Covad CEO Embraces New Mindset

Six months ago, Charles Hoffman left the relatively safe world of wireless
telecommunications and descended into chaos.

He left Rogers Wireless Communications, Inc., Canada’s largest wireless
provider, for an industry that was in the middle of a catastrophic downward
spiral. You’ve got to wonder what kind of glutton for punishment would
want to leave a relatively cushy job as president, chief executive office
and director of a wireless telephone giant to take over the reins of a
company only days away from getting delisted on Nasdaq.

But that’s exactly what Hoffman did, taking
the reins
of Covad Communications from interim chief executive officer
Frank Marshall June 5, who was filling in for Robert Knowling.

Knowling, Covad’s chairman, president and chief executive officer, resigned
from the data competitive local exchange carrier (DLEC) a week after
announcing net losses of nearly $190 million in conjunction with $12
million in revenues.

While Knowling was instrumental in putting together and deploying the
largest and most popular independent DSL provider in the nation, he made
the mistake of signing on some questionable partners that hastened Covad’s
downfall.

Covad, while in the middle of a rapid nationwide deployment of DSL access
multiplexers (DSLAMs) in central offices two years ago, needed customers to
help pay for the equipment and further deployment. As a DSL wholesaler,
Covad attracted the attention of many Internet service providers (ISPs)
around the U.S., who felt they didn’t have to worry the DLEC would steal
its customer base down the road, as many believed the local telephone
companies were doing.

Many of those ISPs, caught in the hype of the broadband frenzy of the time,
signed up to contract term agreements they had no hope of achieving. Most
of those ISPs later
went bankrupt
and reneged on payments Covad expected to receive.

The bankruptcies forced Covad to institute its Safety Net program, a
service that won the gratitude of consumers who didn’t have to worry about
losing their DSL from their bankrupt ISP, but earned the scorn of ISP
owners who thought it was only a matter of time before Covad went after
their customers, too.

Coupled with the burst of the dot com bubble and an expensive overseas
venture, Covad’s stock value and cash reserves quickly dwindled until it
was but a fraction of its former glory.

Enter Hoffman, who quickly assessed the situation as untenable and moved
for a pre-emptive Chapter 11 bankruptcy. Creditors and bondholders were
decidedly not happy with the deal he cut for them, a contract renegotiation
that wiped out Covad’s $1.4 billion debt and gave creditors 19 cents back
on the dollar of their investment, $283 million cash and 33 million shares.

The creditors were clearly not happy, but most clearly remembered the mess
created by NorthPoint earlier in the year. NorthPoint creditors shut down
their network after only getting $135
million back
for its investment. Only one creditor, Vernon Computer
Leasing, Inc., refused to sign off on the deal in the end

Mark Kersey, a broadband industry analyst with ARS, Inc., said the
forthright manner in which Hoffman handled the bankruptcy situation is
probably what helped save Covad.

“The mere fact they were honest with their investors and their bondholders
and filed a pre-negotiated bankruptcy proceeding was definitely a step in
the right direction,” Kersey said. “In stark contrast, you have a company
like NorthPoint, who essentially shut down their network overnight.”

Hoffman also led Covad managers on a cost-cutting campaign, starting with
the divestiture of BlueStar, its business DSL provider arm. Unsuccessful
service areas were taken offline and jobs were cut, resulting in savings of
$25 million in monthly capital expenditures.

A deal with SBC Communications overcame Covad’s last hurdle, putting $135
million in it coffers
.

Charles Hoffman, Covad chief executive officer, said it’s important for
Covad to maintain fiscal responsibility going forward, so you won’t see a
repeat of the situation that got many DSL providers in trouble in the first
place a too-rapid nationwide buildup.

“We’re going to continue to keep our costs low,” he said. “We’re going to
stick with the 50 regions around the country that we’re in right now. Our
customers haven’t really asked us to expand. I think it’s more important
that we rebuild our customer base and take advantage of the network that
we’ve already built.”

Instead, Hoffman said, because of Covad’s unique position as the only DSL
provider in the nation, they’ve made deals with several large businesses,
“so I think you’ll be seeing announcements from us very soon.”

He reiterated his belief that Covad will reach cash-flow positive revenues
sometime in 2003.

How successful will Covad be a year from now? That’s uncertain, but Kersey
believes the Covad board has put together a good team and has a good shot.

“I think any company that has a good management team and deals with their
financial issues in a responsible manner, is going to be successful,”
Kersey said. “When you come right down to it, there are an awful lot of
ISPs and smaller companies that still depend upon Covad for their DSL.”

Kersey speculates that the new deals Hoffman is keeping under wraps involve
other local telephone companies around the country, like BellSouth and
Verizon Communications, with terms similar to SBC.

“Face it, they are the only true DSL wholesale provider in the nation,”
Kersey said. “Sure, you have New Edge Networks, but they avoid the major
cities, so it’s safe to say that Covad is the only provider that counts.”

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