<PAGE>
As filed with the Securities and Exchange Commission on December 23, 1999
Registration No. 333-91169
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
AMENDMENT NO. 2
To
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. [_]
------------
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<TABLE>
<CAPTION>
Proposed
Title of Each Proposed Maximum Amount
Class of Amount Maximum Aggregate of
Securities to be to be Offering Price Offering Registration
Registered Registered (1) Per Share Price (2) Fee (3)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock, $0.001 par
value 4,600,000 $12.00 $55,200,000 $14,573
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes 600,000 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 457(a) under the Securities Act of 1933, as
amended.
(3) Previously paid.
------------
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 DECEMBER 23, 1999
4,000,000 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
$10.00 and $12.00 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 600,000 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 optic ring and two GDSL Systems. The system
graphics are overlayed on a chart which depicts distance from the network
access provider's central office and the percentage of subscribers served
within each distance range.]
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary ................. 3
Risk Factors ....................... 6
Special Note Regarding Forward
Looking Statements ................ 17
Use of Proceeds .................... 18
Dividend Policy .................... 18
Capitalization ..................... 19
Dilution ........................... 20
Selected Financial Data ............ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business ........................... 32
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management ........................ 43
Certain Relationships and Related
Transactions ..................... 53
Principal Stockholders ............ 57
Description of Capital Stock....... 59
Shares Eligible for Future Sale ... 62
Underwriting....................... 64
Notice to Canadian Residents....... 66
Legal Matters...................... 67
Experts............................ 67
Where You May Find Additional
Information About Us ............. 67
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 equipment that transports high-speed DSL and
voice services over existing copper lines at long distances from a network
access provider's central office. This equipment is called a long-range DSL
transmission system. Network access providers are companies that have installed
a network of copper wires, also known as copper lines, which connect businesses
and households to a central location in the telephone network commonly known as
the central office. Digital Subscriber Line, or DSL solutions enable network
access providers to offer cost-effective, high-speed access services over
existing copper lines.
The demand for voice and high-speed data communications services is
increasing and 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 wire
network was designed to provide only one telephone service per copper line.
With the advent of DSL technology, network access providers have begun to
deliver high-speed access services over existing copper lines. 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. We
believe that by extending the reach of DSL services beyond the 18,000 feet
barrier, network access providers can increase their potential customer base by
roughly 50%. Additionally, network access providers are limited in their
ability to offer multiple services on the same copper line. Our GoDigital DSL,
or GDSL, systems enable network access providers to turn standard copper lines
into high-speed conduits to support multiple services over long distances,
providing a cost-effective alternative to installing fiber or copper wire in
the ground or using more expensive network equipment alternatives.
Our GDSL system facilitates the delivery of multiple service offerings,
including DSL and voice services, up to 25 miles from the central office over
the existing copper lines. The GoDigital Full-Service Distribution System, or
FDS, facilitates the delivery of multiple service offerings, including DSL and
voice services, along fiber optic rings of up to 150 miles. Our GDSL and FDS
systems meet stringent industry standards adopted by the largest network access
providers pertaining to safety, environmental factors and reliability. These
standards are known within our industry as NEBS Level 3 requirements. In
addition, our systems are also designed to withstand harsh weather conditions.
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 acceptance of our systems by our over 60 customers;
. continue to develop access solutions focused on satisfying the increasing
demand for higher access speeds and more digital access lines; and
. continue to develop strategic relationships with DSL 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.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered....................... 4,000,000 shares
Common stock to be outstanding after this
offering.................................. 24,499,574 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:
. 2,180,600 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
. 7,396,108 shares reserved for future issuance under our stock option,
executive 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,
1996 Fiscal Year Ended Six Months Ended
(inception) ------------------ -----------------
through Sept.
Mar. 31, Mar. 31, Mar. 31, 30, Sept.
1997 1998 1999 1998 30, 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
======== ========
Pro forma net loss and net
loss per share giving
effect to the acquisition
of the FDS business:
Net loss................. $(14,799) $(13,275) $ (6,430)
======== ======== ========
Basic and diluted net
loss per share.......... $ (10.37) $ (5.58) $ (1.95)
======== ======== ========
</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 $42,088
Working capital.................................. 3,382 3,382 42,802
Total assets..................................... 19,180 19,180 58,600
Long-term obligations, less current portion...... 208 208 208
Total stockholders' equity....................... 9,978 9,978 49,398
</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 4,000,000 shares of
common stock in this offering at an assumed initial public offering price of
$11.00 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.
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. 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 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 factors described throughout this Risk Factors
section as well as:
. 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;
. changes in the prices of our components, including the price of our
integrated circuits and other electronic components;
. growth and demand for multiple services; and
. the demand for high-speed access to the Internet.
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
6
<PAGE>
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 network access providers.
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. In addition, GoDigital
generally does not have long-term contracts with its customers. In addition,
there are no commitments under any of our contracts with our customers to buy
any specific amounts. 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 adapt our products to meet their system requirements;
. the timing, size and terms of future orders for our GDSL products 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.
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 results
of operations.
Substantially all of our revenues are derived from sales of a small number of
systems
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 demand our current
systems. Any reduction in the demand for our current systems, would reduce our
revenues and 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
products include:
. the demand for DSL technology and solutions;
. the availability and price of competing products and technologies; and
. the performance, price and total cost of ownership of our products.
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 access speed demands of end-users. The
development of
7
<PAGE>
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 significantly reduce our
revenues and seriously harm our business.
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 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. We
have found that the Telcordia (Bellcore) specifications for lightning
resistance, with which our systems comply, 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. For example, GTE reduced its order rate as a result of product
failures relating to these lightning storms. 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.
Because DSL services are a new technology and because other high-speed data
transmission technologies may compete effectively with DSL, our products may
not capture market share
DSL services are relatively new, particularly in rural areas. DSL services
compete with a variety of different high-speed data transmission technologies,
including cable modems, satellite, other wireless technologies and access
solutions provided by network access providers such as dial-up analog modems,
and other high-speed delivery services. If these technologies or any technology
that competes with DSL technology is more reliable, faster, less expensive or
has other advantages over DSL technology, then the demand for our products may
decrease, which would reduce our revenue.
8
<PAGE>
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. 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. 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.
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 delay or reduce our revenue and seriously harm our
results of operations and our business.
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
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
9
<PAGE>
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.
Future consolidation in the communications equipment industry may increase
competition
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.
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
We presently purchase several key components for our systems from vendors
for which there are currently no substitutes, including certain semiconductors
from Conexant Systems, Lucent Microelectronics, and Xilinx. We currently do not
have any long-term contracts with our sole-source suppliers. 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, we may not be able to ship our products and may experience significantly
reduced revenues as well as significant damage to our reputation.
10
<PAGE>
Changes affecting the communications industry could reduce demand for our
systems or negatively impact our results of operations
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 or
reduce the demands for our systems. 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. Our
distributors or network access providers' customers requirements, could, or, we
may deem it necessary or advisable to 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 limit our ability to
meet our customers' demands and deliver our products to them on a timely basis,
which could significantly reduce our revenues.
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 for general
corporate purposes. 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, 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.
Our intellectual property protection may be inadequate to protect our
proprietary rights and the costs of enforcing such rights may be significant
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
11
<PAGE>
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.
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
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, we may not be able to sell our
products and we may also be required to pay money damages to third parties
which could reduce our revenue and increase our costs.
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 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. We currently outsource the stuffing and
assembly of printed circuit boards which constitutes approximately 15% of our
total manufacturing effort. 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
12
<PAGE>
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. 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; and
. effectively manage multiple relationships with our customers, suppliers
and other third parties.
Many of our executive officers have been recently hired by us and the
unsuccessful integration of our senior management could seriously harm our
business
We recently hired certain senior members of our management team, including
David Kranz, our Vice President, Marketing and Business Development and David
Yoffie, our Vice President, Operations. Our success depends to a large extent
on the ability of our senior management team to work well together as a team
that can execute our business objectives. These new additions to our management
team may not integrate well with our existing management team, or they may be
unsuccessful in fulfilling our desired objectives for their position. The
occurrence of any of these factors could result in significant senior
management time being diverted from the management of our business to address
these issues, which could seriously harm our business.
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 for a number of reasons, including factors
described throughout this risk factors section as well as the following:
. changes in financial estimates or recommendations by securities analysts;
and
. future equity or debt offerings or our announcements of these offerings;
13
<PAGE>
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.
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 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 cause us to experience operational inefficiencies as well as
increased costs and expenses, which could seriously harm our business.
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 62.4% of our
outstanding common stock following the completion of this offering or 62.1% 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
14
<PAGE>
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 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 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 $9.16 per share at the assumed initial public
offering price of $11.00. 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 24,499,574 shares of common
stock. See "Capitalization" for a discussion of the shares included in and
excluded from this number. The 4,000,000 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
20,343,734........ 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
15
<PAGE>
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.
We may suffer adverse effects from Year 2000, possible effects including:
. 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 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."
Additional risks which we have not specified in this prospectus may harm our
business, results of operations and financial condition
The risks described above are intended to highlight risks that are specific
to us but may not be 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 described above, 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.
16
<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 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.
17
<PAGE>
USE OF PROCEEDS
We expect to receive net proceeds of approximately $39.4 million from the
sale of the 4,000,000 shares of common stock or approximately $45.6 million if
the underwriters' over-allotment option is exercised in full, at an assumed
initial public offering price of $11.00 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 the repayment of approximately $1 million of
outstanding indebtedness, 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.
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<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 a pro forma as adjusted basis to give effect to the sale of 4,000,000
shares of common stock at an assumed initial offering price of $11.00 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, 24,499,574 shares issued and
outstanding (pro forma as adjusted)............ 6 20 24
Additional paid-in capital........................ 41,251 41,245 80,661
Notes receivable from stockholders................ (2,325) (2,325) (2,325)
Deferred stock compensation....................... (12,655) (12,655) (12,655)
Accumulated deficit............................... (16,307) (16,307) (16,307)
-------- ------- --------
Total stockholders' equity...................... 9,978 9,978 49,398
-------- ------- --------
Total capitalization.......................... $ 10,186 $10,186 $ 49,606
======== ======= ========
</TABLE>
- -----------------------
The number of shares of common stock outstanding after this offering
excludes the following:
. 2,180,600 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
. 12,360,000 shares reserved for issuance under our stock option plan,
executive option and employee stock purchase plan, including amounts
authorized for issuance subsequent to September 30, 1999.
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<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, computed as 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. Pro
forma net tangible book value per share was calculated by dividing the sum of
total assets less liabilities less intangible assets by the number of common
shares outstanding at September 30, 1999 and the assumed conversion of
7,058,863 shares of preferred stock into 14,470,282 shares 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
4,000,000 shares of common stock offered hereby at an assumed public offering
price of $11.00 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 $45.0 million or approximately $9.16 per
share. This represents an immediate increase in net tangible book value of
$1.57 per share to existing stockholders and an immediate dilution in net
tangible book value of $9.16 per share to new investors, or approximately 83.3%
of the initial public offering price of $11.00 per share. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $11.00
Pro forma net tangible book value per share at September
30, 1999.................................................. $ 0.27
Increase per share attributable to this offering........... $ 1.57
------
Pro forma as adjusted net tangible book value per share after
this offering............................................... $ 1.84
------
Dilution per share to new investors.......................... $ 9.16
======
</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 $11.00 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 83.7% $25,797,000 37.0% $ 0.79
New investors.......... 4,000,000 16.3 44,000,000 63.0 $11.00
---------- ----- ----------- -----
Total................ 24,499,574 100.0% $69,797,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and table are based on the number of shares of
common stock outstanding after this offering excludes the following:
. 2,180,600 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
. 12,360,000 shares reserved for issuance under our stock option plan,
executive option plan and employee stock purchase plan, including amounts
authorized for issuance subsequent to September 30, 1999.
New investors will suffer additional dilution upon exercise of outstanding
options. At September 30, 1999, assuming exercise and payment of all
outstanding options net tangible book value per share would be $1.75
representing dilution of $9.25 per share to new investors.
To the extent any of these options are exercised or our employees purchase
our shares under our 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.
20
<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.
21
<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.
Overview
We provide long-range DSL transmission systems that increase access speeds
and performance of copper lines to meet the rapidly growing demand for multiple
access lines 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. The loss of any
of our major customers or the delay or reduction in orders from these customers
would significantly reduce our revenues. For example, as a result of the
failure of our GDSL product related to lightning storms, GTE has reduced its
order rate.
Since our inception, we have incurred significant losses and expect to incur
losses for the foreseeable future. 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 were 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
22
<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
23
<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 for $5.5 million in cash certain assets and
assumed certain liabilities relating to the FDS product line from E/O Networks,
which had filed for protection under Chapter 11 of the U.S. Bankruptcy Code
prior to the acquisition. This acquisition was approved and the sale finalized
by the bankruptcy court. The bankruptcy of E/O Networks did not have a material
impact on the results of operations attributable to the acquired assets. The
results of operations for the FDS product line are included in our statement of
operations from the date of acquisition of the FDS product line, which occurred
on July 27, 1999. 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.
Developed technology is technology that is being used in existing products
of the business and is distinguished from in-process technology because it has
achieved technological feasibility. Core technology represents fundamental
technology and advances that are the basis for our developed and in-process
products. New and in-process products may leverage core technology to different
degrees depending on the extent of incorporation of new, previously undeveloped
technologies.
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 acquired in-process
project relates to a digital switch interface that will offer higher access
speeds and integration with advanced digital switches. At the date of
acquisition, the detailed product design and development up to the stage prior
to the first prototype had been completed on the project. We anticipate
spending approximately $200,000 to complete the project and we anticipate the
development will be completed and benefits will begin in the fiscal year 2001.
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 a 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.
It is reasonably possible that the development of this technology could fail
because of either prohibitive cost, our inability to perform the required
efforts to complete the technology or other factors outside of our
24
<PAGE>
control such as a change in the market for the resulting developed products. In
addition, at such time that the project is completed it is reasonably possible
that the completed product does not receive market acceptance or that we are
unable to produce and market the product cost effectively.
Results of Operations
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. We have included a discussion of our results of operations for yearly
periods immediately following our six months comparative analysis.
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 both
our GDSL and our FDS 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%.
25
<PAGE>
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 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.
Fiscal Years Ended March 31, 1997, 1998 and 1999
Net Revenues
The quarter ended June 30, 1998 was our first quarter of revenue. Net
revenues were $8.8 million in fiscal 1999.
26
<PAGE>
Cost of Revenues
Cost of revenues was $5.1 million in fiscal 1999.
Research and Development Expenses
Research and development expenses increased from $2.4 million in fiscal 1997
to $3.4 million in fiscal 1998 primarily due to increased consulting expenses
and other outside services in addition to increased spending for prototypes and
materials purchased for research and development purposes. Research and
development expenses decreased 18% in fiscal 1999 to $2.8 million primarily due
to decreased consulting expenses and decreased materials purchased for research
and development purposes.
Sales and Marketing Expenses
Sales and marketing expenses increased from $242,000 in fiscal 1997 to $1.2
million in fiscal 1998 and to $2.2 million in fiscal 1999. These expenses
increased due to the addition of sales and marketing personnel as well as
commissions on sales, which were recorded for the first time in fiscal 1999.
General and Administrative Expenses
General and administrative expenses increased from $375,000 in fiscal 1997
to $615,000 in fiscal 1998 and to $976,000 in fiscal 1999. This increase was
due primarily to an increase in general and administrative personnel.
Stock Compensation
We recorded deferred stock compensation of $2.4 million for the year ended
March 31, 1999 and amortized $1.3 million during this period. We did not record
or amortize any deferred stock compensation for the years ended March 31, 1997
and 1998.
Other Income and (Expense), Net
Net interest income was $59,000 in fiscal 1997 to $92,000 in fiscal 1998.
Net interest expense was recorded in fiscal year 1999 of $65,000.
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. See "Risk Factors--A number
of factors could cause our operating results to fluctuate significantly and
cause our stock price to be volatile." 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% or currently 8.75% 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% or currently 9.50% 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. We violated the quick ratio and the net income covenants. The
institution waived these covenant defaults pending further negotiations. At
September 30, 1999, $250,000 was outstanding under the line of credit and
$440,000 was outstanding under the equipment line of credit. Additionally, we
have an equipment lease with a leasing company that provides for borrowing of
up to $1.0 million and is secured by the equipment financed under the lease. We
borrowed $926,000 at multiple closings at various interest rates up to 17.3%.
Payments are scheduled to be completed in August 2000. At September 30, 1999,
$305,000 was outstanding under the lease.
29
<PAGE>
We have negotiated a new credit facility with another financial institution
that provides for a line of credit up to $4.0 million at the prime rate and a
term loan of up to $1.5 million at the prime rate plus .25%. This facility will
also have financial covenants associated with it. We expect to finalize and
close this facility prior to January 31, 2000.
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 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, $5.6 million of which relates to cash used to acquire
certain assets from E/O Networks and $800,000 of which relates to the
acquisition of fixed assets in the ordinary course of business. 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.
From July through October 1999, we lent an aggregate $2,475,000 evidenced by
full recourse promissory notes to certain members of management in conjunction
with their purchases of our common stock upon exercise of their stock options
prior to vesting date. 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 employment with us. The notes are collateralized by
the related 2,506,500 shares of common stock issued, which are subject to our
right of repurchase. The amount outstanding has been reflected as a separate
component of stockholders' equity.
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. We expect to raise net proceeds of approximately $39 million in
this offering. Although we believe that on the closing of this offering this
amount together with 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.
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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.
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 equipment that transports high-speed DSL and
voice services over existing copper lines at long distances from a network
access provider's central office. This equipment is called a long-range DSL
transmission system. Network access providers are companies that have installed
a network of copper wires, also known as copper lines, which connect businesses
and households to a central location in the telephone network commonly known as
the central office. Digital Subscriber Line, or DSL solutions enable network
access providers to offer cost-effective, high-speed access services over
existing copper lines.
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.
We have designed our long-range GDSL transmission systems to provide our
customers with the ability to upgrade their service offerings to provide
increasingly higher access speeds 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 installing
fiber or copper lines or using other more expensive network equipment.
GoDigital's systems allow our more than 60 customers, including ALLTEL,
Frontier, GTE, TELUS and US West to offer enhanced voice, Internet access and
data services over long distances to their business and residential customers.
We incorporated in February 1996 and commenced operations in April 1996.
Between April 1996 and the shipment of our first GDSL product we were primarily
engaged in fund raising and research and development activities. In July 1999
we acquired the FDS product line from E/O Networks and incorporated this line
into our product family. Prior to the closing of this offering we plan to
reincorporate into Delaware.
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. Consumers are seeking low-cost,
high-speed access to Internet content and services that require transmission of
large amounts of data 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 telecommuting employees with the same
capabilities they would experience at the office.
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.
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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 delivery 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 existing network access providers increase the levels of services to their
entire customer base.
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 installing
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.
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 voice traffic. In recent years, high-speed modems have been
introduced that are designed to receive data at speeds of up to 56 Kbps.
However, the access speed allowed by the phone line drops very quickly the
greater the distance it must travel along the length of the copper wire.
Therefore, many users do not experience the full potential of their modems.
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 installing 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
installing 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
While DSL technology still is in the early stage of market acceptance,
network access providers have begun to deploy DSL technology as a cost-
effective solution for high-speed Internet access to address the "last mile"
bottleneck. DSL technology achieves 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 lines. DSL also allows voice traffic and data
traffic to be separated at the point where they enter the network freeing the
telephone system 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 telephony system. DSL also allows for a constant connection to
the Internet and other communications networks, resulting in guaranteed access
speed 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.
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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. We believe
that by extending the reach of DSL services beyond the 18,000 feet
barrier, the network access providers can increase their potential
customer base by roughly 50%.
. 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 DSL transmission equipment that will enable them to
significantly expand their customer base. 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 access speeds and
more access lines to virtually all of their customers, regardless of physical
distance from a central office. We design and manufacture 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. We believe that by extending
the reach of DSL services beyond the 18,000 feet barrier, the network access
providers can increase their potential customer base by roughly 50%.Our systems
allow network access providers to deliver single or multiple services from any
point on the copper line or deliver all services the full 25 mile distance.
These services are being delivered to end-user in both suburban and rural
areas.
Enable Compelling Economics by Offering Multiple Services on a Single
Line. Our systems enable network access providers to offer multiple services
and access speeds on one copper line. Our current systems offer up to eight
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, local and long distance telephone and
other 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 installing
new copper lines and that at locations that require less than 200 phone lines,
our systems are more cost effective than installing other expensive
infrastructure equipment.
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Facilitate Efficient and Cost-Effective Installation and Maintenance. Our
systems are designed to be rapidly installed by the network access providers'
service technicians. 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 enable network access providers to remotely
diagnose service problems in the network and reduce the expense of sending on-
site technicians.
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. The OSMINE process is a certification process administered by
Telcordia to ensure general interoperability with existing telephone systems.
We also leverage our core technology expertise together with our relationships
with network access providers, such as GTE, US West, and 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. Our GDSL and FDS systems meet
stringent industry standards adopted by the largest network access providers
pertaining to safety, environmental factors and reliability. These standards
are known within our industry as NEBS Level 3 Requirements. These NEBS Level 3
Requirements are set by Telcordia, formerly known as Bellcore, a company that
among other things sets product and system standards for our industry.
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 Customer Base. As of September 30, 1999 over 60
customers had deployed our solutions. We intend to build upon the sale of our
systems to our customer base 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 High-Speed Access Solutions. Our current systems are
focused on satisfying the increasing demand for access lines used for enhanced
voice services, high-speed analog modem access and DSL services that operate at
speeds of 144 Kbps, commonly known as IDSL, to virtually any point on the
network. As a network access provider's customers require increased access
speeds, we intend to leverage our installed customer base to upgrade their
systems to deliver increasingly higher access speed. We are currently
developing higher access speed delivery methods to meet the needs of highly
data-intensive network applications such as high-speed Internet access,
electronic commerce and full motion video.
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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 the market opportunity for the
suppliers of this equipment. We intend to expand our non-contractual
cooperative marketing 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 expertise and
products relating to fiber optic technology. The FDS systems aggregate multiple
DSL service offerings and offer long-range transport of voice and data over
fiber optic lines. 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 to deliver
services to virtually any location within the network access provider's service
area. 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 Long-Range DSL Transmission 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 Universal Central Office Terminal,
Central Office Terminal Units, Straight Through Repeaters, Add/Drop Repeaters,
and Remote Terminal Units. The Universal Central Office Terminal is the shelf
that houses Central Office Terminal Units. Each Central Office Terminal Unit
aggregates multiple services within the central office for transport over a
single copper line. Our Straight Through Repeaters, are placed approximately
every 25,000 feet along copper lines to maintain signal strength over long
distances. The Add/Drop Repeaters are used to deliver single or multiple
services in route to the Remote Terminal Units, where all or part of the signal
is delivered.
Below is a graphic of our GDSL system which includes a GDSL-8 and GDSL-3i
shelf, Straight Through Repeaters, Add/Drop Repeaters and Remote Terminal
Units.
[Graphic of the GDSL system includes a GDSL-8 and GDSL-3i shelf; several
Straight Through Repeaters, Add/Drop Repeaters and Remote 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, other services, including Caller ID, distinctive ringing
and automated call routing, 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
. DSL equipment designed to withstand harsh weather conditions
. Line powered from the central office
. Interoperates with network access providers' systems and procedures
. Allows multiple points for data delivery along the transmission route
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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 other services, including Caller ID, distinctive ringing and
automated call routing, on one copper line to distances up to 25 miles from the
central office. The GDSL-8 Universal Central Office Terminal is an industry
standard 19 inch or 23 inch rack mount shelf that can hold up to 20 Central
Office Terminal Units 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.
The GDSL-3i can be served from the same Universal Central Office Terminal as
the GDSL-8 and uses the same Straight Through Repeaters used in the GDSL-8
systems.
Full-Service Distribution System
FDS FiberReach. The FDS FiberReach transports multiple IDSL lines or access
lines to multiple delivery points along a fiber optic ring of up to 150 miles.
Fiber optic rings are composed of fiber optic cables layed in the ground in a
circular design. The FDS FiberReach enables our customers to transport long-
range DSL services and interconnect to our copper-based GDSL system to provide
services to end-users. The FDS FiberReach consists of a host digital terminal
and optical network units. The host digital terminal, resides in the central
office and aggregates and transports signals onto the fiber optic rings. The
optical network units deliver services from points along the fiber optic ring
to the end customers.
Below is a graphic of fiber ring with the FDS FiberReach system, including a
host digital terminal, optical network units and connections to a GDSL-8 and a
GDSL-3i:
[Graphic of the FDS FiberReach and fiber ring connected to a GDSL-8]
Features and Benefits
. Optical network units can be sized to deliver from 24 to 192 lines
. Supports up to 30 optical network units on 150 mile fiber optic rings
. Interoperates with network access providers' systems and procedures
. GDSL systems can be used in combination with the FDS FiberReach to
deliver services over long distances using both fiber optic rings and
copper lines
Technology
We believe that our GDSL systems provide us with a competitive advantage by
cost-effectively facilitating the delivery of more services and higher speeds
at long distances. In addition, our systems are NEBS Level 3 compliant and are
also designed to withstand harsh weather conditions. 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.
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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 speeds are
added and more lines are needed.
Optimization of DSL Technology. We customize existing DSL 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 access lines along fiber optic rings. Our GDSL systems interface
with these rings to extend the reach of our solution even further, potentially
providing access services, including IDSL service to virtually all subscribers.
Our powerful combination of fiber optic and copper technology offers network
access providers flexible options to provide increased speeds and more lines to
more customers.
Durable Design. We have created transmission 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 speeds 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
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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. We do not
currently have any long-term contracts with any of our customers.
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 manufacturing
methodology incorporates a high level of automated in-circuit and functional
testing to reduce manufacturing costs and also provide for the ability to
outsource the manufacturing process. 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.
We currently do not have long-term contracts with these suppliers. We instead
place purchase orders with these suppliers.
Our manufacturing process enables us to configure our systems to meet a wide
variety of individual customer requirements. 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 currently outsource approximately 15% of our
manufacturing.
We plan to outsource most of our manufacturing and supply chain management
operations by the end of fiscal 2001 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. We
have non-exclusive agreements with these distribution partners that may be
terminated upon 30 days notice.
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.
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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 which typically last for a period
of two to five years. 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 marks GODIGITAL(R) and GDSL(R), 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.
Government Regulation
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the communications industry, to our customers and to the products and
services that our customers sell. Future FCC regulations, or regulations set
forth by other regulatory bodies, may adversely affect the DSL services
industry. Regulation of our customers could delay deployment of our services
which would seriously harm our business. In addition, international regulatory
bodies are beginning to adopt standards for the communications industry. The
delays that these governmental processes entail may cause order cancellations
or postponements of product purchases by our customers, which would 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
40
<PAGE>
to 25 miles from the central office. We are also developing a GDSL system to
deliver multiple, higher speed 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.
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.
41
<PAGE>
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.
42
<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 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.
43
<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 in high technology,
electronic and Internet companies. Mr . Reyes previously served as Chairman and
Chief Executive Officer of Sunward Technologies until the company was sold in
August 1994. Mr. Reyes serves on the board of directors of C. Cube Microsystems
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.
44
<PAGE>
Compensation Committee Interlocks and Insider Participation
Mr. Reyes and Mr. Carlisle constitute our compensation committee. 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. Mr. Reyes has
invested in our capital stock directly and Mr. Carlisle is a general partner of
Menlo Ventures that has also invested in our capital stock. See "Certain
Relationships and Related Transactions" and "Principal Stockholders."
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. No options were granted to any director in fiscal
year 1999. In November 1999, we amended the 1996 Stock Plan to provide that all
of our non-employee directors will automatically be granted options when they
first become a non-employee director, except for those directors who become
non-employee directors by ceasing to be employee directors, and each year
following our annual stockholder meeting so long as they have been a director
for at least six months. See "--Stock Plans--1996 Stock Plan."
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.
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
Dennis Haar(2)....................... $ $ -- $
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.
(2) Mr. Haar became our President and Chief Executive Officer in August 1999.
His annualized compensation is expected to be $200,000 in fiscal year 2000,
and he was granted options to purchase 1,300,000 shares of our common
stock. 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:
. a change of control as that term is explained in the section "Change of
Control Severance Agreements" below;
. 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.
45
<PAGE>
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 our 1996 Stock Plan. 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.
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 $3,295,000 $4,910,000
Farzin Hatami(1)........ 382,500 34.8% $0.18 9/13/2008 $6,300,000 $9,390,000
</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:
. a change of control as that term is explained in the section "Change of
Control Severance Agreements" below; and
. 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 $11.00 per share minus the actual exercise prices. All options were granted
under our 1996 Stock Plan. These options vest over four years and otherwise
generally conform to the terms of our 1996 Stock Plan.
<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 -- 2,164,000 --
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
46
<PAGE>
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 $11.00 per share,
less the exercise price per share.
Change of Control Severance Arrangements
We have entered into change of control severance agreements with T. Olin
Nichols, Francis Akers, Farzin Hatami, Paul Scherf, David Krantz and David
Yoffie. 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
47
<PAGE>
. 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
coverage under our group health insurance plans and life insurance plans for a
period of 12 months following the date of the employee's termination at a rate
equal to the employee's base salary and coverage levels 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.
The change of control severance agreements also provide that if the employee
is terminated other than for cause, as follows:
. an act of personal dishonesty;
. the employee's conviction of a felony; or
. a willful act by the employee which constitutes misconduct and is
injurious to our company
and apart from a change of control, then the employee will be entitled to
receive severance payments and coverage under our group health insurance plans
and life insurance plans for a period of 12 months following the date of
employee's termination at a rate equal to the employee's base salary and
coverage levels as in effect immediately prior to the termination. In addition,
all shares subject to unvested options or shares subject to our right of
repurchase shall continue to vest over such 12-month period as though the
employee was still employed by us.
We have also entered into a change of control severance agreement with
Dennis Haar, which contains the same terms as set forth above, except that a
termination for cause is also defined to include the continued willful refusal
of the employee to perform his duties after there has been delivered to the
employee a written demand for performance of duties and describing the basis
for the belief that the employee has not substantially performed his duties.
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
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. As a result of
these provisions, we and our stockholders may not be able to obtain monetary
damages from a director for breach of his duty of care.
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.
48
<PAGE>
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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, we have been informed that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
Stock Plans
1996 Stock Plan
Our board of directors adopted our stock option plan in March 1996, and our
stockholders initially approved the plan in March 1996. In connection with this
offering, our board of directors approved the amendment and restatement of our
stock option plan in November 1999, and we plan to submit the amended and
restated plan to our stockholders for approval in 2000. Our stock
option plan provides for the grant of incentive stock options, which may
provide for preferential tax treatment, 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 Stock Option Plan. As
of November 15, 1999, a total of 10,160,000 shares of our common stock were
reserved for issuance pursuant to our stock option plan, of which options to
acquire 2,537,400 shares were issued and outstanding as of that date. As part
of the 1999 amendment and restatement of our stock option plan, the board of
directors approved an increase of 4,000,000 shares reserved for issuance under
the stock option plan. The stock option plan provides for annual increases in
the number of shares available for issuance under our stock option plan on
January 1st of each calendar 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 year, 4,000,000 shares or such lesser amount as our board of directors may
determine.
Administration of the Stock Option Plan. Our board of directors or a
committee of our board administers the stock option plan. The committee may
consist of two or more "outside directors" to satisfy certain tax and
securities requirements. The administrator has the power to determine the terms
of the options 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 stock option plan, but with respect to 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. Additionally, the term of an incentive stock option
may not exceed ten years. 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 of our common
stock.
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.
49
<PAGE>
Stock Purchase Rights. The administrator determines the exercise price of
stock purchase rights granted under our stock option 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 stock option 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
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 stock option 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 stock option 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 for each option or stock purchase right. If the outstanding options
or stock purchase rights are not assumed or substituted for, all outstanding
options and stock purchase rights will terminate as of the closing of such
merger or sale of assets.
Amendment and Termination of our Stock Option Plan. Our stock option 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 stock option plan provided it does not adversely affect any
option previously granted under our stock option plan.
1999 Executive Stock Option Plan
The board of directors adopted our executive option plan in November 1999.
The executive option plan provides for the grant of nonstatutory options to our
employees, directors and consultants.
Number of Shares of Common Stock Available under our Executive Option
Plan. As of November 15, 1999, a total of 200,000 shares of our common stock
were reserved for issuance under our plan, of which options to acquire 200,000
shares were issued and outstanding as of that date.
Administration of the Executive Option Plan. Our board of directors or a
committee of our board administers the executive option plan. The administrator
has the power to determine the terms of the options granted, including the
exercise price, the number of shares subject to each option, the exercisability
of the options and the form of consideration payable upon exercise.
Options. The administrator determines the exercise price and the term of
options granted under our executive option plan. 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 generally 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.
50
<PAGE>
Adjustments upon Merger or Asset Sale. Our executive option plan provides
that in the event of our merger with or into another corporation or a sale of
substantially all of our assets, each outstanding option will be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options are not assumed or an equivalent option is not substituted by the
successor corporation, the administrator will provide notice to the optionee
that he or she has the right to exercise the option as to all of the shares
subject to the option, including shares which would not otherwise be
exercisable, for a period of 15 days from the date of the notice. The option
will terminate upon the expiration of the 15-day period.
Amendment and Termination of our Executive Option Plan. Our executive option
plan will automatically terminate in 2009, unless we terminate it sooner. In
addition, our board of directors has the authority to amend, suspend or
terminate the plan provided it does not adversely affect any option previously
granted under the plan.
1999 Employee Stock Purchase Plan
Concurrently with this offering, we intend to establish an employee stock
purchase plan.
Number of Shares of Common Stock Available under the Employee Stock Purchase
Plan. A total of 2,000,000 shares of our common stock will be made available
for sale. In addition, our 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 may be determined by our board of directors.
Administration of the Employee Stock Purchase Plan. Our board of directors
or a committee of our board administers the plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the plan
and determine eligibility.
Eligibility to Participate. All of our employees are eligible to participate
if they are customarily 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
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.
Offering Periods and Contributions. Our plan is intended to qualify for
preferential tax treatment 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.
The 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 no more than
5,000 shares during any 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 or after a purchase period
ends. If the
51
<PAGE>
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 our employee stock purchase plan other than by will, the laws of descent
and distribution or as otherwise provided under the plan.
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.
Amendment and Termination of the Employee Stock Purchase Plan. Our plan will
terminate in 2009. However, our board of directors has the authority to amend
or terminate our plan, except that, subject to certain exceptions described in
the plan, no such action may adversely affect any outstanding rights to
purchase stock under our plan.
401(k) Plan
On July 1, 1996, we adopted a 401(k) profit sharing 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 Internal Revenue Code and the 401(k) plan trust is intended
to qualify under Section 501(a) of the Internal Revenue 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 up to fifteen percent 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.
52
<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.
These shares are subject to our right of repurchase, which right lapses in its
entirety on January 31, 2000.
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. Upon the closing of this offering, each share of
the Series A Preferred Stock with convert into two shares of common stock. 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. Flach, who is a partner with Accel Partners, is also a
director of GoDigital. Mr. Reyes is a director of GoDigital.
53
<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. Upon the closing of this offering, each
share of the Series B Preferred Stock will convert into two shares of Common
Stock. 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. Mr. Flach, who is a partner
with Accel Partners, is also a director of GoDigital. Mr. Carlisle, who is a
managing director and general partner of Menlo Ventures, is also 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. Upon the closing of this offering, each share of
Series C Preferred Stock will convert into two shares of Common Stock. 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
54
<PAGE>
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. Mr. Flach, who is a partner with Accel Partners, is also a
director of GoDigital. Mr. Carlisle, who is a managing director and general
partner of Menlo Ventures, is also a director of GoDigital.
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. Mr. Flach, who is a partner with Accel Partners, is also a
director of GoDigital. Mr. Carlisle, who is a managing director and general
partner of Menlo Ventures, is also a director of GoDigital.
55
<PAGE>
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. Upon the closing of
this offering, each share of the Series D Preferred Stock will convert into two
shares of Common Stock. 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 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.
Mr. Flach, who is a partner with Accel Partners, is also a director of
GoDigital. Mr. Carlisle, who is a managing director and general partner of
Menlo Ventures, is also 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 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 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, which represents an aggregate of $150,000. In
addition, we allowed our right to repurchase Mr. Byers' 343,750 unvested shares
to lapse. Mr. Byers is not entitled to any other employee benefits other than
standard COBRA benefits applicable to former employees.
56
<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
24,518,574 shares of common stock outstanding after the completion of this
offering, assuming the Underwriters' over-allotment option to purchase 600,000
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 SEC. 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% 6.1%
Dennis Haar(2).......... 1,300,000 -- 6.3 5.3
Farzin Hatami(3)........ 382,500 -- 1.9 1.6
Paul H. Scherf, Jr.(4).. 250,000 171,000 1.2 1.0
Doug Carlisle(5)........ 6,041,252 -- 29.4 24.7
Jim Flach(6)............ 5,349,630 -- 26.1 21.8
Gregorio Reyes(7)....... 272,196 -- 1.3 1.1
All directors and
officers as a group
(9 persons)(8)......... 15,595,586 471,000 75.1 62.4
5% Stockholders
Accel Partners(9)....... 5,349,630 -- 26.1 21.8
428 University Avenue
Palo Alto, CA 94301
Menlo Ventures(10)...... 6,041,252 -- 29.4 24.7
3000 Sand Hill Road,
Building Four, Suite
100
Menlo Park, CA 94025
JAFCO America Ventures,
Inc.(11)............... 2,217,888 -- 10.8 9.1
505 Hamilton Avenue,
Suite 310
Palo Alto, CA 94301
Jack Byers(12).......... 1,500,000 -- 7.3% 6.1%
1897 Crestline Road
Pleasanton, CA 94566
</TABLE>
- -----------------------
57
<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. Barry F.
Schiffman is President and Hitoshi Imuta is Chairman of JAFCO America
Ventures, Inc., the Executive Partner for the JAFCO affiliated funds
listed.
(12) Includes 62,502 shares which are subject to a right of repurchase in favor
of GoDigital which lapses over time.
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<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 24,499,574 shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options after September 30, 1999, after giving effect to the
sale of our common stock in this offering. In addition to 2,180,600 shares
issuable upon exercise of outstanding options and 5,196,108 shares available
for issuance under our stock option plan, as amended, there are an aggregate of
200,000 shares reserved for issuance under our executive option plan and there
are an aggregate of 2,000,000 shares reserved for issuance under our employee
stock purchase plan. The weighted average exercise price of all outstanding
options under our stock option plan is $0.71 per share. 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. The written request of the holders of a majority of the shares
entitled to vote at a meeting of the stockholders is required to call a special
meeting of the stockholders. Notices of annual or special meetings must be
given not less than ten nor more than sixty days before the meeting date. 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.
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:
. restricting dividends on the common stock,
. diluting the voting power of the common stock,
. impairing the liquidation rights of the common stock and
59
<PAGE>
. 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, the holders of 14,469,482 shares of common
stock, assuming conversion of all outstanding shares of preferred stock are
entitled to certain registration rights as set forth in the 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.
The shareholders rights agreement also provides for the indemnification of
each holder of shares who is a party to the agreement against all expenses,
claims, losses, damages and liabilities which they may become subject to under
the Securities Act, the Exchange Act or other state securities laws, arising
out of or based on any untrue statement of a material fact or omission of a
material fact required to be stated or necessary to make the statements
contained in any registration statement or prospectus, or any amendment or
supplement, not misleading or any violation of the Securities Act, Exchange Act
or state securities laws.
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 the "business combination" or the transaction
in which the person became an interested stockholder is approved in a
prescribed manner or certain other exceptions apply. 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 written request of the holders of a majority of the shares
60
<PAGE>
entitled to vote at a meeting of the stockholders is required to call a special
meeting of the stockholders. Notices of annual or special meeting must be given
not less than ten nor more than sixty days before the date of the meeting.
Any vacancy on the board of directors will be filled either by the
affirmative vote of the holders of a majority of the voting power of our then
outstanding shares of voting stock or by the affirmative vote of a majority of
the remaining directors then in office.
Newly created directorships resulting from any increase in the number of
directors will, unless the Board of Directors determines by resolution that the
vacancy will be filled by vote of the stockholders, be filled only by the
affirmative vote of the directors then in office. Any director may be removed
from office at any time with cause by the affirmative vote of the holders of at
least a majority of the voting power of all of our then outstanding shares of
voting stock, or without cause by the affirmative vote of the holders of at
least two-thirds of the voting power of all of our then outstanding shares of
the voting stock.
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 two-thirds 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."
61
<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 24,499,574 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 4,000,000 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 20,499,574 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 20,499,574
shares, 20,343,734 shares will become eligible for sale 180 days after the
effective date subject to Rules 144 and 701. After the expiration of the lock-
up agreements the holders of 14,469,482 shares of our common stock, assuming
the conversion of all outstanding shares of our preferred stock, are entitled
to certain registration rights requiring that we register such shares for sale
under the Securities Act. See "Description of Capital Stock--Registration
Rights."
As of September 30, 1999, there were a total of 2,180,600 shares of common
stock subject to outstanding options under our stock option plan, 876,200 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
stock option plan, our executive option plan and our 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 stock option plan
and our 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 244,995 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.
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<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, shares may be sold under Rule 144(k)
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.
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<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, FleetBoston 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.............................
FleetBoston Robertson Stephens Inc.................................
U.S. Bancorp Piper Jaffray Inc.....................................
---------
Total............................................................ 4,000,000
=========
</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 600,000 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 of
$1.5 million 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
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<PAGE>
other than, in the case of GoDigital, shares pursuant to the conversion or
exchange of convertible or exchangeable securities or the exercise of warrants
or options, in each case outstanding on the date hereof, grants of employee
stock options pursuant to the terms of a plan in effect on the date of the
final prospectus, and the issuance of securities pursuant to the exercise of
such options. Credit Suisse First Boston Corporation has no current intention
to release shares subject to the lock-up agreements.
The underwriters have reserved for sale, at the initial public offering
price up to five percent of the shares of common stock issued in this offering
for directors, customers and vendors 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.
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<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
. 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;
. where required by law, that such purchaser is purchasing as principal and
not as agent; and
. 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.
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<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. A copy of the registration statement may be inspected by anyone
without charge at the Public Reference Section of the SEC 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 SEC, 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 SEC at 1-800-SEC-0330. The SEC
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 SEC.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the SEC. Such periodic reports, proxy statements and other information
will be available for inspection and copying at the SEC's public reference
rooms, and the Web site of the SEC referred to above.
67
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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-22
FDS BUSINESS
Report of Independent Accountants.......................................... F-26
Statements of Operations................................................... F-27
Statements of Financial Position........................................... F-28
Notes to Financial Statements.............................................. F-29
</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
======= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GODIGITAL NETWORKS CORPORATION
STATEMENTS 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)
========== ========== =========== ========== ===========
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 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.
F-10
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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>
F-11
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
F-12
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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.
F-13
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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
F-14
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
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)................ (3,164,400) 3,164,400 1.26
Exercised (unaudited).............. -- (2,564,626) 1.00
Cancelled (unaudited).............. 157,574 (157,574) 0.98
---------- ---------- -----
Balance at September 30, 1999
(unaudited)....................... 1,196,108 2,180,600 $0.71
========== ========== =====
</TABLE>
F-15
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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.
Stock compensation expense is comprised of the following:
<TABLE>
<CAPTION>
Six Month
Year ended Period Ended
March 31, September 30,
---------------- -------------
1997 1998 1999 1998 1999
---- ---- ------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Costs of revenues............................... $ -- $ -- $ 13 $ -- $ 279
Research and development........................ -- -- 197 -- 445
Sales and marketing............................. -- -- 15 -- 314
General and administrative...................... -- -- 1,030 -- 569
---- ---- ------ ----- -------
-- -- $1,255 -- $ 1,607
---- ---- ------ ----- -------
</TABLE>
F-16
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table presents the statement of operations after allocation of
stock compensation to functional categories:
<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............ -- -- 5,098 1,269 8,897
------- ------- ------- ------- -------
Gross margin................ -- -- 3,670 (219) 2,841
------- ------- ------- ------- -------
Operating expenses:
Research and development.. 2,395 3,398 2,982 1,391 2,633
Sales and marketing....... 242 1,213 2,228 936 2,300
General and
administrative........... 375 615 2,006 323 1,865
Write-off of in-process
research and
development.............. -- -- -- -- 638
------- ------- ------- ------- -------
Total operating
expenses............... 3,012 5,226 7,216 2,650 7,436
------- ------- ------- ------- -------
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)
======= ======= ======= ======= =======
</TABLE>
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.
F-17
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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
F-18
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 amortization periods for the acquired intangible assets are as follows:
<TABLE>
<S> <C>
Developed technology................ 36 months
Core technology..................... 60 months
Customer list....................... Remainder of contractual term (5 months)
Assembled workforce................. 24 months
Goodwill............................ 60 months
</TABLE>
The amount allocated to in-process research and development represents the
amounts allocated to projects that, as of the date of the acquisition, had not
yet reached technological feasibility and had no alternative future use. The
acquired in-process project relates to a digital switch interface that will
offer higher bandwidth and integration with advanced digital switches. At the
date of acquisition the detailed product design and product development up to
the stage prior to the first prototype had been completed on the project. The
Company anticipates spending $200,000 to complete the project and anticipates
the development will be completed and benefits will begin in the 2001 time
frame. 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. Cash flows related to the in-
process research and development were discounted at 35%.
Developed technology is technology that is being used in existing products
of the business and is distinguished from in-process technology because it has
achieved technological feasability. Core technology represents fundamental
technology and advances that are the basis for the Company's developed and in-
process products. New and in-process products may leverage core technology to
different degrees depending on the extent of incorporation of new, previously
undeveloped technologies.
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-19
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
It is reasonably possible that the development of this technology could fail
because of either prohibitive cost, inability to perform the required efforts
to complete the technology or other factors outside of the Company's control
such as a change in the market for the resulting developed products. In
addition, at such time that the project is completed it is reasonably possible
that the completed product does not receive market acceptance or that we are
unable to produce and market the product cost effectively.
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 Year ended September 30,
March 31, 1998 March 31, 1999 1999
-------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Pro forma financial
information (unaudited)
Net revenues.................. $ -- $ 16,780 $ 14,422
========== ========== ===========
Loss from operations.......... $ 14,891 $ (13,210) $ (6,416)
========== ========== ===========
Net loss...................... $ 14,799 $ (13,275) $ (6,430)
========== ========== ===========
Net loss per share:
Basic and diluted........... $ (10.37) $ (5.58) $ (1.95)
========== ========== ===========
Weighted average shares
outstanding:
Basic and diluted........... 1,427,150 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 members of the Company's
management 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
F-20
<PAGE>
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
July 2005 or 90 days following termination of 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 amount
outstanding has been reflected as a separate component of stockholders' equity.
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-21
<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-22
<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-23
<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-24
<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:
<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-25
<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-26
<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-27
<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-28
<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
F-29
<PAGE>
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.
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
F-30
<PAGE>
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.
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.
F-31
<PAGE>
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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 Ended
December 31, June 30,
----------------- -----------------------
1997 1998 1998 1999
-------- ------- ----------- -----------
(Unaudited) (Unaudited)
<S> <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.
F-32
<PAGE>
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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-33
<PAGE>
[GoDigital Logo]
Delivering Long Range Network Access
[GDSL-8 Long Range DSL Transmission System Graphic and Product Name]
[GDSL-3i Long Range DSL Transmission System Graphic and Product Name]
[FDS FiberReach System Graphic and Product Name]
<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.......................................... $ 14,573
NASD filing fee............................................... 6,020
Nasdaq National Market listing fee............................ 90,000
Printing and engraving costs.................................. 300,000
Legal fees and expenses....................................... 500,000
Accounting fees and expenses.................................. 350,000
Blue Sky fees and expenses.................................... 3,000
Transfer Agent and Registrar fees............................. 10,000
Miscellaneous expenses........................................ 226,407
----------
Total....................................................... $1,500,000
==========
</TABLE>
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 Francis
I. Akers, Jack Byers and Gregorio Reyes for an aggregate consideration of
$1,560.00.
(2) On March 12, 1996, we issued 120,000 shares of common stock to Larry
Smart 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. The investors
in the Series A Preferred Stock included venture capital investment
partnerships and individual investors.
(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. The
investors in the Series B Preferred Stock included venture capital investment
partnerships and individual investors.
(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. The
investors in the Series C Preferred Stock included venture capital investment
partnerships and companies and individual investors.
II-1
<PAGE>
(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. The investors in
the Series D Preferred Stock included venture capital investment partnerships
and companies and individual investors.
(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. The investors in the
Series F Preferred Stock included venture capital investment partnerships and
companies and individual investors.
(8) On September 14, 1999, we issued an aggregate of 6,000 shares of common
stock to four consultants, Susan Trainer, Jennifer Hart, Donna Wiss, and
Sabrina Sanchez as consideration for past services rendered.
(9) Since our incorporation, we have issued, and there remain outstanding,
options to purchase an aggregate of 2,180,600 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. These options have been granted to
employees, officers, directors and consultants of the Company.
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** Restated Certificate of Incorporation of the Registrant
3.3** 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 option agreements, security agreement and
promissory note 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
10.11* 1999 Executive Stock Option Plan and form of option agreements thereunder
10.12 Form of Restricted Stock Purchase Agreements
10.13 Settlement Agreement and Mutual Release by and between Jack Byers 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
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
** Previously filed
(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
II-3
<PAGE>
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.
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 Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Fremont, State of California, on the 23rd day of December, 1999.
GoDigital Networks Corporation
Dennis Haar*
By: _________________________________
Dennis Haar,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the 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>
Francis I. Akers* Chairman of the Board December 23, 1999
____________________________________ President, Chief
Francis I. Akers Development Officer and
Director
Dennis Haar* President, Chief Executive December 23, 1999
____________________________________ Officer and Director
Dennis Haar (Principal Executive
Officer)
/s/ T. Olin Nichols Vice President, Finance, December 23, 1999
____________________________________ Chief Financial Officer
T. Olin Nichols (Principal Financial
Officer and Principal
Accounting Officer)
Douglas Carlisle* Director December 23, 1999
____________________________________
Douglas Carlisle
James Flach* Director December 23, 1999
____________________________________
James Flach
Gregorio Reyes* Director December 23, 1999
____________________________________
Gregorio Reyes
</TABLE>
/s/ T. Olin Nichols
*By: ________________________________
T. Olin Nichols
Attorney-in-Fact
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** Restated Certificate of Incorporation of the Registrant to be
effective upon the closing of this offering
3.3** 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 option agreements,
security agreement and promissory note 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
10.11* 1999 Executive Stock Option Plan and form of option agreements
thereunder
10.12 Form of Restricted Stock Purchase Agreement
10.13 Settlement Agreement and Mutual Release by and between Jack Byers 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
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
** Previously filed
<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 Delaware on November 19, 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
NAME
----
The name of this corporation is GoDigital Networks Corporation
(hereinafter, the "Company").
<PAGE>
ARTICLE II
REGISTERED OFFICE
-----------------
The address of the Company's registered office in the State of Delaware is
1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware,
19801. The name of the registered agent at such address is The Corporation
Trust Company.
ARTICLE III
PURPOSE
-------
The purpose of the Company is to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
STOCK
-----
The Company is authorized to issue two classes of shares to be designated,
respectively, Common Stock ("Common") and Preferred Stock ("Preferred"). The
total number of shares of capital stock this Company shall have authority to
issue is 47,370,943. The total number of shares of Common this Company shall
have authority to issue is 40,000,000, $0.001 par value. The total number of
shares of Preferred this Company shall have authority to issue is 7,370,943,
$0.001 par value.
There shall be five series of Preferred Stock: one series designated Series
A Preferred Stock (the "Series A Preferred"), one series designated Series B
Preferred Stock (the "Series B Preferred"), one series designated Series C
Preferred Stock (the "Series C Preferred"), one series designated Series D
Preferred Stock (the "Series D Preferred") and one series designated Series E
Preferred Stock (the "Series E Preferred"). The number of shares constituting
the Series A Preferred shall be 2,678,500, the number of shares constituting the
Series B Preferred shall be 1,339,250, the number of shares constituting the
Series C Preferred shall be 1,992,476, the number of shares constituting the
Series D Preferred shall be 440,717 and the number of shares constituting the
Series E Preferred shall be 920,000.
Upon the automatic conversion of all outstanding shares of Preferred in
accordance with the provisions of Article IV, Section 4(b) of this Certificate
of Incorporation (the "Automatic Conversion Event"), the Company shall
immediately thereafter be authorized to issue two classes of stock to be
designated, respectively, Common Stock and Preferred Stock. Immediately
following
-2-
<PAGE>
any Automatic Conversion Event, the total number of shares of Common Stock
which the Company shall have the authority to issue shall be 100,000,000,
$0.001 par value, and the total number of shares of Preferred Stock the
Company shall have the authority to issue shall be 1,000,000, $0.001 par
value. Immediately following any Automatic Conversion Event, 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.
Immediately following any Automatic Conversion Event, the Board of
Directors of the Company is authorized, without the further consent or approval
of the stockholders of the Company to amend and restate this Restated
Certificate of Incorporation to show the authorized classes of capital stock as
set forth in the preceding paragraph and to eliminate all references in this
Restated Certificate of Incorporation to the rights, preferences, privileges and
restrictions of the series of Preferred Stock including those set forth below
this paragraph in this Article IV (and, in connection with any such amendment
and restatement, to renumber the remaining Articles, if necessary).
The relative rights, preferences, privileges and restrictions granted to or
imposed upon the Common, the Series A Preferred, the Series B Preferred, the
Series C Preferred, the Series D Preferred and the Series E Preferred
(collectively, the "Preferred Stock") are as follows:
1. Dividends. The holders of outstanding shares of Series A Preferred,
---------
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred shall be entitled to receive in any fiscal year, when, as and if
declared by the Board of Directors, out of any assets legally available
therefor, prior and in preference to any declaration or payment of any
dividend (payable other than in Common Stock of the Company) on the Common
Stock of the Company, non-cumulative dividends in cash at the rate of $0.05
per share of Series A Preferred, $0.10 per share of Series B Preferred, $0.18
per share of Series C Preferred, $.35 per share of Series D Preferred and
$0.63 per share of Series E Preferred, per annum, as adjusted for any
consolidations, combinations, stock distributions, stock dividends, stock
splits, or similar events (collectively, a "Recapitalization Event").
Dividends, if paid or declared, must be paid or set apart for payment on all
outstanding series of Preferred Stock contemporaneously, and if less than full
dividends are paid or declared and set apart for payment on all outstanding
Preferred Stock, then the same percentage of the respective dividend rate on
each outstanding series of Preferred Stock shall be paid on or declared and
set apart.
-3-
<PAGE>
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of
the Company, either voluntary or involuntary, the holders of shares of
Preferred Stock shall be entitled to receive, on a pari passu basis, prior and
in preference to any distribution of any of the assets of the Company to the
holders of the Common Stock, by reason of their ownership thereof, an amount
equal to $1.00 for each outstanding share of Series A Preferred (the "Series A
Original Issue Price"), as adjusted for any Recapitalization Event, (ii) $2.00
for each outstanding share of Series B Preferred (the "Series B Original Issue
Price"), as adjusted for any Recapitalization Event, (iii) $3.61 for each
outstanding share of Series C Preferred (the "Series C Original Issue Price"),
as adjusted for any Recapitalization Event, (iv) $7.00 for each outstanding
share of Series D Preferred (the "Series D Original Issue Price"), as adjusted
for any Recapitalization Event, and $12.50 for each outstanding share of
Series E Preferred (the "Series E Original Issue Price"), as adjusted for any
Recapitalization Event, plus all declared but unpaid dividends, if any; such
Series A Original Issue Price, Series B Original Issue Price, Series C
Original Issue Price, Series D Original Issue Price and Series E Original
Issue Price are collectively referred to herein as the "Original Issue Price."
If upon the occurrence of such event, the assets thus distributed among the
holders of the Preferred Stock shall be insufficient to permit the payment to
such holders of the full preferential amount, then the entire assets of the
Company legally available for distribution shall be distributed to the holders
of all series of the Preferred Stock in proportion to the Original Issue Price
of the respective series of Preferred Stock held by such holders.
(b) After payment has been made to the holders of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and
Series E Preferred of the full amounts to which they shall be entitled
pursuant to Section 2(a) above, all remaining assets available for
distribution, if any, shall be distributed ratably to the holders of the
Common Stock.
(c) A consolidation or merger of the Company with or into any other
corporation or corporations in which the shareholders of the Company
immediately prior to such consolidation or merger shall own less than fifty
percent (50%) of the voting securities of the surviving corporation, or a sale
of all or substantially all of the assets of the Company, shall be deemed to
be a liquidation, dissolution or winding up within the meaning of this
Section 2.
3. Redemption. The Preferred Stock shall not be redeemable.
----------
4. Conversion. The holders of the Preferred Stock shall have conversion
----------
rights (the "Conversion Rights") as follows:
(a) Subject to subparagraph (d) of this Section 4, each share of
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
Company or any transfer agent for the Preferred Stock, into such number of
fully paid and nonassessable shares of Common Stock as is determined, in the
case of the Series A Preferred, by dividing the Series A Original Issue Price
(as defined in Section 2(a) hereof) by the
-4-
<PAGE>
then-effective Series A Conversion Price (as defined below), as last adjusted
and then currently in effect, in the case of the Series B Preferred, by
dividing the Series B Original Issue Price (as defined in Section 2(a) hereof)
by the then-effective Series B Conversion Price (as defined below), as last
adjusted and then currently in effect, in the case of the Series C Preferred,
by dividing the Series C Original Issue Price (as defined in Section 2(a)
hereof) by the then-effective Series C Conversion Price (as defined below), as
last adjusted and then currently in effect, in the case of the Series D
Preferred, by dividing the Series D Original Issue Price (as defined in
Section 2(a) hereof) by the then-effective Series D Conversion Price (as
defined below), as last adjusted and then currently in effect and, in the case
of the Series E Preferred, by dividing the Series E Original Issue Price (as
defined in Section 2(a) hereof) by the then-effective Series E Conversion
Price (as defined below), as last adjusted and then currently in effect. The
conversion price per share at which shares of Common Stock shall be issuable
upon conversion of shares of the Series A Preferred Stock after the date
hereof shall be $0.50 (the "Series A Conversion Price"); provided, however,
that such Series A Conversion Price shall be subject to adjustment as set
forth in subparagraph (d) of this Section 4. The Conversion Price per share at
which shares of Common Stock shall be issuable upon conversion of shares of
the Series B Preferred Stock after the date hereof shall be $1.00 (the "Series
B Conversion Price"); provided, however, that such Series B Conversion Price
shall be subject to adjustment as set forth in subparagraph (d) of this
Section 4. The Conversion Price per share at which shares of Common Stock
shall be issuable upon conversion of shares of the Series C Preferred Stock
after the date hereof shall be $1.805 (the "Series C Conversion Price");
provided, however, that such Series C Conversion Price shall be subject to
adjustment as set forth in subparagraph (d) of this Section 4. The conversion
price per share at which shares of Common Stock shall be issuable upon
conversion of shares of the Series D Preferred Stock after the date hereof
shall be $2.50 (the "Series D Conversion Price"); provided, however, that such
Series D Conversion Price shall be subject to adjustment as set forth in
subparagraph (d) of this Section 4. The conversion price per share at which
shares of Common Stock shall be issuable upon conversion of shares of the
Series E Preferred Stock shall be $6.25 (the "Series E Conversion Price");
provided, however, that such Series E Conversion Price shall be subject to
adjustment as set forth in subparagraph (d) of this Section 4. The Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series
D Conversion Price and Series E Conversion Price collectively shall
hereinafter be referred to as the "Conversion Price."
(b) Each share of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred shall automatically be
converted into shares of Common Stock at the then-effective Conversion Price
for such series (x) immediately upon the closing of the issuance of shares
following the effectiveness of a registration statement under the Securities
Act of 1933, as amended, (other than a registration statement relating solely
to the sale of securities to employees of the Company or a registration
relating solely to a Securities and Exchange Commission Rule 145 transaction),
pursuant to a firm commitment underwriting and covering the offer and sale of
the Company's Common Stock at a price not less than $4.00 per share for the
Series A Preferred and Series B Preferred, $7.00 per share for the Series C
Preferred and Series D Preferred and $12.50 per share for the Series E
Preferred (in each case subject to appropriate
-5-
<PAGE>
adjustment as provided in subparagraph (d) of this Section 4) the aggregate
proceeds to the Company of which would, at the public offering price, exceed
$10,000,000, or (y) immediately following the affirmative vote of the holders
of two-thirds (2/3) of the shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred, voting as a
single class on an as-converted basis, outstanding at the time of such vote.
(c) Mechanics of Conversion.
-----------------------
Before any holder of Preferred Stock shall be entitled to
convert the same into shares of Common Stock, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Company or of any transfer agent for the Preferred Stock, and shall give
written notice by mail, postage prepaid, to the Company at its principal
corporate office, of the election to convert the same and shall state therein
the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. The Company shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Preferred
Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder
shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender
of the shares of Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock at the close of business on such date.
(d) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Special Definitions. For purposes of this Section 4(d),
-------------------
the following definitions shall apply:
(1) Options' shall mean rights, options or warrants to
-------
subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) 'Original Issue Date' shall mean the date on which
-------------------
the first share of the applicable series of Preferred Stock was first issued.
(3) Convertible Securities' shall mean any evidences of
----------------------
indebtedness, shares (other than the Preferred Stock) or other securities
convertible into or exchangeable for Common Stock.
(4) Additional Shares of Common Stock' shall mean all
---------------------------------
shares of Common Stock issued (or, pursuant to Section 4(d)(iii), deemed to be
issued) by the Company after the applicable Original Issue Date, other than
shares of Common Stock issued or issuable at any time:
(A) upon conversion of the Preferred Stock into
Common Stock;
-6-
<PAGE>
(B) to officers, directors, and employees of, and
consultants to, the Company pursuant to plans, arrangements or agreements
approved by the Board of Directors;
(C) as a dividend or distribution on Preferred Stock
or any event for which adjustment is made pursuant to subparagraph (d)(ii)
hereof;
(D) upon the issuance of warrants or options to
purchase shares of Common Stock or Preferred Stock convertible into shares of
Common Stock, in either case in conjunction with equipment lease transactions,
loan guarantees, commercial loans, bank financing transactions or technology
licenses approved by the Board of Directors, and the issuance of stock upon
exercise of such warrants or options or conversion of such Preferred Stock;
(E) in connection with the sale of all or
substantially all of the Company's assets or the merger or consolidation with
any other corporation in which more than fifty percent (50%) of the voting
power of the Company is disposed of;
(F) by way of dividend or other distribution on
shares of Common Stock excluded from the definition of Additional Shares of
Common Stock by the foregoing clauses (A), (B), (C), (D), (E) or this clause
(F) or on shares of Common Stock so excluded.
(ii) No Adjustment of Conversion Price. No adjustment in
---------------------------------
the respective Conversion Price of a particular share of Preferred Stock shall
be made in respect of the issuance of Additional Shares of Common Stock unless
the consideration per share for an Additional Share of Common Stock issued or
deemed to be issued by the Company is less than the respective Conversion
Price in effect on the date of, and immediately prior to such issue, for such
share of Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common Stock.
-------------------------------------------------
Except as otherwise provided in Section 4(d)(ii), in the event the Company at
any time or from time to time after the applicable Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any
such Options or Convertible Securities, then the maximum number of shares (as
set forth in the instrument relating thereto without regard to any anti-
dilution provisions contained therein for a subsequent adjustment of such
number) of Common Stock issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be Additional
Shares of Common Stock issued as of the time of such issue or, in case such a
record date shall have been fixed, as of the close of business on such record
date, provided that Additional Shares of Common Stock shall not be deemed to
have been issued with respect to the Preferred Stock unless the consideration
per share (determined pursuant to Section 4(d)(v) hereof) of such Additional
Shares of Common Stock would be less than the Conversion Price of the
applicable series of Preferred Stock in effect on the date of and
-7-
<PAGE>
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(1) no further adjustment in the Conversion Price shall
be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of
such Convertible Securities;
(2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decrease in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange thereof, the
Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(3) upon the expiration of any such Options or any rights
of conversion or exchange under such Convertible Securities which shall not
have been exercised, the respective Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(A) in the case of Convertible Securities or Options
for Common Stock, the only Additional Shares of Common Stock issued were
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Company for the issue of all such Options, whether or not exercised, plus the
consideration actually received by the Company upon such exercise, or for the
issue of all such Convertible Securities which were actually converted or
exchanged, plus the additional consideration, if any, actually received by the
Company upon such conversion or exchange, and
(B) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Company for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received
by the Company for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the Company upon the
issue of the Convertible Securities with respect to which such Options were
actually exercised;
(4) no readjustment pursuant to clause (2) or (3) above
shall have the effect of increasing the Conversion Price to an amount which
exceeds the lower of (i) the Conversion Price on the original adjustment date,
or (ii) the Conversion Price that would have
-8-
<PAGE>
resulted from any issuance (and any other deemed issuance) of Additional
Shares of Common Stock between the original adjustment date and such
readjustment date.
(iv) Adjustment of Conversion Price Upon Issuance of
-----------------------------------------------
Additional Shares of Common Stock. In the event the Company shall issue
- ---------------------------------
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 4(d)(iii)) without consideration or
for a consideration per share less than the Series A Conversion Price, the
Series B Conversion Price, the Series C Conversion Price, the Series D
Conversion Price or the Series E Conversion Price in effect on the date of and
immediately prior to such issue, as the case may be, then, and in such event,
the Series A Conversion Price, Series B Conversion Price, the Series C
Conversion Price, the Series D Conversion Price and/or the Series E Conversion
Price, as the case may be, shall be reduced, concurrently with such issue, to
a price (calculated to the nearest cent) determined by multiplying such Series
A Conversion Price, Series B Conversion Price, Series C Conversion Price,
Series D Conversion Price or the Series E Conversion Price, as applicable, by
a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the number of shares of
Common Stock which the aggregate consideration received by the Company for the
total number of Additional Shares of Common Stock so issued would purchase at
such Series A Conversion Price, Series B Conversion Price, Series C Conversion
Price, Series D Conversion Price or the Series E Conversion Price, as
applicable, and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of
such Additional Shares of Common Stock so issued; and provided further that,
for the purposes of this Section 4(d)(iv), all shares of Common Stock issuable
upon conversion of outstanding Options, Convertible Securities and the
Preferred Stock shall be deemed to be outstanding, and immediately after any
Additional Shares of Common Stock are deemed issued pursuant to Section
4(d)(iii), such Additional Shares of Common Stock shall be deemed to be
outstanding.
(v) Determination of Consideration. For purposes of
------------------------------
this Section 4(d), the consideration received by the Company for the issue of
any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration shall:
-----------------
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Company excluding
amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of property
other than cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other
assets of the Company for consideration
-9-
<PAGE>
which covers both, be the proportion of such consideration so received,
computed as provided in clauses (A) and (B) above, as determined in good faith
by the Board of Directors.
(2) Options and Convertible Securities. The
----------------------------------
consideration per share received by the Company for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 4(d)(iii),
relating to Options and Convertible Securities, shall be determined by
dividing
(A) the total amount, if any, received or
receivable by the Company as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without
regard to any anti-dilution provision contained therein for a subsequent
adjustment of such consideration) payable to the Company upon the exercise of
such Options or the conversion or exchange of such Convertible Securities, or
in the case of Options for Convertible Securities, the exercise of such
Options for Convertible Securities and the conversion or exchange of such
Convertible Securities, by
(B) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard to any
anti-dilution provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities .
(e) Adjustments to Conversion Price for Certain Other Events.
--------------------------------------------------------
(i) Adjustments for Subdivisions, Combinations or Consolidation
-----------------------------------------------------------
of Common Stock. In the event the outstanding shares of Common Stock shall be
- ---------------
subdivided (by stock split, stock dividend, or otherwise), into a greater
number of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such subdivision, be proportionately
decreased. In the event the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, the Conversion Price then in effect shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
(ii) Adjustments for Other Distributions. In the event the Company
-----------------------------------
at any time or from time to time makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive, any distribution
payable in securities of the Company other than shares of Common Stock and
other than as otherwise adjusted in this Section 4, then and in each such
event provision shall be made so that the holders of Preferred Stock shall
receive upon conversion thereof, in addition to the number of shares of Common
Stock receivable thereupon, the amount of securities of the Company which they
would have received had their respective Preferred Stock been converted into
Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the date of conversion,
retained such securities receivable by
-10-
<PAGE>
them as aforesaid during such period, subject to all other adjustments called
for during such period under this Section 4 with respect to the rights of the
holders of the Preferred Stock.
(iii) Adjustments for Reclassification, Exchange and
----------------------------------------------
Substitution. If the Common Stock issuable upon conversion of the Preferred
- ------------
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of
shares provided for above), the Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the respective
Preferred Stock shall be convertible into, in lieu of the number of shares of
Common Stock which the holders would otherwise have been entitled to receive,
a number of shares of such other class or classes of stock equivalent to the
number of shares of Common Stock that would have been subject to receipt by
the holders upon conversion of the Preferred Stock immediately before that
change.
(f) No Impairment. Unless approved in accordance with Section 6(a)
-------------
below, the Company will not, by amendment of its Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Company, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 4 and in the
taking of all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the holders of the Preferred Stock against impairment.
(g) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issuable upon conversion; and
the number of shares of Common Stock to be issued shall be rounded down to the
nearest whole share. If any fractional interest in a share of Common Stock
would, except for the provisions of this subparagraph (g), be deliverable upon
conversion of the Preferred Stock then being converted by a shareholder, the
Company shall pay to the holders of such converted stock an amount in cash
equal to the current market value of such fractional interest, as determined
in good faith by the Board of Directors.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price pursuant to this Section 4, the Company, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Preferred Stock a
certificate of its Chief Financial Officer setting forth such adjustment or
readjustment. The Company shall, upon the written request at any time of any
holder of Preferred Stock, furnish or cause to be furnished to such holder a
like certificate setting forth (A) such adjustment and readjustment, (B) the
Conversion Price at the time in effect, and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of Preferred Stock.
-11-
<PAGE>
(h) Notices of Record Date. In the event of any taking by the Company
----------------------
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, the Company shall mail to each holder of Preferred
Stock, at least 10 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
(i) Reservation of Stock Issuable Upon Conversion. The Company shall
---------------------------------------------
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of
the shares of the Preferred Stock such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Preferred Stock,
the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
(j) Notices. Any notice required by the provisions of this Section 4
to be given to the holders of shares of Preferred Stock shall be deemed given
three (3) days after deposit in the United States first class, certified or
registered mail, postage prepaid, and addressed to each holder of record at
his address appearing on the books of the Company, or upon receipt if
delivered by courier.
5. Voting Rights.
-------------
(a) Except as otherwise required by law or by Section 6 hereof, the
holder of each share of Common Stock issued and outstanding shall have one
vote and the holder of each share of Preferred Stock shall be entitled to the
number of votes equal to the number of shares of Common Stock into which such
respective share of Preferred Stock could be converted at the record date for
determination of the shareholders entitled to vote on such matters, or, if no
such record date is established, at the date such vote is taken or any written
consent of shareholders is solicited, such votes to be counted together with
all other shares of stock of the Company having general voting power and not
separately as a class. Holders of Common Stock and Preferred Stock shall be
entitled to notice of any shareholders' meeting in accordance with the Bylaws
of the Company. Fractional votes by the holders of Preferred Stock shall not,
however, be permitted and any fractional voting rights shall (after
aggregating all shares into which shares of Preferred Stock held by each
holder could then be converted) be rounded to the nearest whole number.
(b) So long as 500,000 shares of Series C Preferred (as adjusted for
any Recapitalization Event) are outstanding, the holders of the Series C
Preferred, voting as a separate class, shall be entitled to elect one (1)
director. The holders of the Common Stock and the holders of the Preferred,
voting together as a single class, shall be entitled to elect all other
directors. Any
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<PAGE>
vacancy in the Board of Directors occurring because of the death, resignation,
or removal of a director elected by the holders of the outstanding class with
voting power entitled to elect him or her shall be filled by the vote or written
consent of the holders of the outstanding class with voting power entitled to
elect him or her or, in the absence of action by such holders, by action of the
remaining directors. A director may be removed with or without cause by the
voter consent of the holders of the outstanding class with voting power entitled
to elect him or her in accordance with the California Corporations Code.
6. Covenants. In addition to any other rights provided by law, the
---------
Company shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than two-thirds (2/3) of the outstanding
shares of Preferred Stock, voting together as a class:
(a) amend or repeal any provision of, or add any provision to, the
Company's Articles of Incorporation if such action would adversely change the
preferences, rights, privileges or powers of, or the restrictions provided for
the benefit of, any Preferred Stock; or
(b) increase the number of authorized shares of Preferred Stock; or
(c) take any action that reclassifies any outstanding shares of this
Company's capital stock into capital stock having, or authorize shares of any
equity security having, any preference or priority superior to or on a parity
with any preference or priority of the Preferred Stock; or
(d) sell, convey, or otherwise dispose of all or substantially all
of its property or business or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or effect any
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of;
(e) effect a recapitalization of the Company.
7. Status of Converted Stock. In case any shares of Preferred Stock
-------------------------
shall be converted pursuant to Section 4 hereof, the shares so converted shall
be canceled and shall not be reissuable.
ARTICLE V
EXISTENCE
---------
The Company is to have perpetual existence.
-13-
<PAGE>
ARTICLE VI
BOARD OF DIRECTORS
------------------
1. The management of the business and the conduct of the affairs of the
Company shall be vested in its Board of Directors. The number of directors
which constitute the whole Board of Directors of the Company shall be
designated in the Bylaws of the Company.
2. At such time as a Registration Statement regarding the sale of the
Company's Common Stock to the public is declared effective by the Securities
and Exchange Commission, 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 Company 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.
-14-
<PAGE>
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 Company: 2.2 (Annual Meeting) and 2.3 (Special Meeting).
6. No action shall be taken by the stockholders of the Company 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.
ARTICLE VII
AMENDMENT OF CERTIFICATE OF INCORPORATION
-----------------------------------------
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.
The Company 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 this ARTICLE VII, and all
rights conferred upon the stockholders herein are granted subject to this right.
ARTICLE VIII
AMENDMENT OF BYLAWS
-------------------
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 this Company.
-15-
<PAGE>
ARTICLE IX
INDEMNIFICATION
---------------
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 this
Company shall be indemnified by the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director.
2. The Company 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
Company or any predecessor of the Company or serves or served at any other
enterprise as a director or officer at the request of the Company or any
predecessor to the Company and the Company may indemnify any other employee or
agent.
3. Neither any amendment nor repeal of this Article IX, nor the adoption
of any provision of this Company's Certificate of Incorporation inconsistent
with this Article IX, shall eliminate or reduce the effect of this Article IX,
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article IX, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
ARTICLE X
MEETING OF STOCKHOLDERS
-----------------------
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Company 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 Company.
ARTICLE XI
STOCKHOLDER NOTICES
-------------------
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 Company.
-16-
<PAGE>
ARTICLE XII
CUMULATIVE NOTING
-----------------
Until a Registration Statement regarding the sale of the Company's Common
Stock to the public is declared effective by the Securities and Exchange
Commission, stockholders shall be entitled to cumulative voting rights as set
forth in this Article XII and the Bylaws of the Company. At all elections of
directors of the Company, each holder of stock or of any class or classes or of
a series or series thereof shall be entitled to as many votes as shall equal the
number of votes which (except for this provision as to cumulative voting) such
stockholder would be entitled to cast for the election of directors with respect
to such stockholder's shares of stock multiplied by the number of directors to
be elected, and such stockholder may cast all of such votes for a single
director or may distribute them among the number of directors to be voted for,
or for any two or more of them as such stockholder may see fit. As of the date
that a Registration Statement regarding the sale of the Company's Common Stock
to the public is declared effective by the Securities and Exchange Commission,
this Article XII shall no longer be effective and may be deleted herefrom upon
any restatement of this Certificate of Incorporation."
-17-
<PAGE>
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 20, 1999.
GODIGITAL NETWORKS CORPORATION
By: /s/ DENNIS HAAR
--------------------
Dennis Haar
President and
Chief Executive Officer
-18-
<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.
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<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>
SECURITY AGREEMENT
This Security Agreement is made as of ______________, 1999 between
GoDigital Telecommunications, Inc., a California corporation ("Pledgee"), and
__________________ ("Pledgor").
Recitals
--------
Pursuant to Pledgor's election to purchase Shares under the Restricted
Stock Purchase Agreement dated ___________________, 1999, (the "Agreement")
between Pledgor and Pledgee under Pledgee's 1996 Stock Plan, and Pledgor's
election under the terms of the Agreement to pay for such shares with his
promissory note (the "Note"), Pledgor has purchased ________________ shares of
Pledgee's Common Stock (the "Shares") at a price of $_____ per share, for a
total purchase price of $_____________.
Pledgor has agreed to pledge ________________ shares of the Common Stock of
Pledgee (the "Shares") as collateral for the Note.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of the
---------------------------------------------
transfer of the Shares to Pledgor under the Restricted Stock Purchase Agreement,
and in connection with the Note, Pledgor, hereby pledges all of such shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.
The pledged stock (together with an executed blank stock assignment for use
in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor in connection with the Note, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter into
---------------------------------------
this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
a. Payment of Indebtedness. Pledgor will pay the principal sum of the
-----------------------
Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.
b. Encumbrances. The Shares are free of all other encumbrances, defenses
------------
and liens, and Pledgor will not further encumber the Shares without the prior
written consent of Pledgee.
<PAGE>
c. Margin Regulations. In the event that Pledgee's Common Stock is now
------------------
or later becomes margin-listed by the Federal Reserve Board and Pledgee is
classified as a "lender" within the meaning of the regulations under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to
cooperate with Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.
d. Representations and Warranties.
------------------------------
(i) Pledgor has the right to pledge and grant the Pledgee the
security interest in the Collateral granted under this Agreement.
(ii) Pledgor further agrees that, until the entire principal sum and
all accrued interest due under the Note has been paid in full, Pledgor will not,
without the Pledgee's prior written consent, (i) sell, assign or transfer, or
attempt to sell, assign or transfer, any of the Collateral, or (ii) grant or
create, or attempt to grant or crate, any security interest, lien, pledge, claim
or other encumbrance with respect to any of the Collateral.
3. Voting Rights. During the term of this pledge and so long as all payments
-------------
of principal and interest are made as they become due under the terms of the
Note, Pledgor shall have the right to vote all of the Shares pledged hereunder.
4. Stock Adjustments. In the event that during the term of the pledge any
-----------------
stock dividend, reclassification, readjustment or other changes are declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this pledge,
------------------
subscription Options or other rights or options shall be issued in connection
with the pledged Shares, such rights, Options and options shall be the property
of Pledgor and, if exercised by Pledgor, all new stock or other securities so
acquired by Pledgor as it relates to the pledged Shares then held by
Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of this
-------
Security Agreement in the event:
a. Payment of principal or interest on the Note shall be delinquent for
a period of 10 days or more; or
2
<PAGE>
b. Pledgor fails to perform any of the covenants set forth in the Option
or contained in this Security Agreement for a period of 10 days after written
notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall have
the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee
shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
In the event of default (as defined in the Note) by Pledgor under the Note,
the Pledgor will have full power to sell, assign and deliver the whole or any
part of the Collateral at any broker's exchange or elsewhere, at public or
private sale, at the option of the Pledgor, in order to satisfy any part of the
obligations of Pledgor now existing or hereinafter arising under the Note. On
any such sale, the Pledgor or its assigns may purchase all or any part of the
Collateral. In addition, at its sole option, the Pledgor may elect to retain
all the Collateral in full satisfaction of Pledgor's obligation under the Note,
in accordance with the provisions and procedures set forth in the California
Commercial Code.
The rights and remedies granted to the Pledgor herein upon default under
the Note will be in addition to all the rights, powers and remedies of the
Pledgor under the California Commercial Code and applicable law and such rights,
powers and remedies will be exercisable by the Pledgor with respect to all
Collateral. Pledgor agrees that the Pledgor's reasonable expenses of holding
the Collateral, preparing it for resale and other legal expenses, will be
deducted form the proceeds of any sale or other disposition and will be included
in the amounts Pledgor must tender to redeem the Collateral. All rights, powers
and remedies of the Pledgor, will be cumulative and not alternative. Any
forbearance or failure or delay by the Pledgor in exercising any right, power or
remedy hereunder ill not be deemed to be a waiver of any such right, power or
remedy and any single or partial exercise of any such right, power or remedy
hereunder will not preclude the further exercise thereof.
7. Release of Collateral. Subject to any applicable contrary rules under
---------------------
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
----------------------------------------
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment of all
----
indebtedness secured hereby, at which time the remaining pledged stock shall be
promptly delivered to Pledgor, subject to the provisions for prior release of a
portion of the Collateral as provided in paragraph 7 above.
3
<PAGE>
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding
----------
is instituted by or against it, or if a receiver is appointed for the property
of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the
entire amount unpaid on the Note shall become immediately due and payable, and
Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross negligence,
----------------------
Pledgeholder shall not be liable to any party for any of his acts, or omissions
to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the
-----------------------------------
enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms
---------------------
of this Security Agreement shall be binding on their respective successors and
assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall
be deemed to include, for all purposes, the respective designees, successors,
assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and governed
-------------
under the internal substantive laws, but not the choice of law rules, of
California.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PLEDGOR" _________________________________________
_________________________________________
Address: _________________________________________
_________________________________________
"PLEDGEE" GoDigital Telecommunications, Inc.
a California corporation
_________________________________________
T. Olin Nichols, Chief Financial
Officer
"PLEDGEHOLDER" _________________________________________
Judith M. O'Brien, Assistant Secretary of
GoDigital Networks Corporation
<PAGE>
SECURED FULL RECOURSE PROMISSORY NOTE
$ ___________ Fremont, California
_________________, 1999
FOR VALUE RECEIVED, ___________________ (the Borrower") promises to pay to
GoDigital Telecommunications, Inc., a California corporation (the "Company"), or
order, the principal sum of __________________________ Dollars ($_____________),
together with interest on the unpaid principal hereof from the date hereof at
the rate of _____________________ percent (______%) per annum, compounded
annually.
Principal and interest shall be due and payable on the earlier of (i)
_______________, 200__ or (ii) ____________ (____) days following the date upon
which the Executive's employment with the Company terminates. Payment of
principal and interest shall be made in lawful money of the United States of
America.
The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
This Note is subject to the terms of the Restricted Stock Purchase
Agreement, dated as of ____________________, 1999. This Note is secured in part
by a pledge of the Company's Common Stock under the terms of a Security
Agreement of even date herewith and is subject to all the provisions thereof.
The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.
In the event the undersigned shall cease to be an employee or consultant of
the Company for any reason or shall otherwise fail to make payment on the date
due, this Note shall, at the option of the Company, be accelerated, and the
whole unpaid balance on this Note of principal and accrued interest shall be
immediately due and payable.
Prepayment of principal and/or interest due under this Note may be made at
any time without penalty. Unless otherwise agreed in writing by the Company,
all payments will be made in lawful tender of the Untied States and will be
applied first to the payment of accrued interest, and the remaining balance of
such payment, if any, will then be applied to the payment of principal. If
Purchaser prepays all or a portion of the principal amount of this Note, the
Shares paid for by the portion of principal so paid will continue to be held in
pledge under the Pledge Agreement to serve as independent collateral for the
outstanding portion of this Note for the purpose of commencing the holding
period under Rule 144(d) of the Securities and Exchange Commission with respect
to other Shares purchased with this Note unless Purchaser notifies the Company
in writing otherwise and the Company consents to release of the Shares from the
Pledge Agreement.
6
<PAGE>
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
This Note shall be governed by the internal laws of the State of
California.
BORROWER UNDERSTANDS THAT THE HOLDING PERIOD SPECIFIED UNDER RULE 144(D) OF
THE SECURITIES AND EXCHANGE COMMISSION WILL NOT BEGIN TO RUN WITH RESPECT TO
SHARES PURCHASED WITH THIS NOTE UNTIL EITHER (A) THE PURCHASE PRICE OF SUCH
SHARES IS PAID IN FULL IN CASH OR BY OTHER PROPERTY ACCEPTED BY THE COMPANY, OR
(B) THIS NOTE IS SECURED BY COLLATERAL, OTHER THAN THE SHARES THAT HAVE NOT BEEN
FULLY PAID FOR, HAVING A FAIR MARKET VALUE AT LEAST EQUAL TO THE AMOUNT OF
PURCHASER'S THEN OUTSTANDING OBLIGATION UNDER THIS NOTE (INCLUDING ACCRUED
INTEREST).
Signature: ___________________________
<PAGE>
Exhibit 10.12
GODIGITAL CORPORATION
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of the ___ day of _________, 199__ between
GoDigital Corporation, a California corporation (the "Company") and
__________________ (the "Purchaser").
In consideration of the mutual covenants and representations herein set
forth, the Company and the Purchaser agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
-------------
the Purchaser hereby agrees to purchase an aggregate of ____________ shares of
the Company's Common Stock (the "Shares"), at the price of $.001 per Share for
an aggregate purchase price of $_________.
2. Payment of Purchase Price. The purchase price for the Shares shall be
-------------------------
paid by delivery of a check in the amount thereof to the Company at the time of
execution of this Agreement.
3. Limitations on Transfer. In addition to any other limitation on
-----------------------
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares while the Shares are subject
to the Company's Repurchase Option or Right of First Refusal except in
compliance with the provisions of this Section 3.
(a) Repurchase Option. In the event of the voluntary or involuntary
-----------------
termination of employment of Purchaser with the Company for any reason, with or
without cause (a "Termination"), the Company shall, upon the date of such
Termination, have an irrevocable, exclusive option (the "Repurchase Option") for
a period of 180 days from such date to repurchase from Purchaser, at the
original purchase price per Share (the "Repurchase Price"), all or any portion
of the Shares held by Purchaser as of such date, to the extent such Shares have
not yet been released from the Company's Repurchase Option. The Repurchase
Option shall be exercised by the Company by written notice to Purchaser or his
executor and, at the Company's option, (i) by delivery to the Purchaser or his
executor, with such notice, of a check in the amount of the purchase price for
the Shares being repurchased, or (ii) in the event the Purchaser is indebted to
the Company, by cancellation by the Company of an amount of such indebtedness
equal to the Repurchase Price for the Shares being repurchased, or (iii) by a
combination of (i) and (ii) so that the combined payment and cancellation of
indebtedness equals such Repurchase Price. Upon delivery of such notice and
payment of the Repurchase Price in any of the ways described above, the Company
shall
<PAGE>
become the legal and beneficial owner of the Shares being repurchased and all
rights and interest therein or related thereto, and the Company shall have the
right to transfer to its own name the number of Shares being repurchased by the
Company, without further action by Purchaser.
(i) If a Termination occurs prior to a Change of Control, as defined
below, for any reason at any time after the date hereof and prior to the last
day of__________, 199__, the Repurchase Option shall apply to forty-six
forty-eighths (46/48) of the Shares. On the last day of _________, 199__, three
forty-eighths (3/48) of the Shares shall be released from the Repurchase Option
and one forty-eighth (1/48) of the Shares shall be released from the Repurchase
Option on the last day of each full calendar month thereafter, provided in each
case the Purchaser is an employee of the Company on the date of each said
release. Fractional shares shall be rounded to the nearest whole share.
Notwithstanding the foregoing, in the event of Termination of the Purchaser as a
result of Purchaser's death or total and permanent disability as defined in
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended
("Disability"), the number of Shares released from the Repurchase Option shall
be that number of Shares which would have been subject to the Repurchase Option
pursuant to this Section 3(a)(i) had the Purchaser continued living or had not
become disabled for twelve (12) months after the date of death or Disability,
and had been continuously employed by the Company for those twelve (12) months.
(ii) If a Termination occurs following a Change of Control, as defined
below, for any reason the number of Shares subject to the Repurchase Option
shall be calculated as follows:
(x) fifteen forty-eighths (15/48) of the Shares shall be released on
_____________, 199__, and
(y) one forty-eighth (1/48) of the Shares shall be released from the
Repurchase Option on the last day of each full calendar month thereafter,
provided in each case the Purchaser is an employee of the Company on the date of
each said release. Fractional shares shall be rounded to the nearest whole
share. Notwithstanding the foregoing, in the event of Termination of the
Purchaser as a result of Purchaser's death or Disability, the number of Shares
released from the Repurchase Option shall be that number of Shares which would
have been subject to the Repurchase Option pursuant to this Section 3(a)(ii) had
the Purchaser continued living or had not become disabled for twelve (12) months
after the date of death or Disability, and had been continuously employed by the
Company for those twelve (12) months.
(iii) For the purposes of the foregoing, a Change of Control shall
occur upon the closing of (A) a merger or consolidation of the Company with or
into any other corporation or other entity, or sale of all or substantially all
of the assets of the Company, unless the stockholders of the Company immediately
prior to such transaction hold at least 50% of the outstanding equity
-2-
<PAGE>
securities of the entity surviving such merger or consolidation or the entity
purchasing such assets, or (B) upon a sale or transfer of more than 50% of the
Company's Common Stock to a person or persons acting as a group, who is or are
not controlled directly or indirectly by the Company, in a single transaction or
series of related transactions.
(b) Right of First Refusal. Before any Shares which are not subject
----------------------
to the Repurchase Option may be sold or transferred (including transfer by
operation of law), such Shares shall first be offered to the Company (the "Right
of First Refusal").
(i) In the event the Purchaser wishes to sell the Shares,
Purchaser shall deliver a notice ("Notice") to the Company stating (A) his bona
fide intention to sell or transfer such Shares, (B) the number of such Shares to
be sold or transferred, (C) the price for which he proposes to sell or transfer
such Shares, and (D) the name of the proposed purchaser or transferee.
(ii) Within thirty (30) days after receipt of the Notice, the
Company or its assignee may elect to purchase all or none of the Shares to which
the Notice refers, at the price per Share specified in the Notice. The purchase
of the Shares in either such event shall occur at a closing held at the
Company's principal office at a mutually agreed upon time which in no event
shall be more than thirty (30) days following the end of the time period in
which the Company had to elect to purchase such Shares.
(iii) If all of the Shares to which the Notice refers are not
elected to be purchased, as provided in Section 3(c) hereof, Purchaser may sell
the Shares to any person named in the Notice at the price specified in the
Notice or at a higher price, provided that such sale or transfer is consummated
within sixty (60) days of the date of said Notice to the Company, and provided,
further, that any such sale is in accordance with all the terms and conditions
hereof.
(c) Termination of Restrictions. Notwithstanding the provisions of
---------------------------
Section 3(c) above, the Company's Right of First Refusal shall terminate
immediately as to all Shares upon the occurrence of the first to occur of the
following events:
(i) the acquisition of the Company by another entity by means of
the merger or consolidation of the Company with or into another corporation in
which the shareholders of the Company own less than 50% of the voting securities
of the surviving entity,
(ii) the sale of all or substantially all of the assets of the
Company, or
-3-
<PAGE>
(iii) the date upon which a public market exists for the Company's
capital stock (or any other stock issued to purchasers in exchange for the
Shares purchased under this Agreement). For the purpose of this Agreement, a
"Public Market" shall be deemed to exist if (i) such stock is listed on a
national securities exchange (as that term is used in the Securities Exchange
Act of 1934) or (ii) such stock is traded on the over-the-counter market and
prices are published daily on business days in a recognized financial journal.
(d) Assignment. Whenever the Company shall have the right to purchase
----------
Shares under this Section 3, the Company may designate and assign one or more
employees, officers, directors or shareholders of the Company or other persons
or organizations to exercise all of the Company's purchase rights under this
Agreement and purchase all of such Shares; provided that if the fair market
value of the Shares to be purchased on the date of such designation or
assignment (the "Repurchase FMV") exceeds the purchase price of the Shares
(determined as described hereinabove) to be purchased, then each such designee
or assignee shall pay the Company cash equal to the difference between the
Repurchase FMV and the purchase price of the Shares which such designee or
assignee shall have the right to purchase.
(e) Exempt Transfers. The provisions of this Section 3 shall not
----------------
apply to a transfer of any Shares by Purchaser, either during his lifetime or on
death by will or intestacy to his ancestors, descendants or spouse, or any
custodian or trustee for the account of Purchaser or Purchaser's ancestors,
descendants or spouse; provided, in each such case that the transferee shall
receive and hold such Shares subject to all of the provisions of this Section 3
and there shall be no further transfer of such Shares except in accordance
herewith.
4. Standoff Agreement. Purchaser agrees, in connection with the
------------------
Company's initial public offering of its equity securities, not to sell, make
any short sale of, loan, grant any option for the purchase of or otherwise
dispose of any Shares (other than those included in the registration, if any)
without the prior written consent of the Company or such underwriters, as the
case may be, for such period of time (not to exceed one hundred eighty (180)
days) from the effective date of such registration as may be requested by the
Company or such underwriters; provided, that the officers and directors of the
Company who own stock of the Company also agree to such restrictions.
5. No Transfer Except in Compliance with the Restrictions Herein. The
-------------------------------------------------------------
Company shall not be required (i) to transfer on its books any Shares which
shall have been sold or transferred in violation of any of the provisions set
forth in this Agreement, or (ii) to treat as owner of such Shares or to accord
the right to vote as such owner or to pay dividends to any transferee to whom
such Shares shall have been so transferred. Purchaser shall not sell, transfer,
pledge, hypothecate or
-4-
<PAGE>
otherwise dispose of any shares which remain subject to the restrictions on
transfer set forth in Section 3 hereof.
6. Legends. All certificates representing any of the Shares subject to
-------
the provisions of this Agreement shall have endorsed thereon the following
legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER, RIGHTS OF FIRST REFUSAL AND RIGHTS OF REPURCHASE AS
SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION."
(b) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF ANY EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED."
7. Escrow of Shares.
----------------
(a) The Shares issued under this Agreement shall be held by an escrow
holder designated by the Company (the "Escrow Holder"), along with two stock
assignments executed by the Purchaser in blank, until the expiration of the
Company's options and right of first refusal with respect to such Shares as set
forth above.
(b) The Escrow Holder is hereby directed to permit transfer of the
Shares only in accordance with this Agreement or instructions signed by both
parties. In the event further instructions are desired by the Escrow Holder,
he shall be entitled to rely upon directions executed by a majority of the
authorized number of the Company's Board of Directors. The Escrow Holder shall
have no liability for any act or omission hereunder while acting in good faith
in the exercise of his own judgment.
(c) If the Company or any assignee exercises its Repurchase Option or
Right of First Refusal hereunder, the Escrow Holder, upon receipt of written
notice of such exercise from the proposed transferee, shall take all steps
necessary to accomplish such transfer.
-5-
<PAGE>
(d) When the Repurchase Option or Right of First Refusal have been
exercised or expire unexercised or a portion of the Shares has been released
from the provisions of Section 3 hereof, upon Purchaser's request the Escrow
Holder shall promptly cause a new certificate to be issued for such released
Shares and shall deliver such certificate to the Purchaser.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the provisions of Section 3, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of his ownership of the Shares shall be immediately subject to this
escrow, deposited with the Escrow Holder and included thereafter as "Shares" for
purposes of this Agreement and the Company's Repurchase Option and Right of
First Refusal.
8. Investment Representations. In connection with the purchase of the
--------------------------
Shares, the Purchaser shall, concurrently with the purchase of the Shares,
deliver to the Company his Investment Representation Statement attached hereto
as Exhibit A.
9. Adjustment for Stock Split. All references to the number of Shares
--------------------------
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
10. Tax Consequences. The Purchaser has reviewed with the Purchaser's own
----------------
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement (including any
tax consequences that may result under recently enacted tax legislation). The
Purchaser is relying solely on such advisors and not on any statements or
representations of the Company or any of its agents. The Purchaser understands
that the Purchaser (and not the Company) shall be responsible for the
Purchaser's own tax liability that may arise as a result of this investment or
the transactions contemplated by this Agreement. The Purchaser understands that
Section 83 of the Internal Revenue Code, as amended (the "Code"), taxes as
ordinary income both (i) the difference between the fair market value of the
Shares when the Company granted the Purchaser the right to purchase the Shares
and the fair market value of the Shares on the date of this Agreement and (ii)
the difference between the amount paid for the Shares and the fair market value
of the Shares as of the date any restrictions on the Shares lapse. In this
context, "restriction" includes the right of the Company to buy back the Shares
pursuant to certain of its rights under Section 3. In the event the Company has
registered under the Securities Exchange
-6-
<PAGE>
Act of 1934, as amended (the "Exchange Act"), "restriction" with respect to
officers, directors and 10% shareholders also means the period after the
purchase of the Shares during which such officers, directors and 10%
shareholders could be subject to suit under Section 16(b) of the Exchange Act.
The Purchaser understands that he may elect to be taxed at the time the Shares
are purchased rather than when and as the Company's repurchase option or 16(b)
period expires by filing an election under Section 83(b) of the Code with the
I.R.S. within 30 days from the date of purchase. However, the changes in tax
rates implemented by the Tax Reform Act of 1986, including the phase-in of new
rates during 1987, necessitate review of an optionee's specific situation to
determine whether the optionee's ultimate tax liability could increase or
decrease as a result of filing an election under Section 83(b).
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
11. Termination of Employment.
-------------------------
Purchaser understands and acknowledges that nothing in this Agreement,
shall confer any right upon Purchaser with respect to continuation of employment
by the Company, nor shall it interfere in any way with his right or the
Company's right to terminate his employment at any time, with or without cause.
12. General Provisions.
------------------
(a) Governing Law. This Agreement shall be governed by the laws of
-------------
the State of California. This Agreement represents the entire agreement between
the parties with respect to the purchase of Common Stock by the Purchaser and
may only be modified or amended in writing signed by both parties.
(b) Notices. Any notice, demand or request required or permitted to
-------
be given by either the Company or the Purchaser pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally or deposited in the U.S. mail, First Class with postage prepaid, and
addressed to the parties at the addresses of the parties set forth at the end of
this Agreement or such other address as a party may request by notifying the
other in writing.
-7-
<PAGE>
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
(c) Assignment. The rights and benefits of the Company under this
----------
Agreement shall be transferable to any one or more persons or entities, and all
covenants and agreements hereunder shall inure to the benefit of, and be
enforceable by the Company's successors and assigns. The rights and obligations
of the Purchaser under this Agreement may only be assigned with the prior
written consent of the Company.
(d) Waiver. Either party's failure to enforce any provision or
------
provisions of this Agreement shall not in any way be construed as a waiver of
any such provision or provisions, nor prevent that party thereafter from
enforcing each and every other provision of this Agreement. The rights granted
both parties herein are cumulative and shall not constitute a waiver of either
party's right to assert all other legal remedies available to it under the
circumstances.
(e) Additional Actions. The Purchaser agrees upon request to execute
------------------
any further documents or instruments necessary or desirable to carry out the
purposes or intent of this Agreement.
(f) Arbitration. At the option of either party, any and all disputes
-----------
or controversies, whether of law or in equity, and of any nature whatsoever
arising from or respecting this Agreement, unless otherwise expressly provided
herein, shall be decided by arbitration by the American Arbitration Association
in accordance with the rules and regulations of that Association.
(i) The arbitrators shall be selected as follows: In the event
the Company and Purchaser agree on one arbitrator, the arbitration shall be
conducted by such arbitrator. In the event the Company and Purchaser do not so
agree, the Company and Purchaser shall each select on independent, qualified
arbitrator and these two arbitrators shall select a third arbitrator. The
Company reserves the right to reject any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(ii) Arbitration shall take place at Palo Alto, California, or
any other location mutually agreeable to the parties. At the request of either
party, arbitration proceedings will be conducted in secrecy. In such case all
documents, testimony, and records shall be received, heard, and maintained by
the arbitrators in secrecy under seal, available for inspection only by the
Company and the Purchaser and their respective attorneys and their respective
experts who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known. The arbitrators, who
-8-
<PAGE>
shall act by majority vote, shall be able to decree any and all relief of an
equitable nature, including but not limited to such relief as a temporary
restraining order, a temporary or a permanent injunction, or both, and shall
also be able to award damages (with or without an accounting), costs, and
reasonable attorneys' fees. The decree or judgment of an award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
(iii) Reasonable notice of the time and place of arbitration
shall be given to all persons, other than the parties, as shall be required by
law, in which case such persons or their authorized representatives shall have
the right to attend and participate in all the arbitration hearings to the
extent and in such manner as the law shall require.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first set forth above.
GODIGITAL CORPORATION PURCHASER:
a California corporation
By: __________________________ ______________________________
_____________, Chief Financial Officer ______________________
-9-
<PAGE>
CONSENT OF SPOUSE
-----------------
I, ____________________, spouse of ______________, have read and approve
the foregoing Restricted Stock Agreement dated as of __________, 199__ (the
"Agreement"). In consideration of GoDigital Corporation granting the right to
my spouse to purchase shares of GoDigital Corporation, as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the
exercise of any rights under the Agreement and agree to be bound by the pro
visions of the Agreement insofar as I may have any rights in said Agreement or
any shares issued pursuant thereto under the community property laws of the
State of California or similar laws relating to marital property in effect in
the state of our residence as of the date of the signing of the foregoing
Agreement.
Dated: _______________, 199__ Signature:_________________
<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, ________________, hereby sell, assign and transfer
unto _________________________________________________________________________
________ (__________) shares of the Common Stock of GoDigital Corporation
standing in my name of the books of said corporation represented by Certificate
No. _____ herewith and do hereby irrevocably constitute and appoint Wilson,
Sonsini, Good rich & Rosati, attorney, to transfer the said stock on the books
of the within named corporation with full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between GoDigital Corporation and the undersigned dated
as of ______________, 199__.
Dated: _______________, 199__
Signature:______________________________
<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________, hereby sell, assign and transfer
unto __________________________________________________________________________
________ (__________) shares of the Common Stock of GoDigital Corporation
standing in my name of the books of said corporation represented by Certificate
No. _____ herewith and do hereby irrevocably constitute and appoint Wilson,
Sonsini, Good rich & Rosati, attorney, to transfer the said stock on the books
of the within named corporation with full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between GoDigital Corporation and the undersigned dated
as of ____________, 199__.
Dated: _______________, 199__
Signature:______________________________
<PAGE>
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in his gross income for the current taxable year, the
amount of any compensation taxable to him in connection with his receipt of the
property described below:
The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: ______________ SPOUSE: ________________
ADDRESS: _______________________________________
IDENTIFICATION NO. OF TAXPAYER: ____________ SPOUSE: ___________
TAXABLE YEAR : 199__
2. The property with respect to which the election is made is described as
follows:
_____________ shares (the "Shares") of the Common Stock of GoDigital
Corporation (the "Company").
3. The date on which the property was transferred is: _______________________.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on certain
events. This right lapses with regard to a portion of the Shares over time.
The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never lapse,
of such property is: $ .
----------------------
6. The amount (if any) paid for such property is: $ .
---------------------
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: _____________ ___________________________________
_______________, Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: _____________ ___________________________________
Spouse of Taxpayer
<PAGE>
EXHIBIT A
---------
INVESTMENT REPRESENTATION STATEMENT
PURCHASER : ______________________
COMPANY : GODIGITAL CORPORATION
SECURITY : COMMON STOCK
AMOUNT : ______________ SHARES
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company the following:
(a) I am sufficiently aware of the Company's business affairs and
financial condition to reach an informed and knowledgeable decision to acquire
the Securities. I am purchasing these Securities for my own account for
investment purposes only and not with a view to, or for the resale in connection
with, any "distribution" thereof for purposes of the Securities Act of 1933, as
amended (the "Securities Act").
(b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein. In this connection, I understand that, in
the view of the Securities and Exchange Commission (the "SEC"), the statutory
basis for such exemption may be unavailable if my representation was predicated
solely upon a present intention to hold these Securities for the minimum capital
gains period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future.
(c) I further understand that the Securities must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from registration is
-1-
<PAGE>
otherwise available (such as Rule 144 or the resale provisions of Rule 701 under
the Securities Act). Moreover, I understand that the Company is under no
obligation to register the Securities. In addition, I understand that the
certificate evidencing the Securities will be imprinted with a legend which
prohibits the transfer of the Securities unless they are registered or such
registration is not required in the opinion of counsel for the Company.
(d) I am familiar with the provisions of Rule 144, promulgated under
the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, including, among other things: (1)
The availability of certain public information about the Company; (2) the resale
occurring not less than two years after the party has purchased, and made full
payment for, within the meaning of Rule 144, the securities to be sold; and, in
the case of an affiliate, or of a non-affiliate who has held the securities less
than three years, (3) the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker, as said
term is defined under the Securities Exchange Act of 1934 (the "Exchange Act")
and the amount of securities being sold during any three month period not
exceeding the specified limitations stated therein, if applicable. The Purchaser
further understands that the resale provisions of Rule 701 will not apply until
90 days after the Company becomes subject to the reporting obligations under the
Exchange Act (typically upon the effective date of a company's initial public
offerings). There can be no assurances that the requirements of Rule 144 or
Rule 701 will be met, or that the Securities will ever be saleable.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale, and
that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144, and that, in
such event, I would be precluded from selling the Securities under Rule 144 even
if the two-year minimum holding period had been satisfied.
(f) I further understand that in the event all of the applicable
requirements of Rule 144 are not satisfied, or that the resale provisions of
Rule 701 are not available, registration under the Securities Act, compliance
with Regulation A, compliance with some other registration exemption or the
notification to the Company of the proposed disposition by me and the furnishing
to the Company of (i) detailed information regarding the disposition, and (ii)
and opinion of my counsel to the effect that such disposition will not require
registration (I understand such counsel's opinion shall concur with the opinion
by counsel for the Company and I shall have been informed of such compliance)
will be required and that, notwithstanding the fact that Rule 144 is not
exclusive, the Staff of the SEC has expressed its opinion that persons proposing
to sell private placement
-2-
<PAGE>
securities other than in a registered offering and otherwise than pursuant to
Rule 144 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
(g) I further understand that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities without the consent of the Commissioner of Corporations of
California. I have read the applicable Commissioner's Rules with respect to
such restriction, a copy of which is attached.
Signature of Purchaser:
________________________________
__________________
Dated as of ___________, 199__
-3-
<PAGE>
EXHIBIT 10.13
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement and Mutual Release ("Agreement") is made by and
between GoDigital Telecommunications, Inc. (the "Company"), and Jack Byers
("Employee").
WHEREAS, Employee was employed by the Company as the Company's Vice
President, Operations and Chief Financial Officer;
WHEREAS, the Company and Employee have entered into a Patent and
Confidentiality Agreement (the "Confidentiality Agreement");
WHEREAS, the Company and Employee have mutually agreed to terminate the
employment relationship and to release each other from any claims arising from
or related to the employment relationship;
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee (collectively referred to as "the Parties") hereby agree as
follows:
1. Termination of Duties as an Officer. Employee resigned from his
-----------------------------------
position as the Company's Vice President, Operations and Chief Financial Officer
on January 29, 1999. Employee shall forward a formal letter of resignation to
the Company. Employee's employment with the Company shall terminate as of
January 29, 1999.
2. Consideration. The Company agrees to pay Employee at the rate of
-------------
Five thousand Five Hundred Seventy Three Dollars and 8 Cents ($5,573.08)
biweekly for the time period from February 1, 1999 through January 28, 2000 (the
"payment period") in accordance with the Company's payroll practices. During the
payment period, Employee will not be entitled to accrual of any employee
benefits, including, but not limited to, vacation benefits or bonuses. Employee
will continue to vest in the Company stock as specified in Paragraph 3 below.
3. Repurchase Option. The Parties agree that the Company's
-----------------
repurchase option with respect to the shares of the Company's Common Stock
purchased by Employee pursuant to that certain Restricted Stock Purchase
Agreement entered into between the Company and Employee on March 1, 1996, (the
"Restricted Stock Purchase Agreement") will continue to lapse in accordance with
Employee's vesting schedule throughout the payment period. The parties agree
that the term of the Company's repurchase option pursuant to Section 3 of the
Restricted Stock Purchase Agreement shall be extended for the term of the
payment period.
4. Benefits. Employee shall receive the Company's standard insurance
--------
benefits under COBRA during the payment period. During the payment period, the
Company shall pay Employee's COBRA premiums.
1
<PAGE>
5. Confidential Information. Employee shall continue to maintain the
------------------------
confidentiality of all confidential and proprietary information of the Company
and shall continue to comply with the terms and conditions of the
Confidentiality Agreement between Employee and the Company. Upon the
termination of Employee's employment with the Company, Employee shall return all
the Company property and confidential and proprietary information in his
possession to the Company within five business days.
6. Payment of Salary. Employee acknowledges and represents that as
-----------------
of the date of this Agreement, the Company has paid all salary, wages, accrued
vacation, commissions and any and all other benefits due to Employee.
7. Release of Claims. Employee agrees that the foregoing
-----------------
consideration represents settlement in full of all outstanding obligations owed
to Employee by the Company. Employee and the Company, on behalf of themselves,
and their respective heirs, executors, officers, directors, employees,
investors, shareholders, administrators, predecessor and successor corporations,
and assigns, hereby fully and forever release each other and their respective
heirs, executors, officers, directors, employees, investors, shareholders,
administrators, predecessor and successor corporations, and assigns, of and from
any claim, duty, obligation or cause of action relating to any matters of any
kind, whether presently known or unknown, suspected or unsuspected, that any of
them may possess arising from any omissions, acts or facts that have occurred up
until and including the effective date of this Agreement including, without
limitation,
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Employee's right
to purchase, or actual purchase of shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment; breach
of contract, both express and implied; breach of a 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;
(d) violation of any federal, state or municipal statute, including,
but not limited to, any and all claims for violation of Title VII of the Civil
Rights Act of 1964, any and all claims for violation of the Age Discrimination
in Employment Act of 1967, the Americans with Disabilities Act of 1990, and any
and all claims for violation of the California Fair Employment and Housing Act;
(e) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fees and costs.
2
<PAGE>
The Company and Employee agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released. This release does not extend to any obligations incurred
under this Agreement.
8. Acknowledgment of Waiver of Claims under ADEA. Employee
---------------------------------------------
acknowledges that he is waiving and releasing any rights he may have under the
Age Discrimination in Employment Act of 1967 ("ADEA") and that this waiver and
release is knowing and voluntary. Employee and the Company agree that this
waiver and release does not apply to any rights or claims that may arise
under ADEA after the Effective Date of this Agreement. Employee acknowledges
that the consideration given for this waiver and release Agreement is in
addition to anything of value to which Employee was already entitled. Employee
further acknowledges that he has been advised by this writing that (a) he should
consult with an attorney prior to executing this Agreement; (b) he has at least
twenty-one (21) days within which to consider this Agreement; (c) he has at
least seven (7) days following the execution of this Agreement by the parties to
revoke the Agreement; and (d) this Agreement shall not be effective until the
revocation period has expired.
9. Civil Code Section 1542. The Parties represent that they are not
-----------------------
aware of any claim by either of them other than the claims that are released by
this Agreement. Employee and the Company acknowledge that they have been
advised by legal counsel and are familiar with the provisions of California
Civil Code Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Employee and the Company, being aware of said code section, agree to expressly
waive any rights they may have thereunder, as well as under any other statute or
common law principles of similar effect.
10. Confidentiality. The Parties hereto each agree to use their best
---------------
efforts to maintain in confidence the existence of this Agreement, the contents
and terms of this Agreement, and the consideration for this Agreement
(hereinafter collectively referred to as "Settlement Information"). Each Party
hereto agrees to take every reasonable precaution to prevent disclosure of any
Settlement Information to third parties, and each agrees that there will be no
publicity, directly or indirectly, concerning any Settlement Information. The
Parties hereto agree to take every precaution to disclose Settlement Information
only to those employees, officers, directors, attorneys, accountants,
governmental entities, and family members who have a reasonable need to know of
such Settlement Information.
11. Disparagement. Each party agrees to refrain from any
-------------
disparagement, criticism, defamation, slander of the other, or tortious
interference with the contracts and relationships of the other.
3
<PAGE>
12. Solicitation of Employees. Employee agrees that for a period of
-------------------------
twenty-four (24) months following the date that Employee's employment with the
Company terminates, he shall not either directly or indirectly solicit, induce,
recruit or encourage any of the Company's employees to leave their employment,
or attempt to solicit, induce, recruit, or encourage employees of the Company,
either for himself or for any other person or entity.
13. Non-Competition. Employee agrees that for a period of twenty-four
---------------
(24) months following the date that Employee's employment with the Company
terminates, he shall not engage directly or indirectly, whether on his own
account or as a shareholder (other than as a less than 2% shareholder of a
publicly-held company), partner, joint venturer, employee, consultant, advisor,
and/or agent, of any person, firm, corporation, or other entity, in any line of
business in which the Company is engaged or as of the date of this Agreement
actively contemplated becoming engaged in, within any geographical area in which
the Company engaged in such business or in which the Company contemplated
becoming engaged in such business.
14. Indemnification. The Company will provide Employee
---------------
indemnification pursuant to the indemnification agreement between the Company
and Employee attached hereto as Exhibit A.
---------
15. Tax Consequences. The Company makes no representations or
----------------
warranties with respect to the tax consequences of the payment of any sums to
Employee under the terms of this Agreement. Employee agrees and understands
that he is responsible for payment, if any, of local, state and/or federal taxes
on the sums paid hereunder by the Company and any penalties or assessments
thereon. Employee further agrees to indemnify and hold the Company harmless
from any claims, demands, deficiencies, penalties, assessments, executions,
judgments, or recoveries by any government agency against the Company for any
amounts claimed due on account of Employee's failure to pay federal or state
taxes or damages sustained by the Company by reason of any such claims,
including reasonable attorneys' fees.
16. No Admission of Liability. No action taken by the Parties
-------------------------
hereto, or either of them, either previously or in connection with this
Agreement shall be deemed or construed to be (a) an admission of the truth or
falsity of any claims heretofore made or (b) an acknowledgement or admission by
either party of any fault or liability whatsoever to the other party or to any
third party.
17. Costs. The Parties shall each bear their own costs, expert fees,
-----
attorneys' fees and other fees incurred in connection with this Agreement.
18. Authority. The Company represents and warrants that the
---------
undersigned has the authority to act on behalf of the Company and to bind the
Company and all who may claim through it to the terms and conditions of this
Agreement. Employee represents and warrants that he has the capacity to act on
his own behalf and on behalf of all who might claim through him to bind them to
the terms and conditions of this Agreement. Each Party warrants and represents
that there are no liens or claims of lien or assignments in law or equity or
otherwise of or against any of the claims or causes of action released herein.
4
<PAGE>
19. No Representations. Each party represents that it has had the
------------------
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement. Neither party has
relied upon any representations or statements made by the other party hereto
which are not specifically set forth in this Agreement.
20. Severability. In the event that any provision hereof becomes or
------------
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
21. Entire Agreement. This Agreement represents the entire agreement
----------------
and understanding between the Company and Employee concerning Employee's
separation from the Company, and supersedes and replaces any and all prior
agreements and understandings concerning Employee's relationship with the
Company and his compensation by the Company.
22. No Oral Modification. This Agreement may only be amended in
--------------------
writing signed by Employee and the President of the Company.
23. Governing Law. This Agreement shall be governed by the laws of
-------------
the State of California.
24. Effective Date. This Agreement is effective on the date that is
--------------
seven (7) days after it has been signed by both Parties.
25. Counterparts. This Agreement may be executed in counterparts,
------------
and each counterpart shall have the same force and effect as an original and
shall constitute an effective, binding agreement on the part of each of the
undersigned.
26. Voluntary Execution of Agreement. This Agreement is executed
--------------------------------
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation,
and execution of this Agreement by legal counsel of their own choice or that
they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement
and of the releases it contains;
(d) They are fully aware of the legal and binding effect of this
Agreement.
5
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement on
the respective dates set forth below.
GODIGITAL TELECOMMUNICATIONS, INC.
Dated: February 18, 1999 By /s/ FRANK I. AKERS
--------------------------------
Frank I Akers
President and CEO
JACK BYERS, an individual
Dated: March 9, 1999 By /s/ JACK BYERS
---------------------------------
Jack Byers
6
<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
December 22, 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
December 22, 1999
