September 5, 2002 5:51 AM PDT

AOL to offer Covad's DSL

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America Online has signed a five-year deal with Covad Communications that gives it access to the DSL provider's network, the companies said Thursday.

AOL will have the option to buy DSL (digital subscriber line) services wholesale from Covad, which the companies said will increase the broadband options AOL offers its customers.

Specific financial terms of the deal were not released, but Covad is giving AOL warrants to purchase 3.5 million Covad shares, or about 1.5 percent of the company. The warrants, which will grant AOL the option to purchase Covad stock at prices ranging from $1.06 to $5 per share, are estimated to be worth about $3.5 million, the company said.

Parent company AOL Time Warner has been working hard to beef up AOL's broadband business. AOL Time Warner recently announced a long-sought-after deal to spin off its cable unit as a separate company later this year and to offer broadband service over AT&T Comcast's cable systems.

The AOL pact could also help Covad boost its revenue and number of DSL lines in use. For the second quarter ending June 30, Covad had about 357,000 lines in service, down 2,000 lines from the first quarter. Covad, which has successfully emerged from bankruptcy proceedings, reported a net loss of $40.8 million on revenue of $97.7 million for the second quarter.

Covad said it plans to record the value of the stock warrants as a deferred customer incentive and to charge it against revenue over the term of the agreement. AOL declined to make further comment.

AOL and other tech companies are under investigation for accounting practices that include trading products and services for stock rather than paying cash.

Covad said the warrants were issued in connection with the DSL deal, but AOL's ability to purchase shares is "completely independent" from its performance under the agreement, according to documents the company filed with the Securities and Exchange Commission.

 

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