. INCURRENCE OF DEBT AND ISSUANCE OF DISQUALIFIED STOCK................. 42
SECTION 4.10. ASSET SALES........................................................... 43
SECTION 4.11. TRANSACTIONS WITH AFFILIATES.......................................... 45
SECTION 4.12. LIMITATION ON LIENS................................................... 45
SECTION 4.13. BUSINESS ACTIVITIES................................................... 45
SECTION 4.14. CORPORATE EXISTENCE................................................... 45
SECTION 4.15. OFFER TO REPURCHASE UPON CHANGE OF CONTROL............................ 46
SECTION 4.16. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS......................... 46
SECTION 4.17. LIMITATION ON ISSUANCES AND SALES OF EQUITY INTERESTS IN WHOLLY
OWNED RESTRICTED SUBSIDIARIES......................................... 47
SECTION 4.18. LIMITATION ON ISSUANCES OF GUARANTEES OF DEBT......................... 47
SECTION 4.19. PAYMENTS FOR CONSENT.................................................. 47
ARTICLE 5. SUCCESSORS....................................................................... 48
SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS.............................. 48
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED..................................... 48
ARTICLE 6. DEFAULTS AND REMEDIES............................................................ 49
SECTION 6.01. EVENTS OF DEFAULT..................................................... 49
SECTION 6.02. ACCELERATION.......................................................... 50
SECTION 6.03. OTHER REMEDIES........................................................ 51
SECTION 6.04. WAIVER OF DEFAULTS.................................................... 51
SECTION 6.05. CONTROL BY MAJORITY................................................... 51
SECTION 6.06. LIMITATION ON SUITS................................................... 51
SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT......................... 52
SECTION 6.08. COLLECTION SUIT BY TRUSTEE............................................ 52
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM...................................... 52
SECTION 6.10. PRIORITIES............................................................ 53
SECTION 6.11. UNDERTAKING FOR COSTS................................................. 53
ARTICLE 7. TRUSTEE.......................................................................... 53
SECTION 7.01. DUTIES OF TRUSTEE..................................................... 53
SECTION 7.02. RIGHTS OF TRUSTEE..................................................... 54
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE.......................................... 55
SECTION 7.04. TRUSTEE'S DISCLAIMER.................................................. 55
</TABLE>
ii
<PAGE> 5
<TABLE>
<S> <C>
SECTION 7.05. NOTICE OF DEFAULTS.................................................... 55
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES............................ 55
SECTION 7.07. COMPENSATION AND INDEMNITY............................................ 56
SECTION 7.08. REPLACEMENT OF TRUSTEE................................................ 56
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC...................................... 57
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION......................................... 57
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY..................... 58
ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE......................................... 58
SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.............. 58
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE........................................ 58
SECTION 8.03. COVENANT DEFEASANCE................................................... 58
SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE............................ 59
SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST;
OTHER MISCELLANEOUS PROVISIONS........................................ 60
SECTION 8.06. REPAYMENT TO COMPANY.................................................. 60
SECTION 8.07. REINSTATEMENT......................................................... 61
SECTION 8.08. SURVIVAL.............................................................. 61
ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER................................................. 61
SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES................................... 61
SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES...................................... 62
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT................................... 63
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS..................................... 63
SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES...................................... 63
SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC....................................... 63
ARTICLE 10. MISCELLANEOUS................................................................... 64
SECTION 10.01. TRUST INDENTURE ACT CONTROLS......................................... 64
SECTION 10.02. NOTICES.............................................................. 64
SECTION 10.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES........ 65
SECTION 10.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT................... 65
SECTION 10.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION........................ 65
SECTION 10.06. RULES BY TRUSTEE AND AGENTS.......................................... 66
SECTION 10.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS......................................................... 66
SECTION 10.08. GOVERNING LAW........................................................ 66
SECTION 10.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS........................ 66
SECTION 10.10. SUCCESSORS........................................................... 66
SECTION 10.11. SEVERABILITY......................................................... 66
SECTION 10.12. COUNTERPART ORIGINALS................................................ 66
SECTION 10.13. TABLE OF CONTENTS, HEADINGS, ETC..................................... 66
</TABLE>
iii
<PAGE> 6
EXHIBITS
Exhibit A FORMS OF NOTES
Exhibit B FORM OF CERTIFICATE OF TRANSFER
Exhibit C FORM OF CERTIFICATE OF EXCHANGE
Exhibit D FORM OF CERTIFICATE OF ACQUIRING INSTITUTIONAL ACCREDITED
INVESTOR
iv
<PAGE> 7
INDENTURE dated as of January 28, 2000 between Covad Communications
Group, Inc., a Delaware corporation (the "Company"), and United States Trust
Company of New York, as trustee (the "Trustee").
The Company and the Trustee agree as follows for the benefit of each
other and for the equal and ratable benefit of the Holders of the 12% Senior
Notes due 2010 (the "Series A Notes") and the 12% Senior Notes due 2010 issuable
in exchange for the Series A Notes (the "Series B Notes" and, together with the
Series A Notes, the "Notes"):
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 DEFINITIONS.
"144A Global Note" means a global note in the form of Exhibit A-1
hereto bearing the Global Note Legend and the Private Placement Legend and
deposited with or on behalf of, and registered in the name of, the Depositary or
its nominee that will be issued in a denomination equal to the outstanding
principal amount of the Notes sold in reliance on Rule 144A.
"Acquired Debt" means, with respect to any specified Person, (i)
Debt of any other Person existing at the time such other Person is merged with
or into or becomes a Subsidiary of such specified Person, including, without
limitation, Debt incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Restricted Subsidiary of such
specified Person and (ii) Debt secured by a Lien encumbering any assets acquired
by such specified Person.
"Additional Interest" means, on any date of determination, all
additional interest then owing pursuant to the Registration Rights Agreement, if
any. All references in this Indenture to interest which is or may become payable
on the Notes shall be deemed to include Additional Interest, if applicable.
"Affiliate" of any specified Person means any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"Agent" means any Registrar, Paying Agent or co-registrar.
"all or substantially all" has the meaning given such phrase in the
Revised Model Business Corporation Act.
"Applicable Procedures" means, with respect to any transfer or
exchange of or for beneficial interests in any Global Note, the rules and
procedures of the Depositary, Euroclear and Cedel that apply to such transfer or
exchange.
<PAGE> 8
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets or rights (including, without limitation, by way of a
sale and leaseback) other than sales of services in the ordinary course of
business (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of Section 4.15
hereof and not by the provisions of Section 4.10 hereof, and (ii) the issue or
sale by the Company or any of its Subsidiaries of Equity Interests of any of the
Company's Subsidiaries, in the case of either clause (i) or (ii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following shall not be deemed to be
Asset Sales: (i) a transfer of assets by the Company to a Restricted Subsidiary
or by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary; (ii) an issuance of Equity Interests by a Restricted Subsidiary to
the Company or to another Restricted Subsidiary; (iii) a Restricted Payment that
is permitted by the covenant described under Section 4.07 hereof; (iv) disposals
or replacements of obsolete, uneconomical, negligible, worn-out or surplus
property in the ordinary course of business; or (v) a conveyance constituting or
pursuant to a Permitted Lien.
"Attributable Debt" means, with respect to any Sale and Leaseback
Transaction, the present value at the time of determination (discounted at a
rate consistent with accounting guidelines, as determined in good faith by the
Company) of the payments during the remaining term of the applicable lease
(including any period for which such lease has been extended or may, at the
option of the lessee be extended) or until the earliest date on which the lessee
may terminate such lease without penalty or upon payment of a penalty (in which
case the rental payments shall be calculated to include such penalty), after
excluding all amounts required to be paid on account of maintenance and repairs,
insurance, taxes, assessments, water, utilities and similar charges.
"Average Life to Stated Maturity" means, as of any date of
determination with respect to any Debt, the quotient obtained by dividing (i)
the sum of the products of (a) the number of years from the date of
determination to the date or dates of each successive scheduled principal
payment of such Debt multiplied by (b) the amount of each such principal
payment; by (ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal or
state law providing for the relief of debtors, as from time to time amended and
applicable to the relevant case.
"Beneficial Owner" means a beneficial owner as defined in Rules
13d-3 and 13d-5 under the Exchange Act (or any successor rules), including the
provision of such Rules that a Person shall be deemed to have beneficial
ownership of all securities that such Person has a right to acquire within 60
days; provided that a Person will not be deemed a beneficial owner of, or to own
beneficially, any securities if such beneficial ownership (1) arises solely as a
result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to, and in accordance with, the Exchange Act and (2)
is not also then reportable on Schedule 13D or Schedule 13G (or any successor
schedule) under the Exchange Act.
"Board of Directors" means the Board of Directors of the Company, or
any authorized committee of the Board of Directors.
"Borrowing Base" means an amount equal to the sum of 85% of the
value of accounts receivable (before giving effect to any related reserves)
shown on the Company's most recent consolidated balance sheet in accordance with
GAAP not more than 60 days past due.
2
<PAGE> 9
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital lease
that would at such time be required to be capitalized on the balance sheet of
the lessee in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited) and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of (other than distributions of assets in respect of Debt), the issuing
Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof (provided that the full
faith and credit of the United States is pledged in support thereof) having
maturities of not more than six months from the date of acquisition, (iii)
certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of acquisition, bankers acceptances with maturities
not exceeding six months and overnight bank deposits, in each case with any
domestic commercial bank having combined capital and surplus in excess of $500
million and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each case
maturing within six months after the date of acquisition and (vi) money market
and mutual funds at least 95% of the assets of which constitute Cash Equivalents
of the kinds described in clauses (i)-(v) of this definition.
"Cedel" means Cedel Bank, S.A.
"Change of Control" means the occurrence of any of the following:
(i) the sale, lease, transfer, conveyance or other disposition, in one or a
series of related transactions, of all or substantially all of the assets of the
Company and its Restricted Subsidiaries, taken as a whole, to any Person or
group (as such term is used in Section 13(d)(3) and 14 (d)(2) of the Exchange
Act), (ii) the adoption of a plan relating to the liquidation or dissolution of
the Company, (iii) any Person or group (as defined above) is or becomes the
Beneficial Owner, directly or indirectly, of more than 50% of the total Voting
Stock or Total Common Equity of the Company, including by way of merger,
consolidation or otherwise or (iv) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors.
"Closing Date" shall mean the first date on which Notes are issued
by the Company.
"Closing Price" on any Trading Day with respect to the per share
price of any shares of Capital Stock means the last reported sale price regular
way or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such shares are not listed or admitted to trading on any
national securities exchange or quoted on Nasdaq National Market but the issuer
is a Foreign Issuer (as defined in Rule 3b-4(b) under the Exchange Act) and the
principal securities exchange on which such shares are listed or admitted to
trading is a
3
<PAGE> 10
Designated Offshore Securities Market (as defined in Rule 902(a) under the
Securities Act), the average of the reported closing bid and asked prices
regular way on such principal exchange, or, if such shares are not listed or
admitted to trading on any national securities exchange or quoted on Nasdaq
National Market and the issuer and principal securities exchange do not meet
such requirements, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
is selected from time to time by the Company for that purpose and is reasonably
acceptable to the Trustee.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted.
"Common Stock" means the common stock, par value $0.001 per share,
of the Company.
"Company" means Covad Communications Group, Inc., and any and all
successors thereto.
"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus (i) an
amount equal to any extraordinary loss plus any net loss realized in connection
with an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such Consolidated
Net Income, plus (iii) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued and whether or
not capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period) of such Person and
its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, minus (v) non-cash items increasing such
Consolidated Net Income for such period, in each case, on a consolidated basis
and determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash expenses of, a Restricted Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent that a corresponding amount would be
permitted at the date of determination to be paid as a dividend to the Company
by such Restricted Subsidiary without prior governmental approval (that has not
been obtained), and without direct or indirect restriction pursuant to the terms
of its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Restricted
Subsidiary or the holders of its Capital Stock.
"Consolidated Debt" means, with respect to any Person as of any date
of determination, the sum, without duplication, of (i) the total amount of Debt
of such Person and its Restricted Subsidiaries, plus (ii) the total amount of
Debt of any other Person, to the extent that such Debt has been guaranteed by
the referent Person or one or more of its Restricted Subsidiaries, plus (iii)
the aggregate liquidation value of all preferred stock of Restricted
Subsidiaries of such Person, in each case, determined on a consolidated basis in
accordance with GAAP.
4
<PAGE> 11
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Person that is
not a Wholly Owned Restricted Subsidiary shall be included only to the extent of
the percentage ownership interest in the Net Income of such Person owned on the
last day of such period by the referent Person or a Restricted Subsidiary
thereof; provided that the Net Income of any Person that is an Unrestricted
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net
Income of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any
date, the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (a) all
write-ups (other than write-ups resulting from foreign currency translations and
write-ups of tangible assets of a going concern business made within 12 months
after the acquisition of such business) subsequent to the Closing Date in the
book value of any asset owned by such Person or a consolidated Restricted
Subsidiary of such Person, (b) all investments as of such date in unconsolidated
Subsidiaries and in Persons that are not Restricted Subsidiaries and (c) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Consolidated Tangible Net Worth" means, with respect to any Person
as of any date, Consolidated Net Worth, after deducting therefrom all goodwill,
trade names, patents, unamortized debt discount and expense and any other
intangibles, all as set forth on the most recent consolidated balance sheet of
such Person.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on the date of this Indenture or (ii) was nominated for
election to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election or who was elected or appointed in the ordinary course by
Continuing Directors or other directors so elected or appointed.
"Corporate Trust Office of the Trustee" shall be at the address of
the Trustee specified in Section 10.02 hereof or such other address as to which
the Trustee may give written notice to the Company.
5
<PAGE> 12
"Credit Facilities" means, with respect to the Company or any
Restricted Subsidiary, one or more debt facilities or commercial paper
facilities with any combination of banks, other institutional lenders and other
Persons extending financial accommodations or holding corporate debt obligations
in the ordinary course of their business, providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time by the same or different institutional lenders.
"Custodian" means the Trustee, as custodian with respect to the
Notes in global form, or any successor entity thereto.
"Debt" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all Debt of others secured by a
Lien on any asset of such Person (whether or not such Debt is assumed by such
Person, valued, if not assumed, at the lesser of the Fair Market Value of the
encumbered assets or the amount of Debt so secured) and, to the extent not
otherwise included, the guarantee by such Person of any indebtedness of any
other Person. The amount of any Debt outstanding as of any date shall be (i) the
accreted value thereof, in the case of any Debt issued with original issue
discount and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other Debt.
"Debt to Annualized Cash Flow Ratio" means, as of any date of
determination, the ratio of (a) the Consolidated Debt of the Company as of such
date to (b) two times the Consolidated Cash Flow of the Company for the two most
recent full fiscal quarters ending immediately prior to such date for which
internal financial statements are available (the "Measurement Period"),
determined on a pro forma basis after giving effect to all acquisitions or
dispositions of assets made by the Company and its Restricted Subsidiaries from
the beginning of such two-quarter period through and including such date of
determination (including any related financing transactions) as if such
acquisitions and dispositions had occurred at the beginning of such two-quarter
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the two-quarter Measurement Period or
subsequent to such Measurement Period and on or prior to the date of calculation
shall be deemed to have occurred on the first day of the two-quarter Measurement
Period and Consolidated Cash Flow for such Measurement Period shall be
calculated without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
6
<PAGE> 13
"Definitive Note" means a certificated Note registered in the name
of the Holder thereof and issued in accordance with Section 2.06 hereof, in the
form of Exhibit A-1 hereto except that such Note shall not bear the Global Note
Legend and shall not have the "Schedule of Exchanges of Interests in the Global
Note" attached thereto.
"Depositary" means, with respect to the Notes issuable or issued in
whole or in part in global form, the Person specified in Section 2.03 hereof as
the Depositary with respect to the Notes, and any and all successors thereto
appointed as depositary hereunder and having become such pursuant to the
applicable provision of this Indenture.
"Disqualified Stock" means any Capital Stock that, by its terms (or
by the terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of a
Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that the Company may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such repurchase
or redemption complies with the covenant described under Section 4.07 hereof
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Euroclear" means Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear System.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
(or any successor act), and the rules and regulations thereunder.
"Exchange Notes" means the Notes issued in the Exchange Offer
pursuant to Section 2.06(f) hereof.
"Exchange Offer" has the meaning set forth in the Registration
Rights Agreement.
"Exchange Offer Registration Statement" has the meaning set forth in
the Registration Rights Agreement.
"Existing Debt" means Debt of the Company and its Restricted
Subsidiaries in existence on the Closing Date (including the 1999 Notes and the
accreted value of the 1998 Notes during the term that such indebtedness is
outstanding).
"Fair Market Value" means with respect to any asset or property, the
sale value that would be obtained in an arm's length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public
7
<PAGE> 14
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as have been
approved by a significant segment of the accounting profession, which are in
effect on the date of this Indenture.
"Global Notes" means, individually and collectively, each of the
Restricted Global Notes and the Unrestricted Global Notes, in the form of
Exhibit A hereto, issued in accordance with Section 2.01, 2.06(b)(iv),
2.06(d)(ii) or 2.06(f) hereof.
"Global Note Legend" means the legend set forth in Section
2.06(g)(ii), which is required to be placed on all Global Notes issued under
this Indenture.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"guarantee" means, with respect to any Person, without duplication,
a guarantee (other than by endorsement of negotiable instruments for collection
in the ordinary course of business), direct or indirect, in any manner
(including, without limitation, by way of a pledge of assets or through letters
of credit or reimbursement agreements in respect thereof), of all or any part of
any Debt of another Person.
"Guarantor" means any Subsidiary which is a guarantor of the Notes,
including any Person that is required after the date of the Indenture to execute
a guarantee of the Notes pursuant to the covenant described under Section 4.18
until a successor replaces such party pursuant to the applicable provisions of
the Indenture and, thereafter, shall mean such successor.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Holder" means a Person in whose name a Note is registered.
"IAI Global Note" means the global Note in the form of Exhibit A-l
hereto bearing the Global Note Legend and the Private Placement Legend and
deposited with or on behalf of and registered in the name of the Depositary or
its nominee that will be issued in a denomination equal to the outstanding
principal amount of the Notes sold to Institutional Accredited Investors.
"Indenture" means this Indenture, as amended or supplemented from
time to time.
"Indirect Participant" means a Person who holds a beneficial
interest in a Global Note through a Participant.
"Initial Notes" means the first $215 million aggregate principal
amount of Notes issued under this Indenture on the date hereof.
"Initial Purchasers" means Bear, Stearns & Co. Inc. and Morgan
Stanley & Co. Incorporated, as initial purchasers in the Offering.
8
<PAGE> 15
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, which is not also a QIB.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Debt or other obligations), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Debt, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the Company
or any Restricted Subsidiary of the Company sells or otherwise disposes of any
Equity Interests of any direct or indirect Restricted Subsidiary of the Company
such that, after giving effect to any such sale or disposition, such Person is
no longer a Subsidiary of the Company, the Company shall be deemed to have made
an Investment on the date of any such sale or disposition equal to the fair
market value of the Equity Interests of such Subsidiary not sold or disposed of
in an amount determined as provided in the final paragraph of Section 4.07.
"Issue Date" means January 28, 2000.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue on
such payment for the intervening period.
"Letter of Transmittal" means the letter of transmittal to be
prepared by the Company and sent to all Holders of the Notes for use by such
Holders in connection with the Exchange Offer.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Measurement Period" has the definition set forth above under "Debt
to Annualized Cash Flow Ratio.
"Net Income" means, with respect to any Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions),
or (b) the disposition of any securities by such Person or any of its
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Subsidiaries, and (ii) any extraordinary or nonrecurring gain (but not
loss), together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon
9
<PAGE> 16
the sale or other disposition of any non-cash consideration received in any
Asset Sale), net of the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available tax
credits or deductions and any tax sharing arrangements), amounts required to be
applied to the repayment of Debt secured by a Lien on the asset or assets that
were the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
"1998 Notes" means the Company's 13 1/2% Senior Discount Notes due
2008 issued pursuant to the indenture dated March 11, 1998 between the Company
and The Bank of New York.
"1999 Notes" means the Company's 12 1/2% Senior Notes due 2009
issued pursuant to the indenture dated February 18, 1999 between the Company and
The Bank of New York.
"Non-Recourse Debt" means Debt (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute Debt),
(b) is directly or indirectly liable (as a guarantor or otherwise) or (c)
constitutes the lender; (ii) no default with respect to which (including any
rights that the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Debt of the Company or any of its Restricted Subsidiaries to
declare a default on such other Debt or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries.
"Non-U.S. Person" means a Person who is not a U.S. Person within the
meaning of Regulation S.
"Note Custodian" means the Trustee, as custodian with respect to the
Notes in global form, or any other successor entity thereto.
"Notes" has the meaning assigned to it in the preamble to this
Indenture. The Initial Notes and the Additional Notes shall be treated as a
single class for all purposes under this Indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"Offering" means the offering of the Notes by the Company.
"Officer" means, with respect to any Person, the Chairman of the
Board, the Chief Executive Officer, the President, the Chief Operating Officer,
the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the
Controller, the Secretary or any Vice-President of such Person.
"Officers' Certificate" means a certificate signed on behalf of the
Company by two Officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company, that meets the requirements of
Section 10.05 hereof.
10
<PAGE> 17
"Opinion of Counsel" means an opinion from legal counsel that meets
the requirements of Section 10.05 hereof. The counsel may be an employee of
(provided such employee is a duly admitted attorney) or counsel to the Company,
any Subsidiary of the Company or the Trustee.
"Pari Passu Debt" means (i) any Debt of the Company that is pari
passu in right of payment to the Notes and (ii) with respect to any guarantee,
Debt which ranks pari passu in right of payment to such guarantee.
"Participant" means, with respect to the Depositary, Euroclear or
Cedel, a Person who has an account with the Depositary, Euroclear or Cedel,
respectively (and, with respect to the Depository, shall include Euroclear and
Cedel).
"Permitted Investments" means (i) any Investment in the Company or
in any Wholly Owned Restricted Subsidiary of the Company; (ii) any Investment in
Cash Equivalents; (iii) any Investment by the Company or any Wholly Owned
Restricted Subsidiary of the Company in a Person if, as a result of such
Investment, (a) such Person becomes a Wholly Owned Restricted Subsidiary of the
Company or (b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its Debt, Equity Interests or other
securities to, or is liquidated into, the Company or a Wholly Owned Restricted
Subsidiary of the Company, (iv) any Investment made as a result of the receipt
of non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described under Section 4.10 hereof; (v) any
acquisition of assets to the extent acquired in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company and (vi) any
Investment by the Company in joint ventures or one or more Wholly Owned
Unrestricted Subsidiaries of the Company; provided, however, that the aggregate
amount of Investments made pursuant to this clause (vi) shall not exceed the
greater of $50.0 million and 10% of the Company's Total Common Equity at any one
time outstanding; (vii) accounts receivable created or acquired in the ordinary
course of business of the Company or any Restricted Subsidiary and on ordinary
business terms; and (viii) Investments arising from transactions by the Company
or any Restricted Subsidiaries with trade creditors or customers in the ordinary
course of business (including any such Investment received pursuant to any plan
of reorganization or similar arrangement pursuant to the bankruptcy or
insolvency of such trade creditors or customers or otherwise in settlement of a
claim).
"Permitted Liens" means (i) Liens in favor of the Company or holders
of the Notes; (ii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with the
Company; (iii) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company; provided that such
Liens were in existence prior to the contemplation of such acquisition; (iv)
Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (v) Liens existing on the Closing Date; (vi) Liens
for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (vii) Liens securing Vendor Debt or Purchase Money Debt
permitted by the Indenture, in each case, on the property together with
proceeds, product, accessions, substitutions and replacements thereof; (viii)
Liens created by "notice" or "precautionary" filings in connection with
operating leases or other transactions pursuant to which no Debt or Attributable
Debt is Incurred by the Company or any Restricted Subsidiary;
11
<PAGE> 18
(ix) Liens on securities constituting "margin stock" within the meaning of
Regulation T, U or X promulgated by the Board of Governors of the Federal
Reserve System, to the extent that the Investment by the Company or any
Restricted Subsidiary in such margin stock is not prohibited by the Indenture;
(x) Liens on Capital Stock of Unrestricted Subsidiaries; (xi) Liens in favor of
the Trustee arising under Section 7.07 hereof; (xii) Liens incurred in the
ordinary course of business of the Company or any Subsidiary of the Company with
respect to obligations that do not exceed $2.0 million at any one time
outstanding and that (a) are not incurred in connection with the borrowing of
money or the obtaining of advances or credit (other than trade credit in the
ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by the Company or such Restricted Subsidiary; (xiii) Liens
securing Debt and other obligations under Credit Facilities, and related Hedging
Obligations, and Liens on assets of Restricted Subsidiaries securing Guarantees
of such Debt, Hedging Obligations and, in each case, other obligations relating
thereto; and (xiv) Liens on reserve or escrow accounts (including, without
limitations, interest reserve accounts and any cash, Cash Equivalents or
securities deposited therein) securing payment of interest on any Debt.
"Permitted Refinancing Debt" means any Debt of the Company or any of
its Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other Debt of
the Company or such Restricted Subsidiary (other than intercompany Debt);
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Debt does not exceed the principal amount of (or
accreted value, if applicable), plus accrued interest on, the Debt so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Debt has a final maturity date later than the final maturity date
of, and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Debt being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Debt being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Notes, such Permitted Refinancing Debt has a final maturity date
later than the final maturity date of, and is subordinated in right of payment
to, the Notes on terms at least as favorable to the holders of Notes as those
contained in the documentation governing the Debt being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Debt is incurred either
by the Company or by the Restricted Subsidiary who is the obligor on the Debt
being extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint
venture, association, joint- stock company, trust, unincorporated organization
or government or agency or political subdivision thereof (including any
subdivision or ongoing business of any such entity or substantially all of the
assets of any such entity, subdivision or business).
"Private Placement Legend" means the legend set forth in Section
2.06(g)(i) to be placed on all Notes issued under this Indenture except where
otherwise permitted by the provisions of this Indenture.
"Productive Assets" means assets (including assets owned directly or
indirectly through Capital Stock of a Restricted Subsidiary) of a kind used or
usable in the Telecommunications Business of the Company.
"Public Equity Offering" means an underwritten offering of Common
Stock with gross proceeds to the Company of at least $35.0 million pursuant to a
registration statement that has been declared
12
<PAGE> 19
effective by the Commission pursuant to the Securities Act (other than a
registration statement on Form S-8 or otherwise relating to equity securities
issuable under any employee benefit plan of the Company).
"Purchase Money Debt" means Debt of the Company (including Acquired
Debt and Debt represented by Capital Lease Obligations, mortgage financings and
purchase money obligations), including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time
incurred for the purpose of financing all or any part of the cost of
development, construction, acquisition or improvement by the Company or any
Restricted Subsidiary of the Company of any Productive Assets of the Company or
any Restricted Subsidiary of the Company.
"QIB" means a "qualified institutional buyer" as defined in Rule
144A.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of January 28, 2000, by and among the Company and the other
parties named on the signature pages thereof, as such agreement may be amended,
modified or supplemented from time to time and, with respect to any Additional
Notes, one or more registration rights agreements between the Company and the
other parties thereto, as such agreement(s) may be amended, modified or
supplemented from time to time, relating to rights given by the Company to the
purchasers of Additional Notes to register such Additional Notes under the
Securities Act.
"Regulation S" means Regulation S promulgated under the Securities
Act.
"Regulation S Global Note" means a Regulation S Temporary Global
Note or Regulation S Permanent Global Note, as appropriate.
"Regulation S Permanent Global Note" means a permanent global Note
in the form of Exhibit A-l hereto bearing the Global Note Legend and the Private
Placement Legend and deposited with or on behalf of and registered in the name
of the Depositary or its nominee, issued in a denomination equal to the
outstanding principal amount of the Regulation S Temporary Global Note upon
expiration of the Restricted Period.
"Regulation S Temporary Global Note" means a temporary global Note
in the form of Exhibit A-2 hereto bearing the Global Note Legend and the Private
Placement Legend and deposited with or on behalf of and registered in the name
of the Depositary or its nominee, issued in a denomination equal to the
outstanding principal amount of the Notes initially sold in reliance on Rule 903
of Regulation S.
"Responsible Officer" when used with respect to the Trustee, means
any officer within the Corporate Trust Administration of the Trustee (or any
successor group of the Trustee) or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Definitive Note" means a Definitive Note bearing the
Private Placement Legend.
"Restricted Global Note" means a Global Note bearing the Private
Placement Legend.
"Restricted Investment" means any Investment other than a Permitted
Investment.
13
<PAGE> 20
"Restricted Period" means the 40-day restricted period as defined in
Regulation S.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary. If no referent Person is
identified, the term "Restricted Subsidiaries" shall be deemed to refer to
Restricted Subsidiaries of the Company.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Rule 144A " means Rule 144A promulgated under the Securities Act.
"Rule 903" means Rule 903 promulgated under the Securities Act.
"Rule 904" means Rule 904 promulgated under the Securities Act.
"Sale and Leaseback Transaction" means, with respect to any Person,
any direct or indirect arrangement pursuant to which any property (other than
Capital Stock) is sold by such Person or a Subsidiary, or, in the case of the
Company, a Restricted Subsidiary of such Person and is thereafter leased back
from the purchaser or transferee thereof by such Person or one of its
Subsidiaries or, in the case of the Company, one of its Restricted Subsidiaries.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shelf Registration Statement" means the Shelf Registration
Statement as defined in the Registration Rights Agreement.
"Significant Subsidiary" means any Restricted Subsidiary that would
be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation
S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect
on the date of this Indenture.
"Stated Maturity" means, with respect to any installment of interest
or principal on any series of Debt, the date on which such payment of interest
or principal was scheduled to be paid in the original documentation governing
such Debt, and shall not include any contingent obligations to repay, redeem or
repurchase any such interest or principal prior to the date originally scheduled
for the payment thereof.
"Subordinated Debt" means Debt of the Company or a Guarantor
subordinated in right of payment to the Notes or the guarantee of the Guarantor,
as the use may be.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person or a combination
thereof and (ii) any partnership, limited liability company or similar
pass-through entity, (a) the sole general partner or the managing general
partner or managing member of which is such Person or a Subsidiary of such
Person or (b) the only general partners, managing members,
14
<PAGE> 21
or Persons, however designated in corresponding roles, of which are such Person
or of one or more Subsidiaries of such Person (or any combination thereof).
"Telecommunications Business" means, when used in reference to any
Person, that such Person is engaged primarily in the business of transmitting,
or providing services relating to the transmission of, voice or data through
leased transmission facilities (including facilities such as fiber, copper and
switches), and any business related, ancillary or complementary thereto (as
determined in good faith by the Board of Directors).
"Telecommunications Related Assets" means all assets, rights
(contractual or otherwise) and properties, whether tangible or intangible, real
or personal, used or to be used, in connection with a Telecommunications
Business.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
77aaa-77bbbb) as in effect on the date on which this Indenture is qualified
under the TIA.
"Total Common Equity" of any Person means, as of any date of
determination the product of (i) the aggregate number of outstanding primary
shares of Common Stock of such Person on such day (which shall not include any
options or warrants on, or securities convertible or exchangeable into, shares
of Common Stock of such Person) and (ii) the average Closing Price of such
Common Stock over the 20 consecutive Trading Days immediately preceding such
day. If no such Closing Price exists with respect to shares of any such class,
the value of such shares for purposes of clause (ii) of the preceding sentence
shall be determined by the Board of Directors of the Company in good faith and
evidenced by a resolution of the Board of Directors filed with the Trustee.
"Trading Day", with respect to a securities exchange or automated
quotation system, means a day on which such exchange or system is open for a
full day of trading.
"Trustee" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means the successor serving hereunder.
"Unrestricted Global Note" means a permanent global Note in the form
of Exhibit A-l attached hereto that bears the Global Note Legend and that has
the "Schedule of Exchanges of Interests in the Global Note" attached thereto,
and that is deposited with or on behalf of and registered in the name of the
Depositary, representing a series of Notes that do not bear the Private
Placement Legend.
"Unrestricted Definitive Note" means a Definitive Note that does not
bear and is not required to bear the Private Placement Legend.
"Unrestricted Subsidiary" means any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (i) has no Debt other
than Non-Recourse Debt; (ii) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company, unless such agreement, contract, arrangement or
understanding constitutes a Restricted Payment permitted by the Indenture; (iii)
is a Person with respect to which neither the Company nor any of its Restricted
Subsidiaries has any direct or indirect obligation (a) to subscribe for
additional Equity Interests or (b) to
15
<PAGE> 22
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; (iv) has not guaranteed or
otherwise directly or indirectly provided credit support for any Debt of the
Company or any of its Restricted Subsidiaries; and (v) has at least one director
on its board of directors that is not a director or executive officer the
Company or any of its Restricted Subsidiaries or has at least one executive
officer that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries.
"U.S. Person" means a U.S. person as defined in Rule 902(o) under
the Securities Act.
"Vendor Debt" means any Debt of the Company or any Restricted
Subsidiary incurred in connection with the acquisition or construction of
Telecommunications Related Assets.
"Voting Stock" of any Person means Capital Stock of such Person
which ordinarily has voting power for the election of directors (or Persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Weighted Average Life to Maturity" means, when applied to any Debt
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Debt.
"Wholly Owned Restricted Subsidiary" of any Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
shall at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
SECTION 1.2 OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined in
Term Section
---- ----------
<S> <C>
"Additional Notes"...................................... 2.02
"Affiliate Transaction"................................. 4.11
"Asset Sale Offer"...................................... 3.09
"Authentication Order".................................. 2.02
"Change of Control Offer"............................... 4.15
"Change of Control Payment"............................. 4.15
"Change of Control Payment Date"........................ 4.15
"Covenant Defeasance"................................... 8.03
"DTC"................................................... 2.03
"Event of Default"...................................... 6.01
"Excess Proceeds"....................................... 4.10
"incur"................................................. 4.09
</TABLE>
16
<PAGE> 23
<TABLE>
<S> <C>
"Legal Defeasance"...................................... 8.02
"Offer Amount".......................................... 3.09
"Offer Period".......................................... 3.09
"Paying Agent".......................................... 2.03
"Permitted Debt"........................................ 4.09
"Purchase Date" ........................................ 3.09
"Registrar"............................................. 2.03
"Restricted Payments"................................... 4.07
</TABLE>
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following
meanings:
"indenture securities" means the Notes;
"indenture security Holder" means a Holder of a Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
and
"obligor" on the Notes means the Company and any successor obligor
upon the Notes.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
have the meanings so assigned to them.
SECTION 1.4 RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the
plural include the singular;
(5) provisions apply to successive events and transactions;
and
(6) references to sections of or rules under the Securities
Act shall be deemed to include substitute, replacement or successor
sections or rules adopted by the SEC from time to time.
17
<PAGE> 24
ARTICLE 2.
THE NOTES
SECTION 2.1 FORM AND DATING.
(a) General. The Notes and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit A hereto. The Notes
may have notations, legends or endorsements required by law, stock exchange rule
or usage. Each Note shall be dated the date of its authentication. The Notes
shall be in denominations of $1,000 and integral multiples thereof.
The terms and provisions contained in the Notes shall constitute,
and are hereby expressly made, a part of this Indenture and the Company and the
Trustee, by their execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby. However, to the extent any
provision of any Note conflicts with the express provisions of this Indenture,
the provisions of this Indenture shall govern and be controlling.
(b) Global Notes. Notes issued in global form shall be substantially
in the form of Exhibits A-1 or A-2 attached hereto (including the Global Note
Legend thereon and the "Schedule of Exchanges of Interests in the Global Note"
attached thereto). Notes issued in definitive form shall be substantially in the
form of Exhibit A-l attached hereto (but without the Global Note Legend thereon
and without the "Schedule of Exchanges of Interests in the Global Note" attached
thereto). Each Global Note shall represent such of the outstanding Notes as
shall be specified therein and each shall provide that it shall represent the
aggregate principal amount of outstanding Notes from time to time endorsed
thereon and that the aggregate principal amount of outstanding Notes represented
thereby may from time to time be reduced or increased, as appropriate, to
reflect exchanges and redemptions. Any endorsement of a Global Note to reflect
the amount of any increase or decrease in the aggregate principal amount of
outstanding Notes represented thereby shall be made by the Trustee or the Note
Custodian, at the direction of the Trustee, in accordance with instructions
given by the Holder thereof as required by Section 2.06 hereof.
(c) Temporary Global Notes. Notes offered and sold in reliance on
Regulation S shall be issued initially in the form of the Regulation S Temporary
Global Note, which shall be deposited on behalf of the purchasers of the Notes
represented thereby with the Trustee, at its New York office, as custodian for
the Depositary, and registered in the name of the Depositary or the nominee of
the Depositary for the accounts of designated agents holding on behalf of
Euroclear or Cedel Bank, duly executed by the Company and authenticated by the
Trustee as hereinafter provided. The Restricted Period shall be terminated upon
the receipt by the Trustee of (i) a written certificate from the Depositary,
together with copies of certificates from Euroclear and Cedel Bank certifying
that they have received certification of non-United States beneficial ownership
of 100% of the aggregate principal amount of the Regulation S Temporary Global
Notes (except to the extent of any beneficial owners thereof who acquired an
interest therein during the Restricted Period pursuant to another exemption from
registration under the Securities Act and who will take delivery of a beneficial
ownership interest in a 144A Global Note or an IAI Global Note bearing a Private
Placement Legend, all as contemplated by Section 2.06(a)(ii) hereof), and (ii)
an Officers' Certificate from the Company. Following the termination of the
Restricted Period, beneficial interests in the Regulation S Temporary Global
Notes shall be exchanged for beneficial interests in Regulation S Permanent
Global Notes pursuant to the Applicable Procedures. Simultaneously with the
authentication of Regulation S Permanent Global Notes, the Trustee shall cancel
the Regulation S Temporary Global Note. The aggregate principal amount of the
Regulation S Temporary Global Notes and the Regulation S
18
<PAGE> 25
Permanent Global Notes may from time to time be increased or decreased by
adjustments made on the records of the Trustee and the Depositary or its
nominee, as the case may be, in connection with transfers of interest as
hereinafter provided.
(d) Euroclear and Cedel Procedures Applicable. The provisions of the
"Operating Procedures of the Euroclear System" and "Terms and Conditions
Governing Use of Euroclear" and the "General Terms and Conditions of Cedel Bank"
and "Customer Handbook" of Cedel Bank shall be applicable to transfers of
beneficial interests in the Regulation S Temporary Global Notes and the
Regulation S Permanent Global Notes that are held by Participants through
Euroclear or Cedel Bank.
SECTION 2.2 EXECUTION AND AUTHENTICATION.
Two Officers shall sign the Notes for the Company by manual or
facsimile signature.
If an Officer whose signature is on a Note no longer holds that
office at the time a Note is authenticated, the Note shall nevertheless be
valid.
A Note shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed by two
Officers (an "Authentication Order"), authenticate Notes for original issue up
to $425,000,000 aggregate principal amount on the Issue Date. Such
Authentication Order shall specify the amount of the Notes to be authenticated
and the date on which the original issue of Notes are to be authenticated and
any other information necessary for such authentication. The aggregate principal
amount of Notes outstanding at any time may not exceed such amount except as
provided in the following paragraph or in Section 2.07 hereof.
The Trustee shall, upon execution and delivery of a corporate
Authentication Order, authenticate up to approximately $50 million of additional
Notes ("Additional Notes") for issuance under this Indenture, subject to the
covenant described under Section 4.09 hereof. The Company agrees to comply with
all applicable SEC rules and regulations that relate to the issuance and sale of
any such Additional Notes.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Notes. An authenticating agent may authenticate Notes
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with Holders or an
Affiliate of the Company.
SECTION 2.3 REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where Notes may be
presented for registration of transfer or for exchange ("Registrar") and an
office or agency where Notes may be presented for payment ("Paying Agent"). The
Registrar shall keep a register of the Notes and of their transfer and exchange.
The Company may appoint one or more co-registrars and one or more additional
paying agents. The term "Registrar" includes any co-registrar and the term
"Paying Agent" includes any additional paying agent. The Company may change any
Paying Agent or Registrar without notice to any Holder. The Company shall notify
the Trustee in writing of the name and address of any Agent not a party to this
19
<PAGE> 26
Indenture. If the Company fails to appoint or maintain another entity as
Registrar or Paying Agent, the Trustee shall act as such. The Company or any of
its Subsidiaries may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company ("DTC')
to act as Depositary with respect to the Global Notes.
The Company initially appoints the Trustee to act as the Registrar
and Paying Agent and to act as Note Custodian with respect to the Global Notes.
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the Trustee
to agree in writing that the Paying Agent will hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of
principal, premium, if any, or interest on the Notes, and will notify the
Trustee of any default by the Company in making any such payment. While any such
default continues, the Trustee may require a Paying Agent to pay all money held
by it to the Trustee. The Company at any time may require a Paying Agent to pay
all money held by it to the Trustee. Upon payment over to the Trustee, the
Paying Agent (if other than the Company or a Subsidiary) shall have no further
liability for the money. If the Company or a Subsidiary acts as Paying Agent, it
shall segregate and hold in a separate trust fund for the benefit of the Holders
all money held by it as Paying Agent. Upon any bankruptcy or reorganization
proceedings relating to the Company, the Trustee shall serve as Paying Agent for
the Notes.
SECTION 2.5 HOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with TIA Section 312(a). If the Trustee
is not the Registrar, the Company shall furnish to the Trustee at least seven
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of the Holders of
Notes and the Company shall otherwise comply with TIA Section 312(a).
SECTION 2.6 TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Global Notes. A Global Note may not be
transferred as a whole except by the Depositary to a nominee of the Depositary,
by a nominee of the Depositary to the Depositary or to another nominee of the
Depositary, the Depositary or any such nominee to a successor Depositary or a
nominee of such successor Depositary. All Global Notes will be exchanged by the
Company for Definitive Notes if (i) the Company delivers to the Trustee notice
from the Depositary that it is unwilling or unable to continue to act as
Depositary or that it is no longer a clearing agency registered under the
Exchange Act and, in either case, a successor Depositary is not appointed by the
Company within 120 days after the date of such notice from the Depositary or
(ii) the Company in its sole discretion determines that the Global Notes (in
whole but not in part) should be exchanged for Definitive Notes and delivers a
written notice to such effect to the Trustee; provided that in no event shall
the Regulation S Temporary Global Notes be exchanged by the Company for
Definitive Notes prior to (x) the expiration of the Restricted Period and (y)
the receipt by the Registrar of any certificates required pursuant to Rule
903(c)(3)(ii)(B) under the Securities Act. Upon the occurrence of either of the
preceding events in (i) or (ii) above, Definitive Notes shall be issued in such
names as the Depositary shall instruct the Trustee. Global Notes also may be
exchanged or replaced, in whole or in part, as provided in Sections 2.07 and
2.10 hereof. Every Note
20
<PAGE> 27
authenticated and delivered in exchange for, or in lieu of, a Global Note or any
portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof,
shall be authenticated and delivered in the form of, and shall be, a Global
Note. A Global Note may not be exchanged for another Note other than as provided
in this Section 2.06(a); however, beneficial interests in a Global Note may be
transferred and exchanged as provided in Sections 2.06(b), (c) or (f) hereof.
(b) Transfer and Exchange of Beneficial Interests in the Global
Notes. The transfer and exchange of beneficial interests in the Global Notes
shall be effected through the Depositary, in accordance with the provisions of
this Indenture and the Applicable Procedures. Beneficial interests in the
Restricted Global Notes shall be subject to restrictions on transfer comparable
to those set forth herein to the extent required by the Securities Act.
Transfers of beneficial interests in the Global Notes also shall require
compliance with either subparagraph (i) or (ii) below, as applicable, as well as
one or more of the other following subparagraphs, as applicable:
(i) Transfer of Beneficial Interests in the Same Global Note.
Beneficial interests in any Restricted Global Note may be transferred to Persons
who take delivery thereof in the form of a beneficial interest in the same
Restricted Global Note in accordance with the transfer restrictions set forth in
the Private Placement Legend; provided, however, that prior to the expiration of
the Restricted Period, transfers of beneficial interests in the Regulation S
Temporary Global Note may not be made to a U.S. Person or for the account or
benefit of a U.S. Person (other than an Initial Purchaser). Beneficial interests
in any Unrestricted Global Note may be transferred to Persons who take delivery
thereof in the form of a beneficial interest in an Unrestricted Global Note. No
written orders or instructions shall be required to be delivered to the
Registrar to effect the transfers described in this Section 2.06(b)(i).
(ii) All Other Transfers and Exchanges of Beneficial Interests
in Global Notes. In connection with all transfers and exchanges of beneficial
interests that are not subject to Section 2.06(b)(i) above, the transferor of
such beneficial interest must deliver to the Registrar either (A)(1) a written
order from a Participant or an Indirect Participant given to the Depositary in
accordance with the Applicable Procedures directing the Depositary to credit or
cause to be credited a beneficial interest in another Global Note in an amount
equal to the beneficial interest to be transferred or exchanged and (2)
instructions given in accordance with the Applicable Procedures containing
information regarding the Participant account to be credited with such increase
or (B)(1) a written order from a Participant or an Indirect Participant given to
the Depositary in accordance with the Applicable Procedures directing the
Depositary to cause to be issued a Definitive Note in an amount equal to the
beneficial interest to be transferred or exchanged and (2) instructions given by
the Depositary to the Registrar containing information regarding the Person in
whose name such Definitive Note shall be registered to effect the transfer or
exchange referred to in (1) above; provided that in no event shall Definitive
Notes be issued upon the transfer or exchange of beneficial interests in the
Regulation S Temporary Global Notes prior to (x) the expiration of the
Restricted Period and (y) the receipt by the Registrar of any certificates
required pursuant to Rule 903 under the Securities Act. Upon consummation of an
Exchange Offer by the Company in accordance with Section 2.06(f) hereof, the
requirements of this Section 2.06(b)(ii) shall be deemed to have been satisfied
upon receipt by the Registrar of the instructions contained in the Letter of
Transmittal delivered by the Holder of such beneficial interests in the
Restricted Global Notes. Upon satisfaction of all of the requirements for
transfer or exchange of beneficial interests in Global Notes contained in this
Indenture and the Notes or otherwise applicable under the Securities Act, the
Trustee shall adjust the principal amount of the relevant Global Note(s)
pursuant to Section 2.06(h) hereof.
21
<PAGE> 28
(iii) Transfer of Beneficial Interests to Another Restricted
Global Note. A beneficial interest in any Restricted Global Note may be
transferred to a Person who takes delivery thereof in the form of a beneficial
interest in another Restricted Global Note if the transfer complies with the
requirements of Section 2.06(b)(ii) above and the Registrar receives the
following:
(A) if the transferee will take delivery in the form of
a beneficial interest in the 144A Global Note, then the transferor
must deliver a certificate in the form of Exhibit B hereto,
including the certifications in item (1) thereof; and
(B) if the transferee will take delivery in the form of
a beneficial interest in the Regulation S Temporary Global Note or
the Regulation S Permanent Global Note, then the transferor must
deliver a certificate in the form of Exhibit B hereto, including the
certifications in item (2) thereof; and
(C) if the transferee will take delivery in the form of
a beneficial interest in the IAI Global Note, then the transferor
must deliver a certificate in the form of Exhibit B hereto,
including the certifications and certificates and Opinion of Counsel
required by item (3) thereof, if applicable.
(iv) Transfer and Exchange of Beneficial Interests in a
Restricted Global Note for Beneficial Interests in the Unrestricted Global Note.
A beneficial interest in any Restricted Global Note may be exchanged by any
holder thereof for a beneficial interest in an Unrestricted Global Note or
transferred to a Person who takes delivery thereof in the form of a beneficial
interest in an Unrestricted Global Note if the exchange or transfer complies
with the requirements of Section 2.06(b)(ii) above and:
(A) such exchange or transfer is effected pursuant to
the Exchange Offer in accordance with the Registration Rights
Agreement and the holder of the beneficial interest to be
transferred, in the case of an exchange, or the transferee, in the
case of a transfer, certifies in the applicable Letter of
Transmittal or via the Depository's book-entry system that it is not
(1) a broker-dealer, (2) a Person participating in the distribution
of the Exchange Notes or (3) a Person who is an affiliate (as
defined in Rule 144) of the Company;
(B) such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) such transfer is effected by a Participating Broker-
Dealer pursuant to the Exchange Offer Registration Statement in
accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
22
<PAGE> 29
(1) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial interest for a
beneficial interest in an Unrestricted Global Note, a certificate from
such holder in the form of Exhibit C hereto, including the certifications
in item (1)(a) thereof; or
(2) if the holder of such beneficial interest in a
Restricted Global Note proposes to transfer such beneficial interest to a
Person who shall take delivery thereof in the form of a beneficial
interest in an Unrestricted Global Note, a certificate from such holder in
the form of Exhibit B hereto, including the certifications in item (4)
thereof;
and, in each such case set forth in this subparagraph (D), if the
Registrar so requests or if the Applicable Procedures so require, an
Opinion of Counsel in form reasonably acceptable to the Registrar to the
effect that such exchange or transfer is in compliance with the Securities
Act and that the restrictions on transfer contained herein and in the
Private Placement Legend are no longer required in order to maintain
compliance with the Securities Act.
If any such transfer is effected pursuant to subparagraph (B) or (D)
above at a time when an Unrestricted Global Note has not yet been issued, the
Company shall issue and, upon receipt of an Authentication Order in accordance
with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
aggregate principal amount of beneficial interests transferred pursuant to
subparagraph (B) or (D) above.
Beneficial interests in an Unrestricted Global Note cannot be
exchanged for, or transferred to Persons who take delivery thereof in the form
of, a beneficial interest in a Restricted Global Note.
(c) Transfer or Exchange of Beneficial Interests for Definitive
Notes.
(i) Beneficial Interests in Restricted Global Notes to
Restricted Definitive Notes. If any holder of a beneficial interest in a
Restricted Global Note proposes to exchange such beneficial interest for a
Restricted Definitive Note or to transfer such beneficial interest to a Person
who takes delivery thereof in the form of a Restricted Definitive Note, then,
upon receipt by the Registrar of the following documentation:
(A) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial interest
for a Restricted Definitive Note, a certificate from such holder in
the form of Exhibit C hereto, including the certifications in item
(2)(a) thereof;
(B) if such beneficial interest is being transferred to
a QIB in accordance with Rule 144A under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto, including
the certifications in item (1) thereof;
(C) if such beneficial interest is being transferred to
a Non-U.S. Person in an offshore transaction in accordance with Rule
903 or Rule 904 under the Securities Act, a certificate to the
effect set form in Exhibit B hereto, including the certifications in
item (2) thereof;
23
<PAGE> 30
(D) if such beneficial interest is being transferred
pursuant to an exemption from the registration requirements of the
Securities Act in accordance with Rule 144 under the Securities Act,
a certificate to the effect set forth in Exhibit B hereto, including
the certifications in item (3)(a) thereof;
(E) if such beneficial interest is being transferred to
an institutional Accredited Investor in reliance on an exemption
from the registration requirements of the Securities Act other than
those listed in subparagraphs (B) through (D) above, a certificate
to the effect set forth in Exhibit B hereto, including the
certifications, certificates and Opinion of Counsel required by item
(3) thereof, if applicable;
(F) if such beneficial interest is being transferred to
the Company or any of its Subsidiaries, a certificate to the effect
set forth in Exhibit B hereto, including the certifications in item
(3)(b) thereof; or
(G) if such beneficial interest is being transferred
pursuant to an effective registration statement under the Securities
Act, a certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (3)(c) thereof,
the Trustee shall cause the aggregate principal amount of the applicable
Global Note to be reduced accordingly pursuant to Section 2.06(h) hereof,
and the Company shall execute and the Trustee shall authenticate and
deliver to the Person designated in the instructions a Definitive Note in
the appropriate principal amount. Any Definitive Note issued in exchange
for a beneficial interest in a Restricted Global Note pursuant to this
Section 2.06(c) shall be registered in such name or names and in such
authorized denomination or denominations as the holder of such beneficial
interest shall instruct the Registrar through instructions from the
Depositary and the Participant or Indirect Participant. The Trustee shall
deliver such Definitive Notes to the Persons in whose names such Notes are
so registered. Any Definitive Note issued in exchange for a beneficial
interest in a Restricted Global Note pursuant to this Section 2.06(c)(i)
shall bear the Private Placement Legend and shall be subject to all
restrictions on transfer contained therein.
(ii) Beneficial Interest in Regulation S Temporary Global
Notes to Definitive Notes. Notwithstanding Sections 2.06(c)(i)(A) and (C)
hereof, a beneficial interest in a Regulation S Temporary Global Note may not be
exchanged for a Definitive Note or transferred to a Person who takes delivery
thereof in the form of a Definitive Note prior to (x) the expiration of the
Restricted Period and (y) the receipt by the Registrar of any certificates
required pursuant to Rule 903(c)(3)(ii)(B) under the Securities Act, except in
the case of a transfer pursuant to an exemption from the registration
requirements of the Securities Act other than Rule 903 or Rule 904.
(iii) Beneficial Interests in Restricted Global Notes to
Unrestricted Definitive Notes. A holder of a beneficial interest in a Restricted
Global Note may exchange such beneficial interest for an Unrestricted Definitive
Note or may transfer such beneficial interest to a Person who takes delivery
thereof in the form of an Unrestricted Definitive Note only if:
24
<PAGE> 31
(A) such exchange or transfer is effected pursuant to
the Exchange Offer in accordance with the Registration Rights
Agreement and the holder of such beneficial interest, in the case of
an exchange, or the transferee, in the case of a transfer, certifies
in the applicable Letter of Transmittal that it is not (1) a
broker-dealer, (2) a Person participating in the distribution of the
Exchange Notes or (3) a Person who is an affiliate (as defined in
Rule 144) of the Company;
(B) such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) such transfer is effected by a participating broker-
dealer pursuant to the Exchange Offer Registration Statement in
accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial interest in a
Restricted Global Note proposes to exchange such beneficial interest for a
Definitive Note that does not bear the Private Placement Legend, a
certificate from such holder in the form of Exhibit C hereto, including
the certifications in item (1)(b) thereof; or
(2) if the holder of such beneficial interest in a
Restricted Global Note proposes to transfer such beneficial interest to a
Person who shall take delivery thereof in the form of a Definitive Note
that does not bear the Private Placement Legend, a certificate from such
holder in the form of Exhibit B hereto, including the certifications in
item (4) thereof,
and, in each such case set forth in this
subparagraph (D), if the Company so requests or the Applicable Procedures
so require, an Opinion of Counsel in form reasonably acceptable to the
Registrar to the effect that such exchange or transfer is in compliance
with the Securities Act and that the restrictions on transfer contained
herein and in the Private Placement Legend are no longer required in order
to maintain compliance with the Securities Act.
(iv) Beneficial Interests in Unrestricted Global Notes to
Unrestricted Definitive Notes. If any holder of a beneficial interest in an
Unrestricted Global Note proposes to exchange such beneficial interest for an
Unrestricted Definitive Note or to transfer such beneficial interest to a Person
who takes delivery thereof in the form of an Unrestricted Definitive Note, then,
upon satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof, the
Trustee shall cause the aggregate principal amount of the applicable Global Note
to be reduced accordingly pursuant to Section 2.06(h) hereof, and the Company
shall execute and the Trustee shall authenticate and deliver to the Person
designated in the instructions an Unrestricted Definitive Note in the
appropriate principal amount. Any Unrestricted Definitive Note issued in
exchange for a beneficial interest pursuant to this Section 2.06(c)(iii) shall
be registered in such name or names and in such authorized denomination or
denominations as the holder of such beneficial interest shall instruct the
Registrar through instructions from the Depositary and the Participant or
Indirect Participant. The Trustee shall deliver such Unrestricted Definitive
Notes to the Persons in whose names such Notes are so registered. Any
Unrestricted Definitive Note issued in exchange for a beneficial interest
pursuant to this Section 2.06(c)(iii) shall not bear the Private Placement
Legend.
25
<PAGE> 32
(d) Transfer and Exchange of Definitive Notes for Beneficial
Interests.
(i) Restricted Definitive Notes to Beneficial Interests in
Restricted Global Notes. If any Holder of a Restricted Definitive Note proposes
to exchange such Note for a beneficial interest in a Restricted Global Note or
to transfer such Restricted Definitive Notes to a Person who takes delivery
thereof in the form of a beneficial interest in a Restricted Global Note, then,
upon receipt by the Registrar of the following documentation:
(A) if the Holder of such Restricted Definitive Note
proposes to exchange such Note for a beneficial interest in a
Restricted Global Note, a certificate from such Holder in the form
of Exhibit C hereto, including the certifications in item (2)(b)
thereof;
(B) if such Restricted Definitive Note is being
transferred to a QIB in accordance with Rule 144A under the
Securities Act, a certificate to the effect set forth in Exhibit B
hereto, including the certifications in item (1) thereof;
(C) if such Restricted Definitive Note is being
transferred to a Non-U.S. Person in an offshore transaction in
accordance with Rule 903 or Rule 904 under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto, including
the certifications in item (2) thereof;
(D) if such Restricted Definitive Note is being
transferred pursuant to an exemption from the registration
requirements of the Securities Act in accordance with Rule 144 under
the Securities Act, a certificate to the effect set forth in Exhibit
B hereto, including the certifications in item (3)(a) thereof;
(E) if such Restricted Definitive Note is being
transferred to an Institutional Accredited Investor in reliance on
an exemption from the registration requirements of the Securities
Act other than those listed in subparagraphs (B) through (D) above,
a certificate to the effect set forth in Exhibit B hereto, including
the certifications, certificates and Opinion of Counsel required by
item (3) thereof, if applicable;
(F) if such Restricted Definitive Note is being
transferred to the Company or any of its Subsidiaries, a certificate
to the effect set forth in Exhibit B hereto, including the
certifications in item (3)(b) thereof; or
(G) if such Restricted Definitive Note is being
transferred pursuant to an effective registration statement under
the Securities Act, a certificate to the effect set forth in Exhibit
B hereto, including the certifications in item (3)(c) thereof,
26
<PAGE> 33
the Trustee shall cancel the Restricted Definitive Note, increase or cause
to be increased the aggregate principal amount of, in the case of clause
(A) above, the appropriate Restricted Global Note, in the case of clause
(B) above, the 144A Global Note, in the case of clause (C) above, the
Regulation S Global Note and, in all other cases, the IAI Global Note.
(ii) Restricted Definitive Notes to Beneficial Interests in
Unrestricted Global Notes. A Holder of a Restricted Definitive Note may exchange
such Note for a beneficial interest in an Unrestricted Global Note or transfer
such Restricted Definitive Note to a Person who takes delivery thereof in the
form of a beneficial interest in an Unrestricted Global Note only if:
(A) such exchange or transfer is effected pursuant to
the Exchange Offer in accordance with the Registration Rights
Agreement and the Holder, in the case of an exchange, or the
transferee, in the case of a transfer, certifies in the applicable
Letter of Transmittal that it is not (1) a broker-dealer, (2) a
Person participating in the distribution of the Exchange Notes or
(3) a Person who is an affiliate (as defined in Rule 144) of the
Company;
(B) such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) such transfer is effected by a participating broker-
dealer pursuant to the Exchange Offer Registration Statement in
accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Definitive Notes
proposes to exchange such Notes for a beneficial interest in an
Unrestricted Global Note, a certificate from such Holder in the form of
Exhibit C hereto, including the certifications in item (l)(c) thereof; or
(2) if the Holder of such Definitive Notes
proposes to transfer such Notes to a Person who shall take delivery
thereof in the form of a beneficial interest in an Unrestricted Global
Note, a certificate from such Holder in the form of Exhibit B hereto,
including the certifications in item (4) thereof;
and, in each such case set forth in this subparagraph (D), if the Company
so requests or the Applicable Procedures so require, an Opinion of Counsel
in form reasonably acceptable to the Registrar to the effect that such
exchange or transfer is in compliance with the Securities Act and that the
restrictions on transfer contained herein and in the Private Placement
Legend are no longer required in order to maintain compliance with the
Securities Act.
Upon satisfaction of the conditions of any of the subparagraphs in this
Section 2.06(d)(ii), the Trustee shall cancel the Definitive Notes and
increase or cause to be increased the aggregate principal amount of the
Unrestricted Global Note.
27
<PAGE> 34
(iii) Unrestricted Definitive Notes to Beneficial Interests in
Unrestricted Global Notes. A Holder of an Unrestricted Definitive Note may
exchange such Note for a beneficial interest in an Unrestricted Global Note or
transfer such Definitive Notes to a Person who takes delivery thereof in the
form of a beneficial interest in an Unrestricted Global Note at any time. Upon
receipt of a request for such an exchange or transfer, the Trustee shall cancel
the applicable Unrestricted Definitive Note and increase or cause to be
increased the aggregate principal amount of one of the Unrestricted Global
Notes.
If any such exchange or transfer from a Definitive Note to a
beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or
(iii) above at a time when an Unrestricted Global Note has not yet been issued,
the Company shall issue and, upon receipt of an Authentication Order in
accordance with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Notes in an aggregate principal amount equal to the
principal amount of Definitive Notes so transferred.
(e) Transfer and Exchange of Definitive Notes for Definitive Notes.
Upon request by a Holder of Definitive Notes and such Holder's compliance with
the provisions of this Section 2.06(e), the Registrar shall register the
transfer or exchange of Definitive Notes. Prior to such registration of transfer
or exchange, the requesting Holder shall present or surrender to the Registrar
the Definitive Notes duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Registrar duly executed by such Holder or
by his attorney, duly authorized in writing. In addition, the requesting Holder
shall provide any additional certifications, documents and information, as
applicable, required pursuant to the following provisions of this Section
2.06(e).
(i) Restricted Definitive to Restricted Definitive Notes. Any
Restricted Definitive Note may be transferred to and registered in the name of
Persons who take delivery thereof in the form of a Restricted Definitive Note if
the Registrar receives the following:
(A) if the transfer will be made pursuant to Rule 144A
under the Securities Act, then the transferor must deliver a
certificate in the form of Exhibit B hereto, including the
certifications in item (1) thereof;
(B) if the transfer will be made pursuant to Rule 903 or
Rule 904, then the transferor must deliver a certificate in the form
of Exhibit B hereto, including the certifications in item (2)
thereof; and
(C) if the transfer will be made pursuant to any other
exemption from the registration requirements of the Securities Act,
then the transferor must deliver a certificate in the form of
Exhibit B hereto, including the certifications, certificates and
Opinion of Counsel required by item (3) thereof, if applicable.
(ii) Restricted Definitive Notes to Unrestricted Definitive
Notes. Any Restricted Definitive Note may be exchanged by the Holder thereof for
an Unrestricted Definitive Note or transferred to a Person or Persons who take
delivery thereof in the form of an Unrestricted Definitive Note if:
(A) such exchange or transfer is effected pursuant to
the Exchange Offer in accordance with the Registration Rights
Agreement and the Holder, in the case of an exchange, or the
transferee, in the case of
28
<PAGE> 35
a transfer, certifies in the applicable Letter of Transmittal that
it is not (1) a broker-dealer, (2) a Person participating in the
distribution of the Exchange Notes or (3) a Person who is an
affiliate (as defined in Rule 144) of the Company;
(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) any such transfer is effected by a participating
broker-dealer pursuant to the Exchange Offer Registration Statement
in accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the Holder of such Restricted Definitive
Notes proposes to exchange such Notes for an Unrestricted Definitive Note,
a certificate from such Holder in the form of Exhibit C hereto, including
the certifications in item (1)(d) thereof, or
(2) if the Holder of such Restricted Definitive
Notes proposes to transfer such Notes to a Person who shall take delivery
thereof in the form of an Unrestricted Definitive Note, a certificate from
such Holder in the form of Exhibit B hereto, including the certifications
in item (4) thereof;
and, in each such case set forth in this subparagraph (D), an Opinion of
Counsel in form reasonably acceptable to the Company to the effect that
such exchange or transfer is in compliance with the Securities Act and
that the restrictions on transfer contained herein and in the Private
Placement Legend are no longer required in order to maintain compliance
with the Securities Act.
(iii) Unrestricted Definitive Notes to Unrestricted Definitive
Notes. A Holder of Unrestricted Definitive Notes may transfer such Notes to a
Person who takes delivery thereof in the form of an Unrestricted Definitive
Note. Upon receipt of a request to register such a transfer, the Registrar shall
register the Unrestricted Definitive Notes pursuant to the instructions from the
Holder thereof.
(f) Exchange Offer. Upon the occurrence of the Exchange Offer in
accordance with the Registration Rights Agreement, the Company shall issue and,
upon receipt of an Authentication Order in accordance with Section 2.02, the
Trustee shall authenticate (i) one or more Unrestricted Global Notes in an
aggregate principal amount equal to the principal amount of the beneficial
interests in the Restricted Global Notes tendered for acceptance by Persons that
certify in the applicable Letters of Transmittal that (x) they are not
broker-dealers, (y) they are not participating in a distribution of the Exchange
Notes and (z) they are not affiliates (as defined in Rule 144) of the Company,
and accepted for exchange in the Exchange Offer and (ii) Definitive Notes in an
aggregate principal amount equal to the principal amount of the Restricted
Definitive Notes accepted for exchange in the Exchange Offer. Concurrently with
the issuance of such Notes, the Trustee shall cause the aggregate principal
amount of the applicable Restricted Global Notes to be reduced accordingly, and
the Company shall execute and the Trustee shall authenticate and deliver to the
Persons designated by the Holders of Definitive Notes so accepted Definitive
Notes in the appropriate principal amount.
29
<PAGE> 36
(g) Legends. The following legends shall appear on all Global Notes
and Definitive Notes issued under this Indenture unless specifically stated
otherwise in the applicable provisions of this Indenture.
(i) Private Placement Legend
(A) Except as permitted by subparagraph (B) below, each
Global Note and each Definitive Note (and all Notes issued in
exchange therefor or substitution thereof) shall bear the legend in
substantially the following form.
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER
THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT
FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A) TO OFFER,
SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY,
(2) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE
UNDER THE SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A, (4) PURSUANT TO
OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES
ACT, (5) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF
SUBPARAGRAPH (A),(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES
ACT (AND BASED ON AN OPINION OF COUNSEL), OR (6) PURSUANT TO ANY OTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE
SECURITIES ACT (AND BASED ON AN OPINION OF COUNSEL IF THE COMPANY SO
REQUESTS), SUBJECT IN EACH OF THE FOREGOING CASES TO APPLICABLE
JURISDICTION, AND (B)THAT IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED
TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE
RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
(B) Notwithstanding the foregoing, any Global Note or
Definitive Note issued pursuant to subparagraphs (b)(iv), (c)(ii),
(c)(iii), (c)(iv), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to
this Section 2.06 (and all Notes issued in exchange therefor or
substitution thereof) shall not bear the Private Placement Legend.
(ii) Global Note Legend. Each Global Note shall bear a legend
in substantially the following form:
"THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE
30
<PAGE> 37
BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY
CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON
AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS
GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION
2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE
TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND
(IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH
THE PRIOR WRITTEN CONSENT OF THE COMPANY."
(iii) Regulation S Temporary Global Note Legend. The
Regulation S Temporary Global Note shall bear a legend in substantially the
following form:
"THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE
CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES,
ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER
NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL
BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON."
(iv) Cancellation and/or Adjustment of Global Notes. At such
time as all beneficial interests in a particular Global Note have been exchanged
for Definitive Notes or a particular Global Note has been redeemed, repurchased
or cancelled in whole and not in part, each such Global Note shall be returned
to or retained and cancelled by the Trustee in accordance with Section 2.11
hereof. At any time prior to such cancellation, if any beneficial interest in a
Global Note is exchanged for or transferred to a Person who will take delivery
thereof in the form of a beneficial interest in another Global Note or for
Definitive Notes, the principal amount of Notes represented by such Global Note
shall be reduced accordingly and an endorsement shall be made on such Global
Note by the Trustee or by the Depositary at the direction of the Trustee to
reflect such reduction; and if the beneficial interest is being exchanged for or
transferred to a Person who will take delivery thereof in the form of a
beneficial interest in another Global Note, such other Global Note shall be
increased accordingly and an endorsement shall be made on such Global Note by
the Trustee or by the Depositary at the direction of the Trustee to reflect such
increase.
(h) General Provisions Relating to Transfers and Exchanges.
(i) To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate Global Notes and
Definitive Notes upon the Company's order or at the Registrar's request.
(ii) No service charge shall be made to a holder of a
beneficial interest in a Global Note or to a Holder of a Definitive Note for any
registration of transfer or exchange, but the Company may require payment of a
sum sufficient to cover any transfer tax or similar governmental charge payable
in connection therewith (other than any such transfer taxes or similar
governmental charge payable upon exchange or transfer pursuant to Sections 2.10,
3.06, 3.09, 4.10, 4.15 and 9.05 hereof).
(iii) The Registrar shall not be required to register the
transfer of or exchange any Note selected for redemption in whole or in part,
except the unredeemed portion of any Note being redeemed in part.
(iv) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or Definitive Notes shall
be the valid obligations of the Company,
31
<PAGE> 38
evidencing the same debt, and entitled to the same benefits under this
Indenture, as the Global Notes or Definitive Notes surrendered upon such
registration of transfer or exchange.
(v) The Company shall not be required (A) to issue, to
register the transfer of or to exchange any Notes during a period beginning at
the opening of business 15 days before the day of any selection of Notes for
redemption under Section 3.02 hereof and ending at the close of business on the
day of selection, (B) to register the transfer of or to exchange any Note so
selected for redemption in whole or in part, except the unredeemed portion of
any Note being redeemed in part or (C) to register the transfer of or to
exchange a Note between a record date and the next succeeding Interest Payment
Date.
(vi) Prior to due presentment for the registration of a
transfer of any Note, the Trustee, any Agent and the Company may deem and treat
the Person in whose name any Note is registered as the absolute owner of such
Note for the purpose of receiving payment of principal of and interest on such
Notes and for all other purposes, and none of the Trustee, any Agent or the
Company shall be affected by notice to the contrary.
(vii) The Trustee shall authenticate Global Notes and
Definitive Notes in accordance with the provisions of Section 2.02 hereof.
(viii) All certifications, certificates and Opinions of
Counsel required to be submitted to the Registrar pursuant to this Section 2.06
to effect a registration of transfer or exchange may be submitted by facsimile,
to be followed promptly by originals.
SECTION 2.7 REPLACEMENT NOTES.
If any mutilated Note is surrendered to the Trustee or the Company
and the Trustee receives evidence to its satisfaction of the destruction, loss
or theft of any Note, the Company shall issue and the Trustee, upon receipt of
an Authentication Order, shall authenticate a replacement Note if the Trustee's
requirements are met. If required by the Trustee or the Company, an indemnity
bond must be supplied by the Holder that is sufficient in the judgment of the
Trustee and the Company to protect the Company, the Trustee, any Agent and any
authenticating agent from any loss that any of them may suffer if a Note is
replaced. The Company may charge for its expenses in replacing a Note.
Every replacement Note is an additional obligation of the Company
and shall be entitled to all of the benefits of this Indenture equally and
proportionately with all other Notes duly issued hereunder.
SECTION 2.8 OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes authenticated by
the Trustee except for those cancelled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Note effected by the
Trustee in accordance with the provisions hereof, and those described in this
Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note
does not cease to be outstanding because the Company or an Affiliate of the
Company holds the Note.
If a Note is replaced pursuant to Section 2.07 hereof, it ceases to
be outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a bona fide purchaser.
32
<PAGE> 39
If the principal amount of any Note is considered paid under Section
4.01 hereof, it ceases to be outstanding or, if applicable, interest on it
ceases to accrue.
If the Paying Agent (other than the Company, a Subsidiary or an
Affiliate of any thereof) holds, on a redemption date or maturity date, money
sufficient to pay Notes payable on that date, then on and after that date such
Notes shall be deemed to be no longer outstanding and shall cease to accrue
interest.
SECTION 2.9 TREASURY NOTES.
In determining whether the Holders of the required principal amount
of Notes have concurred in any direction, waiver or consent, Notes owned by the
Company, or by any Person directly or indirectly controlling or controlled by or
under direct or indirect common control with the Company, shall be considered as
though not outstanding, except that for the purposes of determining whether the
Trustee shall be protected in relying on any such direction, waiver or consent,
only Notes that a Responsible Officer of the Trustee knows are so owned shall be
so disregarded.
SECTION 2.10 TEMPORARY NOTES.
Until certificates representing Notes are ready for delivery, the
Company may prepare and the Trustee, upon receipt of an Authentication Order,
shall authenticate temporary Notes. Temporary Notes shall be substantially in
the form of certificated Notes but may have variations that the Company
considers appropriate for temporary Notes and as shall be reasonably acceptable
to the Trustee. Without unreasonable delay, the Company shall prepare and the
Trustee shall authenticate definitive Notes in exchange for temporary Notes.
Holders of temporary Notes shall be entitled to all of the benefits
of this Indenture.
SECTION 2.11 CANCELLATION.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else shall cancel all Notes surrendered for registration of
transfer, exchange, payment, replacement or cancellation and shall return such
cancelled Notes to the Company upon written request. Certification of the
destruction of all cancelled Notes shall be delivered to the Company. The
Company may not issue new Notes to replace Notes that it has paid or that have
been delivered to the Trustee for cancellation.
SECTION 2.12 DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the Notes, it
shall pay the defaulted interest in any lawful manner plus, to the extent
lawful, interest payable on the defaulted interest, to the Persons who are
Holders on a subsequent special record date, in each case at the rate provided
in the Notes and in Section 4.01 hereof. The Company shall notify the Trustee in
writing of the amount of defaulted interest proposed to be paid on each Note and
the date of the proposed payment. The Company shall fix or cause to be fixed
each such special record date and payment date, provided that no such special
record date shall be less than 10 days prior to the related payment date for
such defaulted interest. At least 15 days before the special record date, the
Company (or, upon the written request of the Company, the Trustee in the
33
<PAGE> 40
name and at the expense of the Company) shall mail or cause to be mailed to
Holders a notice that states the special record date, the related payment date
and the amount of such interest to be paid.
SECTION 2.13 CUSIP NUMBERS.
The Company in issuing the Notes may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use CUSIP numbers in notices of
redemption as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness of such numbers either as
printed on the Notes or as contained in any notice of a redemption and that
reliance may be placed only on the other identification numbers printed on the
Notes, and any such redemption shall not be affected by any defect in or the
omission of such numbers. The Company will promptly notify the Trustee of any
change in the CUSIP numbers.
ARTICLE 3.
REDEMPTION AND PREPAYMENT
SECTION 3.1 NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee,
at least 45 days (unless a shorter time period is acceptable to the Trustee) but
not more than 60 days before a redemption date, an Officers' Certificate setting
forth (i) the clause of this Indenture pursuant to which the redemption shall
occur, (ii) the redemption date, (iii) the principal amount of Notes to be
redeemed, (iv) the redemption price and (v) the CUSIP numbers of the Notes to be
redeemed.
SECTION 3.2 SELECTION OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed or purchased in an
offer to purchase at any time, the Trustee shall select the Notes to be redeemed
or purchased among the Holders of the Notes in compliance with the requirements
of the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not so listed, on a pro rata basis, by lot or in
accordance with any other method the Trustee considers fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. In the event
of partial redemption by lot, the particular Notes to be redeemed shall be
selected, unless otherwise provided herein, not less than 30 nor more than 60
days prior to the redemption date by the Trustee from the outstanding Notes not
previously called for redemption.
The Trustee shall promptly notify the Company in writing of the
Notes selected for redemption and, in the case of any Note selected for partial
redemption, the principal amount thereof to be redeemed. Notes and portions of
Notes selected shall be in denominations of $1,000 or integral multiples of
$1,000 in principal amount; except that if all of the Notes of a Holder are to
be redeemed, the entire outstanding amount of Notes held by such Holder, even if
not an integral multiple of $1,000, shall be redeemed. Except as provided in the
preceding sentence, provisions of this Indenture that apply to Notes called for
redemption also apply to portions of Notes called for redemption.
SECTION 3.3 NOTICE OF REDEMPTION.
34
<PAGE> 41
Subject to the provisions of Section 3.09 hereof, at least 30 days
but not more than 60 days before a redemption date, the Company shall mail or
cause to be mailed, by first class mail, a notice of redemption to each Holder
whose Notes are to be redeemed at its registered address.
The notice shall identify the Notes to be redeemed (including CUSIP
numbers) and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the redemption date
upon surrender of such Note, a new Note or Notes in principal amount equal to
the unredeemed portion shall be issued upon cancellation of the original Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(f) that, unless the Company defaults in making such redemption
payment, interest on Notes called for redemption will cease to accrue on and
after the redemption date;
(g) the paragraph of the Notes and/or Section of this Indenture
pursuant to which the Notes called for redemption are being redeemed; and
(h) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the Notes.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense; provided, however, that the
Company shall have delivered to the Trustee, at least 45 days prior to the
redemption date, an Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in such notice as provided
in the preceding paragraph.
SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.03
hereof, Notes called for redemption become irrevocably due and payable on the
redemption date at the redemption price. A notice of redemption may not be
conditional.
SECTION 3.5 DEPOSIT OF REDEMPTION PRICE.
Prior to 10:00 a.m. on the redemption date, the Company shall
deposit with the Trustee or with the Paying Agent money sufficient to pay the
redemption price of and accrued interest on all Notes to be redeemed on that
date. The Trustee or the Paying Agent shall promptly return to the Company any
money deposited with the Trustee or the Paying Agent by the Company in excess of
the amounts necessary to pay the redemption price of, and accrued interest on,
all Notes to be redeemed.
35
<PAGE> 42
If the Company complies with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrue on
the Notes or the portions of Notes called for redemption. If a Note is redeemed
on or after an interest record date but on or prior to the related interest
payment date, then any accrued and unpaid interest shall be paid to the Person
in whose name such Note was registered at the close of business on such record
date. If any Note called for redemption shall not be so paid upon surrender for
redemption because of the failure of the Company to comply with the preceding
paragraph, interest shall be paid on the unpaid principal, from the redemption
date until such principal is paid, and to the extent lawful on any interest not
paid on such unpaid principal, in each case at the rate provided in the Notes
and in Section 4.01 hereof.
SECTION 3.6 NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the Company shall
issue and, upon the Company's written request in the form of an Authentication
Order, the Trustee shall authenticate for the Holder at the expense of the
Company a new Note equal in principal amount to the unredeemed portion of the
Note surrendered.
SECTION 3.7 OPTIONAL REDEMPTION.
(a) Except as set forth in clause (b) of this Section 3.07, the
Company shall not have the option to redeem the Notes pursuant to this Section
3.07 prior to February 15, 2005. Thereafter, the Company shall have the option
to redeem the Notes, in whole or in part, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon, if any, to the applicable redemption date, if redeemed during
the twelve-month period beginning on February 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2005....................................................... 106.00%
2006....................................................... 104.00%
2007....................................................... 102.00%
2008 and thereafter........................................ 100.00%
</TABLE>
(b) Notwithstanding the provisions of clause (a) of this Section
3.07, at any time on or prior to February 15, 2003, the Company, at its option,
may use the net cash proceeds (but only to the extent such proceeds consist of
cash or Cash Equivalents) of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the Notes issued on the Issue Date under the Indenture at
a redemption price of 112.00% of the aggregate principal amount of the Notes,
plus accrued and unpaid interest, if any, to the date of redemption; provided
that Notes representing at least $276.25 million of the aggregate principal
amount of the Notes remains outstanding immediately after the occurrence of such
redemption (excluding Notes held by the Company and its Subsidiaries). In order
to effect the foregoing redemption, the Company must mail a notice of redemption
no later than 30 days after the related Public Equity Offering and must
consummate such redemption within 60 days of the closing of such Public Equity
Offering.
(c) Any redemption pursuant to this Section 3.07 shall be made
pursuant to the provisions of Section 3.01 through 3.06 hereof.
SECTION 3.8 MANDATORY REDEMPTION.
36
<PAGE> 43
The Company shall not be required to make mandatory redemption
payments with respect to the Notes.
SECTION 3.9 OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS.
In the event that, pursuant to Section 4.10 hereof, the Company
shall be required to commence an offer to all Holders to purchase Notes (an
"Asset Sale Offer"), it shall follow the procedures specified below.
The Asset Sale Offer shall remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Offer Period"). No later than
five Business Days after the termination of the Offer Period (the "Purchase
Date"), the Company shall purchase the principal amount of Notes required to be
purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less than
the Offer Amount has been tendered, all Notes tendered in response to the Asset
Sale Offer. Payment for any Notes so purchased shall be made in the same manner
as interest payments are made.
If the Purchase Date is on or after an interest record date and on
or before the related interest payment date, any accrued and unpaid interest
shall be paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest shall be payable to
Holders who tender Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company shall
send, by first class mail, a notice to the Trustee and each of the Holders. The
notice shall contain all instructions and materials necessary to enable such
Holders to tender Notes pursuant to the Asset Sale Offer. The Asset Sale Offer
shall be made to all Holders. The notice, which shall govern the terms of the
Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer shall
remain open;
(b) the Offer Amount, the purchase price and the Purchase Date;
(c) that any Note not tendered or accepted for payment shall
continue to accrue interest;
(d) that, unless the Company defaults in making such payment, any
Note accepted for payment pursuant to the Asset Sale Offer shall cease to accrue
interest after the Purchase Date;
(e) that Holders electing to have a Note purchased pursuant to an
Asset Sale Offer may only elect to have all of such Note purchased and may not
elect to have only a portion of such Note purchased;
(f) that Holders electing to have a Note purchased pursuant to any
Asset Sale Offer shall be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, or
transfer by book-entry transfer, to the Company, a depositary, if appointed by
the Company, or a Paying Agent at the address specified in the notice at least
three Business Days before the Purchase Date;
37
<PAGE> 44
(g) that Holders shall be entitled to withdraw their election if the
Company, the depositary or the Paying Agent, as the case may be, receives, not
later than the expiration of the Offer Period, a facsimile transmission or
letter setting forth the name of the Holder, the certificate number, the
principal amount of the Note the Holder delivered for purchase and a statement
that such Holder is withdrawing his election to have such Note purchased;
(h) that, if the aggregate principal amount of Notes surrendered by
Holders exceeds the Offer Amount, the Company shall select the Notes to be
purchased on a pro rata basis (with such adjustments as may be deemed
appropriate by the Company so that only Notes in denominations of $1,000, or
integral multiples thereof, shall be purchased); and
(i) that Holders whose Notes were purchased only in part shall be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered (or transferred by book-entry transfer).
On or before 10:00 a.m. on the Purchase Date, the Company shall, to
the extent lawful, accept for payment, on a pro rata basis to the extent
necessary, the Offer Amount of Notes or portions thereof tendered pursuant to
the Asset Sale Offer, or if less than the Offer Amount has been tendered, all
Notes tendered, and shall deliver to the Trustee an Officers' Certificate
stating that such Notes or portions thereof were accepted for payment by the
Company in accordance with the terms of this Section 3.09. The Company, the
Depositary or the Paying Agent, as the case may be, shall promptly (but in any
case not later than five Business Days after the Purchase Date) mail or deliver
to each tendering Holder an amount equal to the purchase price of the Notes
tendered by such Holder and accepted by the Company for purchase, and the
Company shall promptly issue a new Note, and the Trustee, upon written request
from the Company shall authenticate and mail or deliver such new Note to such
Holder, in a principal amount equal to any unpurchased portion of the Note
surrendered. Any Note not so accepted shall be promptly mailed or delivered or
caused to be delivered by the Company to the Holder thereof. The Company shall
publicly announce the results of the Asset Sale Offer on the Purchase Date.
Other than as specifically provided in this Section 3.09, any
purchase pursuant to this Section 3.09 shall be made pursuant to the provisions
of Sections 3.01 through 3.06 hereof.
ARTICLE 4.
COVENANTS
SECTION 4.1 PAYMENT OF NOTES.
The Company shall pay or cause to be paid the principal amount of,
premium, if any, and interest on the Notes on the dates and in the manner
provided in the Notes. Principal amount, premium, if any, and interest shall be
considered paid on the date due if the Paying Agent, if other than the Company
or a Subsidiary thereof, holds as of 10:00 a.m. Eastern Time on the due date
money deposited by the Company in immediately available funds and designated for
and sufficient to pay all principal amount, premium, if any, and interest then
due.
The Company shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on overdue principal at the rate equal
to 1% per annum in excess of the then applicable interest rate on the Notes to
the extent lawful; it shall pay interest (including post-petition interest in
any
38
<PAGE> 45
proceeding under any Bankruptcy Law) on overdue installments of interest
(without regard to any applicable grace period) at the same rate to the extent
lawful.
SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in the Borough of Manhattan, The City of
New York, an office or agency (which may be an office of the Trustee or an
affiliate of the Trustee, Registrar or co-registrar) where Notes may be
surrendered for registration of transfer or for exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may be
served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee.
The Company may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; provided,
however, that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in the Borough of
Manhattan, The City of New York for such purposes. The Company shall give prompt
written notice to the Trustee of any such designation or rescission and of any
change in the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of the
Trustee as one such office or agency of the Company in accordance with Section
2.03.
SECTION 4.3 REPORTS.
(a) Whether or not required by the rules and regulations of the SEC,
so long as any Notes are outstanding, the Company shall furnish to the Holders
of Notes and file with the SEC (unless the SEC will not accept such a filing)
(i) all quarterly and annual financial information that would be required to be
contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were
required to file such Forms, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" that describes the financial
condition and results of operations of the Company and its consolidated
Subsidiaries (showing in reasonable detail, either on the face of the financial
statements or in the footnotes thereto and in Management's Discussion and
Analysis of Financial Condition and Results of Operations, the financial
condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the SEC on Form 8-K if the Company were required to file such reports, in each
case within the time periods specified in the SEC's rules and regulations. The
Company shall at all times comply with TIA Section 314(a).
(b) For so long as any Notes remain outstanding, the Company shall
furnish to the Holders, securities analysts, prospective investors and
beneficial owners of the Notes, upon their request, the information required to
be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
SECTION 4.4 COMPLIANCE CERTIFICATE.
(a) The Company shall deliver to the Trustee, within 105 days after
the end of each fiscal year, an Officers' Certificate stating that a review of
the activities of the Company and its Subsidiaries
39
<PAGE> 46
during the preceding fiscal year has been made under the supervision of the
signing Officers with a view to determining whether the Company has kept,
observed, performed and fulfilled its obligations under this Indenture, and
further stating, as to each such Officer signing such certificate, that to the
best of his or her knowledge the Company has kept, observed, performed and
fulfilled each and every covenant contained in this Indenture and is not in
default in the performance or observance of any of the terms, provisions and
conditions of this Indenture (or, if a Default or Event of Default shall have
occurred, describing all such Defaults or Events of Default of which he or she
may have knowledge and what action the Company is taking or proposes to take
with respect thereto) and that to the best of his or her knowledge no event has
occurred and remains in existence by reason of which payments on account of the
principal of or interest, if any, on the Notes is prohibited or if such event
has occurred, a description of the event and what action the Company is taking
or proposes to take with respect thereto. For purposes of this paragraph, such
compliance shall be determined without regard to any period of grace or
requirement of notice provided under the Indenture.
(b) So long as not contrary to the then current recommendations of
the American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.03(a) above shall be accompanied by a
written statement of the Company's independent public accountants (who shall be
a firm of established national reputation) that in making the examination
necessary for certification of such financial statements, nothing has come to
their attention that would lead them to believe that the Company has violated
any provisions of Article 4 or Article 5 hereof or, if any such violation has
occurred, specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or indirectly to
any Person for any failure to obtain knowledge of any such violation.
(c) The Company shall, so long as any of the Notes are outstanding,
deliver to the Trustee, forthwith upon any Officer becoming aware of any Default
or Event of Default, an Officers' Certificate specifying such Default or Event
of Default and what action the Company is taking or proposes to take with
respect thereto.
SECTION 4.5 TAXES.
The Company shall pay, and shall cause each of its Subsidiaries to pay,
prior to delinquency, all material taxes, assessments, and governmental levies
except such as are contested in good faith and by appropriate proceedings or
where the failure to effect such payment is not adverse in any material respect
to the Holders of the Notes.
SECTION 4.6 STAY, EXTENSION AND USURY LAWS.
The Company covenants (to the extent that it may lawfully do so)
that it shall not at any time insist upon, plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay, extension or usury law
wherever enacted, now or at any time hereafter in force, that may affect the
covenants or the performance of this Indenture; and the Company (to the extent
that it may lawfully do so) hereby expressly waives all benefit or advantage of
any such law, and covenants that it shall not, by resort to any such law,
hinder, delay or impede the execution of any power herein granted to the
Trustee, but shall suffer and permit the execution of every such power as though
no such law has been enacted.
SECTION 4.7 RESTRICTED PAYMENTS.
40
<PAGE> 47
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make
any other payment or distribution on account of the Company's or any of its
Restricted Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving the Company or
any of its Restricted Subsidiaries) or to the direct or indirect holders of the
Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or to the Company or a
Restricted Subsidiary of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value (including, without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any direct or indirect parent of the Company (other than any such
Equity Interests owned by the Company or any Restricted Subsidiary of the
Company); (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Debt that is subordinated
to the Notes, except a payment of interest or principal at Stated Maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable two- quarter Measurement Period, have
been permitted to incur at least $1.00 of additional Debt pursuant to the Debt
to Annualized Cash Flow Ratio test set forth in the first paragraph of Section
4.09 hereof; and
(c) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the issue date of the 1999 Notes (excluding Restricted
Payments permitted by clauses (ii), (iii), (iv) and (vi) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 100% of the
Consolidated Cash Flow of the Company for the period (taken as one accounting
period) from the beginning of the first fiscal quarter commencing after the
issue date of the 1999 Notes to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Cash Flow for such period
is a deficit, less 100% of such deficit), minus 150% of consolidated interest
expense for the period (treated as one accounting period) from the issue date of
the 1999 notes to the end of the most recent fiscal quarter for which internal
financial statements are available, plus (ii) 100% of the aggregate net cash
proceeds received by the Company since the issue date of the 1999 Notes as a
contribution to its common equity capital or from the issue or sale of Equity
Interests of the Company (other than Disqualified Stock) or from the issue or
sale of Disqualified Stock or debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of the
Company), plus (iii) to the extent that any Restricted Investment that was made
after the issue date of the 1999 Notes is sold for cash or otherwise liquidated
or repaid for cash, the lesser of (A) the cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment.
The foregoing provisions shall not prohibit (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of this
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Debt or Equity Interests of the Company in
exchange for, or out of the net cash proceeds
41
<PAGE> 48
of the substantially concurrent sale (other than to a Subsidiary of the Company)
of, other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (c)(ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of subordinated Debt
with the net cash proceeds from an incurrence of Permitted Refinancing Debt;
(iv) the payment of any dividend by a Restricted Subsidiary of the Company to
the holders of its common Equity Interests on a pro rata basis; (v) the
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any Subsidiary of the Company held by any
member of the Company's or any of its Restricted Subsidiaries' management;
provided, that (A) the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $250,000 in any
twelve-month period and (B) no Default or Event of Default shall have occurred
and be continuing immediately after such transaction; and (vi) other Restricted
Payments not to exceed $10.0 million in the aggregate at any time outstanding.
The amount of all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined by
the Board of Directors whose resolution with respect thereto shall be delivered
to the Trustee, such determination to be based upon an opinion or appraisal
issued by an accounting, appraisal or investment banking firm of national
standing if such fair market value exceeds $5.0 million. Not later than the date
of making any Restricted Payment, the Company shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by this Section
4.07 were computed, together with a copy of any fairness opinion or appraisal
required by this Indenture.
The Board of Directors may designate any Restricted Subsidiary to be
an Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash or
Cash Equivalents) in the Subsidiary so designated will be deemed to be
Restricted Payments at the time of such designation and will reduce the amount
available for Restricted Payments under the first paragraph of this covenant.
All such outstanding Investments will be deemed to constitute Investments in an
amount equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted Payment
would be permitted at such time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the Trustee
a certified copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by this Section 4.07.
If, at any time, any Unrestricted Subsidiary would fail to meet the
requirements of the definition of an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of this Indenture
and any Debt of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Debt is not permitted to
be incurred as of such date under the covenant described in Section 4.09, the
Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Debt by a Restricted
Subsidiary of the Company of any outstanding Debt of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Debt is
permitted under the covenant described under
42
<PAGE> 49
Section 4.09, calculated on a pro forma basis as if such designation had
occurred at the beginning of the two- quarter Measurement Period, and (ii) no
Default or Event of Default would be in existence following such designation.
SECTION 4.8 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (a) pay dividends or make any other distributions to
the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or
(2) with respect to any other interest or participation in, or measured by, its
profits, (b) pay any indebtedness owed to the Company or any of its Restricted
Subsidiaries, (c) make loans or advances to the Company or any of its Restricted
Subsidiaries or (d) transfer any of its properties or assets to the Company or
any of its Restricted Subsidiaries. However, the foregoing restrictions will not
apply to encumbrances or restrictions existing under or by reason of (a)
Existing Debt as in effect on the date of this Indenture, (b) this Indenture and
the Notes, (c) applicable law, (d) any instrument governing Debt or Capital
Stock of a Person acquired by the Company or any of its Restricted Subsidiaries
as in effect at the time of such acquisition (except to the extent such Debt was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Debt, such Debt was permitted
by the terms of the Indenture to be incurred, (e) customary non-assignment
provisions in contracts entered into in the ordinary course of business, (f)
customary restrictions on encumbrance, transfer or disposition of financed
assets pursuant to agreements governing Purchase Money Debt and Vendor Debt
permitted by this Indenture on the property so acquired, (g) any agreement for
the sale of a Restricted Subsidiary that restricts distributions by that
Restricted Subsidiary pending its sale, (h) Permitted Refinancing Debt, provided
that the restrictions contained in the agreements governing such Permitted
Refinancing Debt are no more restrictive, taken as a whole, than those contained
in the agreements governing the Debt being refinanced, (i) secured Debt
otherwise permitted to be incurred pursuant to the provisions of Section 4.12
hereof that limit the right of the debtor to dispose of the assets securing such
Debt, (j) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements and other similar agreements entered
into in the ordinary course of business, (k) restrictions on cash or other
deposits or net worth imposed by customers under contracts entered into in the
ordinary course of business; and (1) any Credit Facility if (1) the encumbrance
limits, but does not prohibit, the payment of dividends, (2) the encumbrance or
restriction is not more disadvantageous to the holders of the Notes than is
customary in comparable Credit Facilities, as determined by the Board of
Directors and (3) the Board of Directors of the Company determines that any such
encumbrance or restriction is not reasonably expected to materially affect the
Company's ability to satisfy any payment obligations on the Notes, the 1999
Notes or the 1998 Notes, when the Company's same may become due and payable,
whether including payments made in respect of principal, interest, premium, if
any, repayment or Change of Control.
SECTION 4.9 INCURRENCE OF DEBT AND ISSUANCE OF DISQUALIFIED STOCK.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Debt (including Acquired Debt) and
the Company shall not issue any Disqualified Stock; provided, however, that the
Company may incur Debt (including Acquired Debt) or issue shares of Disqualified
Stock if the Company's Debt to Annualized Cash Flow Ratio is no greater than 6.0
to 1.0. Notwithstanding the foregoing, the Company may not incur any
43
<PAGE> 50
Debt that is contractually subordinated in right of payment to any other Debt of
the Company unless such Debt is also contractually subordinated in right of
payment to the Notes on substantially identical terms (except to the extent that
any such subordination terms are inapplicable to the Notes); provided, however,
that no Debt of the Company shall be deemed to be contractually subordinated in
right of payment to any other Debt of the Company solely by virtue of being
unsecured.
The provisions of the first paragraph of this covenant will not
apply to the incurrence of any of the following items of Debt (collectively,
"Permitted Debt'), each such item to be given independent effect:
(i) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Debt under Credit Facilities in an aggregate principal
amount (with letters of credit being deemed to have a principal amount
equal to the maximum reimbursement obligations of the Company and/or any
of its Restricted Subsidiaries thereunder) not to exceed the greater of
$250.0 million or the Borrowing Base at any one time outstanding, less the
aggregate amount of all Net Proceeds of Asset Sales applied to permanently
reduce the commitments with respect to such Debt pursuant to the covenant
described in Section 4.10;
(ii) the incurrence by the Company and/or any of its
Restricted Subsidiaries of Vendor Debt, provided that the aggregate amount
of such Vendor Debt incurred does not exceed the total cost of the
Telecommunications Related Assets acquired and financed by such Vendor
Debt (including acquisitions of Capital Stock of a Person engaged in a
Telecommunications Business that is or becomes a Restricted Subsidiary of
the Company);
(iii) the incurrence by the Company and its Restricted
Subsidiaries of Existing Debt;
(iv) the incurrence by the Company and/or any of its
Restricted Subsidiaries of Debt in an aggregate principal amount not to
exceed $50.0 million at any one time outstanding;
(v) the incurrence by the Company of Debt (other than secured
Acquired Debt) in an aggregate principal amount not to exceed 2.5 times
the sum of the net cash proceeds received by the Company after the issue
date of the 1999 Notes in connection with any issuance and sale of Equity
Interests (other than Disqualified Stock), plus the fair market value of
Equity Interests (other than Disqualified Stock) issued after consummation
of a Public Equity Offering in connection with an acquisition of a
Telecommunications Business or Telecommunications Related Assets; provided
that such Debt does not mature prior to the Stated Maturity of the Notes
or has an Average Life to Stated Maturity at least equal to the Notes;
(vi) the incurrence by the Company of Debt represented by, and
accruing in respect of, the principal amount of Notes originally issued
under this Indenture;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Debt in exchange for, or the net
proceeds of which are used to refund, refinance or replace Debt (other
than intercompany Debt) that was permitted by this Indenture to be
incurred under the first paragraph hereof or clauses (iii) or (vi) of this
paragraph;
44
<PAGE> 51
(viii) the incurrence by the Company or any of its Wholly
Owned Restricted Subsidiaries of intercompany Debt; provided, however,
that (a) any subsequent issuance or transfer of Equity Interests that
results in any such Debt being held by a Person other than the Company or
a Wholly Owned Restricted Subsidiary of the Company and (b) any sale or
other transfer of any such Debt to a Person that is not either the Company
or a Wholly Owned Restricted Subsidiary of the Company shall be deemed, in
each case, to constitute an incurrence of such Debt by the Company or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (viii);
(ix) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Debt that is permitted by the terms of this Indenture to be outstanding;
and
(x) the incurrence by the Company or any of its Restricted
Subsidiaries of Purchase Money Debt, in each case incurred for the purpose
of financing all or any part of the purchase price or cost of development,
construction, maintenance, enhancement or improvement of Productive
Assets; provided, however, that the aggregate principal amount of Purchase
Money Debt shall not exceed $25.0 million at any one time outstanding,
less the aggregate amount of all Net Proceeds of Asset Sales applied to
permanently reduce the commitments with respect to such Debt pursuant to
the covenant described under Section 4.10 hereof.
For purposes of determining compliance with this Section 4.09, in
the event that an item of Debt meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (x) above or is
entitled to be incurred pursuant to the first paragraph of this Section 4.09,
the Company shall, in its sole discretion, classify such item of Debt in any
manner that complies with this Section 4.09. Accrual of interest and accretion
of original issue discount shall not be deemed to be an incurrence of Debt for
purposes of this Section 4.09.
SECTION 4.10 ASSET SALES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless (i) the Company or such
Restricted Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of any
combination of cash or Cash Equivalents; provided that the amount of (a) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or such Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the Company
or such Restricted Subsidiary from further liability and (b) any securities,
notes or other obligations received by the Company or such Restricted Subsidiary
from such transferee that are contemporaneously (subject to ordinary settlement
periods) converted by the Company or such Restricted Subsidiary into cash (to
the extent of the cash received), shall be deemed to be cash for purposes of
this provision.
The Company and its Restricted Subsidiaries will be permitted to
consummate an Asset Sale without complying with clause (ii) of the immediately
proceeding paragraph if (i) the Company or the
45
<PAGE> 52
applicable Restricted Subsidiary, as the case may be, receives consideration at
the time of such Asset Sale at least equal to the Fair Market Value of the
assets or other property sold, issued or otherwise disposed of and (ii) at least
75% of the consideration for such Asset Sale constitutes any combination of
cash, Cash Equivalents and Productive Assets; provided that any cash
consideration, any non-cash consideration not constituting Productive Assets
received by the Company or any of its Restricted Subsidiaries in connection with
such Asset Sale that is converted into or sold or otherwise disposed of for cash
or Cash Equivalents at any time within 365 days after such Asset Sale and any
Productive Assets constituting cash or Cash Equivalents received by the Company
or any of its Restricted Subsidiaries in connection with such Asset Sale shall
constitute Net Cash Proceeds subject to the provisions set forth above.
Within 365 days after the receipt of any Net Proceeds from any Asset
Sale, the Company (or such Restricted Subsidiary) may, subject to the provisions
of the covenant described in Section 4.07 hereof, apply such Net Proceeds to (i)
permanently reduce the amounts permitted to be borrowed by the Company or such
Restricted Subsidiary under the terms of any of its Debt that is not
Subordinated Debt or (ii) the purchase of Telecommunications Related Assets or
Voting Stock of any Person engaged in the Telecommunications Business in the
U.S. (provided that such Person concurrently becomes a Restricted Subsidiary of
the Company). Pending the final application of any such Net Proceeds, the
Company may temporarily reduce revolving credit borrowings or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested as provided in the
first sentence of this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds the greater of $10.0
million or 10% of the Consolidated Tangible Net Worth of the Company, the
Company will be required to make an offer to all holders of Notes (an "Asset
Sale Over") to repurchase the maximum principal amount of Notes that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount of the Notes to be purchased, plus accrued
and unpaid interest thereon, if any, to the date of purchase, in accordance with
the procedures set forth in the Indenture. To the extent that any Excess
Proceeds remain after consummation of an Asset Sale Offer, the Company may use
such Excess Proceeds for any purpose not otherwise prohibited by the Indenture.
If the aggregate principal amount of Notes tendered pursuant to such Asset Sale
Offer exceeds the amount of Excess Proceeds, the Trustee shall select the Notes
to be purchased on a pro rata basis. Upon completion of such offer to purchase,
the amount of Excess Proceeds shall be reset at zero.
The Company shall comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable to the repurchase of Notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of this
Indenture, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
Asset Sale provisions of this Indenture by virtue thereof.
SECTION 4.11 TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
such Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) the Company delivers to the
46
<PAGE> 53
Trustee (a) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $1.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
or series of related Affiliate Transactions complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the holders of such Affiliate Transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of national
standing. Notwithstanding the foregoing, the following shall not be deemed to be
Affiliate Transactions: (i) any employment agreement and related arrangement
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business; (ii) transactions between or among the Company
and/or its Restricted Subsidiaries; (iii) payment of reasonable directors fees
to Persons who are not otherwise affiliates of the Company; and (iv)
transactions permitted under Section 4.07 hereof shall not be deemed Affiliate
Transactions.
SECTION 4.12 LIMITATION ON LIENS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
SECTION 4.13 BUSINESS ACTIVITIES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly engage in any business other than the
Telecommunications Business.
SECTION 4.14 CORPORATE EXISTENCE.
Subject to Article 5 hereof, the Company shall do or cause to be
done all things necessary to preserve and keep in full force and effect (i) its
corporate existence, and the corporate, partnership or other existence of each
of its Subsidiaries, in accordance with the respective organizational documents
(as the same may be amended from time to time) of the Company or any such
Subsidiary and (ii) the rights (charter and statutory), licenses and franchises
of the Company and its Subsidiaries; provided, however, that the Company shall
not be required to preserve any such right, license or franchise, or the
corporate, partnership or other existence of any of its Subsidiaries, if the
Board of Directors shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company and its Subsidiaries,
taken as a whole, and that the loss thereof is not adverse in any material
respect to the Holders of the Notes.
SECTION 4.15 OFFER TO REPURCHASE UPON CHANGE OF CONTROL.
Upon the occurrence of a Change of Control, the Company shall make
an offer (a "Change of Control Offer") to each Holder to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes at
an offer price in cash (the "Change of Control Payment") equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon to
the date of purchase. Within 10 days following any Change of Control, the
Company shall mail a notice to each Holder stating: (1) that the Change of
Control Offer is being made pursuant to this Section 4.15 and that all Notes
tendered will be accepted for payment; (2) the purchase price and the purchase
date, which shall be no earlier than 30 and no later than 60 days from the date
such notice is mailed (the "Change of Control Payment Date");
47
<PAGE> 54
(3) that any Note not tendered will continue to accrue interest; (4) that,
unless the Company defaults in the payment of the Change of Control Payment, all
Notes accepted for payment pursuant to the Change of Control Offer shall cease
to accrue interest after the Change of Control Payment Date; (5) that Holders
electing to have any Notes purchased pursuant to a Change of Control Offer will
be required to surrender the Notes, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Notes completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Payment Date; (6) that Holders will
be entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the second Business Day preceding the Change of
Control Payment Date, a facsimile transmission or letter setting forth the name
of the Holder, the principal amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing his election to have the Notes
purchased; and (7) that Holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, which unpurchased portion must be equal to $1,000 in
principal amount or an integral multiple thereof. The Company shall comply with
the requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of Notes in connection with a
Change of Control.
On the Change of Control Payment Date, the Company shall, to the
extent lawful, (i) accept for payment all Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent prior to 10:00 a.m. on the Change of Control Payment Date an amount equal
to the Change of Control Payment in respect of all Notes or portions thereof so
tendered and (iii) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions thereof being purchased by the Company. The Paying
Agent shall promptly mail to each Holder of Notes so tendered the Change of
Control Payment for such Notes, and the Trustee shall promptly authenticate and
mail (or cause to be transferred by book-entry) to each Holder a new Note equal
in principal amount to any unpurchased portion of the Notes surrendered, if any;
provided, that each such new Note shall be in a principal amount of $1,000 or an
integral multiple thereof. The Company shall publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
Notwithstanding anything to the contrary in this Section 4.15, the
Company shall not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in this
Section 4.15 and purchases all Notes validly tendered and not withdrawn under
such Change of Control Offer.
SECTION 4.16 LIMITATION ON SALE AND LEASEBACK TRANSACTIONS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly enter into, assume, guarantee or
otherwise become liable with respect to any Sale and Leaseback Transactions;
provided that the Company or any Restricted Subsidiary of the Company may enter
into any such transaction if (i) the Company or such Restricted Subsidiary would
be permitted under Section 4.09 and Section 4.12 hereof to incur secured Debt in
an amount equal to the Attributable Debt with respect to such transaction, (ii)
the consideration received by the Company or such Restricted Subsidiary from
such transaction is at least equal to the Fair Market Value of the property
being transferred and (iii) the Net Proceeds received by the Company or such
Restricted Subsidiary from such transaction are applied in accordance with
Section 4.10.
48
<PAGE> 55
SECTION 4.17 LIMITATION ON ISSUANCES AND SALES OF EQUITY INTERESTS IN WHOLLY
OWNED RESTRICTED SUBSIDIARIES.
The Company (i) shall not, and shall not permit any of its Wholly
Owned Subsidiaries to, transfer, convey, sell, lease or otherwise dispose of any
Equity Interests in any Wholly Owned Restricted Subsidiary of the Company to any
Person (other than the Company or another Wholly Owned Restricted Subsidiary),
unless (a) such transfer, conveyance, sale, lease or other disposition is of all
the Equity Interests in of such Wholly Owned Restricted Subsidiary and (b) the
Net Proceeds from such transfer, conveyance, sale, lease or other disposition
are applied in accordance with Section 4.10 hereof and (ii) will not permit any
Wholly Owned Restricted Subsidiary of the Company to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to the Company or another
Wholly Owned Restricted Subsidiary.
SECTION 4.18 LIMITATION ON ISSUANCES OF GUARANTEES OF DEBT.
The Company shall not permit any Subsidiary, directly or indirectly,
to guarantee, assume or in any other manner become liable with respect to any
Pari Passu Debt or Subordinated Debt of the Company unless such Subsidiary
simultaneously executes and delivers a supplemental indenture to this Indenture
providing for a guarantee of the Notes on the same terms as the guarantee of
such Debt except that (i) such guarantee need not be secured unless required
pursuant to Section 4.12 hereof and (ii) if such Debt is by its terms expressly
subordinated to the Notes, any such assumption, guarantee or other liability of
such Subsidiary with respect to such Debt shall be subordinated to such
Subsidiary's guarantee of the Notes at least to the same extent as such Debt is
subordinated to the Notes; provided, that this paragraph shall not apply to any
guarantee or assumption of liability of Debt permitted under clauses (i), (vi),
(vii), (viii) and (ix) of the second paragraph of Section 4.09 hereof.
Notwithstanding the foregoing, any guarantee by a Subsidiary of the
Notes shall provide by its terms that it (and all Liens securing the same) shall
be automatically and unconditionally released and discharged upon any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's Capital Stock in, or all or substantially all the assets of, such
Subsidiary, which transaction is in compliance with the applicable provisions of
this Indenture and such Subsidiary is released from its guarantees of other Debt
of the Company or any of its Subsidiaries.
SECTION 4.19 PAYMENTS FOR CONSENT.
Neither the Company nor any of its Affiliates shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or is
paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
ARTICLE 5.
SUCCESSORS
SECTION 5.1 MERGER, CONSOLIDATION, OR SALE OF ASSETS.
49
<PAGE> 56
The Company shall not and shall not permit any of its Restricted
Subsidiaries to consolidate or merge with or into (whether or not the Company or
such Restricted Subsidiary is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity, unless (i) the Company or such Restricted
Subsidiary is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company or such
Restricted Subsidiary) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation organized
or existing under the laws of the United States, any state thereof or the
District of Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company or such Restricted
Subsidiary) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Notes, this Indenture and the Registration
Rights Agreement pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction, no
Default or Event of Default exists and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (a) shall have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (b) shall have a Debt to Annualized Cash Flow
Ratio of the Company immediately after the transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable two-quarter Measurement Period equal to or less than the Debt to
Annualized Cash Flow Ratio of the Company immediately preceding the transaction,
or any other Person which (x) assumes or guarantees the obligations of the
Company under the Notes, the Indenture and the Registration Rights Agreement
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee, (y) would, as a result of the applicable transaction, properly classify
the Company or such Restricted Subsidiary as a consolidated subsidiary in
accordance with GAAP and (z) would, if the conditions set forth in clauses (a)
and (b) above were tested substituting such Person for the Company, satisfy such
conditions.
SECTION 5.2 SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of the assets
of the Company in accordance with Section 5.01 hereof, the successor corporation
formed by such consolidation or into or with which the Company is merged or to
which such sales, assignment, transfer, lease, conveyance or other disposition
is made shall succeed to, and be substituted for (so that from and after the
date of such consolidation, merger, sale, lease, conveyance or other
disposition, the provisions of this Indenture referring to the "Company" shall
refer instead to the successor corporation and not to the Company), and may
exercise every right and power of the Company under this Indenture with the same
effect as if such successor Person had been named as the Company herein;
provided, however, that the predecessor Company shall not be relieved from the
obligation to pay the principal of and interest on the Notes except in the case
of a sale of all of the Company's assets that meets the requirements of Section
5.01 hereof.
ARTICLE 6.
DEFAULTS AND REMEDIES
SECTION 6.1 EVENTS OF DEFAULT.
An "Event of Default" occurs if:
50
<PAGE> 57
(a) the Company defaults in the payment when due of interest on the
Notes (including any Additional Interest) and such default continues for a
period of 30 days;
(b) the Company defaults in the payment when due of the principal of
or premium, if any, on the Notes when the same becomes due and payable at
maturity, upon redemption (including in connection with an offer to purchase) or
otherwise;
(c) the Company or any of its Restricted Subsidiaries fail to comply
with any of the provisions of Section 4.07, 4.09, 4.10, 4.15, or 5.01 hereof;
(d) the Company or any of its Restricted Subsidiaries fails to
observe or perform any other covenant, representation, warranty or other
agreement in this Indenture or the Notes for 30 days after notice to the Company
by the Trustee or the Holders of at least 25% in aggregate principal amount of
the Notes (including Additional Notes, if any) then outstanding voting as a
single class;
(e) a default occurs under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Debt for money borrowed by the Company or any of its Restricted Subsidiaries
(or the payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries), whether such Debt or guarantee now exists or is created after the
date of this Indenture, which default (a) is caused by a failure to pay
principal of or premium, if any, or interest on such Debt prior to the
expiration of the grace period provided in such Debt on the date of such default
(a "Payment Default") or (b) results in the acceleration of such Debt prior to
its express maturity and, in each case, the principal amount of such Debt,
together with the principal amount of any other such Debt under which there has
been a payment default or the maturity of which has been so accelerated,
aggregates $5.0 million or more;
(f) a final judgment or final judgments for the payment of money are
entered by a court or courts of competent jurisdiction against the Company or
any of its Restricted Subsidiaries and such judgment or judgments remain
undismissed and are not stayed for a period (during which execution shall not be
effectively stayed) of 60 days, provided that the aggregate of all such
undischarged judgments exceeds $5 million; and
(g) the Company or any of its Restricted Subsidiaries pursuant to or
within the meaning of Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief against it
in an involuntary case,
(iii) consents to the appointment of a custodian of it or for
all or substantially all of its property,
(iv) makes a general assignment for the benefit of its
creditors, or
(v) generally is not paying its debts as they become due; or
(h) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
51
<PAGE> 58
(i) is for relief against the Company or any of its
Significant Subsidiaries or any group of Subsidiaries that, taken as a whole,
would constitute a Significant Subsidiary in an involuntary case;
(ii) appoints a custodian of the Company or any of its
Significant Subsidiaries or any group of Subsidiaries that, taken as a whole,
would constitute a Significant Subsidiary or for all or substantially all of the
property of the Company or any of its Significant Subsidiaries or any group of
Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary;
or
(iii) orders the liquidation of the Company or any of its
Significant Subsidiaries or any group of Subsidiaries that, taken as a whole,
would constitute a Significant Subsidiary;
and the order or decree remains unstayed and in effect for 60
consecutive days.
SECTION 6.2 ACCELERATION.
If any Event of Default (other than an Event of Default specified in
clause (h) or (i) of Section 6.01 hereof with respect to the Company, any
Significant Subsidiary or any group of Restricted Subsidiaries that, taken as a
whole, would constitute a Significant Subsidiary) occurs and is continuing, the
Trustee or the Holders of at least 25% in aggregate principal amount of the then
outstanding Notes may declare all the Notes to be due and payable immediately.
Upon any such declaration, all principal of and accrued and unpaid interest, if
any, on the Notes shall be due and payable immediately. Notwithstanding the
foregoing, if an Event of Default specified in clause (h) or (i) of Section 6.01
hereof occurs with respect to the Company, any of its Significant Subsidiaries
or any group of Restricted Subsidiaries that, taken as a whole, would constitute
a Significant Subsidiary, all outstanding Notes shall be due and payable
immediately without further action or notice.
If an Event of Default occurs by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of the Company with the intention
of avoiding payment of the premium that the Company would have had to pay if the
Company then had elected to redeem the Notes pursuant to Section 3.07 hereof,
then, upon acceleration of the Notes, an equivalent premium shall also become
and be immediately due and payable, to the extent permitted by law, anything in
this Indenture or in the Notes to the contrary notwithstanding. If an Event of
Default occurs prior to February 15, 2005 by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of the Company with the intention
of avoiding the prohibition on redemption of the Notes prior to such date, then,
upon acceleration of the Notes, an additional premium shall also become and be
immediately due and payable, to the extent permitted by applicable law, in an
amount, for each of the years beginning on February 15 of the years set forth
below, as set forth below (expressed as a percentage of the principal amount to
the date of payment that would otherwise be due but for the provisions of this
sentence):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2000...................................................... 116.667%
2001...................................................... 114.583%
2002...................................................... 112.500%
2003...................................................... 110.417%
2004...................................................... 108.333%
</TABLE>
52
<PAGE> 59
SECTION 6.3 OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal, premium, if
any, and interest on the Notes or to enforce the performance of any provision of
the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess
any of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Note in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
SECTION 6.4 WAIVER OF DEFAULTS.
Holders of not less than a majority in aggregate principal amount of
the then outstanding Notes by notice to the Trustee may on behalf of the Holders
of all of the Notes waive an existing Default or Event of Default and its
consequences hereunder, except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes (including in connection
with an offer to purchase) (provided, however, that the Holders of a majority in
aggregate principal amount of the then outstanding Notes may rescind an
acceleration and its consequences, including any related payment default that
resulted from such acceleration). Upon any such waiver, such Default shall cease
to exist, and any Event of Default arising therefrom shall be deemed to have
been cured for every purpose of this Indenture; but no such waiver shall extend
to any subsequent or other Default or impair any right consequent thereon.
SECTION 6.5 CONTROL BY MAJORITY.
Holders of a majority in principal amount of the then outstanding
Notes may direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee or exercising any trust or power
conferred on it. However, the Trustee may refuse to follow any direction that
conflicts with law or this Indenture, or that the Trustee determines may be
unduly prejudicial to the rights of other Holders of Notes or that may involve
the Trustee in personal liability.
SECTION 6.6 LIMITATION ON SUITS.
A Holder of a Note may pursue a remedy with respect to this
Indenture or the Notes only if:
(a) the Holder of a Note gives to a Responsible Officer of the
Trustee written notice of a continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the then
outstanding Notes make a written request to the Trustee to pursue the remedy;
(c) such Holder of a Note or Holders of Notes offer and provide to
the Trustee indemnity satisfactory to the Trustee against any loss, liability or
expense;
53
<PAGE> 60
(d) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer and the provision of indemnity; and
(e) during such 60-day period the Holders of a majority in principal
amount of the then outstanding Notes do not give the Trustee a direction
inconsistent with the request.
A Holder of a Note may not use this Indenture to prejudice the
rights of another Holder of a Note or to obtain a preference or priority over
another Holder of a Note.
SECTION 6.7 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Note to receive payment of principal, premium, if any, and
interest on the Note, on or after the respective due dates expressed in the Note
(including in connection with an offer to purchase), or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
SECTION 6.8 COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.01(a) or (b) occurs
and is continuing, the Trustee is authorized to recover judgment in its own name
and as trustee of an express trust on behalf of the Holders against the Company
for the whole amount of principal amount of, premium, if any, and interest
remaining unpaid on the Notes and interest on overdue principal and, to the
extent lawful, interest and such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the claims
of the Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of the Notes allowed in any judicial proceedings relative to the Company
(or any other obligor upon the Notes), its creditors or its property and shall
be entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments to
the Trustee, and in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof. To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 7.07 hereof out of the estate in
any such proceeding, shall be denied for any reason, payment of the same shall
be secured by a Lien on, and shall be paid out of, any and all distributions,
dividends, money, securities and other properties that the Holders may be
entitled to receive in such proceeding whether in liquidation or under any plan
of reorganization or arrangement or otherwise. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 6.10 PRIORITIES.
54
<PAGE> 61
If the Trustee collects any money pursuant to this Article, it shall
pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts due
under Section 7.07 hereof, including payment of all reasonable compensation,
expense and liabilities incurred, and all advances made, by the Trustee and the
reasonable costs and expenses of collection;
Second: to Holders of Notes for amounts due and unpaid on the Notes
for principal amount, premium, if any, and interest, ratably, without preference
or priority of any kind, according to the amounts due and payable on the Notes
for principal, premium, if any and interest, respectively; and
Third: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment
to Holders of Notes pursuant to this Section 6.10.
SECTION 6.11 UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section does not apply to a suit by the Trustee, a suit by a Holder of a
Note pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in
principal amount of the then outstanding Notes.
ARTICLE 7.
TRUSTEE
SECTION 7.1 DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by
the express provisions of this Indenture and the Trustee need perform only those
duties that are specifically set forth in this Indenture and no others, and no
implied covenants or obligations shall be read into this Indenture against the
Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture. However, the
Trustee shall examine the certificates and opinions to determine whether or not
they conform to the
55
<PAGE> 62
requirements of this Indenture (but need not confirm or investigate the accuracy
of mathematical calculations or other facts stated therein).
(c) The Trustee may not be relieved from liabilities for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b)
of this Section;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every provision of
this Indenture that in any way relates to the Trustee is subject to paragraphs
(a), (b), and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or incur any liability. The Trustee shall be under
no obligation to exercise any of its rights and powers under this Indenture at
the request of any Holders, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
(g) The rights, privilege, protections, immunities and benefits
given to the Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each
of its capacities hereunder, and to each agent, custodian and other Person
employed to act hereunder.
SECTION 7.2 RIGHTS OF TRUSTEE.
(a) The Trustee as Trustee and acting in each of its capacities
hereunder may conclusively rely upon any document believed by it to be genuine
and to have been signed or presented by the proper Person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require
an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel. The Trustee may consult with
counsel of its selection and the advice of such counsel or any Opinion of
Counsel shall be full and complete authorization and protection from liability
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence of any agent appointed with
due care.
56
<PAGE> 63
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith that it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any
written demand, request, direction or notice from the Company shall be
sufficient if signed by an Officer of the Company.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders unless such Holders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that might be incurred by it in compliance with such request or direction.
(g) The rights, privileges, protections, immunities and benefits
given to the Trustee, including, without limitation, its right to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each
of its capacities hereunder, and to each agent, custodian and other Person
employed to act hereunder.
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the
owner or pledgees of Notes and may otherwise deal with the Company or any
Affiliate of the Company with the same rights it would have if it were not
Trustee. However, in the event that the Trustee acquires any conflicting
interest it must eliminate such conflict within 90 days, apply to the SEC for
permission to continue as trustee or resign. Any Agent may do the same with like
rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof.
SECTION 7.4 TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for, nor shall it be liable
for, and makes no representation as to the validity or adequacy of this
Indenture or the Notes; it shall not be accountable for the Company's use of the
proceeds from the Notes or any money paid to the Company or upon the Company's
direction under any provision of this Indenture; it shall not be responsible
for, nor shall it be liable for, the use or application of any money received by
any Paying Agent other than the Trustee; and it shall not be responsible for,
nor shall it be liable for, any statement or recital herein or any statement in
the Notes or any other document in connection with the sale of the Notes or
pursuant to this Indenture other than its certificate of authentication.
SECTION 7.5 NOTICE OF DEFAULTS.
(a) The Trustee shall not be deemed to have notice of any Default or
Event of Default unless a Responsible Officer of the Trustee has actual
knowledge thereof or unless written notice of any event which is in fact such a
default is received by a Responsible Officer of the Trustee at the Corporate
Trust Officer of the Trustee, and such notice references the Notes and this
Indenture.
(b) If a Default or Event of Default occurs and is continuing and if
it is known to the Trustee, the Trustee shall mail to Holders of Notes a notice
of the Default or Event of Default within 90 days after it occurs. Except in the
case of a Default or Event of Default in payment of principal of, premium, if
any, or interest on any Note, the Trustee may withhold the notice if and so long
as a committee of its Responsible Officers in good faith determines that
withholding the notice is in the interests of the Holders of the Notes.
57
<PAGE> 64
SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.
Within 60 days after each May 15 beginning with the May 15 following
the date of this Indenture, and for so long as Notes remain outstanding, the
Trustee shall mail to the Holders of the Notes a brief report dated as of such
reporting date that complies with TIA Section 313(a) (but if no event described
in TIA Section 313(a) has occurred within the twelve months preceding the
reporting date, no report need be transmitted). The Trustee also shall comply
with TIA Section 313(b)(2). The Trustee shall also transmit by mail all reports
as required by TIA Section 313(c).
A copy of each report at the time of its mailing to the Holders of
Notes shall be mailed to the Company and filed with the SEC and each stock
exchange on which the Notes are listed in accordance with TIA Section 313(d).
The Company shall promptly notify the Trustee when the Notes are listed on any
stock exchange.
SECTION 7.7 COMPENSATION AND INDEMNITY.
The Company shall pay to the Trustee from time to time such
compensation for its acceptance of this Indenture and services hereunder as
Trustee and acting in each of its capacities hereunder as the parties shall
agree in writing from time to time. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Company
shall reimburse the Trustee promptly upon request for all reasonable
disbursements, advances and expenses incurred or made by it in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee against any and all losses,
liabilities or expenses incurred by it arising out of or in connection with the
acceptance or administration of its duties under this Indenture as Trustee and
acting in each of its capacities hereunder, including the costs and expenses of
enforcing this Indenture against the Company (including this Section 7.07) and
defending itself against any claim (whether asserted by the Company or any
Holder or any other person) or liability in connection with the exercise or
performance of any of its powers or duties hereunder, except to the extent any
such loss, liability or expense may be attributable to its negligence or bad
faith. The Trustee shall notify the Company promptly of any claim for which it
may seek indemnity. Failure by the Trustee to so notify the Company shall not
relieve the Company of its obligations hereunder. The Company shall defend the
claim and the Trustee shall cooperate in the defense. The Trustee may have
separate counsel and the Company shall pay the reasonable fees and expenses of
such counsel. The Company need not pay for any settlement made without its
consent, which consent shall not be unreasonably withheld.
The obligations of the Company under this Section 7.07 shall survive
the satisfaction and discharge of this Indenture.
To secure the Company's payment obligations in this Section, the
Trustee shall have a Lien prior to the Notes on all money or property held or
collected by the Trustee, except that held in trust to pay principal and
interest on particular Notes. Such Lien shall survive the satisfaction and
discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event
of Default specified in Section 6.01(g) or (h) hereof occurs, the expenses and
the compensation for the services (including the
58
<PAGE> 65
reasonable fees and expenses of its agents and counsel) are intended to
constitute expenses of administration under any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA Section 313(b)(2) to
the extent applicable.
SECTION 7.8 REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section.
The Trustee may resign in writing at any time and be discharged from
the trust hereby created by so notifying the Company. The Holders of Notes of a
majority in principal amount of the then outstanding Notes may remove the
Trustee by so notifying the Trustee and the Company in writing. The Company may
remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order
for relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a custodian or public officer takes charge of the Trustee or its
property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Notes may appoint a
successor Trustee to replace the successor Trustee appointed by the Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company, or
the Holders of Notes of at least 10% in principal amount of the then outstanding
Notes may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
If the Trustee, after written request by any Holder of a Note who
has been a Holder of a Note for at least six months, fails to comply with
Section 7.10, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Notes and the Company. The retiring Trustee shall
promptly transfer all property held by it as Trustee to the successor Trustee,
provided all sums owing to the Trustee hereunder have been paid and subject to
the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the
Trustee pursuant to this Section 7.08, the Company's obligations under Section
7.07 hereof shall continue for the benefit of the retiring Trustee.
SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC.
59
<PAGE> 66
If the Trustee consolidates, merges or converts into, or transfers
all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that has a combined capital and surplus of at
least $50 million as set forth in its most recent published annual report of
condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to
TIA Section 310(b).
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee is subject to TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE 8.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.1 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Company may, at the option of its Board of Directors evidenced
by a resolution set forth in an Officers' Certificate, at any time, elect to
have either Section 8.02 or 8.03 hereof be applied to all outstanding Notes upon
compliance with the conditions set forth below in this Article Eight.
SECTION 8.2 LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.02, the Company shall, subject to the satisfaction
of the conditions set forth in Section 8.04 hereof, be deemed to have been
discharged from its obligations with respect to all outstanding Notes on the
date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire Debt represented by the
outstanding Notes, which shall thereafter be deemed to be "outstanding" only for
the purposes of Section 8.05 hereof and the other Sections of this Indenture
referred to in (a) and (b) below, and to have satisfied all its other
obligations under such Notes and this Indenture (and the Trustee, on demand of
and at the expense of the Company, shall execute proper instruments
acknowledging the same upon receipt of an Officer's Certificate and an Opinion
of Counsel in form and substance satisfactory to the Trustee), except for the
following provisions which shall survive until otherwise terminated or
discharged hereunder: (a) the rights of Holders of outstanding Notes to receive
solely from the trust fund described in Section 8.04 hereof, and as more fully
set forth in such Section, payments in respect of the principal of, premium, if
any, and interest on such Notes when such payments are due, (b) the Company's
obligations with respect to such Notes under Article 2 and Section 4.02 hereof,
(c) the rights, powers, trusts, duties and immunities of the Trustee hereunder
and the Company's obligations in connection therewith and (d) this
60
<PAGE> 67
Article Eight. Subject to compliance with this Article Eight, the Company may
exercise its option under this Section 8.02 notwithstanding the prior exercise
of its option under Section 8.03 hereof.
SECTION 8.3 COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03, the Company shall, subject to the satisfaction
of the conditions set forth in Section 8.04 hereof, be released from its
obligations under the covenants contained in Sections 4.07, 4.08, 4.09, 4.10,
4.11, 4.12, 4.13, 4.15, 4.16, 4.17, 4.18 and 4.19 hereof with respect to the
outstanding Notes on and after the date the conditions set forth in Section 8.04
are satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall
thereafter be deemed not "outstanding" for the purposes of any direction,
waiver, consent or declaration or act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"outstanding" for all other purposes hereunder (it being understood that such
Notes shall not be deemed outstanding for accounting purposes). For this
purpose, Covenant Defeasance means that, with respect to the outstanding Notes,
the Company may omit to comply with and shall have no liability in respect of
any term, condition or limitation set forth in any such covenant, whether
directly or indirectly, by reason of any reference elsewhere herein to any such
covenant or by reason of any reference in any such covenant to any other
provision herein or in any other document and such omission to comply shall not
constitute a Default or an Event of Default under Section 6.01 hereof, but,
except as specified above, the remainder of this Indenture and such Notes shall
be unaffected thereby. In addition, upon the Company's exercise under Section
8.01 hereof of the option applicable to this Section 8.03 hereof, subject to the
satisfaction of the conditions set forth in Section 8.04 hereof, Sections
6.01(c) through 6.01(f) hereof shall not constitute Events of Default.
SECTION 8.4 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of either
Section 8.02 or 8.03 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the Holders, cash in United States dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Notes on the stated date for payment thereof or on the applicable
redemption date, as the case may be;
(b) in the case of an election under Section 8.02 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of
this Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such Opinion of
Counsel shall confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(c) in the case of an election under Section 8.03 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in the United
States confirming that the Holders of the
61
<PAGE> 68
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the incurrence of Debt all or a portion of the proceeds of which
will be used to defease the Notes pursuant to this Article Eight concurrently
with such incurrence) or insofar as Sections 6.01(i) or 6.01(j) hereof is
concerned, at any time in the period ending on the 91st day after the date of
deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under, any material agreement
or instrument (other than this Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound;
(f) the Company shall have delivered to the Trustee an Opinion of
Counsel (which may be subject to reasonable customary exceptions) to the effect
that (assuming that no Holder of any Notes would be considered an insider of the
Company under applicable bankruptcy or insolvency law) after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally;
(g) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; and
(h) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
SECTION 8.5 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER
MISCELLANEOUS PROVISIONS.
Subject to Section 8.06 hereof, all money and non-callable
Government Securities (including the proceeds thereof) deposited with the
Trustee (or other qualifying trustee, collectively for purposes of this Section
8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the
outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the payment,
either directly or through any Paying Agent (including the Company acting as
Paying Agent) as the Trustee may determine, to the Holders of such Notes of all
sums due and to become due thereon in respect of principal amount, premium, if
any, and interest, but such money need not be segregated from other funds except
to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the cash or non-callable
Government Securities deposited pursuant to Section 8.04 hereof or the principal
and interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding Notes.
62
<PAGE> 69
Anything in this Article Eight to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the request
of the Company any money or non-callable Government Securities held by it as
provided in Section 8.04 hereof which, in the opinion of a nationally recognized
firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee (which may be the opinion delivered under
Section 8.04(a) hereof), are in excess of the amount thereof that would then be
required to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
SECTION 8.6 REPAYMENT TO COMPANY.
Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal amount of,
premium, if any, or interest on any Note and remaining unclaimed for two years
after such principal amount and premium, if any, or interest has become due and
payable shall be paid to the Company on its request or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Note shall
thereafter, as a secured creditor, look only to the Company for payment thereof,
and all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease; provided, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, may, but is not required to, at the expense
of the Company cause to be published once, in the New York Times and The Wall
Street Journal (national edition), notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such notification or publication, any unclaimed balance of such
money then remaining will be repaid to the Company.
SECTION 8.7 REINSTATEMENT.
If Trustee or Paying Agent is unable to apply any United States
dollars or non-callable Government Securities in accordance with Section 8.02 or
8.03 hereof, as the case may be, by reason of any order or judgment of any court
or governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is
permitted to apply all such money in accordance with Section 8.02 or 8.03
hereof, as the case may be; provided, however, that, if the Company makes any
payment of principal of, premium, if any, or interest on any Note following the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money held by the
Trustee or Paying Agent.
SECTION 8.8 SURVIVAL.
The Trustee's rights under this Article 8 shall survive termination
of this Indenture.
ARTICLE 9.
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF NOTES.
Notwithstanding Section 9.02 of this Indenture, the Company and the
Trustee may amend or supplement this Indenture or the Notes without the consent
of any Holder of a Note:
63
<PAGE> 70
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in place
of certificated Notes or to alter the provisions of Article 2 hereof (including
the related definitions) in a manner that does not materially adversely affect
any Holder;
(c) to provide for the assumption of the Company's obligations to
the Holders of the Notes by a successor to the Company pursuant to Article 5
hereof;
(d) to make any change that would provide any additional rights or
benefits to the Holders of the Notes or that does not adversely affect the legal
rights hereunder of any such Holder;
(e) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA; or
(f) to provide for the issuance of Additional Notes in accordance
with the limitations set forth in this Indenture as of the date hereof.
Upon the request of the Company accompanied by a resolution of its
Board of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon receipt by the Trustee of the documents described in Section
7.02 hereof, the Trustee shall join with the Company in the execution of any
amended or supplemental Indenture authorized or permitted by the terms of this
Indenture and to make any further appropriate agreements and stipulations that
may be therein contained, but the Trustee shall not be obligated to enter into
such amended or supplemental Indenture that affects its own rights, duties or
immunities under this Indenture or otherwise.
SECTION 9.2 WITH CONSENT OF HOLDERS OF NOTES.
Except as provided below in this Section 9.02, the Company and the
Trustee may amend or supplement this Indenture (including Sections 3.09, 4.10
and 4.15 hereof) and the Notes may be amended or supplemented with the consent
of the Holders of at least a majority in principal amount of the Notes
(including the Additional Notes, if any) then outstanding voting as a single
class (including, without limitation, consents obtained in connection with a
purchase of, or a tender offer or exchange offer for, Notes), and, subject to
Sections 6.04 and 6.07 hereof, any existing Default or Event of Default (other
than a Default or Event of Default in the payment of the principal of, premium,
if any, or interest on the Notes, except a payment default resulting from an
acceleration that has been rescinded) or compliance with any provision of this
Indenture or the Notes may be waived with the consent of the Holders of a
majority in aggregate principal amount of the then outstanding Notes (including
the Additional Notes, if any) voting as a single class (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, the Notes).
Upon the request of the Company accompanied by a resolution of its
Board of Directors authorizing the execution of any such amended or supplemental
Indenture, and upon the filing with the Trustee of evidence satisfactory to the
Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by
the Trustee of the documents described in Section 7.02 hereof, the Trustee shall
join with the Company in the execution of such amended or supplemental Indenture
unless such amended or supplemental Indenture directly affects the Trustee's own
rights, duties or immunities under this Indenture or otherwise,
64
<PAGE> 71
in which case the Trustee may in its discretion, but shall not be obligated to,
enter into such amended or supplemental Indenture.
It shall not be necessary for the consent of the Holders of Notes
under this Section 9.02 to approve the particular form of any proposed amendment
or waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders of Notes affected thereby a
notice briefly describing the amendment, supplement or waiver. Any failure of
the Company to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such amended or supplemental
Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the Holders of a
majority in aggregate principal amount of the Notes (including the Additional
Notes, if any) then outstanding voting as a single class may waive compliance in
a particular instance by the Company with any provision of this Indenture or the
Notes. However, without the consent of each Holder affected, an amendment or
waiver under this Section 9.02 may not (with respect to any Notes held by a
non-consenting Holder):
(a) reduce the principal amount of Notes whose Holders must consent
to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any Note
or alter or waive any of the provisions with respect to the redemption of the
Notes except as provided above with respect to Sections 3.09, 4.10 and 4.15
hereof;
(c) reduce the rate of or change the time for payment of interest on
any Note;
(d) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the then outstanding Notes (including the Additional Notes,
if any) and a waiver of the payment default that resulted from such
acceleration);
(e) make any Note payable in money other than that stated in the
Notes;
(f) make any change in the provisions of this Indenture relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of principal of or interest on the Notes;
(g) waive a redemption payment with respect to any Note (other than
a payment required by any of the covenants described under Sections 3.09, 4.10
or 4.15);
(h) make any change in Section 6.04 or 6.07 hereof or in the
foregoing amendment and waiver provisions.
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment or supplement to this Indenture or the Notes shall
be set forth in a amended or supplemental Indenture that complies with the TIA
as then in effect.
SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS.
65
<PAGE> 72
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by the Holder of a
Note and every subsequent Holder of a Note or portion of a Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
is not made on any Note. However, any such Holder of a Note or subsequent Holder
of a Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder.
SECTION 9.5 NOTATION ON OR EXCHANGE OF NOTES.
The Trustee, at the direction of the Company, may place an
appropriate notation about an amendment, supplement or waiver on any Note
thereafter authenticated. The Company in exchange for all Notes may issue and
the Trustee shall, upon receipt of an Authentication Order, authenticate new
Notes that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note shall
not affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amended or supplemental Indenture
authorized pursuant to this Article Nine if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
The Company may not sign an amendment or supplemental Indenture until the Board
of Directors approves it. In executing any amended or supplemental Indenture,
the Trustee shall be entitled to receive (whether or not such amendment or
supplemental Indenture does or does not affect the rights, duties, liabilities
or immunities of the Trustee) and (subject to Section 7.01 hereof) may rely
conclusively on and shall be fully protected in relying upon an Officer's
Certificate and an Opinion of Counsel stating that the execution of such amended
or supplemental Indenture is authorized or permitted by this indenture (and
otherwise in a form and substance reasonably satisfactory to the Trustee).
ARTICLE 10.
MISCELLANEOUS
SECTION 10.1 TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or conflicts
with the duties imposed by TIA Section 318(c), the imposed duties shall control.
SECTION 10.2 NOTICES.
Any notice or communication by the Company or the Trustee to the
others is duly given if in writing and delivered in Person or mailed by first
class mail (registered or certified, return receipt requested), telecopier or
overnight air courier guaranteeing next day delivery, to the others' address
66
<PAGE> 73
If to the Company:
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
Telecopier No.: (408) 844-7501
Attention: Chief Financial Officer
With a copy to:
Irell & Manella LLP
Suite 900
1800 Avenue of the Stars
Los Angeles, California 90067-4276
Telecopier No.: (310) 203-7199
Attention: Meredith Jackson
If to the Trustee:
United States Trust Company of New York
114 West 47th Street
25th Floor
New York, NY 10036
Telecopier No.: (212) 852-1626
Attention: Corporate Trust Administration
The Company or the Trustee, by notice to the others may designate
additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders)
shall be deemed to have been duly given upon receipt.
Any notice or communication to a Holder shall be mailed by first
class mail, certified or registered, return receipt requested, or by overnight
air courier guaranteeing next day delivery to its address shown on the register
kept by the Registrar. Any notice or communication shall also be so mailed to
any Person described in T1A Section 313(c), to the extent required by the TIA.
Failure to mail a notice or communication to a Holder or any defect in it shall
not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Holders, it shall
mail a copy to the Trustee and each Agent at the same time.
SECTION 10.3 COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES.
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA Section 312(c).
67
<PAGE> 74
SECTION 10.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to
take any action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth in
Section 10.05 hereof) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth in
Section 10.05 hereof) stating that, in the opinion of such counsel, all such
conditions precedent and covenants have been satisfied.
SECTION 10.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of
TIA Section 314(e) and shall include:
(a) a statement that the Person making such certificate or opinion
has read such covenant or condition;
(b) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he or she has
made such examination or investigation as is necessary to enable him or her to
express an informed opinion as to whether or not such covenant or condition has
been satisfied; and
(d) a statement as to whether or not, in the opinion of such Person,
such condition or covenant has been satisfied.
SECTION 10.6 RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by or at a meeting
of Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
SECTION 10.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS.
No past, present or future director, officer, employee, incorporator
or stockholder of the Company, as such, shall have any liability for any
obligations of the Company under the Notes, this Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Notes.
SECTION 10.8 GOVERNING LAW.
68
<PAGE> 75
THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
SECTION 10.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret any other indenture,
loan or debt agreement of the Company or its Subsidiaries or of any other
Person. Any such indenture, loan or debt agreement may not be used to interpret
this Indenture.
SECTION 10.10 SUCCESSORS.
All agreements of the Company in this Indenture and the Notes shall
bind its successors. All agreements of the Trustee in this Indenture shall bind
its successors.
SECTION 10.11 SEVERABILITY.
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 10.12 COUNTERPART ORIGINALS.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
SECTION 10.13 TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.
69
<PAGE> 76
SIGNATURES
Dated as of January 28, 2000
COVAD COMMUNICATIONS GROUP, INC.
BY:
-------------------------------------
Name:
Title:
Attest:
- ----------------------------------
Name:
Title:
UNITED STATES TRUST COMPANY OF NEW YORK
BY:
-------------------------------------
Name:
Title:
<PAGE> 77
EXHIBIT A-l
(Face of Note)
================================================================================
CUSIP/CINS_____________
12% Senior Notes due 2010
No. ___ $__________
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to _____________________________________________________________
or registered assigns,
the principal sum of _____________________________________________________
Dollars on February 15, 2010.
Interest Payment Dates: February 15 and August 15
Record Dates: February 1 and August 1
A1-1
<PAGE> 78
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
COVAD COMMUNICATIONS GROUP, INC.
BY:
-------------------------------------
Name:
Title:
BY:
-------------------------------------
Name:
Title:
Dated: January 28, 2000
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
United States Trust Company of New York,
as Trustee
By:
-------------------------------
Authorized Signatory
================================================================================
A1-2
<PAGE> 79
(Back of Note)
12% Senior Notes due 2010
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE
EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE,
(III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO
A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A) TO OFFER, SELL,
PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY, (2) PURSUANT
TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A, (4) PURSUANT TO OFFERS AND SALES
TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (5) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A),
A1-3
<PAGE> 80
(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT (AND BASED ON AN
OPINION OF COUNSEL), OR (6) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT (AND BASED ON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT IN EACH OF THE FOREGOING CASES TO
APPLICABLE JURISDICTION, AND (B) THAT IT WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
Capitalized terms used herein shall have the meanings assigned to
them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. Covad Communications Group, Inc., a Delaware
corporation (the "Company"), promises to pay interest on the principal amount of
this Note at 12% per annum. The Company shall pay interest and Additional
Interest, if any, semi-annually on February 15 and August 15, commencing on
August 15, 2000, or if any such day is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date"). Interest on the Notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the Closing Date; provided that if there is no
existing Default in the payment of interest, and if this Note is authenticated
between a record date referred to on the face hereof and the next succeeding
Interest Payment Date, interest shall accrue from such next succeeding Interest
Payment Date; provided, further, that the first Interest Payment Date shall be
August 15, 2000. The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue principal and
premium, if any, from time to time on demand at a rate that is 1% per annum in
excess of the rate then in effect; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months. All references
in this Note and in the Indenture to "interest" shall be deemed to include any
Additional Interest that may become payable thereon according to the provisions
of the Indenture.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on February 1 or August 1 preceding the Interest
Payment Date, even if such Notes are cancelled after such record date and on or
before such Interest Payment Date, except as provided in Section 2.12 of the
Indenture with respect to defaulted interest. The Notes will be payable as to
principal, premium and interest at the office or agency of the Company
maintained for such purpose within or without the City and State of New York,
or, at the option of the Company, payment of interest may be made by check
mailed to the Holders at their addresses set forth in the register of Holders,
and provided that payment by wire transfer of immediately available funds will
be required with respect to principal of and interest, premium on, all Global
Notes and all other Notes the Holders of which shall have provided wire transfer
instructions to the Company or the Paying Agent. Such payment shall be in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, United States Trust
Company of New York, the Trustee under the Indenture, will act as Paying Agent
and Registrar. The Company may change any Paying Agent or Registrar without
notice to any Holder. The Company or any of its Subsidiaries may act in any such
capacity.
A1-4
<PAGE> 81
4. INDENTURE. The Company issued the Notes under an Indenture dated
as of January 28, 2000 (the "Indenture") between the Company and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15
U.S. Code Sections 77aaa-77bbbb). The Notes are subject to all such terms, and
Holders are referred to the Indenture and such Act for a statement of such
terms. To the extent any provision of this Note conflicts with the express
provisions of the Indenture, the provisions of the Indenture shall govern and be
controlling. The Notes are obligations of the Company limited to $475,000,000 in
aggregate principal amount.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Notes prior to February 15,
2005. Thereafter, the Company shall have the option to redeem the Notes, in
whole or in part, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest thereon, if
any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on February 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2005....................................................... 106.00%
2006....................................................... 104.00%
2007....................................................... 102.00%
2008 and thereafter........................................ 100.00%
</TABLE>
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time prior to February 15, 2003, the Company, at its option,
may use the net cash proceeds (but only to the extent such proceeds consist of
cash or Cash Equivalents) of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the Notes issued on the Issue Date under the Indenture at
a redemption price of 112.00% of the aggregate principal amount of the Notes,
plus accrued and unpaid interest, if any, to the date of redemption; provided
that at least $276.25 million of the aggregate principal amount of the Notes
remains outstanding immediately after the occurrence of such redemption. In
order to effect the foregoing redemption, the Company must mail a notice of
redemption no later than 30 days after the related Public Equity Offering and
must consummate such redemption within 60 days of the closing of such Public
Equity Offering.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall not be
required to make mandatory redemption payments with respect to the Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be required
to make an offer (a "Change of Control Offer") to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of each Holder's Notes at a
purchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (the "Change of Control
Payment"). Within 10 days
A1-5
<PAGE> 82
following any Change of Control, the Company shall mail a notice to each Holder
setting forth the procedures governing the Change of Control Offer as required
by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company shall commence an offer to all
Holders of Notes (an "Asset Sale Offer") pursuant to Section 3.09 of the
Indenture to purchase the maximum principal amount of Notes (including any
Additional Notes) that may be purchased out of the Excess Proceeds at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Additional Interest thereon, if any, to the date
fixed for the closing of such offer, in accordance with the procedures set forth
in the Indenture. To the extent that the aggregate amount of Notes (including
any Additional Notes) tendered pursuant to an Asset Sale Offer is less than the
Excess Proceeds, the Company (or such Restricted Subsidiary) may use such
deficiency for general corporate purposes. If the aggregate principal amount of
Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a pro rata basis. Holders of
Notes that are the subject of an offer to purchase will receive an Asset Sale
Offer from the Company prior to any related purchase date and may elect to have
such Notes purchased by completing the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes or
portions thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of Notes may be registered and Notes may be exchanged as
provided in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, the Company
need not exchange or register the transfer of any Notes for a period of 15 days
before a selection of Notes to be redeemed or during the period between a record
date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note will be
treated as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the then outstanding
Notes (and Additional Notes, if any) voting as a single class, and any existing
default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding Notes (and Additional Notes, if any) voting as a single class.
Without the consent of any Holder of a Note, the Indenture or the Notes may be
amended or supplemented to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
the Notes in case of a merger or consolidation or sale of all or substantially
all of the Company's assets, to make any change that would provide any
additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of
A1-6
<PAGE> 83
any such Holder, to comply with the requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act or to provide for the Issuance of Additional Notes in accordance with the
limitations set forth in the Indenture.
12. DEFAULTS AND REMEDIES. Events of Default include: (i) default
for 30 days in the payment when due of interest on the Notes (including any
Additional Interest); (ii) default in payment when due of principal of or
premium, if any, on the Notes when the same becomes due and payable at maturity,
upon redemption (including in connection with an offer to purchase) or
otherwise; (iii) failure by the Company or any of its Restricted Subsidiaries to
comply with Section 4.07, 4.09, 4.10, 4.15 or 5.01 of the Indenture; (iv)
failure by the Company or any of its Restricted Subsidiaries for 30 days after
notice to the Company by the Trustee or the Holders of at least 25% in principal
amount of the Notes (including Additional Notes, if any) then outstanding voting
as a single class to comply with certain other agreements in the Indenture or
the Notes; (v) default under certain other agreements relating to Debt of the
Company which default is caused by a failure to pay principal of or premium, if
any, or interest on such Debt prior to the grace period provided in such Debt on
the date of such default (a "Payment Default") or results in the acceleration of
such Debt prior to its express maturity and, in each case, the principal amount
of any such Debt under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vi) certain
final judgments for the payment of money that remain undischarged for a period
of 60 days; or (vii) certain events of bankruptcy or insolvency with respect to
the Company or any of its Restricted Subsidiaries. If any Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the then outstanding Notes may declare all the Notes to be
due and payable immediately. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, all
outstanding Notes will become due and payable without further action or notice.
Holders may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest. The Holders of a majority in aggregate
principal amount of the Notes then outstanding by notice to the Trustee may on
behalf of the Holders of all of the Notes waive any existing Default or Event of
Default and its consequences under the Indenture except a continuing Default or
Event of Default in the payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement regarding
compliance with the Indenture, and the Company is required upon becoming aware
of any Default or Event of Default, to deliver to the Trustee a statement
specifying such Default or Event of Default.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Company or its Affiliates, and may otherwise deal with the
Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
15. AUTHENTICATION. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
A1-7
<PAGE> 84
16. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND
RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders of
Notes under the Indenture, Holders of Restricted Global Notes and Restricted
Definitive Notes shall have all the rights set forth in the Registration Rights
Agreement dated as of January 28, 2000, between the Company and the parties
named on the signature pages thereof or, in the case of Additional Notes,
Holders of Restricted Global Notes and Restricted Definitive Notes shall have
the rights set forth in one or more registration rights agreements, if any,
between the Company and the other parties thereto, relating to rights given by
the Company to the purchasers of any Additional Notes (collectively, the
"Registration Rights Agreement").
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
19. GOVERNING LAW. This Note shall be governed by, and construed in
accordance with, the law of the State of New York.
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
Attention: Chief Financial Officer
A1-8
<PAGE> 85
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- --------------------------------------------------------------------------------
Date:
---------------------------
Your Signature:
-----------------------------
(Sign exactly as your name appears on
the face of this Note)
SIGNATURE GUARANTEE.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A1-9
<PAGE> 86
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.10 or 4.15 of the Indenture, check the box below:
[ ] Section 4.10 [ ] Section 4.15
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the
amount you elect to have purchased: $_________
Date:
---------------------------
Your Signature:
-----------------------------
(Sign exactly as your name appears on
the face of this Note)
Tax Identification No:
----------------------
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A1-10
<PAGE> 87
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE
The following exchanges of a part of this Global Note for an
interest in another Global Note or for a Definitive Note, or exchanges of a part
of another Global Note or Definitive Note for an interest in this Global Note,
have been made:
<TABLE>
<CAPTION>
Amount of Principal Amount Signature of
decrease in Amount of increase of this Global authorized
Principal Amount in Principal Note following officer of
of this Amount of this such decrease Trustee or Note
Date of Exchange Global Note Global Note (or increase) Custodian
- ---------------- ---------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
</TABLE>
A1-11
<PAGE> 88
EXHIBIT A-2
(Face of Regulation S Temporary Global Note)
================================================================================
CUSIP/CINS_____________
12% Senior Notes due 2010
No. _____ $__________
COVAD COMMUNICATIONS GROUP, INC.
promises to pay to _____________________________________________________________
or registered assigns,
the principal sum of _____________________________________________________
Dollars on February 15, 2010.
Interest Payment Dates: February 15 and August 15
Record Dates: February 1 and August 1
A2-1
<PAGE> 89
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
COVAD COMMUNICATIONS GROUP, INC.
BY:
-------------------------------------
Name:
Title:
BY:
-------------------------------------
Name:
Title:
Dated: January 28, 2000
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
United States Trust Company of New York,
as Trustee
By:
-------------------------------
Authorized Signatory
================================================================================
A2-2
<PAGE> 90
(Back of Regulation S Temporary Global Note)
12% Senior Notes due 2010
THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE
CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS
SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE
BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY GLOBAL NOTE SHALL BE ENTITLED
TO RECEIVE PAYMENT OF INTEREST HEREON.
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE
EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE,
(III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO
A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A) TO OFFER, SELL,
PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1) TO THE COMPANY,
A2-3
<PAGE> 91
(2) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER
THE SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A, (4) PURSUANT TO OFFERS AND SALES
TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (5) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A), (1),
(2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT IN A TRANSACTION MEETING
THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT (AND BASED ON AN OPINION
OF COUNSEL), OR (6) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT (AND BASED ON AN OPINION OF
COUNSEL IF THE COMPANY SO REQUESTS), SUBJECT IN EACH OF THE FOREGOING CASES TO
APPLICABLE JURISDICTION, AND (B) THAT IT WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF
THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE."
Capitalized terms used herein shall have the meanings assigned to
them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. Covad Communications Group, Inc., a Delaware
corporation (the "Company"), promises to pay interest on the principal amount of
this Note at 12% per annum. The Company shall pay interest and Additional
Interest, if any, semi-annually on February 15 and August 15, commencing on
August 15, 2000, or if any such day is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date"). Interest on the Notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the Closing Date; provided that if there is no
existing Default in the payment of interest, and if this Note is authenticated
between a record date referred to on the face hereof and the next succeeding
Interest Payment Date, interest shall accrue from such next succeeding Interest
Payment Date; provided, further, that the first Interest Payment Date shall be
August 15, 2000. The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue principal and
premium, if any, from time to time on demand at a rate that is 1% per annum in
excess of the rate then in effect; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months. All references
in this Note and in the Indenture to "interest" shall be deemed to include any
Additional Interest that may become payable thereon according to the provisions
of the Indenture.
Until this Regulation S Temporary Global Note is exchanged for one
or more Regulation S Permanent Global Notes, the Holder hereof shall not be
entitled to receive payments of interest hereon; until so exchanged in full,
this Regulation S Temporary Global Note shall in all other respects be entitled
to the same benefits as other Senior Subordinated Notes under the Indenture.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on February 1 or August 1 preceding the Interest
Payment Date, even if such Notes are cancelled after such record date and on or
before such Interest Payment Date, except as provided in Section 2.12 of the
Indenture with respect to defaulted interest. The Notes will be payable as to
principal, premium and interest at the office or agency of the Company
maintained for such purpose within or without the City and State of New York,
or, at the option of the Company, payment of interest may be made by check
mailed to the Holders at their addresses
A2-4
<PAGE> 92
set forth in the register of Holders, and provided that payment by wire transfer
of immediately available funds will be required with respect to principal of and
interest, premium on, all Global Notes and all other Notes the Holders of which
shall have provided wire transfer instructions to the Company or the Paying
Agent. Such payment shall be in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts.
3. PAYING AGENT AND REGISTRAR. Initially, United States Trust
Company of New York, the Trustee under the Indenture, will act as Paying Agent
and Registrar. The Company may change any Paying Agent or Registrar without
notice to any Holder. The Company or any of its Subsidiaries may act in any such
capacity.
4. INDENTURE. The Company issued the Notes under an Indenture dated
as of January 28, 2000 ("Indenture") between the Company and the Trustee. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (15
U.S. Code Sections 77aaa-77bbbb). The Notes are subject to all such terms, and
Holders are referred to the Indenture and such Act for a statement of such
terms. To the extent any provision of this Note conflicts with the express
provisions of the Indenture, the provisions of the Indenture shall govern and be
controlling. The Notes are obligations of the Company limited to $475,000,000 in
aggregate principal amount.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Notes prior to February 15,
2005. Thereafter, the Company shall have the option to redeem the Notes, in
whole or in part, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest thereon, if
any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on February 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2005................................................. 106.00%
2006................................................. 104.00%
2007................................................. 102.00%
2008 and thereafter.................................. 100.00%
</TABLE>
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time prior to February 15, 2003, the Company, at its option,
may use the net cash proceeds (but only to the extent such proceeds consist of
cash or Cash Equivalents) of one or more Public Equity Offerings to redeem up to
an aggregate of 35% of the Notes issued on the Issue Date under the Indenture at
a redemption price of 112.00% of the aggregate principal amount of the Notes,
plus accrued and unpaid interest, if any, to the date of redemption; provided
that at least $276.25 million of the aggregate principal amount of the Notes
remains outstanding immediately after the occurrence of such redemption. In
order to effect the foregoing redemption, the Company must mail a notice of
redemption no later than 30 days after the related Public Equity Offering and
must consummate such redemption within 60 days of the closing of such Public
Equity Offering.
6. MANDATORY REDEMPTION.
A2-5
<PAGE> 93
Except as set forth in paragraph 7 below, the Company shall not be
required to make mandatory redemption payments with respect to the Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be required
to make an offer (a "Change of Control Offer") to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of each Holder's Notes at a
purchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest to the date of purchase (the "Change of Control
Payment"). Within 10 days following any Change of Control, the Company shall
mail a notice to each Holder setting forth the procedures governing the Change
of Control Offer as required by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company shall commence an offer to all
Holders of Notes (an "Asset Sale Offer") pursuant to Section 3.09 of the
Indenture to purchase the maximum principal amount of Notes (including any
Additional Notes) that may be purchased out of the Excess Proceeds at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Additional Interest thereon, if any, to the date
fixed for the closing of such offer, in accordance with the procedures set forth
in the Indenture. To the extent that the aggregate amount of Notes (including
any Additional Notes) tendered pursuant to an Asset Sale Offer is less than the
Excess Proceeds, the Company (or such Restricted Subsidiary) may use such
deficiency for general corporate purposes. If the aggregate principal amount of
Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased on a pro rata basis. Holders of
Notes that are the subject of an offer to purchase will receive an Asset Sale
Offer from the Company prior to any related purchase date and may elect to have
such Notes purchased by completing the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes or
portions thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of Notes may be registered and Notes may be exchanged as
provided in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, the Company
need not exchange or register the transfer of any Notes for a period of 15 days
before a selection of Notes to be redeemed or during the period between a record
date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note will be
treated as its owner for all purposes.
A2-6
<PAGE> 94
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the then outstanding
Notes (and Additional Notes, if any) voting as a single class, and any existing
default or compliance with any provision of the Indenture or the Notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding Notes (and Additional Notes, if any) voting as a single class.
Without the consent of any Holder of a Note, the Indenture or the Notes may be
amended or supplemented to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
the Notes in case of a merger or consolidation or sale of all or substantially
all of the Company's assets, to make any change that would provide any
additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act, or to provide
for the Issuance of Additional Notes in accordance with the limitations set
forth in the Indenture.
12. DEFAULTS AND REMEDIES. Events of Default include: (i) default
for 30 days in the payment when due of interest on the Notes (including any
Additional Interest); (ii) default in payment when due of principal of or
premium, if any, on the Notes when the same becomes due and payable at maturity,
upon redemption (including in connection with an offer to purchase) or
otherwise; (iii) failure by the Company or any of its Restricted Subsidiaries to
comply with Section 4.07, 4.09, 4.10, 4.15 or 5.01 of the Indenture; (iv)
failure by the Company or any of its Restricted Subsidiaries for 30 days after
notice to the Company by the Trustee or the Holders of at least 25% in principal
amount of the Notes (including Additional Notes, if any) then outstanding voting
as a single class to comply with certain other agreements in the Indenture or
the Notes; (v) default under certain other agreements relating to Debt of the
Company which default is caused by a failure to pay principal of or premium, if
any, or interest on such Debt prior to the grace period provided in such Debt on
the date of such default (a "Payment Default") or results in the acceleration of
such Debt prior to its express maturity and, in each case, the principal amount
of any such Debt under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vi) certain
final judgments for the payment of money that remain undischarged for a period
of 60 days; or (vii) certain events of bankruptcy or insolvency with respect to
the Company or any of its Restricted Subsidiaries. If any Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the then outstanding Notes may declare all the Notes to be
due and payable immediately. Notwithstanding the foregoing, in the case of an
Event of Default arising from certain events of bankruptcy or insolvency, all
outstanding Notes will become due and payable without further action or notice.
Holders may not enforce the Indenture or the Notes except as provided in the
Indenture. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest. The Holders of a majority in aggregate
principal amount of the Notes then outstanding by notice to the Trustee may on
behalf of the Holders of all of the Notes waive any existing Default or Event of
Default and its consequences under the Indenture except a continuing Default or
Event of Default in the payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement regarding
compliance with the Indenture, and the Company is required upon becoming aware
of any Default or Event of Default, to deliver to the Trustee a statement
specifying such Default or Event of Default.
A2-7
<PAGE> 95
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Company or its Affiliates, and may otherwise deal with the
Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
15. AUTHENTICATION. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND
RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders of
Notes under the Indenture, Holders of Restricted Global Notes and Restricted
Definitive Notes shall have all the rights set forth in the Registration Rights
Agreement dated as of January 28, 2000, between the Company and the parties
named on the signature pages thereof or, in the case of Additional Notes,
Holders of Restricted Global Notes and Restricted Definitive Notes shall have
the rights set forth in one or more registration rights agreements, if any,
between the Company and the other parties thereto, relating to rights given by
the Company to the purchasers of any Additional Notes (collectively, the
"Registration Rights Agreement").
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
19. GOVERNING LAW. This Note shall be governed by, and construed in
accordance with, the law of the State of New York.
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
Attention: Chief Financial Officer
A2-8
<PAGE> 96
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- --------------------------------------------------------------------------------
Date:
---------------------------
Your Signature:
-----------------------------
(Sign exactly as your name appears on the face of this Note)
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A2-9
<PAGE> 97
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.10 or 4.15 of the Indenture, check the appropriate box
below:
[ ] Section 4.10 [ ] Section 4.15
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 or Section 4.15 of the Indenture, state the
amount you elect to have purchased: $_________
Date:_____________ Your Signature:_______________________________
(Sign exactly as your name appears on the face of this Note)
Tax Identification No:
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
A2-10
<PAGE> 98
SCHEDULE OF EXCHANGES OF REGULATION S TEMPORARY GLOBAL NOTE
The following exchanges of a part of this Regulation S Temporary
Global Note for an interest in another Global Note or for other Restricted
Global Notes for an interest in this Regulation S Temporary Global Note, have
been made:
<TABLE>
<CAPTION>
Amount of Principal Amount Signature of
decrease in Amount of increase of this Global authorized
Principal Amount in Principal Note following officer of
of this Amount of this such decrease Trustee or Note
Date of Exchange Global Note Global Note (or increase) Custodian
- ---------------- ---------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
</TABLE>
A2-11
<PAGE> 99
EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
United States Trust Company of New York
114 West 47th Street
25th Floor
New York, New York 10036
Attention: Corporate Trust Administration
Re: 12% Senior Notes due 2010 of
Covad Communications Group, Inc.
Reference is hereby made to the Indenture, dated as of January 28,
2000 (the "Indenture"), between Covad Communications Group, Inc., as issuer (the
"Company"), and United States Trust Company of New York, as trustee. Capitalized
terms used but not defined herein shall have the meanings given to them in the
Indenture.
______________, (the "Transferor") owns and proposes to transfer the
Note[s] or interest in such Note[s] specified in Annex A hereto, in the
principal amount of $________ in such Note[s] or interests (the "Transfer"), to
__________ (the "Transferee"), as further specified in Annex A hereto. In
connection with the Transfer, the Transferor hereby certifies that:
[CHECK ALL THAT APPLY]
1. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE
144A GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO RULE 144A. The Transfer is
being effected pursuant to and in accordance with Rule 144A under the United
States Securities Act of 1933, as amended (the "Securities Act"), and,
accordingly, the Transferor hereby further certifies that the beneficial
interest or Definitive Note is being transferred to a Person that the Transferor
reasonably believed and believes is purchasing the beneficial interest or
Definitive Note for its own account, or for one or more accounts with respect to
which such Person exercises sole investment discretion, and such Person and each
such account is a "qualified institutional buyer" within the meaning of Rule
144A in a transaction meeting the requirements of Rule 144A and such Transfer is
in compliance with any applicable blue sky securities laws of any state of the
United States. Upon consummation of the proposed Transfer in accordance with the
terms of the Indenture, the transferred beneficial interest or Definitive Note
will be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the 144A Global Note and/or the Definitive Note and
in the Indenture and the Securities Act.
B-1
<PAGE> 100
2. [ ] CHECK IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL INTEREST IN THE
TEMPORARY REGULATION S GLOBAL NOTE, THE REGULATION S GLOBAL NOTE OR A DEFINITIVE
NOTE PURSUANT TO REGULATION S. The Transfer is being effected pursuant to and in
accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly,
the Transferor hereby further certifies that (i) the Transfer is not being made
to a person in the United States and (x) at the time the buy order was
originated, the Transferee was outside the United States or such Transferor and
any Person acting on its behalf reasonably believed and believes that the
Transferee was outside the United States or (y) the transaction was executed in,
on or through the facilities of a designated offshore securities market and
neither such Transferor nor any Person acting on its behalf knows that the
transaction was prearranged with a buyer in the United States, (ii) no directed
selling efforts have been made in contravention of the requirements of Rule
903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the
transaction is not part of a plan or scheme to evade the registration
requirements of the Securities Act and (iv) if the proposed transfer is being
made prior to the expiration of the Restricted Period, the transfer is not being
made to a U.S. Person or for the account or benefit of a U.S. Person (other than
an Initial Purchaser). Upon consummation of the proposed transfer in accordance
with the terms of the Indenture, the transferred beneficial interest or
Definitive Note will be subject to the restrictions on Transfer enumerated in
the Private Placement Legend printed on the Regulation S Global Note, the
Temporary Regulation S Global Note and/or the Definitive Note and in the
Indenture and the Securities Act.
3. [ ] CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF A BENEFICIAL
INTEREST IN THE IAI GLOBAL NOTE OR A DEFINITIVE NOTE PURSUANT TO ANY PROVISION
OF THE SECURITIES ACT OTHER THAN RULE 144A OR REGULATION S. The Transfer is
being effected in compliance with the transfer restrictions applicable to
beneficial interests in Restricted Global Notes and Restricted Definitive Notes
and pursuant to and in accordance with the Securities Act and any applicable
blue sky securities laws of any state of the United States, and accordingly the
Transferor hereby further certifies that (check one):
(a) [ ] such Transfer is being effected pursuant to and in
accordance with Rule 144 under the Securities Act;
or
(b) [ ] such Transfer is being effected to the Company or a
subsidiary thereof;
or
(c) [ ] such Transfer is being effected pursuant to an effective
registration statement under the Securities Act and in compliance with the
prospectus delivery requirements of the Securities Act;
or
(d) [ ] such Transfer is being effected to an Institutional
Accredited Investor and pursuant to an exemption from the registration
requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904,
and the Transferor hereby further certifies that it has not engaged in any
general solicitation within the meaning of Regulation D under the Securities Act
and the Transfer complies with the transfer restrictions applicable to
beneficial interests in a Restricted Global Note or Restricted Definitive Notes
and the requirements of the exemption claimed, which certification is supported
by (1) a certificate executed by the Transferee in the form of Exhibit D to the
Indenture and (2) an Opinion of Counsel provided by the Transferor or the
Transferee (a copy of which the Transferor has attached to this certification),
to the effect that such Transfer is in compliance with the Securities Act. Upon
consummation of the proposed transfer
B-2
<PAGE> 101
in accordance with the terms of the Indenture, the transferred beneficial
interest or Definitive Note will be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the IAI Global Note and/or
the Definitive Notes and in the Indenture and the Securities Act.
4. [ ] Check if Transferee will take delivery of a beneficial interest in an
Unrestricted Global Note or of an Unrestricted Definitive Note.
(a) [ ] CHECK IF TRANSFER IS PURSUANT TO RULE 144. (i) The Transfer
is being effected pursuant to and in accordance with Rule 144 under the
Securities Act and in compliance with the transfer restrictions contained in the
Indenture and any applicable blue sky securities laws of any state of the United
States and (ii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act. Upon consummation of the proposed Transfer in accordance
with the terms of the Indenture, the transferred beneficial interest or
Definitive Note will no longer be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted Global
Notes, on Restricted Definitive Notes and in the Indenture.
(b) [ ] CHECK IF TRANSFER IS PURSUANT TO REGULATION S. (i) The
Transfer is being effected pursuant to and in accordance with Rule 903 or Rule
904 under the Securities Act and in compliance with the transfer restrictions
contained in the Indenture and any applicable blue sky securities laws of any
state of the United States and (ii) the restrictions on transfer contained in
the Indenture and the Private Placement Legend are not required in order to
maintain compliance with the Securities Act. Upon consummation of the proposed
Transfer in accordance with the terms of the Indenture, the transferred
beneficial interest or Definitive Note will no longer be subject to the
restrictions on transfer enumerated in the Private Placement Legend printed on
the Restricted Global Notes, on Restricted Definitive Notes and in the
Indenture.
(c) [ ] CHECK IF TRANSFER IS PURSUANT TO OTHER EXEMPTION. (i) The
Transfer is being effected pursuant to and in compliance with an exemption from
the registration requirements of the Securities Act other than Rule 144, Rule
903 or Rule 904 and in compliance with the transfer restrictions contained in
the Indenture and any applicable blue sky securities laws of any State of the
United States and (ii) the restrictions on transfer contained in the Indenture
and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act. Upon consummation of the proposed Transfer
in accordance with the terms of the Indenture, the transferred beneficial
interest or Definitive Note will not be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted Global
Notes or Restricted Definitive Notes and in the Indenture.
This certificate and the statements contained herein are made for
your benefit and the benefit of the Company.
--------------------------------------------
[Insert Name of Transferor]
By:
----------------------------------------
Name:
Title:
Dated:
---------------------
B-3
<PAGE> 102
ANNEX A TO CERTIFICATE OF TRANSFER
1. The Transferor owns and proposes to transfer the following:
CHECK ONE OF (a) OR (b)
(a) [ ] a beneficial interest in the:
(i) [ ] 144A Global Note (CUSIP 222814AK1), or
(ii) [ ] Regulation S Global Note (CUSIP U22015AD0), or
(iii) [ ] IAI Global Note (CUSIP 222814AL9); or
(b) [ ] a Restricted Definitive Note.
2. After the Transfer the Transferee will hold:
CHECK ONE
(a) [ ] a beneficial interest in the:
(i) [ ] 144A Global Note (CUSIP 222814AK1), or
(ii) [ ] Regulation S Global Note (CUSIP U22015AD0), or
(iii) [ ] IAI Global Note (CUSIP 222814AL9); or
(iv) [ ] Unrestricted Global Note (CUSIP [ ]); or
(b) [ ] a Restricted Definitive Note; or
(c) [ ] an Unrestricted Definitive Note,
in accordance with the terms of the Indenture.
B-4
<PAGE> 103
EXHIBIT C
FORM OF CERTIFICATE OF EXCHANGE
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
United States Trust Company of New York
114 West 47th Street
25th Floor
New York, New York 10036
Attention: Corporate Trust Administration
Re: 12% Senior Notes due 2010 of
Covad Communications Group. Inc.
(CUSIP _____________)
Reference is hereby made to the Indenture, dated as of January 28,
2000 (the "Indenture"), between Covad Communications Group, Inc., as issuer (the
"Company"), and United States Trust Company of New York, as trustee. Capitalized
terms used but not defined herein shall have the meanings given to them in the
Indenture.
_______________ (the "Owner") owns and proposes to exchange the
Note[s] or interest in such Note[s] specified herein, in the principal amount of
$_________ in such Note[s] or interests (the "Exchange"). In connection with the
Exchange, the Owner hereby certifies that:
1. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN A
RESTRICTED GLOBAL NOTE FOR UNRESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS
IN AN UNRESTRICTED GLOBAL NOTE
(a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED
GLOBAL NOTE TO BENEFICIAL INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection
with the Exchange of the Owner's beneficial interest in a Restricted Global Note
for a beneficial interest in an Unrestricted Global Note in an equal principal
amount, the Owner hereby certifies (i) the beneficial interest is being acquired
for the Owner's own account without transfer, (ii) such Exchange has been
effected in compliance with the transfer restrictions applicable to the Global
Notes and pursuant to and in accordance with the United States Securities Act of
1933, as amended (the "Securities Act"), (iii) the restrictions on transfer
contained in the Indenture and the Private Placement Legend are not required in
order to maintain compliance with the Securities Act and (iv) the beneficial
interest in an Unrestricted Global Note is being acquired in compliance with any
applicable blue sky securities laws of any state of the United States.
(b) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED
GLOBAL NOTE TO UNRESTRICTED DEFINITIVE NOTE. In connection with the Exchange of
the Owner's beneficial interest in a Restricted Global Note for an Unrestricted
Definitive Note, the Owner hereby certifies (i) the Definitive Note
C-1
<PAGE> 104
is being acquired for the Owner's own account without transfer, (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to the Restricted Global Notes and pursuant to and in accordance with
the Securities Act, (iii) the restrictions on transfer contained in the
Indenture and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act and (iv) the Definitive Note is being
acquired in compliance with any applicable blue sky securities laws of any state
of the United States.
(c) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO BENEFICIAL
INTEREST IN AN UNRESTRICTED GLOBAL NOTE. In connection with the Owner's Exchange
of a Restricted Definitive Note for a beneficial interest in an Unrestricted
Global Note, the Owner hereby certifies (i) the beneficial interest is being
acquired for the Owner's own account without transfer, (ii) such Exchange has
been effected in compliance with the transfer restrictions applicable to
Restricted Definitive Notes and pursuant to and in accordance with the
Securities Act, (iii) the restrictions on transfer contained in the Indenture
and the Private Placement Legend are not required in order to maintain
compliance with the Securities Act and (iv) the beneficial interest is being
acquired in compliance with any applicable blue sky securities laws of any state
of the United States.
(d) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO
UNRESTRICTED DEFINITIVE NOTE. In connection with the Owner's Exchange of a
Restricted Definitive Note for an Unrestricted Definitive Note, the Owner hereby
certifies (i) the Unrestricted Definitive Note is being acquired for the Owner's
own account without transfer, (ii) such Exchange has been effected in compliance
with the transfer restrictions applicable to Restricted Definitive Notes and
pursuant to and in accordance with the Securities Act, (iii) the restrictions on
transfer contained in the Indenture and the Private Placement Legend are not
required in order to maintain compliance with the Securities Act and (iv) the
Unrestricted Definitive Note is being acquired in compliance with any applicable
blue sky securities laws of any state of the United States.
2. EXCHANGE OF RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN RESTRICTED
GLOBAL NOTES FOR RESTRICTED DEFINITIVE NOTES OR BENEFICIAL INTERESTS IN
RESTRICTED GLOBAL NOTES
(a) [ ] CHECK IF EXCHANGE IS FROM BENEFICIAL INTEREST IN A RESTRICTED
GLOBAL NOTE TO RESTRICTED DEFINITIVE NOTE. In connection with the Exchange of
the Owner's beneficial interest in a Restricted Global Note for a Restricted
Definitive Note with an equal principal amount, the Owner hereby certifies that
the Restricted Definitive Note is being acquired for the Owner's own account
without transfer. Upon consummation of the proposed Exchange in accordance with
the terms of the Indenture, the Restricted Definitive Note issued will continue
to be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the Restricted Definitive Note and in the Indenture
and the Securities Act.
(b) [ ] CHECK IF EXCHANGE IS FROM RESTRICTED DEFINITIVE NOTE TO BENEFICIAL
INTEREST IN A RESTRICTED GLOBAL NOTE. In connection with the Exchange of the
Owner's Restricted Definitive Note for a beneficial interest in the [CHECK ONE]
[ ] 144A Global Note, [ ] Regulation S Global Note, [ ] IAI Global Note with an
equal principal amount, the Owner hereby certifies (i) the beneficial interest
is being acquired for the Owner's own account without transfer and (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to the Restricted Global Notes and pursuant to and in accordance with
the Securities Act, and in compliance with any applicable blue sky securities
laws of any state of the United States. Upon consummation of the proposed
Exchange in accordance with the terms of the Indenture, the beneficial interest
issued will be subject to the restrictions on transfer enumerated in the Private
Placement Legend printed on the relevant Restricted Global Note and in the
Indenture and the Securities Act.
C-2
<PAGE> 105
This certificate and the statements contained herein are made for
your benefit and the benefit of the Company.
--------------------------------------------
[Insert Name of Transferor]
By:
----------------------------------------
Name:
Title:
Dated:
---------------------
C-3
<PAGE> 106
EXHIBIT D
FORM OF CERTIFICATE FROM
ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
United States Trust Company of New York
114 West 47th Street
25th Floor
New York, New York 10036
Attention: Corporate Trust Administration
Re: 12% Senior Notes due 2010 of
Covad Communications Group. Inc.
Reference is hereby made to the Indenture, dated as of January 28,
2000 (the "Indenture"), between Covad Communications Group, Inc., as issuer (the
"Company"), and United States Trust Company of New York, as trustee. Capitalized
terms used but not defined herein shall have the meanings given to them in the
Indenture.
In connection with our proposed purchase of $___________ aggregate
principal amount of:
(a) [ ] a beneficial interest in a Global Note, or
(b) [ ] a Definitive Note,
we confirm that:
1. We understand that any subsequent transfer of the Notes or any
interest therein is subject to certain restrictions and conditions set forth in
the Indenture and the undersigned agrees to be bound by, and not to resell,
pledge or otherwise transfer the Notes or any interest therein except in
compliance with, such restrictions and conditions and the United States
Securities Act of 1933, as amended (the "Securities Act").
2. We understand that the offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes and any interest therein
may not be offered or sold except as permitted in the following sentence. We
agree, on our own behalf and on behalf of any accounts for which we are acting
as hereinafter stated, that if we should sell the Notes or any interest therein,
we will do so only (A) to the Company or any subsidiary thereof, (B) in
accordance with Rule 144A under the Securities Act to a "qualified institutional
buyer" (as defined therein), (C) to an institutional "accredited investor" (as
defined
D-1
<PAGE> 107
below) that, prior to such transfer, furnishes (or has furnished on its behalf
by a U.S. broker-dealer) to you and to the Company a signed letter substantially
in the form of this letter and an Opinion of Counsel in form reasonably
acceptable to the Company to the effect that such transfer is in compliance with
the Securities Act, (D) outside the United States in accordance with Rule 904 of
Regulation S under the Securities Act, (E) pursuant to the provisions of Rule
144(k) under the Securities Act or (F) pursuant to an effective registration
statement under the Securities Act, and we further agree to provide to any
person purchasing the Definitive Note or beneficial interest in a Global Note
from us in a transaction meeting the requirements of clauses (A) through (E) of
this paragraph a notice advising such purchaser that resales thereof are
restricted as stated herein.
3. We understand that, on any proposed resale of the Notes or
beneficial interest therein, we will be required to furnish to you and the
Company such certifications, legal opinions and other information as you and the
Company may reasonably require to confirm that the proposed sale complies with
the foregoing restrictions. We further understand that the Notes purchased by us
will bear a legend to the foregoing effect. We further understand that any
subsequent transfer by us of the Notes or beneficial interest therein acquired
by us must be effected through one of the Placement Agents.
4. We are an institutional "accredited investor" (as defined in Rule
501(a)(l), (2), (3) or (7) of Regulation D under the Securities Act) and have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of our investment in the Notes, and we and
any accounts for which we are acting are each able to bear the economic risk of
our or its investment.
5. We are acquiring the Notes or beneficial interest therein
purchased by us for our own account or for one or more accounts (each of which
is an institutional "accredited investor") as to each of which we exercise sole
investment discretion.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.
--------------------------------------------
[Insert Name of Transferor]
By:
----------------------------------------
Name:
Title:
Dated:
---------------------
D-2
<PAGE> 1
EXHIBIT 4.11
EXECUTION COPY
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
by and among
COVAD COMMUNICATIONS GROUP, INC.,
as Issuer
and
BEAR, STEARNS & CO. INC.
and
MORGAN STANLEY & CO. INCORPORATED
as Initial Purchasers
DATED AS OF JANUARY 28, 2000
- --------------------------------------------------------------------------------
<PAGE> 2
This Registration Rights Agreement (this "Agreement") is made and
entered into as of January 28, 2000, by and among Covad Communications Group,
Inc., a Delaware corporation (the "Issuer"), on the one hand, and Bear, Stearns
& Co. Inc. and Morgan Stanley & Co. Incorporated (each an "Initial Purchaser"
and, collectively, the "Initial Purchasers"), on the other hand, each of whom
has agreed to purchase a specified number of the Issuer's 12% Senior Notes due
2010 (the "Initial Notes") pursuant to the Purchase Agreement (as defined
below).
This Agreement is made pursuant to the Purchase Agreement, dated as
of January 21, 2000 (the "Purchase Agreement"), by and among the Issuer and the
Initial Purchasers (i) for the benefit of the Issuer and the Initial Purchasers
and (ii) for the benefit of the holders from time to time of the Notes
(including the Initial Purchasers). In order to induce the Initial Purchasers to
purchase the Initial Notes, the Issuer has agreed to provide the registration
rights set forth in this Agreement. The execution and delivery of this Agreement
is a condition to the obligations of the Initial Purchasers set forth in Section
8 of the Purchase Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall
have the following meanings:
Additional Interest: As defined in Section 5 hereto.
Additional Interest Payment Date: With respect to the Initial Notes,
February 15 and August 15, while a Registration Default is outstanding.
Broker-Dealer: Any broker or dealer registered under the Exchange
Act.
Broker-Dealer Transfer Restricted Securities: Exchange Notes that
are acquired by a Broker- Dealer in the Exchange Offer in exchange for Initial
Notes that such Broker-Dealer acquired for its own account as a result of market
making activities or other trading activities (other than Initial Notes acquired
directly from the Company or any of its affiliates).
Closing Date: The date of this Agreement.
Commission: The Securities and Exchange Commission.
Consummate: An Exchange Offer shall be deemed "Consummated" for
purposes of this Agreement upon the occurrence of (i) the filing and
effectiveness under the Securities Act of the Exchange Offer Registration
Statement relating to the Exchange Notes to be issued in the Exchange Offer,
(ii) the maintenance of such Registration Statement continuously effective and
the keeping of the Exchange Offer open for a period not less than the minimum
period required pursuant to Section 3(b) hereof, and (iii) the delivery by the
Issuer to the Registrar under the Indenture of Exchange Notes in the same
aggregate principal amount at maturity as the aggregate principal amount at
maturity of Initial Notes that were tendered by Holders thereof pursuant to the
Exchange Offer.
Effectiveness Target Date: As defined in Section 5.
2
<PAGE> 3
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exchange Notes: The Series B 12% Senior Notes due 2010, of the same
class under the Indenture as the Initial Notes, to be issued to Holders in
exchange for Transfer Restricted Securities pursuant to this Agreement.
Exchange Offer: The registration by the Issuer under the Securities
Act of the Exchange Notes pursuant to a Registration Statement pursuant to which
the Issuer offers the Holders of all outstanding Transfer Restricted Securities
the opportunity to exchange all such outstanding Transfer Restricted Securities
held by such Holders for Exchange Notes in an aggregate principal amount at
maturity equal to the aggregate principal amount at maturity of the Transfer
Restricted Securities tendered in such exchange offer by such Holders.
Exchange Offer Registration Statement: The Registration Statement
relating to the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Initial Purchasers
propose to sell the Initial Notes to certain "qualified institutional buyers,"
as such term is defined in Rule 144A under the Securities Act, and to certain
non-U.S. persons outside the United States within the meaning of Regulation S
under the Securities Act.
Holders: As defined in Section 2(b) hereof.
Indemnified Holder: As defined in Section 8(a) hereof.
Indenture: The Indenture, dated as of January 28, 2000, among the
Issuer and United States Trust Company of New York, as trustee (the "Trustee"),
pursuant to which the Notes are to be issued, as such Indenture is amended or
supplemented from time to time in accordance with the terms thereof.
Initial Purchaser: As defined in the preamble hereto.
Initial Notes: The Series A 12% Senior Notes due 2010, of the same
class under the Indenture as the Exchange Notes, for so long as such securities
constitute Transfer Restricted Securities.
Initial Placement: The issuance and sale by the Issuer of the
Initial Notes to the Initial Purchasers pursuant to the Purchase Agreement.
Interest Payment Date: As defined in the Notes.
NASD: National Association of Securities Dealers, Inc.
Notes: The Initial Notes and the Exchange Notes.
Person: An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
Prospectus: The prospectus included in a Registration Statement, as
amended or supplemented by any prospectus supplement and by all other amendments
thereto, including post-effective amendments, and all material incorporated by
reference into such Prospectus.
3
<PAGE> 4
Record Date: With respect to the Initial Notes, for the purposes of
determining the Holders entitled to payments of Additional Interest, each
February 1 and August 1.
Record Holder: With respect to any Additional Interest Payment Date
relating to the Notes, each Person who is a Holder of Notes on the Record Date
with respect to the Additional Interest Payment Date.
Registration Default: As defined in Section 5 hereof.
Registration Statement: Any registration statement of the Issuer
relating to (a) an offering of Exchange Notes pursuant to the Exchange Offer or
(b) the registration for resale of Transfer Restricted Securities pursuant to
the Shelf Registration Statement, which is filed pursuant to the provisions of
this Agreement, in each case, including the Prospectus included therein, all
amendments and supplements thereto (including post-effective amendments) and all
exhibits and material incorporated by reference therein.
Restricted Broker-Dealer: Any Broker-Dealer which holds
Broker-Dealer Transfer Restricted Securities.
Securities Act: The Securities Act of 1933, as amended.
Shelf Filing Deadline: As defined in Section 4 hereof.
Shelf Registration Statement: As defined in Section 4 hereof.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section
77aaa-77bbbb) as in effect on the date of the Indenture.
Transfer Restricted Securities: Each Initial Note, until the
earliest to occur of (a) the date on which such Note is exchanged in the
Exchange Offer and entitled to be resold to the public by the Holder thereof
without complying with the prospectus delivery requirements of the Securities
Act, (b) the date on which such Note has been effectively registered under the
Securities Act and disposed of in accordance with a Shelf Registration Statement
and (c) the date on which such Note is distributed to the public pursuant to
Rule 144 under the Securities Act or by a Broker-Dealer pursuant to the "Plan of
Distribution" contemplated by the Exchange Offer Registration Statement
(including delivery of the Prospectus contained therein).
Underwritten Registration or Underwritten Offering: A registration
in which securities of the Issuer are sold to an underwriter for reoffering to
the public.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) Transfer Restricted Securities. The securities entitled to the
benefits of this Agreement are the Transfer Restricted Securities.
(b) Holders of Transfer Restricted Securities. On any date of
determination, any Person in whose name Transfer Restricted Securities are
registered in accordance with the Indenture is deemed to be a holder of Transfer
Restricted Securities (each, a "Holder").
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permissible under applicable
law or Commission policy (after the procedures set forth in Section 6(a) below
have been complied with), the Issuer shall
4
<PAGE> 5
(i) cause to be filed with the Commission no later than 60 days after the
Closing Date, a Registration Statement under the Securities Act relating to the
Exchange Notes and the Exchange Offer, (ii) use its best efforts to cause such
Registration Statement to become effective no later than 180 days after the
Closing Date, (iii) in connection with the foregoing, (A) file all pre-effective
amendments to such Registration Statement as may be necessary in order to cause
such Registration Statement to become effective, (B) if applicable, file a post-
effective amendment to such Registration Statement pursuant to Rule 430A under
the Securities Act and (C) cause all necessary filings in connection with the
registration and qualification of the Exchange Notes to be made under the Blue
Sky laws of such jurisdictions as are necessary to permit Consummation of the
Exchange Offer, and (iv) upon the effectiveness of such Registration Statement,
commence the Exchange Offer. The Exchange Offer shall be on the appropriate form
to permit registration of the Exchange Notes to be offered in exchange for the
Transfer Restricted Securities and sales of Broker-Dealer Transfer Restricted
Securities by Restricted Broker-Dealers as contemplated by Section 3(c) below.
(b) The Issuer shall cause the Exchange Offer Registration Statement to be
effective continuously and shall keep the Exchange Offer open for a period of
not less than the minimum period required under applicable federal and state
securities laws to Consummate the Exchange Offer; provided, however, that in no
event shall such period be less than 30 days after the date notice of the
Exchange Offer is mailed to the Holders. The Issuer shall cause the Exchange
Offer to comply with all applicable federal and state securities laws. No
securities other than the Notes shall be included in the Exchange Offer
Registration Statement. The Issuer shall use its best efforts to cause the
Exchange Offer to be Consummated no later than 210 days after the Closing Date.
(c) The Issuer shall indicate in a "Plan of Distribution" section
contained in the Prospectus forming a part of the Exchange Offer Registration
Statement that any Restricted Broker-Dealer who holds Initial Notes that are
Transfer Restricted Securities and that were acquired for its own account as a
result of market- making activities or other trading activities (other than
Transfer Restricted Securities acquired directly from the Issuer or one of its
affiliates), may exchange such Initial Notes pursuant to the Exchange Offer;
however, such Broker-Dealer may be deemed to be an "underwriter" within the
meaning of the Securities Act and must, therefore, deliver a prospectus meeting
the requirements of the Securities Act in connection with any resales of the
Exchange Notes received by such Broker-Dealer in the Exchange Offer, which
prospectus delivery requirement may be satisfied by the delivery by such
Broker-Dealer of the Prospectus contained in the Exchange Offer Registration
Statement. Such "Plan of Distribution" section shall also contain all other
information with respect to such resales by Restricted Broker-Dealers that the
Commission may require in order to permit such resales pursuant thereto, but
such "Plan of Distribution" shall not name any such Broker- Dealer or disclose
the amount of Notes held by any such Broker-Dealer except to the extent required
by the Commission as a result of a change in policy after the date of this
Agreement.
The Issuer shall use its best efforts to keep the Exchange Offer
Registration Statement continuously effective, supplemented and amended as
required by the provisions of Section 6(c) below to the extent necessary to
ensure that it is available for resales of Broker-Dealer Transfer Restricted
Securities acquired by Restricted Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities, and to ensure
that it conforms with the requirements of this Agreement, the Securities Act and
the policies, rules and regulations of the Commission as announced from time to
time, for a period ending on the earlier of (i) 150 days from the date on which
the Exchange Offer Registration Statement is declared effective and (ii) the
date on which a Restricted Broker-Dealer is no longer required to deliver a
prospectus in connection with market-making or other trading activities.
5
<PAGE> 6
The Issuer shall provide sufficient copies of the latest version of
such Prospectus to Restricted Broker-Dealers promptly upon request at any time
during such 150-day (or shorter as provided in the foregoing sentence) period in
order to facilitate such resales.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Issuer is not required to file an
Exchange Offer Registration Statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy (after the procedures set forth in Section 6(a) below have been complied
with), (ii) for any reason the Exchange Offer is not Consummated within 210 days
after the Closing Date, or (iii) with respect to any Holder of Transfer
Restricted Securities (A) such Holder is prohibited by applicable law or
Commission policy from participating in the Exchange Offer, or (B) such Holder
may not resell the Exchange Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and that the Prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales by such Holder, or (C) such Holder is a Broker-Dealer and holds Initial
Notes acquired directly from the Issuer or one of its affiliates, then, upon
such Holder's request, the Issuer shall
(x) cause to be filed a shelf registration statement pursuant to
Rule 415 under the Securities Act, which may be an amendment to the
Exchange Offer Registration Statement (in either event, the "Shelf
Registration Statement") as soon as practicable but in any event on or
prior to 30 days after the obligation to file the Shelf Registration
Statement arises (such date being the "Shelf Filing Deadline"), which
Shelf Registration Statement shall provide for resales of all Transfer
Restricted Securities the Holders of which shall have provided the
information required pursuant to Section 4(b) hereof; and
(y) use its best efforts to cause such Shelf Registration Statement
to be declared effective by the Commission on or before the 180th day
after such obligation arises.
The Issuer shall use its best efforts to keep such Shelf Registration Statement
continuously effective, supplemented and amended as required by the provisions
of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is
available for resales of Notes by the Holders of Transfer Restricted Securities
entitled to the benefit of this Section 4(a), and to ensure that it conforms
with the requirements of this Agreement, the Securities Act and the policies,
rules and regulations of the Commission as announced from time to time, for a
period of at least two years following the effective date of such Shelf
Registration Statement (or shorter period that will terminate when all the Notes
covered by such Shelf Registration Statement have been sold pursuant to such
Shelf Registration Statement).
(b) Provision by Holders of Certain Information in Connection with the
Shelf Registration Statement. No Holder of Transfer Restricted Securities may
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Issuer in writing, within 10 business days after receipt of a request
therefor, such information as the Issuer may reasonably request for use in
connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus included therein. Each Holder as to which any Shelf Registration
Statement is being effected agrees to furnish promptly to the Issuer all
information required to be disclosed in order to make the information previously
furnished to the Issuer by such Holder not materially misleading.
SECTION 5. ADDITIONAL INTEREST
If (i) any of the Registration Statements required by this Agreement
is not filed with the Commission on or prior to the date specified for such
filing in this Agreement, (ii) any of such Registration
6
<PAGE> 7
Statements has not been declared effective by the Commission on or prior to the
date specified for such effectiveness in this Agreement (the "Effectiveness
Target Date"), regardless of the reasonableness of any efforts made by or on
behalf of the Issuer to cause such Registration Statement to become effective),
(iii) the Company fails to consummate the Exchange Offer within 30 days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (iv) any Registration Statement required by this Agreement is
filed and declared effective but shall thereafter cease to be effective or fail
to be usable for its intended purpose without being succeeded immediately by a
post-effective amendment to such Registration Statement that cures such failure
and that is itself immediately declared effective (each such event referred to
in clauses (i) through (iv), a "Registration Default"), the Issuer hereby agrees
that additional interest ("Additional Interest") shall accrue on the Transfer
Restricted Securities at a rate of 0.50% per annum over the rate at which
interest is then otherwise accruing or, as applicable, principal is then
accreting (as determined under the provisions of the Indenture) during the
90-day period immediately following the occurrence of any Registration Default
and shall increase by 0.25% per annum at the end of each subsequent 90-day
period, but in no event shall such Additional Interest exceed 2.00% per annum.
Following the cure of all Registration Defaults relating to any particular
Transfer Restricted Securities, the Issuer shall not be obligated to accrue and
pay Additional Interest on the Transfer Restricted Securities; provided,
however, that, if at any time thereafter a different Registration Default
occurs, Additional Interest shall again become payable on the relevant Transfer
Restricted Securities pursuant to the foregoing provisions.
All obligations of the Issuer set forth in the preceding paragraph
that are outstanding with respect to any Transfer Restricted Security at the
time such security ceases to be a Transfer Restricted Security shall survive
until such time as all such obligations with respect to such Note shall have
been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement. In connection with the Exchange
Offer, the Issuer shall comply with all of the provisions of Section 6(c) below,
shall use its best efforts to effect such exchange to permit the sale of
Broker-Dealer Transfer Restricted Securities being sold in accordance with the
intended method or methods of distribution thereof, and shall comply with all of
the following provisions:
(i) If in the reasonable opinion of counsel to the Issuer there is a
question as to whether the Exchange Offer is permitted by applicable law, the
Issuer hereby agrees to seek a no-action letter or other favorable decision from
the Commission allowing the Issuer to Consummate an Exchange Offer for such
Initial Notes. The Issuer hereby agrees to pursue the issuance of such a
decision to the Commission staff level but shall not be required to take
commercially unreasonable action to effect a change of Commission policy. The
Issuer hereby agrees, however, to (A) participate in telephonic conferences with
the Commission, (B) deliver to the Commission staff an analysis prepared by
counsel to the Issuer setting forth the legal bases, if any, upon which such
counsel has concluded that such an Exchange Offer should be permitted and (C)
diligently pursue a favorable resolution by the Commission staff of such
submission.
(ii) As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer Restricted
Securities shall furnish, upon the request of the Issuer, prior to the
Consummation thereof, a written representation to the Issuer (which may be
contained in the letter of transmittal contemplated by the Exchange Offer
Registration Statement) to the effect that (A) it is not an affiliate of the
Issuer, (B) it is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a distribution
of the Exchange Notes to be issued in the Exchange Offer and (C) it is acquiring
the Exchange Notes in its ordinary course of business. In addition, all such
Holders of Transfer Restricted Securities shall otherwise cooperate in the
Issuer's preparations for the Exchange Offer. Each Holder hereby acknowledges
and agrees that any Broker-Dealer
7
<PAGE> 8
and any such Holder using the Exchange Offer to participate in a distribution of
the securities to be acquired in the Exchange Offer (1) could not under
Commission policy as in effect on the date of this Agreement rely on the
position of the Commission enunciated in Morgan Stanley and Co., Inc. (available
June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988),
as interpreted in the Commission's letter to Shearman & Sterling dated July 2,
1993, and similar no-action letters (which may include any no-action letter
obtained pursuant to clause (i) above), and (2) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction and that such a secondary resale
transaction should be covered by an effective registration statement containing
the selling security holder information required by Item 507 or 508, as
applicable, of Regulation S-K if the resales are of Exchange Notes obtained by
such Holder in exchange for Initial Notes acquired by such Holder directly from
the Issuer.
(b) Shelf Registration Statement. In connection with the Shelf
Registration Statement, the Issuer shall comply with all the provisions of
Section 6(c) below and shall use its best efforts to effect such registration to
permit the sale of the Transfer Restricted Securities being sold in accordance
with the intended method or methods of distribution thereof, and pursuant
thereto the Issuer will as expeditiously as possible prepare and file with the
Commission a Registration Statement relating to the registration on any
appropriate form under the Securities Act, which form shall be available for the
sale of the Transfer Restricted Securities in accordance with the intended
method or methods of distribution thereof,
(c) General Provisions. In connection with any Registration Statement and
any Prospectus required by this Agreement to permit the sale or resale of
Transfer Restricted Securities (including, without limitation, any Registration
Statement and the related Prospectus required to permit resales of Broker-Dealer
Transfer Restricted Securities by Restricted Broker-Dealers), the Issuer shall:
(i) use its best efforts to keep such Registration Statement
continuously effective and provide all requisite financial statements for the
period specified in Section 3 or 4 of this Agreement, as applicable; upon the
occurrence of any event that would cause any such Registration Statement or the
Prospectus contained therein (A) to contain a material misstatement or omission
or (B) not to be effective and usable for resale of Transfer Restricted
Securities during the period required by this Agreement, the Issuer shall file
promptly an appropriate amendment to such Registration Statement, in the case of
clause (A), correcting any such misstatement or omission, and, in the case of
either clause (A) or (B), use its best efforts to cause such amendment to be
declared effective and such Registration Statement and the related Prospectus to
become usable for their intended purpose(s) as soon as practicable thereafter;
(ii) prepare and file with the Commission such amendments and
post-effective amendments to the Registration Statement as may be necessary to
keep the Registration Statement effective for the applicable period set forth in
Section 3 or 4 hereof, as applicable, or such shorter period as will terminate
when all Transfer Restricted Securities covered by such Registration Statement
have been sold; cause the Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
under the Securities Act, and to comply fully with the applicable provisions of
Rules 424 and 430A under the Securities Act in a timely manner; and comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the applicable period
in accordance with the intended method or methods of distribution by the sellers
thereof set forth in such Registration Statement or supplement to the
Prospectus;
(iii) advise the underwriter(s), if any, and selling Holders
promptly and, if requested by such Persons, to confirm such advice in writing,
(A) when the Prospectus or any Prospectus supplement or post- effective
amendment has been filed, and, with respect to any Registration Statement or any
post-effective amendment thereto, when the same has become effective, (B) of any
request by the Commission
8
<PAGE> 9
for amendments to the Registration Statement or amendments or supplements to the
Prospectus or for additional information relating thereto, (C) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement under the Securities Act or of the suspension by any
state securities commission of the qualification of the Transfer Restricted
Securities for offering or sale in any jurisdiction, or the initiation of any
proceeding for any of the preceding purposes, (D) of the existence of any fact
or the happening of any event that makes any statement of a material fact made
in the Registration Statement, the Prospectus, any amendment or supplement
thereto, or any document incorporated by reference therein untrue in any
material respect, or that requires the making of any additions to or changes in
the Registration Statement or the Prospectus in order to make the statements
therein not misleading in any material respect. If at any time the Commission
shall issue any stop order suspending the effectiveness of the Registration
Statement, or any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption from
qualification of the Transfer Restricted Securities under state securities or
Blue Sky laws, the Issuer shall use its best efforts to obtain the withdrawal or
lifting of such order at the earliest possible time;
(iv) furnish without charge to each of the Initial Purchasers and
each of the underwriter(s), if any, before filing with the Commission, copies of
any Registration Statement or any Prospectus included therein or any amendments
or supplements to any such Registration Statement or Prospectus, which documents
will be subject to the review of Initial Purchasers which are Holders of
Transfer Restricted Securities covered by such Registration Statement and
underwriter(s), if any, for a period of at least five business days, and the
Issuer will not file any such Registration Statement or Prospectus or any
amendment or supplement to any such Registration Statement or Prospectus
(including all such documents incorporated by reference) to which any such
Initial Purchaser or the underwriter(s), if any, shall reasonably object in
writing within five business days after the receipt thereof (such objection to
be deemed timely made upon confirmation of telecopy transmission within such
period). The objection of any such Initial Purchaser or underwriter, if any,
shall be deemed to be reasonable if such Registration Statement, amendment,
Prospectus or supplement, as applicable, as proposed to be filed, contains a
material misstatement or omission;
(v) promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus provide
copies of such document to the Initial Purchasers and to the underwriter(s), if
any, make the Issuer's representatives available for discussion of such document
and other customary due diligence matters, and include such information in such
document prior to the filing thereof as the underwriter(s), if any, reasonably
may request;
(vi) make available upon request at reasonable times for inspection
by the Initial Purchasers, any managing underwriter participating in any
disposition pursuant to such Registration Statement, and any attorney or
accountant retained by any of the underwriter(s), all financial and other
records, pertinent corporate documents of the Issuer and cause the Issuer's
officers, directors and employees to supply all information reasonably requested
by any such underwriter, attorney or accountant in connection with such
Registration Statement subsequent to the filing thereof and prior to its
effectiveness;
(vii) if requested the underwriter(s), if any, promptly incorporate
in any Registration Statement or Prospectus, pursuant to a supplement or
post-effective amendment if necessary, such information as such selling Holders
and underwriter(s), if any, may reasonably request to have included therein,
including, without limitation, information relating to the "Plan of
Distribution" of the Transfer Restricted Securities, information with respect to
the principal amount of Transfer Restricted Securities being sold to such
underwriter(s), the purchase price being paid therefor and any other terms of
the offering of the Transfer Restricted Securities to be sold in such offering;
and make all required filings of such Prospectus
9
<PAGE> 10
supplement or post-effective amendment as soon as practicable after the Issuer
is notified of the matters to be incorporated in such Prospectus supplement or
post-effective amendment;
(viii) cause the Transfer Restricted Securities covered by the
Registration Statement to be rated with the appropriate rating agencies, if so
requested by the Holders of a majority in aggregate principal amount of Notes
covered thereby or the underwriter(s), if any;
(ix) furnish to each selling Holder and each of the underwriter(s),
if any, without charge, at least one copy of the Registration Statement, as
first filed with the Commission, and of each amendment thereto, including
financial statements and schedules, all documents incorporated by reference
therein and all exhibits (including exhibits incorporated therein by reference);
(x) deliver to each selling Holder and each of the underwriter(s),
if any, without charge, as many copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto as such Persons
reasonably may request, the Issuer hereby consents to the use of the Prospectus
and any amendment or supplement thereto by each of the selling Holders and each
of the underwriter(s), if any, in connection with the offering and the sale of
the Transfer Restricted Securities covered by the Prospectus or any amendment or
supplement thereto;
(xi) enter into such agreements (including an underwriting
agreement), and make such representations and warranties, and take all such
other actions in connection therewith in order to expedite or facilitate the
disposition of the Transfer Restricted Securities pursuant to any Registration
Statement contemplated by this Agreement, all to such extent as may be requested
by any Initial Purchaser or by any underwriter in connection with any sale or
resale pursuant to any Registration Statement contemplated by this Agreement;
and whether or not an underwriting agreement is entered into and whether or not
the registration is an Underwritten Registration, the Issuer shall:
(A) furnish to each underwriter, if any, in such substance and scope
as they may request and as are customarily made by issuers to underwriters
in primary underwritten offerings, upon the date of the Consummation of
the Exchange Offer and, if applicable, the effectiveness of the Shelf
Registration Statement:
(1) a certificate, dated the date of Consummation of the
Exchange Offer or the date of effectiveness of the Shelf
Registration Statement, as the case may be, signed by (y) the
President or any Vice President and (z) a principal financial or
accounting officer of the Issuer confirming, as of the date thereof,
the matters set forth in paragraphs (c) and (d) of Section 8 of the
Purchase Agreement but applying, mutatis mutandis, to the Shelf
Registration Statement in each place where reference is made to the
Offering Memorandum in such Sections 8(c) and (d), and to the filing
date of the Shelf Registration Statement in each place where
reference is made to "the Closing Date" or "the date hereof" in such
Sections 8(c) and (d), and such other matters as such parties may
reasonably request;
(2) an opinion, dated the date of Consummation of the Exchange
Offer or the date of effectiveness of the Shelf Registration
Statement, as the case may be, of counsel for the Issuer covering
the matters set forth in paragraphs (f) and (g) of Section 8 of the
Purchase Agreement and such other matter as such parties may
reasonably request, and in any event including a statement to the
effect that such counsel has participated in conferences with
officers and other representatives of the Issuer, representatives of
the independent public accountants for the Issuer, the Initial
Purchasers' representatives and the Initial Purchasers' counsel in
connection with the preparation of such Registration Statement
10
<PAGE> 11
and the related Prospectus and has considered the matters required
to be stated therein and the statements contained therein, although
such counsel has not independently verified the accuracy,
completeness or fairness of any such statements; and that such
counsel advises that, on the basis of the foregoing (relying as to
materiality to a large extent upon facts provided to such counsel by
officers and other representatives of the Issuer and without
independent check or verification), no facts came to such counsel's
attention that caused such counsel to believe that the applicable
Registration Statement, at the time such Registration Statement or
any post-effective amendment thereto became effective, and, in the
case of the Exchange Offer Registration Statement, as of the date of
filing contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in any material
respect, or that the Prospectus contained in such Registration
Statement as of its date and, in the case of the opinion dated the
date of Consummation of the Exchange Offer, as of the date of
filing, contained an untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made,
not misleading in any material respect. Without limiting the
foregoing, such counsel may state further that such counsel assumes
no responsibility for, and has not independently verified, the
accuracy, completeness or fairness of the financial statements,
notes and schedules and other financial data included in any
Registration Statement contemplated by this Agreement or the related
Prospectus; and
(3) a customary comfort letter, dated as of the date of
Consummation of the Exchange Offer or the date of effectiveness of
the Shelf Registration Statement, as the case may be, from the
Issuer's independent accountants, in the customary form and covering
matters of the type customarily covered in comfort letters by
underwriters in connection with primary underwritten offerings, and
affirming the matters set forth in the comfort letters delivered
pursuant to Section 8 of the Purchase Agreement, as they relate to
the Shelf Registration Statement without exception;
(B) set forth in full or incorporate by reference in the
underwriting agreement, if any, the indemnification provisions and
procedures of Section 8 hereof with respect to all parties to be
indemnified pursuant to said Section; and
(C) deliver such other documents and certificates as may be
reasonably requested by such parties to evidence compliance with clause
(A) above and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Issuer pursuant to this
clause (xi), if any.
If at any time the representations and warranties of the Issuer
contemplated in clause (A)(1) above cease to be true and correct in any material
respect, the Issuer shall so advise the Initial Purchasers and the
underwriter(s), if any, and each selling Holder promptly and, if requested by
such Persons, shall confirm such advice in writing;
(xii) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders, the underwriter(s), if any, and
their respective counsel in connection with the registration and qualification
of the Transfer Restricted Securities under the securities or Blue Sky laws of
such jurisdictions as the selling Holders or underwriter(s) may request and do
any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Transfer Restricted Securities covered
by the Shelf Registration Statement; provided, however, that the Issuer shall
not be required to register or qualify as a foreign corporation where it is not
then so qualified or to take any action that would
11
<PAGE> 12
subject it to the service of process in suits or to taxation, other than as to
matters and transactions relating to the Registration Statement, in any
jurisdiction where it is not then so subject;
(xiii) shall issue, upon the request of any Holder of Initial Notes
covered by the Shelf Registration Statement, Exchange Notes, having an aggregate
principal amount at maturity equal to the aggregate principal amount at maturity
of Initial Notes surrendered to the Issuer by such Holder in exchange therefor
or being sold by such Holder; such Exchange Notes to be registered in the name
of such Holder or in the name of the purchaser(s) of such Notes, as the case may
be; in return, the Initial Notes held by such Holder shall be surrendered to the
Issuer for cancellation;
(xiv) cooperate with the selling Holders and the underwriter(s), if
any, to facilitate the timely preparation and delivery of certificates
representing Transfer Restricted Securities to be sold and not bearing any
restrictive legends; and enable such Transfer Restricted Securities to be in
such denominations and registered in such names as the Holders or the
underwriter(s), if any, may request at least two business days prior to any sale
of Transfer Restricted Securities made by such underwriter(s);
(xv) use its best efforts to cause the Transfer Restricted
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof or the underwriter(s), if any, to
consummate the disposition of such Transfer Restricted Securities, subject to
the proviso contained in clause (viii) above;
(xvi) if any fact or event contemplated by clause (c)(iii)(D) above
shall exist or have occurred, prepare a supplement or post-effective amendment
to the Registration Statement or related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of Transfer Restricted Securities, the Prospectus
will not contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading;
(xvii) provide a CUSIP number for all Transfer Restricted Securities
not later than the effective date of the Registration Statement and provide the
Trustee under the Indenture with printed certificates for the Transfer
Restricted Securities which are in a form eligible for deposit with The
Depository Trust Company;
(xviii) cooperate and assist in any filings required to be made with
the NASD and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter") that is required
to be retained in accordance with the rules and regulations of the NASD, and use
its reasonable best efforts to cause such Registration Statement to become
effective and approved by such governmental agencies or authorities as may be
necessary to enable the Holders selling Transfer Restricted Securities to
consummate the disposition of such Transfer Restricted Securities;
(xix) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to its
security holders, as soon as practicable, a consolidated earnings statement
meeting the requirements of Rule 158 (which need not be audited) for the
twelve-month period (A) commencing at the end of any fiscal quarter in which
Transfer Restricted Securities are sold to underwriters in a firm or best
efforts Underwritten Offering or (B) if not sold to underwriters in such an
offering, beginning with the first month of the Issuer's first fiscal quarter
commencing after the effective date of the Registration Statement;
(xx) cause the Indenture to be qualified under the TIA not later
than the effective date of the first Registration Statement required by this
Agreement, and, in connection therewith, cooperate with
12
<PAGE> 13
the Trustee and the Holders of Notes to effect such changes to the Indenture as
may be required for such Indenture to be so qualified in accordance with the
terms of the TIA; and execute and use its best efforts to cause the Trustee to
execute, all documents that may be required to effect such changes and all other
forms and documents required to be filed with the Commission to enable such
Indenture to be so qualified in a timely manner; and
(xxi) provide promptly to each Holder upon request each document
filed with the Commission pursuant to the requirements of Section 13 and Section
15 of the Exchange Act.
Each Holder agrees by acquisition of a Transfer Restricted Security
that, upon receipt of any notice from the Issuer of the existence of any fact of
the kind described in Section 6(c)(iii)(D) hereof, such Holder will forthwith
discontinue disposition of Transfer Restricted Securities pursuant to the
applicable Registration Statement until such Holder's receipt of the copies of
the supplemented or amended Prospectus contemplated by Section 6(c)(xvi) hereof,
or until it is advised in writing (the "Advice") by the Issuer that the use of
the Prospectus may be resumed, and has received copies of any additional or
supplemental filings that are incorporated by reference in the Prospectus. If so
directed by the Issuer, each Holder will deliver to the Issuer (at the Issuer's
expense) all copies, other than permanent file copies then in such Holder's
possession, of the Prospectus covering such Transfer Restricted Securities that
was current at the time of receipt of such notice. In the event the Issuer shall
give any such notice, the time period regarding the effectiveness of such
Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall
be extended by the number of days during the period from and including the date
of the giving of such notice pursuant to Section 6(c)(iii)(D) hereof to and
including the date when each selling Holder covered by such Registration
Statement shall have received the copies of the supplemented or amended
Prospectus contemplated by Section 6(c)(xvi) hereof or shall have received the
Advice; however, no such extension shall be taken into account in determining
whether Additional Interest is due pursuant to Section 5 hereof or the amount of
such Additional Interest, it being agreed that the Issuer's option to suspend
use of a Registration Statement pursuant to this paragraph shall be treated as a
Registration Default for purposes of Section 5.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Issuer's performance of or compliance
with this Agreement will be borne by the Issuer regardless of whether a
Registration Statement becomes effective, including without limitation: (i) all
registration and filing fees and expenses (including filings made by any Initial
Purchaser or Holder with the NASD (and, if applicable, the fees and expenses of
any "qualified independent underwriter" and its counsel that may be required by
the rules and regulations of the NASD)); (ii) all fees and expenses of
compliance with federal securities and state Blue Sky or securities laws; (iii)
all expenses of printing (including printing certificates for the Exchange Notes
to be issued in the Exchange Offer and printing of Prospectuses), messenger and
delivery services and telephone; (iv) all fees and disbursements of counsel for
the Issuer and, subject to Section 7(b) below, the Holders of Transfer
Restricted Securities; and (v) all fees and disbursements of independent
certified public accountants of the Issuer (including the expenses of any
special audit and comfort letters required by or incident to such performance).
The Issuer will, in any event, bear its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expenses of any annual
audit and the fees and expenses of any Person, including special experts,
retained by the Issuer.
(b) In connection with any Registration Statement required by this
Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Issuer will reimburse the
Initial Purchasers and the Holders of Transfer Restricted Securities being
tendered in the Exchange Offer and/or resold pursuant to the "Plan of
Distribution" contained in the Exchange Offer
13
<PAGE> 14
Registration Statement or registered pursuant to the Shelf Registration
Statement, as applicable, for the reasonable fees and disbursements of not more
than one counsel, who shall be Simpson Thacher & Bartlett or such other counsel
as may be chosen by the Holders of a majority in principal amount of the
Transfer Restricted Securities for whose benefit such Registration Statement is
being prepared.
SECTION 8. INDEMNIFICATION
(a) The Issuer agrees to indemnify and hold harmless (i) each Holder and
(ii) each person, if any, who controls (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) any Holder (any of the persons
referred to in this clause (ii) being hereinafter referred to as a "controlling
person") and (iii) the respective officers, directors, partners, employees,
representatives and agents of any Holder or any controlling person (any person
referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an
"Indemnified Holder"), to the fullest extent lawful, from and against any and
all losses, claims, damages, liabilities, judgments, actions and expenses
(including without limitation and as incurred, reimbursement of all reasonable
costs of investigating, preparing, pursuing, settling, compromising paying or
defending any claim or action, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, including the reasonable
fees and expenses of counsel to any Indemnified Holder), joint or several,
directly or indirectly caused by, related to, based upon, arising out of or in
connection with any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement or Prospectus (or any amendment or
supplement thereto), or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or expenses are caused by an untrue statement or omission or alleged
untrue statement or omission that is made in reliance upon and in conformity
with information relating to any of the Holders furnished in writing to the
Issuer by any of the Holders expressly for use therein. This indemnity agreement
shall be in addition to any liability which the Issuer may otherwise have.
In case any action or proceeding (including any governmental or
regulatory investigation or proceeding) shall be brought or asserted against any
of the Indemnified Holders with respect to which indemnity may be sought against
the Issuer, such Indemnified Holder (or the Indemnified Holder controlled by
such controlling person) shall promptly notify the Issuer in writing (provided,
that the failure to give such notice shall not relieve the Issuer of its
obligations pursuant to this Agreement). Such Indemnified Holder shall have the
right to employ its own counsel in any such action and the fees and expenses of
such counsel shall be paid, as incurred, by the Issuer. The Issuer shall not, in
connection with any one such action or proceeding or separate but substantially
similar or related actions or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) at any time for such Indemnified Holders, which firm shall be
designated by the Holders. The Issuer shall be liable for any settlement of any
such action or proceeding effected with the Issuer's prior written consent,
which consent shall not be withheld unreasonably, and the Issuer agrees to
indemnify and hold harmless any Indemnified Holder from and against any loss,
claim, damage, liability or expense by reason of any settlement of any action
effected with the written consent of the Issuer. The Issuer shall not, without
the prior written consent of each Indemnified Holder, settle or compromise or
consent to the entry of judgment in or otherwise seek to terminate any pending
or threatened action, claim, litigation or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not any
Indemnified Holder is a party thereto), unless such settlement, compromise,
consent or termination includes an unconditional release of each Indemnified
Holder from all liability arising out of such action, claim, litigation or
proceeding.
(b) Each Holder of Transfer Restricted Securities agrees, severally and
not jointly, to indemnify and hold harmless the Issuer and its directors,
officers of the Company who sign a Registration Statement,
14
<PAGE> 15
and any person controlling (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act) the Issuer and the respective officers,
directors, partners, employees, representatives and agents of each such person,
to the same extent as the foregoing indemnity from the Issuer to each of the
Indemnified Holders, but only with respect to claims and actions based on
information relating to such Holder furnished in writing by such Holder
expressly for use in any Registration Statement. In case any action or
proceeding shall be brought against the Issuer or its directors or officers or
any such controlling person in respect of which indemnity may be sought against
a Holder of Transfer Restricted Securities, such Holder shall have the rights
and duties given the Issuer and the Issuer or its directors or officers or such
controlling person shall have the rights and duties given to each Holder by the
preceding paragraph. In no event shall the liability of any selling Holder
hereunder be greater in amount than the dollar amount of the proceeds received
by such Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) If the indemnification provided for in this Section 8 is unavailable
to an indemnified party under Section 8(a) or Section 8(b) hereof (other than by
reason of exceptions provided in those Sections) in respect of any losses,
claims, damages, liabilities, judgments, actions or expenses referred to
therein, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative benefits
received by the Issuer on the one hand and the Holders on the other hand from
the Initial Placement (which in the case of the Issuer shall be deemed to be
equal to the total gross proceeds from the Initial Placement as set forth on the
cover page of the Offering Memorandum), the amount of Additional Interest which
did not become payable as a result of the filing of the Registration Statement
resulting in such losses, claims, damages, liabilities, judgments actions or
expenses, and such Registration Statement, or if such allocation is not
permitted by applicable law, the relative fault of the Issuer on the one hand
and of the Indemnified Holder on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
fault of the Issuer on the one hand and of the Indemnified Holder on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Issuer or by the
Indemnified Holder and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in the second paragraph of Section 8(a),
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim.
The Issuer and each Holder of Transfer Restricted Securities agree
that it would not be just and equitable if contribution pursuant to this Section
8(c) were determined by pro rata allocation (even if the Holders were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or expenses referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8, none of the
Holders (and its related Indemnified Holders) shall be required to contribute,
in the aggregate, any amount in excess of the amount by which the total discount
received by such Holder with respect to the Initial Notes exceeds the amount of
any damages which such Holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who. was not guilty of such fraudulent misrepresentation. The Holders'
15
<PAGE> 16
obligations to contribute pursuant to this Section 8(c) are several in
proportion to the respective principal amount at maturity of Initial Notes held
by each of the Holders hereunder and not joint.
SECTION 9. RULE 144A
The Issuer hereby agrees with each Holder, for so long as any
Transfer Restricted Securities remain outstanding, to make available to any
Holder or beneficial owner of Transfer Restricted Securities in connection with
any sale thereof and any prospective purchaser of such Transfer Restricted
Securities from such Holder or beneficial owner, the information required by
Rule 144A(d)(4) under the Securities Act in order to permit resales of such
Transfer Restricted Securities pursuant to Rule 144A.
SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration hereunder
unless such Holder (a) agrees to sell such Holder's Transfer Restricted
Securities on the basis provided in any underwriting arrangements approved by
the Persons entitled hereunder to approve such arrangements and (b) completes
and executes all reasonable questionnaires, powers of attorney, indemnities,
underwriting agreements, lock- up letters and other documents required under the
terms of such underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
The Holders of Transfer Restricted Securities covered by the Shelf
Registration Statement who desire to do so may sell such Transfer Restricted
Securities in an Underwritten Offering. In any such Underwritten Offering the
investment banker or investment bankers and manager or managers that will
administer the offering will be selected by the Issuer.
SECTION 12. MISCELLANEOUS
(a) Remedies. The Issuer agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agree to waive the defense in any action
for specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Issuer will not, on or after the date
of this Agreement enter into any agreement with respect to its securities that
is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. The Company has not previously
entered into any agreement granting any registration rights with respect to its
securities to any Person. The rights granted to the Holders hereunder do not in
any way conflict with and are not inconsistent with the rights granted to the
holders of the Issuer's securities under any agreement in effect on the date
hereof.
(c) Adjustments Affecting the Note. The Issuer will not take any action,
or permit any change to occur, with respect to the Notes that would materially
and adversely affect the ability of the Holders to Consummate any Exchange
Offer.
(d) Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless the Issuer has obtained the
written consent of Holders of a majority of the outstanding principal amount at
maturity of Transfer Restricted Securities. Notwithstanding the foregoing, a
waiver or consent to departure from the provisions hereof that relates
exclusively to the rights of Holders whose securities are being tendered
pursuant to the Exchange Offer and that does not affect directly or indirectly
the rights of other Holders whose securities are not being tendered pursuant to
such Exchange Offer may be given by the
17
<PAGE> 17
Holders of a majority of the outstanding principal amount at maturity of
Transfer Restricted Securities being tendered or registered; provided that, with
respect to any matter that directly or indirectly affects the rights of any
Initial Purchaser hereunder, the Issuer shall obtain the written consent of each
such Initial Purchaser with respect to which such amendment, qualification,
supplement, waiver, consent or departure is to be effective.
(e) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar under the
Indenture; and
(ii) if to the Issuer:
Covad Communications Group, Inc.
2330 Central Expressway
Santa Clara, California 95050
Telecopier No.: (408) 844-7501
Attention: Chief Financial Officer
All such notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt acknowledged, if telecopied; and on
the next business day, if timely delivered to an air courier guaranteeing
overnight delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(f) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
Holders of Transfer Restricted Securities; provided, however, that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign acquired
Transfer Restricted Securities from such Holder.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
(j) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
18
<PAGE> 18
(k) Entire Agreement. This Agreement together with the other Operative
Documents (as defined in the Purchase Agreement) is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Issuer with respect to
the Transfer Restricted Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
[Signature pages follow]
19
<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
COVAD COMMUNICATIONS GROUP, INC.
By:
-------------------------------------
Name:
Title:
[Signatures continues on next page]
<PAGE> 20
The foregoing Registration Rights
Agreement is hereby confirmed and
accepted as of the date first above written.
BEAR, STEARNS & CO. INC.
MORGAN STANLEY & CO. INCORPORATED
By: BEAR, STEARNS & CO. INC.
By:
------------------------------------
Name:
Title:
<PAGE> 1
Exhibit 23.1
Consent of Ernst & Young LLP
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 15, 1999, except for the fourth paragraph of
Note 11 as to which the date is May 4, 1999, in the Registration Statement (Form
S-4) and related Prospectus of Covad Communications Group, Inc. for the
registration of $425,000,000 of 12% Senior Notes due 2010.
/s/ Ernst & Young LLP
San Jose, California
February 14, 2000
