<PAGE>
As filed with the Securities and Exchange Commission on November 17, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-----------
GODIGITAL NETWORKS CORPORATION
(Exact name of Registrant as specified in its charter)
-----------
<TABLE>
<S> <C> <C>
California
(prior to reincorporation)
Delaware 3661 94-3240382
(after reincorporation) (Primary Standard Industrial (I.R.S. Employer
(State or other jurisdiction
of Classification Code Number) Identification Number)
incorporation or
organization)
</TABLE>
41652 Boscell Road
Fremont, California 94538
(510) 979-2200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-----------
T. Olin Nichols
Chief Financial Officer
41652 Boscell Road
Fremont, California 94538
(510) 979-2200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
Copies to:
<TABLE>
<S> <C>
Judith M. O'Brien, Esq. Nora L. Gibson, Esq.
Alisande M. Rozynko, Esq. Laura M. de Petra, Esq.
Lior Zorea, Esq. Leonard A. Ho, Esq.
Wilson Sonsini Goodrich & Rosati Brobeck, Phleger & Harrison LLP
Professional Corporation One Market, Spear Street Tower
650 Page Mill Road San Francisco, CA 94105
Palo Alto, CA 94304 (415) 442-0900
(650) 493-9300
</TABLE>
-----------
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 on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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(c)
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. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
-----------
CALCULATION OF REGISTRATION FEE
<TABLE>
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- ----------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value............................... $56,000,000 $15,568
- ----------------------------------------------------------------------------------------------------
</TABLE>
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(1) Includes shares which the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
-----------
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 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1999
Shares
[GoDigital Networks Corporation Logo]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$ and $ per share. We have applied to list our common stock on the Nasdaq
National Market under the symbol "GDNT."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" starting on
page 6.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions GoDigital
-------------- ------------- -----------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Robertson Stephens
U.S. Bancorp Piper Jaffray
The date of this prospectus is , 2000.
<PAGE>
[GO DIGITAL LOGO]
[Graphic of GDSL-8 and GDSL-3i DSL Transmission Systems connected to icons
of computers, phones and faxes. Graphic of the FDS Fiber Reach Distribution
System connected to a fiber ring and two GDSL Systems.]
. GDSL-8 DSL Transmission System Eight full-service digital access lines on
one copper pair for voice and CLASS services, high-speed analog modem
access, and fax services.
. GDSL-3i DSL Transmission System Three 144 Kbps IDSL lines on one copper
line.
. FDS FiberReach Distribution System Transports multiple IDSL or digital
access lines, connects with GDSL Systems.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary ................. 3
Risk Factors ....................... 6
Special Note Regarding Forward
Looking Statements ................ 18
Use of Proceeds .................... 19
Dividend Policy .................... 19
Capitalization ..................... 20
Dilution ........................... 21
Selected Financial Data ............ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business ........................... 32
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management ........................ 42
Certain Relationships and Related
Transactions ..................... 51
Principal Stockholders ............ 55
Description of Capital Stock....... 57
Shares Eligible for Future Sale ... 59
Underwriting....................... 61
Notice to Canadian Residents....... 63
Legal Matters...................... 64
Experts............................ 64
Where You May Find Additional
Information About Us ............. 64
Index To Financial Statements ..... F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
delivery requirement is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to unsold allotments
or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information we present more fully elsewhere in this
prospectus. You should read this entire prospectus carefully.
GoDigital Networks Corporation
GoDigital Networks provides long-range DSL transmission systems that
increase the bandwidth and performance of copper lines at very long distances
from the central office. Digital Subscriber Line, or DSL, solutions enable
network access providers to offer high-speed, cost-effective broadband access
services over existing copper infrastructure.
According to International Data Corporation, or IDC, an estimated 15 million
or 15% of United States households in 1997 had two or more access lines and IDC
estimates that as many as 34 million or 30% of United States' households will
have two or more access lines by 2002. A significant number of these additional
access lines are being used to access the Internet and other communications
networks. According to IDC, today nearly 70 million, or 86%, of home users
worldwide access the Internet via traditional analog telephone lines. The
increasing demand for multiple voice and high-speed data communications access
lines has created a significant market for deploying communications services to
both residential and business customers.
Historically, network access providers have not been able to meet this
demand because the copper infrastructure was designed to carry only one analog
voice signal per copper line. With the advent of DSL technology, network access
providers have begun to leverage the capabilities of their copper
infrastructure. However, traditional DSL equipment offerings have significant
distance, or reach, limitations. Today, network access providers cannot offer
DSL services over a copper line to locations more than 18,000 feet from a
central office and as a result, we believe that network access providers are
unable to offer DSL services to roughly 50% of their subscriber base.
Additionally, network access providers are limited in their ability to offer
multiple digital services on the same copper line. Our GoDigital DSL, or GDSL,
systems enable network access providers to turn standard copper lines into
high-speed digital conduits to support multiple digital access services over
long distances, providing a cost-effective alternative to laying fiber or
copper wire or installing other more expensive network equipment.
Our GDSL systems facilitate high-speed access up to 25 miles from the
central office over existing copper infrastructure and delivery of multiple
service offerings, including 144 Kbps DSL service and digital access lines for
voice, custom local-area signalling services, or CLASS, and high-speed analog
modem access. Our technology allows network access providers to power their
GDSL systems from the central office for a full 25 miles regardless of power
availability at a particular location and enables multiple drop off points
along the transmission route. The GoDigital Full-Service Distribution System,
or FDS, transports multiple IDSL lines and digital access lines to multiple
drop off points along 40 Mbps fiber rings of up to 150 miles. The ease of
installation and interoperability of our systems allow our customers to rapidly
deploy multiple new services on one copper line. Our GDSL and FDS systems are
weather hardened for outside plant deployment and are NEBS Level 3 compliant.
Our FDS systems, when used in combination with our GDSL systems, allow the
flexibility to deliver services to virtually any location within the network
access provider's service area.
Our business strategy is to be the leading provider of long-range DSL
transmission systems that enable network access providers to cost-effectively
offer multiple DSL-based services to all business and residential subscribers
regardless of distance from the central office. To implement our strategy, we
intend to leverage our early market acceptance by our over 60 customers,
including ALLTEL, Frontier, GTE, TELUS and US West to extend our market share
and become the leading supplier of cost-efficient, long-range DSL transmission
solutions. We intend to continue to develop scalable access solutions focused
on satisfying the increasing demand for higher bandwidths and more digital
access lines to virtually any point on the network. We are focused on
continuing to develop strategic relationships with DSL central office and
customer located equipment vendors to extend the range of their existing DSL
solutions, thereby expanding their market opportunity.
We were incorporated in February 1996 in California. We intend to
reincorporate in Delaware prior to the completion of this offering. Our
principal executive offices are located at 41652 Boscell Road, Fremont,
California 94538, and our telephone number is (510) 979-2200. Our web site is
located at "www.godigital.com." Information contained on our web site does not
constitute a part of this prospectus.
GODIGITAL(R) and GDSL(R) are registered trademarks of GoDigital. We own
rights to other unregistered marks. This prospectus also makes reference to
trademarks of other companies, which are their property.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered....................... shares
Common stock to be outstanding after this
offering.................................. shares
Use of proceeds............................ General corporate purposes, including
working capital, capital expenditures, and
potential acquisitions.
Proposed Nasdaq National Market symbol..... GDNT
</TABLE>
- ----------------------
The above table is based on shares outstanding as of September 30, 1999.
This table excludes:
. 2,150,600 shares issuable upon exercise of stock options outstanding as
of September 30, 1999 under our stock option plan with a weighted average
exercise price of $0.71 per share; and
. 12,160,000 shares reserved for future issuance under our stock option and
employee stock purchase plans (including amounts authorized for issuance
subsequent to September 30, 1999).
You should be aware that our fiscal year ends on the Sunday closest to March
31; thus, a reference to "fiscal 1999", for example, is the fiscal year ended
March 28, 1999. For the purposes of presentation, we have indicated that the
accounting year ends March 31, or the month-end for interim quarterly periods.
In addition, except as otherwise indicated, information in this prospectus
reflects the following:
. a two-for-one stock split of the common stock to be effected prior to the
closing of this offering;
. that each outstanding share of Series A, Series B, Series C and Series E
preferred stock will convert into two shares of common stock immediately
prior to the closing of this offering after giving effect to the two-for-
one stock split;
. that each outstanding share of Series D preferred stock will convert into
approximately 2.8 shares of common stock immediately prior to the closing
of this offering after giving effect to the two-for-one stock split;
. that the underwriters' over-allotment option will not be exercised; and
. that we will file our restated certificate of incorporation prior to the
closing of this offering.
4
<PAGE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
February 9, Six Months
1996 Fiscal Year Ended Ended
(inception) ------------------ ----------------
through Sept. Sept.
Mar. 31, Mar. 31, Mar. 31, 30, 30,
1997 1998 1999 1998 1999
----------- -------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues................ $ -- $ -- $ 8,768 $ 1,050 $11,738
Cost of revenues............ -- -- 5,085 1,269 8,618
Gross margin................ -- -- 3,683 (219) 3,120
Loss from operations........ (3,012) (5,226) (3,546) (2,869) (4,595)
Net loss.................... (2,953) (5,134) (3,611) (2,888) (4,609)
Net loss per share:
Basic and diluted......... $ (5.17) $ (3.60) $ (1.52) $ (1.40) $ (1.40)
======= ======= ======= ======= =======
Weighted average shares .. 572 1,427 2,377 2,070 3,292
======= ======= ======= ======= =======
Pro forma net loss per
share:
Basic and diluted......... $ (0.24) $ (0.27)
======= =======
Weighted average shares... 15,028 16,923
======= =======
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $ 2,668 $2,668 $
Working capital.................................. 3,382 3,382
Total assets..................................... 19,180 19,180
Long-term obligations, less current portion...... 208 208
Total stockholders' equity....................... 9,978 9,978
</TABLE>
See note 1 of notes to the financial statements for an explanation of the
determination of the number of shares used in computing diluted net loss per
share.
The pro forma numbers reflect the conversion of all outstanding shares of
our preferred stock into 14,470,282 shares of common stock effective
automatically upon the closing of this offering.
The pro forma as adjusted amounts reflect the sale of shares of
common stock in this offering at an assumed initial public offering price of
$ per share and the application of the net proceeds after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus including the discussions in "Special
Note Regarding Forward-Looking Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as our financial statements and the accompanying notes before purchasing
our common stock. Investing in our common stock involves a high degree of risk.
The risks described below are intended to highlight risks that are specific to
us and are not the only ones we face. Additional risks and uncertainties, such
as those that generally apply to our industry or to companies undertaking
initial public offerings, may also impair our business operations. Risks and
uncertainties, in addition to those we describe below, that are presently not
known to us or that we currently believe are not material, may subsequently
become material and may also impair our financial condition. If any of the
following risks actually occur, our business, results of operations and
financial condition would suffer. In addition, the trading price of our common
stock could decline due to the occurrence of any of these risks, and you may
lose all or part of your investment.
We have a history of losses, expect future losses and may not achieve or
sustain profitability
As of September 30, 1999, we have incurred accumulated losses of $16.3
million since our inception and may continue to incur net losses in the future.
We anticipate continuing to incur significant sales and marketing, product
development and general and administrative expenses and, as a result, we will
need to generate significantly higher revenues to achieve and sustain
profitability on an annual basis. We incurred net losses of approximately $3.0
million from inception through March 31, 1997, approximately $5.1 million for
fiscal year 1998 and approximately $3.6 million for fiscal year 1999. Although
our revenue has grown in recent quarters, on a year to year basis, we cannot be
certain that our revenue growth will continue at the same rate as our
historical growth, or that we will realize sufficient revenues to achieve and
sustain profitability.
We have a limited operating history and, as a result, it is difficult to
predict our future results of operations
We commenced operations in April 1996, and began shipping our GDSL systems
during the first quarter of fiscal 1999. We acquired the FDS product line from
E/O Networks in July 1999 and have generated only limited revenues from the
sales of these systems. Due to our limited operating history, it is difficult
or impossible for us to predict future results of operations and you should not
expect future revenue growth rates to be comparable to our recent revenue
growth rates. In addition, we believe that comparing different periods of our
operating results is not meaningful, and you should not rely on the results for
any period as an indication of our future performance. Investors in our common
stock must consider our business and prospects in light of the risks and
difficulties typically encountered by companies in their early stages of
development, particularly those in rapidly evolving markets such as the
communications equipment industry. Some of the specific risks we face are
discussed in more detail throughout this Risk Factors section.
A number of factors could cause our operating results to fluctuate
significantly and cause our stock price to be volatile
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. Some of the factors that
could affect our quarterly or annual operating results include:
. the timing and amount of, or cancellation or rescheduling of, orders for
our systems, particularly large orders from our key customers;
. our ability to develop, introduce, ship and support new products and
enhancements and manage product transitions;
6
<PAGE>
. our ability to attain and maintain production volumes and quality levels
for our systems;
. announcements, new product introductions and reductions in the price of
products offered by our competitors;
. changes in our pricing policies or the pricing policies of our
competitors;
. our ability to obtain sufficient supplies of sole- or limited-source
components for our systems;
. changes in the prices of our components;
. growth and demand for multiple digital access communications
infrastructure; and
. continued growth of the Internet as a widespread communications medium.
Our operating expenses are largely based on anticipated revenue trends and a
high percentage of our expenses are, and will continue to be, fixed in the
short term. As a result, a delay in generating or recognizing revenue for any
reason could cause significant variations in our operating results from quarter
to quarter and could result in greater than anticipated operating losses. If
our quarterly or annual operating results do not meet the expectations of
securities analysts and investors, the trading price of our common stock could
decline.
We derive almost all of our revenues from a small number of customers and our
revenues may decline significantly if any major customer cancels or delays a
purchase of our systems
We currently sell our systems predominantly to incumbent local exchange
carriers. Aggregate sales to our largest customer, GTE, accounted for
approximately 89.8% of our net revenues for the fiscal year ended March 31,
1999. Aggregate sales to GTE and TELUS Communications accounted for
approximately 64.1% and 17.5% of our net revenues, respectively, for the six
months ended September 30, 1999. We expect to continue to derive a substantial
portion of revenue from GTE, TELUS and a limited number of other customers in
the foreseeable future. These and other customers tend to be significantly
larger than us and are able to exert a high degree of influence over us. They
have significant bargaining power and may demand lower prices and other
preferential terms. Accordingly, unless and until we diversify and expand our
customer base, our future success will significantly depend on our largest
customers and, in particular:
. our ability to develop and manage our relationships with these customers
in order to meet their product requirements;
. the timing, size and terms of future purchase orders from these
customers and our ability to deliver on these orders;
. the spending budgets of these customers; and
. the success of the services provided by our customers that utilize our
systems.
In addition, we may experience delays in releasing new products and product
enhancements in the future. Material delays in introducing new products and
enhancements or our inability to introduce competitive new products may cause
these customers to forego purchases of our products and purchase those of our
competitors. The loss of any one of our major customers or the delay of
significant orders from these customers, even if only temporary, could, among
other things, reduce or delay our recognition of revenues and reduce our
ability to accurately predict cash flow, and, as a consequence, seriously harm
our business, results of operations and financial condition.
Substantially all of our revenues are derived from sales of a small number of
systems and depend on their widespread market acceptance
We currently derive substantially all of our revenues from the sale of our
GDSL and FDS systems, and we expect this product concentration to continue for
the foreseeable future. The market may not continue to
7
<PAGE>
demand our current systems, and we may not be successful in developing and
marketing any new or enhanced products. Any reduction in the demand for our
current systems, or our failure to successfully develop, market and introduce
new or enhanced products could materially harm our business. In particular, we
recently acquired the FDS product line and cannot be certain that we will
successfully market and sell these systems. Additional factors that could
affect sales of our current or new or enhanced products include:
. the demand for DSL technology and solutions;
. the continued growth of the Internet as a widespread communications
medium;
. the availability and price of competing products and technologies;
. the performance, price and total cost of ownership of our products;
. our successful development, introduction and market acceptance of new
and enhanced products that address customer requirements;
. the success and development of our distributors and direct sales
channels; and
. technological changes.
Our success depends on our ability to develop products and product enhancements
that will achieve market acceptance as well as meet significant industry
regulations and standards
The communications market is characterized by rapid technological advances,
evolving industry standards, changes in end-user requirements, new
communications infrastructure equipment and evolving offerings by network
access providers. We believe our future success will depend, in part, on our
ability to anticipate and adapt to these changes and to offer, on a timely
basis, products that meet customer demand. In particular, our products need to
successfully address the increased bandwidth demands of end-users. The
development of new or enhanced products is a complex and uncertain process
requiring the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. The introduction of new or enhanced products also requires that
we manage the transition from older products in order to minimize disruption in
customer ordering patterns and ensure that adequate supplies of new products
can be delivered to meet anticipated customer demand. Our inability to develop
on a timely basis new products or enhancements to existing products, or the
failure of these new products or enhancements to achieve market acceptance,
could result in a reduction in the amounts of our products sold or slow the
growth of adoption of our products, which could harm our business, results of
operations and financial condition.
In addition, the market for our products is characterized by the need to
meet a significant number of communications regulations and standards, some of
which are evolving as new technologies are deployed. In order to meet the
requirements of our customers, our products may be required to comply with
various regulations and standards established by the Federal Communications
Commission, or the FCC, the Underwriters Laboratories, the Canadian Standards
Association, Bell Communications Research and our customers. Failure of our
products to comply, or delays in compliance, with the various existing and
evolving industry regulations and standards could delay the introduction of our
products. Moreover, enactment by federal, state or foreign governments of new
laws or regulations, changes in the interpretation of existing laws or
regulations, or a reversal of the trend toward deregulation in the
telecommunications industry could seriously harm our customers, and thereby
harm our business, results of operations and financial condition.
Because our systems are complex and are deployed in complex environments, they
may have errors or defects that we find only after full deployment, which could
seriously harm our business
Our highly complex systems are deployed in extensive, complicated
communications networks. As a result, our systems can only be fully tested when
deployed in the field. To date, customers have only deployed
8
<PAGE>
our systems on a limited basis. Consequently, our customers may discover
errors or defects in our hardware or software after our systems have been
deployed in the field. For example, during the summer of 1999, there was a
series of lightning storms throughout the midwest region of the United States
and Texas. Our customers experienced some GDSL-8 system failures because of
these lightning storms. Although our systems were developed in compliance with
the Telcordia (Bellcore) specifications, we have found that the Telcordia
specifications for lightning resistance were inadequate in some circumstances.
As a result, we redesigned our products to better withstand sudden surges in
power levels whether as a result of lightning storms, or otherwise. In
connection with this product update program, we recorded an expense of $2.9
million which was charged to cost of revenues in the three month period ended
September 30, 1999. In addition, because of the nature of the services they
offer, network access providers require extremely reliable products.
Consequently, if we are unable to fix errors or other problems that may be
identified in full deployment, we could experience:
. loss of, or delay, in revenues and loss of market share;
. loss of customers;
. failure to achieve market acceptance of our systems;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by our customers; and
. increased insurance costs.
Any of the above described factors could harm our business, results of
operations and financial condition.
Customer product liability claims based on errors in our software or defects
in material or labor could result in costly litigation and product returns
Our systems have in the past contained, and may in the future contain,
undetected or unresolved errors or defects when first introduced or as
enhancements are released. Despite extensive testing, errors, defects or
failures may be found in our current or future products or enhancements after
commencement of commercial shipments. Our products are designed to provide
critical communications services, and therefore, we may receive significant
liability claims if any errors, defects or failures are found in our systems.
Our agreements with customers typically contain provisions intended to limit
our exposure to liability claims. However, these limitations may not preclude
all potential claims resulting from a defect in one of our products. Although
we maintain product liability insurance covering certain damages arising from
implementation and use of our products, our insurance may not cover any claims
sought against us. Liability claims could require us to spend significant time
and money in litigation or to pay significant damages. As a result, these
claims, whether or not successful, could seriously damage our reputation and
our business, results of operations and financial condition.
The long sales cycle for our systems, as well as our expectation that
customers will sporadically place large orders with short lead times, may
cause revenues and operating results to vary significantly from quarter to
quarter
A customer's decision to purchase our systems may involve a significant
commitment of its resources and a lengthy evaluation and product qualification
process, often taking up to one year. Throughout the sales cycle, we often
spend considerable time educating and providing information to prospective
customers regarding the use and benefits of our systems. The length of the
approval process can vary and is affected by a number of factors, including
customer priorities, customer budgets and regulatory issues affecting network
access providers. Delays in the product approval process or the failure to
receive approval could seriously harm our business, results of operations and
financial condition.
9
<PAGE>
Even after making the decision to purchase, our customers tend to deploy our
systems slowly and deliberately. Timing of deployment can vary widely and
depends on:
. the size of the network deployment;
. the complexity of the customer's network environment;
. the degree of hardware and software configuration necessary to deploy our
systems;
. our vendor delivery times;
. our ability to ship adequate volume of our systems in a timely manner;
and
. changes in customer demand.
Customers with large networks usually expand their networks in large
increments on a periodic basis. Accordingly, we may receive purchase orders for
significant dollar amounts on an irregular basis. Because of our limited
operating history, we cannot predict these sales cycles. These long cycles, a
delay in, or cancellation of, the sale of our products or our expectation that
customers will tend to sporadically place large orders with short lead times,
may cause our revenues and operating results to vary significantly and
unexpectedly from quarter to quarter.
Competition within the communications equipment market is intense and includes
numerous established competitors who may enter our segment of the market at any
time; in addition, future consolidation in the communications equipment
industry may increase competition
We provide communications systems that enable network access providers to
extend their service offerings up to 25 miles from their central offices. We
currently compete directly with privately held companies that offer long-range
DSL-based products. However, many large communication equipment vendors, such
as Alcatel, Cisco Systems, Lucent Technologies, and Nortel Networks, may,
either through internal development or through acquisitions of competitive
businesses or technologies, develop systems that compete directly with ours.
These potential competitors have substantially greater name recognition along
with larger technical, financial and marketing resources. We cannot assure you
that we will have the financial resources, technical expertise or marketing,
distribution and support capabilities to compete successfully against these
companies. Competitive pressures from existing or new competitors in our market
could harm our business, results of operations and financial condition in the
following ways:
. reduce demand for our systems;
. cause delays or cancellations of customer orders;
. cause us to reduce prices on our existing systems; or
. increase our expenses.
In addition, the markets in which we compete are characterized by increasing
consolidation as exemplified by the acquisition of Ascend Communications by
Lucent Technologies and Diamond Lane Communications by Nokia. We cannot predict
with certainty how industry consolidation will affect us or our existing or
potential competitors. We may not be able to compete successfully in an
increasingly consolidated industry. Increased consolidation in our industry,
including consolidation of strategic third parties with whom we currently have
relationships, could require us to reduce the prices of our products, increase
our costs, or result in our loss of market share, which would seriously harm
our business, results of operations and financial condition.
10
<PAGE>
We may not be able to produce sufficient quantities of our systems because we
obtain certain key components from, and depend on, certain sole-source
suppliers; if we are unable to obtain these sole-source components, we would
not be able to ship our systems in a timely manner and our strategic
relationships with our customers would be detrimentally affected
Although we generally use standard parts and components for our systems,
several key components are purchased from sole- or single-source vendors for
which alternative sources are not currently available. We presently purchase
several key components from vendors for which there are currently no
substitutes, including certain semiconductors from Conexant Systems, Lucent
Microelectronics, and Xilinx. We are evaluating alternate source vendors for
each of these key components, but any alternate vendor may not meet our quality
standards or volume requirements for components. In addition, any of our sole-
source suppliers may:
. enter into exclusive arrangements with our competitors;
. stop selling their products or components to us at commercially
reasonable prices; or
. refuse to sell their products or components to us at any price.
In the event of a reduction or interruption of supply of any sole-sourced
components, we would be forced to locate an alternative source of supply. If we
were able to locate an alternative source of supply, as much as six months
could be required before we would begin receiving adequate supplies from these
suppliers. It is possible, however, that an alternative source may not be
available for us, or may not be in a position to satisfy our production
requirements at acceptable prices and on a timely basis, if at all. The
manufacture of our single- or sole-source components is extremely complex, and
our reliance on the suppliers of these components exposes us to potential
production difficulties and quality variations, which could negatively impact
cost and timely delivery of our systems. Furthermore, additional sole-source
components may be incorporated into our future products thereby increasing our
sole-source supplier risks.
If we are unable to obtain sufficient quantities of sole-source components,
or if there is a degradation in the quality of these components, or if any of
our sole-source manufacturers delay or halt production of these components and
we are unable to develop alternative sources for these components on a timely
basis, our business, results of operations and financial condition would be
seriously harmed.
Changes affecting the communications industry could reduce demand for our
systems or negatively impact our results of operations
Any changes to legal requirements relating to the communications industry,
including the adoption of new regulations by federal or state regulatory
authorities under current laws or any legal challenges to existing laws or
regulations relating to the communications industry could reduce the demand for
our systems. Moreover, our distributors or network access providers' customers
may require, or we may otherwise deem it necessary or advisable, that we modify
our systems to address actual or anticipated changes in the regulatory
environment. Our inability to modify our systems or address any regulatory
changes could seriously harm our business, results of operations and financial
condition.
If we are unable to obtain additional capital to fund our operations when
needed, we may not be able to develop or enhance our systems, take advantage of
future opportunities or respond to competitive pressures which would harm our
business
We expect to use the net proceeds of this offering primarily to continue to
invest in product development, to expand our sales and marketing activities and
to make capital expenditures. We believe that these proceeds, together with our
existing capital resources, will be sufficient to meet our capital requirements
for at least the next twelve months. However, our capital requirements depend
on several factors, including the rate of market acceptance of our systems, the
ability to expand our client base, the rate of growth of our sales and
marketing expenses, and other factors. If capital requirements vary
significantly from those currently planned, we may require additional financing
sooner than anticipated. If additional funds are raised through the issuance of
equity securities, stockholders may experience additional dilution. These
equity securities may also have rights,
11
<PAGE>
preferences or privileges senior to those of the holders of our common stock.
If additional funds are raised through the issuance of debt securities, these
securities would have rights, preferences and privileges senior to holders of
common stock and the term of this debt could impose restrictions on our
operations. Additional financing may not be available when needed on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to develop or enhance our
products, take advantage of future opportunities or respond to competitive
pressures, which could seriously harm our business, results of operations and
financial condition.
Our intellectual property protection may be inadequate to protect our
proprietary rights, and claims against us alleging our infringement of a third
party's intellectual property could result in significant expense and in our
loss of significant rights
We regard our systems, services and technology as proprietary. We attempt to
protect them with patents, copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. These methods may not be
sufficient to protect our technology. We also generally enter into
confidentiality or license agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our systems, services or
technology without authorization, or to develop similar technology
independently.
We currently have one issued patent, four pending formal patent
applications, and three pending provisional applications in the United States.
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. Litigation could result in substantial costs, produce unfavorable
rulings or judgments, and divert management attention and resources, which
would seriously harm our business, results of operations and financial
condition.
The communications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to our business. Any claims asserting that our products infringe or
may infringe proprietary rights of third parties, if determined adversely to
us, could seriously harm our business, results of operations and financial
condition. In addition, in some of our agreements, we agree to indemnify our
customers for any expenses or liabilities resulting from claimed infringements
of patents, trademarks or copyrights of third parties. As the number of
entrants in our market increases and if the functionality of our systems is
enhanced and if our systems overlap with the products of other companies, we
may become subject to claims of infringement or misappropriation of the
intellectual property rights of others. Any claims, with or without merit,
could be time-consuming, result in costly litigation, divert the efforts of our
technical and management personnel, cause product shipment delays or require us
to enter into royalty or licensing agreements, any of which could have a
serious negative impact on our operating results. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if at
all. Legal action claiming patent infringement may be commenced against us. We
cannot assure you that we would prevail in such litigation given the complex
technical issues and inherent uncertainties in patent litigation. In the event
a claim against us were to be successful and we could not obtain a license to
the relevant technology on acceptable terms, license a substitute technology or
redesign our systems to avoid infringement, our business, results of operations
and financial condition would be seriously harmed.
12
<PAGE>
We must substantially expand our direct and indirect sales operations and our
customer service and support organization in order to increase market awareness
and sales of our systems
Our systems and services require a significant sales effort targeted at
several key people within each of our prospective customers' organizations.
This sales effort requires the efforts of select personnel as well as
specialized system and field engineers. We have recently expanded our direct
sales force and plan to hire additional qualified sales personnel and system
and field engineers. We currently have a small customer service and support
organization and will need to increase our staff to support new customers and
the expanding needs of existing customers. Competition for these individuals is
intense, and we might not be able to hire the kind and number of sales
personnel, system and field engineers and customer service and support
personnel we need. In addition, we believe that our future success is dependent
upon establishing successful relationships with a variety of distribution
partners. We have entered into agreements with only a small number of
distribution partners. We cannot be certain that we will be able to reach
agreement with additional distribution partners on a timely basis or at all, or
that our distribution partners will devote adequate resources to selling our
systems. In addition, some of our distribution partners also sell products that
compete with ours. If we are unable to expand our direct and indirect sales
operations and our customer support organization, we may not be able to
increase market awareness or sales of our systems, which may prevent us from
achieving and maintaining profitability.
If we fail to accurately predict our manufacturing requirements, we could incur
additional costs or experience manufacturing delays
Currently, we do not have long-term contracts with Eltech Electronics and
our other outsource manufacturers. These companies are not obligated to
manufacture our products for any specific period, in any specific quantity or
at any certain price, except as may be provided in a particular purchase order.
We provide forecasts of our demand to our outsource manufacturers up to six
months prior to scheduled delivery of products to our customers. If we
overestimate our requirements, our outsource manufacturers may have excess
inventory, which would increase our costs. If we underestimate our
requirements, our outsource manufacturers may have an inadequate inventory,
which could interrupt manufacturing of our products and result in delays in
shipments and revenues. In addition, lead times for materials and components we
order vary significantly and depend on factors such as the specific supplier,
contract terms and demand for each component at a given time. We also may
experience shortages of certain components from time to time, which could delay
the manufacturing of our products.
We continue to rapidly and significantly expand our operations, and our failure
to manage growth could harm our business and adversely affect our results of
operations and financial condition
We have rapidly and significantly expanded our operations, including the
number of our employees, the geographic scope of our activities and our product
offerings. We expect that further significant expansion will be required to
address potential growth in our customer base and market opportunities. Any
failure to manage growth effectively could harm our business and adversely
affect our results of operations and financial condition. We cannot assure you
that we will be able to do any of the following, which we believe are essential
to successfully manage the anticipated growth of our operations:
. improve our existing and implement new operational, financial and
management information controls, reporting systems and procedures;
. hire, train and manage additional qualified personnel;
. expand and upgrade our core technologies; and
. effectively manage multiple relationships with our customers, suppliers
and other third parties.
In the future, we may also experience difficulties meeting the demand for
our products. The installation and use of our products require training. If we
are unable to provide training and support for our products, more time may be
necessary to complete the implementation process and customer satisfaction may
be adversely affected. In
13
<PAGE>
addition, our suppliers may not be able to meet increased demand for our
products. We cannot assure you that our systems, procedures or controls will be
adequate to support the anticipated growth in our operations.
We depend on our key personnel to manage our business effectively in a rapidly
changing market and if we are unable to hire additional personnel, our ability
to manage our business could be harmed
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel.
None of our officers or key employees is bound by an employment agreement for
any specific term. We also intend to hire a significant number of engineering,
sales, marketing and support personnel in the future, and we believe our
success depends, in large part, upon our ability to attract and retain these
key employees. Competition for these persons is intense, especially in the San
Francisco Bay Area. The loss of the services of any of our key employees, the
inability to attract or retain qualified personnel in the future, or delays in
hiring required personnel, particularly engineers and sales personnel, could
delay the development and introduction of and negatively impact our ability to
sell our products.
Our stock price could fluctuate widely in response to various factors, many of
which are beyond our control
The trading price of our common stock is likely to be highly volatile. Our
stock price could fluctuate widely in response to factors such as the
following:
. actual or anticipated variations in quarterly operating results;
. announcements of new customers, products or services by us or our
competitors or new competing technologies;
. changes in financial estimates or recommendations by securities analysts;
. conditions or trends in the telecommunications industry, including
regulatory developments;
. growth of the Internet and electronic commerce industries;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. future equity or debt offerings or our announcements of these offerings;
. general market and general economic conditions; and
. other events or factors, many of which are beyond our control.
In addition, in recent years the stock market in general, the Nasdaq
National Market and the market for communications and technology companies in
particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may
negatively impact our stock price, regardless of our operating performance. In
the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted
against these companies. Litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which would
seriously harm our business, results of operations and financial condition.
We may engage in future acquisitions that could dilute our stockholders, cause
us to incur debt and assume contingent liabilities
As part of our business strategy, we expect to review acquisition prospects
that could complement our current product offerings, augment our market
coverage or enhance our technical capabilities, or that may
14
<PAGE>
otherwise offer growth opportunities. While we have no current agreements or
negotiations underway with respect to any acquisitions, we may acquire
businesses, products or technologies in the future. In the event of future
acquisitions, we could issue equity securities that would dilute current
stockholders' percentage ownership, incur substantial debt, or assume
contingent liabilities. Any acquisitions by us could seriously harm our results
of operations and/or the price of our common stock. Acquisitions also entail
numerous risks, including:
. difficulties in assimilating acquired operations, technologies or
products;
. unanticipated costs associated with the acquisition;
. acquisition-related charges and the amortization of acquired technology
and other intangibles could negatively affect our reported results of
operations;
. diversion of management's attention from other business concerns;
. adverse effects on existing business relationships with suppliers and
customers;
. risks of entering markets in which we have no or limited prior
experience; and
. potential loss of key employees of acquired organizations.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could seriously harm our business, results of operations and financial
condition.
Management may apply the proceeds of this offering to uses that do not result
in an increase in our profits or market value
Our management will have considerable discretion in the application of the
net proceeds from this offering, and you will not have the opportunity, as part
of your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for general corporate purposes in
ways with which our stockholders do not agree or in ways that do not increase
our results of operations or our market value. Pending application of the net
proceeds, the proceeds may be placed in investments that do not produce income
or that lose value.
Insiders will continue to have substantial control over us after this offering
and could delay or prevent a change in corporate control and other actions, and
such control could negatively impact our stock price or lessen any premium over
market price that an acquirer might otherwise pay
We anticipate that the executive officers, directors and entities affiliated
with them will, in the aggregate, beneficially own approximately % of our
outstanding common stock following the completion of this offering or % if
the underwriters' option is fully exercised. These stockholders, if acting
together, would be able to influence significantly all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. This
concentration of ownership may delay or prevent a beneficial merger or
discourage a potential acquirer. This level of control could adversely affect
our stock's market price or lessen any premium over market price that an
acquirer might otherwise pay. See "Principal Stockholders."
Certain provisions of our charter documents may make acquiring control of our
company more difficult for a third party, which could negatively impact our
stock's market price or lessen any premium over market price that an acquirer
might otherwise pay
Our charter documents contain provisions providing for a classified board of
directors, eliminating cumulative voting in the election of directors,
restricting our stockholders from acting without a meeting and other
provisions. See "Description of Capital Stock." These provisions may make
certain corporate actions more difficult and might delay or prevent a change in
control and therefore limit the price the new investors
15
<PAGE>
will pay for our stock. Further, the board of directors may issue up to
1,000,000 new shares of preferred stock with certain rights, preferences,
privileges and restrictions, including voting rights, without any vote by our
stockholders. Our existing stockholders may be negatively impacted by the
rights of this preferred stock. New preferred stock might also be used to make
acquiring control more difficult. We have no current plans to issue shares of
preferred stock. We will also indemnify officers and directors against losses
incurred in legal proceedings to the broadest extent permitted by Delaware law.
You will immediately experience substantial dilution in net tangible book value
when you initially purchase our common stock
Because our common stock has in the past been sold at prices substantially
less than the initial public offering price that you will pay, investors
purchasing stock in this offering will incur substantial and immediate dilution
in net tangible book value of $ per share at the assumed initial public
offering price of $ . To the extent that currently outstanding options are
exercised, there will be further dilution in net tangible book value. See
"Dilution" for a definition of the term "net tangible book value" and further
explanation of this risk.
There are substantial shares of common stock eligible for future sale, and such
sales may depress our stock price
After this offering, we will have outstanding shares of common
stock. See "Capitalization" for a discussion of the shares included in and
excluded from this number. The shares sold in this offering will be
freely tradable. The remaining shares of common stock outstanding after this
offering will be available for sale, assuming the effectiveness of certain
lock-up arrangements under which the stockholders have agreed not to sell or
otherwise dispose of their shares of common stock, in the public market as
follows:
<TABLE>
<CAPTION>
Number of Shares Date of Availability for Sale
---------------- -----------------------------
<S> <C>
0................. (date of this prospectus)
0................. (90 days after the date of this prospectus)
[ ]............... (after 180 days following the date of this prospectus);
and the remaining shares at various times thereafter upon
the expiration of one-year holding periods
</TABLE>
If our stockholders sell substantial amounts of common stock in the public
market, including shares issuable upon the exercise of outstanding options, the
market price of our common stock could fall. In addition, the sale of shares by
our stockholders could impair our ability to raise capital through the sale of
additional stock. See "Shares Eligible for Future Sale" and "Underwriting."
Our securities have no prior market, and our stock price may decline after the
offering
Before this offering, there has not been a public market for our common
stock and an active public market for our common stock may not develop or be
sustained after this offering. If an active public market for our common stock
does not develop, the liquidity of your investment may be limited, and our
stock price may fluctuate or decline below our initial public offering price.
The initial public offering price will be determined by negotiations between us
and the representatives of the underwriters. See "Underwriting" for a
discussion of the factors that will be considered in determining the initial
public offering price.
Our failure or the failure of our key suppliers and customers to be Year 2000
compliant would harm our business.
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January
1, 2000, computer systems and software used by many companies and organizations
in a wide variety of industries, including technology, transportation,
utilities, finance and telecommunications, will produce erroneous results or
fail unless they have been modified or upgraded to process date information
correctly.
16
<PAGE>
Although we cannot predict with any certainty what adverse effects we may
suffer from Year 2000 compliance issues, possible effects include:
. disruption in basic services such as water, electricity and telephone,
any of which could require us to close or substantially reduce the level
of activity at our facilities until service returns to normal;
. disruption in the supply of components and manufactured goods from our
component suppliers and contract manufacturers if they experience
disruptions in the delivery of basic services;
. disruptions in our ability to ship and receive goods if third-party
transportation and delivery providers experience disruptions in their
operations; and
. delays in receiving accurate management information from our internal
accounting and management systems.
We believe our internal systems are substantially Year 2000 compliant.
However, we currently have no contingency plan to address potential
interruptions in the operation of our internal systems or those of third
parties upon whom we depend as a result of Year 2000 noncompliance.
We may face claims based on Year 2000 issues arising from the integration of
multiple products within an overall network. We may also experience reduced
sales of our products as potential customers reduce their budgets for network
equipment and network services due to increased expenditures on their own Year
2000 compliance efforts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
17
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements
within the meaning of the federal securities laws that relate to future events
or our future financial performance. These statements involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by the forward-looking statements. These
risks and other factors include those listed under "Risk Factors" and elsewhere
in this prospectus. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
the negative of these terms or other comparable terminology. In addition, these
forward-looking statements include, but are not limited to, statements
regarding the following:
. anticipated development and release of new products;
. anticipated sources of future revenues;
. anticipated product return rates;
. future third party manufacturing arrangements;
. anticipated expenditures for research and development, sales and
marketing and general and administrative expenses;
. the adequacy of our capital resources to fund our operations; and
. our assessment of our readiness to address, and risks relating to, year
2000 issues.
These statements are only predictions. In evaluating these statements, you
should specifically consider various factors, including the risks outlined
under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus or to conform our prior
statements to actual results.
18
<PAGE>
USE OF PROCEEDS
We expect to receive net proceeds of approximately $ million from
the sale of the shares of common stock or approximately $ million
if the underwriters' over-allotment option is exercised in full, at an assumed
initial public offering price of $ per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, including working capital, and capital expenditures. The
amounts we actually expend for working capital and other purposes may vary
significantly and will depend on a number of factors, including the amount of
our future revenues and the other factors described under "Risk Factors."
Accordingly, our management will retain broad discretion in the allocation of
the net proceeds of this offering. We may also use a portion of the net
proceeds to acquire products, technologies or businesses that are complementary
to our current and future business and product lines. We currently have no
commitments or agreements and are not involved in any negotiations with respect
to any acquisition transactions. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in interest-bearing, investment-
grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
19
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of September 30,
1999 on the following:
. on an actual basis;
. on a pro forma basis to give effect to the conversion of all shares of
preferred stock into 14,470,282 shares of common stock effective
automatically upon the closing of this offering; and
. on pro forma as adjusted basis to give effect to the sale of
shares of common stock at an assumed initial offering price of $
per share (less underwriting discounts and commissions and estimated
offering expenses).
You should read this table in conjunction with our financial statements and
the accompanying notes, Selected Financial Data, and Management's Discussion
and Analysis of Financial Condition and Results of Operations included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
(unaudited)
---------------------------
Pro
Pro Forma As
Actual Forma Adjusted
-------- ------- --------
(in thousands)
<S> <C> <C> <C>
Long-term obligations, less current portion........ $ 208 $ 208 $ 208
Stockholders' equity:
Preferred stock, $0.001 par value: 7,837,750
authorized, 7,058,863 issued and outstanding
(actual); 7,837,750 authorized, no shares issued
and outstanding (pro forma); 1,000,000
authorized, no shares issued and outstanding
(pro forma as adjusted) ........................ 8 -- --
Common stock, $0.001 par value: 40,000,000
authorized, 6,029,292 issued and outstanding
(actual); 40,000,000 authorized, 20,499,574
issued and outstanding (pro forma); 100,000,000
authorized, shares issued and outstanding
(pro forma as adjusted)......................... 6 20
Additional paid-in capital......................... 41,251 41,245
Notes receivable from stockholders................. (2,325) (2,325)
Deferred stock compensation........................ (12,655) (12,655) ( )
Accumulated deficit................................ (16,307) (16,307) ( )
-------- ------- -----
Total stockholders' equity....................... 9,978 9,978
-------- ------- -----
Total capitalization........................... $ 10,186 $10,186 $
======== ======= =====
</TABLE>
- -----------------------
The number of shares of common stock outstanding after this offering
excludes the following:
. 2,150,600 shares issuable upon exercise of outstanding stock options as
of September 30, 1999 with a weighted average exercise price of $0.71 per
share; and
. 12,160,000 shares reserved for issuance under our 1996 Stock Plan and
1999 Employee Stock Purchase Plan (including amounts authorized for
issuance subsequent to September 30, 1999).
20
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of common
stock after this offering. In the table below, we have calculated net tangible
book value per share by dividing the net tangible book value (total assets less
intangible assets and total liabilities) by the number of outstanding shares of
common stock. Our pro forma net tangible book value as of September 30, 1999
was $5.6 million or $0.27 per share of common stock. Dilution in net tangible
book value per share represents the difference between the amount per share
paid by purchasers of shares of common stock in this offering and the net
tangible book value per share of common stock immediately after the completion
of this offering. After giving effect to the sale of the shares of common
stock offered hereby (at an assumed public offering price of $ per share (less
underwriting discounts and commissions and estimated offering expenses), our
pro forma net tangible book value as of September 30, 1999 would have been $
or approximately $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution in net tangible book value of $ per share to new investors, or
approximately % of the initial public offering price of $ per share. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at September
30, 1999................................................. $ 0.27
Increase per share attributable to this offering.......... $
------
Pro forma as adjusted net tangible book value per share
after this offering........................................ $
-------
Dilution per share to new investors......................... $
=======
</TABLE>
The following table shows on a pro forma basis after giving effect to this
offering, based on an assumed initial public offering price of $ per share, as
of September 30, 1999, the differences between the existing holders of common
stock and the new investors with respect to the number of shares of common
stock purchased from us, the total consideration paid to us, and the average
price per share paid, before deducting the underwriting discounts and
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 20,499,574 % $25,797,000 % $0.79
New investors..........
---------- ----- ----------- -----
Total................ 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and table are based on the number of shares of
common stock outstanding after this offering excludes the following:
. 2,150,600 shares issuable upon exercise of outstanding stock options as
of September 30, 1999 with a weighted average exercise price of $0.71 per
share; and
. 12,160,000 shares reserved for issuance under our 1996 Stock Plan and
1999 Employee Stock Purchase Plan (including amounts authorized for
issuance subsequent to September 30, 1999).
To the extent any of these options are exercised or our employees purchase
our shares under our 1999 Employee Stock Purchase Plan, there will be further
dilution to investors. See "Capitalization," "Management--Stock Plans,"
"Description of Capital Stock" and note 6 of notes to financial statements.
21
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and are qualified by reference to the financial statements and
notes thereto appearing elsewhere in this prospectus. The statement of
operations data set forth below for the years ended March 31, 1997, 1998, and
1999, and the balance sheet data at March 31, 1998 and 1999 are derived from,
and are qualified by reference to, the financial statements that have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are
included elsewhere in this prospectus. The balance sheet data as of March 31,
1997 are derived from financial statements not included in this prospectus. The
statement of operations data for the six months ended September 30, 1998 and
1999 and the balance sheet data as of September 30, 1999 are derived from
unaudited financial statements included in this prospectus. In the opinion of
management, these unaudited financial statements have been prepared on the same
basis as the audited financial statements referred to above and contain all
adjustments, consisting only of normal recurring adjustments, necessary for
fair presentation of the financial results and position for the indicated
periods and dates. The historical results are not necessarily indicative of
results to be expected for any future period.
<TABLE>
<CAPTION>
February 9, Fiscal Year Six Months
1996 Ended Ended
(inception) ---------------- ----------------
through Mar. Mar. Sept. Sept.
Mar. 31, 31, 31, 30, 30,
1997 1998 1999 1998 1999
----------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues................... $ -- $ -- $ 8,768 $ 1,050 $11,738
Cost of revenues............... -- -- 5,085 1,269 8,618
------- ------- ------- ------- -------
Gross margin................... -- -- 3,683 (219) 3,120
Operating expenses:
Research and development..... 2,395 3,398 2,785 1,391 2,188
Sales and marketing.......... 242 1,213 2,213 936 1,986
General and administrative... 375 615 976 323 1,296
Stock compensation........... -- -- 1,255 -- 1,607
Write-off of in-process
research and development.... -- -- -- -- 638
------- ------- ------- ------- -------
Total operating expenses... 3,012 5,226 7,229 2,650 7,715
------- ------- ------- ------- -------
Loss from operations........... (3,012) (5,226) (3,546) (2,869) (4,595)
Other income (expense), net.... 59 92 (65) (19) (14)
------- ------- ------- ------- -------
Net loss....................... $(2,953) $(5,134) $(3,611) $(2,888) $(4,609)
======= ======= ======= ======= =======
Net loss per share:
Basic and diluted.............. $ (5.17) $ (3.60) $ (1.52) $ (1.40) $ (1.40)
======= ======= ======= ======= =======
Weighted average shares........ 572 1,427 2,377 2,070 3,292
======= ======= ======= ======= =======
Pro forma net loss per share:
Basic and diluted............ $ (0.24) $ (0.27)
======= =======
Weighted average shares...... 15,028 16,923
======= =======
</TABLE>
<TABLE>
<CAPTION>
Mar. 31, Mar. 31, Mar. 31, Sept. 30,
1997 1998 1999 1999
-------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............. $2,036 $ 3,578 $ 2,595 $ 2,668
Working capital........................ 2,095 3,915 4,355 3,382
Total assets........................... 3,284 5,772 8,362 19,180
Long-term obligations, less current
portion............................... 540 567 424 208
Accumulated deficit.................... (2,953) (8,087) (11,698) (16,307)
Total stockholders' equity............. 2,419 4,458 5,175 9,978
</TABLE>
See note 1 of notes to financial statements for an explanation of the
determination of the weighted average common and common equivalent shares used
to compute net loss per share.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes thereto, as well as the other information included
elsewhere in this prospectus. Our discussion contains forward-looking
statements based upon current expectations that involve risks and
uncertainties, such as our plans, objectives, expectations, and intentions. Our
actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors," "Business" and
elsewhere in this prospectus.
Overview
We provide long-range DSL transmission systems that increase the bandwidth
and performance of copper lines to meet the rapidly growing demand for multiple
access line and high-speed, reliable Internet access and data services. We
commenced operations in April 1996. During the period from commencement through
the end of fiscal year 1998, we were a development stage company focused on
developing our initial product, recruiting personnel, building our corporate
infrastructure and raising capital, and had no product revenue. In fiscal year
1999, we began shipping our GDSL systems and expanded our operations. During
fiscal 1999, we increased our investments in research and development, sales
and marketing, customer support and services and our general and administrative
infrastructure. Since 1996, we have:
. added more than 60 customers;
. hired more than 100 employees;
. hired a sales team covering six domestic areas and Canada; and
. acquired technology and added an additional product line.
We currently derive our revenues from sales of our GDSL and FDS systems to
network access providers. Our net revenues have grown from $1.1 million for the
six months ended September 30, 1998 to $11.7 million for the six months ended
September 30, 1999. To date, we have generated a substantial portion of our
revenues from a limited number of customers, with one customer, GTE, accounting
for approximately 64.1% of our net revenues for the six months ended September
30, 1999 and approximately 89.8% of our net revenues for the year ended March
31, 1999. We expect that a significant portion of our future revenues will
continue to come from sales to a limited number of customers.
Since our inception, we have incurred significant losses, and as of
September 30, 1999, we had an accumulated deficit of $16.3 million. We have not
achieved profitability on an annual basis. We expect to incur significant sales
and marketing, research and development and general and administrative expenses
and, as a result, we will need to generate significantly higher revenues to
achieve and maintain profitability.
We sell our systems through our direct sales force and through third party
distributors. We recognize revenue from direct sales at the time of shipment,
net of allowances for returns. We recognize revenue from sales to distributors
upon the shipment of our systems to the end-users. We may grant distributors
limited rights of return on unsold inventory on a case by case basis. We
provide a reserve for warranty returns based on our warranty history and
expected future costs.
Cost of revenues consists of the cost of components and other materials,
outside assembly and test, in-house direct labor and other personnel costs,
warranty expense and other overhead. During the summer of 1999 there were a
series of lightning storms throughout the midwest region of the United States
and Texas. Our customers experienced GDSL-8 system failures in these areas
relating to these lightning storms. Although these systems was developed in
compliance with Telcordia (Bellcore) specifications, after the recent field
experiences, we found these specifications for lightning resistance were
inadequate. In response, we redesigned our systems to better withstand sudden
surges in power levels, whether as a result of lightning storms, or
23
<PAGE>
otherwise. We adopted a program by which our customers may receive modified
field units that meet these higher standards. Associated with this program we
recorded an expense of $2.9 million during the quarter ended September 30,
1999, which was charged to cost of revenues.
In the first half of fiscal 1999, gross margins were adversely affected by
manufacturing start-up costs and inefficiencies related to the relatively low
manufacturing levels in the initial production phase. We believe that our gross
margins will primarily be affected in the future by the following factors:
. demand for our systems;
. changes in our pricing policies;
. the mix and composition of the systems we sell;
. the mix of sales channels through which we sell our systems;
. the cost of raw materials; and
. manufacturing efficiencies.
Our manufacturing operations consist primarily of prototype development,
materials planning and procurement, final assembly, testing and quality
control, all performed in our Fremont, California location. We use several
independent suppliers to provide printed circuit boards, chassis and
subassemblies. We purchase components from third party distributors. For
prototypes and early production volumes we procure circuit boards and
components and provide them in kit form for consignment assembly at one or more
local assembly companies. We plan to outsource most of our manufacturing and
supply chain management operations in the future with the goal of lowering per
unit product costs as a result of manufacturing economies of scale. However, we
cannot assure you when or if such outsourcing will occur or that such cost
reductions will be realized. The failure to obtain such cost reductions would
materially adversely affect our gross margins and operating results.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers, and
prototype costs related to the design, development, testing and enhancement of
our systems. We expense our research and development costs as they are
incurred. We are devoting substantial resources to the continued development of
new systems. We believe that research and development is critical to our
strategic product development objectives and that to leverage our technology
and meet the changing requirements of our customers, we will need to fund
investments in several development projects in parallel. As a result, we expect
our research and development expenses to increase in absolute dollars in the
future.
Sales and marketing expenses consist primarily of salaries, commissions
based on performance measured against individual quotas, related expenses for
personnel engaged in marketing, sales and customer support functions, as well
as costs associated with promotional and other marketing expenses. We intend to
expand our direct and indirect sales operations and our marketing efforts
substantially in order to increase market awareness of our systems. We expect
that sales and marketing expenses will increase in absolute dollars as we hire
additional sales and marketing personnel and initiate additional marketing
programs. We believe that continued investment in sales and marketing is
critical to our success.
General and administrative expenses consist primarily of employee salaries
and related expenses for executive, administrative and accounting personnel,
insurance costs and professional fees. We expect general and administrative
expenses to increase in absolute dollars as we add personnel and incur
additional costs related to the growth of our business and our operations as a
public company.
We recorded a total of $14.4 million of deferred stock compensation costs
since our inception through September 30, 1999. These charges represent the
difference between the exercise price and the deemed fair value of certain
stock options granted to our employees. The options generally vest ratably over
a four-year
24
<PAGE>
period. We are amortizing these costs over the vesting period of the options
and have recorded deferred stock compensation charges of $2.3 million in the
year ended March 31, 1999, and $12.1 million in the six months ended September
30, 1999, respectively. Based on option activity through September 30, 1999, we
expect to recognize amortization expense related to deferred stock compensation
of approximately $5.6 million, $5.3 million, $2.3 million, $1.0 million and
$200,000 during the fiscal years ended March 31, 2000, 2001, 2002, 2003, and
2004 respectively. See note 6 of notes to financial statements.
As of March 31, 1999, we had $5.3 million of federal net operating loss
carryforwards and $5.3 million of state net operating loss carryforwards for
tax reporting purposes available to offset future taxable income. The federal
and state net operating loss carry-forwards expire beginning in 2012 and 2004,
respectively, to the extent that they are not utilized. We have not recognized
any benefit from the future use of loss carryforwards because of the
uncertainty surrounding their utilization.
In July 1999, we acquired certain assets and assumed certain liabilities
relating to the FDS product line from E/O Networks.We allocated the purchase
price of approximately $5.6 million to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective fair values
on the acquisition date. We determined the fair value of intangible assets
using a combination of methods, including estimates based on risk-adjusted
income approach for acquired research and development, developed technology,
core technology and customer list, and on the cost replacement approach for
acquired work force.
We recorded a charge of $638,000 in the six-month period ended September 30,
1999 to write-off in-process research and development acquired as part of the
acquisition of the FDS product line from E/O Networks. The value of the in-
process research and development project was determined by estimating the net
cash flows resulting from the completion of the project reduced to the
percentage of completion of the project. We estimated revenues, margins and
operating costs based upon historical information about similar product
developments combined with projections of future revenue and cost patterns,
including projections used when initially evaluating the acquisition of the FDS
product line. Net cash flows were tax affected and then discounted back to
their present value at a discount rate based on our required risk adjusted
weighted average rate of return.
The nature of the efforts to develop all purchased in-process technology
into commercially viable products principally relates to the completion of all
planning, designing, prototyping, verification and testing activities that are
necessary to establish that the resulting products can meet their design
specification, including function, features and technical performance
requirements. Due to the fact that the project is in-process there is
uncertainty whether it can be successfully finished and result in the net cash
flows that we originally estimated at acquisition. We cannot guarantee that we
will realize revenue from this in-process project in the amount estimated or
that the costs incurred will be materially consistent with estimates made.
25
<PAGE>
Results of Operations
We have not included a discussion of our results of operations for any
yearly periods as we had no revenues prior to fiscal 1999. We believe that
period to period comparisons of our annual results are less meaningful than
comparisons of more recent operating results. Therefore, an analysis of our
operating results is focused primarily on a comparison of our operating results
for the six months ended September 30, 1998 and September 30, 1999.
The following table sets forth, for the periods presented, certain data from
the statement of operations expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
Six Months Ended
--------------------
Sept. 30, Sept. 30,
1998 1999
--------- ---------
<S> <C> <C>
Summary of Operations Data:
Net revenues........................................... 100.0 % 100.0 %
Cost of revenues....................................... 120.9 73.4
------ -----
Gross margin........................................... (20.9)% 26.6 %
Operating expenses:
Research and development............................. 132.5 18.7
Sales and marketing.................................. 89.1 16.9
General and administrative........................... 30.8 11.0
Amortization of deferred stock compensation.......... -- 13.7
Write-off of in-process research and development..... -- 5.4
------ -----
Total operating expenses........................... 252.4 65.7
Loss from operations................................... (273.2) (39.1)
Other income (expense)................................. (1.8) (0.1)
------ -----
Net loss............................................... (275.0)% (39.2)%
====== =====
</TABLE>
Six Months Ended September 30, 1998 and September 30, 1999
Net Revenues
Net revenues increased from $1.0 million for the six months ended September
30, 1998 to $11.7 million for the six months ended September 30, 1999. This
increase in net revenues was due primarily to an increase in the sales of our
systems to existing and new customers. Sales to GTE accounted for 80% of net
revenues for the six months ended September 30, 1998 and 64% for the six months
ended September 30, 1999.
Cost of Revenues
Cost of revenues increased from $1.3 million for the six months ended
September 30, 1998 to $8.6 million for the six months ended September 30, 1999.
Gross margins for the six months ended September 30, 1998 were a (20.9)% of net
revenues compared to 26.6% for the six months ended September 30, 1999. The
increase in gross margins was due to efficiencies achieved with higher
manufacturing volumes. The cost of revenues and gross margins for the six
months ended September 30, 1999 were significantly impacted by the recording of
a $2.9 million charge for providing our customers field units that meet higher
standards for lightning resistance. Had we not taken this charge, our gross
margins for this period would have been 51.4%.
Research and Development Expenses
Research and development expenses increased from $1.4 million for the six
months ended September 30, 1998 to $2.2 million for the six months ended
September 30, 1999. This increase was due primarily to the increase in product
development personnel from four individuals at September 30, 1998 to 23
individuals at
26
<PAGE>
September 30, 1999, and the amortization of technology acquired from E/O
Networks, which accounted for $104,000 for the six months ended September 30,
1999. Our future success depends in large part on our ability to develop new
products that meet the needs of our customers. Accordingly, we expect research
and development expenses to increase in future periods.
In-process Research and Development
We recorded a charge of $638,000 in the six-month period ended September 30,
1999 to write-off in-process research and development acquired as part of the
acquisition of the FDS product line from E/O Networks. This charge represents
purchased in-process technology for a project that has not yet reached
technological feasibility and has no alternative future use. In estimating the
value of in-process research and development, we anticipated that development
would be completed and benefits would begin in fiscal 2001. Due to the fact
that the project is in-process there is uncertainty whether it can be
successfully finished and result in the net cash flows that we originally
estimated at acquisition. We cannot guarantee that we will realize revenue from
this in-process project in the amount estimated or that the costs incurred will
be materially consistent with estimates made.
Sales and Marketing Expenses
Sales and marketing expenses increased from $900,000 for the six months
ended September 30, 1998 to $2.0 million for the six months ended September 30,
1999. This increase was due to an increase in sales and marketing personnel
from six individuals at September 30, 1998 to 27 individuals at September 30,
1999, and increased advertising and travel expenses. We expect sales and
marketing expenses to increase in absolute dollars as we increase our sales and
marketing expenditures in order to grow revenues and expand our brand
awareness.
General and Administrative Expenses
General and administrative expenses increased from $300,000 for the six
months ended September 30, 1998 to $1.3 million for the six months ended
September 30, 1999. This increase was due primarily to an increase in general
and administrative personnel from two individuals at September 30, 1998 to nine
individuals at September 30, 1999. We expect general and administrative
expenses to increase in absolute dollars as we expand our administrative staff,
further develop our internal information systems and incur costs associated
with being a publicly held company.
Stock Based Compensation
We recorded deferred stock compensation of $12.1 million for the six months
ended September 30, 1999 and amortized $1.6 million during this period. We did
not record or amortize any deferred stock compensation in the six-month period
ended September 30, 1998. See note 6 of notes to our financial statements.
Other Income and (Expense), Net
Other expense, net was $19,000 and $14,000 for the six months ended
September 30, 1998 and September 30, 1999, respectively.
27
<PAGE>
Quarterly Results of Operations
The following table sets forth, for the periods presented, certain data from
the statement of operations and such data as a percentage of net revenues. The
statements of operations data have been derived from our unaudited financial
statements. In management's opinion, these statements have been prepared on
substantially the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information for the periods presented.
This information should be read in conjunction with the financial statements
and notes thereto included elsewhere in this prospectus. The operating results
in any quarter are not necessarily indicative of the results that may be
expected for any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30,
1998 1998 1998 1999 1999 1999
-------- --------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues................................... $ 141 $ 909 $3,803 $ 3,915 $5,554 $ 6,184
Cost of revenues............................... 363 906 1,814 2,002 2,643 5,975
-------- ------- ------ ------- ------ -------
Gross margin................................... (222) 3 1,989 1,913 2,911 209
Operating expenses:
Research and development..................... 694 697 584 810 858 1,330
Sales and marketing.......................... 422 514 646 631 944 1,042
General and administrative................... 156 167 240 413 519 777
Write-off of in-process research and
development................................. -- -- -- -- -- 638
Amortization of deferred stock compensation.. -- -- 90 1,165 456 1,151
-------- ------- ------ ------- ------ -------
Total operating expenses................... 1,272 1,378 1,560 3,019 2,777 4,938
-------- ------- ------ ------- ------ -------
Income (Loss) from operations.................. (1,494) (1,375) 429 (1,106) 134 (4,729)
Other income (expense)......................... 4 (23) (25) (21) (13) (1)
-------- ------- ------ ------- ------ -------
Net income (loss).............................. $ (1,490) $(1,398) $ 404 $(1,127) $ 121 $(4,730)
======== ======= ====== ======= ====== =======
<CAPTION>
As a Percentage of Net Revenues
--------------------------------------------------------------
Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30,
1998 1998 1998 1999 1999 1999
-------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues................................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues............................... 257.5 99.7 47.7 51.1 47.6 96.6
-------- ------- ------ ------- ------ -------
Gross margin................................... (157.5) 0.3 52.3 48.9 52.4 3.4
Operating expenses:
Research and development..................... 492.2 76.7 15.4 20.7 15.5 21.5
Sales and marketing.......................... 299.3 56.6 17.0 16.1 17.0 16.9
General and administrative................... 110.6 18.4 6.3 10.6 9.3 12.6
Write-off of in-process research and
development................................. -- -- -- -- -- 10.3
Amortization of deferred stock compensation.. 0.0 0.0 2.4 29.8 8.2 18.6
-------- ------- ------ ------- ------ -------
Total operating expenses................... 902.1 151.7 41.1 77.2 50.0 79.9
-------- ------- ------ ------- ------ -------
Income (Loss) from operations.................. (1,059.6) (151.4) 11.2 (28.3) 2.4 (76.5)
Other income (expense)......................... 2.8 (2.5) (0.7) (0.5) (0.2) (0.0)
-------- ------- ------ ------- ------ -------
Net income (loss).............................. (1,056.8)% (153.9)% 10.5 % (28.8)% 2.2 % (76.5)%
======== ======= ====== ======= ====== =======
</TABLE>
28
<PAGE>
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. The following discussion
highlights significant events that have impacted our net revenues and financial
results for the six quarters ended September 30, 1999.
Net Revenues
Net revenues increased in each of the six quarters from $141,000 for the
quarter ended June 30, 1998 to $6.2 million for the quarter ended September 30,
1999 due primarily to increased sales of our GDSL systems. Additionally, in the
quarter ended September 30, 1999, we began to recognize revenue on our FDS
systems.
Cost of Revenues
Cost of revenues increased in each quarter. Gross margins for the three
months ended June 30, 1998 and September 30, 1998 were (157.5)% and 0.3% of net
revenues, primarily due to high overhead relative to low manufacturing volumes.
Gross margins for the three months ended December 31, 1998, March 31, 1999 and
June 30, 1999 fluctuated between 48.9% and 52.4% associated with efficiencies
related to relatively high manufacturing volumes. Gross margin for the three
months ended September 30, 1999 was 3.4%, which reflects the $2.9 million
charge we recorded in connection with providing our customers enhanced field
units that are better able to withstand power surges. Had we not taken this
charge, our gross margin for this period would have been 50.5%.
Operating Expenses
Operating expenses increased in each quarter primarily as a result of
increased sales of our systems as well as increased personnel and personnel
costs as our business has grown. In particular, during this period we increased
research and development personnel to 23 individuals and sales and marketing
personnel to 27 individuals. In addition, the increase in operating expenses
for the quarter ended September 30, 1999 also reflects $104,000 in amortization
of technology acquired from E/O Networks and $638,000 write-off of related in
process research and development.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
sale of preferred equity securities in addition to monies received from sales
of our common stock and debt financing. We raised an aggregate of $23.2
million, net of offering expenses, through the sales of preferred stock.
At September 30, 1999, we had cash and cash equivalents of $2.7 million. We
have a line of credit with a lending institution that provides for borrowings
of up to $3.0 million and an equipment line of credit with the same financial
institution that provides for borrowings of up to $750,000. These facilities
are secured by all of our assets. The line of credit bears interest at the
prime interest rate, plus 0.25% per annum and expired in November 1999.
Borrowings under the equipment line of credit are repayable in equal monthly
installments over three years and bear interest at the prime rate plus 0.75%
per annum. This agreement also expired in November 1999. Under these credit
facilities, we are required to maintain certain financial covenants, including
liquidity, working capital, and other financial ratios. At September 30, 1999,
$250,000 was outstanding under the line of credit and $440,000 was outstanding
under the equipment line of credit. We are currently negotiating new credit
facilities with our bank. Additionally, we have an equipment lease with a
leasing company that provides for borrowings of up to $1.0 million and is
secured by the equipment financed under the lease. The Company borrowed
$926,000 at multiple closings at various interest rates. Payments are scheduled
to be completed in August 2000. At September 30, 1999, $305,000 was outstanding
under the lease.
Cash used in operating activities for the six months ended September 30,
1999 was $1.0 million. Cash used in operating activities was primarily related
to the net loss incurred and increases in accounts receivable
29
<PAGE>
and inventory offset by the increase in amortization of deferred stock
compensation and accounts payable and accrued expenses. Cash used in operating
activities for 1997, 1998, and 1999 was $3.1 million, $5.3 million, and $3.8
million, respectively. The increase in cash used in operating activities for
fiscal 1998 compared to the prior period was primarily due to the increase in
our net loss from $3.0 million in fiscal 1997 to $5.1 million in fiscal 1998.
The decrease in cash used for operating activities for fiscal year 1999
compared to the prior year period was primarily due to the decrease in our net
loss from $5.1 million in fiscal 1998 to $3.6 million in fiscal 1999. This
decrease was partially offset by increases in accounts receivable and inventory
and amortization of deferred stock compensation.
Cash used in investing activities for the six months ended September 30,
1999 was $6.5 million, which relates to the acquisition of intangibles and
fixed assets for $5.6 million and $800,000, respectively. Cash used in
investing activities for fiscal 1997, 1998, and 1999 was $166,000, $329,000,
and $525,000, respectively, primarily in connection with the acquisition of
fixed assets.
Cash provided from financing for the six months ended September 30, 1999 was
$7.6 million, which was primarily due to the $7.6 million net proceeds from the
sale of Series E preferred stock. Cash provided by financing activities for the
fiscal 1997, 1998, and 1999 was $5.3 million, $7.2 million, and $3.4 million,
respectively, primarily from private sales of preferred stock.
We have no material commitments other than obligations under our credit
facilities and operating and capital leases. We expect to continue to expend
significant amounts on property and equipment related to the expansion of
facility infrastructure, computer equipment and for research and development
laboratory and test equipment to support on-going research and development
operations. Although we believe that on the closing of this offering our
current cash balances will be sufficient to fund our operations for at least
the next 12 months, there can be no assurance that we will not require
additional financing within this time frame or that such additional funding, if
needed, will be available on terms acceptable to us or at all.
Qualitative and Quantitative Disclosures About Market Risk
Interest Rate Sensitivity
We maintain our portfolio of cash equivalents and short-term investments
primarily in a portfolio comprised of commercial paper, money market funds and
short-term debt securities. As of September 30, 1999, all of our investments
mature in less than three months. Accordingly, we do not believe that our
investments have significant exposure to interest rate risk.
Exchange Rate Sensitivity
We operate primarily in the United States, and all sales to date have been
made in U.S. dollars. Accordingly, we have had no material exposure to foreign
currency rate fluctuations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we
do not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of FAS No. 133 will not have a material
impact on our financial position or results of operations.
Year 2000 Issues
Many currently installed computer systems, software products and other
control devices are unable to accept four digit entries to distinguish 21st
century dates form 20th century dates. As a result, many companies' computer
systems, software products and control devices may need to be upgraded or
replaced in order to operate properly in the year 2000 and beyond.
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We have designed our products to be year 2000 compliant. However, there can
be no assurance that our current products do not contain undetected errors or
defects associated with year 2000 date functions. If such errors or defects do
exist, we may incur material costs to resolve them.
The internal systems used to deliver our services utilize third-party
hardware and software. We have completed an internal systems and processes
review for year 2000 compliance. We have completed our assessment of the year
2000 risks we may encounter, and all identified instances of noncompliance have
been repaired and tested. We believe our internal systems are substantially
year 2000 compliant. We have contacted the vendors of these products in order
to gauge their year 2000 compliance. Based on these vendors' representations,
we believe that the third-party hardware and software we use are year 2000
compliant. There can be no assurance, however, that we will not experience
unanticipated negative consequences, including material costs, caused by
undetected errors or defects in the technology used in our internal systems.
We have no specific contingency plan to address the effect of year 2000
compliance. If, in the future it comes to our attention that certain of our
products need modification, or certain of our third-party hardware and software
are not year 2000 compliant, then we will seek to make modifications. In such
cases, we expect such modifications to be made on a timely basis and we do not
believe that the cost of such modifications will have a material effect on our
operating results. There can be no assurance, however, that we will be able to
modify our products, services and systems in a timely manner to comply with
year 2000 requirements, which could have a material adverse effect on our
business.
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BUSINESS
Overview
GoDigital Networks provides long-range DSL transmission systems that
increase the bandwidth and performance of copper lines at very long distances
from the central office. The increasing demand for multiple voice and high-
speed reliable Internet access and data services has created a significant
market for deploying communications services to both residential and business
customers. Our GDSL systems enable network access providers to address this
demand by turning standard copper lines into high-speed digital conduits that
support multiple digital access services at long distances.
The scalable design of our long-range GDSL transmission systems provides our
customers the ability to upgrade their service offerings to provide
increasingly higher bandwidths to their end-users. The ease of installation and
interoperability of our systems allow our customers to rapidly deploy new
services. Our GDSL systems provide a cost-effective alternative to laying fiber
or copper wire or installing other more expensive network equipment.
GoDigital's systems allow our more than 60 customers, including ALLTEL,
Frontier, GTE, TELUS and US West, to leverage their existing copper
infrastructure to offer enhanced voice, Internet access and data services over
long distances to their business and residential customers.
Industry Background
The Growing Demand for High-Speed Access to Communications Networks
The volume of traffic transmitted over communications networks has grown
dramatically in recent years. The broadening range of activities for which
these networks are being used by both businesses and consumers is driving the
increase in the quantity and importance of information carried over, and also
the number of users accessing, the Internet and private communications
networks. Consumers are seeking low-cost, high-speed access to bandwidth-
intensive Internet content and services such as highly graphical Web sites,
audio, video and high-speed data. Businesses have even greater requirements for
high-speed access in order to implement electronic commerce strategies or Web-
based business models, and to provide employees and others with robust
telecommuting capabilities.
As more consumers and businesses have begun to rely on the Internet and
communications networks, the demand for access to these networks has
accelerated. As a result, the number of devices and access lines leading into
these networks has undergone dramatic growth. International Data Corporation,
or IDC, estimates that in 1997, 15 million or 15% of United States' households
had two or more access lines and that this number will grow to 34 million, or
30% of United States' households by 2002. A significant number of these
additional access lines are being used to access the Internet and other
communications networks. According to IDC, today nearly 70 million, or 86%, of
home users worldwide access the Internet via traditional analog telephone
lines. In addition, the demand for access is increasing as more and more small
businesses, self-employed individuals, and corporate telecommuters are
regularly accessing the Internet and other communications networks. IDC
estimates that there are 27 million households with at least one person doing
some business-related work from home, in some fashion, on a part-time or full-
time basis. Many work at home users are demanding the same access speeds from
their home offices that they experience at corporate locations.
Network Access Providers Must Leverage their Installed Copper Infrastructure
This increasing demand for multiple voice, Internet access and high-speed
data communications access lines, together with technological advances, has
created a significant market for the provisioning of communications services to
both residential and business customers. Network access providers are
capitalizing on this growing demand by deploying new technologies throughout
their networks to provide these enhanced services. Network access providers are
also deploying these enhanced services to differentiate themselves in an
increasingly competitive environment due to the proliferation of carriers
caused by government deregulation of the telecommunications industry.
Additionally, government public utility commission regulations are mandating
that incumbent network access providers increase the levels of services to
their entire customer base.
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In order to cost-effectively provide these services and respond quickly to
subscriber demand, network access providers need to leverage their existing
network infrastructure, the public telephone infrastructure or the copper line
connections between the central office and the end user, commonly known as the
"last mile." The public telephone infrastructure currently in place represents
a large capital investment that Dataquest estimates has involved laying over
200 million copper lines in North America and close to 900 million copper lines
worldwide. Dataquest believes that the total number of copper lines could
exceed one billion by 2002. This installed base of copper is a network access
provider's primary means of delivering services to its subscribers and,
therefore, its largest and most valuable asset. Regional Bell Operating
Companies, or RBOCs, and independent phone companies leverage their copper
infrastructure to generate more than $100 billion annually.
The "Last Mile" Access Bottleneck
While the copper lines that constitute the "last mile" reach the vast
majority of users in the United States, they were originally designed to
transport only analog voice traffic. In recent years, high-speed analog modems
have been introduced that are designed to receive data at speeds of up to 56
Kbps. However, the access speed allowed by the analog phone line drops very
quickly the greater the distance it must travel along the length of the copper
wire. Therefore, in spite of high-speed analog modems, we believe that roughly
50% of the population who live more than three miles beyond a central office
will not experience access speeds greater than 28.8 Kbps.
The number of available access lines also presents a problem for network
access providers. The "last mile" was not originally designed for multiple
lines per household and the cost for laying new copper lines is prohibitively
expensive. While we estimate that revenue on a given copper line remains
relatively constant, on average $20 per month, the cost to install a copper
line increases with distance. For example, we believe the cost for laying a
copper line could be more than $5,000 per line at distances of about five miles
and twice that at distances of ten miles.
DSL as a Solution for "Last Mile" Access
Network access providers have begun to deploy DSL technology as a cost-
effective broadband access solution to address the "last mile" bottleneck. DSL
technology utilizes sophisticated data modulation techniques to achieve high-
speed data transmission across existing copper line infrastructure. For the
network access provider, the principal benefit of DSL is this ability to permit
the rapid flow of information using existing copper infrastructure. DSL also
allows voice traffic and data traffic to be separated at the point where they
enter the network. Consequently, data traffic can be routed around the
traditional telephony network to an alternate data communications network,
freeing the telephony network to carry only voice traffic. This allows network
access providers to meet the growing need for high-speed data services without
having to upgrade their traditional telephony networks. DSL also allows for a
constant connection to the Internet and other communications networks,
resulting in guaranteed access speed or bandwidth to the desktop. In contrast,
with broadcast mediums such as coaxial cable or wireless infrastructure, the
upstream and downstream data paths have to be shared with other subscribers on
the same system. As a result, the connection speed any one subscriber actually
receives is a function of how many other subscribers are using the upstream and
downstream connections.
Traditional Equipment Does Not Leverage the Full Capabilities of DSL
Technology
While DSL technology has been deployed to solve the problem of delivering
high-speed Internet access and data services to end users in concentrated
metropolitan markets, network access providers are prevented from deploying DSL
service to mass markets due to significant limitations of available DSL
equipment offerings:
. Traditional DSL equipment offerings have significant distance or reach
limitations. Today, network access providers cannot offer DSL services
to customers located over 18,000 feet from a central office and as a
result, we believe that today they are unable to provide DSL service to
roughly 50% of their subscriber base.
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. Traditional DSL equipment does not allow a single copper line to provide
multiple digital services. As a result, in order to offer incremental
services, network access providers must often incur the expense of
installing additional copper lines.
These distance and single service limitations are pushing network access
providers to look for scalable DSL transmission equipment that will enable them
to significantly expand their addressable market. In order to be deployed to
reach the mass market, this equipment must also be able to be efficiently and
cost-effectively installed and maintained, interoperate within their current
networks, withstand harsh outside plant environments and be designed for
flexibility.
The GoDigital Solution
GoDigital Networks is committed to developing long-range DSL transmission
systems that enable network access providers to offer higher bandwidth and more
digital access lines to virtually all of their customers, regardless of
physical distance from a central office. We design and manufacture scalable
systems that enable network access providers to deploy multiple service
offerings on a single copper line at distances that we believe to be over seven
times of what is capable with today's DSL equipment. Our systems are designed
for interoperability with a carrier's existing infrastructure, efficient and
cost effective installation and maintenance, outside plant durability and
deployment flexibility.
Extend Carrier Service Range to Reach Mass Market. Our DSL transmission
systems offer network access providers the ability to extend their full-service
offerings up to 25 miles from the central office, thereby reaching what we
believe to be the remaining 50% of their subscriber base that is outside of the
three mile range of most alternative solutions. Our systems allow network
access providers to drop single or multiple services from any point on the
copper loop or deliver all services the full 25 mile distance.
Enable Compelling Economics by Offering Multiple Services on a Single
Line. Our systems enable network access providers to offer multiple digital
services and access bandwidths on one copper line. Our current systems offer up
to eight digital voice telephone lines or three 144 Kbps data lines over one
copper line. Our systems enable network access providers to offer services such
as Internet access that do not degrade with distance, switched local and long
distance voice, and CLASS services, including Caller ID, distinctive ringing
and automated call routing.
Our solution offers a new, attractive economic model to network access
providers. Instead of being constrained to one service offering per copper
line, with our GDSL equipment, network access providers can offer multiple
services and realize multiple revenue streams from one line. At the same time,
these network access providers can respond to subscriber demand and provide
differentiated, competitive services without incurring significant expenses to
install new copper lines for each new service. We believe, that at distances
greater than 2,500 feet, our systems are more cost effective than laying new
copper lines and that at subscriber densities less than 200 lines our systems
are more cost effective than installing extensive new infrastructure equipment
such as digital loop carrier systems.
Facilitate Efficient and Cost-Effective Installation and Maintenance. Our
systems are designed to be rapidly installed by the network access providers'
service technicians. Our central office products meet the stringent Network
Equipment Building Standards set in the Telcordia (Bellcore) documents
pertaining to safety, environmental factors, human factors and reliability, or
NEBS Level 3 requirements. We also comply with the more stringent requirements
of many of our customers' test labs. We have also designed our central office
shelf products for high density and to fit as a standard rack mounted product
to ease installation. In addition, our planning and configuration software
allows our customers to design and test the viability of their long-range DSL
transmission networks. Our systems also offer automated loop testing that
enables network access providers to remotely diagnose service problems in the
network and reduce the expense of sending on-site technicians.
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Provide Interoperability. Our DSL solutions adhere to industry standards
and, as a result, offer interoperability within a carrier's existing network
infrastructure. In addition, our DSL solutions have gone through the OSMINE
process for approval by Telcordia where they have been approved by Telcordia
for interoperability with RBOC legacy systems. We also leverage our core
technology expertise together with our relationships with network access
providers, such as GTE, US West, and leading DSL network equipment vendors,
such as Copper Mountain, to allow our systems to interoperate within their
networks and with their systems.
Design for Product Durability. Our core technology expertise in designing
products that will reside in the outside plant has resulted in final products
and systems that withstand harsh environmental conditions, including extreme
hot and cold temperatures, rain, wind and snow. Additionally, we have designed
our products to better withstand sudden surges in power levels experienced
during lightning storms.
Design for Deployment Flexibility. Our equipment can be placed virtually
anywhere the copper infrastructure extends. Our core expertise in the area of
power management provides a unique advantage in designing electronics with
extremely low power requirements. This technology allows network access
providers to power their systems for a full 25 miles from the central office.
This feature offers the network access provider the flexibility to deploy
elements of our systems wherever they are needed regardless of power
availability at a particular location. The density, size and ease of
installation of our outside equipment allows network access providers to
quickly deploy and re-deploy our systems as needed to service their
subscribers.
GoDigital Strategy
Our objective is to be the leading provider of long-range DSL transmission
systems that enable network access providers to cost-effectively offer multiple
communications services to all business and residential subscribers regardless
of distance from the central office. Key elements of our strategy include the
following:
Capitalize upon our Early Market Acceptance. We intend to leverage our early
market acceptance to extend our market share. We have focused on long-range DSL
transmission systems for three years. As of September 30, 1999 over 60
customers, including ALLTEL, Frontier, GTE, TELUS and US West had deployed our
solutions. We intend to build upon this early acceptance of our systems to
become the primary supplier of cost-efficient, long-range DSL transmission
solutions to these customers and other network access providers as they
continue to deploy their networks.
Continue to Develop Scalable Access Solutions. Our current systems are
focused on satisfying the increasing demand for digital access lines used for
enhanced voice services, high-speed analog modem access and IDSL service to
virtually any point on the network. As a network access provider's customers
require more bandwidth, we intend to leverage our installed customer base to
upgrade their systems to deliver increasingly more bandwidth. We are currently
developing higher bandwidth delivery methods to meet the needs of highly data-
intensive network applications such as high-speed Internet access, electronic
commerce and full motion video.
Leverage Strategic Relationships with DSL Equipment Vendors. The GoDigital
Networks solution extends the range of existing DSL solutions, thereby
increasing the value of existing equipment and expanding the market opportunity
for suppliers of DSL central office and customer located equipment. We intend
to expand our cooperative relationship with Copper Mountain and to develop
future relationships that continue to promote GoDigital Networks in the
industry, allow interoperability, extend our sales capabilities and increase
our sales volume.
Leverage Strategic Acquisitions to Complement Product Offerings. We recently
acquired the FDS product line from E/O Networks to gain both optical expertise
and optical transmission products. The FDS systems aggregate multiple DSL
service offerings and offer long-range transport along fiber optic rings at
speeds of 40 Mbps. The FDS systems are deployed by our customers to distribute
IDSL and digital access lines to multiple locations in their networks. Our FDS
systems together with our GDSL systems allow the flexibility
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to deliver services to virtually any location within the network access
provider's service area through combined fiber/copper applications. We intend
to pursue strategic acquisitions in the future as we identify companies or
products that will complement our current DSL transmission offerings.
Products
GDSL Scalable Long-Range DSL Systems
GDSL systems enable network access providers to leverage existing copper-
based networks to multiply and extend service offerings to reach customers that
were previously too far from the central office to be reached with traditional
technologies and also in areas where there are no additional copper lines
available. Our GDSL systems consist of a GDSL Universal Central Office
Terminal, or COT, which is the shelf that houses the Central Office Terminal
Units, or CTUs. Each CTU aggregates multiple services within the central office
for transport over a single copper line. Our GDSL Straight Through Repeaters,
or STRs, are placed approximately every 25,000 feet along copper lines to
maintain signal strength over long distances. The Add/Drop Repeaters, or ADRs,
are used to drop off single or multiple services in route to the Remote
Terminal Units, or RTUs, where all or part of the signal is delivered.
[Graphic of the GDSL system includes a GDSL-8 and GDSL-3i shelf; several STRs
and terminal units.]
Features and Benefits
. Facilitate high-speed access up to 25 miles from the central office over
the existing copper infrastructure
. Delivery of multiple service offerings including IDSL and digital access
lines for voice, CLASS services, and high-speed analog modem access on
the same copper line
. Rapid deployment time and cost-effective economics
. Multiple services delivered on one copper line
. NEBS Level 3 compliant
. Weather hardened outside plant DSL equipment
. Line powered from the central office
. Interoperates with network access providers' systems and procedures
. Allows multiple drop off points along the transmission route
GDSL-8. The GDSL-8 uses DSL technology to deliver 544 Kbps DSL service
channeled into eight digital access lines for high-speed analog modem access,
voice and CLASS services on one copper line to distances up to 25 miles from
the central office. The GDSL-8 COT is an industry standard 19 inch or 23 inch
rack mount shelf that can hold up to 20 CTUs and supports up to 160 lines,
conserving valuable office space.
GDSL-3i. The GDSL-3i uses the same 544 Kbps long-range DSL architecture to
deliver three IDSL lines to distances up to 25 miles from the central office,
extending the reach of an IDSL Digital Subscriber Line Access Multiplexer, or
DSLAM, from 18,000 feet up to 130,000 feet from the central office. A DSLAM
aggregates DSL lines at a central office for distribution over the
communications network. The GDSL-3i can be served from the same COT shelf as
the GDSL-8 and uses the same STRs used in the GDSL-8 systems.
Full-Service Distribution System
FDS FiberReach. The FDS FiberReach transports multiple IDSL lines or digital
access lines to multiple drop off points along a 40 Mbps fiber ring of up to
150 miles. The FDS FiberReach enables our customers to transport long-range DSL
services and interconnect to our copper-based GDSL system to provide services
to
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end-users. The FDS FiberReach consists of a host digital terminal, which
resides in the central office and aggregates and transports signals to the
fiber rings and optical network units, or ONUs, that drop signals at points
along the fiber ring.
[Graphic of the FDS FiberReach and fiber ring connected to a GDSL-8]
Features and Benefits
. ONUs can be sized from 24 to 192 lines
. Supports up to 30 ONUs on 150 mile fiber rings
. Interoperates with network access providers' systems and procedures
. GDSL systems can be used in combination with the FDS FiberReach for
combined fiber / copper long-range transmission applications
Technology
We believe that our GDSL systems provide us with a competitive advantage by
cost-effectively facilitating the delivery of more services and higher
bandwidths at long distances. In addition, our systems provide a NEBS Level 3
compliant platform that is both robust and reliable for the central office and
the outside plant environment. The following are key components of our
differentiated technology platform:
Signal Processing Capabilities. Our GDSL signal processing technology enables
us to aggregate a variety of services including voice, high-speed data and
Internet access services for transmission over a single copper line.
Power Management Capabilities. Our proprietary electronics technology gives
us the ability to tightly control the distribution of power along the entire
length of the DSL network. This capability enables us to send consistent power
levels long distances while minimizing interference or noise usually
experienced as distance increases along copper lines. We have also designed our
DSL systems to selectively use power in remote locations, enabling signals to
travel farther without degradation. These two elements enable us to maintain a
competitive advantage as more service types are introduced, higher bandwidths
are added and more lines are needed.
Optimization of DSL Chip Technology. We customize existing DSL chip
technologies to regulate the speed of the signal traveling over the copper
lines. This feature combined with our power management capabilities allows us
to provide DSL services over very long distances.
Combining FDS and GDSL. Our FDS FiberReach can transport multiple IDSL lines
as well as digital access lines along fiber rings. Our GDSL systems interface
with these rings to extend the reach of our solution even further, potentially
providing digital access services, including IDSL service to virtually all
subscribers. Our powerful combination of fiber and copper technology offers
network access providers flexible options to provide increased bandwidths and
more lines to more customers.
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Robust System Design. We have created digital transport systems uniquely
designed for long-reach DSL networks that specifically address the challenges
presented by long spans of aging copper in the harshest of environments. For
example, we have designed our GDSL systems to withstand a four to five times
greater power surge than industry standards for lightning survivability, and
avoiding external influences from power lines or other electronic signals. In
addition, our GDSL systems are efficiently packaged. We believe our products
have five times more central office density than our nearest competitor and are
designed for ease of installation. The density, ease of installation, and cost-
effectiveness of our systems provides flexibility to network access providers
who can install our systems at any location on an as-needed basis when new
services or higher bandwidths are required.
Customers
For the twelve-month period ended on September 30, 1999, we had over 60
customers. The following table sets forth our customers who have purchased more
than $50,000 of our systems during that period.
. ALLTEL Supply
. The Armstrong Group
. Century Telephone Enterprises
. Horizon Chillicothe Telephone
. Dakota Electric Supply
. Farmers Telephone Company
. Frontier Communications (including sales through Anixter)
. GTE
. Manitoba Telecom Services
. Monon Telephone Company
. RT Communications
. Sprint Communications Company
. TELUS Communications
. US West
Aggregate sales to our largest customer, GTE, accounted for approximately
89.8% of our net revenues for fiscal year ended March 31, 1999. Aggregate sales
to GTE and TELUS, accounted for approximately 64.1% and 17.5% of our net
revenues, respectively, for the six months ended September 30, 1999. We expect
to continue to derive a substantial portion of net revenues from GTE or a
limited number of other customers in the foreseeable future.
Manufacturing
Our manufacturing operations consist primarily of prototype development,
materials planning and procurement, final assembly, testing and quality
control, all performed in our Fremont, California location. Our design-for-
manufacturability methodology incorporates a high level of automated in-circuit
and functional testing to reduce manufacturing costs and also provide for rapid
turn-key outsourcing. We use several independent suppliers to provide printed
circuit boards, chassis and subassemblies. We purchase components from several
large distributors and use multiple sources for all components when possible.
Some components are purchased on a sole-source basis from suppliers including
Conexant Systems, Lucent Microelectronics, and Xilinx.
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Our manufacturing process enables us to configure our systems to meet a wide
variety of individual customer requirements, as these requirements are often
differentiated by the form factor and electrical connectors on the unit
housings. For prototypes and early production volumes we procure circuit boards
and components and provide them in kit form for consignment assembly at one or
more local assembly companies. Our circuit board assemblies are designed to be
used in a variety of customer-specific plastic housings.
We plan to outsource most of our manufacturing and supply chain management
operations in the future with the goal of lowering per unit product costs as a
result of manufacturing economies of scale.
Sales, Marketing and Customer Support
We sell and market our systems through a direct sales force and through
selected distributors. Initial discussions with our customers generally involve
contact with our sales and marketing personnel who work to communicate the
strengths of our company and our systems. Our sales process typically involves
responding to customer requests for proposals, completing a technical
certification process to verify the functionality of our systems, consulting on
network deployment, training, and in some cases, developing customized software
for product compatibility or enhanced services.
Our direct sales responsibilities are divided into geographic regions managed
by regional directors and sales managers who are responsible for relationships
with our customers. The sales management team for each customer is responsible
for maintaining contact with key individuals who have planning and policy
responsibility within a customer's organization. At the same time, our sales
engineers work with customers to sell products at key levels throughout the
customer's organization.
We also sell our systems indirectly through a limited number of distribution
partners including ALLTEL, Anixter, Dakota Electric Supply and GTE. We engage
in joint sales activities with these partners, and regularly provide them with
collateral materials to enable their sales forces to promote our systems.
Our marketing efforts are focused on new product planning, providing customer
sales support and supporting industry standard initiatives. Our marketing staff
coordinates activities throughout our organization and provides marketing
support services, including marketing communications, marketing research, and
other support functions.
The majority of our service and support activities are related to
installation and network configuration support. These services are provided by
telephone and directly at customer installations with resources from our
customer support group based in Fremont, California. We provide technical
support for our systems that have warranties. We have a variety of
comprehensive and flexible hardware and software maintenance and support
programs available for systems no longer under warranty, with services ranging
from time and materials remote service support to 24-hour on-site support,
depending on our customer's preferences. We also offer various training courses
for our distribution partners and telecommunications service provider
customers.
Intellectual Property
We rely on a combination of patents, trademarks, and trade secrets, as well
as confidentiality agreements and other contractual restrictions with employees
and third parties, to establish and protect our proprietary rights. Despite
these precautions, we cannot assure you that the measures we undertake will be
adequate to protect our proprietary technology, or that they will preclude
competitors from independently developing products with functionality or
features similar to our systems. We cannot assure you that the precautions we
take will prevent misappropriation or infringement of our technology. We
currently have one issued patent, four pending formal patent applications and
three pending provisional applications in the United States with respect to our
technology. However, it is possible that patents may not be issued for our
patent applications. Patents issued to us may not adequately protect our
technology from infringement or prevent others from claiming that our
technology infringes on that of third parties. We currently own two federal
trademark registrations, for the
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marks GODIGITAL and GDSL, and we own rights to other unregistered marks.
Competitors and others, though, may challenge the validity or scope of these
rights. Failure to protect our intellectual property could seriously harm our
business.
It is possible that 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. Litigation could result
in substantial costs and diversion of our resources and could materially harm
our business. In addition, we may receive in the future notice of claims of
infringement of other parties' proprietary rights. Infringement or other claims
could be asserted or prosecuted against us in the future, and it is possible
that past or future assertions or prosecutions could harm our business. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause delays in
the development and release of our products, or require us to develop non-
infringing technology or enter into royalty or licensing arrangements. Such
royalty or licensing arrangements, if required, may not be available on terms
acceptable to us, or at all. For these reasons, infringement claims could
seriously harm our business.
Research and Development
In fiscal 1999 and the six months ended September 30, 1999, our research and
development expenses were $2.8 million and $2.2 million, respectively. We
believe that our future success depends on our ability to continue to enhance
our existing systems and to develop new systems that maintain technological
competitiveness. We have focused our recent research and development activities
on enhancing our GDSL systems, including the ability to support industry
standards for 56 Kbps access speeds, or V.90, to locations up to 25 miles from
the central office. We are also developing a GDSL system to deliver multiple,
higher bandwidth services on one copper line up to 25 miles from the central
office. We are committed to an ongoing program of new product development
through our internal development efforts as well as the possible acquisition of
additional technology from outside sources. We design our products around
current industry standards and will continue to support emerging standards that
are consistent with our product strategy.
Competition
The network access market we are addressing is highly competitive and we
believe that competition may increase substantially in the future. Digital
signal transport technology is evolving and becoming increasingly competitive.
We currently compete with privately held companies that offer long-range DSL-
based products. In addition, many large communications equipment vendors such
as Alcatel, Cisco, Lucent and Nortel may, either through internal development
or through acquisitions of competitive businesses or technologies, develop
products that compete with ours. Furthermore, other technologies such as
optical fiber or wireless may replace copper systems as a means of providing
"last mile" network access for business and residences in the future.
The principal competitive factors in our markets include:
. relationships with network access providers;
. product reliability, performance and interoperability;
. product features;
. product availability;
. price;
. ability to distribute products;
. ease of installation and use;
. technical support and customer service; and
. brand recognition.
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We believe we are addressing each of these competitive factors. Nonetheless,
we expect to face increasing competitive pressures from both current and future
competitors in the markets we serve.
Many of our current and potential competitors have customer relationships and
account support organizations that are larger and more established than ours.
Many of them have more customers than we do, and offer broader product lines,
so that they are favored in cases where customers prefer a single integrated
source for their product needs. These large companies have the capability to
price their products competitively while maintaining an overall favorable
margin on a wide product mix which could cause us to reduce prices and margins.
As a result, we may not be able to maintain a competitive position against our
competitors. Failure on our part to maintain our market share and product
margins could seriously harm our business, results of operations and financial
condition.
Employees
As of September 30, 1999, we employed 105 full-time employees, including 27
in sales and marketing, 46 in manufacturing, 23 in engineering, and 9 in
finance and administration. All of our employees are located in the United
States. None of our employees is represented by collective bargaining
agreements and we consider relations with our employees to be good.
Facilities
Our corporate headquarters facility, of approximately 46,000 square feet, is
located in Fremont, California. We lease our corporate headquarters facility
pursuant to a lease agreement that expires in June 2004. We believe this
existing facility is adequate for our needs through the next twelve months of
operations.
Legal Proceedings
We are not currently a party to any material legal proceedings.
41
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to our
executive officers and directors as of November 1, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Francis I. Akers.................... 52 Chairman of the Board, Chief Development Officer
and Director
Dennis Haar......................... 44 President, Chief Executive Officer and Director
T. Olin Nichols..................... 48 Vice President, Finance, Chief Financial Officer
and Secretary
David Krantz........................ 30 Vice President, Marketing and Business
Development
Paul H. Scherf, Jr. ................ 52 Vice President, Sales
Farzin Hatami....................... 41 Vice President, Engineering
Douglas Carlisle (1) (2)............ 42 Director
James Flach (1)..................... 52 Director
Gregorio Reyes (2).................. 58 Director
</TABLE>
- -----------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Francis I. Akers founded GoDigital in February 1996, and has served as our
Chairman of the Board and a director since February 1996, and as our Chief
Development Officer since August 1999. From February 1996 until August 1999,
Mr. Akers also served as our President and Chief Executive Officer. Prior to
founding GoDigital, Mr. Akers worked from October 1990 to January 1996, as
general manager of the Transmission Products Group (TPG) for Raychem
Corporation. Mr. Akers holds a B.S. in Chemistry and an M.S. in Physical
Chemistry from Virginia Tech, and has received business administration training
through ITT's Executive Training Program.
Dennis Haar has served as our President, Chief Executive Officer and a
director since August 1999. Prior to joining us, Mr. Haar worked from October
1998 to July 1999, as an advisor and general consultant to Aspect
Telecommunications. From October 1995 to October 1998, he served as President
and Chief Operating Officer of Aspect Telecommunications, and from 1991 to
October 1995, he served as its Vice President of North America Sales and
Support. Mr. Haar holds a B.S. in Electrical Engineering from Stanford
University and an M.B.A. from the Stanford University Graduate School of
Business.
T. Olin Nichols has served as our Vice President, Finance and Chief
Financial Officer since May 1999, and our Secretary since September 1999.
Additionally, Mr. Nichols is responsible for our treasury services, information
technology and human resources. From November 1998 to May 1999, Mr. Nichols was
an independent consultant. From March 1993 to November 1998, Mr. Nichols was
Chief Financial Officer and Secretary of Synergy Semiconductor. Mr. Nichols
holds a B.S. in Mechanical Engineering and an M.B.A. from the University of
Washington.
David Krantz has served as our Vice President of Marketing and Business
Development since September 1999. Prior to joining us, Mr. Krantz worked from
March 1999 to September 1999 as Senior Director of Marketing and Development at
America Online. Mr. Krantz was Director of Business Planning for Netscape
Communications Corporation from December 1997 to March 1999, prior to its
merger with America Online. From June 1996 to December 1997, Mr. Krantz was
Director of Business Development and Alliances, consumer markets group for
Pacific Bell. From September 1994 to June 1996, Mr. Krantz attended the M.B.A.
program at the Harvard Business School. Mr. Krantz holds a B.S. with a
concentration in Finance and Management from the University of Virginia,
McIntire School of Commerce and an M.B.A. from Harvard Business School.
42
<PAGE>
Paul H. "Hank" Scherf, Jr. has served as our Vice President of Sales since
September 1998. Prior to joining us, Mr. Scherf worked from October 1993 to
April 1998 at ADC Kentrox, a subsidiary of ADC Telecommunications, Inc. as
Regional Vice President, Sales. Mr. Scherf holds a B.S. in Aerospace
Engineering from the U.S. Naval Academy, an M.S. in Mechanical Engineering from
North Carolina State University and an M.B.A. from the Stanford University
Graduate School of Business.
Farzin Hatami has served as our Vice President of Engineering since
September 1998. From 1990 to March 1998, Mr. Hatami served as Executive
Director of Research and Development at Cisco Systems/StrataCom, Inc. Between
March 1998 and September 1998, Mr. Hatami was on sabbatical. Mr. Hatami holds a
B.S. in Electronic Engineering from Mankato State University and a M.B.A. in
Business Administration and Engineering Management from City University in
Bellevue, Washington.
Douglas Carlisle has served as one of our directors since April 1996. Mr.
Carlisle has been Managing Director and General Partner of Menlo Ventures since
1984. Mr. Carlisle holds a B.S. in Electrical Engineering from the University
of California, Berkeley, an M.B.A. from Stanford University Graduate School of
Business and a J.D. from the Stanford University Law School.
James Flach has served as one of our directors since April 1996. Mr. Flach
has been a Partner of Accel Partners since 1992. Mr. Flach serves on the board
of directors of Redback Networks and serveral private companies. Mr. Flach
holds a B.S. in Physics from Rensselaer Polytechnic Institute and an M.S. in
Applied Mathematics from the Rochester Institute of Technology.
Gregorio Reyes has served as one of our directors since March 1996. Since
August 1994, Mr. Reyes has been a private investor and consultant. Mr. Reyes
serves on the board of directors of C. Cube, S3 and Sync Research and several
private companies. Mr. Reyes holds a B.S. in Engineering from Rensselaer
Polytechnic Institute and an M.S. in Engineering from Stevens Institute of
Technology.
Board of Directors
Our board of directors currently consists of six authorized members and we
currently have five directors and one vacancy. Upon the completion of this
offering, the terms of office of the board of directors will be divided into
three classes, each class consisting of two directors: Class I, whose term will
expire at the annual meeting of stockholders to be held in 2000; Class II,
whose term will expire at the annual meeting of stockholders to be held in
2001; and Class III, whose term will expire at the annual meeting of the
stockholders to be held in 2002. At each annual meeting of stockholders after
the initial classification, the successors to directors whose terms will then
expire will be elected to serve from the time of election and qualification
until the third annual meeting following election. As a result, only one class
of directors will be elected at each annual meeting of our stockholders, with
the other classes continuing for the remainder of their respective three-year
terms. This classification of the board of directors may have an effect of
delaying or preventing a change of control or management of GoDigital. See the
Risk Factor titled "Certain provisions of our charter documents . . ." Each
officer serves at the discretion of the board of directors.
Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Carlisle and Flach. The audit committee
reviews our internal accounting procedures, consults with and reviews the
services provided by our independent accountants and makes recommendations to
the board of directors regarding the selection of independent accountants. The
compensation committee consists of Messrs. Carlisle and Reyes. The compensation
committee reviews and recommends to the board of directors the salaries,
incentive compensation and benefits of our officers and employees and
administers our stock plans and employee benefit plans.
43
<PAGE>
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee is currently, or has ever
been at any time since our formation, one of our officers or employees. No
member of the compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more officers
serving as a member of our board of directors or compensation committee.
Compensation
Our non-employee directors are reimbursed for expenses incurred in
connection with attending board and committee meetings but are not compensated
for their services as board or committee members. We have in the past granted
non-employee directors options to purchase our common stock pursuant to the
terms of our 1996 Stock Plan. We may also grant non-employee directors options
to purchase our common stock pursuant to the terms of our 1996 Stock Plan. See
"--Stock Plans."
Executive Officers
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among our directors and officers.
Compensation
The following table sets forth all compensation paid or accrued during our
fiscal year ended March 31, 1999 to our President and Chief Executive Officer,
and each of our officers whose compensation exceeded $100,000 for the period
(collectively, our "Named Executive Officers"). In accordance with the rules of
the SEC, the compensation described in this table does not include perquisites
and other personal benefits received by the named executive officers which do
not exceed the lesser of $50,000 or 10% of the total salary and bonus reported
for these officers.
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual
Compensation Securities
---------------- Underlying All Other
Name and Principal Position Salary Bonus Options Compensation
- --------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Francis I. Akers(1).................. $164,741 $72,000 -- $ --
Chief Development Officer
Paul H. Scherf, Jr. ................. $185,490 $11,548 200,000 $ --
Vice President, Sales
Farzin Hatami........................ $ 82,498 $40,000 382,500 $ --
Vice President, Engineering
</TABLE>
- -----------------------
(1) Mr. Akers served as our President and Chief Executive Officer until August
1999.
Option Grants in Fiscal Year 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during
fiscal year 1999. All options granted to these executive officers in the last
fiscal year were granted under the 1996 Stock Plan, as amended. One-quarter of
the shares subject to each option vests and becomes exercisable on the first
anniversary of the date of grant and an additional one forty-eighth of the
shares subject to each option vests each month thereafter. In addition, options
granted to each of the individuals set forth below may be exercised early,
provided that such individual enters into a restricted stock purchase
agreement. The shares acquired remain subject to a right of repurchase by us.
The percent of the total options set forth below is based on an aggregate of
1,098,940 shares subject to options granted to employees during our fiscal year
ended March 31, 1999. All options were granted at a fair market value as
determined by our board of directors on the date of grant.
44
<PAGE>
Potential realizable value represents hypothetical gains that could be
achieved for the options if exercised at the end of the option term assuming
that the initial public offering price of our common stock appreciates at 5%
and 10% over the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with rules of the SEC and do not
represent our estimate or projection of our future common stock price.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of
Securities Granted to Stock Appreciation
Underlying Employees Exercise for Option Term
Options During Fiscal Price Expiration ---------------------
Name Granted Year 1999 Per Share Date 5% 10%
- ---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Francis I. Akers........ 0 -- -- --
Paul H. Scherf, Jr.(1).. 200,000 18.2% $0.18 4/20/2008
Farzin Hatami(1)........ 382,500 34.8% $0.18 9/13/2008
</TABLE>
- -----------------------
(1) Such options are subject to certain change of control provisions under a
separate agreement pursuant to which a portion of the unvested shares
subject to the option shall vest and become immediately exercisable upon
the occurrence of the following: (i) a change of control (as that term is
explained in the section "Change of Control Severance Agreements" below),
and (ii) the involuntary termination of service with us or the termination
of service with us without cause (as that term is explained in the section
"Change of Control Severance Agreements" below).
Aggregate Option Exercises in Fiscal Year 1999 and Values at March 31, 1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by the named executive officers. The value of
unexercised in-the-money options is based on an assumed initial offering price
of $ per share minus the actual exercise prices. All options were granted
under our 1996 Stock Plan, as amended. These options vest over four years and
otherwise generally conform to the terms of our 1996 Stock Plan, as amended.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at March 31, 1999 at March 31, 1999(3)
Shares Acquired Value ---------------------------- -------------------------
Name on Exercise(1) Realized Exercisable(2) Unexercisable Exercisable Unexercisable
---- --------------- -------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Francis I. Akers........ -- $ -- -- -- -- --
Paul H. Scherf, Jr. .... -- $ -- 200,000 -- --
Farzin Hatami........... 382,500 $ -- -- -- --
</TABLE>
- -----------------------
(1) The shares acquired by the individuals set forth were exercised under a
right of early exercise, pursuant to a restricted stock purchase agreement
with us. These shares remain subject to a right of repurchase by us for any
shares that are not vested at the time the stockholder ceases to be an
employee or service provider to us, which lapses over time based on the
following schedule: 1/4 of the shares subject to the option vest twelve
months after the vesting commencement date, and 1/48 of the shares subject
to the option vest each month thereafter.
(2) The options that are exercisable under a right of early exercise subject to
each optionee entering into a restricted stock purchase agreement with us.
Such agreement contains our right of repurchase for any shares that are not
vested at the time the optionee ceases to be our service provider based on
the following schedule: 1/4 of the shares subject to the option vest twelve
months after the vesting commencement date, and 1/48 of the shares subject
to the option vest each month thereafter.
(3) Based upon the assumed initial public offering price of $ per share, less
the exercise price per share.
45
<PAGE>
Change of Control Severance Arrangements
We have entered into change of control severance agreements with certain of
our officers. These agreements provide that upon a change of control which is
defined to include the occurrence of any of the following events:
. the approval by our stockholders of a merger or consolidation of us with
any other entity which would result in our stockholders owning less than
50% of the surviving entity;
. the approval of our stockholders of a plan of liquidation or an agreement
for the sale or disposition by us of all or substantially all of our
assets; or
. a transaction in which a person or affiliated group of persons becomes
the beneficial owner of more than 50% of our voting securities;
then upon the occurrence of such change of control, one-third of the
employee's unvested options, or shares subject to right of repurchase by us in
the case of restricted stock purchased by the employee, automatically vest.
Following such acceleration, the employee's remaining options or restricted
stock will continue to vest in accordance with the original vesting schedule
subject to the following additional provisions.
In addition, if, at any time within 24 months following a change of control,
the employee is terminated as a result of an involuntary termination,
including:
. without the employee's express written consent, a significant reduction
without good business reasons of the employee's duties, position or
responsibilities relative to employee's duties, position or
responsibilities in effect immediately prior to such reduction, or
employee's removal from such position, duties and responsibilities,
unless such employee is provided with comparable duties, position and
responsibilities, excluding a reduction in duties, position or
responsibilities solely by virtue of the acquisition;
. without the employee's express written consent, a substantial reduction
of the facilities and perquisites available to the employee immediately
prior to such reduction;
. a reduction of the employee's base salary;
. a material reduction in the overall benefits package available to the
employee;
. without the employee's express written consent, the relocation of the
employee to a facility or a location more than 50 miles from employee's
current location;
. any purported termination of the employee which is not a result of any
act of personal dishonesty by the employee which is intended to result in
the employee's substantial personal enrichment, employee's conviction of
a felony, which would reasonably have a material detrimental effect on
our reputation or business, and a willful act by the employee which
constitutes misconduct and is injurious to us; or
. the failure to obtain the assumption of the change of control severance
agreement by any acquiring company;
then the employee shall be entitled to receive severance payments and
certain other employee benefits for a period of 12 months following the date of
the employee's termination at a rate equal to the employee's base salary as in
effect immediately prior to the change of control. In addition, all shares
subject to unvested options or shares subject to our right of repurchase shall
fully vest such that each option granted to the employee shall be fully
exercisable and our right of repurchase shall lapse entirely as to all
restricted stock purchased by the employee in this twelve month period.
Limitations on Directors' and Officers' Liability and Indemnification
Our restated certificate of incorporation to be filed upon completion of
this offering limits the liability of our directors to the maximum extent
permitted by Delaware law. Delaware law provides that directors of a
46
<PAGE>
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability associated with any of
the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemption; or
. any transaction from which the director derived an improper personal
benefit.
The limitation of our director's liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our restated certificate of incorporation also provides that we shall
indemnify our directors and executive officers and may indemnify our employees
and other agents to the fullest extent permitted by law. We believe that
indemnification under our restated certificate of incorporation covers at least
negligence and gross negligence on the part of indemnified parties.
We intend to enter into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify such officers and directors against liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
Stock Plans
1996 Stock Plan, as Amended
Our board of directors adopted the 1996 Stock Plan, referred to as the "1996
Plan", in March 1996 and our stockholders initially approved the 1996 Plan in
March 1996. In connection with this offering, our board of directors approved
the amendment and restatement of the 1996 Plan in November 1999, and our
stockholders approved the amendment and restatement in 1999. Our 1996
Plan provides for the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code, referred to as the "Code," to our
employees, and for the grant of nonstatutory stock options and stock purchase
rights to our employees, directors and consultants.
Number of Shares of Common Stock Available under our 1996 Plan. As of
November 15, 1999, a total of 10,160,000 shares of our common stock were
reserved for issuance pursuant to our 1996 Plan, of which options to acquire
2,343,400 shares were issued and outstanding as of that date. As part of the
1999 amendment and restatement of our 1996 Plan, the board of directors
approved an increase of 4,000,000 shares reserved for issuance under our 1996
Plan. Our 1996 Plan provides for annual increases in the number of shares
available for issuance under our 1996 Plan on January 1st of each year,
effective beginning in 2001, equal to the lesser of 5% of the outstanding
shares of our common stock on the first day of the calendar year, 4,000,000
shares or such lesser amount as our board of directors may determine.
Administration of the 1996 Plan. Our board of directors or a committee of
our board administers the 1996 Plan. In the case of options intended to qualify
as "performance-based compensation" within the meaning of Section 162(m) of the
Code, the committee will consist of two or more "outside directors" within the
meaning of Section 162(m) of the Code. The administrator has the power to
determine the terms of the options
47
<PAGE>
or stock purchase rights granted, including the exercise price, the number of
shares subject to each option or stock purchase right, the exercisability of
the options and the form of consideration payable upon exercise.
Options. The administrator determines the exercise price of options granted
under our 1996 Plan, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code and all incentive stock options, the exercise price must at
least be equal to the fair market value of our common stock on the date of
grant. The term of an incentive stock option may not exceed ten years, except
that with respect to any participant who owns 10% of the voting power of all
classes of our outstanding capital stock, the term must not exceed five years
and the exercise price must equal at least 110% of the fair market value on the
grant date. The administrator determines the term of all other options.
No optionee may be granted an option to purchase more than 500,000 shares in
any fiscal year. In connection with his or her initial service, an optionee may
be granted an additional option to purchase up to 500,000 shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. If termination is due to death or disability, the option will remain
exercisable for 12 months following such termination. In all other cases, the
option will generally remain exercisable for 3 months. However, an option may
never be exercised later than the expiration of its term.
Stock Purchase Rights. The administrator determines the exercise price of
stock purchase rights granted under our 1996 Plan. Unless the administrator
determines otherwise, the restricted stock purchase agreement will grant us a
repurchase option that we may exercise upon the voluntary or involuntary
termination of the purchaser's service with us for any reason (including death
or disability). The purchase price for shares we repurchase will generally be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The administrator determines the rate at
which our repurchase option will lapse.
Outside Director Options. Our 1996 Plan provides for the automatic grant of
an option to a non-employee director when such person first becomes a non-
employee director (except for those directors who become non-employee directors
by ceasing to be employee directors) to purchase 25,000 shares. All of our non-
employee directors who have been directors for at least 6 months will receive
an option to purchase 10,000 shares each year following our stockholder
meeting.
All options granted to our non-employee directors have a term of ten years
and an exercise price equal to fair market value on the date of grant. The
shares subject to the option vest over three-years following the date of grant.
Each option becomes exercisable as to 1/3 of the shares subject to the option
on each anniversary of the date of grant, provided the non-employee director
remains a director with us on such dates.
Transferability of Options and Stock Purchase Rights. Our 1996 Plan
generally does not allow for the transfer of options or stock purchase rights
and only the optionee may exercise an option and stock purchase right during
his or her lifetime.
Adjustments upon Merger or Asset Sale. Our 1996 Plan provides that in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation will assume or substitute each
option or stock purchase right. If the outstanding options or stock purchase
rights are not assumed or substituted, each option or stock purchase right
shall terminate as of the closing of the merger or sale of assets.
48
<PAGE>
Amendment and Termination of our 1996 Plan. Our 1996 Plan will automatically
terminate in 2006, unless we terminate it sooner. In addition, our board of
directors has the authority to amend, suspend or terminate the 1996 Plan
provided it does not adversely affect any option previously granted under our
1996 Plan.
1999 Employee Stock Purchase Plan.
Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan, referred to as the "Purchase Plan."
Number of Shares of Common Stock Available under the Purchase Plan. A total
of 2,000,000 shares of our common stock will be made available for sale. In
addition, our Purchase Plan provides for annual increases in the number of
shares available for issuance under the Purchase Plan on January 1st of each
year, beginning in 2001, equal to the lesser of 2% of the outstanding shares of
our common stock on the first day of the calendar year, 2,000,000 shares, or
such other lesser amount as our board of directors may determine.
Administration of the Purchase Plan. Our board of directors or a committee
of our board administers the Purchase Plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the
Purchase Plan and determine eligibility.
Eligibility to Participate. All of our employees are eligible to participate
if they are employed by us or any participating subsidiary for at least 20
hours per week and more than five months in any calendar year. However, an
employee may not be granted an option to purchase stock under the Purchase Plan
if such employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year in which such option is outstanding at any time.
Offering Periods and Contributions. Our Purchase Plan is intended to qualify
under Section 423 of the Code and contains consecutive, overlapping 24-month
offering periods. Each offering period includes four 6-month purchase periods.
The offering periods generally start on the first trading day on or after May
1st and November 1st of each year, except for the first such offering period
which will commence on the first trading day on or after the effective date of
this offering and will end on the last trading day on or before April 30, 2002.
Our Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 20% of their eligible compensation which includes a
participant's base straight time gross earnings, commissions, overtime,
bonuses, incentive compensation and incentive payments, but excluding all other
compensation paid to our employees. A participant may purchase a maximum of
5,000 shares during a 6-month purchase period.
Purchase of Shares. Amounts deducted and accumulated by the participant are
used to purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair market value of our
common stock at the beginning of an offering period and the fair market value
of our common stock at the end of such purchase period. If the fair market
value at the end of a purchase period is less than the fair market value at the
beginning of the offering period, participants will be withdrawn from the
current offering period following their purchase of shares on the purchase date
and will be automatically re-enrolled in a new offering period. Participants
may end their participation at any time during an offering period, and will be
paid their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
Transferability of Rights. A participant may not transfer rights granted
under the Purchase Plan other than by will, the laws of descent and
distribution or as otherwise provided under the Purchase Plan.
49
<PAGE>
Adjustments upon Merger or Asset Sale. In the event of our merger with or
into another corporation or a sale of all or substantially all of our assets, a
successor corporation may assume or substitute each outstanding option. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set. Each participant will be notified in writing at
least ten days prior to the new exercise date and the participants option shall
be exercised automatically on the new exercise date, unless the participant has
withdrawn before the new exercise date.
Amendment and Termination of the Purchase Plan. Our Purchase Plan will
terminate in 2009. However, our board of directors has the authority to amend
or terminate our Purchase Plan, except that, subject to certain exceptions
described in the Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our Purchase Plan.
401(k) Plan
On July 1, 1996, we adopted a 401(k) Profit Sharing Plan referred to as the
"401(k) Plan" which covers all of our eligible employees who have attained the
age of 18. The 401(k) Plan excludes from participation all collectively
bargained and nonresident alien employees. The 401(k) Plan is intended to
qualify under Sections 401(a), 401(m) and 401(k) of the Code and the 401(k)
Plan trust is intended to qualify under Section 501(a) of the Code. All
contributions to the 401(k) Plan by eligible employees or by us, and the
investment earnings thereon are not taxable to such employees until withdrawn,
and any contributions we may make are expected to be deductible by us when
made. Our eligible employees may elect to reduce their current compensation by
two percent (2%) up to fifteen (15%) subject to the maximum statutorily
prescribed annual limit of $10,000 (in 1999), and to have such salary
reductions contributed on their behalf to the 401(k) Plan. In addition, we
currently match our employees' contributions to the 401(k) Plan dollar for
dollar up to a maximum yearly matching contribution of $500. To be eligible for
this matching contribution, an eligible employee must be employed by us on the
last day of each plan year for which such matching contributions are made. The
401(k) Plan permits, but does not require, that we may make additional
profit-sharing contributions on behalf of all eligible employees. To date, we
have not made such additional profit-sharing contributions to the 401(k) Plan.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than compensation agreements and other arrangements, which are
described as required in "Management", and the transactions described below,
since we were formed, there has not been nor is there currently proposed, any
transaction or series of similar transactions to which we were or will be a
party:
. in which the amount involved exceeded or will exceed $60,000, and
. in which any director, executive officer, holder of more than 5% or our
common stock on an as-converted basis or any member of their immediate
family had or will have a direct or indirect material interest.
We believe that each of the transactions described below were on terms no
less favorable than could have been obtained from unaffiliated third parties.
All future transactions between us and any director or executive officer will
be subject to approval by a majority of the disinterested members of our board
of directors.
Common Stock
On March 1, 1996, we issued the following shares of common stock at a price
of $0.0005 per share. The purchasers of the common stock were:
<TABLE>
<CAPTION>
Shares of
Purchaser Common Stock
--------- ------------
<S> <C>
Francis I. Akers................................................ 1,500,000
Jack Byers...................................................... 1,500,000
Gregorio Reyes.................................................. 120,000
</TABLE>
Mr. Akers, a founder, is an officer and director and greater than 5%
stockholder of GoDigital. Mr. Byers, a founder, is a greater than 5%
stockholder of GoDigital. Mr. Reyes is a founder and director of GoDigital.
Series A Preferred Stock
On April 2, 1996, we sold 2,678,500 shares of our Series A Preferred Stock
at a price of $1.00 per share. The purchasers of the Series A Preferred Stock
included, among others:
<TABLE>
<CAPTION>
As Converted
Shares of Shares of
Purchaser Series A Stock Common Stock
--------- -------------- ------------
<S> <C> <C>
Accel V, L.P. .................................. 926,900 1,853,800
Accel Internet/Strategic Technology Fund L.P. .. 124,200 248,400
Accel Keiretsu V L.P. .......................... 18,400 36,800
Accel Investors '96 L.P. ....................... 55,200 110,400
Ellmore C. Patterson Partners................... 25,300 50,600
Menlo Ventures VI, L.P. ........................ 1,354,680 2,709,360
Menlo Entrepreneurs Fund VI, L.P. .............. 20,320 40,640
Gregorio Reyes and Vanessa F. Reyes, Trustees of
the Gregorio Reyes and Vanessa F. Reyes Trust,
UDT dtd April 22, 1983, as amended............. 25,000 50,000
</TABLE>
Accel V, L.P., Accel Internet/Strategic Technology Fund L.P., Accel Keiretsu
V L.P., Accel Investors '96 L.P. and Ellmore C. Patterson Partners are
affiliated entities and together are considered a greater than 5% stockholder
of GoDigital. Menlo Ventures VI, L.P. and Menlo Entrepreneurs Fund VI, L.P. are
affiliated entities and together are considered a greater than 5% stockholder
of GoDigital. Mr. Reyes is a director of GoDigital.
51
<PAGE>
Series B Preferred Stock
On December 11, 1996, we sold 1,339,250 shares of our Series B Preferred
Stock at a price of $2.00 per share. The purchasers of the Series B Preferred
Stock included, among others:
<TABLE>
<CAPTION>
As Converted
Shares of Shares of
Purchaser Series B Stock Common Stock
--------- -------------- ------------
<S> <C> <C>
Accel V, L.P. .................................. 463,450 926,900
Accel Internet/Strategic Technology Fund L.P. .. 62,100 124,200
Accel Keiretsu V L.P. .......................... 9,200 18,400
Accel Investors "96 L.P. ....................... 27,600 55,200
Ellmore C. Patterson Partners................... 12,650 25,300
Menlo Ventures VI, L.P. ........................ 677,340 1,354,680
Menlo Entrepreneurs Fund VI, L.P. .............. 10,160 20,320
Gregorio Reyes and Vanessa F. Reyes, Trustees of
the Gregorio Reyes and Vanessa F. Reyes Trust,
UDT dtd April 22, 1983, as amended............. 12,500 25,000
</TABLE>
Accel V, L.P., Accel Internet/Strategic Technology Fund L.P., Accel Keiretsu
V L.P., Accel Investors "96 L.P. and Ellmore C. Patterson Partners are
affiliated entities and together are considered a greater than 5% stockholder
of GoDigital. Menlo Ventures VI, L.P. and Menlo Entrepreneurs Fund VI, L.P. are
affiliated entities and together are considered a greater than 5% stockholder
of GoDigital. Mr. Reyes is a director of GoDigital.
Series C Preferred Stock.
On August 7, 1997, we sold 1,992,476 shares of our Series C Preferred Stock
at a price of $3.61 per share. The purchasers of the Series C Preferred Stock
included, among others:
<TABLE>
<CAPTION>
As Converted
Shares of Shares of
Purchaser Series C Stock Common Stock
--------- -------------- ------------
<S> <C> <C>
Accel V, L.P. ................................. 446,538 893,076
Accel Internet/Strategic Technology Fund
L.P. ......................................... 59,834 119,668
Accel Keiretsu V L.P. ......................... 8,864 17,728
Accel Investors "96 L.P. ...................... 26,593 53,186
Ellmore C. Patterson Partners.................. 12,188 24,376
Menlo Ventures VI, L.P. ....................... 554,016 1,108,032
Menlo Entrepreneurs Fund VI, L.P. ............. 8,310 16,620
Japan Associated Finance Co., Ltd. ............ 33,241 66,482
JAFCO G-6A Investment Enterprise Partnership... 20,492 40,984
JAFCO G-6B Investment Enterprise Partnership... 20,492 40,984
JAFCO G-7A Investment Enterprise Partnership... 27,776 55,552
JAFCO G-7B Investment Enterprise Partnership... 27,776 55,552
JAFCO J-S3 Investment Enterprise Partnership... 13,660 27,320
JAFCO R-3 Investment Enterprise Partnership.... 22,768 45,536
U.S. Information Technology Investment
Enterprise Partnership II..................... 664,820 1,329,640
</TABLE>
Accel V, L.P., Accel Internet/Strategic Technology Fund L.P., Accel Keiretsu
V L.P., Accel Investors "96 L.P. and Ellmore C. Patterson Partners are
affiliated entities and together are considered a greater than 5% stockholder
of GoDigital. Menlo Ventures VI, L.P. and Menlo Entrepreneurs Fund VI, L.P. are
affiliated entities and together are considered a greater than 5% stockholder
of GoDigital. Japan Associated Finance Co., Ltd., JAFCO G-6A Investment
Enterprise Partnership, JAFCO G-6B Investment Enterprise Partnership, JAFCO G-
7A Investment Enterprise Partnership, JAFCO G-7B Investment Enterprise
Partnership, JAFCO J-S3 Investment Enterprise Partnership, JAFCO R-3 Investment
Enterprise Partnership, and U.S. Information Technology Investment Enterprise
Partnership II are affiliated entities and together are considered a greater
than 5% stockholder of GoDigital.
52
<PAGE>
Series D Preferred Stock
On September 22, 1998, we sold 428,574 shares of our Series D Preferred
Stock at a price of $7.00 per share and on October 15, 1998, we sold 12,143
shares of our Series D Preferred Stock at a price of $7.00 per share. Upon the
closing of this offering, each share of Series D Preferred Stock will convert
into approximately 2.8 shares of Common Stock. The purchasers of the Series D
Preferred Stock included, among others:
<TABLE>
<CAPTION>
As Converted
Shares of Shares of
Purchaser Series D Stock Common Stock
--------- -------------- ------------
<S> <C> <C>
Accel V, L.P. .................................. 115,144 322,402
Accel Internet/Strategic Technology Fund L.P. .. 15,429 43,200
Accel Keiretsu V L.P. .......................... 2,286 6,400
Accel Investors "96 L.P. ....................... 6,857 19,198
Ellmore C. Patterson Partners .................. 3,142 8,796
Menlo Ventures VI, L.P. ........................ 140,747 394,090
Menlo Entrepreneurs Fund VI, L.P. .............. 2,111 5,910
JAFCO Co., Ltd. ................................ 5,714 15,998
JAFCO G-7A Investment Enterprise Partnership.... 11,429 32,000
JAFCO G-7B Investment Enterprise Partnership.... 11,429 32,000
U.S. Information Technology Investment
Enterprise Partnership II...................... 114,286 320,000
Gregorio Reyes and Vanessa F. Reyes, Trustees of
the Gregorio Reyes and Vanessa F. Reyes Trust,
UDT dtd April 22, 1983, as amended............. 7,142 19,996
</TABLE>
Accel V, L.P., Accel Internet/Strategic Technology Fund L.P., Accel Keiretsu
V L.P., Accel Investors "96 L.P. and Ellmore C. Patterson Partners are
affiliated entities and together are considered a greater than 5% stockholder
of GoDigital. Menlo Ventures VI, L.P. and Menlo Entrepreneurs Fund VI, L.P. are
affiliated entities and together are considered a greater than 5% stockholder
of GoDigital. JAFCO Co., Ltd., JAFCO G-7A Investment Enterprise Partnership,
JAFCO G-7B Investment Enterprise Partnership and U.S. Information Technology
Investment Enterprise Partnership II are affiliated entities and together are
considered a greater than 5% stockholder of GoDigital. Mr. Reyes is a director
of GoDigital.
Series E Preferred Stock
On July 30, 1999, we sold 530,000 shares of our Series E Preferred Stock at
a price of $12.50 per share and on August 12, 1999 we sold 77,920 shares of our
Series E Preferred Stock at a price of $12.50 per share. The purchasers of the
Series E Preferred Stock included, among others:
<TABLE>
<CAPTION>
As Converted
Shares of Shares of
Purchaser Series E Stock Common Stock
--------- -------------- ------------
<S> <C> <C>
Accel V, L.P. ................................. 157,815 315,630
Accel Keiretsu V L.P. ......................... 3,133 6,266
Accel Internet/Strategic Technology Fund
L.P. ......................................... 21,146 42,292
Accel Investors "96 L.P. ...................... 9,398 18,796
Ellmore C. Patterson Partners.................. 4,308 8,616
Menlo Ventures VI, L.P. ....................... 192,906 385,812
Menlo Entrepreneurs Fund VI, L.P. ............. 2,894 5,788
JAFCO Co., Ltd. ............................... 15,520 31,040
U.S. Information Technology Investment
Enterprise Partnership II..................... 62,400 124,800
Gregorio Reyes and Vanessa F. Reyes............ 3,600 7,200
</TABLE>
Accel V, L.P., Accel Internet/Strategic Technology Fund L.P., Accel Keiretsu
V L.P., Accel Investors "96 L.P. and Ellmore C. Patterson Partners are
affiliated entities and together are considered a greater than 5% stockholder
of GoDigital. Menlo Ventures VI, L.P. and Menlo Entrepreneurs Fund VI, L.P. are
affiliated entities
53
<PAGE>
and together are considered a greater than 5% stockholder of GoDigital. JAFCO
Co., Ltd. and U.S. Information Technology Investment Enterprise Partnership II
are affiliated entities and together are considered a greater than 5%
stockholder of GoDigital. Mr. Reyes is a director of GoDigital.
Other Material Transactions
Loans to Certain Executive Officers
On July 12, 1999, we loaned $225,000 secured by a pledge agreement to T.
Olin Nichols, our Vice President, Finance, Chief Financial Officer and
Secretary, in connection with his purchase of 300,000 shares of our common
stock for $0.75 per share. This loan is evidenced by a note that accrues
interest at the rate of 5.82% per annum, compounded annually, and is due on the
earlier of July 12, 2004, or ninety (90) days following the date upon which
Mr. Nichols' employment with us terminates.
On September 1, 1999, we loaned $1,950,000 secured by a pledge agreement to
Dennis Haar, our President and Chief Executive Officer, in connection with his
purchase of 1,300,000 shares of our common stock for $1.50 per share. This loan
is evidenced by a note that accrues interest at the rate of 5.98% per annum,
compounded annually, and is due on the earlier of September 1, 2004, or ninety
(90) days following the date upon which Mr. Haar's employment with us
terminates.
Settlement Agreement and Mutual Release with Jack Byers
On January 29, 1999, Jack Byers resigned from his position as our Vice
President, Operations and Chief Financial Officer. We entered into a settlement
and mutual release agreement with Mr. Byers pursuant to which Mr. Byers will
continue to receive an amount equal to his monthly salary to be paid bi-weekly
through January 28, 2000. In addition, we allowed our right to repurchase Mr.
Byers' unvested shares to lapse. Mr. Byers is not entitled to any other
employee benefits other than standard COBRA benefits applicable to former
employees.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of November 1, 1999 and as adjusted
to reflect the sale of common stock offered hereby by the following:
. each person known by us to own beneficially more than 5% of our common
stock;
. each of our President and Chief Executive Officer and each of our
officers whose compensation exceeded $100,000 during our fiscal year
ended March 31, 1999;
. each of our directors; and
. all directors and executive officers as a group.
Unless otherwise indicated, the address of each listed stockholder is c/o
GoDigital Networks Corporation, 41652 Boscell Road, Fremont, California 94538.
The number and percentage of shares beneficially owned are based on 20,518,574
shares of our common stock outstanding as of November 1, 1999, assuming that
all outstanding preferred stock has been converted into common stock and
shares of common stock outstanding after the completion of this
offering, assuming the Underwriters' over-allotment option to purchase
shares of common stock is not exercised. Except as otherwise indicated, we
believe that the beneficial owners of the common stock listed below, on the
information furnished by such owners, have sole voting power and investment
power with respect to such shares. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the percent
ownership of that person, shares of common stock subject to options held by
that person that are currently exercisable or will become exercisable within 60
days after November 1, 1999 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percent ownership of any other
person. Entries denoted by an asterisk represent an amount less than 1%.
<TABLE>
<CAPTION>
Percent
Shares Beneficially Owned Beneficially
Prior to Offering Owned
---------------------------------------- -----------------
Number Of
Shares Beneficially Shares Issuable
Owned (Including the Pursuant to Options
Number of Shares Exercisable within
Name or Group of Shown in 60 Days of November Prior To After
Beneficial Owners the Second Column) 1, 1999 Offering Offering
- ----------------- -------------------- ------------------- -------- --------
<S> <C> <C> <C> <C>
Named Executive Officers
and Directors
Frank I. Akers(1)....... 1,500,000 100,000 7.3% %
Dennis Haar(2).......... 1,300,000 -- 6.3
Farzin Hatami(3)........ 382,500 -- 1.9
Paul H. Scherf, Jr.(4).. 250,000 171,000 1.2
Doug Carlisle(5)........ 6,041,252 -- 29.4
Jim Flach(6)............ 5,349,630 -- 26.1
Gregorio Reyes(7)....... 272,196 -- 1.3
All directors and
officers as a group
(9 persons)(8)......... 15,595,586 471,000 75.1
5% Stockholders
Accel Partners(9)....... 5,349,630 -- 26.1
428 University Avenue
Palo Alto, CA 94301
Menlo Ventures(10)...... 6,041,252 -- 29.4
3000 Sand Hill Road,
Building Four, Suite
100
Menlo Park, CA 94025
JAFCO America Ventures,
Inc.(11)............... 2,217,888 -- 10.8
505 Hamilton Avenue,
Suite 310
Palo Alto, CA 94301
Jack Byers(12).......... 1,500,000 -- 7.3% %
1897 Crestline Road
Pleasanton, CA 94566
</TABLE>
- -----------------------
55
<PAGE>
(1) Includes 62,502 shares which are subject to a right of repurchase in favor
of GoDigital which lapses over time. Also includes an aggregate of 100,000
shares held in trust for Mr. Akers' minor children as follows: 50,000
shares held by Kimberly D. Akers, Trustee of The Blair Elizabeth Akers
Trust UTA dated July 12, 1999 and 50,000 shares held by Kimberly D. Akers,
Trustee of The John Francis Akers Trust UTA dated July 12, 1999.
(2) Includes 1,300,000 shares which are subject to a right of repurchase in
favor of GoDigital which lapses over time.
(3) Includes 278,906 shares which are subject to a right of repurchase in
favor of GoDigital which lapses over time.
(4) Includes 13,300 shares held by Victoria R. Sanders. Also includes 4,000
shares which are subject to a right of repurchase in favor of GoDigital
which lapses over time.
(5) Mr. Carlisle is a general partner of Menlo Ventures and is a director of
GoDigital. Includes 5,951,974 shares held by Menlo Ventures VI, L.P. and
89,278 shares held by Menlo Entrepreneurs Fund VI, L.P. Mr. Carlisle
disclaims beneficial ownership of shares held by these entities, except to
the extent of his proportional interest arising from his partnership
interest therein.
(6) Mr. Flach is a general partner of Accel Partners and is a director of
GoDigital. Includes 256,780 shares held by Accel Investors "96 L.P.,
577,760 shares held by Accel Internet/Strategic Technology Fund L.P.,
85,594 shares held by Accel Keiretsu V, L.P., 4,311,808 shares held by
Accel V, L.P., and 117,688 shares held by Ellmore C. Patterson Partners.
Mr. Flach disclaims beneficial ownership of shares held by these entities,
except to the extent of his proportional interest arising from his
partnership interest therein.
(7) Mr. Reyes is a director of GoDigital. Includes 94,996 shares held by
Gregorio Reyes and Vanessa F. Reyes, Trustees of the Gregorio Reyes and
Vanessa F. Reyes Trust, UDT dtd April 22, 1983, as amended, and 7,200
shares held by Gregorio Reyes and Vanessa F. Reyes. Also includes 55,000
shares which are subject to a right of repurchase in favor of GoDigital
which lapses over time.
(8) Includes shares described in footnotes (1) through (8) that are
beneficially owned by the directors and officers as a group and includes
2,062,910 shares subject to our right of repurchase as of November 1,
1999.
(9) Represents 256,780 shares held by Accel Investors "96 L.P., 577,760 shares
held by Accel Internet/Strategic Technology Fund L.P., 85,594 shares held
by Accel Keiretsu V L.P., 4,311,808 shares held by Accel V L.P., and
117,688 shares held by Ellmore C. Patterson Partners. Mr. Flach is a
partner of Accel Partners and has dispositive and voting power for these
shares.
(10) Represents 5,951,974 shares held by Menlo Ventures VI, L.P. and 89,278
shares held by Menlo Entrepreneurs Fund VI, L.P. Mr. Carlisle is a partner
of Menlo Ventures and has dispositive and voting power for these shares.
(11) Represents 66,482 shares held by Japan Associated Finance Co., Ltd.,
47,038 shares held by JAFCO Co., Ltd., 40,984 shares held by JAFCO G-6A
Investment Enterprise Partnership, 40,984 shares held by JAFCO G-6B
Investment Enterprise Partnership, 87,552 shares held by JAFCO G-7A
Investment Enterprise Partnership, 87,552 shares held by JAFCO G-7B
Investment Enterprise Partnership, 27,320 shares held by JAFCO J-S3
Investment Enterprise Partnership, 45,536 shares held by JAFCO R-3
Investment Enterprise Partnership, and 1,774,440 shares held by U.S.
Information Technology Investment Enterprise Partnership II.
(12) Includes 62,502 shares which are subject to a right of repurchase in favor
of GoDigital which lapses over time.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
101,000,000 shares, $0.001 par value per share, to be divided into two classes
to be designated common stock and preferred stock. Of the shares authorized,
100,000,000 shares shall be designated as common stock and 1,000,000 shares
shall be designated as preferred stock. The following description of our
capital stock is only a summary. You should refer to our restated certificate
of incorporation and bylaws as in effect upon the closing of this offering,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable Delaware law.
Common Stock
As of September 30, 1999, and assuming the conversion of all outstanding
shares of preferred stock into common stock, there were 20,499,574 shares of
common stock outstanding which were held of record by approximately 80
stockholders. There will be shares of common stock outstanding (assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options after , 1999) after giving effect to the sale of
our common stock in this offering. In addition to 2,150,600 shares issuable
upon exercise of outstanding options and shares available for
issuance under our 1996 Stock Plan, as amended, there are an aggregate of
2,000,000 shares reserved for issuance under our 1999 Employee Stock Purchase
Plan. See "Management--Stock Plans" for a description of our stock plans.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our restated
certificate of incorporation to be filed concurrently with completion of this
offering, does not provide for cumulative voting in the election of directors.
Our restated bylaws limit the ability of the stockholders to call a special
meeting and eliminate the ability of the stockholders to act by written
consent. Our bylaws provide for a classified board of directors each of whose
terms will then expire at the third annual meeting following election. This
provision of our bylaws may have the effect of delaying, deferring or
preventing a change of control of our company. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by our board of directors out of funds legally available for that
purpose. In the event of our liquidation, dissolution or winding up, holders of
our common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. Holders of our common stock have no preemptive
or other subscription or conversion rights. There are no redemption or sinking
fund provisions applicable to our common stock. All outstanding shares of
common stock are fully paid and non-assessable, and the shares of common stock
to be issued upon the completion of this offering will be fully paid and non-
assessable.
Preferred Stock
Our certificate of incorporation filed in connection with this offering
provides that our board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series. The rights,
preferences and privileges of each series of preferred stock may be greater
than the rights of our common stock. It is not possible to state the actual
effect of the issuance of any shares of preferred stock upon the rights of
holders of our common stock until the board of directors determines the
specific rights of the holders of any preferred stock that may be issued.
However, the effects might include, among other things: (1) restricting
dividends on the common stock, (2) diluting the voting power of the common
stock, (3) impairing the liquidation rights of the common stock and (4)
delaying or preventing a change in our control without further action by the
stockholders. Upon the closing of this offering, no shares of preferred stock
will be outstanding, and we have no present plans to issue any shares of
preferred stock.
Registration Rights
Pursuant to a shareholders rights agreement we entered into with holders of
shares of our preferred stock (14,469,482 shares of common stock assuming
conversion of all outstanding shares of preferred stock), the holders of these
shares are entitled to certain registration rights and information rights as
set forth in the
57
<PAGE>
agreement. The registration rights agreement provides that if we propose to
register any securities under the Securities Act, either for our own account or
for the account of other security holders exercising registration rights, they
are entitled to notice of the registration and are entitled to include shares
of their common stock in the registration. This right is subject to conditions
and limitations, including the right of the underwriters in an offering to
limit the number of shares included in the registration. The holders of these
shares may also require us to file up to two registration statements under the
Securities Act at our expense with respect to their shares of common stock. We
are required to use our best efforts to effect this registration, subject to
conditions and limitations. Furthermore, the holders of these shares may
require us to file additional registration statements on Form S-3, subject to
conditions and limitations. These rights terminate on the earlier of five years
after the completion of this offering, the date on which all securities subject
registration rights have been sold, or when a holder is able to sell all its
shares pursuant to Rule 144 under the Securities Act in any 90-day period.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Certain provisions of Delaware law and our restated certificate of
incorporation and bylaws could make more difficult the acquisition of GoDigital
by means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions, summarized below, may
discourage certain types of coercive takeover practices and inadequate takeover
bids and encourage persons seeking to acquire control of our company to first
negotiate with us. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure our company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of
interested stockholder status, did own) 15% or more of a corporation's voting
stock. The existence of this provision would be expected to have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Our restated bylaws limit the ability of the stockholders to call a special
meeting and eliminate the ability of the stockholders to act by written
consent. The certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors. The authorization of
undesignated preferred stock makes it possible for our board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of our company. These and
other provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company. The amendment of any of these
provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is EquiServe.
Nasdaq Stock Market National Market Listing
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "GDNT."
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect market prices for our common stock or could impair our ability
to raise capital through an offering of equity securities. Furthermore, since
no shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public after these restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon completion of this offering, we will have shares of common stock
outstanding (assuming conversion of all of the currently outstanding shares of
preferred stock) based on shares outstanding as of September 30, 1999 and
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options. All of the shares sold in this offering will be
freely transferable without restriction under the Securities Act. However, the
sale of any of these shares if purchased by "affiliates" as that term is
defined in Rule 144 are subject to certain limitations and restrictions that
are described below.
The remaining shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. These shares are "restricted
shares" as that term is defined in Rule 144 and therefore may not be sold
publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. In addition, our
directors and officers as well as other stockholders and optionholders have
entered into "lock-up agreements" with the underwriters. These lock-up
agreements provide that, except under limited exceptions, the stockholder may
not offer, sell, contract to sell or otherwise dispose of any of our common
stock or securities that are convertible into or exchangeable for, or that
represent the right to receive, our common stock for a period of 180 days after
the date of this prospectus. Credit Suisse First Boston Corporation, however,
may in its sole discretion, at any time without notice, release all or any
portion of the shares subject to lock-up agreements. Accordingly, of the
remaining shares, shares will become eligible for sale
180 days after the effective date subject to Rules 144 and 701.
As of September 30, 1999, there were a total of 2,150,600 shares of common
stock subject to outstanding options under our 1996 Stock Plan, 315,610 of
which were vested, and all of which are subject to lock-up agreements.
Immediately after the completion of the offering, we intend to file
registration statements on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under our
1996 Stock Plan and our 1999 Employee Stock Purchase Plan. On the date 180 days
after the effective date of the offering, the date that the lock-up agreements
expire, a total of shares of our common stock subject to outstanding
options or subject to repurchase will be vested. After the effective dates of
the registration statements on Form S-8, shares purchased upon exercise of
options granted pursuant to our 1996 Stock Plan and our 1999 Employee Stock
Purchase Plan generally would be available for resale in the public market.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any three-
month period, a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering;
or
. the average weekly trading volume of the common stock on the Nasdaq
Stock Market's National Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such sale.
59
<PAGE>
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell such shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell these shares 90 days
after the effective date of this offering in reliance on Rule 144, without
having to comply with certain restrictions, including the holding period,
contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than "affiliates," as defined in Rule 144, subject only to the manner of
sale provisions of Rule 144. Securities issued in reliance on Rule 701 may be
sold by "affiliates" under Rule 144 without compliance with its one-year
minimum holding period requirement.
60
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens Inc., and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
BancBoston Robertson Stephens Inc..................................
U.S. Bancorp Piper Jaffray Inc.....................................
---
Total............................................................
===
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and Commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our executive officers, directors and certain other of our security
holders have agreed not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act relating to, any
shares of common stock or securities convertible into or exchangeable or
exercisable for any of our common stock, or publicly disclose the intention to
make any such offer, sale, pledge, disposition or filing, without the prior
written consent of Credit Suisse First Boston Corporation for a period of
180 days after the date of this prospectus.
61
<PAGE>
The underwriters have reserved for sale, at the initial public offering
price up to shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in this offering. The number of shares available for
sale to the general public in this offering will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares not purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "GDNT."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include:
. the information in this prospectus and otherwise available to the
underwriters;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our development and our current financial
condition;
. the general condition of the securities markets at the time of this
offering;
. and the recent market prices of, and the demand for, publicly-traded
common stock of generally comparable companies.
The representatives may engage in, as defined below, over-allotment,
stabilizing transactions, syndicate covering transactions, and penalty bids in
accordance with Regulation M under the Securities Exchange Act of 1934:
. over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
62
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action of Ontario Purchasers
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. Such report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one such report must
be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
63
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, San Francisco, California. As of the date of this
prospectus, WS Investment Company 96A, WS Investment Company 96B, WS Investment
Company 97B and WS Investment Company 98B, each an investment partnership
composed of certain current and former members of and persons associated with
Wilson Sonsini Goodrich & Rosati, Professional Corporation, in addition to
certain current individual members of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, beneficially own an aggregate of 79,550 shares of
GoDigital Networks Corporation preferred stock.
EXPERTS
The financial statements of GoDigital Networks Corporation as of March 31,
1999 and for each of the three years in the period ended March 31, 1999
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of FDS Business as of December 31, 1998 and for
each of the two years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU MAY FIND ADDITIONAL INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered under this prospectus. This prospectus,
which constitutes a part of the registration statement, does not contain all
the information set forth in the registration statement and the exhibits and
schedules that are part of the registration statement. For further information
with respect to us and our common stock, reference is made to the registration
statement and to the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of the contract or other document
filed as an exhibit to the registration statement, each statement being
qualified in all respects by this reference. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Room of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
You may obtain further information on the operation of the Public Reference
Room by calling the Commission at 1-800-SEC-0330. The Commission maintains a
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
64
<PAGE>
GODIGITAL NETWORKS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity ........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
PRO FORMA COMBINED FINANCIAL INFORMATION
Pro Forma Combined Financial Information................................... F-21
FDS BUSINESS
Report of Independent Accountants.......................................... F-25
Statements of Operations................................................... F-26
Statements of Financial Position........................................... F-27
Notes to Financial Statements.............................................. F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GoDigital Networks Corporation
The reincorporation and two-for-one stock split described in Note 1 to the
financial statements has not been consummated as of November 17, 1999. When it
has been consummated, we will be in a position to issue the following report:
"In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of GoDigital
Networks Corporation at March 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above."
PricewaterhouseCoopers LLP
San Jose, California
June 18, 1999, except as to Note 8,
which is as of August 5, 1999
F-2
<PAGE>
GODIGITAL NETWORKS CORPORATION
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
March 31, Equity at
----------------- September 30, September 30,
1998 1999 1999 1999
------- -------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...... $ 3,578 $ 2,595 $ 2,668
Accounts receivable, net of
allowance for doubtful
accounts of $0, $50 and $100
(unaudited)................... -- 1,878 3,767
Inventories.................... 947 2,517 5,801
Other current assets........... 137 128 140
------- -------- --------
Total current assets........... 4,662 7,118 12,376
Property and equipment, net.... 1,038 1,222 2,283
Other assets................... 72 22 100
Intangible assets.............. -- -- 4,421
------- -------- --------
Total assets................... $ 5,772 $ 8,362 $ 19,180
======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Borrowings, current portion.... $ 79 $ 480 $ 480
Capital lease obligations,
current portion............... 255 326 307
Accounts payable............... 203 714 2,921
Accrued expenses............... 210 863 4,286
Deferred revenue............... -- 380 1,000
------- -------- --------
Total current liabilities....... 747 2,763 8,994
Borrowings, less current
portion........................ 159 325 208
Capital lease obligations, less
current portion................ 408 99 --
------- -------- --------
Total liabilities............... 1,314 3,187 9,202
------- -------- --------
Commitments and contingencies
(Note 7)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred
Stock: $0.001 par value,
2,678,500 shares authorized,
issued and outstanding; none
issued and outstanding pro
forma (Liquidation value
$2,678)....................... 3 3 3 $ --
Series B Convertible Preferred
Stock: $0.001 par value,
1,339,250 shares authorized,
issued and outstanding; none
issued and outstanding pro
forma (Liquidation value
$2,678)....................... 1 1 1 --
Series C Convertible Preferred
Stock: $0.001 par value,
1,992,476 shares authorized
issued and outstanding; none
issued and outstanding pro
forma (Liquidation value
$7,193)....................... 2 2 2 --
Series D Convertible Preferred
Stock: $0.001 par value, none
700,000, and 440,717
(unaudited) shares authorized
at March 31, 1998, 1999 and
September 30, 1999,
respectively; none, none and
440,717 issued and outstanding
at March 31, 1998, 1999 and
September 30, 1999,
respectively; none issued and
outstanding pro forma
(Liquidation value $4,900).... -- 1 1 --
Series E Convertible Preferred
Stock: $0.001 par value,
920,000 shares authorized;
none, none and 607,920
(unaudited) shares issued and
outstanding at March 31, 1998,
1999 and September 30, 1999,
respectively; none issued and
outstanding pro forma
(Liquidation value $7,599).... -- -- 1 --
Common Stock, $0.001 par value,
40,000,000 shares authorized;
3,473,750, 3,458,666 and
6,029,292 (unaudited) shares
issued and outstanding at
March 31, 1998, 1999 and
September 30, 1999,
respectively; 20,499,574
(unaudited) shares issued and
outstanding pro forma......... 3 3 6 20
Additional paid-in capital..... 12,536 18,988 41,251 41,245
Notes receivable from
stockholders.................. -- -- (2,325) (2,325)
Deferred stock compensation.... -- (2,125) (12,655) (12,655)
Accumulated deficit............ (8,087) (11,698) (16,307) (16,307)
------- -------- -------- --------
Total stockholders' equity..... 4,458 5,175 9,978 $ 9,978
------- -------- -------- ========
Total liabilities and
stockholders' equity.......... $ 5,772 $ 8,362 $ 19,180
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GODIGITAL NETWORKS CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
------------------------------ ----------------------
1997 1998 1999 1998 1999
------- --------- ---------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues............ $ -- $ -- $ 8,768 $ 1,050 $ 11,738
Cost of revenues........ -- -- 5,085 1,269 8,618
------- --------- ---------- --------- ----------
Gross margin............ -- -- 3,683 (219) 3,120
------- --------- ---------- --------- ----------
Operating expenses:
Research and
development.......... 2,395 3,398 2,785 1,391 2,188
Sales and marketing... 242 1,213 2,213 936 1,986
General and
administrative....... 375 615 976 323 1,296
Write-off of in-
process research and
development.......... -- -- -- -- 638
Stock compensation.... -- -- 1,255 -- 1,607
------- --------- ---------- --------- ----------
Total operating
expenses........... 3,012 5,226 7,229 2,650 7,715
------- --------- ---------- --------- ----------
Loss from operations.... (3,012) (5,226) (3,546) (2,869) (4,595)
Interest income......... 94 220 75 51 45
Interest expense........ (35) (128) (140) (70) (59)
------- --------- ---------- --------- ----------
Net loss................ $(2,953) $ (5,134) $ (3,611) $ (2,888) $ (4,609)
======= ========= ========== ========= ==========
Basic net loss per
share.................. $ (5.17) $ (3.60) $ (1.52) $ (1.40) $ (1.40)
======= ========= ========== ========= ==========
Diluted net loss per
share.................. $ (5.17) $ (3.60) $ (1.52) $ (1.40) $ (1.40)
======= ========= ========== ========= ==========
Basic weighted average
shares outstanding..... 571,710 1,427,150 2,376,984 2,069,674 3,292,200
======= ========= ========== ========= ==========
Diluted weighted average
shares outstanding..... 571,710 1,427,150 2,376,984 2,069,674 3,292,200
======= ========= ========== ========= ==========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.24) $ (0.27)
========== ==========
Pro forma basic and
diluted weighted
average shares
outstanding
(unaudited)............ 15,027,502 16,922,976
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GODIGITAL NETWORKS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Convertible Notes
Preferred Stock Common Stock Additional Receivable Deferred Total
---------------- ----------------- Paid-In from Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
--------- ------ --------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31,
1996.................. -- -- 3,240,000 $ 3 $ 12 -- -- -- $ 15
Issuance of
restricted Common
Stock................ -- -- 234,000 -- -- -- -- -- --
Issuance of Series A
Convertible Preferred
Stock, net........... 2,678,500 $ 2 -- -- 2,676 -- -- -- 2,678
Issuance of Series B
Convertible Preferred
Stock, net........... 1,339,250 2 -- -- 2,676 -- -- -- 2,678
Net loss............. -- -- -- -- -- -- -- $ (2,953) (2,953)
--------- --- --------- --- ------- ------- -------- -------- -------
BALANCE AT MARCH 31,
1997.................. 4,017,750 4 3,474,000 3 5,364 -- -- (2,953) 2,418
Issuance of Series C
Convertible Preferred
Stock, net........... 1,992,476 2 -- -- 7,170 -- -- -- 7,172
Exercise of Common
Stock options........ -- -- 22,000 -- 3 -- -- -- 3
Issuance of
restricted Common
Stock................ -- -- 24,000 -- 2 -- -- -- 2
Repurchase of Common
Stock................ -- -- (46,250) -- (3) -- -- -- (3)
Net loss............. -- -- -- -- -- -- -- (5,134) (5,134)
--------- --- --------- --- ------- ------- -------- -------- -------
BALANCE AT MARCH 31,
1998.................. 6,010,226 6 3,473,750 3 12,536 -- -- (8,087) 4,458
Issuance of Series D
Convertible Preferred
Stock, net........... 440,717 1 -- -- 3,071 -- -- -- 3,072
Exercise of Common
Stock options........ -- -- 13,666 -- 3 -- -- -- 3
Repurchase of Common
Stock................ -- -- (28,750) -- (2) -- -- -- (2)
Deferred stock
compensation......... -- -- -- -- 2,350 -- $ (2,350) -- --
Stock compensation... -- -- -- -- 1,030 -- -- -- 1,030
Amortization of stock
compensation......... -- -- -- -- -- -- 225 -- 225
Net loss............. -- -- -- -- -- -- -- (3,611) (3,611)
--------- --- --------- --- ------- ------- -------- -------- -------
BALANCE AT MARCH 31,
1999.................. 6,450,943 7 3,458,666 3 18,988 -- (2,125) (11,698) 5,175
Issuance of Series E
Convertible Preferred
Stock, net
(unaudited).......... 607,920 1 -- -- 7,572 -- -- -- 7,573
Exercise of Common
Stock options
(unaudited).......... -- -- 2,564,626 3 2,554 $(2,325) -- -- 232
Issuance of common
stock for services
(unaudited).......... -- -- 6,000 -- 57 -- -- -- 57
Deferred stock
compensation
(unaudited).......... -- -- -- -- 12,080 -- (12,080) -- --
Amortization of
deferred stock
compensation
(unaudited).......... -- -- -- -- -- -- 1,550 -- 1,550
Net loss
(unaudited).......... -- -- -- -- -- -- -- (4,609) (4,609)
--------- --- --------- --- ------- ------- -------- -------- -------
BALANCE AT SEPTEMBER
30, 1999 (unaudited).. 7,058,863 $ 8 6,029,292 $ 6 $41,251 $(2,325) $(12,655) $(16,307) $ 9,978
========= === ========= === ======= ======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
GODIGITAL NETWORKS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
------------------------- -----------------------
1997 1998 1999 1998 1999
------- ------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................... $(2,953) $(5,134) $(3,611) $(2,888) $(4,609)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............. 73 239 408 182 299
Stock compensation........ -- -- 1,255 -- 1,607
Amortization of intangible
assets................... -- -- -- -- 219
Write-off of in-process
research and
development.............. -- -- -- -- 638
Changes in assets and
liabilities:
Accounts receivable....... -- -- (1,878) (670) (1,889)
Inventories............... (363) (584) (1,570) (884) (3,284)
Other current assets...... (20) (117) 9 46 (12)
Accounts payable.......... 57 146 511 294 2,207
Accrued expenses.......... 85 125 653 310 3,223
Deferred revenue.......... -- -- 380 -- 620
------- ------- ------- ------- -------
Net cash used in
operating activities.... (3,121) (5,325) (3,843) (3,610) (981)
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property and
equipment................. (135) (288) (575) (272) (838)
Other assets............... (31) (41) 50 -- (78)
Acquisition of certain
assets from E/O Networks
Inc....................... -- -- -- -- (5,600)
------- ------- ------- ------- -------
Net cash used in
investing activities.... (166) (329) (525) (272) (6,516)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on
capital lease
obligations............... (48) (216) (255) (121) (118)
Borrowings under bank line
of credit................. -- -- 250 500 --
Borrowing/(repayment) under
equipment line of credit
agreement................. -- 238 317 307 (117)
Proceeds from issuance of
Convertible Preferred
Stock..................... 5,356 7,172 3,072 2,000 7,573
Proceeds from issuance of
Common Stock.............. -- 2 1 -- 232
------- ------- ------- ------- -------
Net cash provided by
financing activities.... 5,308 7,196 3,385 2,686 7,570
------- ------- ------- ------- -------
Net increase (decrease) in
cash and cash equivalents.. 2,021 1,542 (983) (1,196) 73
Cash and cash equivalents at
beginning of period........ 15 2,036 3,578 3,578 2,595
------- ------- ------- ------- -------
Cash and cash equivalents at
end of period.............. $ 2,036 $ 3,578 $ 2,595 $ 2,382 $ 2,668
======= ======= ======= ======= =======
DISCLOSURE OF NON-CASH
TRANSACTIONS:
Property purchased under
capital lease agreements.. $ 772 $ -- $ 17 $ -- $ --
======= ======= ======= ======= =======
Issuance of common stock in
exchange for promissory
notes..................... $ -- $ -- $ -- $ -- $ 2,398
======= ======= ======= ======= =======
Liabilities assumed upon
acquisition (Note 8)...... $ -- $ -- $ -- $ -- $ 200
======= ======= ======= ======= =======
Issuance of Series D
Convertible Preferred
Stock in exchange for
promissory notes.......... $ -- $ -- $ -- $ 1,000 $ --
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GoDigital Networks Corporation (formerly GoDigital Telecommunication, Inc.)
(the "Company") was incorporated in California on February 9, 1996. The Company
provides long-range DSL transmission systems that increase the bandwidth and
performance of copper lines at very long distances from the central office. The
Company operates in one industry segment.
Reincorporation and stock split
On November 15, 1999, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware and a two-for-one stock
split. As a result of the reincorporation, the Company is $0.001 authorized to
issue 100,000,000 shares of $0.001 par value Common Stock and 1,000,000 shares
of $0.001 par value Preferred Stock. The par value and shares of Common Stock
in the accompanying financial statements have been retroactively adjusted to
reflect the reincorporation and stock split.
Basis of presentation
The Company's fiscal year ends on the Sunday closest to March 31. For
purposes of presentation, the Company has indicated its accounting year ends on
March 31 or the month-end for interim quarterly periods. Results of operations
for fiscal 1998 and 1999 each include 52 weeks. Fiscal 1997 includes results of
operations from February 9, 1996 (date of inception) to March 31, 1997. The
results of operations from February 9, 1996 to March 31, 1996 were not material
to the results of operations for the year ended March 31, 1997.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents consist principally of A1-rated commercial paper and are stated at
cost, which approximates fair value.
Revenue recognition
Revenue from product sales to other than distributors is generally
recognized at the time the product is shipped. The Company grants distributors
limited rights of return on unsold inventory held by such distributors. The
Company has limited control over the extent to which products sold to
distributors are sold through to end users. Accordingly, the Company recognizes
revenues on sales to distributors based on products sold through to end users.
Recognition of the gross profit on the products held by distributors is
deferred until the sale to the end user occurs, as notified by the distributor.
The deferred gross profit is captioned as "deferred revenue" on the Company's
balance sheet.
F-7
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes the Company's sales and accounts receivable
balances with its major customers as percentages of total corresponding
revenues and accounts receivable at or exceeding 10%.
<TABLE>
<CAPTION>
Sales Accounts Receivable at
------------------------ -----------------------
Six Months
Year Ended Ended
March 31, September 30, March 31, September 30,
1999 1999 1999 1999
---------- ------------- --------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Customer A..................... 90% 64% 94% 39%
Customer B..................... -- 18% -- 44%
Customer C..................... -- -- -- 12%
</TABLE>
Warranty costs
The Company accrues the estimated costs of warranty upon shipment of
products.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company limits its exposure to loss by placing its
cash and cash equivalents primarily in market rate accounts with high-credit
quality financial institutions. The Company's accounts receivable are derived
from revenue earned from customers located in North America. The Company
performs on-going credit evaluations of its customers' financial condition and
generally requires no collateral. The Company maintains an allowance for
doubtful accounts receivable based upon expected collectibility.
Fair value of financial instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and capital lease obligations are carried
at cost, which approximates their fair value because of the short-term maturity
of these instruments.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which is
generally three to five years. Leasehold improvements are depreciated over the
shorter of their useful lives or the term of the lease.
Intangible assets
Intangible assets comprise primarily purchased technology, goodwill,
assembled workforce and customer lists. Intangible assets are amortized on a
straight-line basis over the estimated lives, which generally range from two to
five years. See Note 8.
Long-lived assets
The Company periodically evaluates the recoverability of its long-lived
assets based upon expected undiscounted cash flows and recognizes impairment
from the carrying value of long-lived assets, if any, based on the fair value
of such assets.
F-8
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income taxes
The Company accounts for income taxes under the asset and liability method,
which requires, among other things, that deferred income taxes be provided for
temporary differences between the tax bases of the Company's assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future benefit of utilizing net
operating losses and research and development credit carryforwards. A valuation
allowance is provided against deferred tax assets when it is more likely than
not that they will not be realized.
Research and development
Research and development costs are charged to operations as incurred.
Inventories
Inventories consists of raw materials, work-in-process and finished goods
and are stated at the lower of cost, determined using the first-in, first-out
method, or market.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." The Company accounts for
stock issued to non-employees in accordance with the provisions of SFAS No. 123
and Emerging Issues Task Force ("EITF") EITF 96-18 "Accounting for equity
investments that are issued to other than employees for acquiring, or in
conjunction with selling, goods or services."
Comprehensive income
Effective April 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from nonowner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income (loss) as
compared to its reported net loss, and accordingly net loss is equal to
comprehensive net loss for all periods presented.
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed
by dividing the net loss for the period by the weighted average number of
shares of Common Stock outstanding during the period. Basic weighted average
shares exclude shares of Common Stock subject to repurchase ("restricted
shares"). Diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of shares of Common Stock and
potential Common Stock outstanding during the period, if dilutive. Potential
Common Stock includes unvested restricted shares of Common Stock and
incremental shares of Common Stock issuable upon the exercise of stock options
and warrants and upon conversion of Series A, B, C, D and E Convertible
Preferred Stock.
F-9
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except share and per share
data):
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
------------------------------- --------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss.............. $ (2,953) $ (5,134) $ (3,611) $ (2,888) $ (4,609)
========= ========= ========= ========= =========
Denominator:
Weighted average
shares outstanding... 3,354,362 3,477,289 3,471,478 3,473,750 4,319,482
Weighted average
shares of Common
Stock subject to
repurchase........... 2,782,652 2,050,139 1,094,494 1,404,076 1,027,282
--------- --------- --------- --------- ---------
Denominator for basic
and diluted
calculation.......... 571,710 1,427,150 2,376,984 2,069,674 3,292,200
========= ========= ========= ========= =========
Basic and diluted net
loss per share......... $ (5.17) $ (3.60) $ (1.52) $ (1.40) $ (1.40)
========= ========= ========= ========= =========
</TABLE>
The effects of options to purchase 504,000, 675,000, 2,191,600 and 2,150,600
(unaudited) shares of Common Stock at an average exercise price of $0.05,
$0.15, $0.29 and $0.71 (unaudited) per share; and 8,035,500, 12,020,452,
13,254,442 and 14,470,282 (unaudited) common shares resulting from the
potential conversion of Convertible Preferred Stock for the years ended March
31, 1997, 1998 and 1999 and the six months ended September 30, 1999,
respectively, have not been included in the computation of diluted net loss per
share as their effect would have been anti-dilutive.
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended March 31, 1999 and the six
months ended September 30, 1999 is computed using the weighted average number
of shares of Common Stock outstanding, including the pro forma effects of the
automatic conversion of the Company's Series A, B, C, D and E Convertible
Preferred Stock into shares of the Company's Common Stock effective upon the
closing of the Company's initial public offering as if such conversion occurred
on April 1, 1998 or at the date of original issuance, if later. The resulting
pro forma adjustment includes an increase in the weighted average shares used
to compute basic net loss per share of 12,650,518 for the year ended March 31,
1999 and 13,630,776 for the six months ended September 30, 1999.
New accounting pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company has not
yet determined what the effect of SFAS No. 133 will be on the operations and
financial position of the Company. The Company will be required to implement
SFAS No. 133 beginning in 2001.
Unaudited interim results
The accompanying balance sheet as of September 30, 1999, the statements of
operations and cash flows for the six month periods ended September 30, 1999
and 1998 and the statements of stockholders' equity for the six months ended
September 30, 1999 are unaudited. In the opinion of management, these
statements have
F-10
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position and its results of operations
and cash flows for the interim periods. The data included in notes to the
financial statements for these periods is unaudited.
NOTE 2--BALANCE SHEET COMPONENTS (in thousands):
<TABLE>
<CAPTION>
March 31,
-------------- September 30,
1998 1999 1999
------ ------ -------------
(unaudited)
<S> <C> <C> <C>
Inventories:
Raw materials................................ $ 913 $1,301 $ 3,803
Work-in-process.............................. 34 1,035 1,794
Finished goods............................... -- 181 204
------ ------ -------
$ 947 $2,517 $ 5,801
====== ====== =======
Property and equipment, net:
Leasehold improvements....................... $ -- $ -- $ 87
Computers and equipment...................... 1,196 1,673 2,497
Furniture and fixtures....................... 60 124 227
Purchased software........................... 94 145 216
Construction in progress..................... -- -- 275
------ ------ -------
1,350 1,942 3,302
Less: Accumulated depreciation and
amortization................................ (312) (720) (1,019)
------ ------ -------
$1,038 $1,222 $ 2,283
====== ====== =======
</TABLE>
Property and equipment includes $926,000, $944,000, and $944,000 (unaudited)
of assets under capital lease at March 31, 1998, 1999, and September 30, 1999,
respectively. Accumulated depreciation of assets under capital lease was
$258,000, $475,000, and $583,000 (unaudited) at March 31, 1998, 1999, and
September 30, 1999, respectively.
<TABLE>
<CAPTION>
March 31,
--------- September 30,
1998 1999 1999
---- ---- -------------
(unaudited)
<S> <C> <C> <C>
Accrued expenses:
Accrued compensation................................. $130 $332 $ 488
Warranty reserve (Note 8)............................ -- 191 3,577
Other accruals....................................... 80 340 221
---- ---- ------
$210 $863 $4,286
==== ==== ======
</TABLE>
NOTE 3--BORROWINGS:
Line of credit
At March 31, 1999, the Company had a line of credit with a lending
institution which provides for borrowings of up to $3 million secured by the
Company's assets. The line of credit bears interest at the prime interest rate,
plus 0.25% per annum and expired in November 1999. The interest rate in effect
at March 31, 1999, and September 30, 1999 was 8.0%, and 8.5% per annum,
respectively. At March 31, 1999, and September 30, 1999 (unaudited), $250,000
was outstanding under this line of credit.
F-11
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Notes payable
At March 31, 1999, and September 30, 1999 the Company had $555,000 and
$440,000 (unaudited), respectively outstanding under an equipment line of
credit agreement with a financial institution. The agreement provides for
borrowings of up to $750,000, collaterized by substantially all of the
Company's assets. Borrowings under the agreement are repayable in equal monthly
installments over three years and bear interest at the prime rate plus 0.75%
per annum (8.5% and 9.0% per annum at March 31, 1999, and September 30, 1999
(unaudited), respectively). Under the agreement, the Company is required to
maintain certain financial covenants, including liquidity, working capital and
other financial ratios. The Company was in compliance with such covenants at
March 31, 1999. The Company was not in compliance at September 30, 1999
(unaudited) but has received a waiver of the non-compliance. The agreement
expired in November 1999.
Principal payments under this agreement are due as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
<S> <C>
2000................................................................. $230
2001................................................................. 230
2002................................................................. 95
----
555
Less current portion................................................. 230
----
Borrowings, less current portion..................................... $325
====
</TABLE>
NOTE 4--INCOME TAXES:
No provision for federal or state income taxes has been provided since
inception as the Company has incurred net operating losses. At March 31, 1999,
the Company had net operating loss carryforwards for federal and state tax
reporting purposes of approximately $5.3 million available to offset future
taxable income. Federal and state carryforwards expire beginning in 2012 and
2005, respectively. In addition, the Company has approximately $215,000 and
$108,000 of research and development credit carryovers as of March 31, 1999 for
federal and state tax reporting purposes respectively. The federal research and
development credit will expire beginning in 2012. The state research and
development credit can be carried forward until utilized.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses that can be carried forward may be impaired or limited in
certain circumstances. Events which may cause limitations in the utilization of
net operating losses include, but are not limited to, a cumulative stock
ownership change of greater than 50%, as defined, over a three year period.
Such a change may have occurred prior to March 31, 1999.
Deferred tax assets, which have been fully reserved due to the uncertainty
of realization, comprise the following (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 1,582 $ 2,117
Research and development credits........................... 211 323
Intangible assets.......................................... 1,310 1,164
Other nondeductible reserves and accruals.................. 369 842
------- -------
Total deferred tax assets................................ 3,472 4,446
Valuation allowance........................................ (3,472) (4,446)
------- -------
$ -- $ --
======= =======
</TABLE>
F-12
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5--STOCKHOLDERS' EQUITY:
Founders Stock
At inception, the Company issued 3,120,000 shares of its Common Stock to its
founders and 120,000 shares of common stock to certain initial investors at
$0.0005 per share under Restricted Stock Purchase Agreements. These shares are
subject to a right of repurchase at the option of the Company if the founder
departs prior to vesting. This right of repurchase lapses ratably over a 48
month period. The Restricted Stock Purchase Agreement also includes provisions
which accelerate vesting upon a change in control of the Company. In connection
with the termination of employment of a founder, the Company accelerated the
lapsing of the right of repurchase of 343,750 shares of Common Stock. The
intrinsic value of these shares amounted to $1,030,000 and has been recognized
as compensation expense in the year ended March 31, 1999. At March 31, 1999 and
September 30, 1999, 362,500 and 145,000 (unaudited) shares, respectively, were
subject to the rights of repurchase.
Convertible Preferred Stock
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 6,710,224 shares of Preferred Stock of which 2,678,500,
1,339,250, 1,992,476 and 700,000 shares are designated Series A, Series B,
Series C, and Series D, respectively.
The rights with respect to voting, dividends, liquidation and conversion of
the Preferred Stock are as follows:
Voting
Each share of Series A, B , C and D Convertible Preferred Stock has the same
number of votes as the number of shares of Common Stock into which that Series
of Preferred Stock is convertible. So long as 500,000 shares of Series C
Preferred are outstanding, the holders of Series C Convertible Preferred,
voting as a separate class, are entitled to elect one director.
Dividends
Holders of Series A, B , C and D Convertible Preferred Stock are entitled to
receive non-cumulative dividends at the annual rate of $0.05, $0.10, $0.18 and
$0.35 per share, respectively, when and as declared by the Board of Directors.
Such dividends are payable prior and in preference to any dividends for Common
Stock declared by the Board of Directors. There have been no dividends declared
to date.
Liquidation
In the event of any liquidation or winding up of the Company, including a
merger or sale of significant assets, the holders of Series A, B, C and D
Convertible Preferred Stock shall be entitled to receive prior and in
preference to any distribution of any of the assets of the Company to the
holders of Common Stock an amount of $1.00, $2.00, $3.61 and $7.00 per share
for each share of Series A, B, C and D Convertible Preferred Stock,
respectively, plus all declared but unpaid dividends, if any. If assets are
insufficient to permit payment in full of a particular series, then
distribution would occur in proportion to the original issue price of the
respective series of Preferred Stock held by such holders.
After paying the amounts due the holders of shares of Convertible Preferred
Stock, the remaining assets available for distribution shall be distributed to
the holders of Common Stock.
F-13
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Conversion
Each share of Convertible Preferred Stock is convertible into Common Stock
at the option of the holder or upon the consent of the holders of at least two-
thirds of the then outstanding Convertible Preferred Stock. The number of fully
paid and nonassessable shares of Common Stock into which each share of Series
A, B, C and D Convertible Preferred Stock may be converted shall be determined
by dividing the gross issue proceeds by the original issue price. In addition,
the Series D Preferred Stock conversion price was adjusted to $2.50 per share
as a result of the Company not meeting certain performance criteria specified
in the agreement. At March 31, 1999, the Series A, B, C and D conversion prices
were $0.50, $1.00, $1.81 and $2.50, respectively.
Such conversion is automatic upon the effective date of a public offering of
Common Stock for which the aggregate proceeds are at least $10,000,000 and the
offering price per share is at least $2.00 per share for the Series A and B
Preferred, $3.50 per share for the Series C and $2.50 per share for the Series
D Preferred. A total of 13,254,458 shares of Common Stock have been reserved
for issuance upon the conversion of Preferred Stock.
NOTE 6--EMPLOYEE BENEFIT PLANS:
Stock option plan
In 1996, the Company's Board of Directors (the "Board") adopted the 1996
Stock Plan (the "Plan"). The Plan, as amended, provides for the granting of
stock options and stock purchase rights to employees, consultants and
directors. At March 31, 1999 and September 30, 1999, 2,560,000 and
6,160,000 (unaudited) shares, respectively, of Common Stock was reserved for
issuance under the Plan. The Plan is administered by the Board and allows for
the granting of both nonstatutory stock options ("NSOs") and incentive stock
options ("ISOs"). ISOs are granted at exercise prices which are not less than
100% of the fair value on the date of grant, as determined by the Board. NSOs
are granted at prices not less than 85% of the fair market value on the date of
grant, as determined by the Board. The Plan provides that the options shall be
exercisable over a period not to exceed ten years and shall vest over a period
of four years. ISO's granted to a person owning more than 10% of the combined
voting power of all classes of stock of the Company must be issued at prices
not less than 110% of the fair market value of the stock on the date of grant
for a term not to exceed five years. The options generally vest 25% one year
after the date of grant and the remaining shares vest in equal monthly amounts
over the following 36 months.
Stock purchase rights may be granted either alone, in addition to, or in
tandem with other awards granted under the Plan. Stock purchase rights are
granted at prices not less than 100% of the estimated fair value of the shares
on the date of grant, as determined by the Board, and must be exercised at the
time of execution of the restricted stock purchase agreement. Shares purchased
through the exercise of stock purchase rights are subject to repurchase by the
Company, to the extent that such shares are unreleased from the Company's
repurchase option, at the original purchase price paid by the purchaser in the
event the purchaser's employment with the Company is terminated for any reason.
Shares purchased through the exercise of stock purchase rights are released
from the Company's repurchase option at a rate of 25% after the first year and
in equal monthly amounts over the following 36 months. There were 24,000 stock
purchase rights to purchase common stock at $0.10 per share, granted in fiscal
1998. There were no stock purchase rights granted in fiscal 1999 and 1,300,000
(unaudited) stock purchase rights to purchase Common Stock at $1.50 per share
granted in the six months ended September 30, 1999. The Company repurchased
28,750 shares of Common Stock issued due to exercise of repurchase rights at
$0.05 during fiscal 1999, and none (unaudited) in the six months ended
September 30, 1999. Shares issued due to exercise of purchase rights subject to
repurchase were 132,750, 49,000, and 1,333,000 (unaudited) at March 31, 1998,
1999 and September 30, 1999, respectively.
F-14
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In the six-month period ended September 30, 1999, the Company issued
1,211,500 (unaudited) shares of Common Stock upon certain employees' exercise
of their stock options prior to the corresponding vesting dates. All such
Common Stock are subject to the Company's repurchase, to the extent that such
shares are unreleased from the Company's repurchase option, at the original
purchase price paid by the purchaser in the event the purchaser's employment
with Company is terminated for any reason. Shares purchased through the
exercise of stock purchase rights are released from the Company's repurchase
option at a rate of 25% after the first year and in equal monthly amounts over
the following 36 months. The Company did not repurchase any shares issued on
the early exercise stock options during the six-month period ended September
30, 1999 (unaudited). Shares issued on the early exercise of stock options
subject to repurchase were 1,025,146 (unaudited), as of September 30, 1999.
F-15
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option activity, including the stock
purchase rights and excluding founder's stock and restricted stock issued in
conjunction with early exercise of stock options, under the Plan:
<TABLE>
<CAPTION>
Weighted
Options Average
Available Options Exercise Price
to Grant Outstanding Per Share
---------- ----------- --------------
<S> <C> <C> <C>
Authorized......................... 1,760,000 -- $ --
Granted............................ (738,000) 738,000 0.05
Exercised.......................... -- (234,000) 0.05
---------- ---------- -----
Balance outstanding at March 31,
1997.............................. 1,022,000 504,000 0.05
Granted............................ (382,000) 382,000 0.16
Exercised.......................... -- (46,000) 0.12
Cancelled.......................... 165,000 (165,000) 0.17
Repurchase of restricted stock..... 46,250 -- 0.08
---------- ---------- -----
Balance at March 31, 1998.......... 851,250 675,000 0.15
Authorized......................... 600,000 -- --
Granted............................ (1,098,940) 1,098,940 0.38
Exercised.......................... -- (13,666) 0.26
Cancelled.......................... 21,874 (21,874) 0.18
Repurchase of restricted stock..... 28,750 -- 0.05
---------- ---------- -----
Balance at March 31, 1999.......... 402,934 1,738,400 0.29
Authorized (unaudited)............. 3,800,000 -- --
Granted (unaudited)................ (3,116,400) 3,116,400 1.33
Exercised (unaudited).............. -- (2,564,626) 1.00
Cancelled (unaudited).............. 139,574 (139,574) 0.94
---------- ---------- -----
Balance at September 30, 1999
(unaudited)....................... 1,226,108 2,150,600 $0.71
========== ========== =====
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable as of March 31, 1999.
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding at March 31, 1999 at March 31, 1999
---------------------------------------------------- ------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number of Life Exercise Number of Exercise
Prices Shares (years) Price Shares Price
-------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.05 480,000 7.00 $0.05 380,000 $0.05
0.10 93,000 8.00 0.10 36,792 0.10
0.18 924,400 9.42 0.18 796,750 0.18
0.38 241,000 9.75 0.38 45,000 0.38
--------- ---------
1,738,400 1,258,542
========= =========
</TABLE>
Fair value disclosures
The weighted average fair value of options granted during fiscal 1998 and
1999 under the Company's stock option plan was $0.02 and $0.03 per option,
respectively. In determining the fair value of options granted, the Company
used the minimum value method and assumed the following: a risk free interest
rate of 6.0%, an
F-16
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
average expected option life of 4 years, and a zero dividend yield for fiscal
1998 and 1999, respectively. The difference between the net loss, as reported,
and pro forma net loss determined under SFAS 123 was not material for all
periods presented.
Deferred stock compensation
In connection with certain stock option grants during the period September
1, 1998, to March 31, 1999, the Company recorded deferred stock compensation
costs totaling $2,350,000 being the difference between the exercise price and
the deemed fair value at the date of grant which is being recognized over the
vesting period of the related options of four years. Amortization expense
associated with deferred stock compensation totaled $225,000 for the year ended
March 31, 1999. Future amortization of deferred compensation expense is
estimated to be approximately (unaudited) $5.6 million, $5.3 million, $2.3
million, $1.0 million and $0.2 million in the years ended March 31, 2000, 2001,
2002, 2003 and 2004 respectively.
401(k) Savings plan
The Company has a savings plan that qualifies as a deferred salary
arrangement under Section 401 (k) of the Internal Revenue Code (the "Plan").
Contributions made by the Company are determined annually by the Board of
Directors. No contributions have been made to the Plan by the Company.
NOTE 7--COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities and equipment under noncancelable
operating and capital leases with various expiration dates through 2005.
Effective June 1, 1999, the Company entered into a noncancelable operating
lease for new office facilities, which expires in May 2004. Rent expense for
the years ended March 31, 1998 and 1999 was $71,000, and $96,000, respectively.
Future minimum lease payments under all noncancelable operating and capital
leases at an implicit interest of 7.8% per annum, including the operating lease
entered into subsequent to March 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Year Ended March 31, Leases Leases
-------------------- --------- -------
<S> <C> <C>
2000....................................................... $ 348 $ 372
2001....................................................... 440 91
2002....................................................... 457 5
2003....................................................... 476 5
2004....................................................... 495 --
2005....................................................... 125 --
------ -----
Total minimum payments..................................... $2,341 473
Less: Amount representing interest......................... (48)
-----
Present value of capital lease obligations................. 425
Less: Current portion...................................... (326)
-----
Capital lease obligations, less current portion............ $ 99
=====
</TABLE>
NOTE 8--SUBSEQUENT EVENTS:
Issuance of Series E preferred stock and amended articles of incorporation
On June 25, 1999, the Company amended and restated its Articles of
Incorporation to increase the total number of shares authorized for issuance to
54,741,886, of which 40,000,000 is designated for Common Stock
F-17
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
and the remaining 14,741,886 for Preferred Stock. Of the 14,741,886 shares
authorized for issuance of Preferred Stock, 5,357,000, 2,678,500, 3,844,952,
881,434, and 1,840,000 shares are designated for Series A, B, C, D, and E
Preferred Stock, respectively.
In July 1999, the Company issued 607,920 shares of Series E Convertible
Preferred Stock at $12.50 per share for net proceeds of approximately
$7,573,000. The rights of Series E are similar to Series D except, among other
differences, the holders of Series E are entitled to noncumulative dividends of
$0.625 per share when and if declared and the liquidation preference is $12.50
per share. Each share of Series E Convertible Preferred Stock is convertible
into Common Stock at the conversion price of $6.25 per share. Such conversion
is automatic upon the effective date of public offering of Common Stock for
which the aggregate proceeds are at least $10,000,000 and the offering price
per share is at least $6.25 per share.
Acquisition of certain assets from E/O Networks, Inc
In July 1999, the Company acquired certain assets and assumed certain
liabilities relating to the FDS product line of E/O Networks, Inc., which
developed, manufactured, and marketed a digital loop access system. E/O
Networks, Inc. filed bankruptcy under Chapter 11 in April 1999. The cash
purchase price of approximately $5.6 million has been allocated to the tangible
and intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The fair value of intangible
assets was determined by an independent consultant using a combination of
methods, including estimates based on risk-adjusted income approach for
acquired research and development, completed technology, and customer list, and
on the cost replacement approach for acquired work force.
The allocation of the purchase price is summarized below:
<TABLE>
<S> <C>
Developed technology............................................. $1,107,000
Core technology.................................................. 3,112,000
In-process research and development.............................. 638,000
Customer list.................................................... 94,000
Assembled workforce.............................................. 98,000
Fixed assets..................................................... 522,000
Goodwill......................................................... 229,000
Assumed liabilities.............................................. (200,000)
----------
Total net purchase price....................................... $5,600,000
==========
</TABLE>
The amount allocated to in-process research and development represents the
purchased in-process technology for projects that, as of the date of the
acquisition, had not yet reached technological feasibility and had no
alternative future use. Based on preliminary assessments, the value of these
projects was determined by estimating the resulting net cash flows from the
sale of the products resulting from the completion of the projects, reduced by
the portion of the revenue attributable to core technology and the percentage
completion of the project. The resulting cash flows were then discounted back
to their present value at appropriate discount rates.
The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specification including function, features and technical performance
requirements. The resulting net cash flows from such products are based on
estimates of revenue, cost of revenue, research and developments costs, sales
and marketing costs, and income taxes from such projects.
F-18
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The amount allocated to in-process research and development was charged to
the statement of operations in the period of the acquisition.
The following unaudited pro forma financial information reflects the results
of operations for the six month period ended September 30, 1998 and 1999, as if
the acquisition had occurred on April 1, 1998. These pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of what operating results would have been had the acquisitions actually taken
place on April 1, 1998, and may not be indicative of future operating results,
(in thousands except share and per share amounts).
<TABLE>
<CAPTION>
Six Month
Period Ended
Year ended September 30,
March 31, 1999 1999
-------------- -------------
(unaudited)
<S> <C> <C>
Pro forma financial information (unaudited)
Net revenues.................................. $ 16,780 $ 14,422
========== ===========
Loss from operations.......................... $ (13,210) $ (6,416)
========== ===========
Net loss...................................... $ (13,275) $ (6,430)
========== ===========
Net loss per share:
Basic and diluted........................... $ (5.58) $ (1.95)
========== ===========
Weighted average shares outstanding:
Basic and diluted........................... 2,376,984 3,292,200
========== ===========
</TABLE>
Update program (unaudited)
In July 1999, the Company was informed by a customer that certain systems
could experience failures during lightning storms. Although these systems were
in compliance with Telcordia (Bellcore) specification, the Company found these
specifications, in regard to lightning resistance, to be inadequate. The
Company has redesigned these systems specifications to be better able to
withstand such operating conditions. As a result, the Company voluntarily
adopted a program by which certain customers may receive modified field units.
The Company estimated the related expenses to be approximately $2.9 million
which was charged to cost of revenues in the quarter ended September 30, 1999.
Increase of stock options available for grant (unaudited)
In August 1999, the Company amended its 1996 Stock Plan to increase the
number of shares of Common Stock reserved for issuance under the Plan to
6,160,000.
Related party transactions (unaudited)
From July through October 1999, the Company lent an aggregate $2,475,000
evidenced by full recourse promissory notes to certain executives in
conjunction with their purchases of the Company's Common Stock upon exercise of
their stock options prior to vesting date (see Note 6). The notes bear interest
of 5.82% through 5.98% per annum and are due at various dates from July 2004
through July 2005 or 90 days following termination of the executive's
employment with the Company. The notes are collateralized by the related
2,506,500 shares of Common Stock issued, which are subject to the Company's
right of repurchase. The net amount outstanding has been reflected as a
separate component of stockholders' equity.
F-19
<PAGE>
GO DIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred stock compensation (unaudited)
In connection with certain stock option grants during the six months ended
September 30, 1999, the Company recorded deferred stock compensation cost
totaling $12,080,000 which is being recognized over the vesting period of the
related options of four years. Amortization expense associated with deferred
stock compensation totaled $1,550,000 for the six months ended September 30,
1999.
F-20
<PAGE>
GODIGITAL NETWORKS CORPORATION
PRO FORMA COMBINED FINANCIAL INFORMATION
Overview
Acquisition of certain assets and assumption of certain liabilities from E/O
Networks, Inc.
The accompanying unaudited Pro Forma Combined Statements of Operations of
the Company for the year ended March 31, 1999 and the six month period ended
September 30, 1999 were prepared by the Company to illustrate the estimated
effects of the acquisition from E/O Networks, Inc. of certain assets and
assumption of certain liabilities relating to part of the FDS product line (the
"FDS Business") described in the notes to the Pro Forma Combined Financial
Information. A Pro Forma Combined Balance Sheet has not been presented as the
acquired assets and assumed liabilities of the FDS product line are included in
balance sheet of GoDigital Networks Corporation as of September 30, 1999. The
Pro Forma Combined Statement of Operations gives effect to the transaction as
if it had taken place on April 1, 1998.
For the purposes of the accompanying unaudited Pro Forma Combined Statements
of Operations the results of operations of the FDS Business for the year ended
December 31, 1998 and six month period ended June 30, 1999 have been combined
with the results of operations of GoDigital for the year ended March 31, 1999
and the six month period ended September 30, 1999, respectively.
The Pro Forma Combined Statement of Operations do not purport to represent
what the results of operations would have been had in fact the transaction
occurred on such date or to project the results of operations of the Company
for any future period. The Pro Forma Combined Statement of Operations of the
Company should be read in together with the Financial Statements of the Company
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
F-21
<PAGE>
GODIGITAL NETWORKS CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31, 1999
----------------------------------------------
GoDigital FDS Pro Forma Combined
Networks Corp. Business Adjustments Pro Forma
-------------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues.................... $ 8,768 $ 8,012 $ -- $ 16,780
Cost of revenues................ 5,085 7,087 542 a 12,714
------- ------- ------- ---------
Gross margin.................. 3,683 925 (542) 4,066
Operating expenses:
Research and development...... 2,785 2,164 622 b 5,571
Sales and marketing........... 2,213 5,423 7,636
General and administrative.... 976 1,649 189 c 2,814
Stock compensation............ 1,255 -- -- 1,255
------- ------- ------- ---------
Total operating expenses.... 7,229 9,236 811 17,276
------- ------- ------- ---------
Loss from operations............ (3,546) (8,311) (1,353) (13,210)
Interest and other income, net.. 75 -- -- 75
Interest expense................ (140) -- -- (140)
------- ------- ------- ---------
Net loss...................... $(3,611) $(8,311) $(1,353) $ (13,275)
======= ======= ======= =========
Pro forma net loss per share:
Basic and diluted............. $ (5.58)
=========
Weighted average shares--basic
and diluted.................. 2,376,984
=========
</TABLE>
See accompanying notes to Combined Pro Forma Financial Information.
F-22
<PAGE>
GODIGITAL NETWORKS CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Six Month Period Ended September 30, 1999
----------------------------------------------
GoDigital FDS Pro Forma Combined
Networks Corp. Business Adjustments Pro Forma
-------------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues.................... $11,738 $ 2,684 $ -- $ 14,422
Cost of revenues................ 8,618 2,434 181 a 11,233
------- ------- ----- ---------
Gross margin.................. 3,120 250 (181) 3,189
Operating expenses:
Research and development...... 2,188 811 207 b 3,206
Sales and marketing........... 1,986 932 -- 2,918
General and administrative.... 1,296 490 88 c 1,874
Write-off of in-process
research and development..... 638 -- (638)d --
Stock compensation............ 1,607 -- -- 1,607
------- ------- ----- ---------
Total operating expenses.... 7,715 2,233 (343) 9,605
------- ------- ----- ---------
Income (loss) from operations... (4,595) (1,983) 162 (6,416)
Interest and other income, net.. 45 -- -- 45
Interest expense................ (59) -- -- (59)
------- ------- ----- ---------
Net loss........................ $(4,609) $(1,983) $ 162 $ (6,430)
======= ======= ===== =========
Pro forma net loss per share:
Basic and diluted............. $ (1.95)
=========
Weighted average shares--basic
and diluted.................. 3,292,200
=========
</TABLE>
See accompanying notes to Combined Pro Forma Financial Information.
F-23
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(Unaudited)
NOTE 1--BASIS OF PRESENTATION:
Effective July 1999, the Company acquired from E/O Networks certain assets
and assumed certain liabilities relating to part of the FDS product line. The
FDS product line is a digital loop access system.
The allocation of the cash purchase price is summarized below (in
thousands):
<TABLE>
<S> <C>
Developed technology............................................. $1,107,000
Core technology.................................................. 3,112,000
In-process research and development.............................. 638,000
Customer list.................................................... 94,000
Workforce........................................................ 98,000
Fixed assets..................................................... 522,000
Goodwill......................................................... 229,000
Assumed liabilities.............................................. (200,000)
----------
Total purchase price........................................... $5,600,000
==========
</TABLE>
The amount allocated to in-process research and development represents the
purchased in-process technology for projects that, as of the date of the
acquisition, had not yet reached technological feasibility and had no
alternative future use. Based on preliminary assessments, the value of these
projects was determined by estimating the resulting net cash flows from the
sale of the products resulting from the completion of the projects, reduced by
the portion of the revenue attributable to core technology and the percentage
completion of the project. The resulting cash flows were then discounted back
to their present value at appropriate discount rates.
The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specification including function, features and technical performance
requirements. The resulting net cash flows from such products are based on
estimates of revenue, cost of revenue, research and development costs, sales
and marketing costs, and income taxes from such projects.
The amounts allocated to in-process research and development was charged to
the statement of operations in the period of the acquisition.
NOTE 2--PRO FORMA ADJUSTMENTS:
(a) To reflect amortization of fixed assets and developed technology as if
the acquisition had occurred on April 1, 1998.
(b) To reflect amortization of core technology.
(c) To reflect amortization of goodwill, workforce and customer list.
(d) To reflect elimination of write-off of in-process research and
development due to its non-recurring nature.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
GoDigital Networks Corporation
In our opinion, the accompanying statement of financial position and the
related statements of operations present fairly, in all material respects, the
financial position of the FDS Business, acquired by GoDigital Networks
Corporation from E/O Networks, Inc. (the "Company"), at December 31, 1997 and
1998, and the results of operations for each of the two years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of GoDigital's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying financial statements were prepared to comply with the rules
and regulations of the Securities and Exchange Commission and on the basis of
presentation as described in Note 1, to present the financial position and
results of operations of the FDS Business acquired by GoDigital Networks
Corporation from E/O Networks, Inc.
PricewaterhouseCoopers LLP
San Jose, California
November 17, 1999
F-25
<PAGE>
FDS BUSINESS
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Six Month
Years Ended Period Ended
December 31, June 30,
----------------- ----------------
1997 1998 1998 1999
-------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C>
Revenues............................... $ 6,500 $ 8,012 $ 3,868 $ 2,684
Cost of revenues....................... 6,855 7,087 3,744 2,434
-------- ------- ------- -------
Gross margin....................... (355) 925 124 250
Expenses:
Research and development............. 3,187 2,164 1,492 811
Sales and marketing.................. 5,053 5,423 2,664 932
General and administrative........... 1,595 1,649 426 490
-------- ------- ------- -------
Total operating expenses........... 9,835 9,236 4,582 2,233
-------- ------- ------- -------
Net loss........................... $(10,190) $(8,311) $(4,458) $(1,983)
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
FDS BUSINESS
STATEMENTS OF FINANCIAL POSITION
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Accounts receivable less allowance for doubtful
accounts of $157 and $133 at December 31, 1997 and
1998, respectively, and $420 (unaudited) at
June 30, 1999...................................... $1,406 $1,470 $ 270
Inventory........................................... 708 590 346
------ ------ ------
Total current assets.............................. 2,114 2,060 616
Property and equipment, net......................... 613 681 633
------ ------ ------
Total assets...................................... $2,727 $2,741 $1,249
====== ====== ======
LIABILITIES AND OWNER'S NET INVESTMENT
Accrued payroll and related......................... $ 670 $ 509 $ 526
Accrued product warranty............................ 487 433 693
------ ------ ------
Total current liabilities......................... 1,157 942 1,219
Owner's net investment.............................. 1,570 1,799 30
------ ------ ------
Total liabilities and owner's net investment...... $2,727 $2,741 $1,249
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION:
Effective July 26, 1999, GoDigital Networks Corporation ("GoDigital")
acquired from E/O Networks, Inc. ("E/O Networks") certain assets and assumed
certain liabilities relating to part of the FDS product line (the "FDS
Business"). E/O Networks had filed for bankruptcy under Chapter 11 on April 13,
1999. The FDS product line is a digital loop access system.
Historically, financial statements were not prepared for the FDS Business.
The accompanying financial statements were prepared to comply with the rules
and regulations of the Securities and Exchange Commission. These statements are
derived from E/O Networks historical accounting records. Throughout the period
covered by the financial statements, the FDS Business was wholly-owned and
operated by E/O Networks, Inc.
Under the terms of the Acquisition Agreement, GoDigital acquired certain
tangible and intangible assets relating to the FDS Business. The acquired
assets excluded accounts receivable and cash. GoDigital assumed responsibility
for certain FDS Business product warranty obligations under certain contracts,
all other liabilities remained with E/O Networks.
The FDS Business was not operated as a separate, discrete business of E/O
Networks and accordingly all financing and treasury functions were handled at
E/O Networks corporate level. Cash requirements of the business were provided
entirely by E/O Networks and cash generated by the FDS Business was remitted
directly to E/O Networks. Given these constraints, it is not possible to
determine cash balances associated with the Business. In addition, E/O Networks
was responsible for certain liabilities related to facilities, functions and
services used by the FDS Business as well as other E/O Networks businesses. It
is not possible to allocate these shared liabilities to the FDS Business.
The Statement of Financial Position of the FDS Business includes all assets
and liabilities that are specifically attributable to the FDS Business or can
be allocated to the FDS Business and are reflective of E/O Networks historical
cost information. All other unallocable assets and liabilities including cash
comprise E/O Networks net investment in the FDS Business and have been
disclosed in the Statement of Financial Position as Owner's Net Investment in
lieu of Stockholders Equity. In addition, due to the constraints outlined
above, certain supplemental cash flow information related to the FDS Business
has been presented (See Note 5) in lieu of a Statement of Cash Flows.
The Statement of Operations includes all revenues and costs directly
attributable to the FDS Business, including costs for facilities, functions and
services used by the FDS Business at a site shared with other E/O Networks
operations. The results of operations also includes costs for certain functions
and services performed by E/O Networks corporate level including officers and
employees salaries, rent, depreciation, advertising, accounting and legal
services which have been allocated to the FDS Business based on usage. The only
costs excluded from the Statement of Operations for the FDS Business relate to
direct expenses specifically attributable to other businesses of E/O Networks
that were not acquired and interest expense (See Note 6).
All of the allocations and estimates in the Financial Statements are based
on assumptions that management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the
costs that would have resulted if the FDS Business had been operated as a
separate entity.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-28
<PAGE>
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentration of credit risk
The FDS Business provides credit in the form of trade accounts receivable to
its customers. The FDS Business generally does not require collateral to
support customer receivables. The FDS Business performs ongoing credit
evaluations of its customers and maintains allowances which management believes
are adequate for potential credit losses.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight line method over estimated useful lives as follows:
<TABLE>
<S> <C>
Computers and related equipment............................. 3 to 5 years
Furniture and fixtures...................................... 3 to 7 years
</TABLE>
Revenue recognition
Revenues from product sales are generally recognized at the time of shipment
to customers. Certain of the FDS Business shipments have been trial orders with
rights of return. Accordingly, the Business deferred billing and recognition of
revenue until written acceptance was received from the customers. The Business
records estimated reserves for warranty costs at the time of shipment.
Research and development
Research and development costs are expensed as incurred and consist
primarily of salaries, travel, materials, supplies and contract services.
Stock compensation
Effective January 1, 1996, the FDS Business adopted the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." In accordance with the provisions of
SFAS No. 123, the Company applies Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its employees stock benefit plans.
Long-lived assets
The FDS Business periodically evaluates the recoverability of its long-lived
assets based upon expected undiscounted cash flows and recognizes impairment
from the carrying value of long-lived assets, if any, based on the fair value
of such assets.
Inventories
Inventories consist of raw materials, work-in-process and finished goods and
are stated at lower of cost, determined using the first-in, first-out method,
or market.
Comprehensive income
Effective January 1, 1998, the FDS Business adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from nonowner sources. To date, the FDS Business has not had
any transactions that are required to be reported in comprehensive income
(loss) as compared to its reported net loss, and accordingly net loss is equal
to comprehensive net loss for all periods presented.
F-29
<PAGE>
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income taxes
The taxable loss of the FDS Business was included in the tax return of E/O
Networks. As such, separate income tax returns were not prepared or filed for
the FDS Business.
The FDS Business accounts for income taxes under the asset and liability
method as if the FDS Business were a separate tax paying entity. Under the
basis of presentation of these financial statements, tax due to/due from E/O
Networks is indicated as a component of Owner's Net Investment.
Segment information
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. During each period presented, the FDS Business operated in
a single business segment in the United States.
Unaudited interim results
The accompanying statement of financial position as of June 30, 1999 and the
statement of operations for the six months ended June 30, 1999 and 1998 are
unaudited. In the opinion of management, these statements have been prepared on
the same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the FDS Business' financial position and its results of operations for the
interim periods. The data included in notes to the financial statements for
these periods is unaudited.
NOTE 3--RELATED PARTY TRANSACTIONS:
The financial statements include significant transactions with E/O Networks
involving transactions and services (cash management, administration,
facilities, purchasing, legal and accounting) that were provided to the FDS
Business. The costs of these transactions and services have been directly
charged and/or allocated to the FDS Business using methods that management
believes are reasonable. Such charges and allocations are not necessarily
indicative of the costs that would have been incurred if the FDS Business had
been a separate entity. All operating expenses in the financial statements
relate to amounts paid by E/O Networks and have been allocated to the FDS
Business. In addition FDS Business employees participated in benefits plans
provided by E/O Networks including 401(k) plans and stock options, the cost of
which is included as part of FDS operating expenses.
NOTE 4--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
December 31,
-------------- June 30,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Inventories:
Raw materials.................................. $ 216 $ 291 $ 172
Work-in-process................................ 274 43 7
Finished goods................................. 218 256 167
------ ------ ------
$ 708 $ 590 $ 346
====== ====== ======
Property and equipment, net:
Computers and related equipment................ $ 909 $1,182 $1,267
Furniture and fixtures......................... 114 155 162
------ ------ ------
1,023 1,337 1,429
Less: Accumulated depreciation................. (410) (656) (796)
------ ------ ------
$ 613 $ 681 $ 633
====== ====== ======
</TABLE>
F-30
<PAGE>
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5--SUPPLEMENTAL CASH FLOW INFORMATION:
As described in Note 1, the Business did not have a separate cash management
system and all cash payments and cash receipts were handled by E/O Networks at
the corporate level. In addition, E/O Networks corporate systems are not
designed to track liabilities and payments on a business specific basis. Given
these constraints, the following data are presented to facilitate analysis of
key components of cash flow activity.
<TABLE>
<CAPTION>
Year Ended Six Month Period
December 31, Ended June 30,
----------------- -------------------
1997 1998 1998 1999
-------- ------- ----------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net loss........................ $(10,190) $(8,311) $(4,458) $(1,983)
Depreciation.................... 439 247 115 139
Change in accounts receivable... (2,415) (64) (80) 1,200
Change in inventory............. 1,047 118 63 244
Change in accrued liabilities... (22) (215) (95) 277
-------- ------- ------- -------
Cash flow from operating
activities, excluding E/O
Networks financing............. (11,141) (8,225) (4,455) (123)
Investment activities
Capital expenditures.......... (399) (315) (146) (91)
-------- ------- ------- -------
Net financing received from
E/O Networks................. $(11,540) $(8,540) $(4,601) $ (214)
======== ======= ======= =======
</TABLE>
The difference between Cash Flow from Operating Activities and Investment
Activities does not necessarily represent the cash flows of the FDS Business,
or the timing of such cash flows, had it operated as a separate entity. Net
financing received from E/O Networks is included as an element of Owner's Net
Investment.
NOTE 6--OWNER'S NET INVESTMENT:
E/O Networks did not historically charge the FDS Business interest based on
financing provided or the balance of Owner's Net Investment.
A reconciliation of changes in Owner's Net Investment is as follows (in
thousands):
<TABLE>
<S> <C>
Balance, December 31, 1996............................................ $ 220
Net loss.............................................................. (10,190)
Net financing received from E/O Networks.............................. 11,540
--------
Balance, December 31, 1997............................................ 1,570
Net loss.............................................................. (8,311)
Net financing received from E/O Networks.............................. 8,540
--------
Balance, December 31, 1998............................................ 1,799
Net loss (unaudited).................................................. (1,983)
Net financing received from E/O Networks (unaudited).................. 214
--------
Balance, June 30, 1999 (unaudited).................................... $ 30
========
</TABLE>
Average Owner's Net Investments for the year ended December 31, 1997, 1998
and the six month period ended June 30, 1999 (unaudited) amounted to $895,000,
$1,685,000 and $915,000, respectively.
F-31
<PAGE>
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 7--COMMITMENTS AND CONTINGENCIES:
The Business does not have any material lease commitments.
The Business is subject to various lawsuits and claims with respect to such
matters as product liabilities, governmental regulations and other actions
arising out of the normal course of business. While the effect on future
financial results is not subject to reasonable estimation because considerable
uncertainty exists, in the opinion of management, the ultimate liabilities
resulting from such lawsuits and claims will not materially affect the
financial statements of the FDS Business.
NOTE 8--SUBSEQUENT EVENTS:
On July 26, 1999, certain assets and liabilities comprising the FDS Business
were acquired by GoDigital Networks Corporation for approximately $5.6 million.
F-32
<PAGE>
[GoDigital Logo]
Delivering Long Range Network Access
[GDSL-8 Graphic]
GDSL-8
The GDSL-8 uses DSL technology to transport eight digital access lines used for
voice and CLASS services, high-speed analog modem access, and fax services as
far as 25 miles from the central phone office on one copper line.
[GDSL-3i Graphic]
GDSL-3i
The GDSL-3i transports three 144 Kbps IDSL lines as far as 25 miles from the
central phone office on one copper line.
[FDS FiberReach Distribution System Graphic]
FDS FiberReach Distribution System
The FDS FiberReach transports multiple IDSL lines or digital access lines, to
multiple drop points along a 150 mile, 40 Mbps, fiber ring. FDS FiberReach
systems can be used in combination with GDSL Systems for combined fiber/copper
long range transmission applications.
1
<PAGE>
[GoDigital Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by GoDigital Networks
Corporation in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $15,568
NASD filing fee.................................................. 6,100
Nasdaq National Market listing fee............................... *
Printing and engraving costs..................................... *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... 3,000
Transfer Agent and Registrar fees................................ *
Miscellaneous expenses........................................... *
-------
Total.......................................................... $ *
=======
</TABLE>
- -----------------------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation 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.
Article XI of the Registrant's Restated Certificate of Incorporation
provides for the indemnification of the Registrant's directors and officers to
the fullest extent permissible under Delaware law.
The Registrant intends to enter into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Restated Certificate of Incorporation, and intends to enter
into indemnification agreements with any new directors and executive officers
in the future.
Item 15. Recent Sales of Unregistered Securities
Since our incorporation in February 1996, we have sold and issued the
following securities:
(1) On March 1, 1996, we issued 3,120,000 shares of common stock to three
founding stockholders for an aggregate consideration of $1,560.00.
(2) On March 12, 1996, we issued 120,000 shares of common stock to a
consultant for an aggregate consideration of $60.00.
(3) On April 6, 1996, we issued 2,678,000 shares of Series A Preferred Stock
to ten investors for an aggregate consideration of $2,678,500.00.
II-1
<PAGE>
(4) On December 11, 1996, we issued 1,339,250 shares of Series B Preferred
Stock to ten investors for an aggregate consideration of $2,678,500.00.
(5) On August 5, 1997, we issued 1,992,476 shares of Series C Preferred
Stock to twelve investors for an aggregate consideration of $7,192,838.36.
(6) On September 22, 1998, we issued 428,574 shares of Series D Preferred
Stock to three investors for an aggregate consideration of $3,000,018.00, and
on October 15, 1998, we issued 12,143 shares of Series D Preferred Stock to
three investors for an aggregate consideration of $85,001.00.
(7) On July 30, 1999, we issued 530,000 shares of Series E Preferred Stock
to fifteen investors for an aggregate consideration of $6,625,000.00, and on
August 12, 1999, we issued 77,920 shares of Series E Preferred Stock to one
investor for an aggregate consideration of $974,000.00.
(8) On September 14, 1999, we issued an aggregate of 6,000 shares of common
stock to four consultants as consideration for past services rendered.
(9) Since our incorporation, we have issued, and there remain outstanding,
options to purchase an aggregate of 2,150,600 shares of common stock with
exercise prices ranging from $0.18 to $4.50 per share. Since our incorporation,
options to purchase 2,858,292 shares of common stock have been exercised for an
aggregate consideration of $2,578,838.78.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering.
The issuance of securities described in Items 15(1) through (6) and (8) were
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering. The issuance of securities described in Item 15(7) were exempt from
registration under the Securities Act in reliance on Regulation D of the
Securities Act as transactions by an issuer not involving a public offering.
The issuance of securities described in Item 15(9) were exempt from
registration under the Securities Act in reliance on Section 4(2) or Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
- -------
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1* Specimen of Common Stock Certificate
4.2 Third Amended and Restated Shareholder Rights Agreement
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1 Form of Indemnification Agreement between the Registrant and each of its directors and officers
10.2*+ Purchase Agreement by and between BCTel and the Registrant
10.3* Multi-Tenant Industrial Triple Net Lease, dated as of June 1, 1999, by and between the Registrant
and Catellus Development
10.4 Amended and Restated 1996 Stock Plan and forms of agreements thereunder
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C>
10.5 1999 Employee Stock Purchase Plan
10.6 Change of Control Severance Agreement by and between the Registrant and each of its officers
10.7 Change of Control Severance Agreement by and between Dennis Haar and the Registrant
10.8*+ Product Purchase Agreement between GTE Communication Systems Corporation and the Registrant
10.9*+ Agreement for Products by and between US West Communications, Inc. and E/O Networks
10.10*+ Assignment, Assumption and Acceptance for Products by and among US West Communications,
Inc., E/O Networks and the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.3* Consent of Counsel (see Exhibit 5.1)
24.1 Power of Attorney (see page II-5 of this filing)
27.1 Financial Data Schedules
</TABLE>
- -----------------------
+ The Registrant will request confidential treatment with respect to certain
portions of this exhibit. The omitted portions will be separately filed with
the Commission.
* To be filed by amendment
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<S> <C>
Schedule II--Valuation and Qualifying Accounts........................ S-1
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
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 foregoing provisions referenced in Item 14 of this
registration statement 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, 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 a
director, officer or controlling person in connection with the securities being
registered hereunder, 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 and will be governed
by the final adjudication of such issue.
II-3
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, 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 to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fremont,
State of California, on the 17 day of November, 1999.
GoDigital Networks Corporation
/s/ Dennis Haar
By: _________________________________
Dennis Haar,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dennis Haar and T. Olin Nichols 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 of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, 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 of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Francis I. Akers Chairman of the Board November 17, 1999
____________________________________ President, Chief
Francis I. Akers Development Officer and
Director
/s/ Dennis Haar President, Chief Executive November 17, 1999
____________________________________ Officer and Director
Dennis Haar (Principal Executive
Officer)
/s/ T. Olin Nichols Vice President, Finance, November 17, 1999
____________________________________ Chief Financial Officer
T. Olin Nichols (Principal Financial
Officer)
/s/ Douglas Carlisle Director November 17, 1999
____________________________________
Douglas Carlisle
/s/ James Flach Director November 17, 1999
____________________________________
James Flach
/s/ Gregorio Reyes Director November 17, 1999
____________________________________
Gregorio Reyes
</TABLE>
II-5
<PAGE>
Schedule II
GODIGITAL NETWORKS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
beginning Charged Credited at end
Description of period to expenses to expenses of period
----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable:
Fiscal year ended March 31,
1997.......................... $ -- $ -- $-- $ --
Fiscal year ended March 31,
1998.......................... -- -- -- --
Fiscal year ended March 31,
1999.......................... $ -- $ 50 $-- $ 50
Allowance for excess and obsolete
inventory:
Fiscal year ended March 31,
1997.......................... $ -- 396 -- $396
Fiscal year ended March 31,
1998.......................... 396 502 -- 898
Fiscal year ended March 31,
1999.......................... $ 898 465 -- $1,363
Deferred tax valuation allowance:
Fiscal year ended March 31,
1997.......................... $ -- $1,249 $-- $1,249
Fiscal year ended March 31,
1998.......................... 1,249 2,223 -- 3,472
Fiscal year ended March 31,
1999.......................... $3,472 $ 974 $-- $4,446
</TABLE>
S-1
<PAGE>
REPORT OF FINANCIAL ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of GoDigital Networks
Corporation has been included in this Form S-1 on page F-2. In connection with
our audit of such financial statements, we have also audited the related
financial statement schedule listed in the index page II-3 of this Form S-1. In
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly the information required to be included therein.
PricewaterhouseCoopers LLP
San Jose, California
November 17, 1999
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1* Specimen of Common Stock Certificate
4.2 Third Amended and Restated Shareholder Rights Agreement
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2*+ Purchase Agreement by and between BC Tel and the Registrant
10.3* Multi-Tenant Industrial Triple Net Lease, dated as of June 1, 1999, by
and between the Registrant and Catellus Development
10.4 Amended and Restated 1996 Stock Plan and form of agreements thereunder
10.5 1999 Employee Stock Purchase Plan
10.6 Change of Control Severance Agreement by and between the Registrant
and each of its officers
10.7 Change of Control Severance Agreement by and between Dennis Haar and
the Registrant
10.8*+ Product Purchase Agreement between GTE Communication Systems
Corporation and the Registrant
10.9*+ Agreement for Products by and between US West Communications, Inc. and
E/O Networks
10.10*+ Assignment, Assumption and Acceptance of Agreement for Products by and
among US West Communications, Inc., E/O Networks and the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.3* Consent of Counsel (see Exhibit 5.1)
24.1 Power of Attorney (see page II-5 of this filing)
27.1 Financial Data Schedules
</TABLE>
- -----------------------
+ The Registrant will request confidential treatment with respect to certain
portions of this exhibit. The omitted portions will be separately filed with
the Commission.
* To be filed by amendment
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
GODIGITAL NETWORKS CORPORATION
GoDigital Networks Corporation, a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is GoDigital Networks Corporation. The
corporation was originally incorporated under the same name and the original
Certificate of Incorporation of the corporation was filed with the Secretary of
State of the State of Delaware on November 18, 1999.
B. This Restated Certificate of Incorporation has been duly adopted in
accordance with the provisions Sections 211 and 242 of the General Corporation
Law of the State of Delaware by the Board of Directors and the stockholders of
the corporation.
C. Pursuant to Section 245 of the General Corporation Law of the State of
Delaware, this Restated Certificate of Incorporation restates the provisions of
the Certificate of Incorporation of this corporation.
D. The Certificate of Incorporation is hereby restated in its entirety to
read as follows :
"Article I.
The name of the corporation is GoDigital Networks Corporation (the
"Corporation").
<PAGE>
Article II.
The address of the Corporation's registered office in the State of Delaware is
1209 Orange Street, in the City of Wilmington, Delaware 19801, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
Article III.
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
Article IV.
This Corporation is authorized to issue two classes of stock to be
designated, respectively, Common Stock and Preferred Stock. The total number of
shares of Common Stock which the Company is authorized to issue is 100,000,000,
$0.001 par value, and the total number of shares of Preferred Stock the Company
is authorized to issue is 1,000,000, $0.001 par value. The Preferred Stock may
be issued from time to time in one or more series pursuant to a resolution or
resolutions providing for such issue duly adopted by the Board of Directors
(authority to do so being hereby expressly vested in the Board). The Board of
Directors is further authorized to determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and to fix the number of shares of any series of
Preferred Stock and the designation of any such series of Preferred Stock. The
Board of Directors, within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors originally fixing the number of shares
constituting any series, may increase or decrease (but not below the number of
shares in any such series then outstanding), the number of shares of any series
subsequent to the issue of shares of that series.
Article V.
The Corporation is to have perpetual existence.
Article VI.
1. The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of directors
which constitute the whole Board of Directors of the corporation shall be
designated in the Bylaws of the corporation.
<PAGE>
2. The Board of Directors shall be divided into three classes designated
as Class I, Class II and Class III, respectively. Directors shall be assigned
to each class in accordance with a resolution or resolutions adopted by the
Board of Directors. At the first annual meeting of stockholders following the
date hereof, the term of office of the Class I directors shall expire and Class
I directors shall be elected for a full term of three years. At the second
annual meeting of stockholders following the date hereof, the term of office of
the Class II directors shall expire and Class II directors shall be elected for
a full term of three years. At the third annual meeting of stockholders
following the date hereof, the term of office of the Class III directors shall
expire and Class III directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders, directors shall be elected
for a full term of three years to succeed the directors of the class whose terms
expire at such annual meeting.
3. Notwithstanding the foregoing provisions of this Article, each director
shall serve until his or her successor is duly elected and qualified or until
his or her death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
4. Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall be filled by
either (i) the affirmative vote of the holders of a majority of the voting power
of the then-outstanding shares of voting stock of the corporation entitled to
vote generally in the election of directors ("Voting Stock") voting together as
a single class; or (ii) by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. Newly created directorships resulting from any increase in the
number of directors shall, unless the Board of Directors determines by
resolution that any such newly created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors then in
office, even though less than a quorum of the Board of Directors. Any director
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified.
5. The affirmative vote of sixty-six and two-thirds percent (66-2/3%) of
the voting power of the then outstanding shares of Voting Stock, voting together
as a single class, shall be required for the adoption, amendment or repeal of
the following sections of the corporation's Bylaws by the stockholders of this
corporation: 2.2 (Annual Meeting) and 2.3 (Special Meeting).
6. No action shall be taken by the stockholders of the corporation except at an
annual or special meeting of the stockholders called in accordance with the
Bylaws.
7. Any director, or the entire Board of Directors, may be removed from office
at any time (i) with cause by the affirmative vote of the holders of at least a
majority of the voting power of all of the then-outstanding shares of the Voting
Stock, voting together as a single class; or (ii) without cause by the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding shares of the
Voting Stock
<PAGE>
ARTICLE VII
Notwithstanding any other provisions of this Certificate of Incorporation or
any provision of law which might otherwise permit a lesser vote or no vote, but
in addition to any affirmative vote of the holders of any particular class or
series of the Voting Stock required by law, this Certificate of Incorporation or
any Preferred Stock Designation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock, voting together as a single class,
shall be required to alter, amend or repeal ARTICLE VI or this ARTICLE VII.
ARTICLE VIII
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in ARTICLE VII of this
Certificate, and all rights conferred upon the stockholders herein are granted
subject to this right.
ARTICLE IX
In furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to make, alter, amend or repeal the
Bylaws of the Corporation.
ARTICLE X
1. To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as may hereafter be amended, a director of the Corporation
shall be indemnified by the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director.
2. The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.
3. Neither any amendment nor repeal of this Article X, nor the adoption of
any provision of this Corporation's Certificate of Incorporation inconsistent
with this Article X, shall eliminate or reduce the effect of this Article X, in
respect of any matter occurring, or any action or proceeding accruing or arising
or that, but for this Article X, would accrue or arise, prior to such amendment,
repeal or adoption of an inconsistent provision.
<PAGE>
ARTICLE XII
Meetings of stockholders may be held within or without the State of Delaware,
as the Bylaws may provide. The books of the Corporation may be kept (subject to
any provision contained in the statutes) outside of the State of Delaware at
such place or places as may be designated from time to time by the Board of
Directors or in the Bylaws of the Corporation.
ARTICLE XIII
Advance notice of new business and stockholder nominations for the election of
directors shall be given in the manner and to the extent provided in the Bylaws
of the Corporation."
The undersigned certifies under penalty of perjury that the foregoing Restated
Certificate of Incorporation of GoDigital Networks Corporation is the act and
deed of this corporation and that the statements therein are true.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused this
Restated Certificate of Incorporation to be signed by Dennis Haar, its President
and Chief Executive Officer, effective as of December __, 1999.
GODIGITAL NETWORKS CORPORATION
By:
-------------------------
Dennis Haar
President and Chief Executive Officer
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
GODIGITAL NETWORKS CORPORATION
A Delaware Corporation
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I CORPORATE OFFICES..................................................................................1
1.1 REGISTERED OFFICE..........................................................................1
1.2 OTHER OFFICES..............................................................................1
ARTICLE II MEETINGS OF STOCKHOLDERS..........................................................................1
2.1 PLACE OF MEETINGS..........................................................................1
2.2 ANNUAL MEETING.............................................................................1
2.3 SPECIAL MEETING............................................................................2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS...........................................................2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS............................2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE...............................................3
2.7 QUORUM.....................................................................................4
2.8 ADJOURNED MEETING; NOTICE..................................................................4
2.9 VOTING.....................................................................................5
2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT..........................................5
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING....................................5
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS................................6
2.13 PROXIES....................................................................................7
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................................................7
2.15 CONDUCT OF BUSINESS........................................................................7
ARTICLE III DIRECTORS........................................................................................8
3.1 POWERS.....................................................................................8
3.2 NUMBER OF DIRECTORS........................................................................8
3.3 CLASSES OF DIRECTORS.......................................................................8
3.4 RESIGNATION AND VACANCIES..................................................................9
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..................................................10
3.6 REGULAR MEETINGS..........................................................................10
3.7 SPECIAL MEETINGS; NOTICE..................................................................10
3.8 QUORUM....................................................................................11
3.9 WAIVER OF NOTICE..........................................................................11
3.10 ADJOURNMENT...............................................................................11
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Page
----
3.11 NOTICE OF ADJOURNMENT.....................................................................11
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.........................................11
3.13 FEES AND COMPENSATION OF DIRECTORS........................................................12
3.14 REMOVAL OF DIRECTORS......................................................................12
ARTICLE IV COMMITTEES.......................................................................................12
4.1 COMMITTEES OF DIRECTORS...................................................................12
4.2 MEETINGS AND ACTION OF COMMITTEES.........................................................13
ARTICLE V OFFICERS..........................................................................................13
5.1 OFFICERS..................................................................................13
5.2 APPOINTMENT OF OFFICERS...................................................................13
5.3 SUBORDINATE OFFICERS......................................................................13
5.4 REMOVAL AND RESIGNATION OF OFFICERS.......................................................14
5.5 VACANCIES IN OFFICES......................................................................14
5.6 CHAIRMAN OF THE BOARD.....................................................................14
5.7 PRESIDENT AND CHIEF EXECUTIVE OFFICER.....................................................14
5.8 VICE PRESIDENTS...........................................................................14
5.9 SECRETARY.................................................................................15
5.10 CHIEF FINANCIAL OFFICER...................................................................15
5.11 ASSISTANT SECRETARY.......................................................................15
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS..............................16
6.1 THIRD PARTY ACTIONS.......................................................................16
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.............................................16
6.3 SUCCESSFUL DEFENSE........................................................................16
6.4 DETERMINATION OF CONDUCT..................................................................17
6.5 PAYMENT OF EXPENSES IN ADVANCE............................................................17
6.6 INDEMNITY NOT EXCLUSIVE...................................................................17
6.7 INSURANCE INDEMNIFICATION.................................................................17
6.8 THE CORPORATION...........................................................................17
6.9 EMPLOYEE BENEFIT PLAN.....................................................................18
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES...............................18
ARTICLE VII RECORDS AND REPORTS.............................................................................18
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER..............................................18
7.2 MAINTENANCE AND INSPECTION OF BYLAWS......................................................19
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Page
----
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.....................................19
7.4 INSPECTION BY DIRECTORS...................................................................20
7.5 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............................................20
ARTICLE VIII GENERAL MATTERS................................................................................20
8.1 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.................................................20
8.2 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.........................................20
8.3 CERTIFICATES FOR SHARES...................................................................20
8.4 LOST CERTIFICATES.........................................................................21
8.5 CONSTRUCTION; DEFINITIONS.................................................................21
ARTICLE IX AMENDMENTS.......................................................................................21
9.1 AMENDMENT BY STOCKHOLDERS.................................................................21
9.2 AMENDMENT BY DIRECTORS....................................................................22
ARTICLE X DISSOLUTION.......................................................................................22
ARTICLE XI CUSTODIAN........................................................................................22
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES...............................................22
11.2 DUTIES OF A CUSTODIAN.....................................................................23
</TABLE>
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<PAGE>
BYLAWS
------
OF
--
GODIGITAL NETWORKS CORPORATION
------------------------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE.
-----------------
The registered office of the Corporation shall be 1209 Orange Street, in
the City of Wilmington, County of New Castle, State of Delaware, 19801. The
name of the registered agent of the Corporation at such location is The
Corporation Trust Company.
1.2 OTHER OFFICES.
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS.
-----------------
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING.
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the second
Tuesday of July in each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING.
---------------
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, by the president or by the
holders of shares entitled to cast not less than a majority of the shares
entitled to vote thereat.
If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. No business may be transacted at such special
meeting other than as specified in the notice. The officer receiving the
request shall cause notice to be promptly given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.6 of these bylaws,
that a meeting will be held at the time requested by the person or persons
calling the meeting, so long as that time is not less than ten (10) nor more
than sixty (60) days after the receipt of the request. If the notice is not
given within twenty (20) days after receipt of the request, then the person or
persons requesting the meeting may give the notice. Nothing contained in this
paragraph of this Section 2.3 shall be construed as limiting, fixing or
affecting the time when a meeting of stockholders called by action of the board
of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.
--------------------------------
All notices of meetings of stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.6 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote. The notice shall specify the place, date,
and hour of the meeting and (i) in the case of a special meeting, the general
nature of the business to be transacted (no business other than that specified
in the notice may be transacted) or (ii) in the case of the annual meeting,
those matters which the board of directors, at the time of giving the notice,
intends to present for action by the stockholders. The notice of any meeting at
which directors are to be elected shall include the name of any nominee or
nominees who, at the time of the notice, the board intends to present for
election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS.
---------------------------------------------------------------
To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the board of directors, (b) otherwise properly brought before the
meeting by or at the direction of the board of directors, or (c) otherwise
properly brought before the meeting by a stockholder. For such nominations or
other business to be considered properly brought before the meeting by a
stockholder, such stockholder must have given timely notice and in proper form
of his intent to bring such business before such meeting. To be timely, such
stockholder's notice must be delivered to or mailed and received by the
secretary of the Corporation not less than 90 days prior to the meeting;
provided, however, that in the event that less than 100 days notice or prior
public disclosure of the date of the meeting is given or made to
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<PAGE>
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. To be in proper form, a stockholder's notice to the secretary shall set
forth:
(i) the name and address of the stockholder who intends to make the
nominations, propose the business, and, as the case may be, the
name and address of the person or persons to be nominated or the
nature of the business to be proposed;
(ii) a representation that the stockholder is a holder of record of
stock of the Corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting
to nominate the person or persons specified in the notice or
introduce the business specified in the notice;
(iii) if applicable, a description of all arrangements or understandings
between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to
be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission had the nominee been
nominated, or intended to be nominated, or the matter been
proposed, or intended to be proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as director of
the Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the foregoing
procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.
--------------------------------------------
Written notice of any meeting of stockholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by facsimile or other
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that stockholder by mail or facsimile or other communication to the
corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county where that office is located.
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by facsimile or other means of communication.
-3-
<PAGE>
Pursuant to Section 230(b) of the Delaware General Corporation Law,
whenever (i) notice of two consecutive annual meetings, and all notices of
meetings or the taking of action by written consent without a meeting to such
person during the period between two such consecutive annual meetings, or (ii)
all, and at least two, payments (if sent by first class mail) of dividends or
interest on securities during a twelve month period, have been mailed addressed
to such person at such person's address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM.
------
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of stockholders. The stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
If, however, such quorum is not present or represented at any meeting of
the stockholders, then either (i) the chairman of the meeting, or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.8 ADJOURNED MEETING; NOTICE.
-------------------------
Any stockholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting except
as provided in Section 2.7 of these bylaws.
When any meeting of stockholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the adjournment is taken.
However, if a new record date for the adjourned meeting is fixed or if the
adjournment is for more than thirty (30) days from the date set for the original
meeting, then notice of the adjourned meeting shall be given. Notice of any
such adjourned meeting shall be given to each stockholder of record entitled to
vote at the adjourned meeting in accordance with the provisions of Sections 2.4
and 2.6 of these bylaws. At any adjourned meeting the corporation may transact
any business which might have been transacted at the original meeting.
-4-
<PAGE>
2.9 VOTING.
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Sections 2.12 and 2.14 of these
Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
All stockholders' votes shall be by ballot.
Except as may be otherwise provided in the certificate of incorporation,
each outstanding share shall be entitled to one vote on each matter submitted to
a vote of the stockholders. Any stockholder entitled to vote on any matter may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or, except when the matter is the election of directors, may
vote them against the proposal; but, if the stockholder fails to specify the
number of shares which the stockholder is voting affirmatively, it will be
conclusively presumed that the stockholder's approving vote is with respect to
all shares which the stockholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the stockholders, unless the vote of a greater number or a vote by classes is
required by the Delaware General Corporation Law or by the certificate of
incorporation.
2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT.
-------------------------------------------------
The transactions of any meeting of stockholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though they
had been taken at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of stockholders. All such waivers, consents,
and approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the Code to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
-------------------------------------------------------
Any action which may be taken at any annual or special meeting of
stockholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of
-5-
<PAGE>
votes that would be necessary to authorize or take that action at a meeting at
which all shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be effective
only if signed by the holders of all outstanding shares entitled to vote for the
election of directors pursuant to Section 211(b) of the General Corporation Law
of Delaware. However, a director may be elected at any time to fill any vacancy
on the board of directors, provided that it was not created by removal of a
director and that it has not been filled by the directors, by the written
consent of the holders of a majority of the outstanding shares entitled to vote
for the election of directors.
All such consents shall be maintained in the corporate records. Any
stockholder giving a written consent, or the stockholder's proxy holders, or a
transferee of the shares, or a personal representative of the stockholder, or
their respective proxy holders, may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
Notwithstanding the foregoing, effective upon the listing of the Common
Stock of the Corporation on the Nasdaq Stock Market and the registration of any
class of securities of the Corporation pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, the stockholders of the Corporation
may not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.
-----------------------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only stockholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date, except as otherwise provided in the Code.
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<PAGE>
If the board of directors does not so fix a record date, the fixing of such
record date shall be governed by the provisions of Section 213 of the General
Corporation Law of Delaware.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES.
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the stockholder and filed with the secretary of the
corporation but no such proxy shall be voted or acted upon after 3 years from
its date, unless the proxy provides for a longer period. A proxy shall be
deemed signed if the stockholder's name is placed on the proxy (whether by
manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE.
-------------------------------------
The officer who has charge of the stock ledger of a Corporation shall
prepare and make, at least 10 days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The stock ledger shall
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders and
of the number of shares held by each such stockholder.
2.15 CONDUCT OF BUSINESS.
-------------------
Meetings of stockholders shall be presided over by the chairman of the
board, if any, or in his absence by the president, or in his absence by a vice
president, or in the absence of the foregoing persons by a chairman designated
by the board of directors, or in the absence of such designation by a chairman
chosen at the meeting. The secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting. The chairman of any meeting of stockholders shall
determine the order of business and the procedures at the meeting, including
such matters as the regulation of the manner of voting and conduct of business.
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<PAGE>
ARTICLE III
DIRECTORS
---------
3.1 POWERS.
------
Subject to the provisions of the Delaware General Corporation Law and any
limitations in the certificate of incorporation and these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS.
-------------------
The exact number of directors shall be one (1) until changed by a bylaw
amending this Section 3.2, duly adopted by the board of directors or by the
stockholders.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
Directors shall be elected at each annual meeting of stockholders to hold
office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.
3.3 CLASSES OF DIRECTORS.
--------------------
At such time as a Registration Statement regarding the sale of the
Corporation's Common Stock to the public is declared effective by the Securities
and Exchange Commission, the Directors shall be divided into three classes
designated as Class I, Class II and Class III, respectively. Directors shall be
assigned to each class in accordance with a resolution or resolutions adopted by
the Board of Directors. At the first annual meeting of stockholders following
the closing of the Initial Public Offering, the term of office of the Class I
Directors shall expire and Class I Directors shall be elected for a full term of
three years. At the second annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class II Directors
shall expire and Class II Directors shall be elected for a full term of three
years. At the third annual meeting of stockholders following the closing of the
Initial Public Offering, the term of office of the Class III Directors shall
expire and Class III Directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders, Directors shall be elected
for a full term of three years to succeed the Directors of the class whose terms
expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each Director
shall serve until his successor is duly elected and qualified or until his
earlier death, resignation or removal. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of any incumbent
Director.
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<PAGE>
3.4 RESIGNATION AND VACANCIES.
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Pursuant to Section 223 of the Delaware General Corporation Law, and unless
otherwise provided in the certificate of incorporation or these bylaws:
(i) Vacancies in the board of directors and newly created directorships
resulting from any increase in the authorized number of directors
may be filled by a majority of the remaining directors, even if
less than a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the
provisions of the certificate of incorporation, vacancies and newly
created directorships of such class or classes or series may be
filled by a majority of the directors elected by such class or
classes or series thereof then in office, or by a sole remaining
director so elected.
Each director so elected shall hold office until the next annual meeting of
the stockholders and until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, (iii) if the authorized number of directors is increased, or (iv) if the
stockholders fail, at any meeting of stockholders at which any director or
directors are elected, to elect the number of directors to be elected at that
meeting.
If at any time, by reason of death or resignation or other cause, the
Corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may apply to the Court of Chancery for a decree summarily
ordering an election as provided in Section 211 of the General Corporation Law
of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least 10% of the total number of the shares at the time outstanding having the
right to vote for such directors, summarily order an election to be held to fill
any such vacancies or newly created directorships, or to replace the directors
chosen by the directors then in office as aforesaid, which
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<PAGE>
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
The stockholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election other
than to fill a vacancy created by removal, if by written consent, shall require
the consent of the holders of a majority of the outstanding shares entitled to
vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS.
----------------
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE.
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
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<PAGE>
3.8 QUORUM.
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business. Every act or decision done or made by a
majority of the directors present at a duly held meeting at which a quorum is
present shall be regarded as the act of the board of directors.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE.
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT.
-----------
If a quorum is not present at any meeting of the board of directors, then
the directors present, whether or not constituting a quorum, may adjourn any
meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT.
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
-------------------------------------------------
Any action required or permitted to be taken by the board of directors, or
any committee thereof, may be taken without a meeting, provided that all members
of the board or committee, as the case may be individually or collectively
consent in writing to that action. Such action by written consent shall have
the same force and effect as a unanimous vote of the board of directors. Such
written consent and any counterparts thereof shall be filed with the minutes of
the proceedings of the board.
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<PAGE>
3.13 FEES AND COMPENSATION OF DIRECTORS.
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors.
3.14 REMOVAL OF DIRECTORS.
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these Bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors. If at any time a class or series
of shares is entitled to elect one or more directors, the provisions of this
Article 3.14 shall apply to the vote of that class or series and not to the vote
of the outstanding shares as a whole.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS.
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of one or more directors. The board may designate one (1) or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of directors. Any committee, to the extent provided in the resolution of the
board, shall have all the authority of the board, except with respect to: (i)
amend the certificate of incorporation (except that a committee may, to the
extent authorized in the resolution or resolutions providing for the issuance of
shares of stock adopted by the board of directors as provided in Section 151(a)
of the General Corporation Law of Delaware, fix any of the preferences or rights
of such shares relating to dividends, redemption, dissolution, any distribution
of assets of the Corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the same
or any other class or classes of stock of the Corporation), (ii) adopt an
agreement of merger or consolidation under Sections 251 or 252 of the General
Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease
or exchange of all or substantially all of the Corporation's property and
assets, (iv) recommend to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or (v) amend the Bylaws of the Corporation; and,
unless the board resolution establishing the committee, the Bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
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<PAGE>
4.2 MEETINGS AND ACTION OF COMMITTEES.
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS.
--------
The officers of the corporation shall be a president and chief executive
officer, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents, one or more assistant secretaries, one or more
assistant treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 5.3 of these bylaws. Any number of offices may
be held by the same person.
5.2 APPOINTMENT OF OFFICERS.
-----------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3 SUBORDINATE OFFICERS.
--------------------
The board of directors may appoint, or may empower the president and chief
executive officer to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these bylaws or as
the board of directors may from time to time determine.
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<PAGE>
5.4 REMOVAL AND RESIGNATION OF OFFICERS.
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES.
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD.
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT AND CHIEF EXECUTIVE OFFICER.
-------------------------------------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall, subject to the control of the board of directors, have general
supervision, direction, and control of the business and the officers of the
corporation. He shall preside at all meetings of the stockholders and, in the
absence or nonexistence of a chairman of the board, at all meetings of the board
of directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS.
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
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<PAGE>
5.9 SECRETARY.
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER.
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY.
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
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<PAGE>
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------
6.1 THIRD PARTY ACTIONS.
-------------------
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.
---------------------------------------------
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper.
6.3 SUCCESSFUL DEFENSE.
-------------------
To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in
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<PAGE>
Sections 6.1 and 6.2, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
6.4 DETERMINATION OF CONDUCT.
------------------------
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court)
shall be made by the Corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made
(1) by the board of Directors or the Executive Committee by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) or if such quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
6.5 PAYMENT OF EXPENSES IN ADVANCE.
------------------------------
Expenses incurred in defending any civil or criminal action or proceeding
for which indemnification is required pursuant to Section 6.1 or pursuant to
Section 6.2 following authorization thereof by the Board of Directors shall be
paid by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of the indemnified
party to repay such amount if it shall ultimately be determined that the
indemnified party is not entitled to be indemnified as authorized in this
Article VI.
6.6 INDEMNITY NOT EXCLUSIVE.
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Certificate of
Incorporation.
6.7 INSURANCE INDEMNIFICATION.
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Article VI.
6.8 THE CORPORATION.
---------------
For purposes of this Article VI, references to "the Corporation" shall
include, in addition to the resulting Corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had
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<PAGE>
power and authority to indemnify its directors, officers, and employees or
agents, so that any person who is was a director, officer, employee or agent of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under and subject to the provisions of this Article VI
(including, without limitation the provisions of Section 6.4) with respect to
the resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS.
----------------------
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably deemed to have acted in a manner "not opposed to the best interests
of the Corporation" as referred to in this Article VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
-----------------------------------------------------------
The indemnification and advanced of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER.
--------------------------------------------
The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its stockholders
listing the names and addresses of all stockholders and the number and class of
shares held by each stockholder.
A stockholder or stockholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records of stockholders'
names, addresses, and shareholdings during usual business hours on five (5)
days' prior written demand on
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the corporation, (ii) obtain from the transfer agent of the corporation, on
written demand and on the tender of such transfer agent's usual charges for such
list, a list of the names and addresses of the stockholders who are entitled to
vote for the election of directors, and their shareholdings, as of the most
recent record date for which that list has been compiled or as of a date
specified by the stockholder after the date of demand. Such list shall be made
available to any such stockholder by the transfer agent on or before the later
of five (5) days after the demand is received or five (5) days after the date
specified in the demand as the date as of which the list is to be compiled.
The record of stockholders shall also be open to inspection on the written
demand of any stockholder or holder of a voting trust certificate, at any time
during usual business hours, for a purpose reasonably related to the holder's
interests as a stockholder or as the holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the stockholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS.
------------------------------------
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as amended
to date, which bylaws shall be open to inspection by the stockholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon the
written request of any stockholder, furnish to that stockholder a copy of these
bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.
-----------------------------------------------------
The accounting books and records and the minutes of proceedings of the
stockholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written form,
and the accounting books and records shall be kept either in written form or in
any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any stockholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a stockholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
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<PAGE>
7.4 INSPECTION BY DIRECTORS.
-----------------------
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney. The
right of inspection includes the right to copy and make extracts of documents.
7.5 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 CERTIFICATES FOR SHARES.
-----------------------
A certificate or certificates for shares of the corporation shall be issued
to each stockholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
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consideration to be paid for them and the amount actually paid. All
certificates shall be signed in the name of the corporation by the chairman of
the board or the vice chairman of the board or the president or a vice president
and by the chief financial officer or an assistant treasurer or the secretary or
an assistant secretary, certifying the number of shares and the class or series
of shares owned by the stockholder. Any or all of the signatures on the
certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that officer,
transfer agent or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent or registrar at the date of issue.
8.4 LOST CERTIFICATES.
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.5 CONSTRUCTION; DEFINITIONS.
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
----------
9.1 AMENDMENT BY STOCKHOLDERS.
-------------------------
New bylaws may be adopted or these bylaws may be amended or repealed by the
vote or written consent of holders of at least two-thirds (2/3) of the
outstanding shares entitled to vote; provided, however, that if the certificate
of incorporation of the corporation set forth the number of authorized directors
of the corporation, then the authorized number of directors may be changed only
by an amendment of the certificate of incorporation.
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9.2 AMENDMENT BY DIRECTORS.
----------------------
Subject to the rights of the stockholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the board of directors to the extent provided in
the certificate of incorporation.
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the Corporation that the Corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the Corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the Corporation shall be dissolved.
ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the Corporation is insolvent, to be
receivers, of and for the Corporation when:
(i) at any meeting held for the election of directors the stockholders
are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon
qualification of their successors; or
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(ii) the business of the Corporation is suffering or is threatened with
irreparable injury because the directors are so divided respecting
the management of the affairs of the Corporation that the required
vote for action by the board of directors cannot be obtained and
the stockholders are unable to terminate this division; or
(iii) the Corporation has abandoned its business and has failed within a
reasonable time to take steps to dissolve, liquidate or distribute
its assets.
11.2 DUTIES OF A CUSTODIAN
---------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the Corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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CERTIFICATE OF ADOPTION OF BYLAWS
OF
GODIGITAL NETWORKS CORPORATION
Adoption by Incorporator
------------------------
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of GoDigital Networks Corporation hereby adopts the
foregoing bylaws, comprising twenty-three (23) pages, as the Bylaws of the
corporation.
Executed this ___ day of November 1999.
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Edward F. Vermeer, Incorporator
Certificate by Secretary of Adoption by Incorporator
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The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of GoDigital Networks Corporation and that the foregoing
Bylaws, comprising twenty-three (23) pages, were adopted as the Bylaws of the
corporation on November ___, 1999, by the person appointed in the Certificate of
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and affixed
the corporate seal this ___ day of November 1999.
--------------------------------------
T. Olin Nichols, Secretary
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EXHIBIT 4.2
GODIGITAL TELECOMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED
SHAREHOLDER RIGHTS AGREEMENT
This Third Amended and Restated Shareholder Rights Agreement (the "Rights
Agreement"), dated as of July 30, 1999, is entered into by and among GoDigital
Telecommunications, Inc., a California corporation (the "Company"), the
purchasers of Series A Preferred Stock and Series B Preferred Stock of the
Company pursuant to that certain Series A Preferred Stock and Series B Preferred
Stock Purchase Agreement dated as of April 2, 1996 (the "Series A and B
Agreement") among the Company and such purchasers (the "Series A and B
Purchasers"), the purchasers of Series C Preferred Stock of the Company pursuant
to that certain Series C Preferred Stock Purchase Agreement dated as of August
5, 1997 (the "Series C Agreement") among the Company and such purchasers (the
"Series C Purchasers"), the purchasers of Series D Preferred Stock of the
Company pursuant to that certain Series D Preferred Stock Purchase Agreement
dated as of September 22, 1998 (the "Series D Agreement") among the Company and
such purchasers (the "Series D Purchasers") and the purchasers of Series E
Preferred Stock of the Company pursuant to that certain Series E Preferred Stock
Purchase Agreement of even date herewith (the "Series E Agreement") among the
Company and such purchasers (the "Series E Purchasers") (the Series A and B
Purchasers, the Series C Purchasers, the Series D Purchasers and the Series E
Purchasers being collectively referred to herein as the "Purchasers").
R E C I T A L S
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NOW THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties hereto agree as follows:
A. Pursuant to the Series A and B Agreement, the Series A and B Purchasers
have purchased 2,678,500 shares of Series A Preferred Stock of the Company (the
"Series A Preferred"), and 1,339,250 shares of Series B Preferred Stock of the
Company (the "Series B Preferred"); pursuant to the Series C Agreement, the
Series C Purchasers have purchased 1,992,476 shares of Series C Preferred Stock
of the Company (the "Series C Preferred"); pursuant to the Series D Agreement,
the Series D Purchasers purchased 440,717 shares of Series D Preferred Stock of
the Company (the "Series D Preferred"); and pursuant to the Series E Agreement,
the Company shall sell to the Series E Purchasers up to 680,000 shares of Series
E Preferred Stock of the Company (the "Series E Preferred") (the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred are hereinafter collectively referred to as the "Preferred Stock").
In connection with the Series D Agreement, the Series A and B Purchasers, the
Series C Purchasers, the Series D Purchasers and the Company entered into a
Second Amended and Restated Shareholder Rights Agreement dated September 22,
1998 (the "Prior Rights Agreement") setting forth their agreement and
understandings with respect to certain rights and privileges accompanying the
shares of the Series A Preferred, Series B Preferred, Series C Preferred and
Series D Preferred.
<PAGE>
B. Concurrently herewith, the Series E Purchasers and the Company are
entering into the Series E Agreement, pursuant to which the Purchasers are
purchasing from the Company the Series E Preferred.
C. The obligations of each of the Series E Purchasers to purchase their
respective amounts of Series E Preferred Stock is conditioned upon, among other
things, the execution and delivery of this Rights Agreement by each of the
Purchasers and the Company.
D. The Series A and B Purchasers, the Series C Purchasers, the Series D
Purchasers and the Company desire to amend and restate the Prior Rights
Agreement and to accept the rights created pursuant hereto in lieu of the rights
granted to them under the Prior Rights Agreement including, without limitation a
termination of the Right of First Refusal (as that term is defined in the Prior
Rights Agreement) contained in the Prior Rights Agreement.
NOW THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties to the Prior Rights Agreement agree that the
Prior Rights Agreement shall be superseded and replaced in its entirety by this
Rights Agreement and that the Right of First Refusal contained in the Prior
Rights Agreement is hereby terminated and of no further force or effect, and the
parties hereto agree as follows:
1. Certain Definitions. As used in this Rights Agreement, the following
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terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Holder" or "Holders" shall mean any holder, or an assignee under
Section 3.11 hereof, of outstanding Registrable Securities.
"Initiating Holders" shall mean any Holders who in the aggregate are
Holders of two-thirds (2/3) or more of the Registrable Securities.
The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the declaration or ordering of the
effectiveness of such registration statement.
"Registrable Securities" shall mean shares of common stock of the
Company ("Common Stock") (i) issued or issuable pursuant to the conversion of
the Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred or Series E Preferred (the "Conversion Shares") and (ii) issued in
<PAGE>
respect of securities issued pursuant to the conversion of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred upon any stock split, stock dividend, recapitalization,
substitution, or similar event; provided, however, that Registrable Securities
-------- -------
shall not include any (a) shares of Common Stock which may be sold pursuant to
an effective registration statement, (b) shares of Common Stock which have
previously been sold to the public, or (c) securities which would otherwise be
Registrable Securities held by a Holder who is then permitted to sell all of
such securities within any three (3) month period following the Company's
initial public offering pursuant to Rule 144.
"Registration Expenses" shall mean all expenses (excluding
underwriting discounts and selling commissions) incurred in connection with a
registration under Sections 3.1, 3.2 or 3.4 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such registration,
and the reasonable fees and expenses of one counsel for the selling shareholders
(but excluding the compensation of regular employees of the Company, which shall
be paid in any event by the Company).
"Restricted Securities" shall mean the securities of the Company
required to bear or bearing the legend set forth in Section 2.1 hereof.
"Rule 144" shall mean Rule 144 as promulgated by the Commission under
the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Selling Expenses" shall include all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities.
2. Restrictions on Transferability. The Restricted Securities shall not
-------------------------------
be transferred except upon the conditions specified in this Rights Agreement,
which conditions are intended to insure compliance with the provisions of the
Securities Act or, in the case of Section 3.12 hereof, to assist in an orderly
distribution. Each holder of Restricted Securities will cause any proposed
transferee of Restricted Securities held by that holder to agree to take and
hold those securities subject to the provisions and upon the conditions
specified in this Rights Agreement.
2.1 Restrictive Legend. Each certificate representing (i) the Series
------------------
A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and
Series E Preferred, and (ii) shares of the Company's Common Stock issued upon
conversion of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred, and (iii) any other securities issued
in respect of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred or the Common Stock issued upon
conversion of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred, upon any stock split, stock dividend,
recapitalization,
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merger, consolidation or similar event, shall (unless otherwise permitted or
unless the securities evidenced by such certificate shall have been registered
under the Securities Act) be stamped or otherwise imprinted with a legend
substantially in the following form (in addition to any legend required under
applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, (THE "ACT") OR ANY STATE SECURITIES LAWS. SUCH
SHARES MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND
ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT.
COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SHARES AND
RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN
REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICE OF THE
CORPORATION.
Upon request of a holder of such a certificate, the Company shall
remove the foregoing legend from the certificate or issue to such holder a new
certificate therefor free of any transfer legend, if, with such request, the
Company shall have received either the opinion or the "no-action" letter
referred to in Section 2.2 to the effect that any transfer by such holder of the
securities evidenced by such certificate will not violate the Securities Act and
applicable state securities laws, unless any such transfer legend may be removed
pursuant to Rule 144(k), in which case no such opinion or "no-action" letter
shall be required, and provided that the Company shall not be obligated to
remove any such legends prior to the date of the initial public offering of the
Company's Common Stock under the Securities Act.
2.2 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 2.2. Prior to any proposed
transfer of any Restricted Securities (other than under circumstances described
in Sections 3.1, 3.2 and 3.4 hereof), the holder thereof shall give written
notice to the Company of such holder's intention to effect such transfer. Each
such notice shall describe the manner and circumstances of the proposed transfer
in sufficient detail, and shall be accompanied (except in transactions in
compliance with Rule 144(k) promulgated under the Securities Act or for a
transfer to a holder's spouse, ancestors, descendants or a trust for any of
their benefit, or in transactions involving the distribution without
consideration of Restricted Securities by a holder to any of its partners or
retired partners or to the estate of any of its partners or retired partners) by
either (i) a written opinion of legal counsel to the holder who shall be
reasonably satisfactory to the Company, addressed to the Company and reasonably
satisfactory in form and substance to the Company's counsel, to the effect that
the proposed transfer of the Restricted Securities may be effected without
registration under the Securities Act or (ii) a "no-action" letter from the
Commission to the effect that the distribution of such securities without
registration will not result in a recommendation by the staff of the Commission
that action be taken with respect thereto, whereupon the holder of such
Restricted Securities shall be entitled to transfer
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<PAGE>
such Restricted Securities in accordance with the terms of the notice delivered
by such holder to the Company. Each certificate evidencing the Restricted
Securities transferred as above provided shall bear the restrictive legend set
forth in Section 2.1 above, except that such certificate shall not bear such
restrictive legend after the date of the Company's initial public offering under
the Securities Act if the opinion of counsel or "no-action" letter referred to
above expressly indicates that such legend is not required in order to establish
compliance with the Act or if such legend is no longer required pursuant to Rule
144(k).
3. Registration Rights.
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3.1 Demand Registration.
-------------------
(a) Request for Registration. If the Company shall receive from
------------------------
Initiating Holders a written request that the Company effect any registration
with respect to at least fifty percent (50%) of the Registrable Securities
(provided that such number of Registrable Securities would result in an
aggregate offering of at least $7,500,000), the Company will:
(i) promptly given written notice of the proposed
registration to all other Holders; and
(ii) as soon as practicable, use its diligent best efforts
to effect such registration (including, without limitation, the
execution of an undertaking to file post effective amendments,
appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations
issued under the Securities Act) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion
of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any
Holder or Holders joining in such request as are specified in a
written request delivered to the Company within fifteen (15) days
after receipt of such written notice from the Company.
Subject to the limitations of Section 3.13, the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable, after receipt of the request or requests of
the Initiating Holders.
The registration statement filed pursuant to the request of the
Initiating Holders, may, subject to the provisions of Sections 3.1(b) and 3.2
below, include other securities of the Company which are held by officers or
directors of the Company or which are held by persons who, by virtue of
agreements with the Company, are entitled to include their securities in any
such registration, but the Company shall have no right to include any of its
securities in any such registration except as provided in Sections 3.1(b) and
3.2 below.
(b) Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a
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part of their request made pursuant to Section 3.1, and the Company shall
include such information in the written notice referred to in Section 3.1(a)(i)
above. The right of any Holder to registration pursuant to Section 3.1 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder with respect to such participation and inclusion) to the extent
provided herein. A Holder may elect to include in such underwriting all or a
part of the Registrable Securities he holds.
If officers or directors of the Company shall request inclusion of
securities of the Company other than Registrable Securities in any registration
pursuant to Section 3, or if holders of securities of the Company who are
entitled by contract with the Company to have securities included in such a
registration (such officers, directors, and other shareholders being
collectively referred to as the "Other Shareholders") request such inclusion,
the Initiating Holders shall, on behalf of all Holders, offer to include the
securities of such Other Shareholders in the underwriting and may condition such
offer on their acceptance of the further applicable provisions of this Rights
Agreement. All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and Other Shareholders proposing
to distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters (the "Underwriter") selected for such underwriting
by sixty-one percent (61%) of the Initiating Holders and reasonably acceptable
to the Company. Notwithstanding any other provision of this Section 3.1, if the
Underwriter, in its sole discretion, determines that marketing factors require a
limitation on the number of shares to be underwritten, the Underwriter may
(subject to the allocation priority set forth below) limit the number of
Registrable Securities to be included in the registration and underwriting to
not less than fifty percent (50%) of the securities which Holders have requested
be included therein. The Company shall so advise all holders of securities
requesting registration, and the number of shares of securities that are
entitled to be included in the registration and underwriting shall be allocated
in the following priority: first, among all Holders of Registrable Securities
(pro rata among such Holders on the basis of all Registrable Securities then
held by such Holders); second, the Company shall be able to include any
securities which it desires to sell for its own account; and third, among all
Other Shareholders in proportion, as nearly as practicable, to the respective
amounts of securities which they had requested to be included in such
registration at the time of filing the registration statement. If any Holder or
Other Shareholder disapproves of the terms of any such underwriting, such holder
may elect to withdraw therefrom by written notice to the Company and the
Underwriter. Any Registrable Securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
3.2 Company Registration.
--------------------
(a) If the Company shall determine to register any of its securities
either for its own account or for the account of a security holder or holders
exercising their respective demand registration rights, other than a
registration relating solely to employee benefit plans or a registration
relating solely to a Commission Rule 145 transaction or a registration on any
registration form which does not permit secondary sales or does not include
substantially the same information as would be
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<PAGE>
required to be included in a registration statement covering the sale of
Registrable Securities, the Company will:
(i) promptly give to each Holder written notice thereof
(which, to the extent then known and applicable, shall include a list
of the jurisdictions in which the Company intends to attempt to
qualify such securities under the applicable blue sky or other state
securities laws); and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all of the Registrable Securities
specified in a written request or requests made by any Holder within
fifteen (15) days after receipt of the written notice from the Company
described in clause (i) above, except as set forth in Section 3.2(b)
below. Such written request may specify all or a part of a Holder's
Registrable Securities.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 3.2(a)(i). In such event the right of any Holder to
registration pursuant to Section 3.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the Other Shareholders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the Underwriter selected for underwriting by the Company.
Notwithstanding any other provision of this Section 3.2, if the Underwriter
determines that marketing factors require a limitation on the number of shares
to be underwritten, and (a) if such registration is the first registered
offering of the Company's securities to the public, the Underwriter may exclude
from such registration and underwriting some (subject to the allocation priority
set forth below) or all of the Registrable Securities and other securities held
by the Holders and the Other Shareholders which would otherwise be underwritten
pursuant hereto, and (b) if such registration is other than the first registered
offering of the sale of the Company's securities to the public, the Underwriter
may (subject to the allocation priority set forth below) limit the number of
securities of the Holders and the Other Shareholders to be included in the
secondary portion of the registration and underwriting to not less than twenty
percent (20%) of the Registrable Securities which Holders have requested be
included therein. The Company shall so advise all such Holders and Other
Shareholders requesting registration, and the number of shares of securities
that are entitled to be included in the registration and underwriting shall be
allocated among all such Holders and Other Shareholders as set forth in Section
3.1 If any Holder or Other Shareholder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to the
Company and the Underwriter. Any Registrable Securities, or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
3.3 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to this
Rights Agreement shall be borne by the Company, and all Selling Expenses shall
be borne by the holders of the securities to be registered pro rata
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<PAGE>
on the basis of the number of their shares so registered; provided, however,
that the Company shall not be required to pay any Registration Expenses if, as a
result of the withdrawal of a request for registration by Initiating Holders,
the registration statement does not become effective. If the Company is not
required to pay any Registration Expenses, then the Holders and Other
Shareholders requesting registration shall bear such Registration Expenses pro
rata on the basis of the number of their shares so included in the registration
request, and such registration shall not be considered a registration for
purposes of Section 3.13(b).
3.4 Registration on Form S-3. The Company shall use its best efforts
------------------------
to qualify for registration on Form S-3, and to that end, the Company shall use
its best efforts to comply with the reporting requirements of the Exchange Act
within six (6) months following the effective date of the first registration of
any securities of the Company for a registered public offering. After the
Company has qualified for the use of Form S-3, holders of at least thirty
percent (30%) of the outstanding Registrable Securities shall have the right to
request one registration on Form S-3 in each 12-month period (such requests
shall be in writing and shall state the number of shares of Registrable
Securities to be disposed of and the intended method of disposition of such
shares by each such holder), subject only to the following limitations:
(a) The Company shall not be obligated to cause a registration on Form
S-3 to become effective prior to one hundred and eighty (180) days following the
effective date of a Company-initiated registration (other than a registration
effected solely to qualify an employee benefit plan or to effect a business
combination pursuant to Rule 145), and provided that the Company shall use its
best efforts to achieve such effectiveness promptly following such one hundred
and eighty (180) day period;
(b) The Company shall not be obligated to cause a registration on Form
S-3 to become effective prior to expiration of one hundred and eighty (180) days
following the effective date of the most recent registration pursuant to a
request by a holder of Registrable Securities under this Rights Agreement or
pursuant to a request by a holder of registration rights under any other
agreement of the Company granting Form S-3 registration rights; provided,
however, that the Company shall use its best efforts to achieve such
effectiveness promptly following such one hundred and eighty (180) day period;
(c) The Company shall not be required to effect a registration
pursuant to this Section 3.4 unless the Holder or Holders requesting
registration propose to dispose of shares of Registrable Securities having an
aggregate offering price (before deduction of underwriting discounts and
expenses of sale) of at least $1,000,000; and
(d) The Company shall not be required to maintain and keep any such
registration on Form S-3 effective for a period exceeding ninety (90) days from
the effective date thereof. The Company shall give notice to all Holders and
all holders of registration rights under any other agreement of the Company
granting Form S-3 or similar registration rights of the receipt of a request for
registration pursuant to this Section 3.4 and shall provide a reasonable
opportunity for all such other
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<PAGE>
holders to participate in the registration. Subject to the foregoing, the
Company will use its best efforts to effect promptly the registration of all
shares of Registrable Securities on Form S-3 to the extent requested by such
holder or holders of Registrable Securities for purposes of disposition. The
Company, non-requesting Holders and Other Shareholders shall have the right to
participate in such registration as provided in Section 3.1 except that in the
event the Underwriter determines that market factors require a limitation on the
number of shares to be underwritten, then shares shall be excluded from such
registration and underwriting pursuant to the allocation method (and subject to
any limitations) described in Section 3.1.
3.5 Registration Procedures. In the case of each registration
-----------------------
effected by the Company pursuant to this Rights Agreement, the Company will keep
each Holder advised in writing as to the initiation of such registration and as
to the completion thereof. At its expense, the Company will:
(a) Keep such registration effective for a period of ninety (90) days
or until the Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs; and
(b) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request; and
(c) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 3.1 hereof, the Company will
enter into any underwriting agreement reasonably necessary to effect the offer
and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions, and provided further that if the underwriter
so requests the underwriting agreement will contain customary indemnification
and contribution provisions, and provided further that the Underwriter is
reasonably acceptable to the Company.
3.6 Indemnification.
---------------
(a) To the extent permitted by law, the Company will indemnify each
Holder, and each person controlling such Holder within the meaning of Section 15
of the Securities Act, with respect to which registration, qualification or
compliance has been effected pursuant to this Rights Agreement, against all
expenses, claims, losses, damages and liabilities (or actions in respect
thereof) to which they may become subject under the Securities Act, or the
Exchange Act and other state securities laws, including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement or prospectus, or any amendment or
supplement thereto, incident to any such registration, or any such document,
offering circular or other document incident to such qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or any violation by the Company of any rule or regulation promulgated under the
Securities Act, the Exchange Act or state securities laws applicable to the
Company and relating to action or inaction required of the Company in connection
with any such registration,
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qualification or compliance, and will reimburse each such Holder, and each
person controlling such Holder for any legal and any other expenses reasonably
incurred, within three months after a request for reimbursement has been
received by the Company, in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder and stated to be specifically for use
therein, provided, further, that the indemnity agreement contained in this
Section 3.6(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability, or action if such settlement is effected without the
consent of the Company.
(b) To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers and its legal counsel and
independent accountants, each underwriter, if any, of the Company's securities
covered by such a registration statement, each person who controls the Company
or such other person within the meaning of Section 15 of the Securities Act, and
each other such Holder including shares of his Registrable Securities against
all claims, losses, damages and liabilities (or actions in respect thereof) to
which any of the foregoing persons may become subject under the Securities Act,
the Exchange Act and other state securities laws arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement or prospectus, and any amendment or supplement
thereto, incident to any such registration, or any such document, offering
circular or other document incident to such qualification or compliance, 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, and
will reimburse the Company, such Holders, such directors, officers, legal
counsel, independent accountants, underwriters or control persons for any legal
or any other expenses reasonably incurred, within three months after a request
for reimbursement has been received by the indemnifying Holder, in connection
with investigating, preparing or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein, provided, however, that the indemnity
agreement contained in this Section 3.6(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holders of sixty-one percent
(61%) in interest, which consent shall not be unreasonably withheld and provided
further that each Holder's liability for indemnification hereunder shall be
limited to the amount of any proceeds received by such Holder from the sale of
securities described in the first sentence of this Section 3.6(b).
(c) Each party entitled to indemnification under this Section 3.6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and shall
permit the Indemnifying Party to assume the defense of any such claim or any
10
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litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, including any legal fees incurred, and provided further that
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Rights Agreement,
except to the extent, but only to the extent, that the Indemnifying Party's
ability to defend against such claim or litigation is impaired as a result of
such failure to give notice. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation.
(d) If the indemnification provided for in this Section 3.6 is held by
a court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party 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 indemnifying party or by
the indemnified party and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
(f) The obligations of the Company and Holders under this Section 3.6
shall survive the completion of any offering of Registrable Securities in a
registration statement under Sections 3.1, 3.2 and 3.4 of this Rights Agreement,
and otherwise.
3.7 Information by Holder. Each Holder and each Other Shareholder
---------------------
holding securities included in any registration shall furnish to the Company
such information regarding such Holder or Other Shareholder as the Company may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification or compliance referred to in this Rights
Agreement.
3.8 Limitations on Registration of Issues of Securities. Subject to
---------------------------------------------------
Section 5.5, from and after the date of this Rights Agreement, the Company
shall not enter into any agreement with any
11
<PAGE>
holder or prospective holder of any securities of the Company giving such holder
or prospective holder the right to require the Company to initiate any
registration of any securities of the Company, provided that this Section 3.8
shall not limit the right of the Company to enter any agreements with any holder
or prospective holder of any securities of the Company giving such holder or
prospective holder the right to require the Company, upon any registration of
any of its securities, to include, among the securities which the Company is
then registering, securities owned by such holder. Any right given by the
Company to any holder or prospective holder of the Company's securities in
connection with the registration of securities shall be conditioned such that it
shall be consistent with the provisions of this Rights Agreement and with the
rights of the Holders provided in this Rights Agreement.
3.9 Rule 144 Reporting. With a view to making available the benefits
------------------
of certain rules and regulations of the Commission which may permit the sale of
the Restricted Securities to the public without registration, the Company agrees
to:
(a) Make and keep public information available as those terms are
understood and defined in Rule 144 under the Securities Act, at all times from
and after ninety (90) days following the effective date of the first
registration under the Securities Act filed by the Company for an offering of
its securities to the general public;
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act at any time after it has become subject to
such reporting requirements;
(c) So long as a Purchaser owns any Restricted Securities, furnish to
the Purchaser forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of Rule 144 (at any time from and
after ninety (90) days following the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed as a Purchaser may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Purchaser to sell any such securities
without registration.
3.10 No-Action Letter or Opinion of Counsel. Notwithstanding
--------------------------------------
anything in this Rights Agreement to the contrary, if at any time after the date
of the Company's initial public offering of its securities under the Securities
Act the Company shall have obtained from the Commission a "no-action" letter in
which the Commission has indicated that it will take no action if, without
registration under the Securities Act, any Holder disposes of Registrable
Securities covered by any request for registration made under this Rights
Agreement in the manner in which such Holder proposes to dispose of the
Registrable Securities included in such request, or if in the opinion of counsel
for the Company concurred in by counsel for such Holder no registration under
the Securities Act is required in connection with such disposition, the
Registrable Securities included in such request shall not be eligible for
registration under this Rights Agreement; provided, however, with respect to any
Holder who may deemed to be an "affiliate," as that term is defined under Rule
144, if, notwithstanding the opinion of such counsel, the
12
<PAGE>
Holder is unable to dispose of all of the Registrable Securities included in his
request in the manner in which such Holder so proposes without registration, the
Registrable Securities included in such request shall be eligible for
registration under this Rights Agreement.
3.11 Transfer or Assignment of Registration Rights. The right to
---------------------------------------------
cause the Company to register Registrable Securities granted to a Holder by the
Company under Sections 3.1, 3.2 and 3.4 hereof may be transferred or assigned by
Holder to (i) a transferee or assignee of at least 50,000 shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred, or of Common Stock issued pursuant to an conversion of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred, and (ii) to any constituent partner of a Holder, provided in each
instance that (x) the Company is given written notice by the Holder within two
(2) business days of said transfer or assignment of such Registrable Securities,
stating the name and address of said transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned; (y) the transferee or assignee of such rights is not deemed by the
Board of Directors of the Company, in its reasonable judgment, to be a
competitor of the Company; and (z) the transferee or assignee of such rights
assumes in writing the obligations of such Holder under this Rights Agreement.
3.12 "Market Stand-off" Agreement. Each Purchaser agrees, if
----------------------------
requested by the Company and an underwriter of Common Stock (or other
securities) of the Company, not to sell or otherwise transfer or dispose of any
Common Stock (or other securities) of the Company held by Purchaser during a
period of time determined by the Company and its underwriters (not to exceed 180
days) following the effective date of a registration statement of the Company
filed under the Securities Act with respect to the Company's initial public
offering, provided that all executive officers, directors and holders of five
percent or more of the Company's outstanding capital stock (on a common-
equivalent basis) of the Company who then hold Common Stock (or other
securities) of the Company enter into similar agreements. Such agreement shall
be in writing in a form satisfactory to the Company and such underwriter. The
Company may impose stop-transfer instructions with respect to the shares (or
securities) subject to the foregoing restriction until the end of said period.
3.13 Limitations on Registration Obligations. The Company shall not
---------------------------------------
be obligated to effect, or to take any action to effect, any registration
qualification or compliance pursuant to Sections 3.1, 3.2 or 3.4:
(a) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting
such registration, qualification or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be
required by the Securities Act; or
(b) With respect to a registration pursuant to Section 3.1, after
the Company has effected two (2) such registrations pursuant to Section
3.1; or
13
<PAGE>
(c) At any time (i) prior to the closing of the initial offering
to the public of the Company's securities pursuant to a firm commitment
registered underwriting for the account of the Company (other than an
offering relating either to the sale of securities to employees of the
Company pursuant to a stock option, stock purchase or similar plan or a
Commission Rule 145 transaction) (the "Public Offering") or (ii) following
the fifth anniversary of the Public Offering, or
(d) Prior to six (6) months following the effective date of any
other registration statement relating to an underwritten public offering of
the Company's securities filed under the Securities Act, or
(e) If the Company shall furnish to Holders following a request
for registration a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its
shareholders for such registration statement to be filed on or before the
time filing would be required and it is therefore essential to defer the
filing of such registration statement, the Company shall have the right to
defer such filing for a period of not more than one hundred twenty (120)
days after receipt of the request of the Initiating Holders (it being
understood that the Company shall not have any obligation to take any
action to register Registrable Securities for which the Company receives
notice pursuant to Sections 3.1(a) or 3.4 during such 120-day period).
4. Additional Covenants.
--------------------
4.1 Annual and Quarterly Financial Information. As long as any
------------------------------------------
Purchaser is a holder of at least 100,000 shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred or shares
of Common Stock issued upon conversion of such shares (as adjusted for any
consolidations, combinations, stock distributions, stock dividends, stock
splits, or similar events), the Company will mail or otherwise deliver to each
such person who will agree to maintain such information in confidence with
standard and reasonable exceptions to such confidentiality:
(a) As soon as practicable after the end of each fiscal
year, and in any event within 90 days thereafter, consolidated balance
sheets of the Company and its subsidiaries, if any, as of the end of
such fiscal year, and consolidated statements of income and
consolidated statements of cash flows of the Company and its
subsidiaries, if any, for such year, prepared in accordance with
United States generally accepted accounting principles and setting
forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail and audited by independent
public accountants of national standing selected by the Company and
approved by the Board of Directors.
14
<PAGE>
(b) As soon as available, and in any event within forty-five
(45) days after each quarterly accounting period, the Company will
furnish to each Purchaser quarterly financial statements of the
Company, including a balance sheet, profit and loss statement, cash
flow analysis and a comparison to budget.
4.2 Other Financial Information. As long as any Purchaser is a
---------------------------
holder of at least 200,000 shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred or shares of Common
Stock issued upon conversion of such shares, the Company will mail or otherwise
deliver to each such person, who will agree to maintain such information in
confidence with standard and reasonable exceptions to such confidentiality
(a) Within twenty days following the end of each month,
monthly financial statements including an income statement, statement
of cash flows and balance sheet for the prior month, such statements
will include year to date figures and, a comparison of such figures to
the Company's budget for each item (with any variances delineated).
(b) Within thirty (30) days before the end of each fiscal
year, a budget, including projected income statement, cash flow and
balance sheet, on a monthly basis, for the next succeeding fiscal
year, together with a brief qualitative description of the Company's
business plan for such year.
4.3 Termination of Additional Covenants. The Company's obligations
-----------------------------------
under this Section 4 will terminate immediately prior to the Public Offering.
5. Miscellaneous
-------------
5.1 Governing Law. This Rights Agreement and the legal relations
-------------
between the parties arising hereunder shall be governed by and interpreted in
accordance with the laws of the State of California. The parties hereto agree
to submit to the jurisdiction of the federal and state courts of the State of
California with respect to the breach or interpretation of this Rights Agreement
or the enforcement of any and all rights, duties, liabilities, obligations,
powers, and other relations between the parties arising under this Rights
Agreement.
5.2 Fractional Shares. Anything in this Rights Agreement
-----------------
notwithstanding, no fractional shares shall be issuable and the number of shares
of Common Stock to be issued shall be rounded down to the nearest whole number.
5.3 Entire Agreement. This Rights Agreement constitutes the full and
----------------
entire understanding and agreement between the parties regarding the rights
described herein. Except as otherwise expressly provided herein, the provisions
hereof shall inure to the benefit of, and be binding upon, the successors,
assigns, heirs, executors and administrators of the parties hereto.
15
<PAGE>
5.4 Notices, Etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be sent by facsimile,
overnight courier service, mailed by first-class mail, postage prepaid, or
delivered either by hand or by messenger, addressed (a) if to a Purchaser, as
indicated on the Schedule of Purchasers attached as Exhibit A to the Series A
---------
and B Agreement, the Series C Agreement, the Series D Agreement or the Series E
Agreement, or at such other address and facsimile number as Purchaser shall have
furnished to the Company in writing, or (b) if to the Company, at its address
and facsimile number set forth at the end of this Rights Agreement or at such
other address and facsimile number as the Company shall have furnished to the
Purchasers and each such other holder in writing (with a copy to Judith M.
O'Brien, Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California 94304, facsimile: (650) 493-6811).
Each such notice or other communication shall for all purposes of this
Rights Agreement be treated as effective or having been given when delivered if
delivered personally or by messenger, or, if sent by mail, at the earlier of its
receipt or 72 hours after the same has been deposited in a regularly maintained
receptacle for the deposit of the United States mail, addressed and mailed as
aforesaid.
5.5 Any holder of Series E Preferred who purchases those shares from
the Company pursuant to the Series E Agreement may become a party to this Rights
Agreement after the date hereof without the consent of any of the other parties
hereto by executing a counterpart signature page to this Rights Agreement in the
form attached hereto.
5.6 Amendments and Waivers. With the written consent of the record
----------------------
or beneficial holders of at least two-thirds of the Registrable Securities, the
obligations of the Company and the rights of the parties under this Rights
Agreement may be waived (either generally or in a particular instance, either
retroactively or prospectively, and either for a specified period of time or
indefinitely), and with the same consent the Company, when authorized by
resolution of its Board of Directors, may enter into a supplementary agreement
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Rights Agreement; provided, however,
that no such modification, amendment or waiver shall reduce the aforesaid
majority of Registrable Securities consent requirement without the consent of
two-thirds of the holders of the Registrable Securities. Upon the effectuation
of each such waiver, consent, agreement of amendment or modification, the
Company shall promptly give written notice thereof to the record holders of the
Registrable Securities who have not previously consented thereto in writing.
This Rights Agreement or any provision hereof may be changed, waived, discharged
or terminated only by a statement in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought, except as
provided in subsection 5.5 and to the extent provided in this subsection 5.6.
5.7 Counterparts. This Rights Agreement may be executed in any
------------
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
[Signature Page to Third Amended and Restated Shareholder Rights Agreement]
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Rights Agreement as of
the date first above written.
COMPANY:
GoDigital Telecommunications, Inc.
41305 Albrae Street
Fremont, CA 94538
By: /s/ FRANCIS I. AKERS
-------------------------------------------
Francis I. Akers, President
PURCHASERS:
Menlo Ventures VI, L.P.
By: MV Management VI, L.P.
Its: General Partner
By: /s/ DOUG CARLISLE
-------------------------------------------
General Partner
Menlo Entrepreneurs Fund VI, L.P.
By: MV Management VI, L.P.
Its: General Partner
By: /s/ DOUG CARLISLE
-------------------------------------------
General Partner
Accel V L.P.
By: Accel V Associates L.L.C.
Its: General Partner
By: /s/ A. SEDMIN
-------------------------------------------
Managing Member
Accel Internet/Strategic Technology Fund L.P.
By: Accel Internet/Strategic Technology Fund
Associates L.L.C.
Its: General Partner
By: /s/ A. SEDMIN
-------------------------------------------
Managing Member
Accel Investors '96 L.P.
By: /s/ A. SEDMIN
-------------------------------------------
General Partner
Accel Keiretsu V L.P.
By: Accel Keiretsu V Associates L.L.C.
Its: General Partner
By: /s/ A. SEDMIN
-------------------------------------------
Managing Member
Ellmore C. Patterson Partners
By: /s/ E. PATTERSON
-------------------------------------------
General Partner
Gregorio Reyes and Vanessa F. Reyes, Trustees
of the Gregorio Reyes and Vanessa F. Reyes Trusts
U/D/T dtd 4/22/83, as amended
By: /s/ GREG REYES
-------------------------------------------
Name: Greg Reyes
----------------------------------------
Title: Trustee
Stanford University
By: /s/ CAROL GILMER
-------------------------------------------
Carol Gilmer
Gift Administrator, Stanford Management Co.
On behalf of the board of Trustees
Leland Stanford Junior University
William Plant and Margaret Beth Plant
----------------------------------------------
William Plant
----------------------------------------------
Beth Plant
Tom Miller
----------------------------------------------
William F. King and Jackie K. King
----------------------------------------------
William F. King
----------------------------------------------
Jackie K. King
Donald E. Pattison and Cathy Pattison
----------------------------------------------
Donald E. Pattison
----------------------------------------------
Cathy Pattison
Robert B. Wagy and Peggy A. Wagy
----------------------------------------------
Robert B. Wagy
----------------------------------------------
Peggy A. Wagy
JAFCO Co., Ltd.
By: /s/ HITOSHI IMUTA
------------------------------------------
Name: Hitoshi Imuta, Chairman
JAFCO America Ventures, Inc.
Its Executive Partner
JAFCO G-6(A) Investment Enterprise Partnership
By: /s/ HITOSHI IMUTA
------------------------------------------
Name: Hitoshi Imuta, Chairman
JAFCO America Ventures, Inc.
Its Executive Partner
JAFCO G-6(B) Investment Enterprise Partnership
By: /s/ HITOSHI IMUTA
------------------------------------------
Name: Hitoshi Imuta, Chairman
JAFCO America Ventures, Inc.
Its Executive Partner
JAFCO J-S3 Investment Enterprise Partnership
By: /s/ HITOSHI IMUTA
------------------------------------------
Name: Hitoshi Imuta, Chairman
JAFCO America Ventures, Inc.
Its Executive Partner
JAFCO R-3 Investment Enterprise Partnership
By: /s/ HITOSHI IMUTA
-----------------------------------------
Name: Hitoshi Imuta, Chairman
JAFCO America Ventures, Inc.
Its Executive Partner
JAFCO Co., Ltd.
By: /s/ HITOSHI IMUTA
----------------------------------------
Name: Hitoshi Imuta, Chairman
JAFCO America Ventures, Inc.
Its Executive Partner
U.S. Information Technology No. 2
Investment Enterprise Partnership
By: /s/ HITOSHI IMUTA
----------------------------------------
Name: Hitoshi Imuta, Chairman
JAFCO America Ventures, Inc.
Attorney-in-fact
CJG Trust
By: /s/ M.D. GINSBERG
---------------------------------------
Name: M.D. Ginsberg
-------------------------------------
Title: Trustee
------------------------------------
Coral Partners IV, Limited Partnership
By: Coral Management Partners IV,
Limited Partnership
Its: General Partner
/s/ YUVAL ALMOG
By: --------------------------------------
Name: Yuval Almog
--------------------------------------
Title: General Partner
------------------------------------
Linda L. Watchmaker
/s/ LINDA L. WATCHMAKER
-----------------------------------------
Yuval Almog
/s/ YUVAL ALMOG
-----------------------------------------
Mark C. Headrick
/s/ MARK C. HEADRICK
-----------------------------------------
Peter H. McNermey
/s/ PETER H. MCNERMEY
-----------------------------------------
William Baumel
/s/ WILLIAM BAUMEL
-----------------------------------------
Karen Boezi
/s/ KAREN M. BOEZI
-----------------------------------------
RWI Group II, LP
By: /s/ DONALD A. LUCAS
-------------------------------------
Name: Donald A. Lucas
-----------------------------------
Title: General Partner
----------------------------------
Sevin Rosen Fund IV, L.P.
By: SRB Associates IV L.P., its general
partner
By: /s/ JOHN JAGGERS
-------------------------------------
Name: John Jaggers
-----------------------------------
Title: General Partner
----------------------------------
Donald L. Lucas, SUCC TTEE, Donald L. Lucas
Profit Sharing Trust dtd 1-1-84
By: /s/ DONALD L. LUCAS
-------------------------------------
Name: Donald L. Lucas
-----------------------------------
Title: Successor Trustee
----------------------------------
[Signature Page to Third Amended and Restated Shareholder Rights Agreement]
17
<PAGE>
EXHIBIT 10.1
GODIGITAL NETWORKS CORPORATION
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is entered into as of the ___
day of November, 1999 by and between GoDigital Networks Corporation, a Delaware
corporation (the "Company") and ______________ ("Indemnitee"), and shall become
effective as of the time the Securities and Exchange Commission declares
effective the Company's Registration Statement on Form S-1 relative to the
Company's initial underwritten public offering of Common Stock.
RECITALS
--------
A. WHEREAS, the Company and Indemnitee recognize the significant increases
in the cost of liability insurance for its directors, officers, employees,
agents and fiduciaries.
B. WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited.
B. WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other directors,
officers, employees, agents and fiduciaries of the Company may not be willing to
continue to serve in such capacities without additional protection.
C. WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve the Company and, in
part, in order to induce Indemnitee to continue to provide services to the
Company, wishes to provide for the indemnification and advancing of expenses to
the Indemnitee to the maximum extent permitted by law.
D. WHEREAS, in view of the considerations set forth above, the Company
desires that Indemnitee be indemnified by the Company as set forth herein.
RECITALS
--------
NOW, THEREFORE, in consideration of the mutual convenants and agreements
set forth herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Company and Indemnitee hereby
agree as follows:
1. Certain Definitions.
-------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to GoDigital Networks Corporation, any constituent
corporation (including any constituent
<PAGE>
of a constituent) absorbed in a consolidation or merger to which GoDigital
Networks Corporation (or any of its wholly owned subsidiaries) is a party, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents, so that if Indemnitee is
or was a director, officer, employee or agent of such constituent corporation,
or is or was serving at the request of such constituent corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, Indemnitee shall stand in the same position
under the provisions of this Agreement with respect to the resulting or
surviving corporation as such Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, (i) references to "other
enterprises" shall include employee benefit plans; (ii) references to "fines"
shall include any excise taxes assessed on Indemnitee with respect to an
employee benefit plan; (iii) references to "serving at the request of the
Company" shall include any service as a director, officer, employee or agent of
the Company which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or its beneficiaries; and (iv) if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if, on or after the date of this Agreement, (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing more than 50%
of the total voting power represented by the Company's then outstanding Voting
Securities, (ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least two
thirds (2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof,
or (iii) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation other than a merger or consolidation
which would result in the Voting Securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving
entity) at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the stockholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company
<PAGE>
of (in one transaction or a series of related transactions) all or substantially
all of the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 2(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitees within the last three years (other than
with respect to matters concerning the rights of Indemnitees under this
Agreement, or of other indemnitees under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean the
member or members of the Company's Board of Directors or any other body,
including a committee of the Board of Directors, appointed by the Board of
Directors who is not a party to the particular Claim for which Indemnitee are
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean any
securities of the Company that vote generally in the election of directors.
2. Indemnification.
---------------
(a) Indemnification of Expenses. The Company shall indemnify the
---------------------------
Indemnitee to the fullest extent permitted by applicable law, including, but not
limited to Section 145 of the General Corporation Law of the State of Delaware:
(i) if Indemnitee was or is or becomes a defendant, party to or
witness or other participant in, or is threatened to be made a defendant, party
to or witness or other participant in, any threatened, pending or completed
action, suit, proceeding or alternative dispute resolution mechanism, or any
hearing, inquiry or investigation that Indemnitee in good faith believes might
lead to the institution of any such action, suit, proceeding or alternative
dispute resolution mechanism, whether civil, criminal, administrative,
investigative or other (hereinafter a "Claim");
(ii) by reason of (or arising in part out of) any event or occurrence
related to the fact that Indemnitee is or was a director, officer, employee,
agent or fiduciary of the Company, or any subsidiary of the Company, or is or
was serving at the request of the Company as a director, officer, employee,
agent or fiduciary of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action or inaction on the part of
Indemnitee while serving in such capacity (hereinafter an "Indemnifiable
Event");
(iii) against any and all expenses (including attorneys' fees and all
other costs, expenses and obligations incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in, any such action, suit,
proceeding, alternative dispute resolution mechanism, hearing, inquiry or
investigation), judgments, fines, penalties and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) of such
<PAGE>
Claim and any federal, state, local or foreign taxes imposed on Indemnitees as a
result of the actual or deemed receipt of any payments under this Agreement
(collectively, hereinafter "Expenses"), including all interest, assessments and
other charges paid or payable in connection with or in respect of such Expenses.
Such payment of Expenses shall be made by the Company as soon as
practicable but in any event no later than twenty (20) days after written demand
by the Indemnitee therefor is presented to the Company.
(b) Reviewing Party. Notwithstanding the foregoing,
---------------
(i) the obligations of the Company under Section 2(a) shall be
subject to the condition that the Reviewing Party (as described in Section 1(e)
hereof) shall not have determined (in a written opinion, in any case in which
the Independent Legal Counsel referred to in Section 2(c) hereof is involved)
that Indemnitee would not be permitted to be indemnified under applicable law
including, but not limited to Section 145 of the General Corporation Law of the
State of Delaware, because the Indemnitee has not met the applicable standard of
conduct as set forth in such applicable laws and
(ii) the obligation of the Company to make an advance payment of
Expenses to Indemnitee pursuant to Section 3(a) (an "Expense Advance") shall be
subject to the condition that, if, when and to the extent that the Reviewing
Party determines that Indemnitee would not be permitted to be so indemnified
under applicable law, including but not limited to Section 145 of the General
Corporation Law of the State of Delaware, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agree to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
-------- -------
commenced or thereafter commence legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee should be indemnified
under applicable law, any determination made by the Reviewing Party that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any Expense Advance until a final judicial determination is made with respect
thereto (as to which all rights of appeal therefrom have been exhausted or
lapsed).
The Indemnitee's obligation to reimburse the Company for any Expense
Advance shall be unsecured and no interest shall be charged thereon. If there
has not been a Change in Control (as defined in Section 1(c) hereof), the
Reviewing Party shall be selected by the Board of Directors. If there has been
such a Change in Control (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), the Reviewing Party shall be the Independent
Legal Counsel referred to in Section 2(c) hereof. If there has been no
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation seeking an initial determination by the court or challenging any such
determination by the
<PAGE>
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Absent such litigation, any determinations made by the
Reviewing Party shall be conclusive and binding on the Company and Indemnitee.
(c) Selection of Independent Legal Counsel Upon a Change in Control.
---------------------------------------------------------------
The Company agrees that if there is a Change in Control of the Company (other
than a Change in Control which has been approved by a majority of the Company's
Board of Directors who were directors immediately prior to such Change in
Control) then, with respect to all matters thereafter arising concerning the
rights of Indemnitees to payments of Expenses and Expense Advances under this
Agreement or any other agreement or under the Company's Certificate of
Incorporation or Bylaws as now or hereafter in effect, Independent Legal Counsel
(as defined in Section 1(d) hereof) shall be selected by Indemnitees and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
permitted to be indemnified under applicable law and the Company agrees to abide
by such opinion. The Company agrees to pay the reasonable fees and out-of-pocket
expenses of the Independent Legal Counsel referred to above and to fully
indemnify such counsel against any and all expenses (including attorneys' fees
and out-of-pocket expenses), claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.
(d) Mandatory Indemnification. Notwithstanding any other provision of
-------------------------
this Agreement other than Section 10 hereof, to the extent that Indemnitee has
been successful on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, in defense of any Claim referred to in
Section (2)(a) hereof, Indemnitee shall be indemnified against all Expenses
actually and reasonably incurred by such Indemnitee in connection therewith.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all Expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than
twenty (20) days after written demand by Indemnitee therefor to the Company;
provided, however, subject to such other limitations contained in Section 2(b),
- --------- --------
above, that Indemnitee shall reimburse and repay all Expenses advanced to
Indemnitee pursuant to this Section 3(a) if it is ultimately determined by the
Reviewing Party (as described in Section 1(e) hereof) (or by Independent Legal
Counsel, as applicable) that the Indemnitee is not entitled to be indemnified
under the terms of this Agreement or under applicable law.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
--------------------------------
precedent to Indemnitee's right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable but in no event later than five
(5) business days after Indemnitee's receipt of written notice or complaint of
any Claim made against Indemnitee for which indemnification will or
<PAGE>
could be sought under this Agreement. Notice to the Company shall be directed to
the Chief Executive Officer of the Company at the address shown on the signature
page of this Agreement (or such other address as the Company shall designate in
writing to Indemnitee). In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement,
--------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
---------------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law, shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief. In connection with any determination by the Reviewing Party
or otherwise as to whether Indemnitee is entitled to be indemnified hereunder,
the burden of proof shall be on the Company to establish that Indemnitee is not
so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company
------------------
of a notice of a Claim pursuant to Section 3(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of Indemnitee, all amounts payable as a result of such action, suit,
proceeding, inquiry or investigation in accordance with the terms of such
policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to pay the Expenses of any Claim, the Company shall be entitled to
assume the defense of such Claim with counsel approved by Indemnitee, which
approval shall not be unreasonably withheld, upon the delivery to Indemnitee of
written notice of its election to do so. After delivery of such notice, approval
of such counsel by Indemnitee and the retention of such counsel by the Company,
the Company will not be liable to Indemnitee under this Agreement for any fees
of counsel subsequently incurred by Indemnitee with respect to the same Claim;
provided, however, that, (i) Indemnitee shall have the right to employ
- -------- -------
Indemnitee's counsel in any such Claim at Indemnitee's expense and (ii) if (A)
the employment of counsel by Indemnitee has been previously authorized by the
Company, (B) Indemnitee shall have reasonably concluded that there is a conflict
of interest between the Company and Indemnitee in the conduct of any such
defense, or (C) the Company shall not continue to retain such counsel to defend
such Claim, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company. The Company shall have the right to conduct such
<PAGE>
defense as it sees fit in its sole discretion, including the right to settle any
claim against Indemnitee without the consent of the Indemnitee.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its Board of Directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its Board of Directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 9(a) hereof.
(b) Nonexclusivity; Continuation of Rights After Ceasing Service to the
-------------------------------------------------------------------
Company. The indemnification and advancement of Expenses provided by this
- -------
Agreement shall be in addition to any other rights to which Indemnitee may be
entitled under the Company's Certificate of Incorporation, its Bylaws, any
agreement, any vote of stockholders or disinterested directors, the General
Corporation Law of the State of Delaware, or otherwise. The indemnification and
advancement of Expenses provided under this Agreement shall continue as to
Indemnitee for any action Indemnitee took or did not take while serving in an
indemnified capacity even though Indemnitee may have ceased to serve in such
capacity and shall issue to the benefit of the heirs, executors and
administrators of such Indemnitee.
5. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
6. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
7. Mutual Acknowledgement of Limitations or Indemnification. Both the
--------------------------------------------------------
Company and Indemnitee acknowledge that in certain instances, Federal law or
applicable public policy may prohibit the Company from indemnifying its
directors, officers, employees, agents or fiduciaries under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange
<PAGE>
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy to
indemnify Indemnitee.
8. Liability Insurance. The Company shall, from time to time, make the
-------------------
good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable insurance
companies providing the officers and directors of the Company with coverage for
losses from wrongful acts, or to ensure the Company's performance of its
indemnification obligations under this Agreement. Among other considerations,
the Company will weigh the costs of obtaining such insurance coverage against
the protection afforded by such coverage. To the extent the Company maintains
liability insurance applicable to directors, officers or key employees,
Indemnitee shall be named as an insured in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if Indemnitee is not an officer or
director but is a key employee. Notwithstanding the foregoing, the Company shall
have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, if the
premium costs for such insurance are disproportionate to the amount of coverage
provided, if the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
9. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts or Omissions. (i) To indemnify Indemnitee for
--------------------------
Expenses resulting from acts, omissions or transactions for which Indemnitee is
prohibited from being indemnified under this Agreement or under applicable law
including, but not limited to, Sections 102(b)(7) and 145 of the General
Corporation Law of the State of Delaware or (ii) to indemnify the Indemnitee for
Indemnitee's intentional acts or transactions in violation of the Company's
policies;
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be;
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this
<PAGE>
Agreement, if a court of competent jurisdiction determines that each of the
material assertions made by Indemnitee in such proceeding was not made in good
faith or was frivolous; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Period of Limitations. No legal action shall be brought and no
---------------------
cause of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
-------- -------
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect with respect to Claims relating to Indemnifiable Events
regardless of whether Indemnitee continues to serve as a director, officer,
employee, agent or fiduciary of the Company or of any other enterprise at the
Company's request.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of expenses with respect to such action, unless, as a part of such action, a
court of competent jurisdiction over such action determines that each of the
material assertions made by Indemnitee as a basis for such action was not made
in good faith or was frivolous. In the event of an action instituted by or in
the name of the Company under this Agreement to enforce or interpret any of the
terms of this Agreement, Indemnitee shall be entitled to be paid all expenses
incurred by Indemnitee in defense of such action (including costs and expenses
incurred with respect to Indemnitee's counterclaims and cross-claims made in
such action), and shall be entitled to the advancement of expenses with respect
to such action, unless, as a part of
<PAGE>
such action, a court having jurisdiction over such action determines that each
of Indemnitee's material defenses to such action was made in bad faith or was
frivolous.
14. Notice. All notices and other communications required or permitted
------
under this Agreement shall be in writing, shall be effective when given, and
shall in any event be deemed to be given (a) five (5) days after deposit with
the U.S. Postal Service or other applicable postal service, if delivered by
first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c)
one business day after the business day of deposit with Federal Express or
similar overnight courier with delivery charges prepaid, or (d) on the same day
as delivered by facsimile transmission if delivered during business hours or
shall be deemed to have been delivered on the next successive business day if
delivered via facsimile transmission after business hours. All notices delivered
by the U.S. Postal Service, or by courier service shall be addressed if to
Indemnitee, at the Indemnitee's address as set forth beneath Indemnitee's
signature to this Agreement and if to the Company at the address of its
principal corporate offices (attention: Chief Executive Officer) or at such
other address as such party may designate by ten days' advance written notice to
the other party hereto.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable
------------
in the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed and enforced in accordance with the laws of the State of
Delaware, as applied to contracts between Delaware residents, entered into and
to be performed entirely within the State of Delaware, without regard to the
conflict of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
<PAGE>
19. Amendment and Termination. No amendment, modification,
-------------------------
termination, waiver, or cancellation of this Agreement shall be effective unless
it is in writing signed by both the parties hereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provisions hereof (whether or not similar) nor shall such waiver
constitute a continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
[Remainder of this Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
GODIGITAL NETWORKS CORPORATION
a Delaware corporation
By:_________________________________
Name: _________________________________
Address: GoDigital Networks Corporation
41652 Boscell Road
Fremont, California 94538
AGREED TO AND ACCEPTED BY:
- --------------------------
Address:
- --------------------------
- --------------------------
<PAGE>
Exhibit 10.4
GODIGITAL NETWORKS CORPORATION
1996 STOCK PLAN
(as amended and restated November 15, 1999)
1. Purposes of the Plan. The purposes of this 1996 Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees, Directors and Consultants,
and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall be
-------------
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the administration
---------------
of stock option plans under U. S. state corporate laws, U.S. federal and
state securities laws, the Code, any stock exchange or quotation system on
which the Common Stock is listed or quoted and the applicable laws of any
foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board in
---------
accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means GoDigital Networks Corporation, Inc., a Delaware
-------
corporation.
(h) "Consultant" means any person, including an advisor, engaged by the
----------
Company or a Parent or Subsidiary to render services to such entity.
<PAGE>
(i) "Director" means a member of the Board.
--------
(j) "Disability" means total and permanent disability as defined in Section
----------
22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors, employed
--------
by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may
exceed ninety (90) days, unless reemployment upon expiration of such leave
is guaranteed by statute or contract. If reemployment upon expiration of a
leave of absence approved by the Company is not so guaranteed, on the 181st
day of such leave any Incentive Stock Option held by the Optionee shall
cease to be treated as an Incentive Stock Option and shall be treated for
tax purposes as a Nonstatutory Stock Option. Neither service as a Director
nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
(m) "Fair Market Value" means, as of any date, the value of Common Stock
-----------------
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last market
trading day prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(o) "Inside Director" means a Director who is an Employee.
---------------
(p) "IPO Effective Date" means the date upon which the Securities and
------------------
Exchange Commission declares the initial public offering of the Company's
common stock as effective.
-2-
<PAGE>
(q) "Nonstatutory Stock Option" means an Option not intended to qualify as an
-------------------------
Incentive Stock Option.
(r) "Notice of Grant" means a written or electronic notice evidencing certain
---------------
times and conditions of an individual Option or Stock Purchase Right grant.
The Notice of Grant is part of the Option Agreement.
(s) "Officer" means a person who is an officer of the Company within the
-------
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Option Agreement" means an agreement between the Company and an Optionee
----------------
evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(v) "Option Exchange Program" means a program whereby outstanding Options are
-----------------------
surrendered in exchange for Options with a lower exercise price.
(w) "Optioned Stock" means the Common Stock subject to an Option or Stock
--------------
Purchase Right.
(x) "Optionee" means the holder of an outstanding Option or Stock Purchase
--------
Right granted under the Plan.
(y) "Outside Director" means a Director who is not an Employee.
----------------
(z) "Parent" means a "parent corporation," whether now or hereafter existing,
------
as defined in Section 424(e) of the Code.
(aa) "Plan" means this 1996 Stock Plan, as amended and restated.
----
(bb) "Restricted Stock" means shares of Common Stock acquired pursuant to a
----------------
grant of Stock Purchase Rights under Section 11 of the Plan.
(cc) "Restricted Stock Purchase Agreement" means a written agreement between
-----------------------------------
the Company and the Optionee evidencing the terms and restrictions applying
to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and
the Notice of Grant.
(dd) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
----------
Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(ee) "Section 16(b) " means Section 16(b) of the Exchange Act.
-------------
(ff) "Service Provider" means an Employee, Director or Consultant.
----------------
-3-
<PAGE>
(gg) "Share" means a share of the Common Stock, as adjusted in accordance with
-----
Section 14 of the Plan.
(hh) "Stock Purchase Right" means the right to purchase Common Stock pursuant
--------------------
to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ii) "Subsidiary" means a "subsidiary corporation", whether now or hereafter
----------
existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 14 of the
-------------------------
Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 5,080,000 Shares, plus an annual increase to be added on
January 1st beginning in 2001 equal to the lesser of (i) 2,000,000 shares, (ii)
5% of the outstanding shares of Common Stock on such date, or (iii) an amount
determined by the Board. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Stock Purchase Right, shall not
be returned to the Plan and shall not become available for future distribution
under the Plan, except that if Shares of Restricted Stock are repurchased by the
Company at their original purchase price, such Shares shall become available for
future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be administered by
------------------------------
different Committees with respect to different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator determines
--------------
it to be desirable to qualify Options granted hereunder as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the Plan shall
be administered by a Committee of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
--------------------
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
-4-
<PAGE>
(b) Powers of the Administrator. Subject to the provisions of the Plan, and
---------------------------
in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be covered
by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase Right
to the then current Fair Market Value if the Fair Market Value of the Common
Stock covered by such Option or Stock Purchase Right shall have declined since
the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations relating to
the Plan, including rules and regulations relating to sub-plans established for
the purpose of qualifying for preferred tax treatment under foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right (subject to
Section 16(c) of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable;
-5-
<PAGE>
(xii) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or advisable
for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
----------------------------------
determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be
-----------
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options
are exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 6(a), Incentive Stock Options shall be taken into
account in the order in which they were granted. The Fair Market Value of
the Shares shall be determined as of the time the Option with respect to
such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon
an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they
interfere in any way with the Optionee's right or the Company's right to
terminate such relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of the
Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial service, a Service Provider
may be granted Options to purchase up to an additional 500,000 Shares, which
shall not count against the limit, set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 14.
(iv) If an Option is cancelled in the same fiscal year of the Company in
which it was granted (other than in connection with a transaction described in
Section 14), the cancelled Option will be counted against the limits set forth
in subsections (i) and (ii) above. For this purpose, if the exercise price of an
Option is reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
-6-
<PAGE>
7. Term of Plan. Subject to Section 20 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 16 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share exercise
price shall be determined by the Administrator. In the case of a Nonstatutory
Stock Option intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a per
Share exercise price of less than 100% of the Fair Market Value per Share on the
date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is granted,
---------------------------------
the Administrator shall fix the period within which the Option may be exercised
and shall determine any conditions that must be satisfied before the Option may
be exercised.
(c) Form of Consideration. The Administrator shall determine the acceptable
---------------------
form of consideration for exercising an Option, including the method of payment.
In the case of an Incentive Stock Option, the Administrator shall determine the
acceptable form of consideration at the time of grant. Such consideration may
consist entirely of:
-7-
<PAGE>
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon exercise
of an option, have been owned by the Optionee for more than six (6) months on
the date of surrender, and (B) have a Fair Market Value on the date of surrender
equal to the aggregate exercise price of the Shares as to which said Option
shall be exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the Optionee,
including any liability attributable to the Optionee's participation in any
Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and
set forth in the Option Agreement. Unless the Administrator provides
otherwise, vesting of Options granted hereunder shall be tolled during any
unpaid leave of absence. An Option may not be exercised for a fraction of
a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 14 of the Plan.
-8-
<PAGE>
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. Subject to Section 14,
-------------------------------------------------
if an Optionee ceases to be a Service Provider (but not in the event of an
Optionee's change of status from Employee to Consultant (in which case an
Employee's Incentive Stock Option shall automatically convert to a
Nonstatutory Stock Option on the ninety-first (91st) day following such
change of status) or from Consultant to Employee), such Optionee may, but
only within such period of time as is specified in the Option Agreement,
and in the case of an Incentive Stock Option not exceeding three (3) months
after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that Optionee was
entitled to exercise it at the date of such termination. In the absence of
a specified time in the Option Agreement, the Option shall remain
exercisable for three (3) months following the Optionee's termination. If,
on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option
shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified by the Administrator,
the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service Provider
----------------------
as a result of the Optionee's Disability, the Optionee may, but only within
twelve (12) months from the date of such termination (and in no event later
than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option the extent the Option is
vested on the date of termination. If such disability is not a Disability,
in the case of an Incentive Stock Option such Incentive Stock Option shall
automatically cease to be treated as an Incentive Stock Option and shall be
treated for tax purposes as a Nonstatutory Stock Option on the day three
(3) months and one day following such termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider, the
-----------------
Option may be exercised at any time within twelve (12) months following the
date of death (but in no event later than the expiration of the term of
such Option as set forth in the Notice of Grant), by the Optionee's estate
or by a person who acquires the right to exercise the Option by bequest or
inheritance, but only to the extent that the Option is vested on the date
of death. If, at the time of death, the Optionee is not vested as to his or
her entire Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the
person(s) entitled to exercise the Option under the Optionee's will or the
laws of descent or distribution. If the Option is not so exercised within
the time specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
-9-
<PAGE>
(e) Buyout Provisions. The Administrator may at any time offer to buy out for
-----------------
a payment in cash or Shares an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in
------------------
addition to, or in tandem with other awards granted under the Plan and/or
cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise
the offeree in writing or electronically, by means of a Notice of Grant, of
the terms, conditions and restrictions related to the offer, including the
number of Shares that the offeree shall be entitled to purchase, the price
to be paid, and the time within which the offeree must accept such offer,
which shall not exceed ninety (90) days from the date upon which the
Administrator makes the determination to grant the Stock Purchase Right.
The offer shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise, the
-----------------
Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate
determined by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall contain
----------------
such other terms, provisions and conditions not inconsistent with the Plan
as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the
-----------------------
purchaser shall have the rights equivalent to those of a shareholder, and
shall be a shareholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment will
be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in
Section 14 of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Formula Option Grants to Outside Directors. Outside Directors shall be
------------------------------------------
automatically granted Options each year in accordance with the following
provisions:
-10-
<PAGE>
(a) All Options granted pursuant to this Section 13 shall be Nonstatutory
Stock Options and, except as otherwise provided herein, shall be subject to
the other terms and conditions of the Plan.
(b) Each person who first becomes an Outside Director on or after the IPO
Effective Date, whether through election by the stockholders of the Company
or appointment by the Board to fill a vacancy, and who did not hold
unvested Options as of the IPO Effective Date, shall be automatically
granted an Option to purchase 12,500 Shares (the "First Option") on the
date he or she first becomes an Outside Director; provided, however, that
an Inside Director who ceases to be an Inside Director but who remains a
Director shall not receive a First Option.
(c) Each Outside Director shall be automatically granted an Option to
purchase 5,000 Shares (a "Subsequent Option") following each annual meeting
of the stockholders of the Company, except in the case of the first such
annual meeting after the IPO Effective Date if such annual meeting is held
within six (6) months of the IPO Effective Date, and if, as of such date,
he or she shall continue to serve on the Board and shall have served on the
Board for at least the preceding six (6) months.
(d) Notwithstanding the provisions of subsections (b) and (c) hereof, any
exercise of an Option granted before the Company has obtained stockholder
approval of the Plan in accordance with Section 20 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in
accordance with Section 20 hereof.
(e) The terms of each Option granted pursuant to this Section shall be as
follows:
(i) the term of the Option shall be ten (10) years.
(ii) the exercise price per Share shall be 100% of the Fair Market Value
per Share on the date of grant of the Option.
(iii) the Option shall vest and become exercisable in successive, equal
annual installments on each of the first three anniversaries of the date of
grant.
14. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
------------------------------------------------------------------------
Sale.
----
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and Stock Purchase Right, the number of shares
of Common Stock covered by First Options and Subsequent Options to be
granted under the Plan, the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options or
Stock Purchase Rights have yet been granted or which have been returned to
the Plan upon cancellation or expiration of an Option or Stock Purchase
Right, the number of shares of Common Stock which may be added to the Plan
each year (pursuant to Section 3(i)), as well as the price per share of
Common Stock covered by each such outstanding Option or Stock Purchase
Right, shall be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification of the
Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without
-11-
<PAGE>
receipt of consideration by the Company; provided, however, that conversion
of any convertible securities of the Company shall not be deemed to have
been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of
Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or
--------------------------
liquidation of the Company, the Administrator shall notify Optionee at
least fifteen (15) days prior to such proposed action. To the extent it
has not been previously exercised, the Option or Stock Purchase Right shall
terminate immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with or
--------------------
into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for
the Option or Stock Purchase Right, each outstanding Option and Stock
Purchase Right shall terminate as of the closing of the merger or sale of
assets. For the purposes of this paragraph, the Option or Stock Purchase
Right shall be considered assumed if, following the merger or sale of
assets, the option or right confers the right to purchase or receive, for
each Share of Optioned Stock subject to the Option or Stock Purchase Right
immediately prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property) received in the
merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the
consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
15. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
16. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or terminate the Plan.
-12-
<PAGE>
(b) Shareholder Approval. The Company shall obtain shareholder approval of
--------------------
any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration, suspension
----------------------------------
or termination of the Plan shall impair the rights of any Optionee, unless
mutually agreed otherwise between the Optionee and the Administrator, which
agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to
exercise the powers granted to it hereunder with respect to Options granted
under the Plan prior to the date of such termination.
17. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the exercise of
----------------
an Option or Stock Purchase Right unless the exercise of such Option or
Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an Option
--------------------------
or Stock Purchase Right, the Company may require the person exercising such
Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
18. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
19. Reservation of Shares. The Company, during the term of this Plan, will at
---------------------
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
20. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
GODIGITAL NETWORKS CORPORATION
1996 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number ___________________________________
Date of Grant ___________________________________
Vesting Commencement Date ___________________________________
Exercise Price per Share $__________________________________
Total Number of Shares Granted ___________________________________
Total Exercise Price $__________________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date:
Vesting Schedule:
----------------
Subject to accelerated vesting as set forth in the Plan, this Option may be
exercised, in whole or in part, in accordance with the following schedule:
25% of the Shares subject to the Option shall vest upon the first
anniversary of the Vesting Commencement Date, and 1/48 of the Shares subject to
the Option shall vest each full calendar month thereafter, subject to Optionee
continuing to be a Service Provider on such dates. Anything in this Agreement
notwithstanding, in the event of a termination of Optionee's status as a Service
Provider as a result of Optionee's death or Disability, the number of Shares
vested shall be that number of Shares which would have been vested pursuant to
this Agreement had Optionee continued
<PAGE>
living or had not become disabled for twelve (12) months after the date of such
death or Disability, and had been a Service Provider for the entirety of those
twelve (12) months.
[1/3 of the Shares subject to the Option shall vest upon each anniversary
of the Vesting Commencement Date, so that one hundred percent (100%) of the
Shares subject to the Option shall be exercisable three (3) years after the date
of grant; provided, however, that in no event shall any Option be exercisable
prior to the date the stockholders of the Company approve the Plan.] [VESTING
SCHEDULE FOR DIRECTOR GRANTS]
Termination Period:
------------------
This Option may be exercised for thirty (30) days after Optionee ceases to
be a Service Provider. Upon the death or Disability of Optionee, this Option
may be exercised for twelve (12) months after Optionee ceases to be a Service
Provider. In no event shall this Option be exercised later than the
Term/Expiration Date as provided above.
II. AGREEMENT
---------
A. Grant of Option.
----------------
The Plan Administrator of the Company hereby grants to the Optionee
named in the Notice of Grant attached as Part I of this Agreement (the
"Optionee") an option (the "Option") to purchase the number of Shares, as set
forth in the Notice of Grant, at the exercise price per share set forth in the
Notice of Grant (the "Exercise Price"), subject to the terms and conditions of
the Plan, which is incorporated herein by reference. Subject to Section 16(c) of
the Plan, in the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
B. Exercise of Option.
-------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an exercise
------------------
notice, in the form attached as Exhibit A (the "Exercise Notice"), which
shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"),
and such other representations and agreements as may be required by the
Company pursuant to the provisions of the Plan. The Exercise Notice shall
be completed by the Optionee and delivered to the Stock Plan Administrator
of the Company. The Exercise Notice shall be accompanied by payment of the
aggregate Exercise Price as to all Exercised Shares. This Option
-2-
<PAGE>
shall be deemed to be exercised upon receipt by the Company of such fully
executed Exercise Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option unless
such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
-3-
<PAGE>
C. Method of Payment.
------------------
Payment of the aggregate Exercise Price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
1. cash; or
2. check; or
3. consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
4. surrender of other Shares which (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of surrender, and (ii) have a Fair Market Value on the
date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
D. Non-Transferability of Option.
------------------------------
This Option may not be transferred in any manner otherwise than by will or
by the laws of descent or distribution and may be exercised during the lifetime
of Optionee only by the Optionee. The terms of the Plan and this Option
Agreement shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
E. Term of Option.
---------------
This Option may be exercised only within the term set out in the Notice of
Grant, and may be exercised during such term only in accordance with the Plan
and the terms of this Option Agreement.
F. Tax Consequences.
-----------------
Some of the federal tax consequences relating to this Option, as of the
date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
1. Exercising the Option.
---------------------
(a) Nonstatutory Stock Option. The Optionee may incur regular
-------------------------
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If the
Optionee is an Employee or a former Employee, the Company will be required to
withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an
-4-
<PAGE>
amount in cash equal to a percentage of this compensation income at the time of
exercise, and may refuse to honor the exercise and refuse to deliver Shares if
such withholding amounts are not delivered at the time of exercise.
(b) Incentive Stock Option. If this Option qualifies as an ISO, the
----------------------
Optionee will have no regular federal income tax liability upon its exercise,
although the excess, if any, of the Fair Market Value of the Exercised Shares on
the date of exercise over their aggregate Exercise Price will be treated as an
adjustment to alternative minimum taxable income for federal tax purposes and
may subject the Optionee to alternative minimum tax in the year of exercise. In
the event that the Optionee ceases to be an Employee but remains a Service
Provider, any Incentive Stock Option of the Optionee that remains unexercised
shall cease to qualify as an Incentive Stock Option and will be treated for tax
purposes as a Nonstatutory Stock Option on the date three (3) months and one (1)
day following such change of status.
2. Disposition of Shares.
---------------------
(a) NSO. If the Optionee holds NSO Shares for at least one year, any
---
gain realized on disposition of the Shares will be treated as long-term capital
gain for federal income tax purposes.
(b) ISO. If the Optionee holds ISO Shares for at least one year after
---
exercise and two years after the grant date, any gain realized on disposition of
the Shares will be treated as long-term capital gain for federal income tax
purposes. If the Optionee disposes of ISO Shares within one year after exercise
or two years after the grant date, any gain realized on such disposition will be
treated as compensation income (taxable at ordinary income rates) to the extent
of the excess, if any, of the lesser of (A) the difference between the Fair
Market Value of the Shares acquired on the date of exercise and the aggregate
Exercise Price, or (B) the difference between the sale price of such Shares and
the aggregate Exercise Price. Any additional gain will be taxed as capital gain,
short-term or long-term depending on the period that the ISO Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee
-------------------------------------------------
sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on
or before the later of (i) two years after the grant date, or (ii) one year
after the exercise date, the Optionee shall immediately notify the Company in
writing of such disposition. The Optionee agrees that he or she may be subject
to income tax withholding by the Company on the compensation income recognized
from such early disposition of ISO Shares by payment in cash or out of the
current earnings paid to the Optionee.
G. Entire Agreement; Governing Law.
--------------------------------
The Plan is incorporated herein by reference. The Plan and this Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
-5-
<PAGE>
H. NO GUARANTEE OF CONTINUED SERVICE.
----------------------------------
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT
THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED
AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND
AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE
VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED
PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD,
FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE
COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT
ANY TIME, WITH OR WITHOUT CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: GODIGITAL NETWORKS CORPORATION
- --------------------------- --------------------------------
Signature By
- --------------------------- --------------------------------
Print Name Title
- ---------------------------
Residence Address
- ---------------------------
-6-
<PAGE>
EXHIBIT A
---------
GODIGITAL NETWORKS CORPORATION
1996 STOCK PLAN
EXERCISE NOTICE
GoDigital Networks Corporation
41652 Boscell Road
Fremont, CA 94538
Attention: [Title]
1. Exercise of Option. Effective as of today, ________________, _____, the
------------------
undersigned ("Purchaser") hereby elects to purchase ______________ shares (the
"Shares") of the Common Stock of GoDigital Networks Corporation (the "Company")
under and pursuant to the GoDigital Networks Corporation 1996 Stock Plan (the
"Plan") and the Stock Option Agreement dated, _____ (the "Option Agreement").
The purchase price for the Shares shall be $_____, as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the full
-------------------
purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser has
----------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate
---------------------
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the Shares, no right to vote or receive dividends or any other
rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Shares so acquired shall be
issued to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date of issuance, except as provided in Section 14 of the Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse
----------------
tax consequences as a result of Purchaser's purchase or disposition of the
Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
<PAGE>
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
Submitted by: Accepted by:
PURCHASER GODIGITAL NETWORKS CORPORATION
- ----------------------------- -------------------------------
Signature By
- ----------------------------- -------------------------------
Print Name Its
Address: Address:
- ------- -------
GoDigital Networks Corporation
- ----------------------------- 41652 Boscell Road
Fremont, CA 94538
- -----------------------------
-------------------------------
Date Received
<PAGE>
Exhibit 10.5
GODIGITAL NETWORKS CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
(Adopted November 15, 1999)
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of GoDigital Networks Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the Company
-------
and its Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company through accumulated payroll deductions. It is the intention of the
Company to have the Plan qualify as an "Employee Stock Purchase Plan" under
Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of
the Plan, accordingly, shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company or any
-----
committee thereof designated by the Board of Directors of the Company in
accordance with Section 14 of the Plan.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the common stock of the Company.
------------
(d) "Company" shall mean GoDigital Networks Corporation and any
-------
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings,
------------
commissions, overtime, shift premium, incentive compensation, incentive
payments, bonuses but exclusive of payments for any other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each Offering
---------------
Period.
(i) "Exercise Date" shall mean the last Trading Day of each Purchase
-------------
Period.
<PAGE>
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the date of determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock prior
to the date of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board; or
(iv) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately
----------------
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1st and
November 1st of each year and terminating on the last Trading Day in the periods
ending twenty-four months later; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
April 30, 2002. The duration and timing of Offering Periods may be changed
pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this 1999 Employee Stock Purchase Plan.
----
(m) "Purchase Period" shall mean the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
--------------
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
(o) "Reserves" shall mean the number of shares of Common Stock covered
--------
by each option under the Plan which have not yet been exercised and the number
of shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
-2-
<PAGE>
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1st and November 1st each year, or on such other
date as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
April 30, 2002. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without shareholder approval if such change is announced prior
to the scheduled beginning of the first Offering Period to be affected
thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
-3-
<PAGE>
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription agreement, he
or she shall elect to have payroll deductions made on each pay day during the
Offering Period in an amount not exceeding 20% of the Compensation which he or
she receives on each pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan as
provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply with
Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll
deductions may be decreased to zero percent (0%) at any time during a Purchase
Period. Payroll deductions shall recommence at the rate provided in such
participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at the
time some or all of the Company's Common Stock issued under the Plan is disposed
of, the participant must make adequate provision for the Company's federal,
state, or other tax withholding obligations, if any, which arise upon the
exercise of the option or the disposition of the Common Stock. At any time, the
Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 5,000
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of
-4-
<PAGE>
the Company's Common Stock an Employee may purchase during each Purchase Period
of such Offering Period. Exercise of the option shall occur as provided in
Section 8 hereof, unless the participant has withdrawn pursuant to Section 10
hereof. The option shall expire on the last day of the Offering Period.
8. Exercise of Option.
------------------
(a) Unless a participant withdraws from the Plan as provided in Section
10 hereof, his or her option for the purchase of shares shall be exercised
automatically on the Exercise Date, and the maximum number of full shares
subject to option shall be purchased for such participant at the applicable
Purchase Price with the accumulated payroll deductions in his or her account. No
fractional shares shall be purchased; any payroll deductions accumulated in a
participant's account which are not sufficient to purchase a full share shall be
retained in the participant's account for the subsequent Purchase Period or
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 hereof. Any other monies left over in a participant's account after
the Exercise Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
(b) If the Board determines that, on a given Exercise Date, the number
of shares with respect to which options are to be exercised may exceed (i) the
number of shares of Common Stock that were available for sale under the Plan on
the Enrollment Date of the applicable Offering Period, or (ii) the number of
shares available for sale under the Plan on such Exercise Date, the Board may in
its sole discretion (x) provide that the Company shall make a pro rata
allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
shareholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on which a
--------
purchase of shares occurs, the Company shall arrange the delivery to each
participant, as appropriate, of a certificate representing the shares purchased
upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant
-5-
<PAGE>
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason, he or she
shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the Company
as provided in Section 19 hereof, the maximum number of shares of the Company's
Common Stock which shall be made available for sale under the Plan shall be
1,000,000 shares plus an annual increase to be added on January 1st beginning in
2001, equal to the lesser of (i) 1,000,000 shares, (ii) 2% of the outstanding
shares on such date or (iii) a lesser amount determined by the Board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
-6-
<PAGE>
(a) A participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to an Exercise Date on
which the option is exercised but prior to delivery to such participant of such
shares and cash. In addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's account under the
Plan in the event of such participant's death prior to exercise of the option.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant at
any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and distribution
or as provided in Section 15 hereof) by the participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds from
an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant in
-------
the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
- --------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), the
number of shares that may be added annually to the shares reserved under the
Plan (pursuant to Section 13(a)(i)), as well as the price per share and the
number of shares of Common Stock covered by each option under the Plan which has
not yet been exercised shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification of
the Common Stock, or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not
be
-7-
<PAGE>
deemed to have been "effected without receipt of consideration." Such adjustment
shall be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its shareholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain shareholder approval in such a manner
and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
-8-
<PAGE>
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of the
Plan may result in unfavorable financial accounting consequences, the Board may,
in its discretion and, to the extent necessary or desirable, modify or amend the
Plan to reduce or eliminate such accounting consequence including, but not
limited to:
(i) altering the Purchase Price for any Offering Period including
an Offering Period underway at the time of the change in Purchase Price;
(ii) shortening any Offering Period so that Offering Period ends on
a new Exercise Date, including an Offering Period underway at the time of the
Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder approval
or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
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<PAGE>
24. Automatic Transfer to Low Price Offering Period. To the extent permitted
-----------------------------------------------
by any applicable laws, regulations, or stock exchange rules if the Fair Market
Value of the Common Stock on any Exercise Date in an Offering Period is lower
than the Fair Market Value of the Common Stock on the Enrollment Date of such
Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
---------
GODIGITAL NETWORKS CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date:___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the GoDigital Networks
Corporation Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")
and subscribes to purchase shares of the Company's Common Stock in accordance
with this Subscription Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 0 to _____%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note that
no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price determined
in accordance with the Employee Stock Purchase Plan. I understand that if I do
not withdraw from an Offering Period, any accumulated payroll deductions will be
used to automatically exercise my option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in all
respects subject to the terms of the Plan. I understand that my ability to
exercise the option under this Subscription Agreement is subject to shareholder
approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only).
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the Offering
Period during which I purchased such shares) or one year after the Exercise
Date, I will be treated for federal income tax purposes as having received
ordinary income at the time of such disposition in an amount equal to the excess
of the fair market value of the shares at the time such shares were purchased by
me over the price which I paid for the shares. I hereby agree to notify the
Company in writing within 30 days after the date of any disposition of my shares
and I will make adequate provision for Federal, state or other tax withholding
obligations, if any, which arise upon the
<PAGE>
disposition of the Common Stock. The Company may, but will not be obligated to,
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any time after
the expiration of the 2-year and 1-year holding periods, I understand that I
will be treated for federal income tax purposes as having received income only
at the time of such disposition, and that such income will be taxed as ordinary
income only to the extent of an amount equal to the lesser of (1) the excess of
the fair market value of the shares at the time of such disposition over the
purchase price which I paid for the shares, or (2) 15% of the fair market value
of the shares on the first day of the Offering Period. The remainder of the
gain, if any, recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan.
The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Employee
Stock Purchase Plan:
NAME: (Please print)_____________________________________________________
(First) (Middle) (Last)
_________________________ ________________________________
Relationship
________________________________
(Address)
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<PAGE>
Employee's Social
Security Number:
____________________________________
Employee's Address:
____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ ____________________________________
Signature of Employee
____________________________________
Spouse's Signature (If beneficiary
other than spouse)
-3-
<PAGE>
EXHIBIT B
---------
GODIGITAL NETWORKS CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the GoDigital Networks
Corporation Employee Stock Purchase Plan which began on ____________, ______
(the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:____________________________
<PAGE>
EXHIBIT 10.6
GODIGITAL TELECOMMUNICATIONS, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
This Change of Control Severance Agreement (the "Agreement") is made and
entered into effective as of May 20, 1999 (the "Effective Date"), by and between
___________________ (the "Employee") and GoDigital Telecommunications, Inc., a
California corporation (the "Company"). Certain capitalized terms used in this
Agreement are defined in Section 1 below.
R E C I T A L S
---------------
A. It is expected that the Company from time to time will consider the
possibility of a Change of Control. The Board of Directors of the Company (the
"Board") recognizes that such consideration can be a distraction to the Employee
and can cause the Employee to consider alternative employment opportunities.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to maximize the value of the Company upon a Change of Control for
the benefit of its shareholders.
C. In order to provide the Employee with enhanced financial security and
sufficient encouragement to remain with the Company notwithstanding the
possibility of a Change of Control, the Board believes that it is imperative to
provide the Employee with certain benefits upon a Change of Control and certain
severance benefits upon the Employee's termination of employment following a
Change of Control.
AGREEMENT
---------
In consideration of the mutual covenants herein contained and the continued
employment of Employee by the Company, the parties agree as follows:
1. Definition of Terms. The following terms referred to in this Agreement
-------------------
shall have the following meanings:
(a) Cause. "Cause" shall mean (i) any act of personal dishonesty
-----
taken by the Employee in connection with his responsibilities as an employee
which is intended to result in substantial personal enrichment of the Employee,
(ii) Employee's conviction of a felony which the Board reasonably believes has
had or will have a material detrimental effect on the Company's reputation or
business, and (iii) a willful act by the Employee which constitutes misconduct
and is injurious to the Company.
(b) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
<PAGE>
(i) the approval by shareholders of the Company of a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation;
(ii) any approval by the shareholders of the Company of a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets;
or
(iii) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becoming the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities.
(c) Compensation Continuation Period. "Compensation Continuation
--------------------------------
Period" shall mean the period of time commencing with termination of the
Employee's employment as a result of Involuntary Termination at anytime within
twenty four (24) months after a Change of Control and ending with the expiration
of twelve (12) months following the date of the Employee's termination.
(d) Involuntary Termination. "Involuntary Termination" shall mean (i)
-----------------------
without the Employee's express written consent, a significant reduction of the
Employee's duties, position or responsibilities relative to the Employee's
duties, position or responsibilities in effect immediately prior to such
reduction, or the removal of the Employee from such position, duties and
responsibilities, unless the Employee is provided with comparable duties,
position and responsibilities; provided, however, that a reduction in duties,
position or responsibilities solely by virtue of the Company being acquired and
made part of a larger entity (as, for example, when the Chief Financial Officer
of the Company remains as such following a Change of Control but is not made the
Chief Financial Officer of the acquiring corporation) shall not constitute an
"Involuntary Termination;" (ii) without the Employee's express written consent,
a substantial reduction of the facilities and perquisites (including office
space and location) available to the Employee immediately prior to such
reduction; (iii) a reduction by the Company of the Employee's base salary as in
effect immediately prior to such reduction; (iv) a reduction by the Company in
the kind or level of employee benefits to which the Employee is entitled
immediately prior to such reduction with the result that the Employee's overall
benefits package is materially reduced; (v) without the Employee's express
written consent, the relocation of the Employee to a facility or a location more
than fifty (50) miles from his current location; (vi) any purported termination
of the Employee by the Company which is not effected for Cause or for which the
grounds relied upon are not valid; or (vii) the failure of the Company to obtain
the assumption of this Agreement by any successors contemplated in Section 6
below.
(e) Termination Date. "Termination Date" shall mean the effective
----------------
date of any notice of termination delivered by one party to the other hereunder.
-2-
<PAGE>
2. Term of Agreement. This Agreement shall terminate upon the date that
-----------------
all obligations of the parties hereto under this Agreement have been satisfied.
3. At-Will Employment. The Company and the Employee acknowledge that the
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
established under the Company's then existing employee benefit plans or policies
at the time of termination.
4. Change of Control and Severance Benefits.
----------------------------------------
(a) Option Acceleration Upon a Change of Control. Upon a Change of
--------------------------------------------
Control, (i) the vesting and exercisability of each option granted to the
Employee by the Company (the "Options") and (ii) the vesting and termination of
the Company's repurchase option in the case restricted stock purchase by the
Employee from the Company (the "Restricted Shares") shall automatically
accelerate with respect to one third (1/3) of the number of shares which are
unvested on the date of such Change of Control and are then subject to such
Options or are Restricted Stock. Following such acceleration, such Options and
Restricted Stock shall continue to vest in accordance with the same vesting
schedule as existed prior to the Change of Control. For example, if 1,000 shares
vested each month prior to the Change of Control, 1,000 shares shall continue to
vest each month following the Change of Control.
(b) Termination Following A Change of Control.
-----------------------------------------
(i) Severance Payments. If the Employee's employment with the
------------------
Company terminates as a result of an Involuntary Termination at any time within
twenty four (24) months after a Change of Control, then the Employee shall be
entitled to receive continuing payments of severance pay during the Compensation
Continuation Period at a rate equal to the Employee's base salary (as in effect
immediately prior to the Change of Control). Such severance payments shall be
paid in accordance with the Company's normal payroll practices. In addition,
during the Compensation Continuation Period, the Company shall continue to make
available to the Employee and Employee's spouse and dependents covered under any
group health plans or life insurance plans of the Company on the date of such
termination of employment ("Covered Dependents"), benefits provided to Employee
and/or his Covered Dependents in existence prior to such Involuntary
Termination.
(ii) Option Acceleration. If the Employee's employment with the
-------------------
Company terminates as a result of an Involuntary Termination at any time within
twenty four (24) months after a Change of Control, then the vesting and
exercisability of each Option and the vesting and termination of the Company's
repurchase option with respect to Restricted Stock shall continue to vest and
become exercisable or to vest and cease to be subject to the repurchase option
during the Compensation Continuation Period.
(iii) Other Termination. If the Employee's employment with the
-----------------
Company terminates other than as a result of an Involuntary Termination at any
time within twenty four (24)
-3-
<PAGE>
months after a Change of Control, then the Employee shall not be entitled to
receive severance or other benefits hereunder, but may be eligible for those
benefits (if any) as may then be established under the Company's then existing
severance and benefits plans and policies at the Termination Date.
(c) Termination Apart from a Change of Control. If the Employee's
------------------------------------------
employment with the Company is terminated for cause or Employee voluntarily
resigns other than within twenty four (24) months following a Change of Control,
then the Employee shall not be entitled to receive severance or other benefits
hereunder. If the Employee's employment with the Company is terminated without
cause other than within twenty four (24) months following a Change of Control,
then Employee shall be entitled to receive continuing payments of severance pay
for a period of twelve (12) months following the date of termination of his
employment at a rate equal to the Employee's base salary (as in effect as of the
date of such termination) and Employee and his Covered Dependents shall continue
to be entitled to receive the benefits under the Company's group health or life
insurance plans. Such severance shall be made in accordance with the Company's
normal payroll practices. In addition, the vesting and exercisability of each
Option and the vesting and termination of the Company's repurchase option with
respect to Restricted stock shall continue to vest and become exercisable or to
vest and cease to be subject to the repurchase option during such twelve (12)
month period.
(d) Accrued Wages and Vacation; Expenses. Without regard to the
------------------------------------
reason for, or the timing of, Employee's termination of employment: (i) the
Company shall pay the Employee any unpaid base salary due for periods prior to
the Termination Date; (ii) the Company shall pay the Employee all of the
Employee's accrued and unused vacation through the Termination Date; and (iii)
following submission of proper expense reports by the Employee, the Company
shall reimburse the Employee for all expenses reasonably and necessarily
incurred by the Employee in connection with the business of the Company prior to
the Termination Date. These payments shall be made promptly upon termination and
within the period of time mandated by law.
5. Limitation on Payments. In the event that the benefits provided for in
----------------------
the Agreement, when aggregated with any other payments or benefits received by
the Employee, would (i) constitute "parachute payments" within the meaning of
Section 280G of the Code, and (ii) would be subject to the excise tax imposed by
Section 4999 of the Code ("the Excise Tax"), then the Employee's benefits
hereunder shall be either
-4-
<PAGE>
(a) delivered in full, or
(b) delivered as to such lesser extent which would result in no
portion of such benefits being subject to the Excise Tax, whichever of the
foregoing amounts, taking into account the applicable federal, state and local
income taxes and the Excise Tax, results in the receipt by the Employee on an
after-tax basis, of the greatest amount of benefits, notwithstanding that all or
some portion of such benefits may be taxable under Section 4999 of the Code.
Unless the Company and the Employee otherwise agree in writing, any
determination required under this paragraph shall be made in writing by the
Company's independent public accountants (the "Accountants") whose determination
shall be conclusive and binding upon the Employee and the Company for all
purposes. For purposes of making the calculations required by this paragraph,
the Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of Sections 280G and 4999 of the Code. The Company
and the Employee shall furnish to the Accountants such information and documents
as the Accountants may reasonably request in order to make a determination under
this paragraph. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this paragraph.
6. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the Company's obligations under this Agreement and
agree expressly to perform the Company's obligations under this Agreement in the
same manner and to the same extent as the Company would be required to perform
such obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. Without the written consent of the
---------------------
Company, Employee shall not assign or transfer this Agreement or any right or
obligation under this Agreement to any other person or entity. Notwithstanding
the foregoing, the terms of this Agreement and all rights of Employee hereunder
shall inure to the benefit of, and be enforceable by, Employee's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
7. Notices.
-------
(a) General. Notices and all other communications contemplated by
-------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address that he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
-5-
<PAGE>
(b) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with this Section. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the Termination
Date (which shall be not more than thirty (30) days after the giving of such
notice). The failure by the Employee to include in the notice any fact or
circumstance which contributes to a showing of Involuntary Termination shall not
waive any right of the Employee hereunder or preclude the Employee from
asserting such fact or circumstance in enforcing his rights hereunder.
8. Arbitration.
-----------
(a) Any dispute or controversy arising out of, relating to, or in
connection with this Agreement, or the interpretation, validity, construction,
performance, breach, or termination thereof, shall be settled by binding
arbitration to be held in San Francisco, California, in accordance with the
National Rules for the Resolution of Employment Disputes then in effect of the
American Arbitration Association (the "Rules"). The arbitrator may grant
injunctions or other relief in such dispute or controversy. The decision of the
arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgment may be entered on the arbitrator's decision in any court
having jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to conflicts of law rules. The arbitration
proceedings shall be governed by federal arbitration law and by the Rules,
without reference to state arbitration law. Employee hereby consents to the
personal jurisdiction of the state and federal courts located in California for
any action or proceeding arising from or relating to this Agreement or relating
to any arbitration in which the parties are participants.
(c) The Company and Employee shall each pay one-half of the costs and
expenses of such arbitration, and each shall separately pay its counsel fees and
expenses.
(d) Employee understands that nothing in this Section modifies
Employee's at-will employment status. Either Employee or the Company can
terminate the employment relationship at any time, with or without cause.
(e) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EMPLOYEE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF,
RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION,
VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING
ARBITRATION, CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AND
RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE
EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING
CLAIMS:
-6-
<PAGE>
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD
FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL
INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION;
NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC
ADVANTAGE; AND DEFAMATION.
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS
ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT
ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR
STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABOR CODE
SECTION 201, et seq;
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
9. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.
(b) Waiver. No provision of this Agreement may be modified, waived or
------
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of compliance
with, any condition or provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition
or provision at another time.
(c) Integration. This Agreement and the stock option agreements
-----------
representing the Options represent the entire agreement and understanding
between the parties as to the subject matter herein and supersede all prior or
contemporaneous agreements, whether written or oral.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the internal substantive
laws, but not the conflicts of law rules, of the State of California.
(e) Severability. The invalidity or unenforceability of any provision
------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
-7-
<PAGE>
(f) Employment Taxes. All payments made pursuant to this Agreement
----------------
shall be subject to withholding of applicable income and employment taxes.
(g) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
COMPANY: GODIGITAL TELECOMMUNICATIONS, INC.
By:_______________________________
Title:____________________________
EMPLOYEE: __________________________________
-8-
<PAGE>
EXHIBIT 10.7
GODIGITAL TELECOMMUNICATIONS, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
This Change of Control Severance Agreement (the "Agreement") is made and
entered into effective as of August 18, 1999 (the "Effective Date"), by and
between Dennis Haar (the "Employee") and GoDigital Telecommunications, Inc., a
California corporation (the "Company"). Certain capitalized terms used in this
Agreement are defined in Section 1 below.
R E C I T A L S
---------------
A. It is expected that the Company from time to time will consider the
possibility of a Change of Control. The Board of Directors of the Company (the
"Board") recognizes that such consideration can be a distraction to the Employee
and can cause the Employee to consider alternative employment opportunities.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to maximize the value of the Company upon a Change of Control for
the benefit of its shareholders.
C. In order to provide the Employee with enhanced financial security and
sufficient encouragement to remain with the Company notwithstanding the
possibility of a Change of Control, the Board believes that it is imperative to
provide the Employee with certain benefits upon a Change of Control and certain
severance benefits upon the Employee's termination of employment following a
Change of Control.
AGREEMENT
---------
In consideration of the mutual covenants herein contained and the continued
employment of Employee by the Company, the parties agree as follows:
1. Definition of Terms. The following terms referred to in this Agreement
-------------------
shall have the following meanings:
(a) Cause. "Cause" shall mean (i) any act of personal dishonesty taken
-----
by the Employee in connection with his responsibilities as an employee which is
intended to result in substantial personal enrichment of the Employee, (ii)
Employee's conviction of a felony which the Board reasonably believes has had or
will have a material detrimental effect on the Company's reputation or business,
(iii) a willful act by the Employee which constitutes misconduct and is
injurious to the Company, and (iv) continued willful violations by the Employee
of the Employee's obligations to the Company after there has been delivered to
the Employee a written demand for performance from the Company which describes
the basis for the Company's belief that the Employee has not substantially
performed his duties.
<PAGE>
(b) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
(i) the approval by shareholders of the Company of a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation;
(ii) any approval by the shareholders of the Company of a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets; or
(iii) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becoming the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities.
(c) Compensation Continuation Period. "Compensation Continuation
--------------------------------
Period" shall mean the period of time commencing with termination of the
Employee's employment as a result of Involuntary Termination at anytime within
twenty four (24) months after a Change of Control and ending with the expiration
of twelve (12) months following the date of the Employee's termination.
(d) Involuntary Termination. "Involuntary Termination" shall mean (i)
-----------------------
without the Employee's express written consent, a significant reduction of the
Employee's duties, position or responsibilities relative to the Employee's
duties, position or responsibilities in effect immediately prior to such
reduction, or the removal of the Employee from such position, duties and
responsibilities, unless the Employee is provided with comparable duties,
position and responsibilities; provided, however, that a reduction in duties,
position or responsibilities solely by virtue of the Company being acquired and
made part of a larger entity (as, for example, when the Chief Financial Officer
of the Company remains as such following a Change of Control but is not made the
Chief Financial Officer of the acquiring corporation) shall not constitute an
"Involuntary Termination;" (ii) without the Employee's express written consent,
a substantial reduction, without good business reasons, of the facilities and
perquisites (including office space and location) available to the Employee
immediately prior to such reduction; (iii) a reduction by the Company of the
Employee's base salary as in effect immediately prior to such reduction; (iv) a
material reduction by the Company in the kind or level of employee benefits to
which the Employee is entitled immediately prior to such reduction with the
result that the Employee's overall benefits package is significantly reduced;
(v) without the Employee's express written consent, the relocation of the
Employee to a facility or a location more than fifty (50) miles from his current
location; (vi) any purported termination of the Employee by the Company which is
not effected for Cause or for which the grounds relied upon are not valid; or
(vii) the failure of the Company to obtain the assumption of this Agreement by
any successors contemplated in Section 6 below.
-2-
<PAGE>
(e) Termination Date. "Termination Date" shall mean the effective date
----------------
of any notice of termination delivered by one party to the other hereunder.
2. Term of Agreement. This Agreement shall terminate upon the date that
-----------------
all obligations of the parties hereto under this Agreement have been satisfied.
3. At-Will Employment. The Company and the Employee acknowledge that the
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
established under the Company's then existing employee benefit plans or policies
at the time of termination.
4. Change of Control and Severance Benefits.
----------------------------------------
(a) Option Acceleration Upon a Change of Control. Upon a Change of
--------------------------------------------
Control, (i) the vesting and exercisability of each option granted to the
Employee by the Company (the "Options") and (ii) the vesting and termination of
the Company's repurchase option in the case restricted stock purchase by the
Employee from the Company (the "Restricted Shares") shall automatically
accelerate with respect to one third (1/3) of the number of shares which are
unvested on the date of such Change of Control and are then subject to such
Options or are Restricted Stock. Following such acceleration, such Options and
Restricted Stock shall continue to vest in accordance with the same vesting
schedule as existed prior to the Change of Control. For example, if 1,000 shares
vested each month prior to the Change of Control, 1,000 shares shall continue to
vest each month following the Change of Control.
(b) Termination Following A Change of Control.
-----------------------------------------
(i) Severance Payments. If the Employee's employment with the
------------------
Company terminates as a result of an Involuntary Termination at any time within
twenty four (24) months after a Change of Control, then the Employee shall be
entitled to receive continuing payments of severance pay during the Compensation
Continuation Period at a rate equal to the Employee's base salary (as in effect
immediately prior to the Change of Control). Such severance payments shall be
paid in accordance with the Company's normal payroll practices. In addition,
during the Compensation Continuation Period, the Company shall continue to make
available to the Employee and Employee's spouse and dependents covered under any
group health plans or life insurance plans of the Company on the date of such
termination of employment ("Covered Dependents"), benefits provided to Employee
and/or his Covered Dependents in existence prior to such Involuntary
Termination.
-3-
<PAGE>
(ii) Option Acceleration. If the Employee's employment with the
-------------------
Company terminates as a result of an Involuntary Termination at any time within
twenty four (24) months after a Change of Control, then the vesting and
exercisability of each Option and the vesting and termination of the Company's
repurchase option with respect to Restricted Stock shall continue to vest and
become exercisable or to vest and cease to be subject to the repurchase option
during the Compensation Continuation Period.
(iii) Other Termination. If the Employee's employment with the
-----------------
Company terminates other than as a result of an Involuntary Termination at any
time within twenty four (24) months after a Change of Control, then the Employee
shall not be entitled to receive severance or other benefits hereunder, but may
be eligible for those benefits (if any) as may then be established under the
Company's then existing severance and benefits plans and policies at the
Termination Date.
(c) Termination Apart from a Change of Control. If the Employee's
------------------------------------------
employment with the Company is terminated for cause or Employee voluntarily
resigns other than within twenty four (24) months following a Change of Control,
then the Employee shall not be entitled to receive severance or other benefits
hereunder. If the Employee's employment with the Company is terminated without
cause other than within twenty four (24) months following a Change of Control,
then Employee shall be entitled to receive continuing payments of severance pay
for a period of twelve (12) months following the date of termination of his
employment at a rate equal to the Employee's base salary (as in effect as of the
date of such termination) and Employee and his Covered Dependents shall continue
to be entitled to receive the benefits under the Company's group health or life
insurance plans. Such severance shall be made in accordance with the Company's
normal payroll practices. In addition, the vesting and exercisability of each
Option and the vesting and termination of the Company's repurchase option with
respect to Restricted stock shall continue to vest and become exercisable or to
vest and cease to be subject to the repurchase option during such twelve (12)
month period.
(d) Accrued Wages and Vacation; Expenses. Without regard to the reason
------------------------------------
for, or the timing of, Employee's termination of employment: (i) the Company
shall pay the Employee any unpaid base salary due for periods prior to the
Termination Date; (ii) the Company shall pay the Employee all of the Employee's
accrued and unused vacation through the Termination Date; and (iii) following
submission of proper expense reports by the Employee, the Company shall
reimburse the Employee for all expenses reasonably and necessarily incurred by
the Employee in connection with the business of the Company prior to the
Termination Date. These payments shall be made promptly upon termination and
within the period of time mandated by law.
5. Limitation on Payments. In the event that the benefits provided for in
----------------------
the Agreement, when aggregated with any other payments or benefits received by
the Employee, would (i) constitute "parachute payments" within the meaning of
Section 280G of the Code, and (ii) would be subject to the excise tax imposed by
Section 4999 of the Code ("the Excise Tax"), then the Employee's benefits
hereunder shall be either
-4-
<PAGE>
(a) delivered in full, or
(b) delivered as to such lesser extent which would result in no
portion of such benefits being subject to the Excise Tax, whichever of the
foregoing amounts, taking into account the applicable federal, state and local
income taxes and the Excise Tax, results in the receipt by the Employee on an
after-tax basis, of the greatest amount of benefits, notwithstanding that all or
some portion of such benefits may be taxable under Section 4999 of the Code.
Unless the Company and the Employee otherwise agree in writing, any
determination required under this paragraph shall be made in writing by the
Company's independent public accountants (the "Accountants") whose determination
shall be conclusive and binding upon the Employee and the Company for all
purposes. For purposes of making the calculations required by this paragraph,
the Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of Sections 280G and 4999 of the Code. The Company
and the Employee shall furnish to the Accountants such information and documents
as the Accountants may reasonably request in order to make a determination under
this paragraph. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this paragraph.
6. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the Company's obligations under this Agreement and
agree expressly to perform the Company's obligations under this Agreement in the
same manner and to the same extent as the Company would be required to perform
such obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. Without the written consent of the
---------------------
Company, Employee shall not assign or transfer this Agreement or any right or
obligation under this Agreement to any other person or entity. Notwithstanding
the foregoing, the terms of this Agreement and all rights of Employee hereunder
shall inure to the benefit of, and be enforceable by, Employee's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
7. Notices.
-------
(a) General. Notices and all other communications contemplated by
-------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address that he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
-5-
<PAGE>
(b) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with this Section. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the Termination
Date (which shall be not more than thirty (30) days after the giving of such
notice). The failure by the Employee to include in the notice any fact or
circumstance which contributes to a showing of Involuntary Termination shall not
waive any right of the Employee hereunder or preclude the Employee from
asserting such fact or circumstance in enforcing his rights hereunder.
8. Arbitration.
-----------
(a) Any dispute or controversy arising out of, relating to, or in
connection with this Agreement, or the interpretation, validity, construction,
performance, breach, or termination thereof, shall be settled by binding
arbitration to be held in San Francisco, California, in accordance with the
National Rules for the Resolution of Employment Disputes then in effect of the
American Arbitration Association (the "Rules"). The arbitrator may grant
injunctions or other relief in such dispute or controversy. The decision of the
arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgment may be entered on the arbitrator's decision in any court
having jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to conflicts of law rules. The arbitration
proceedings shall be governed by federal arbitration law and by the Rules,
without reference to state arbitration law. Employee hereby consents to the
personal jurisdiction of the state and federal courts located in California for
any action or proceeding arising from or relating to this Agreement or relating
to any arbitration in which the parties are participants.
(c) The Company and Employee shall each pay one-half of the costs and
expenses of such arbitration, and each shall separately pay its counsel fees and
expenses.
(d) Employee understands that nothing in this Section modifies
Employee's at-will employment status. Either Employee or the Company can
terminate the employment relationship at any time, with or without cause.
(e) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EMPLOYEE UNDERSTANDS THAT SUBMITTING ANY CLAIMS ARISING OUT OF,
RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION,
VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING
ARBITRATION, CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AND
RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE
EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING
CLAIMS:
-6-
<PAGE>
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR
INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL
MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR
PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION.
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS
ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT
ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR
STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABOR CODE
SECTION 201, et seq;
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
9. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.
(b) Waiver. No provision of this Agreement may be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Integration. This Agreement and the stock option agreements
-----------
representing the Options represent the entire agreement and understanding
between the parties as to the subject matter herein and supersede all prior or
contemporaneous agreements, whether written or oral.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the internal substantive
laws, but not the conflicts of law rules, of the State of California.
(e) Severability. The invalidity or unenforceability of any
------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
-7-
<PAGE>
(f) Employment Taxes. All payments made pursuant to this Agreement
----------------
shall be subject to withholding of applicable income and employment taxes.
(g) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
COMPANY: GODIGITAL TELECOMMUNICATIONS, INC.
By:
----------------------------------
Title:
-------------------------------
EMPLOYEE: -------------------------------------
Dennis Haar
-8-
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated June 18, 1999, except as to Note 8, which is as of August 5,
1999, relating to the financial statements and financial statement schedule of
GoDigital Networks Corporation, which appear in such Registration Statement. We
also consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.
PricewaterhouseCoopers LLP
San Jose, California
November 17, 1999
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated November 17, 1999, relating to the financial statements of the FDS
Business, which appears in such Registration Statement. We also consent to the
references to us under the headings "Experts".
PricewaterhouseCoopers LLP
San Jose, California
November 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-2000
<PERIOD-START> APR-01-1998 APR-01-1999
<PERIOD-END> MAR-31-1999 SEP-30-1999
<CASH> 2,595 2,668
<SECURITIES> 0 0
<RECEIVABLES> 1,878 3,767
<ALLOWANCES> 50 100
<INVENTORY> 2,517 5,801
<CURRENT-ASSETS> 7,118 12,376
<PP&E> 1,222 2,283
<DEPRECIATION> (720) (1,019)
<TOTAL-ASSETS> 8,362 19,180
<CURRENT-LIABILITIES> 2,763 8,994
<BONDS> 0 0
0 0
7 8
<COMMON> 3 6
<OTHER-SE> 5,165 9,964
<TOTAL-LIABILITY-AND-EQUITY> 8,362 19,180
<SALES> 8,768 11,738
<TOTAL-REVENUES> 8,768 11,738
<CGS> 3,683 3,120
<TOTAL-COSTS> 7,229 7,715
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 19 14
<INCOME-PRETAX> (2,888) (4,609)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,888) (4,609)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,888) (4,609)
<EPS-BASIC> (1.40) (1.40)
<EPS-DILUTED> (1.40) (1.40)
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