-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EcJPdVJM7IMf2ELX7ouirz9PQCmLusZ0OiMCcUwFNndj+8EyGiWzBvbTTyC2ZGyF AxwwOXJA8wFXo7nSIl4uLQ== 0001012870-99-004769.txt : 19991224 0001012870-99-004769.hdr.sgml : 19991224 ACCESSION NUMBER: 0001012870-99-004769 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19991223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GODIGITAL NETWORKS CORP CENTRAL INDEX KEY: 0001098246 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 943240382 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-91169 FILM NUMBER: 99779629 BUSINESS ADDRESS: STREET 1: 41652 BOSCELL RD CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5109792200 MAIL ADDRESS: STREET 1: 41652 BOSCELL RD CITY: FREMONT STATE: CA ZIP: 94538 S-1/A 1 AMENDMENT NO. 2 TO THE FORM S-1 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) ------------ 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)
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: 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
------------ 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. [_] ------------ - -------------------------------------------------------------------------------
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) - ------------------------------------------------------------------------------------ Common Stock, $0.001 par value 4,600,000 $12.00 $55,200,000 $14,573
- ------------------------------------------------------------------------------- (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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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.
Underwriting Price to Discounts and Proceeds to Public Commissions GoDigital -------------- ------------- ----------- Per Share.................................. $ $ $ Total...................................... $ $ $
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. [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.] ------------ TABLE OF CONTENTS
Page ---- 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
Page ---- 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
------------ 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. 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 The Offering 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
- ---------------------- 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 Summary Financial Information (in thousands, except per share data)
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) 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) ======== ======== ========
At September 30, 1999 ----------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (unaudited) 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
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 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 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 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 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 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 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 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 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 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 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:
Number of Shares Date of Availability for Sale ---------------- ----------------------------- 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
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 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 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 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. 18 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.
September 30, 1999 (unaudited) --------------------------- Pro Pro Forma As Actual Forma Adjusted -------- ------- -------- (in thousands) 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 ======== ======= ========
- ----------------------- 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. 19 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: 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 ======
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:
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- 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% ========== ===== =========== =====
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 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.
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) 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 ======= =======
Mar. 31, Mar. 31, Mar. 31, Sept. 30, 1997 1998 1999 1999 -------- -------- -------- --------- (in thousands) 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
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 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 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 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 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.
Six Months Ended -------------------- Sept. 30, Sept. 30, 1998 1999 --------- --------- 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)% ====== =====
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 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 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 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.
Three Months Ended -------------------------------------------------------------- Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, 1998 1998 1998 1999 1999 1999 -------- --------- -------- -------- -------- --------- (in thousands) 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) ======== ======= ====== ======= ====== ======= As a Percentage of Net Revenues -------------------------------------------------------------- Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, 1998 1998 1998 1999 1999 1999 -------- --------- -------- -------- -------- --------- 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)% ======== ======= ====== ======= ====== =======
28 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 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. 30 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. 31 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. 32 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. 33 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. 34 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. 35 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 36 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. 37 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 38 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. 39 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 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 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 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.
Name Age Position ---- --- -------- 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
- ----------------------- (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 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 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.
Long-Term Compensation ------------ Annual Compensation Securities ---------------- Underlying All Other Name and Principal Position Salary Bonus Options Compensation - --------------------------- -------- ------- ------------ ------------ 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
- ----------------------- (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 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.
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% - ---- ---------- ------------- --------- ---------- ---------- ---------- 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
- ----------------------- (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.
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 ---- --------------- -------- -------------- ------------- ----------- ------------- Francis I. Akers........ -- $ -- -- -- $ -- -- Paul H. Scherf, Jr. .... -- $ -- 200,000 -- 2,164,000 -- Farzin Hatami........... 382,500 $ -- -- -- --
- ----------------------- (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 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 . 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 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 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 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 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 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:
Shares of Purchaser Common Stock --------- ------------ Francis I. Akers................................................ 1,500,000 Jack Byers...................................................... 1,500,000 Gregorio Reyes.................................................. 120,000
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:
As Converted Shares of Shares of Purchaser Series A Stock Common Stock --------- -------------- ------------ 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
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 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:
As Converted Shares of Shares of Purchaser Series B Stock Common Stock --------- -------------- ------------ 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
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:
As Converted Shares of Shares of Purchaser Series C Stock Common Stock --------- -------------- ------------ 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
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 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:
As Converted Shares of Shares of Purchaser Series D Stock Common Stock --------- -------------- ------------ 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
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 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:
As Converted Shares of Shares of Purchaser Series E Stock Common Stock --------- -------------- ------------ 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
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 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%.
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 - ----------------- -------------------- ------------------- -------- -------- 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
- ----------------------- 57 (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. 58 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 . 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 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 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. 62 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. 63 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:
Number of Underwriters Shares ------------ --------- Credit Suisse First Boston Corporation............................. FleetBoston Robertson Stephens Inc................................. U.S. Bancorp Piper Jaffray Inc..................................... --------- Total............................................................ 4,000,000 =========
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.
Per Share Total ----------------------------- ----------------------------- Without With Without With Over-allotment Over-allotment Over-allotment Over-allotment -------------- -------------- -------------- -------------- Underwriting Discounts and Commissions paid by us..................... $ $ $ $ Expenses payable by us.. $ $ $ $
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 64 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. 65 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. 66 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 GODIGITAL NETWORKS CORPORATION INDEX TO FINANCIAL STATEMENTS
Page ---- 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
F-1 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 GODIGITAL NETWORKS CORPORATION BALANCE SHEETS (in thousands, except share and per share data)
Pro Forma Stockholders' March 31, Equity at ----------------- September 30, September 30, 1998 1999 1999 1999 ------- -------- ------------- ------------- (unaudited) (unaudited) 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 ======= ======== ========
The accompanying notes are an integral part of these financial statements. F-3 GODIGITAL NETWORKS CORPORATION STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
Six Months Ended Year Ended March 31, September 30, ----------------------------- ---------------------- 1997 1998 1999 1998 1999 ------- --------- --------- ----------- ---------- (unaudited) (unaudited) 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 ======= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-4 GODIGITAL NETWORKS CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
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 --------- ------ --------- ------ ---------- ------------ ------------ ----------- ------------- 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 ========= === ========= === ======= ======= ======== ======== =======
The accompanying notes are an integral part of these statements. F-5 GODIGITAL NETWORKS CORPORATION STATEMENTS OF CASH FLOWS (in thousands)
Six Months Ended Year Ended March 31, September 30, ------------------------- ----------------------- 1997 1998 1999 1998 1999 ------- ------- ------- ----------- ----------- (unaudited) (unaudited) 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 $ -- ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-6 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 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%.
Sales Accounts Receivable at ------------------------ ----------------------- Six Months Year Ended Ended March 31, September 30, March 31, September 30, 1999 1999 1999 1999 ---------- ------------- --------- ------------- (unaudited) (unaudited) Customer A..................... 90% 64% 94% 39% Customer B..................... -- 18% -- 44% Customer C..................... -- -- -- 12%
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 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 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):
Six Months Ended Year Ended March 31, September 30, ----------------------------------- ----------------------- 1997 1998 1999 1998 1999 ---------- ---------- ----------- ---------- ----------- (unaudited) 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 =========== ===========
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 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):
March 31, -------------- September 30, 1998 1999 1999 ------ ------ ------------- (unaudited) 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 ====== ====== =======
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.
March 31, --------- September 30, 1998 1999 1999 ---- ---- ------------- (unaudited) Accrued expenses: Accrued compensation................................. $130 $332 $ 488 Warranty reserve (Note 8)............................ -- 191 3,577 Other accruals....................................... 80 340 221 ---- ---- ------ $210 $863 $4,286 ==== ==== ======
F-11 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):
Year ended March 31, -------------------- 2000................................................................. $230 2001................................................................. 230 2002................................................................. 95 ---- 555 Less current portion................................................. 230 ---- Borrowings, less current portion..................................... $325 ====
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 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):
March 31, ---------------- 1998 1999 ------- ------- 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) ------- ------- $ -- $ -- ======= =======
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 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 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:
Weighted Options Average Available Options Exercise Price to Grant Outstanding Per Share ---------- ----------- -------------- 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 ========== ========== =====
F-15 GODIGITAL NETWORKS CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) The following table summarizes information about stock options outstanding and exercisable as of March 31, 1999.
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 -------- --------- ----------- -------- --------- -------- $ 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 ========= =========
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:
Six Month Year ended Period Ended March 31, September 30, ---------------- ------------- 1997 1998 1999 1998 1999 ---- ---- ------ ------------- (unaudited) 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 ---- ---- ------ ----- -------
F-16 GODIGITAL NETWORKS CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) The following table presents the statement of operations after allocation of stock compensation to functional categories:
Six Months Ended Year Ended March 31, September 30, ------------------------- ---------------------- 1997 1998 1999 1998 1999 ------- ------- ------- ----------- ---------- (unaudited) (unaudited) 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) ======= ======= ======= ======= =======
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 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):
Operating Capital Year Ended March 31, Leases Leases -------------------- --------- ------- 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 =====
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 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: 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 ==========
The amortization periods for the acquired intangible assets are as follows: Developed technology................ 36 months Core technology..................... 60 months Customer list....................... Remainder of contractual term (5 months) Assembled workforce................. 24 months Goodwill............................ 60 months
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 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).
Six Month Period Ended Year ended Year ended September 30, March 31, 1998 March 31, 1999 1999 -------------- -------------- ------------- (unaudited) (unaudited) 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 ========== ========== ===========
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 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 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 GODIGITAL NETWORKS CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS (Unaudited) (in thousands, except share and per share amounts)
Year Ended March 31, 1999 ---------------------------------------------- GoDigital FDS Pro Forma Combined Networks Corp. Business Adjustments Pro Forma -------------- -------- ----------- --------- 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 =========
See accompanying notes to Combined Pro Forma Financial Information. F-23 GODIGITAL NETWORKS CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS (Unaudited) (in thousands, except share and per share amounts)
Six Month Period Ended September 30, 1999 ---------------------------------------------- GoDigital FDS Pro Forma Combined Networks Corp. Business Adjustments Pro Forma -------------- -------- ----------- --------- 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 =========
See accompanying notes to Combined Pro Forma Financial Information. F-24 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: 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 ==========
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 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 FDS BUSINESS STATEMENTS OF OPERATIONS (in thousands)
Six Month Years Ended Period Ended December 31, June 30, ----------------- ---------------- 1997 1998 1998 1999 -------- ------- ------- ------- (unaudited) 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) ======== ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-27 FDS BUSINESS STATEMENTS OF FINANCIAL POSITION (in thousands)
December 31, ------------- June 30, 1997 1998 1999 ------ ------ ----------- (unaudited) 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 ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-28 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 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: Computers and related equipment............................. 3 to 5 years Furniture and fixtures...................................... 3 to 7 years
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 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 FDS BUSINESS NOTES TO FINANCIAL STATEMENTS--(Continued) NOTE 4--BALANCE SHEET COMPONENTS:
December 31, -------------- June 30, 1997 1998 1999 ------ ------ ----------- (unaudited) 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 ====== ====== ======
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.
Year Ended Six Month Period Ended December 31, June 30, ----------------- ----------------------- 1997 1998 1998 1999 -------- ------- ----------- ----------- (Unaudited) (Unaudited) 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) ======== ======= ======= =======
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 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): 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 ========
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 [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] [GoDigital Logo] 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. 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 ==========
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 (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
Exhibit Number - ------- 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
II-2
Exhibit Number ------- 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
- ----------------------- + 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
Schedule Page -------- ---- Schedule II--Valuation and Qualifying Accounts........................ S-1
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 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 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:
Signature Title Date --------- ----- ---- 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
/s/ T. Olin Nichols *By: ________________________________ T. Olin Nichols Attorney-in-Fact II-5 Schedule II GODIGITAL NETWORKS CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED MARCH 31, 1999, 1998 AND 1997 (in thousands)
Balance at Balance beginning Charged Credited at end Description of period to expenses to expenses of period ----------- ---------- ----------- ----------- --------- 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
S-1 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 EXHIBIT INDEX
Exhibit Number ------- 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
- ----------------------- + 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 EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION 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"). 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- 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- 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- 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- 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- (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- 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- 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- 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- 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- (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 -12- 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- 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- 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- 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- 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- 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- EX-10.4 3 AMENDED AND RESTATED 1996 STOCK PLAN 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. (i) "Director" means a member of the Board. -------- (j) "Disability" means total and permanent disability as defined in Section ---------- 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, employed -------- by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ (m) "Fair Market Value" means, as of any date, the value of Common Stock ----------------- determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an ---------------------- incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (o) "Inside Director" means a Director who is an Employee. --------------- (p) "IPO Effective Date" means the date upon which the Securities and ------------------ Exchange Commission declares the initial public offering of the Company's common stock as effective. -2- (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- (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- (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- (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- 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- (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- 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- (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- (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- 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- (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- 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 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- 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- 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- 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- 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- 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. 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 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. 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 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 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 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 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 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: ___________________________ EX-10.12 4 RESTATED STOCK PURCHASE AGREEMENT 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 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- 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- (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- 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- (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- 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- 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- 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- 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:_________________ 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:______________________________ 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:______________________________ 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 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- 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- 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- EX-10.13 5 SETTLEMENT AGREEMENT MUTUAL LEASE 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 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 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 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 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 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 EX-23.1 6 CONSENT OF PRICEWATERHOUSECOOPERS LLP 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 EX-23.2 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP 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 -----END PRIVACY-ENHANCED MESSAGE-----