As filed with the Securities and Exchange Commission on November 17, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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GODIGITAL NETWORKS CORPORATION
(Exact name of Registrant as specified in its charter)
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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)
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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)
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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
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee
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Common Stock, $0.001 par value............................... $56,000,000 $15,568
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(1) Includes shares which the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
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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.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1999
Shares
[GoDigital Networks Corporation Logo]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$ and $ per share. We have applied to list our common stock on the Nasdaq
National Market under the symbol "GDNT."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" starting on
page 6.
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 ring and two GDSL Systems.]
. GDSL-8 DSL Transmission System Eight full-service digital access lines on
one copper pair for voice and CLASS services, high-speed analog modem
access, and fax services.
. GDSL-3i DSL Transmission System Three 144 Kbps IDSL lines on one copper
line.
. FDS FiberReach Distribution System Transports multiple IDSL or digital
access lines, connects with GDSL Systems.
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TABLE OF CONTENTS
Page
----
Prospectus Summary ................. 3
Risk Factors ....................... 6
Special Note Regarding Forward
Looking Statements ................ 18
Use of Proceeds .................... 19
Dividend Policy .................... 19
Capitalization ..................... 20
Dilution ........................... 21
Selected Financial Data ............ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business ........................... 32
Page
----
Management ........................ 42
Certain Relationships and Related
Transactions ..................... 51
Principal Stockholders ............ 55
Description of Capital Stock....... 57
Shares Eligible for Future Sale ... 59
Underwriting....................... 61
Notice to Canadian Residents....... 63
Legal Matters...................... 64
Experts............................ 64
Where You May Find Additional
Information About Us ............. 64
Index To Financial Statements ..... F-1
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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 long-range DSL transmission systems that
increase the bandwidth and performance of copper lines at very long distances
from the central office. Digital Subscriber Line, or DSL, solutions enable
network access providers to offer high-speed, cost-effective broadband access
services over existing copper infrastructure.
According to International Data Corporation, or IDC, an estimated 15 million
or 15% of United States households in 1997 had two or more access lines and IDC
estimates that as many as 34 million or 30% of United States' households will
have two or more access lines by 2002. A significant number of these additional
access lines are being used to access the Internet and other communications
networks. According to IDC, today nearly 70 million, or 86%, of home users
worldwide access the Internet via traditional analog telephone lines. The
increasing demand for multiple voice and high-speed data communications access
lines has created a significant market for deploying communications services to
both residential and business customers.
Historically, network access providers have not been able to meet this
demand because the copper infrastructure was designed to carry only one analog
voice signal per copper line. With the advent of DSL technology, network access
providers have begun to leverage the capabilities of their copper
infrastructure. However, traditional DSL equipment offerings have significant
distance, or reach, limitations. Today, network access providers cannot offer
DSL services over a copper line to locations more than 18,000 feet from a
central office and as a result, we believe that network access providers are
unable to offer DSL services to roughly 50% of their subscriber base.
Additionally, network access providers are limited in their ability to offer
multiple digital services on the same copper line. Our GoDigital DSL, or GDSL,
systems enable network access providers to turn standard copper lines into
high-speed digital conduits to support multiple digital access services over
long distances, providing a cost-effective alternative to laying fiber or
copper wire or installing other more expensive network equipment.
Our GDSL systems facilitate high-speed access up to 25 miles from the
central office over existing copper infrastructure and delivery of multiple
service offerings, including 144 Kbps DSL service and digital access lines for
voice, custom local-area signalling services, or CLASS, and high-speed analog
modem access. Our technology allows network access providers to power their
GDSL systems from the central office for a full 25 miles regardless of power
availability at a particular location and enables multiple drop off points
along the transmission route. The GoDigital Full-Service Distribution System,
or FDS, transports multiple IDSL lines and digital access lines to multiple
drop off points along 40 Mbps fiber rings of up to 150 miles. The ease of
installation and interoperability of our systems allow our customers to rapidly
deploy multiple new services on one copper line. Our GDSL and FDS systems are
weather hardened for outside plant deployment and are NEBS Level 3 compliant.
Our FDS systems, when used in combination with our GDSL systems, allow the
flexibility to deliver services to virtually any location within the network
access provider's service area.
Our business strategy is to be the leading provider of long-range DSL
transmission systems that enable network access providers to cost-effectively
offer multiple DSL-based services to all business and residential subscribers
regardless of distance from the central office. To implement our strategy, we
intend to leverage our early market acceptance by our over 60 customers,
including ALLTEL, Frontier, GTE, TELUS and US West to extend our market share
and become the leading supplier of cost-efficient, long-range DSL transmission
solutions. We intend to continue to develop scalable access solutions focused
on satisfying the increasing demand for higher bandwidths and more digital
access lines to virtually any point on the network. We are focused on
continuing to develop strategic relationships with DSL central office and
customer located equipment vendors to extend the range of their existing DSL
solutions, thereby expanding their market opportunity.
We were incorporated in February 1996 in California. We intend to
reincorporate in Delaware prior to the completion of this offering. Our
principal executive offices are located at 41652 Boscell Road, Fremont,
California 94538, and our telephone number is (510) 979-2200. Our web site is
located at "www.godigital.com." Information contained on our web site does not
constitute a part of this prospectus.
GODIGITAL(R) and GDSL(R) are registered trademarks of GoDigital. We own
rights to other unregistered marks. This prospectus also makes reference to
trademarks of other companies, which are their property.
3
The Offering
Common stock offered....................... shares
Common stock to be outstanding after this
offering.................................. shares
Use of proceeds............................ General corporate purposes, including
working capital, capital expenditures, and
potential acquisitions.
Proposed Nasdaq National Market symbol..... GDNT
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The above table is based on shares outstanding as of September 30, 1999.
This table excludes:
. 2,150,600 shares issuable upon exercise of stock options outstanding as
of September 30, 1999 under our stock option plan with a weighted average
exercise price of $0.71 per share; and
. 12,160,000 shares reserved for future issuance under our stock option and
employee stock purchase plans (including amounts authorized for issuance
subsequent to September 30, 1999).
You should be aware that our fiscal year ends on the Sunday closest to March
31; thus, a reference to "fiscal 1999", for example, is the fiscal year ended
March 28, 1999. For the purposes of presentation, we have indicated that the
accounting year ends March 31, or the month-end for interim quarterly periods.
In addition, except as otherwise indicated, information in this prospectus
reflects the following:
. a two-for-one stock split of the common stock to be effected prior to the
closing of this offering;
. that each outstanding share of Series A, Series B, Series C and Series E
preferred stock will convert into two shares of common stock immediately
prior to the closing of this offering after giving effect to the two-for-
one stock split;
. that each outstanding share of Series D preferred stock will convert into
approximately 2.8 shares of common stock immediately prior to the closing
of this offering after giving effect to the two-for-one stock split;
. that the underwriters' over-allotment option will not be exercised; and
. that we will file our restated certificate of incorporation prior to the
closing of this offering.
4
Summary Financial Information
(in thousands, except per share data)
February 9, Six Months
1996 Fiscal Year Ended Ended
(inception) ------------------ ----------------
through Sept. Sept.
Mar. 31, Mar. 31, Mar. 31, 30, 30,
1997 1998 1999 1998 1999
----------- -------- -------- ------- -------
(unaudited)
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
======= =======
At September 30, 1999
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Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents........................ $ 2,668 $2,668 $
Working capital.................................. 3,382 3,382
Total assets..................................... 19,180 19,180
Long-term obligations, less current portion...... 208 208
Total stockholders' equity....................... 9,978 9,978
See note 1 of notes to the financial statements for an explanation of the
determination of the number of shares used in computing diluted net loss per
share.
The pro forma numbers reflect the conversion of all outstanding shares of
our preferred stock into 14,470,282 shares of common stock effective
automatically upon the closing of this offering.
The pro forma as adjusted amounts reflect the sale of shares of
common stock in this offering at an assumed initial public offering price of
$ per share and the application of the net proceeds after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. See "Use of Proceeds" and "Capitalization."
5
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus including the discussions in "Special
Note Regarding Forward-Looking Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as our financial statements and the accompanying notes before purchasing
our common stock. Investing in our common stock involves a high degree of risk.
The risks described below are intended to highlight risks that are specific to
us and are not the only ones we face. Additional risks and uncertainties, such
as those that generally apply to our industry or to companies undertaking
initial public offerings, may also impair our business operations. Risks and
uncertainties, in addition to those we describe below, that are presently not
known to us or that we currently believe are not material, may subsequently
become material and may also impair our financial condition. If any of the
following risks actually occur, our business, results of operations and
financial condition would suffer. In addition, the trading price of our common
stock could decline due to the occurrence of any of these risks, and you may
lose all or part of your investment.
We have a history of losses, expect future losses and may not achieve or
sustain profitability
As of September 30, 1999, we have incurred accumulated losses of $16.3
million since our inception and may continue to incur net losses in the future.
We anticipate continuing to incur significant sales and marketing, product
development and general and administrative expenses and, as a result, we will
need to generate significantly higher revenues to achieve and sustain
profitability on an annual basis. We incurred net losses of approximately $3.0
million from inception through March 31, 1997, approximately $5.1 million for
fiscal year 1998 and approximately $3.6 million for fiscal year 1999. Although
our revenue has grown in recent quarters, on a year to year basis, we cannot be
certain that our revenue growth will continue at the same rate as our
historical growth, or that we will realize sufficient revenues to achieve and
sustain profitability.
We have a limited operating history and, as a result, it is difficult to
predict our future results of operations
We commenced operations in April 1996, and began shipping our GDSL systems
during the first quarter of fiscal 1999. We acquired the FDS product line from
E/O Networks in July 1999 and have generated only limited revenues from the
sales of these systems. Due to our limited operating history, it is difficult
or impossible for us to predict future results of operations and you should not
expect future revenue growth rates to be comparable to our recent revenue
growth rates. In addition, we believe that comparing different periods of our
operating results is not meaningful, and you should not rely on the results for
any period as an indication of our future performance. Investors in our common
stock must consider our business and prospects in light of the risks and
difficulties typically encountered by companies in their early stages of
development, particularly those in rapidly evolving markets such as the
communications equipment industry. Some of the specific risks we face are
discussed in more detail throughout this Risk Factors section.
A number of factors could cause our operating results to fluctuate
significantly and cause our stock price to be volatile
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a variety of
factors, many of which are outside of our control. Some of the factors that
could affect our quarterly or annual operating results include:
. the timing and amount of, or cancellation or rescheduling of, orders for
our systems, particularly large orders from our key customers;
. our ability to develop, introduce, ship and support new products and
enhancements and manage product transitions;
6
. our ability to attain and maintain production volumes and quality levels
for our systems;
. announcements, new product introductions and reductions in the price of
products offered by our competitors;
. changes in our pricing policies or the pricing policies of our
competitors;
. our ability to obtain sufficient supplies of sole- or limited-source
components for our systems;
. changes in the prices of our components;
. growth and demand for multiple digital access communications
infrastructure; and
. continued growth of the Internet as a widespread communications medium.
Our operating expenses are largely based on anticipated revenue trends and a
high percentage of our expenses are, and will continue to be, fixed in the
short term. As a result, a delay in generating or recognizing revenue for any
reason could cause significant variations in our operating results from quarter
to quarter and could result in greater than anticipated operating losses. If
our quarterly or annual operating results do not meet the expectations of
securities analysts and investors, the trading price of our common stock could
decline.
We derive almost all of our revenues from a small number of customers and our
revenues may decline significantly if any major customer cancels or delays a
purchase of our systems
We currently sell our systems predominantly to incumbent local exchange
carriers. Aggregate sales to our largest customer, GTE, accounted for
approximately 89.8% of our net revenues for the fiscal year ended March 31,
1999. Aggregate sales to GTE and TELUS Communications accounted for
approximately 64.1% and 17.5% of our net revenues, respectively, for the six
months ended September 30, 1999. We expect to continue to derive a substantial
portion of revenue from GTE, TELUS and a limited number of other customers in
the foreseeable future. These and other customers tend to be significantly
larger than us and are able to exert a high degree of influence over us. They
have significant bargaining power and may demand lower prices and other
preferential terms. Accordingly, unless and until we diversify and expand our
customer base, our future success will significantly depend on our largest
customers and, in particular:
. our ability to develop and manage our relationships with these customers
in order to meet their product requirements;
. the timing, size and terms of future purchase orders from these
customers and our ability to deliver on these orders;
. the spending budgets of these customers; and
. the success of the services provided by our customers that utilize our
systems.
In addition, we may experience delays in releasing new products and product
enhancements in the future. Material delays in introducing new products and
enhancements or our inability to introduce competitive new products may cause
these customers to forego purchases of our products and purchase those of our
competitors. The loss of any one of our major customers or the delay of
significant orders from these customers, even if only temporary, could, among
other things, reduce or delay our recognition of revenues and reduce our
ability to accurately predict cash flow, and, as a consequence, seriously harm
our business, results of operations and financial condition.
Substantially all of our revenues are derived from sales of a small number of
systems and depend on their widespread market acceptance
We currently derive substantially all of our revenues from the sale of our
GDSL and FDS systems, and we expect this product concentration to continue for
the foreseeable future. The market may not continue to
7
demand our current systems, and we may not be successful in developing and
marketing any new or enhanced products. Any reduction in the demand for our
current systems, or our failure to successfully develop, market and introduce
new or enhanced products could materially harm our business. In particular, we
recently acquired the FDS product line and cannot be certain that we will
successfully market and sell these systems. Additional factors that could
affect sales of our current or new or enhanced products include:
. the demand for DSL technology and solutions;
. the continued growth of the Internet as a widespread communications
medium;
. the availability and price of competing products and technologies;
. the performance, price and total cost of ownership of our products;
. our successful development, introduction and market acceptance of new
and enhanced products that address customer requirements;
. the success and development of our distributors and direct sales
channels; and
. technological changes.
Our success depends on our ability to develop products and product enhancements
that will achieve market acceptance as well as meet significant industry
regulations and standards
The communications market is characterized by rapid technological advances,
evolving industry standards, changes in end-user requirements, new
communications infrastructure equipment and evolving offerings by network
access providers. We believe our future success will depend, in part, on our
ability to anticipate and adapt to these changes and to offer, on a timely
basis, products that meet customer demand. In particular, our products need to
successfully address the increased bandwidth demands of end-users. The
development of new or enhanced products is a complex and uncertain process
requiring the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. The introduction of new or enhanced products also requires that
we manage the transition from older products in order to minimize disruption in
customer ordering patterns and ensure that adequate supplies of new products
can be delivered to meet anticipated customer demand. Our inability to develop
on a timely basis new products or enhancements to existing products, or the
failure of these new products or enhancements to achieve market acceptance,
could result in a reduction in the amounts of our products sold or slow the
growth of adoption of our products, which could harm our business, results of
operations and financial condition.
In addition, the market for our products is characterized by the need to
meet a significant number of communications regulations and standards, some of
which are evolving as new technologies are deployed. In order to meet the
requirements of our customers, our products may be required to comply with
various regulations and standards established by the Federal Communications
Commission, or the FCC, the Underwriters Laboratories, the Canadian Standards
Association, Bell Communications Research and our customers. Failure of our
products to comply, or delays in compliance, with the various existing and
evolving industry regulations and standards could delay the introduction of our
products. Moreover, enactment by federal, state or foreign governments of new
laws or regulations, changes in the interpretation of existing laws or
regulations, or a reversal of the trend toward deregulation in the
telecommunications industry could seriously harm our customers, and thereby
harm our business, results of operations and financial condition.
Because our systems are complex and are deployed in complex environments, they
may have errors or defects that we find only after full deployment, which could
seriously harm our business
Our highly complex systems are deployed in extensive, complicated
communications networks. As a result, our systems can only be fully tested when
deployed in the field. To date, customers have only deployed
8
our systems on a limited basis. Consequently, our customers may discover
errors or defects in our hardware or software after our systems have been
deployed in the field. For example, during the summer of 1999, there was a
series of lightning storms throughout the midwest region of the United States
and Texas. Our customers experienced some GDSL-8 system failures because of
these lightning storms. Although our systems were developed in compliance with
the Telcordia (Bellcore) specifications, we have found that the Telcordia
specifications for lightning resistance were inadequate in some circumstances.
As a result, we redesigned our products to better withstand sudden surges in
power levels whether as a result of lightning storms, or otherwise. In
connection with this product update program, we recorded an expense of $2.9
million which was charged to cost of revenues in the three month period ended
September 30, 1999. In addition, because of the nature of the services they
offer, network access providers require extremely reliable products.
Consequently, if we are unable to fix errors or other problems that may be
identified in full deployment, we could experience:
. loss of, or delay, in revenues and loss of market share;
. loss of customers;
. failure to achieve market acceptance of our systems;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by our customers; and
. increased insurance costs.
Any of the above described factors could harm our business, results of
operations and financial condition.
Customer product liability claims based on errors in our software or defects
in material or labor could result in costly litigation and product returns
Our systems have in the past contained, and may in the future contain,
undetected or unresolved errors or defects when first introduced or as
enhancements are released. Despite extensive testing, errors, defects or
failures may be found in our current or future products or enhancements after
commencement of commercial shipments. Our products are designed to provide
critical communications services, and therefore, we may receive significant
liability claims if any errors, defects or failures are found in our systems.
Our agreements with customers typically contain provisions intended to limit
our exposure to liability claims. However, these limitations may not preclude
all potential claims resulting from a defect in one of our products. Although
we maintain product liability insurance covering certain damages arising from
implementation and use of our products, our insurance may not cover any claims
sought against us. Liability claims could require us to spend significant time
and money in litigation or to pay significant damages. As a result, these
claims, whether or not successful, could seriously damage our reputation and
our business, results of operations and financial condition.
The long sales cycle for our systems, as well as our expectation that
customers will sporadically place large orders with short lead times, may
cause revenues and operating results to vary significantly from quarter to
quarter
A customer's decision to purchase our systems may involve a significant
commitment of its resources and a lengthy evaluation and product qualification
process, often taking up to one year. Throughout the sales cycle, we often
spend considerable time educating and providing information to prospective
customers regarding the use and benefits of our systems. The length of the
approval process can vary and is affected by a number of factors, including
customer priorities, customer budgets and regulatory issues affecting network
access providers. Delays in the product approval process or the failure to
receive approval could seriously harm our business, results of operations and
financial condition.
9
Even after making the decision to purchase, our customers tend to deploy our
systems slowly and deliberately. Timing of deployment can vary widely and
depends on:
. the size of the network deployment;
. the complexity of the customer's network environment;
. the degree of hardware and software configuration necessary to deploy our
systems;
. our vendor delivery times;
. our ability to ship adequate volume of our systems in a timely manner;
and
. changes in customer demand.
Customers with large networks usually expand their networks in large
increments on a periodic basis. Accordingly, we may receive purchase orders for
significant dollar amounts on an irregular basis. Because of our limited
operating history, we cannot predict these sales cycles. These long cycles, a
delay in, or cancellation of, the sale of our products or our expectation that
customers will tend to sporadically place large orders with short lead times,
may cause our revenues and operating results to vary significantly and
unexpectedly from quarter to quarter.
Competition within the communications equipment market is intense and includes
numerous established competitors who may enter our segment of the market at any
time; in addition, future consolidation in the communications equipment
industry may increase competition
We provide communications systems that enable network access providers to
extend their service offerings up to 25 miles from their central offices. We
currently compete directly with privately held companies that offer long-range
DSL-based products. However, many large communication equipment vendors, such
as Alcatel, Cisco Systems, Lucent Technologies, and Nortel Networks, may,
either through internal development or through acquisitions of competitive
businesses or technologies, develop systems that compete directly with ours.
These potential competitors have substantially greater name recognition along
with larger technical, financial and marketing resources. We cannot assure you
that we will have the financial resources, technical expertise or marketing,
distribution and support capabilities to compete successfully against these
companies. Competitive pressures from existing or new competitors in our market
could harm our business, results of operations and financial condition in the
following ways:
. reduce demand for our systems;
. cause delays or cancellations of customer orders;
. cause us to reduce prices on our existing systems; or
. increase our expenses.
In addition, the markets in which we compete are characterized by increasing
consolidation as exemplified by the acquisition of Ascend Communications by
Lucent Technologies and Diamond Lane Communications by Nokia. We cannot predict
with certainty how industry consolidation will affect us or our existing or
potential competitors. We may not be able to compete successfully in an
increasingly consolidated industry. Increased consolidation in our industry,
including consolidation of strategic third parties with whom we currently have
relationships, could require us to reduce the prices of our products, increase
our costs, or result in our loss of market share, which would seriously harm
our business, results of operations and financial condition.
10
We may not be able to produce sufficient quantities of our systems because we
obtain certain key components from, and depend on, certain sole-source
suppliers; if we are unable to obtain these sole-source components, we would
not be able to ship our systems in a timely manner and our strategic
relationships with our customers would be detrimentally affected
Although we generally use standard parts and components for our systems,
several key components are purchased from sole- or single-source vendors for
which alternative sources are not currently available. We presently purchase
several key components from vendors for which there are currently no
substitutes, including certain semiconductors from Conexant Systems, Lucent
Microelectronics, and Xilinx. We are evaluating alternate source vendors for
each of these key components, but any alternate vendor may not meet our quality
standards or volume requirements for components. In addition, any of our sole-
source suppliers may:
. enter into exclusive arrangements with our competitors;
. stop selling their products or components to us at commercially
reasonable prices; or
. refuse to sell their products or components to us at any price.
In the event of a reduction or interruption of supply of any sole-sourced
components, we would be forced to locate an alternative source of supply. If we
were able to locate an alternative source of supply, as much as six months
could be required before we would begin receiving adequate supplies from these
suppliers. It is possible, however, that an alternative source may not be
available for us, or may not be in a position to satisfy our production
requirements at acceptable prices and on a timely basis, if at all. The
manufacture of our single- or sole-source components is extremely complex, and
our reliance on the suppliers of these components exposes us to potential
production difficulties and quality variations, which could negatively impact
cost and timely delivery of our systems. Furthermore, additional sole-source
components may be incorporated into our future products thereby increasing our
sole-source supplier risks.
If we are unable to obtain sufficient quantities of sole-source components,
or if there is a degradation in the quality of these components, or if any of
our sole-source manufacturers delay or halt production of these components and
we are unable to develop alternative sources for these components on a timely
basis, our business, results of operations and financial condition would be
seriously harmed.
Changes affecting the communications industry could reduce demand for our
systems or negatively impact our results of operations
Any changes to legal requirements relating to the communications industry,
including the adoption of new regulations by federal or state regulatory
authorities under current laws or any legal challenges to existing laws or
regulations relating to the communications industry could reduce the demand for
our systems. Moreover, our distributors or network access providers' customers
may require, or we may otherwise deem it necessary or advisable, that we modify
our systems to address actual or anticipated changes in the regulatory
environment. Our inability to modify our systems or address any regulatory
changes could seriously harm our business, results of operations and financial
condition.
If we are unable to obtain additional capital to fund our operations when
needed, we may not be able to develop or enhance our systems, take advantage of
future opportunities or respond to competitive pressures which would harm our
business
We expect to use the net proceeds of this offering primarily to continue to
invest in product development, to expand our sales and marketing activities and
to make capital expenditures. We believe that these proceeds, together with our
existing capital resources, will be sufficient to meet our capital requirements
for at least the next twelve months. However, our capital requirements depend
on several factors, including the rate of market acceptance of our systems, the
ability to expand our client base, the rate of growth of our sales and
marketing expenses, and other factors. If capital requirements vary
significantly from those currently planned, we may require additional financing
sooner than anticipated. If additional funds are raised through the issuance of
equity securities, stockholders may experience additional dilution. These
equity securities may also have rights,
11
preferences or privileges senior to those of the holders of our common stock.
If additional funds are raised through the issuance of debt securities, these
securities would have rights, preferences and privileges senior to holders of
common stock and the term of this debt could impose restrictions on our
operations. Additional financing may not be available when needed on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to develop or enhance our
products, take advantage of future opportunities or respond to competitive
pressures, which could seriously harm our business, results of operations and
financial condition.
Our intellectual property protection may be inadequate to protect our
proprietary rights, and claims against us alleging our infringement of a third
party's intellectual property could result in significant expense and in our
loss of significant rights
We regard our systems, services and technology as proprietary. We attempt to
protect them with patents, copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. These methods may not be
sufficient to protect our technology. We also generally enter into
confidentiality or license agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our systems, services or
technology without authorization, or to develop similar technology
independently.
We currently have one issued patent, four pending formal patent
applications, and three pending provisional applications in the United States.
We intend to prepare additional applications and to seek patent protection for
our systems and services. These patents may not be issued to us. If issued,
they may not protect our intellectual property from competition. Competitors
could seek to design around or invalidate these patents.
Effective patent, copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. The global nature of the
Internet makes it virtually impossible to control the ultimate destination of
our proprietary information. The steps that we have taken may not prevent
misappropriation or infringement of our technology. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Litigation could result in substantial costs, produce unfavorable
rulings or judgments, and divert management attention and resources, which
would seriously harm our business, results of operations and financial
condition.
The communications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to our business. Any claims asserting that our products infringe or
may infringe proprietary rights of third parties, if determined adversely to
us, could seriously harm our business, results of operations and financial
condition. In addition, in some of our agreements, we agree to indemnify our
customers for any expenses or liabilities resulting from claimed infringements
of patents, trademarks or copyrights of third parties. As the number of
entrants in our market increases and if the functionality of our systems is
enhanced and if our systems overlap with the products of other companies, we
may become subject to claims of infringement or misappropriation of the
intellectual property rights of others. Any claims, with or without merit,
could be time-consuming, result in costly litigation, divert the efforts of our
technical and management personnel, cause product shipment delays or require us
to enter into royalty or licensing agreements, any of which could have a
serious negative impact on our operating results. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if at
all. Legal action claiming patent infringement may be commenced against us. We
cannot assure you that we would prevail in such litigation given the complex
technical issues and inherent uncertainties in patent litigation. In the event
a claim against us were to be successful and we could not obtain a license to
the relevant technology on acceptable terms, license a substitute technology or
redesign our systems to avoid infringement, our business, results of operations
and financial condition would be seriously harmed.
12
We must substantially expand our direct and indirect sales operations and our
customer service and support organization in order to increase market awareness
and sales of our systems
Our systems and services require a significant sales effort targeted at
several key people within each of our prospective customers' organizations.
This sales effort requires the efforts of select personnel as well as
specialized system and field engineers. We have recently expanded our direct
sales force and plan to hire additional qualified sales personnel and system
and field engineers. We currently have a small customer service and support
organization and will need to increase our staff to support new customers and
the expanding needs of existing customers. Competition for these individuals is
intense, and we might not be able to hire the kind and number of sales
personnel, system and field engineers and customer service and support
personnel we need. In addition, we believe that our future success is dependent
upon establishing successful relationships with a variety of distribution
partners. We have entered into agreements with only a small number of
distribution partners. We cannot be certain that we will be able to reach
agreement with additional distribution partners on a timely basis or at all, or
that our distribution partners will devote adequate resources to selling our
systems. In addition, some of our distribution partners also sell products that
compete with ours. If we are unable to expand our direct and indirect sales
operations and our customer support organization, we may not be able to
increase market awareness or sales of our systems, which may prevent us from
achieving and maintaining profitability.
If we fail to accurately predict our manufacturing requirements, we could incur
additional costs or experience manufacturing delays
Currently, we do not have long-term contracts with Eltech Electronics and
our other outsource manufacturers. These companies are not obligated to
manufacture our products for any specific period, in any specific quantity or
at any certain price, except as may be provided in a particular purchase order.
We provide forecasts of our demand to our outsource manufacturers up to six
months prior to scheduled delivery of products to our customers. If we
overestimate our requirements, our outsource manufacturers may have excess
inventory, which would increase our costs. If we underestimate our
requirements, our outsource manufacturers may have an inadequate inventory,
which could interrupt manufacturing of our products and result in delays in
shipments and revenues. In addition, lead times for materials and components we
order vary significantly and depend on factors such as the specific supplier,
contract terms and demand for each component at a given time. We also may
experience shortages of certain components from time to time, which could delay
the manufacturing of our products.
We continue to rapidly and significantly expand our operations, and our failure
to manage growth could harm our business and adversely affect our results of
operations and financial condition
We have rapidly and significantly expanded our operations, including the
number of our employees, the geographic scope of our activities and our product
offerings. We expect that further significant expansion will be required to
address potential growth in our customer base and market opportunities. Any
failure to manage growth effectively could harm our business and adversely
affect our results of operations and financial condition. We cannot assure you
that we will be able to do any of the following, which we believe are essential
to successfully manage the anticipated growth of our operations:
. improve our existing and implement new operational, financial and
management information controls, reporting systems and procedures;
. hire, train and manage additional qualified personnel;
. expand and upgrade our core technologies; and
. effectively manage multiple relationships with our customers, suppliers
and other third parties.
In the future, we may also experience difficulties meeting the demand for
our products. The installation and use of our products require training. If we
are unable to provide training and support for our products, more time may be
necessary to complete the implementation process and customer satisfaction may
be adversely affected. In
13
addition, our suppliers may not be able to meet increased demand for our
products. We cannot assure you that our systems, procedures or controls will be
adequate to support the anticipated growth in our operations.
We depend on our key personnel to manage our business effectively in a rapidly
changing market and if we are unable to hire additional personnel, our ability
to manage our business could be harmed
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel.
None of our officers or key employees is bound by an employment agreement for
any specific term. We also intend to hire a significant number of engineering,
sales, marketing and support personnel in the future, and we believe our
success depends, in large part, upon our ability to attract and retain these
key employees. Competition for these persons is intense, especially in the San
Francisco Bay Area. The loss of the services of any of our key employees, the
inability to attract or retain qualified personnel in the future, or delays in
hiring required personnel, particularly engineers and sales personnel, could
delay the development and introduction of and negatively impact our ability to
sell our products.
Our stock price could fluctuate widely in response to various factors, many of
which are beyond our control
The trading price of our common stock is likely to be highly volatile. Our
stock price could fluctuate widely in response to factors such as the
following:
. actual or anticipated variations in quarterly operating results;
. announcements of new customers, products or services by us or our
competitors or new competing technologies;
. changes in financial estimates or recommendations by securities analysts;
. conditions or trends in the telecommunications industry, including
regulatory developments;
. growth of the Internet and electronic commerce industries;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. future equity or debt offerings or our announcements of these offerings;
. general market and general economic conditions; and
. other events or factors, many of which are beyond our control.
In addition, in recent years the stock market in general, the Nasdaq
National Market and the market for communications and technology companies in
particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may
negatively impact our stock price, regardless of our operating performance. In
the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted
against these companies. Litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which would
seriously harm our business, results of operations and financial condition.
We may engage in future acquisitions that could dilute our stockholders, cause
us to incur debt and assume contingent liabilities
As part of our business strategy, we expect to review acquisition prospects
that could complement our current product offerings, augment our market
coverage or enhance our technical capabilities, or that may
14
otherwise offer growth opportunities. While we have no current agreements or
negotiations underway with respect to any acquisitions, we may acquire
businesses, products or technologies in the future. In the event of future
acquisitions, we could issue equity securities that would dilute current
stockholders' percentage ownership, incur substantial debt, or assume
contingent liabilities. Any acquisitions by us could seriously harm our results
of operations and/or the price of our common stock. Acquisitions also entail
numerous risks, including:
. difficulties in assimilating acquired operations, technologies or
products;
. unanticipated costs associated with the acquisition;
. acquisition-related charges and the amortization of acquired technology
and other intangibles could negatively affect our reported results of
operations;
. diversion of management's attention from other business concerns;
. adverse effects on existing business relationships with suppliers and
customers;
. risks of entering markets in which we have no or limited prior
experience; and
. potential loss of key employees of acquired organizations.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could seriously harm our business, results of operations and financial
condition.
Management may apply the proceeds of this offering to uses that do not result
in an increase in our profits or market value
Our management will have considerable discretion in the application of the
net proceeds from this offering, and you will not have the opportunity, as part
of your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for general corporate purposes in
ways with which our stockholders do not agree or in ways that do not increase
our results of operations or our market value. Pending application of the net
proceeds, the proceeds may be placed in investments that do not produce income
or that lose value.
Insiders will continue to have substantial control over us after this offering
and could delay or prevent a change in corporate control and other actions, and
such control could negatively impact our stock price or lessen any premium over
market price that an acquirer might otherwise pay
We anticipate that the executive officers, directors and entities affiliated
with them will, in the aggregate, beneficially own approximately % of our
outstanding common stock following the completion of this offering or % if
the underwriters' option is fully exercised. These stockholders, if acting
together, would be able to influence significantly all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. This
concentration of ownership may delay or prevent a beneficial merger or
discourage a potential acquirer. This level of control could adversely affect
our stock's market price or lessen any premium over market price that an
acquirer might otherwise pay. See "Principal Stockholders."
Certain provisions of our charter documents may make acquiring control of our
company more difficult for a third party, which could negatively impact our
stock's market price or lessen any premium over market price that an acquirer
might otherwise pay
Our charter documents contain provisions providing for a classified board of
directors, eliminating cumulative voting in the election of directors,
restricting our stockholders from acting without a meeting and other
provisions. See "Description of Capital Stock." These provisions may make
certain corporate actions more difficult and might delay or prevent a change in
control and therefore limit the price the new investors
15
will pay for our stock. Further, the board of directors may issue up to
1,000,000 new shares of preferred stock with certain rights, preferences,
privileges and restrictions, including voting rights, without any vote by our
stockholders. Our existing stockholders may be negatively impacted by the
rights of this preferred stock. New preferred stock might also be used to make
acquiring control more difficult. We have no current plans to issue shares of
preferred stock. We will also indemnify officers and directors against losses
incurred in legal proceedings to the broadest extent permitted by Delaware law.
You will immediately experience substantial dilution in net tangible book value
when you initially purchase our common stock
Because our common stock has in the past been sold at prices substantially
less than the initial public offering price that you will pay, investors
purchasing stock in this offering will incur substantial and immediate dilution
in net tangible book value of $ per share at the assumed initial public
offering price of $ . To the extent that currently outstanding options are
exercised, there will be further dilution in net tangible book value. See
"Dilution" for a definition of the term "net tangible book value" and further
explanation of this risk.
There are substantial shares of common stock eligible for future sale, and such
sales may depress our stock price
After this offering, we will have outstanding shares of common
stock. See "Capitalization" for a discussion of the shares included in and
excluded from this number. The shares sold in this offering will be
freely tradable. The remaining shares of common stock outstanding after this
offering will be available for sale, assuming the effectiveness of certain
lock-up arrangements under which the stockholders have agreed not to sell or
otherwise dispose of their shares of common stock, in the public market as
follows:
Number of Shares Date of Availability for Sale
---------------- -----------------------------
0................. (date of this prospectus)
0................. (90 days after the date of this prospectus)
[ ]............... (after 180 days following the date of this prospectus);
and the remaining shares at various times thereafter upon
the expiration of one-year holding periods
If our stockholders sell substantial amounts of common stock in the public
market, including shares issuable upon the exercise of outstanding options, the
market price of our common stock could fall. In addition, the sale of shares by
our stockholders could impair our ability to raise capital through the sale of
additional stock. See "Shares Eligible for Future Sale" and "Underwriting."
Our securities have no prior market, and our stock price may decline after the
offering
Before this offering, there has not been a public market for our common
stock and an active public market for our common stock may not develop or be
sustained after this offering. If an active public market for our common stock
does not develop, the liquidity of your investment may be limited, and our
stock price may fluctuate or decline below our initial public offering price.
The initial public offering price will be determined by negotiations between us
and the representatives of the underwriters. See "Underwriting" for a
discussion of the factors that will be considered in determining the initial
public offering price.
Our failure or the failure of our key suppliers and customers to be Year 2000
compliant would harm our business.
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January
1, 2000, computer systems and software used by many companies and organizations
in a wide variety of industries, including technology, transportation,
utilities, finance and telecommunications, will produce erroneous results or
fail unless they have been modified or upgraded to process date information
correctly.
16
Although we cannot predict with any certainty what adverse effects we may
suffer from Year 2000 compliance issues, possible effects include:
. disruption in basic services such as water, electricity and telephone,
any of which could require us to close or substantially reduce the level
of activity at our facilities until service returns to normal;
. disruption in the supply of components and manufactured goods from our
component suppliers and contract manufacturers if they experience
disruptions in the delivery of basic services;
. disruptions in our ability to ship and receive goods if third-party
transportation and delivery providers experience disruptions in their
operations; and
. delays in receiving accurate management information from our internal
accounting and management systems.
We believe our internal systems are substantially Year 2000 compliant.
However, we currently have no contingency plan to address potential
interruptions in the operation of our internal systems or those of third
parties upon whom we depend as a result of Year 2000 noncompliance.
We may face claims based on Year 2000 issues arising from the integration of
multiple products within an overall network. We may also experience reduced
sales of our products as potential customers reduce their budgets for network
equipment and network services due to increased expenditures on their own Year
2000 compliance efforts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
17
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements
within the meaning of the federal securities laws that relate to future events
or our future financial performance. These statements involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by the forward-looking statements. These
risks and other factors include those listed under "Risk Factors" and elsewhere
in this prospectus. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
the negative of these terms or other comparable terminology. In addition, these
forward-looking statements include, but are not limited to, statements
regarding the following:
. anticipated development and release of new products;
. anticipated sources of future revenues;
. anticipated product return rates;
. future third party manufacturing arrangements;
. anticipated expenditures for research and development, sales and
marketing and general and administrative expenses;
. the adequacy of our capital resources to fund our operations; and
. our assessment of our readiness to address, and risks relating to, year
2000 issues.
These statements are only predictions. In evaluating these statements, you
should specifically consider various factors, including the risks outlined
under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus or to conform our prior
statements to actual results.
18
USE OF PROCEEDS
We expect to receive net proceeds of approximately $ million from
the sale of the shares of common stock or approximately $ million
if the underwriters' over-allotment option is exercised in full, at an assumed
initial public offering price of $ per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
We intend to use the net proceeds from this offering primarily for general
corporate purposes, including working capital, and capital expenditures. The
amounts we actually expend for working capital and other purposes may vary
significantly and will depend on a number of factors, including the amount of
our future revenues and the other factors described under "Risk Factors."
Accordingly, our management will retain broad discretion in the allocation of
the net proceeds of this offering. We may also use a portion of the net
proceeds to acquire products, technologies or businesses that are complementary
to our current and future business and product lines. We currently have no
commitments or agreements and are not involved in any negotiations with respect
to any acquisition transactions. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in interest-bearing, investment-
grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
19
CAPITALIZATION
The following table sets forth our actual capitalization as of September 30,
1999 on the following:
. on an actual basis;
. on a pro forma basis to give effect to the conversion of all shares of
preferred stock into 14,470,282 shares of common stock effective
automatically upon the closing of this offering; and
. on pro forma as adjusted basis to give effect to the sale of
shares of common stock at an assumed initial offering price of $
per share (less underwriting discounts and commissions and estimated
offering expenses).
You should read this table in conjunction with our financial statements and
the accompanying notes, Selected Financial Data, and Management's Discussion
and Analysis of Financial Condition and Results of Operations included
elsewhere in this prospectus.
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, shares issued and outstanding
(pro forma as adjusted)......................... 6 20
Additional paid-in capital......................... 41,251 41,245
Notes receivable from stockholders................. (2,325) (2,325)
Deferred stock compensation........................ (12,655) (12,655) ( )
Accumulated deficit................................ (16,307) (16,307) ( )
-------- ------- -----
Total stockholders' equity....................... 9,978 9,978
-------- ------- -----
Total capitalization........................... $ 10,186 $10,186 $
======== ======= =====
- -----------------------
The number of shares of common stock outstanding after this offering
excludes the following:
. 2,150,600 shares issuable upon exercise of outstanding stock options as
of September 30, 1999 with a weighted average exercise price of $0.71 per
share; and
. 12,160,000 shares reserved for issuance under our 1996 Stock Plan and
1999 Employee Stock Purchase Plan (including amounts authorized for
issuance subsequent to September 30, 1999).
20
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of common
stock after this offering. In the table below, we have calculated net tangible
book value per share by dividing the net tangible book value (total assets less
intangible assets and total liabilities) by the number of outstanding shares of
common stock. Our pro forma net tangible book value as of September 30, 1999
was $5.6 million or $0.27 per share of common stock. Dilution in net tangible
book value per share represents the difference between the amount per share
paid by purchasers of shares of common stock in this offering and the net
tangible book value per share of common stock immediately after the completion
of this offering. After giving effect to the sale of the shares of common
stock offered hereby (at an assumed public offering price of $ per share (less
underwriting discounts and commissions and estimated offering expenses), our
pro forma net tangible book value as of September 30, 1999 would have been $
or approximately $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution in net tangible book value of $ per share to new investors, or
approximately % of the initial public offering price of $ per share. The
following table illustrates this per share dilution:
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at September
30, 1999................................................. $ 0.27
Increase per share attributable to this offering.......... $
------
Pro forma as adjusted net tangible book value per share
after this offering........................................ $
-------
Dilution per share to new investors......................... $
=======
The following table shows on a pro forma basis after giving effect to this
offering, based on an assumed initial public offering price of $ per share, as
of September 30, 1999, the differences between the existing holders of common
stock and the new investors with respect to the number of shares of common
stock purchased from us, the total consideration paid to us, and the average
price per share paid, before deducting the underwriting discounts and
commissions and estimated offering expenses:
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
Existing stockholders.. 20,499,574 % $25,797,000 % $0.79
New investors..........
---------- ----- ----------- -----
Total................ 100.0% $ 100.0%
========== ===== =========== =====
The foregoing discussion and table are based on the number of shares of
common stock outstanding after this offering excludes the following:
. 2,150,600 shares issuable upon exercise of outstanding stock options as
of September 30, 1999 with a weighted average exercise price of $0.71 per
share; and
. 12,160,000 shares reserved for issuance under our 1996 Stock Plan and
1999 Employee Stock Purchase Plan (including amounts authorized for
issuance subsequent to September 30, 1999).
To the extent any of these options are exercised or our employees purchase
our shares under our 1999 Employee Stock Purchase Plan, there will be further
dilution to investors. See "Capitalization," "Management--Stock Plans,"
"Description of Capital Stock" and note 6 of notes to financial statements.
21
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.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes thereto, as well as the other information included
elsewhere in this prospectus. Our discussion contains forward-looking
statements based upon current expectations that involve risks and
uncertainties, such as our plans, objectives, expectations, and intentions. Our
actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors," "Business" and
elsewhere in this prospectus.
Overview
We provide long-range DSL transmission systems that increase the bandwidth
and performance of copper lines to meet the rapidly growing demand for multiple
access line and high-speed, reliable Internet access and data services. We
commenced operations in April 1996. During the period from commencement through
the end of fiscal year 1998, we were a development stage company focused on
developing our initial product, recruiting personnel, building our corporate
infrastructure and raising capital, and had no product revenue. In fiscal year
1999, we began shipping our GDSL systems and expanded our operations. During
fiscal 1999, we increased our investments in research and development, sales
and marketing, customer support and services and our general and administrative
infrastructure. Since 1996, we have:
. added more than 60 customers;
. hired more than 100 employees;
. hired a sales team covering six domestic areas and Canada; and
. acquired technology and added an additional product line.
We currently derive our revenues from sales of our GDSL and FDS systems to
network access providers. Our net revenues have grown from $1.1 million for the
six months ended September 30, 1998 to $11.7 million for the six months ended
September 30, 1999. To date, we have generated a substantial portion of our
revenues from a limited number of customers, with one customer, GTE, accounting
for approximately 64.1% of our net revenues for the six months ended September
30, 1999 and approximately 89.8% of our net revenues for the year ended March
31, 1999. We expect that a significant portion of our future revenues will
continue to come from sales to a limited number of customers.
Since our inception, we have incurred significant losses, and as of
September 30, 1999, we had an accumulated deficit of $16.3 million. We have not
achieved profitability on an annual basis. We expect to incur significant sales
and marketing, research and development and general and administrative expenses
and, as a result, we will need to generate significantly higher revenues to
achieve and maintain profitability.
We sell our systems through our direct sales force and through third party
distributors. We recognize revenue from direct sales at the time of shipment,
net of allowances for returns. We recognize revenue from sales to distributors
upon the shipment of our systems to the end-users. We may grant distributors
limited rights of return on unsold inventory on a case by case basis. We
provide a reserve for warranty returns based on our warranty history and
expected future costs.
Cost of revenues consists of the cost of components and other materials,
outside assembly and test, in-house direct labor and other personnel costs,
warranty expense and other overhead. During the summer of 1999 there were a
series of lightning storms throughout the midwest region of the United States
and Texas. Our customers experienced GDSL-8 system failures in these areas
relating to these lightning storms. Although these systems was developed in
compliance with Telcordia (Bellcore) specifications, after the recent field
experiences, we found these specifications for lightning resistance were
inadequate. In response, we redesigned our systems to better withstand sudden
surges in power levels, whether as a result of lightning storms, or
23
otherwise. We adopted a program by which our customers may receive modified
field units that meet these higher standards. Associated with this program we
recorded an expense of $2.9 million during the quarter ended September 30,
1999, which was charged to cost of revenues.
In the first half of fiscal 1999, gross margins were adversely affected by
manufacturing start-up costs and inefficiencies related to the relatively low
manufacturing levels in the initial production phase. We believe that our gross
margins will primarily be affected in the future by the following factors:
. demand for our systems;
. changes in our pricing policies;
. the mix and composition of the systems we sell;
. the mix of sales channels through which we sell our systems;
. the cost of raw materials; and
. manufacturing efficiencies.
Our manufacturing operations consist primarily of prototype development,
materials planning and procurement, final assembly, testing and quality
control, all performed in our Fremont, California location. We use several
independent suppliers to provide printed circuit boards, chassis and
subassemblies. We purchase components from third party distributors. For
prototypes and early production volumes we procure circuit boards and
components and provide them in kit form for consignment assembly at one or more
local assembly companies. We plan to outsource most of our manufacturing and
supply chain management operations in the future with the goal of lowering per
unit product costs as a result of manufacturing economies of scale. However, we
cannot assure you when or if such outsourcing will occur or that such cost
reductions will be realized. The failure to obtain such cost reductions would
materially adversely affect our gross margins and operating results.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers, and
prototype costs related to the design, development, testing and enhancement of
our systems. We expense our research and development costs as they are
incurred. We are devoting substantial resources to the continued development of
new systems. We believe that research and development is critical to our
strategic product development objectives and that to leverage our technology
and meet the changing requirements of our customers, we will need to fund
investments in several development projects in parallel. As a result, we expect
our research and development expenses to increase in absolute dollars in the
future.
Sales and marketing expenses consist primarily of salaries, commissions
based on performance measured against individual quotas, related expenses for
personnel engaged in marketing, sales and customer support functions, as well
as costs associated with promotional and other marketing expenses. We intend to
expand our direct and indirect sales operations and our marketing efforts
substantially in order to increase market awareness of our systems. We expect
that sales and marketing expenses will increase in absolute dollars as we hire
additional sales and marketing personnel and initiate additional marketing
programs. We believe that continued investment in sales and marketing is
critical to our success.
General and administrative expenses consist primarily of employee salaries
and related expenses for executive, administrative and accounting personnel,
insurance costs and professional fees. We expect general and administrative
expenses to increase in absolute dollars as we add personnel and incur
additional costs related to the growth of our business and our operations as a
public company.
We recorded a total of $14.4 million of deferred stock compensation costs
since our inception through September 30, 1999. These charges represent the
difference between the exercise price and the deemed fair value of certain
stock options granted to our employees. The options generally vest ratably over
a four-year
24
period. We are amortizing these costs over the vesting period of the options
and have recorded deferred stock compensation charges of $2.3 million in the
year ended March 31, 1999, and $12.1 million in the six months ended September
30, 1999, respectively. Based on option activity through September 30, 1999, we
expect to recognize amortization expense related to deferred stock compensation
of approximately $5.6 million, $5.3 million, $2.3 million, $1.0 million and
$200,000 during the fiscal years ended March 31, 2000, 2001, 2002, 2003, and
2004 respectively. See note 6 of notes to financial statements.
As of March 31, 1999, we had $5.3 million of federal net operating loss
carryforwards and $5.3 million of state net operating loss carryforwards for
tax reporting purposes available to offset future taxable income. The federal
and state net operating loss carry-forwards expire beginning in 2012 and 2004,
respectively, to the extent that they are not utilized. We have not recognized
any benefit from the future use of loss carryforwards because of the
uncertainty surrounding their utilization.
In July 1999, we acquired certain assets and assumed certain liabilities
relating to the FDS product line from E/O Networks.We allocated the purchase
price of approximately $5.6 million to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective fair values
on the acquisition date. We determined the fair value of intangible assets
using a combination of methods, including estimates based on risk-adjusted
income approach for acquired research and development, developed technology,
core technology and customer list, and on the cost replacement approach for
acquired work force.
We recorded a charge of $638,000 in the six-month period ended September 30,
1999 to write-off in-process research and development acquired as part of the
acquisition of the FDS product line from E/O Networks. The value of the in-
process research and development project was determined by estimating the net
cash flows resulting from the completion of the project reduced to the
percentage of completion of the project. We estimated revenues, margins and
operating costs based upon historical information about similar product
developments combined with projections of future revenue and cost patterns,
including projections used when initially evaluating the acquisition of the FDS
product line. Net cash flows were tax affected and then discounted back to
their present value at a discount rate based on our required risk adjusted
weighted average rate of return.
The nature of the efforts to develop all purchased in-process technology
into commercially viable products principally relates to the completion of all
planning, designing, prototyping, verification and testing activities that are
necessary to establish that the resulting products can meet their design
specification, including function, features and technical performance
requirements. Due to the fact that the project is in-process there is
uncertainty whether it can be successfully finished and result in the net cash
flows that we originally estimated at acquisition. We cannot guarantee that we
will realize revenue from this in-process project in the amount estimated or
that the costs incurred will be materially consistent with estimates made.
25
Results of Operations
We have not included a discussion of our results of operations for any
yearly periods as we had no revenues prior to fiscal 1999. We believe that
period to period comparisons of our annual results are less meaningful than
comparisons of more recent operating results. Therefore, an analysis of our
operating results is focused primarily on a comparison of our operating results
for the six months ended September 30, 1998 and September 30, 1999.
The following table sets forth, for the periods presented, certain data from
the statement of operations expressed as a percentage of net revenues.
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 our
systems to existing and new customers. Sales to GTE accounted for 80% of net
revenues for the six months ended September 30, 1998 and 64% for the six months
ended September 30, 1999.
Cost of Revenues
Cost of revenues increased from $1.3 million for the six months ended
September 30, 1998 to $8.6 million for the six months ended September 30, 1999.
Gross margins for the six months ended September 30, 1998 were a (20.9)% of net
revenues compared to 26.6% for the six months ended September 30, 1999. The
increase in gross margins was due to efficiencies achieved with higher
manufacturing volumes. The cost of revenues and gross margins for the six
months ended September 30, 1999 were significantly impacted by the recording of
a $2.9 million charge for providing our customers field units that meet higher
standards for lightning resistance. Had we not taken this charge, our gross
margins for this period would have been 51.4%.
Research and Development Expenses
Research and development expenses increased from $1.4 million for the six
months ended September 30, 1998 to $2.2 million for the six months ended
September 30, 1999. This increase was due primarily to the increase in product
development personnel from four individuals at September 30, 1998 to 23
individuals at
26
September 30, 1999, and the amortization of technology acquired from E/O
Networks, which accounted for $104,000 for the six months ended September 30,
1999. Our future success depends in large part on our ability to develop new
products that meet the needs of our customers. Accordingly, we expect research
and development expenses to increase in future periods.
In-process Research and Development
We recorded a charge of $638,000 in the six-month period ended September 30,
1999 to write-off in-process research and development acquired as part of the
acquisition of the FDS product line from E/O Networks. This charge represents
purchased in-process technology for a project that has not yet reached
technological feasibility and has no alternative future use. In estimating the
value of in-process research and development, we anticipated that development
would be completed and benefits would begin in fiscal 2001. Due to the fact
that the project is in-process there is uncertainty whether it can be
successfully finished and result in the net cash flows that we originally
estimated at acquisition. We cannot guarantee that we will realize revenue from
this in-process project in the amount estimated or that the costs incurred will
be materially consistent with estimates made.
Sales and Marketing Expenses
Sales and marketing expenses increased from $900,000 for the six months
ended September 30, 1998 to $2.0 million for the six months ended September 30,
1999. This increase was due to an increase in sales and marketing personnel
from six individuals at September 30, 1998 to 27 individuals at September 30,
1999, and increased advertising and travel expenses. We expect sales and
marketing expenses to increase in absolute dollars as we increase our sales and
marketing expenditures in order to grow revenues and expand our brand
awareness.
General and Administrative Expenses
General and administrative expenses increased from $300,000 for the six
months ended September 30, 1998 to $1.3 million for the six months ended
September 30, 1999. This increase was due primarily to an increase in general
and administrative personnel from two individuals at September 30, 1998 to nine
individuals at September 30, 1999. We expect general and administrative
expenses to increase in absolute dollars as we expand our administrative staff,
further develop our internal information systems and incur costs associated
with being a publicly held company.
Stock Based Compensation
We recorded deferred stock compensation of $12.1 million for the six months
ended September 30, 1999 and amortized $1.6 million during this period. We did
not record or amortize any deferred stock compensation in the six-month period
ended September 30, 1998. See note 6 of notes to our financial statements.
Other Income and (Expense), Net
Other expense, net was $19,000 and $14,000 for the six months ended
September 30, 1998 and September 30, 1999, respectively.
27
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. The following discussion
highlights significant events that have impacted our net revenues and financial
results for the six quarters ended September 30, 1999.
Net Revenues
Net revenues increased in each of the six quarters from $141,000 for the
quarter ended June 30, 1998 to $6.2 million for the quarter ended September 30,
1999 due primarily to increased sales of our GDSL systems. Additionally, in the
quarter ended September 30, 1999, we began to recognize revenue on our FDS
systems.
Cost of Revenues
Cost of revenues increased in each quarter. Gross margins for the three
months ended June 30, 1998 and September 30, 1998 were (157.5)% and 0.3% of net
revenues, primarily due to high overhead relative to low manufacturing volumes.
Gross margins for the three months ended December 31, 1998, March 31, 1999 and
June 30, 1999 fluctuated between 48.9% and 52.4% associated with efficiencies
related to relatively high manufacturing volumes. Gross margin for the three
months ended September 30, 1999 was 3.4%, which reflects the $2.9 million
charge we recorded in connection with providing our customers enhanced field
units that are better able to withstand power surges. Had we not taken this
charge, our gross margin for this period would have been 50.5%.
Operating Expenses
Operating expenses increased in each quarter primarily as a result of
increased sales of our systems as well as increased personnel and personnel
costs as our business has grown. In particular, during this period we increased
research and development personnel to 23 individuals and sales and marketing
personnel to 27 individuals. In addition, the increase in operating expenses
for the quarter ended September 30, 1999 also reflects $104,000 in amortization
of technology acquired from E/O Networks and $638,000 write-off of related in
process research and development.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
sale of preferred equity securities in addition to monies received from sales
of our common stock and debt financing. We raised an aggregate of $23.2
million, net of offering expenses, through the sales of preferred stock.
At September 30, 1999, we had cash and cash equivalents of $2.7 million. We
have a line of credit with a lending institution that provides for borrowings
of up to $3.0 million and an equipment line of credit with the same financial
institution that provides for borrowings of up to $750,000. These facilities
are secured by all of our assets. The line of credit bears interest at the
prime interest rate, plus 0.25% per annum and expired in November 1999.
Borrowings under the equipment line of credit are repayable in equal monthly
installments over three years and bear interest at the prime rate plus 0.75%
per annum. This agreement also expired in November 1999. Under these credit
facilities, we are required to maintain certain financial covenants, including
liquidity, working capital, and other financial ratios. At September 30, 1999,
$250,000 was outstanding under the line of credit and $440,000 was outstanding
under the equipment line of credit. We are currently negotiating new credit
facilities with our bank. Additionally, we have an equipment lease with a
leasing company that provides for borrowings of up to $1.0 million and is
secured by the equipment financed under the lease. The Company borrowed
$926,000 at multiple closings at various interest rates. Payments are scheduled
to be completed in August 2000. At September 30, 1999, $305,000 was outstanding
under the lease.
Cash used in operating activities for the six months ended September 30,
1999 was $1.0 million. Cash used in operating activities was primarily related
to the net loss incurred and increases in accounts receivable
29
and inventory offset by the increase in amortization of deferred stock
compensation and accounts payable and accrued expenses. Cash used in operating
activities for 1997, 1998, and 1999 was $3.1 million, $5.3 million, and $3.8
million, respectively. The increase in cash used in operating activities for
fiscal 1998 compared to the prior period was primarily due to the increase in
our net loss from $3.0 million in fiscal 1997 to $5.1 million in fiscal 1998.
The decrease in cash used for operating activities for fiscal year 1999
compared to the prior year period was primarily due to the decrease in our net
loss from $5.1 million in fiscal 1998 to $3.6 million in fiscal 1999. This
decrease was partially offset by increases in accounts receivable and inventory
and amortization of deferred stock compensation.
Cash used in investing activities for the six months ended September 30,
1999 was $6.5 million, which relates to the acquisition of intangibles and
fixed assets for $5.6 million and $800,000, respectively. Cash used in
investing activities for fiscal 1997, 1998, and 1999 was $166,000, $329,000,
and $525,000, respectively, primarily in connection with the acquisition of
fixed assets.
Cash provided from financing for the six months ended September 30, 1999 was
$7.6 million, which was primarily due to the $7.6 million net proceeds from the
sale of Series E preferred stock. Cash provided by financing activities for the
fiscal 1997, 1998, and 1999 was $5.3 million, $7.2 million, and $3.4 million,
respectively, primarily from private sales of preferred stock.
We have no material commitments other than obligations under our credit
facilities and operating and capital leases. We expect to continue to expend
significant amounts on property and equipment related to the expansion of
facility infrastructure, computer equipment and for research and development
laboratory and test equipment to support on-going research and development
operations. Although we believe that on the closing of this offering our
current cash balances will be sufficient to fund our operations for at least
the next 12 months, there can be no assurance that we will not require
additional financing within this time frame or that such additional funding, if
needed, will be available on terms acceptable to us or at all.
Qualitative and Quantitative Disclosures About Market Risk
Interest Rate Sensitivity
We maintain our portfolio of cash equivalents and short-term investments
primarily in a portfolio comprised of commercial paper, money market funds and
short-term debt securities. As of September 30, 1999, all of our investments
mature in less than three months. Accordingly, we do not believe that our
investments have significant exposure to interest rate risk.
Exchange Rate Sensitivity
We operate primarily in the United States, and all sales to date have been
made in U.S. dollars. Accordingly, we have had no material exposure to foreign
currency rate fluctuations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we
do not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of FAS No. 133 will not have a material
impact on our financial position or results of operations.
Year 2000 Issues
Many currently installed computer systems, software products and other
control devices are unable to accept four digit entries to distinguish 21st
century dates form 20th century dates. As a result, many companies' computer
systems, software products and control devices may need to be upgraded or
replaced in order to operate properly in the year 2000 and beyond.
30
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 long-range DSL transmission systems that
increase the bandwidth and performance of copper lines at very long distances
from the central office. The increasing demand for multiple voice and high-
speed reliable Internet access and data services has created a significant
market for deploying communications services to both residential and business
customers. Our GDSL systems enable network access providers to address this
demand by turning standard copper lines into high-speed digital conduits that
support multiple digital access services at long distances.
The scalable design of our long-range GDSL transmission systems provides our
customers the ability to upgrade their service offerings to provide
increasingly higher bandwidths to their end-users. The ease of installation and
interoperability of our systems allow our customers to rapidly deploy new
services. Our GDSL systems provide a cost-effective alternative to laying fiber
or copper wire or installing other more expensive network equipment.
GoDigital's systems allow our more than 60 customers, including ALLTEL,
Frontier, GTE, TELUS and US West, to leverage their existing copper
infrastructure to offer enhanced voice, Internet access and data services over
long distances to their business and residential customers.
Industry Background
The Growing Demand for High-Speed Access to Communications Networks
The volume of traffic transmitted over communications networks has grown
dramatically in recent years. The broadening range of activities for which
these networks are being used by both businesses and consumers is driving the
increase in the quantity and importance of information carried over, and also
the number of users accessing, the Internet and private communications
networks. Consumers are seeking low-cost, high-speed access to bandwidth-
intensive Internet content and services such as highly graphical Web sites,
audio, video and high-speed data. Businesses have even greater requirements for
high-speed access in order to implement electronic commerce strategies or Web-
based business models, and to provide employees and others with robust
telecommuting capabilities.
As more consumers and businesses have begun to rely on the Internet and
communications networks, the demand for access to these networks has
accelerated. As a result, the number of devices and access lines leading into
these networks has undergone dramatic growth. International Data Corporation,
or IDC, estimates that in 1997, 15 million or 15% of United States' households
had two or more access lines and that this number will grow to 34 million, or
30% of United States' households by 2002. A significant number of these
additional access lines are being used to access the Internet and other
communications networks. According to IDC, today nearly 70 million, or 86%, of
home users worldwide access the Internet via traditional analog telephone
lines. In addition, the demand for access is increasing as more and more small
businesses, self-employed individuals, and corporate telecommuters are
regularly accessing the Internet and other communications networks. IDC
estimates that there are 27 million households with at least one person doing
some business-related work from home, in some fashion, on a part-time or full-
time basis. Many work at home users are demanding the same access speeds from
their home offices that they experience at corporate locations.
Network Access Providers Must Leverage their Installed Copper Infrastructure
This increasing demand for multiple voice, Internet access and high-speed
data communications access lines, together with technological advances, has
created a significant market for the provisioning of communications services to
both residential and business customers. Network access providers are
capitalizing on this growing demand by deploying new technologies throughout
their networks to provide these enhanced services. Network access providers are
also deploying these enhanced services to differentiate themselves in an
increasingly competitive environment due to the proliferation of carriers
caused by government deregulation of the telecommunications industry.
Additionally, government public utility commission regulations are mandating
that incumbent network access providers increase the levels of services to
their entire customer base.
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In order to cost-effectively provide these services and respond quickly to
subscriber demand, network access providers need to leverage their existing
network infrastructure, the public telephone infrastructure or the copper line
connections between the central office and the end user, commonly known as the
"last mile." The public telephone infrastructure currently in place represents
a large capital investment that Dataquest estimates has involved laying over
200 million copper lines in North America and close to 900 million copper lines
worldwide. Dataquest believes that the total number of copper lines could
exceed one billion by 2002. This installed base of copper is a network access
provider's primary means of delivering services to its subscribers and,
therefore, its largest and most valuable asset. Regional Bell Operating
Companies, or RBOCs, and independent phone companies leverage their copper
infrastructure to generate more than $100 billion annually.
The "Last Mile" Access Bottleneck
While the copper lines that constitute the "last mile" reach the vast
majority of users in the United States, they were originally designed to
transport only analog voice traffic. In recent years, high-speed analog modems
have been introduced that are designed to receive data at speeds of up to 56
Kbps. However, the access speed allowed by the analog phone line drops very
quickly the greater the distance it must travel along the length of the copper
wire. Therefore, in spite of high-speed analog modems, we believe that roughly
50% of the population who live more than three miles beyond a central office
will not experience access speeds greater than 28.8 Kbps.
The number of available access lines also presents a problem for network
access providers. The "last mile" was not originally designed for multiple
lines per household and the cost for laying new copper lines is prohibitively
expensive. While we estimate that revenue on a given copper line remains
relatively constant, on average $20 per month, the cost to install a copper
line increases with distance. For example, we believe the cost for laying a
copper line could be more than $5,000 per line at distances of about five miles
and twice that at distances of ten miles.
DSL as a Solution for "Last Mile" Access
Network access providers have begun to deploy DSL technology as a cost-
effective broadband access solution to address the "last mile" bottleneck. DSL
technology utilizes sophisticated data modulation techniques to achieve high-
speed data transmission across existing copper line infrastructure. For the
network access provider, the principal benefit of DSL is this ability to permit
the rapid flow of information using existing copper infrastructure. DSL also
allows voice traffic and data traffic to be separated at the point where they
enter the network. Consequently, data traffic can be routed around the
traditional telephony network to an alternate data communications network,
freeing the telephony network to carry only voice traffic. This allows network
access providers to meet the growing need for high-speed data services without
having to upgrade their traditional telephony networks. DSL also allows for a
constant connection to the Internet and other communications networks,
resulting in guaranteed access speed or bandwidth to the desktop. In contrast,
with broadcast mediums such as coaxial cable or wireless infrastructure, the
upstream and downstream data paths have to be shared with other subscribers on
the same system. As a result, the connection speed any one subscriber actually
receives is a function of how many other subscribers are using the upstream and
downstream connections.
Traditional Equipment Does Not Leverage the Full Capabilities of DSL
Technology
While DSL technology has been deployed to solve the problem of delivering
high-speed Internet access and data services to end users in concentrated
metropolitan markets, network access providers are prevented from deploying DSL
service to mass markets due to significant limitations of available DSL
equipment offerings:
. Traditional DSL equipment offerings have significant distance or reach
limitations. Today, network access providers cannot offer DSL services
to customers located over 18,000 feet from a central office and as a
result, we believe that today they are unable to provide DSL service to
roughly 50% of their subscriber base.
33
. Traditional DSL equipment does not allow a single copper line to provide
multiple digital services. As a result, in order to offer incremental
services, network access providers must often incur the expense of
installing additional copper lines.
These distance and single service limitations are pushing network access
providers to look for scalable DSL transmission equipment that will enable them
to significantly expand their addressable market. In order to be deployed to
reach the mass market, this equipment must also be able to be efficiently and
cost-effectively installed and maintained, interoperate within their current
networks, withstand harsh outside plant environments and be designed for
flexibility.
The GoDigital Solution
GoDigital Networks is committed to developing long-range DSL transmission
systems that enable network access providers to offer higher bandwidth and more
digital access lines to virtually all of their customers, regardless of
physical distance from a central office. We design and manufacture scalable
systems that enable network access providers to deploy multiple service
offerings on a single copper line at distances that we believe to be over seven
times of what is capable with today's DSL equipment. Our systems are designed
for interoperability with a carrier's existing infrastructure, efficient and
cost effective installation and maintenance, outside plant durability and
deployment flexibility.
Extend Carrier Service Range to Reach Mass Market. Our DSL transmission
systems offer network access providers the ability to extend their full-service
offerings up to 25 miles from the central office, thereby reaching what we
believe to be the remaining 50% of their subscriber base that is outside of the
three mile range of most alternative solutions. Our systems allow network
access providers to drop single or multiple services from any point on the
copper loop or deliver all services the full 25 mile distance.
Enable Compelling Economics by Offering Multiple Services on a Single
Line. Our systems enable network access providers to offer multiple digital
services and access bandwidths on one copper line. Our current systems offer up
to eight digital voice telephone lines or three 144 Kbps data lines over one
copper line. Our systems enable network access providers to offer services such
as Internet access that do not degrade with distance, switched local and long
distance voice, and CLASS services, including Caller ID, distinctive ringing
and automated call routing.
Our solution offers a new, attractive economic model to network access
providers. Instead of being constrained to one service offering per copper
line, with our GDSL equipment, network access providers can offer multiple
services and realize multiple revenue streams from one line. At the same time,
these network access providers can respond to subscriber demand and provide
differentiated, competitive services without incurring significant expenses to
install new copper lines for each new service. We believe, that at distances
greater than 2,500 feet, our systems are more cost effective than laying new
copper lines and that at subscriber densities less than 200 lines our systems
are more cost effective than installing extensive new infrastructure equipment
such as digital loop carrier systems.
Facilitate Efficient and Cost-Effective Installation and Maintenance. Our
systems are designed to be rapidly installed by the network access providers'
service technicians. Our central office products meet the stringent Network
Equipment Building Standards set in the Telcordia (Bellcore) documents
pertaining to safety, environmental factors, human factors and reliability, or
NEBS Level 3 requirements. We also comply with the more stringent requirements
of many of our customers' test labs. We have also designed our central office
shelf products for high density and to fit as a standard rack mounted product
to ease installation. In addition, our planning and configuration software
allows our customers to design and test the viability of their long-range DSL
transmission networks. Our systems also offer automated loop testing that
enables network access providers to remotely diagnose service problems in the
network and reduce the expense of sending on-site technicians.
34
Provide Interoperability. Our DSL solutions adhere to industry standards
and, as a result, offer interoperability within a carrier's existing network
infrastructure. In addition, our DSL solutions have gone through the OSMINE
process for approval by Telcordia where they have been approved by Telcordia
for interoperability with RBOC legacy systems. We also leverage our core
technology expertise together with our relationships with network access
providers, such as GTE, US West, and leading DSL network equipment vendors,
such as Copper Mountain, to allow our systems to interoperate within their
networks and with their systems.
Design for Product Durability. Our core technology expertise in designing
products that will reside in the outside plant has resulted in final products
and systems that withstand harsh environmental conditions, including extreme
hot and cold temperatures, rain, wind and snow. Additionally, we have designed
our products to better withstand sudden surges in power levels experienced
during lightning storms.
Design for Deployment Flexibility. Our equipment can be placed virtually
anywhere the copper infrastructure extends. Our core expertise in the area of
power management provides a unique advantage in designing electronics with
extremely low power requirements. This technology allows network access
providers to power their systems for a full 25 miles from the central office.
This feature offers the network access provider the flexibility to deploy
elements of our systems wherever they are needed regardless of power
availability at a particular location. The density, size and ease of
installation of our outside equipment allows network access providers to
quickly deploy and re-deploy our systems as needed to service their
subscribers.
GoDigital Strategy
Our objective is to be the leading provider of long-range DSL transmission
systems that enable network access providers to cost-effectively offer multiple
communications services to all business and residential subscribers regardless
of distance from the central office. Key elements of our strategy include the
following:
Capitalize upon our Early Market Acceptance. We intend to leverage our early
market acceptance to extend our market share. We have focused on long-range DSL
transmission systems for three years. As of September 30, 1999 over 60
customers, including ALLTEL, Frontier, GTE, TELUS and US West had deployed our
solutions. We intend to build upon this early acceptance of our systems to
become the primary supplier of cost-efficient, long-range DSL transmission
solutions to these customers and other network access providers as they
continue to deploy their networks.
Continue to Develop Scalable Access Solutions. Our current systems are
focused on satisfying the increasing demand for digital access lines used for
enhanced voice services, high-speed analog modem access and IDSL service to
virtually any point on the network. As a network access provider's customers
require more bandwidth, we intend to leverage our installed customer base to
upgrade their systems to deliver increasingly more bandwidth. We are currently
developing higher bandwidth delivery methods to meet the needs of highly data-
intensive network applications such as high-speed Internet access, electronic
commerce and full motion video.
Leverage Strategic Relationships with DSL Equipment Vendors. The GoDigital
Networks solution extends the range of existing DSL solutions, thereby
increasing the value of existing equipment and expanding the market opportunity
for suppliers of DSL central office and customer located equipment. We intend
to expand our cooperative relationship with Copper Mountain and to develop
future relationships that continue to promote GoDigital Networks in the
industry, allow interoperability, extend our sales capabilities and increase
our sales volume.
Leverage Strategic Acquisitions to Complement Product Offerings. We recently
acquired the FDS product line from E/O Networks to gain both optical expertise
and optical transmission products. The FDS systems aggregate multiple DSL
service offerings and offer long-range transport along fiber optic rings at
speeds of 40 Mbps. The FDS systems are deployed by our customers to distribute
IDSL and digital access lines to multiple locations in their networks. Our FDS
systems together with our GDSL systems allow the flexibility
35
to deliver services to virtually any location within the network access
provider's service area through combined fiber/copper applications. We intend
to pursue strategic acquisitions in the future as we identify companies or
products that will complement our current DSL transmission offerings.
Products
GDSL Scalable Long-Range DSL Systems
GDSL systems enable network access providers to leverage existing copper-
based networks to multiply and extend service offerings to reach customers that
were previously too far from the central office to be reached with traditional
technologies and also in areas where there are no additional copper lines
available. Our GDSL systems consist of a GDSL Universal Central Office
Terminal, or COT, which is the shelf that houses the Central Office Terminal
Units, or CTUs. Each CTU aggregates multiple services within the central office
for transport over a single copper line. Our GDSL Straight Through Repeaters,
or STRs, are placed approximately every 25,000 feet along copper lines to
maintain signal strength over long distances. The Add/Drop Repeaters, or ADRs,
are used to drop off single or multiple services in route to the Remote
Terminal Units, or RTUs, where all or part of the signal is delivered.
[Graphic of the GDSL system includes a GDSL-8 and GDSL-3i shelf; several STRs
and terminal units.]
Features and Benefits
. Facilitate high-speed access up to 25 miles from the central office over
the existing copper infrastructure
. Delivery of multiple service offerings including IDSL and digital access
lines for voice, CLASS services, and high-speed analog modem access on
the same copper line
. Rapid deployment time and cost-effective economics
. Multiple services delivered on one copper line
. NEBS Level 3 compliant
. Weather hardened outside plant DSL equipment
. Line powered from the central office
. Interoperates with network access providers' systems and procedures
. Allows multiple drop off points along the transmission route
GDSL-8. The GDSL-8 uses DSL technology to deliver 544 Kbps DSL service
channeled into eight digital access lines for high-speed analog modem access,
voice and CLASS services on one copper line to distances up to 25 miles from
the central office. The GDSL-8 COT is an industry standard 19 inch or 23 inch
rack mount shelf that can hold up to 20 CTUs and supports up to 160 lines,
conserving valuable office space.
GDSL-3i. The GDSL-3i uses the same 544 Kbps long-range DSL architecture to
deliver three IDSL lines to distances up to 25 miles from the central office,
extending the reach of an IDSL Digital Subscriber Line Access Multiplexer, or
DSLAM, from 18,000 feet up to 130,000 feet from the central office. A DSLAM
aggregates DSL lines at a central office for distribution over the
communications network. The GDSL-3i can be served from the same COT shelf as
the GDSL-8 and uses the same STRs used in the GDSL-8 systems.
Full-Service Distribution System
FDS FiberReach. The FDS FiberReach transports multiple IDSL lines or digital
access lines to multiple drop off points along a 40 Mbps fiber ring of up to
150 miles. The FDS FiberReach enables our customers to transport long-range DSL
services and interconnect to our copper-based GDSL system to provide services
to
36
end-users. The FDS FiberReach consists of a host digital terminal, which
resides in the central office and aggregates and transports signals to the
fiber rings and optical network units, or ONUs, that drop signals at points
along the fiber ring.
[Graphic of the FDS FiberReach and fiber ring connected to a GDSL-8]
Features and Benefits
. ONUs can be sized from 24 to 192 lines
. Supports up to 30 ONUs on 150 mile fiber rings
. Interoperates with network access providers' systems and procedures
. GDSL systems can be used in combination with the FDS FiberReach for
combined fiber / copper long-range transmission applications
Technology
We believe that our GDSL systems provide us with a competitive advantage by
cost-effectively facilitating the delivery of more services and higher
bandwidths at long distances. In addition, our systems provide a NEBS Level 3
compliant platform that is both robust and reliable for the central office and
the outside plant environment. The following are key components of our
differentiated technology platform:
Signal Processing Capabilities. Our GDSL signal processing technology enables
us to aggregate a variety of services including voice, high-speed data and
Internet access services for transmission over a single copper line.
Power Management Capabilities. Our proprietary electronics technology gives
us the ability to tightly control the distribution of power along the entire
length of the DSL network. This capability enables us to send consistent power
levels long distances while minimizing interference or noise usually
experienced as distance increases along copper lines. We have also designed our
DSL systems to selectively use power in remote locations, enabling signals to
travel farther without degradation. These two elements enable us to maintain a
competitive advantage as more service types are introduced, higher bandwidths
are added and more lines are needed.
Optimization of DSL Chip Technology. We customize existing DSL chip
technologies to regulate the speed of the signal traveling over the copper
lines. This feature combined with our power management capabilities allows us
to provide DSL services over very long distances.
Combining FDS and GDSL. Our FDS FiberReach can transport multiple IDSL lines
as well as digital access lines along fiber rings. Our GDSL systems interface
with these rings to extend the reach of our solution even further, potentially
providing digital access services, including IDSL service to virtually all
subscribers. Our powerful combination of fiber and copper technology offers
network access providers flexible options to provide increased bandwidths and
more lines to more customers.
37
Robust System Design. We have created digital transport systems uniquely
designed for long-reach DSL networks that specifically address the challenges
presented by long spans of aging copper in the harshest of environments. For
example, we have designed our GDSL systems to withstand a four to five times
greater power surge than industry standards for lightning survivability, and
avoiding external influences from power lines or other electronic signals. In
addition, our GDSL systems are efficiently packaged. We believe our products
have five times more central office density than our nearest competitor and are
designed for ease of installation. The density, ease of installation, and cost-
effectiveness of our systems provides flexibility to network access providers
who can install our systems at any location on an as-needed basis when new
services or higher bandwidths are required.
Customers
For the twelve-month period ended on September 30, 1999, we had over 60
customers. The following table sets forth our customers who have purchased more
than $50,000 of our systems during that period.
. ALLTEL Supply
. The Armstrong Group
. Century Telephone Enterprises
. Horizon Chillicothe Telephone
. Dakota Electric Supply
. Farmers Telephone Company
. Frontier Communications (including sales through Anixter)
. GTE
. Manitoba Telecom Services
. Monon Telephone Company
. RT Communications
. Sprint Communications Company
. TELUS Communications
. US West
Aggregate sales to our largest customer, GTE, accounted for approximately
89.8% of our net revenues for fiscal year ended March 31, 1999. Aggregate sales
to GTE and TELUS, accounted for approximately 64.1% and 17.5% of our net
revenues, respectively, for the six months ended September 30, 1999. We expect
to continue to derive a substantial portion of net revenues from GTE or a
limited number of other customers in the foreseeable future.
Manufacturing
Our manufacturing operations consist primarily of prototype development,
materials planning and procurement, final assembly, testing and quality
control, all performed in our Fremont, California location. Our design-for-
manufacturability methodology incorporates a high level of automated in-circuit
and functional testing to reduce manufacturing costs and also provide for rapid
turn-key outsourcing. We use several independent suppliers to provide printed
circuit boards, chassis and subassemblies. We purchase components from several
large distributors and use multiple sources for all components when possible.
Some components are purchased on a sole-source basis from suppliers including
Conexant Systems, Lucent Microelectronics, and Xilinx.
38
Our manufacturing process enables us to configure our systems to meet a wide
variety of individual customer requirements, as these requirements are often
differentiated by the form factor and electrical connectors on the unit
housings. For prototypes and early production volumes we procure circuit boards
and components and provide them in kit form for consignment assembly at one or
more local assembly companies. Our circuit board assemblies are designed to be
used in a variety of customer-specific plastic housings.
We plan to outsource most of our manufacturing and supply chain management
operations in the future with the goal of lowering per unit product costs as a
result of manufacturing economies of scale.
Sales, Marketing and Customer Support
We sell and market our systems through a direct sales force and through
selected distributors. Initial discussions with our customers generally involve
contact with our sales and marketing personnel who work to communicate the
strengths of our company and our systems. Our sales process typically involves
responding to customer requests for proposals, completing a technical
certification process to verify the functionality of our systems, consulting on
network deployment, training, and in some cases, developing customized software
for product compatibility or enhanced services.
Our direct sales responsibilities are divided into geographic regions managed
by regional directors and sales managers who are responsible for relationships
with our customers. The sales management team for each customer is responsible
for maintaining contact with key individuals who have planning and policy
responsibility within a customer's organization. At the same time, our sales
engineers work with customers to sell products at key levels throughout the
customer's organization.
We also sell our systems indirectly through a limited number of distribution
partners including ALLTEL, Anixter, Dakota Electric Supply and GTE. We engage
in joint sales activities with these partners, and regularly provide them with
collateral materials to enable their sales forces to promote our systems.
Our marketing efforts are focused on new product planning, providing customer
sales support and supporting industry standard initiatives. Our marketing staff
coordinates activities throughout our organization and provides marketing
support services, including marketing communications, marketing research, and
other support functions.
The majority of our service and support activities are related to
installation and network configuration support. These services are provided by
telephone and directly at customer installations with resources from our
customer support group based in Fremont, California. We provide technical
support for our systems that have warranties. We have a variety of
comprehensive and flexible hardware and software maintenance and support
programs available for systems no longer under warranty, with services ranging
from time and materials remote service support to 24-hour on-site support,
depending on our customer's preferences. We also offer various training courses
for our distribution partners and telecommunications service provider
customers.
Intellectual Property
We rely on a combination of patents, trademarks, and trade secrets, as well
as confidentiality agreements and other contractual restrictions with employees
and third parties, to establish and protect our proprietary rights. Despite
these precautions, we cannot assure you that the measures we undertake will be
adequate to protect our proprietary technology, or that they will preclude
competitors from independently developing products with functionality or
features similar to our systems. We cannot assure you that the precautions we
take will prevent misappropriation or infringement of our technology. We
currently have one issued patent, four pending formal patent applications and
three pending provisional applications in the United States with respect to our
technology. However, it is possible that patents may not be issued for our
patent applications. Patents issued to us may not adequately protect our
technology from infringement or prevent others from claiming that our
technology infringes on that of third parties. We currently own two federal
trademark registrations, for the
39
marks GODIGITAL and GDSL, and we own rights to other unregistered marks.
Competitors and others, though, may challenge the validity or scope of these
rights. Failure to protect our intellectual property could seriously harm our
business.
It is possible that litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Litigation could result
in substantial costs and diversion of our resources and could materially harm
our business. In addition, we may receive in the future notice of claims of
infringement of other parties' proprietary rights. Infringement or other claims
could be asserted or prosecuted against us in the future, and it is possible
that past or future assertions or prosecutions could harm our business. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause delays in
the development and release of our products, or require us to develop non-
infringing technology or enter into royalty or licensing arrangements. Such
royalty or licensing arrangements, if required, may not be available on terms
acceptable to us, or at all. For these reasons, infringement claims could
seriously harm our business.
Research and Development
In fiscal 1999 and the six months ended September 30, 1999, our research and
development expenses were $2.8 million and $2.2 million, respectively. We
believe that our future success depends on our ability to continue to enhance
our existing systems and to develop new systems that maintain technological
competitiveness. We have focused our recent research and development activities
on enhancing our GDSL systems, including the ability to support industry
standards for 56 Kbps access speeds, or V.90, to locations up to 25 miles from
the central office. We are also developing a GDSL system to deliver multiple,
higher bandwidth services on one copper line up to 25 miles from the central
office. We are committed to an ongoing program of new product development
through our internal development efforts as well as the possible acquisition of
additional technology from outside sources. We design our products around
current industry standards and will continue to support emerging standards that
are consistent with our product strategy.
Competition
The network access market we are addressing is highly competitive and we
believe that competition may increase substantially in the future. Digital
signal transport technology is evolving and becoming increasingly competitive.
We currently compete with privately held companies that offer long-range DSL-
based products. In addition, many large communications equipment vendors such
as Alcatel, Cisco, Lucent and Nortel may, either through internal development
or through acquisitions of competitive businesses or technologies, develop
products that compete with ours. Furthermore, other technologies such as
optical fiber or wireless may replace copper systems as a means of providing
"last mile" network access for business and residences in the future.
The principal competitive factors in our markets include:
. relationships with network access providers;
. product reliability, performance and interoperability;
. product features;
. product availability;
. price;
. ability to distribute products;
. ease of installation and use;
. technical support and customer service; and
. brand recognition.
40
We believe we are addressing each of these competitive factors. Nonetheless,
we expect to face increasing competitive pressures from both current and future
competitors in the markets we serve.
Many of our current and potential competitors have customer relationships and
account support organizations that are larger and more established than ours.
Many of them have more customers than we do, and offer broader product lines,
so that they are favored in cases where customers prefer a single integrated
source for their product needs. These large companies have the capability to
price their products competitively while maintaining an overall favorable
margin on a wide product mix which could cause us to reduce prices and margins.
As a result, we may not be able to maintain a competitive position against our
competitors. Failure on our part to maintain our market share and product
margins could seriously harm our business, results of operations and financial
condition.
Employees
As of September 30, 1999, we employed 105 full-time employees, including 27
in sales and marketing, 46 in manufacturing, 23 in engineering, and 9 in
finance and administration. All of our employees are located in the United
States. None of our employees is represented by collective bargaining
agreements and we consider relations with our employees to be good.
Facilities
Our corporate headquarters facility, of approximately 46,000 square feet, is
located in Fremont, California. We lease our corporate headquarters facility
pursuant to a lease agreement that expires in June 2004. We believe this
existing facility is adequate for our needs through the next twelve months of
operations.
Legal Proceedings
We are not currently a party to any material legal proceedings.
41
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 (TPG) for Raychem
Corporation. Mr. Akers holds a B.S. in Chemistry and an M.S. in Physical
Chemistry from Virginia Tech, and has received business administration training
through ITT's Executive Training Program.
Dennis Haar has served as our President, Chief Executive Officer and a
director since August 1999. Prior to joining us, Mr. Haar worked from October
1998 to July 1999, as an advisor and general consultant to Aspect
Telecommunications. From October 1995 to October 1998, he served as President
and Chief Operating Officer of Aspect Telecommunications, and from 1991 to
October 1995, he served as its Vice President of North America Sales and
Support. Mr. Haar holds a B.S. in Electrical Engineering from Stanford
University and an M.B.A. from the Stanford University Graduate School of
Business.
T. Olin Nichols has served as our Vice President, Finance and Chief
Financial Officer since May 1999, and our Secretary since September 1999.
Additionally, Mr. Nichols is responsible for our treasury services, information
technology and human resources. From November 1998 to May 1999, Mr. Nichols was
an independent consultant. From March 1993 to November 1998, Mr. Nichols was
Chief Financial Officer and Secretary of Synergy Semiconductor. Mr. Nichols
holds a B.S. in Mechanical Engineering and an M.B.A. from the University of
Washington.
David Krantz has served as our Vice President of Marketing and Business
Development since September 1999. Prior to joining us, Mr. Krantz worked from
March 1999 to September 1999 as Senior Director of Marketing and Development at
America Online. Mr. Krantz was Director of Business Planning for Netscape
Communications Corporation from December 1997 to March 1999, prior to its
merger with America Online. From June 1996 to December 1997, Mr. Krantz was
Director of Business Development and Alliances, consumer markets group for
Pacific Bell. From September 1994 to June 1996, Mr. Krantz attended the M.B.A.
program at the Harvard Business School. Mr. Krantz holds a B.S. with a
concentration in Finance and Management from the University of Virginia,
McIntire School of Commerce and an M.B.A. from Harvard Business School.
42
Paul H. "Hank" Scherf, Jr. has served as our Vice President of Sales since
September 1998. Prior to joining us, Mr. Scherf worked from October 1993 to
April 1998 at ADC Kentrox, a subsidiary of ADC Telecommunications, Inc. as
Regional Vice President, Sales. Mr. Scherf holds a B.S. in Aerospace
Engineering from the U.S. Naval Academy, an M.S. in Mechanical Engineering from
North Carolina State University and an M.B.A. from the Stanford University
Graduate School of Business.
Farzin Hatami has served as our Vice President of Engineering since
September 1998. From 1990 to March 1998, Mr. Hatami served as Executive
Director of Research and Development at Cisco Systems/StrataCom, Inc. Between
March 1998 and September 1998, Mr. Hatami was on sabbatical. Mr. Hatami holds a
B.S. in Electronic Engineering from Mankato State University and a M.B.A. in
Business Administration and Engineering Management from City University in
Bellevue, Washington.
Douglas Carlisle has served as one of our directors since April 1996. Mr.
Carlisle has been Managing Director and General Partner of Menlo Ventures since
1984. Mr. Carlisle holds a B.S. in Electrical Engineering from the University
of California, Berkeley, an M.B.A. from Stanford University Graduate School of
Business and a J.D. from the Stanford University Law School.
James Flach has served as one of our directors since April 1996. Mr. Flach
has been a Partner of Accel Partners since 1992. Mr. Flach serves on the board
of directors of Redback Networks and serveral private companies. Mr. Flach
holds a B.S. in Physics from Rensselaer Polytechnic Institute and an M.S. in
Applied Mathematics from the Rochester Institute of Technology.
Gregorio Reyes has served as one of our directors since March 1996. Since
August 1994, Mr. Reyes has been a private investor and consultant. Mr. Reyes
serves on the board of directors of C. Cube, S3 and Sync Research and several
private companies. Mr. Reyes holds a B.S. in Engineering from Rensselaer
Polytechnic Institute and an M.S. in Engineering from Stevens Institute of
Technology.
Board of Directors
Our board of directors currently consists of six authorized members and we
currently have five directors and one vacancy. Upon the completion of this
offering, the terms of office of the board of directors will be divided into
three classes, each class consisting of two directors: Class I, whose term will
expire at the annual meeting of stockholders to be held in 2000; Class II,
whose term will expire at the annual meeting of stockholders to be held in
2001; and Class III, whose term will expire at the annual meeting of the
stockholders to be held in 2002. At each annual meeting of stockholders after
the initial classification, the successors to directors whose terms will then
expire will be elected to serve from the time of election and qualification
until the third annual meeting following election. As a result, only one class
of directors will be elected at each annual meeting of our stockholders, with
the other classes continuing for the remainder of their respective three-year
terms. This classification of the board of directors may have an effect of
delaying or preventing a change of control or management of GoDigital. See the
Risk Factor titled "Certain provisions of our charter documents . . ." Each
officer serves at the discretion of the board of directors.
Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Messrs. Carlisle and Flach. The audit committee
reviews our internal accounting procedures, consults with and reviews the
services provided by our independent accountants and makes recommendations to
the board of directors regarding the selection of independent accountants. The
compensation committee consists of Messrs. Carlisle and Reyes. The compensation
committee reviews and recommends to the board of directors the salaries,
incentive compensation and benefits of our officers and employees and
administers our stock plans and employee benefit plans.
43
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee is currently, or has ever
been at any time since our formation, one of our officers or employees. No
member of the compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more officers
serving as a member of our board of directors or compensation committee.
Compensation
Our non-employee directors are reimbursed for expenses incurred in
connection with attending board and committee meetings but are not compensated
for their services as board or committee members. We have in the past granted
non-employee directors options to purchase our common stock pursuant to the
terms of our 1996 Stock Plan. We may also grant non-employee directors options
to purchase our common stock pursuant to the terms of our 1996 Stock Plan. See
"--Stock Plans."
Executive Officers
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among our directors and officers.
Compensation
The following table sets forth all compensation paid or accrued during our
fiscal year ended March 31, 1999 to our President and Chief Executive Officer,
and each of our officers whose compensation exceeded $100,000 for the period
(collectively, our "Named Executive Officers"). In accordance with the rules of
the SEC, the compensation described in this table does not include perquisites
and other personal benefits received by the named executive officers which do
not exceed the lesser of $50,000 or 10% of the total salary and bonus reported
for these officers.
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
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.
Option Grants in Fiscal Year 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during
fiscal year 1999. All options granted to these executive officers in the last
fiscal year were granted under the 1996 Stock Plan, as amended. One-quarter of
the shares subject to each option vests and becomes exercisable on the first
anniversary of the date of grant and an additional one forty-eighth of the
shares subject to each option vests each month thereafter. In addition, options
granted to each of the individuals set forth below may be exercised early,
provided that such individual enters into a restricted stock purchase
agreement. The shares acquired remain subject to a right of repurchase by us.
The percent of the total options set forth below is based on an aggregate of
1,098,940 shares subject to options granted to employees during our fiscal year
ended March 31, 1999. All options were granted at a fair market value as
determined by our board of directors on the date of grant.
44
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
Farzin Hatami(1)........ 382,500 34.8% $0.18 9/13/2008
- -----------------------
(1) Such options are subject to certain change of control provisions under a
separate agreement pursuant to which a portion of the unvested shares
subject to the option shall vest and become immediately exercisable upon
the occurrence of the following: (i) a change of control (as that term is
explained in the section "Change of Control Severance Agreements" below),
and (ii) the involuntary termination of service with us or the termination
of service with us without cause (as that term is explained in the section
"Change of Control Severance Agreements" below).
Aggregate Option Exercises in Fiscal Year 1999 and Values at March 31, 1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by the named executive officers. The value of
unexercised in-the-money options is based on an assumed initial offering price
of $ per share minus the actual exercise prices. All options were granted
under our 1996 Stock Plan, as amended. These options vest over four years and
otherwise generally conform to the terms of our 1996 Stock Plan, as amended.
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 -- --
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 to us, which lapses over time based on the
following schedule: 1/4 of the shares subject to the option vest twelve
months after the vesting commencement date, and 1/48 of the shares subject
to the option vest each month thereafter.
(2) The options that are exercisable under a right of early exercise subject to
each optionee entering into a restricted stock purchase agreement with us.
Such agreement contains our right of repurchase for any shares that are not
vested at the time the optionee ceases to be our service provider based on
the following schedule: 1/4 of the shares subject to the option vest twelve
months after the vesting commencement date, and 1/48 of the shares subject
to the option vest each month thereafter.
(3) Based upon the assumed initial public offering price of $ per share, less
the exercise price per share.
45
Change of Control Severance Arrangements
We have entered into change of control severance agreements with certain of
our officers. These agreements provide that upon a change of control which is
defined to include the occurrence of any of the following events:
. the approval by our stockholders of a merger or consolidation of us with
any other entity which would result in our stockholders owning less than
50% of the surviving entity;
. the approval of our stockholders of a plan of liquidation or an agreement
for the sale or disposition by us of all or substantially all of our
assets; or
. a transaction in which a person or affiliated group of persons becomes
the beneficial owner of more than 50% of our voting securities;
then upon the occurrence of such change of control, one-third of the
employee's unvested options, or shares subject to right of repurchase by us in
the case of restricted stock purchased by the employee, automatically vest.
Following such acceleration, the employee's remaining options or restricted
stock will continue to vest in accordance with the original vesting schedule
subject to the following additional provisions.
In addition, if, at any time within 24 months following a change of control,
the employee is terminated as a result of an involuntary termination,
including:
. without the employee's express written consent, a significant reduction
without good business reasons of the employee's duties, position or
responsibilities relative to employee's duties, position or
responsibilities in effect immediately prior to such reduction, or
employee's removal from such position, duties and responsibilities,
unless such employee is provided with comparable duties, position and
responsibilities, excluding a reduction in duties, position or
responsibilities solely by virtue of the acquisition;
. without the employee's express written consent, a substantial reduction
of the facilities and perquisites available to the employee immediately
prior to such reduction;
. a reduction of the employee's base salary;
. a material reduction in the overall benefits package available to the
employee;
. without the employee's express written consent, the relocation of the
employee to a facility or a location more than 50 miles from employee's
current location;
. any purported termination of the employee which is not a result of any
act of personal dishonesty by the employee which is intended to result in
the employee's substantial personal enrichment, employee's conviction of
a felony, which would reasonably have a material detrimental effect on
our reputation or business, and a willful act by the employee which
constitutes misconduct and is injurious to us; or
. the failure to obtain the assumption of the change of control severance
agreement by any acquiring company;
then the employee shall be entitled to receive severance payments and
certain other employee benefits for a period of 12 months following the date of
the employee's termination at a rate equal to the employee's base salary as in
effect immediately prior to the change of control. In addition, all shares
subject to unvested options or shares subject to our right of repurchase shall
fully vest such that each option granted to the employee shall be fully
exercisable and our right of repurchase shall lapse entirely as to all
restricted stock purchased by the employee in this twelve month period.
Limitations on Directors' and Officers' Liability and Indemnification
Our restated certificate of incorporation to be filed upon completion of
this offering limits the liability of our directors to the maximum extent
permitted by Delaware law. Delaware law provides that directors of a
46
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability associated with any of
the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemption; or
. any transaction from which the director derived an improper personal
benefit.
The limitation of our director's liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our restated certificate of incorporation also provides that we shall
indemnify our directors and executive officers and may indemnify our employees
and other agents to the fullest extent permitted by law. We believe that
indemnification under our restated certificate of incorporation covers at least
negligence and gross negligence on the part of indemnified parties.
We intend to enter into indemnification agreements with each of our officers
and directors containing provisions that require us to, among other things,
indemnify such officers and directors against liabilities that may arise by
reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to cover our directors and officers under any of
our liability insurance policies applicable to our directors and officers. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
Stock Plans
1996 Stock Plan, as Amended
Our board of directors adopted the 1996 Stock Plan, referred to as the "1996
Plan", in March 1996 and our stockholders initially approved the 1996 Plan in
March 1996. In connection with this offering, our board of directors approved
the amendment and restatement of the 1996 Plan in November 1999, and our
stockholders approved the amendment and restatement in 1999. Our 1996
Plan provides for the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code, referred to as the "Code," to our
employees, and for the grant of nonstatutory stock options and stock purchase
rights to our employees, directors and consultants.
Number of Shares of Common Stock Available under our 1996 Plan. As of
November 15, 1999, a total of 10,160,000 shares of our common stock were
reserved for issuance pursuant to our 1996 Plan, of which options to acquire
2,343,400 shares were issued and outstanding as of that date. As part of the
1999 amendment and restatement of our 1996 Plan, the board of directors
approved an increase of 4,000,000 shares reserved for issuance under our 1996
Plan. Our 1996 Plan provides for annual increases in the number of shares
available for issuance under our 1996 Plan on January 1st of each year,
effective beginning in 2001, equal to the lesser of 5% of the outstanding
shares of our common stock on the first day of the calendar year, 4,000,000
shares or such lesser amount as our board of directors may determine.
Administration of the 1996 Plan. Our board of directors or a committee of
our board administers the 1996 Plan. In the case of options intended to qualify
as "performance-based compensation" within the meaning of Section 162(m) of the
Code, the committee will consist of two or more "outside directors" within the
meaning of Section 162(m) of the Code. The administrator has the power to
determine the terms of the options
47
or stock purchase rights granted, including the exercise price, the number of
shares subject to each option or stock purchase right, the exercisability of
the options and the form of consideration payable upon exercise.
Options. The administrator determines the exercise price of options granted
under our 1996 Plan, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code and all incentive stock options, the exercise price must at
least be equal to the fair market value of our common stock on the date of
grant. The term of an incentive stock option may not exceed ten years, except
that with respect to any participant who owns 10% of the voting power of all
classes of our outstanding capital stock, the term must not exceed five years
and the exercise price must equal at least 110% of the fair market value on the
grant date. The administrator determines the term of all other options.
No optionee may be granted an option to purchase more than 500,000 shares in
any fiscal year. In connection with his or her initial service, an optionee may
be granted an additional option to purchase up to 500,000 shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. If termination is due to death or disability, the option will remain
exercisable for 12 months following such termination. In all other cases, the
option will generally remain exercisable for 3 months. However, an option may
never be exercised later than the expiration of its term.
Stock Purchase Rights. The administrator determines the exercise price of
stock purchase rights granted under our 1996 Plan. Unless the administrator
determines otherwise, the restricted stock purchase agreement will grant us a
repurchase option that we may exercise upon the voluntary or involuntary
termination of the purchaser's service with us for any reason (including death
or disability). The purchase price for shares we repurchase will generally be
the original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to us. The administrator determines the rate at
which our repurchase option will lapse.
Outside Director Options. Our 1996 Plan provides for the automatic grant of
an option to a non-employee director when such person first becomes a non-
employee director (except for those directors who become non-employee directors
by ceasing to be employee directors) to purchase 25,000 shares. All of our non-
employee directors who have been directors for at least 6 months will receive
an option to purchase 10,000 shares each year following our stockholder
meeting.
All options granted to our non-employee directors have a term of ten years
and an exercise price equal to fair market value on the date of grant. The
shares subject to the option vest over three-years following the date of grant.
Each option becomes exercisable as to 1/3 of the shares subject to the option
on each anniversary of the date of grant, provided the non-employee director
remains a director with us on such dates.
Transferability of Options and Stock Purchase Rights. Our 1996 Plan
generally does not allow for the transfer of options or stock purchase rights
and only the optionee may exercise an option and stock purchase right during
his or her lifetime.
Adjustments upon Merger or Asset Sale. Our 1996 Plan provides that in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation will assume or substitute each
option or stock purchase right. If the outstanding options or stock purchase
rights are not assumed or substituted, each option or stock purchase right
shall terminate as of the closing of the merger or sale of assets.
48
Amendment and Termination of our 1996 Plan. Our 1996 Plan will automatically
terminate in 2006, unless we terminate it sooner. In addition, our board of
directors has the authority to amend, suspend or terminate the 1996 Plan
provided it does not adversely affect any option previously granted under our
1996 Plan.
1999 Employee Stock Purchase Plan.
Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan, referred to as the "Purchase Plan."
Number of Shares of Common Stock Available under the Purchase Plan. A total
of 2,000,000 shares of our common stock will be made available for sale. In
addition, our Purchase Plan provides for annual increases in the number of
shares available for issuance under the Purchase Plan on January 1st of each
year, beginning in 2001, equal to the lesser of 2% of the outstanding shares of
our common stock on the first day of the calendar year, 2,000,000 shares, or
such other lesser amount as our board of directors may determine.
Administration of the Purchase Plan. Our board of directors or a committee
of our board administers the Purchase Plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the
Purchase Plan and determine eligibility.
Eligibility to Participate. All of our employees are eligible to participate
if they are employed by us or any participating subsidiary for at least 20
hours per week and more than five months in any calendar year. However, an
employee may not be granted an option to purchase stock under the Purchase Plan
if such employee:
. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year in which such option is outstanding at any time.
Offering Periods and Contributions. Our Purchase Plan is intended to qualify
under Section 423 of the Code and contains consecutive, overlapping 24-month
offering periods. Each offering period includes four 6-month purchase periods.
The offering periods generally start on the first trading day on or after May
1st and November 1st of each year, except for the first such offering period
which will commence on the first trading day on or after the effective date of
this offering and will end on the last trading day on or before April 30, 2002.
Our Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 20% of their eligible compensation which includes a
participant's base straight time gross earnings, commissions, overtime,
bonuses, incentive compensation and incentive payments, but excluding all other
compensation paid to our employees. A participant may purchase a maximum of
5,000 shares during a 6-month purchase period.
Purchase of Shares. Amounts deducted and accumulated by the participant are
used to purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair market value of our
common stock at the beginning of an offering period and the fair market value
of our common stock at the end of such purchase period. If the fair market
value at the end of a purchase period is less than the fair market value at the
beginning of the offering period, participants will be withdrawn from the
current offering period following their purchase of shares on the purchase date
and will be automatically re-enrolled in a new offering period. Participants
may end their participation at any time during an offering period, and will be
paid their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
Transferability of Rights. A participant may not transfer rights granted
under the Purchase Plan other than by will, the laws of descent and
distribution or as otherwise provided under the Purchase Plan.
49
Adjustments upon Merger or Asset Sale. In the event of our merger with or
into another corporation or a sale of all or substantially all of our assets, a
successor corporation may assume or substitute each outstanding option. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set. Each participant will be notified in writing at
least ten days prior to the new exercise date and the participants option shall
be exercised automatically on the new exercise date, unless the participant has
withdrawn before the new exercise date.
Amendment and Termination of the Purchase Plan. Our Purchase Plan will
terminate in 2009. However, our board of directors has the authority to amend
or terminate our Purchase Plan, except that, subject to certain exceptions
described in the Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our Purchase Plan.
401(k) Plan
On July 1, 1996, we adopted a 401(k) Profit Sharing Plan referred to as the
"401(k) Plan" which covers all of our eligible employees who have attained the
age of 18. The 401(k) Plan excludes from participation all collectively
bargained and nonresident alien employees. The 401(k) Plan is intended to
qualify under Sections 401(a), 401(m) and 401(k) of the Code and the 401(k)
Plan trust is intended to qualify under Section 501(a) of the Code. All
contributions to the 401(k) Plan by eligible employees or by us, and the
investment earnings thereon are not taxable to such employees until withdrawn,
and any contributions we may make are expected to be deductible by us when
made. Our eligible employees may elect to reduce their current compensation by
two percent (2%) up to fifteen (15%) subject to the maximum statutorily
prescribed annual limit of $10,000 (in 1999), and to have such salary
reductions contributed on their behalf to the 401(k) Plan. In addition, we
currently match our employees' contributions to the 401(k) Plan dollar for
dollar up to a maximum yearly matching contribution of $500. To be eligible for
this matching contribution, an eligible employee must be employed by us on the
last day of each plan year for which such matching contributions are made. The
401(k) Plan permits, but does not require, that we may make additional
profit-sharing contributions on behalf of all eligible employees. To date, we
have not made such additional profit-sharing contributions to the 401(k) Plan.
50
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.
Series A Preferred Stock
On April 2, 1996, we sold 2,678,500 shares of our Series A Preferred Stock
at a price of $1.00 per share. The purchasers of the Series A Preferred Stock
included, among others:
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. Reyes is a director of GoDigital.
51
Series B Preferred Stock
On December 11, 1996, we sold 1,339,250 shares of our Series B Preferred
Stock at a price of $2.00 per share. The purchasers of the Series B Preferred
Stock included, among others:
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.
Series C Preferred Stock.
On August 7, 1997, we sold 1,992,476 shares of our Series C Preferred Stock
at a price of $3.61 per share. The purchasers of the Series C Preferred Stock
included, among others:
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 Investment Enterprise Partnership, JAFCO R-3 Investment
Enterprise Partnership, and U.S. Information Technology Investment Enterprise
Partnership II are affiliated entities and together are considered a greater
than 5% stockholder of GoDigital.
52
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.
Series E Preferred Stock
On July 30, 1999, we sold 530,000 shares of our Series E Preferred Stock at
a price of $12.50 per share and on August 12, 1999 we sold 77,920 shares of our
Series E Preferred Stock at a price of $12.50 per share. The purchasers of the
Series E Preferred Stock included, among others:
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
53
and together are considered a greater than 5% stockholder of GoDigital. JAFCO
Co., Ltd. and U.S. Information Technology Investment Enterprise Partnership II
are affiliated entities and together are considered a greater than 5%
stockholder of GoDigital. Mr. Reyes is a director of GoDigital.
Other Material Transactions
Loans to Certain Executive Officers
On July 12, 1999, we loaned $225,000 secured by a pledge agreement to T.
Olin Nichols, our Vice President, Finance, Chief Financial Officer and
Secretary, in connection with his purchase of 300,000 shares of our common
stock for $0.75 per share. This loan is evidenced by a note that accrues
interest at the rate of 5.82% per annum, compounded annually, and is due on the
earlier of July 12, 2004, or ninety (90) days following the date upon which
Mr. Nichols' employment with us terminates.
On September 1, 1999, we loaned $1,950,000 secured by a pledge agreement to
Dennis Haar, our President and Chief Executive Officer, in connection with his
purchase of 1,300,000 shares of our common stock for $1.50 per share. This loan
is evidenced by a note that accrues interest at the rate of 5.98% per annum,
compounded annually, and is due on the earlier of September 1, 2004, or ninety
(90) days following the date upon which Mr. Haar's employment with us
terminates.
Settlement Agreement and Mutual Release with Jack Byers
On January 29, 1999, Jack Byers resigned from his position as our Vice
President, Operations and Chief Financial Officer. We entered into a settlement
and mutual release agreement with Mr. Byers pursuant to which Mr. Byers will
continue to receive an amount equal to his monthly salary to be paid bi-weekly
through January 28, 2000. In addition, we allowed our right to repurchase Mr.
Byers' unvested shares to lapse. Mr. Byers is not entitled to any other
employee benefits other than standard COBRA benefits applicable to former
employees.
54
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of November 1, 1999 and as adjusted
to reflect the sale of common stock offered hereby by the following:
. each person known by us to own beneficially more than 5% of our common
stock;
. each of our President and Chief Executive Officer and each of our
officers whose compensation exceeded $100,000 during our fiscal year
ended March 31, 1999;
. each of our directors; and
. all directors and executive officers as a group.
Unless otherwise indicated, the address of each listed stockholder is c/o
GoDigital Networks Corporation, 41652 Boscell Road, Fremont, California 94538.
The number and percentage of shares beneficially owned are based on 20,518,574
shares of our common stock outstanding as of November 1, 1999, assuming that
all outstanding preferred stock has been converted into common stock and
shares of common stock outstanding after the completion of this
offering, assuming the Underwriters' over-allotment option to purchase
shares of common stock is not exercised. Except as otherwise indicated, we
believe that the beneficial owners of the common stock listed below, on the
information furnished by such owners, have sole voting power and investment
power with respect to such shares. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the percent
ownership of that person, shares of common stock subject to options held by
that person that are currently exercisable or will become exercisable within 60
days after November 1, 1999 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percent ownership of any other
person. Entries denoted by an asterisk represent an amount less than 1%.
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% %
Dennis Haar(2).......... 1,300,000 -- 6.3
Farzin Hatami(3)........ 382,500 -- 1.9
Paul H. Scherf, Jr.(4).. 250,000 171,000 1.2
Doug Carlisle(5)........ 6,041,252 -- 29.4
Jim Flach(6)............ 5,349,630 -- 26.1
Gregorio Reyes(7)....... 272,196 -- 1.3
All directors and
officers as a group
(9 persons)(8)......... 15,595,586 471,000 75.1
5% Stockholders
Accel Partners(9)....... 5,349,630 -- 26.1
428 University Avenue
Palo Alto, CA 94301
Menlo Ventures(10)...... 6,041,252 -- 29.4
3000 Sand Hill Road,
Building Four, Suite
100
Menlo Park, CA 94025
JAFCO America Ventures,
Inc.(11)............... 2,217,888 -- 10.8
505 Hamilton Avenue,
Suite 310
Palo Alto, CA 94301
Jack Byers(12).......... 1,500,000 -- 7.3% %
1897 Crestline Road
Pleasanton, CA 94566
- -----------------------
55
(1) Includes 62,502 shares which are subject to a right of repurchase in favor
of GoDigital which lapses over time. Also includes an aggregate of 100,000
shares held in trust for Mr. Akers' minor children as follows: 50,000
shares held by Kimberly D. Akers, Trustee of The Blair Elizabeth Akers
Trust UTA dated July 12, 1999 and 50,000 shares held by Kimberly D. Akers,
Trustee of The John Francis Akers Trust UTA dated July 12, 1999.
(2) Includes 1,300,000 shares which are subject to a right of repurchase in
favor of GoDigital which lapses over time.
(3) Includes 278,906 shares which are subject to a right of repurchase in
favor of GoDigital which lapses over time.
(4) Includes 13,300 shares held by Victoria R. Sanders. Also includes 4,000
shares which are subject to a right of repurchase in favor of GoDigital
which lapses over time.
(5) Mr. Carlisle is a general partner of Menlo Ventures and is a director of
GoDigital. Includes 5,951,974 shares held by Menlo Ventures VI, L.P. and
89,278 shares held by Menlo Entrepreneurs Fund VI, L.P. Mr. Carlisle
disclaims beneficial ownership of shares held by these entities, except to
the extent of his proportional interest arising from his partnership
interest therein.
(6) Mr. Flach is a general partner of Accel Partners and is a director of
GoDigital. Includes 256,780 shares held by Accel Investors "96 L.P.,
577,760 shares held by Accel Internet/Strategic Technology Fund L.P.,
85,594 shares held by Accel Keiretsu V, L.P., 4,311,808 shares held by
Accel V, L.P., and 117,688 shares held by Ellmore C. Patterson Partners.
Mr. Flach disclaims beneficial ownership of shares held by these entities,
except to the extent of his proportional interest arising from his
partnership interest therein.
(7) Mr. Reyes is a director of GoDigital. Includes 94,996 shares held by
Gregorio Reyes and Vanessa F. Reyes, Trustees of the Gregorio Reyes and
Vanessa F. Reyes Trust, UDT dtd April 22, 1983, as amended, and 7,200
shares held by Gregorio Reyes and Vanessa F. Reyes. Also includes 55,000
shares which are subject to a right of repurchase in favor of GoDigital
which lapses over time.
(8) Includes shares described in footnotes (1) through (8) that are
beneficially owned by the directors and officers as a group and includes
2,062,910 shares subject to our right of repurchase as of November 1,
1999.
(9) Represents 256,780 shares held by Accel Investors "96 L.P., 577,760 shares
held by Accel Internet/Strategic Technology Fund L.P., 85,594 shares held
by Accel Keiretsu V L.P., 4,311,808 shares held by Accel V L.P., and
117,688 shares held by Ellmore C. Patterson Partners. Mr. Flach is a
partner of Accel Partners and has dispositive and voting power for these
shares.
(10) Represents 5,951,974 shares held by Menlo Ventures VI, L.P. and 89,278
shares held by Menlo Entrepreneurs Fund VI, L.P. Mr. Carlisle is a partner
of Menlo Ventures and has dispositive and voting power for these shares.
(11) Represents 66,482 shares held by Japan Associated Finance Co., Ltd.,
47,038 shares held by JAFCO Co., Ltd., 40,984 shares held by JAFCO G-6A
Investment Enterprise Partnership, 40,984 shares held by JAFCO G-6B
Investment Enterprise Partnership, 87,552 shares held by JAFCO G-7A
Investment Enterprise Partnership, 87,552 shares held by JAFCO G-7B
Investment Enterprise Partnership, 27,320 shares held by JAFCO J-S3
Investment Enterprise Partnership, 45,536 shares held by JAFCO R-3
Investment Enterprise Partnership, and 1,774,440 shares held by U.S.
Information Technology Investment Enterprise Partnership II.
(12) Includes 62,502 shares which are subject to a right of repurchase in favor
of GoDigital which lapses over time.
56
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
101,000,000 shares, $0.001 par value per share, to be divided into two classes
to be designated common stock and preferred stock. Of the shares authorized,
100,000,000 shares shall be designated as common stock and 1,000,000 shares
shall be designated as preferred stock. The following description of our
capital stock is only a summary. You should refer to our restated certificate
of incorporation and bylaws as in effect upon the closing of this offering,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable Delaware law.
Common Stock
As of September 30, 1999, and assuming the conversion of all outstanding
shares of preferred stock into common stock, there were 20,499,574 shares of
common stock outstanding which were held of record by approximately 80
stockholders. There will be shares of common stock outstanding (assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding options after , 1999) after giving effect to the sale of
our common stock in this offering. In addition to 2,150,600 shares issuable
upon exercise of outstanding options and shares available for
issuance under our 1996 Stock Plan, as amended, there are an aggregate of
2,000,000 shares reserved for issuance under our 1999 Employee Stock Purchase
Plan. See "Management--Stock Plans" for a description of our stock plans.
The holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of the stockholders. Our restated
certificate of incorporation to be filed concurrently with completion of this
offering, does not provide for cumulative voting in the election of directors.
Our restated bylaws limit the ability of the stockholders to call a special
meeting and eliminate the ability of the stockholders to act by written
consent. Our bylaws provide for a classified board of directors each of whose
terms will then expire at the third annual meeting following election. This
provision of our bylaws may have the effect of delaying, deferring or
preventing a change of control of our company. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by our board of directors out of funds legally available for that
purpose. In the event of our liquidation, dissolution or winding up, holders of
our common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. Holders of our common stock have no preemptive
or other subscription or conversion rights. There are no redemption or sinking
fund provisions applicable to our common stock. All outstanding shares of
common stock are fully paid and non-assessable, and the shares of common stock
to be issued upon the completion of this offering will be fully paid and non-
assessable.
Preferred Stock
Our certificate of incorporation filed in connection with this offering
provides that our board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series. The rights,
preferences and privileges of each series of preferred stock may be greater
than the rights of our common stock. It is not possible to state the actual
effect of the issuance of any shares of preferred stock upon the rights of
holders of our common stock until the board of directors determines the
specific rights of the holders of any preferred stock that may be issued.
However, the effects might include, among other things: (1) restricting
dividends on the common stock, (2) diluting the voting power of the common
stock, (3) impairing the liquidation rights of the common stock and (4)
delaying or preventing a change in our control without further action by the
stockholders. Upon the closing of this offering, no shares of preferred stock
will be outstanding, and we have no present plans to issue any shares of
preferred stock.
Registration Rights
Pursuant to a shareholders rights agreement we entered into with holders of
shares of our preferred stock (14,469,482 shares of common stock assuming
conversion of all outstanding shares of preferred stock), the holders of these
shares are entitled to certain registration rights and information rights as
set forth in the
57
agreement. The registration rights agreement provides that if we propose to
register any securities under the Securities Act, either for our own account or
for the account of other security holders exercising registration rights, they
are entitled to notice of the registration and are entitled to include shares
of their common stock in the registration. This right is subject to conditions
and limitations, including the right of the underwriters in an offering to
limit the number of shares included in the registration. The holders of these
shares may also require us to file up to two registration statements under the
Securities Act at our expense with respect to their shares of common stock. We
are required to use our best efforts to effect this registration, subject to
conditions and limitations. Furthermore, the holders of these shares may
require us to file additional registration statements on Form S-3, subject to
conditions and limitations. These rights terminate on the earlier of five years
after the completion of this offering, the date on which all securities subject
registration rights have been sold, or when a holder is able to sell all its
shares pursuant to Rule 144 under the Securities Act in any 90-day period.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Certain provisions of Delaware law and our restated certificate of
incorporation and bylaws could make more difficult the acquisition of GoDigital
by means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions, summarized below, may
discourage certain types of coercive takeover practices and inadequate takeover
bids and encourage persons seeking to acquire control of our company to first
negotiate with us. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure our company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of
interested stockholder status, did own) 15% or more of a corporation's voting
stock. The existence of this provision would be expected to have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Our restated bylaws limit the ability of the stockholders to call a special
meeting and eliminate the ability of the stockholders to act by written
consent. The certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors. The authorization of
undesignated preferred stock makes it possible for our board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of our company. These and
other provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company. The amendment of any of these
provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is EquiServe.
Nasdaq Stock Market National Market Listing
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "GDNT."
58
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect market prices for our common stock or could impair our ability
to raise capital through an offering of equity securities. Furthermore, since
no shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public after these restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon completion of this offering, we will have shares of common stock
outstanding (assuming conversion of all of the currently outstanding shares of
preferred stock) based on shares outstanding as of September 30, 1999 and
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options. All of the shares sold in this offering will be
freely transferable without restriction under the Securities Act. However, the
sale of any of these shares if purchased by "affiliates" as that term is
defined in Rule 144 are subject to certain limitations and restrictions that
are described below.
The remaining shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. These shares are "restricted
shares" as that term is defined in Rule 144 and therefore may not be sold
publicly unless they are registered under the Securities Act or are sold
pursuant to Rule 144 or another exemption from registration. In addition, our
directors and officers as well as other stockholders and optionholders have
entered into "lock-up agreements" with the underwriters. These lock-up
agreements provide that, except under limited exceptions, the stockholder may
not offer, sell, contract to sell or otherwise dispose of any of our common
stock or securities that are convertible into or exchangeable for, or that
represent the right to receive, our common stock for a period of 180 days after
the date of this prospectus. Credit Suisse First Boston Corporation, however,
may in its sole discretion, at any time without notice, release all or any
portion of the shares subject to lock-up agreements. Accordingly, of the
remaining shares, shares will become eligible for sale
180 days after the effective date subject to Rules 144 and 701.
As of September 30, 1999, there were a total of 2,150,600 shares of common
stock subject to outstanding options under our 1996 Stock Plan, 315,610 of
which were vested, and all of which are subject to lock-up agreements.
Immediately after the completion of the offering, we intend to file
registration statements on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under our
1996 Stock Plan and our 1999 Employee Stock Purchase Plan. On the date 180 days
after the effective date of the offering, the date that the lock-up agreements
expire, a total of shares of our common stock subject to outstanding
options or subject to repurchase will be vested. After the effective dates of
the registration statements on Form S-8, shares purchased upon exercise of
options granted pursuant to our 1996 Stock Plan and our 1999 Employee Stock
Purchase Plan generally would be available for resale in the public market.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any three-
month period, a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering;
or
. the average weekly trading volume of the common stock on the Nasdaq
Stock Market's National Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such sale.
59
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell such shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell these shares 90 days
after the effective date of this offering in reliance on Rule 144, without
having to comply with certain restrictions, including the holding period,
contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than "affiliates," as defined in Rule 144, subject only to the manner of
sale provisions of Rule 144. Securities issued in reliance on Rule 701 may be
sold by "affiliates" under Rule 144 without compliance with its one-year
minimum holding period requirement.
60
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens Inc., and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives, the following respective numbers of shares of common stock:
Number of
Underwriters Shares
------------ ---------
Credit Suisse First Boston Corporation.............................
BancBoston Robertson Stephens Inc..................................
U.S. Bancorp Piper Jaffray Inc.....................................
---
Total............................................................
===
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
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.
61
The underwriters have reserved for sale, at the initial public offering
price up to shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in this offering. The number of shares available for
sale to the general public in this offering will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares not purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "GDNT."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include:
. the information in this prospectus and otherwise available to the
underwriters;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our development and our current financial
condition;
. the general condition of the securities markets at the time of this
offering;
. and the recent market prices of, and the demand for, publicly-traded
common stock of generally comparable companies.
The representatives may engage in, as defined below, over-allotment,
stabilizing transactions, syndicate covering transactions, and penalty bids in
accordance with Regulation M under the Securities Exchange Act of 1934:
. over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
62
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action of Ontario Purchasers
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. Such report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one such report must
be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
63
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, San Francisco, California. As of the date of this
prospectus, WS Investment Company 96A, WS Investment Company 96B, WS Investment
Company 97B and WS Investment Company 98B, each an investment partnership
composed of certain current and former members of and persons associated with
Wilson Sonsini Goodrich & Rosati, Professional Corporation, in addition to
certain current individual members of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, beneficially own an aggregate of 79,550 shares of
GoDigital Networks Corporation preferred stock.
EXPERTS
The financial statements of GoDigital Networks Corporation as of March 31,
1999 and for each of the three years in the period ended March 31, 1999
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of FDS Business as of December 31, 1998 and for
each of the two years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU MAY FIND ADDITIONAL INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered under this prospectus. This prospectus,
which constitutes a part of the registration statement, does not contain all
the information set forth in the registration statement and the exhibits and
schedules that are part of the registration statement. For further information
with respect to us and our common stock, reference is made to the registration
statement and to the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of the contract or other document
filed as an exhibit to the registration statement, each statement being
qualified in all respects by this reference. A copy of the registration
statement may be inspected by anyone without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the Public Reference Room of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
You may obtain further information on the operation of the Public Reference
Room by calling the Commission at 1-800-SEC-0330. The Commission maintains a
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
64
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-21
FDS BUSINESS
Report of Independent Accountants.......................................... F-25
Statements of Operations................................................... F-26
Statements of Financial Position........................................... F-27
Notes to Financial Statements.............................................. F-28
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
======= ========= ========== ========= ==========
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 accompanying notes are an integral part of these financial statements.
F-4
GODIGITAL NETWORKS CORPORATION
STATEMENT 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)
========= ========= ========= ========= =========
The effects of options to purchase 504,000, 675,000, 2,191,600 and 2,150,600
(unaudited) shares of Common Stock at an average exercise price of $0.05,
$0.15, $0.29 and $0.71 (unaudited) per share; and 8,035,500, 12,020,452,
13,254,442 and 14,470,282 (unaudited) common shares resulting from the
potential conversion of Convertible Preferred Stock for the years ended March
31, 1997, 1998 and 1999 and the six months ended September 30, 1999,
respectively, have not been included in the computation of diluted net loss per
share as their effect would have been anti-dilutive.
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended March 31, 1999 and the six
months ended September 30, 1999 is computed using the weighted average number
of shares of Common Stock outstanding, including the pro forma effects of the
automatic conversion of the Company's Series A, B, C, D and E Convertible
Preferred Stock into shares of the Company's Common Stock effective upon the
closing of the Company's initial public offering as if such conversion occurred
on April 1, 1998 or at the date of original issuance, if later. The resulting
pro forma adjustment includes an increase in the weighted average shares used
to compute basic net loss per share of 12,650,518 for the year ended March 31,
1999 and 13,630,776 for the six months ended September 30, 1999.
New accounting pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company has not
yet determined what the effect of SFAS No. 133 will be on the operations and
financial position of the Company. The Company will be required to implement
SFAS No. 133 beginning in 2001.
Unaudited interim results
The accompanying balance sheet as of September 30, 1999, the statements of
operations and cash flows for the six month periods ended September 30, 1999
and 1998 and the statements of stockholders' equity for the six months ended
September 30, 1999 are unaudited. In the opinion of management, these
statements have
F-10
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position and its results of operations
and cash flows for the interim periods. The data included in notes to the
financial statements for these periods is unaudited.
NOTE 2--BALANCE SHEET COMPONENTS (in thousands):
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
==== ==== ======
NOTE 3--BORROWINGS:
Line of credit
At March 31, 1999, the Company had a line of credit with a lending
institution which provides for borrowings of up to $3 million secured by the
Company's assets. The line of credit bears interest at the prime interest rate,
plus 0.25% per annum and expired in November 1999. The interest rate in effect
at March 31, 1999, and September 30, 1999 was 8.0%, and 8.5% per annum,
respectively. At March 31, 1999, and September 30, 1999 (unaudited), $250,000
was outstanding under this line of credit.
F-11
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Notes payable
At March 31, 1999, and September 30, 1999 the Company had $555,000 and
$440,000 (unaudited), respectively outstanding under an equipment line of
credit agreement with a financial institution. The agreement provides for
borrowings of up to $750,000, collaterized by substantially all of the
Company's assets. Borrowings under the agreement are repayable in equal monthly
installments over three years and bear interest at the prime rate plus 0.75%
per annum (8.5% and 9.0% per annum at March 31, 1999, and September 30, 1999
(unaudited), respectively). Under the agreement, the Company is required to
maintain certain financial covenants, including liquidity, working capital and
other financial ratios. The Company was in compliance with such covenants at
March 31, 1999. The Company was not in compliance at September 30, 1999
(unaudited) but has received a waiver of the non-compliance. The agreement
expired in November 1999.
Principal payments under this agreement are due as follows (in thousands):
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.
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)
------- -------
$ -- $ --
======= =======
F-12
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5--STOCKHOLDERS' EQUITY:
Founders Stock
At inception, the Company issued 3,120,000 shares of its Common Stock to its
founders and 120,000 shares of common stock to certain initial investors at
$0.0005 per share under Restricted Stock Purchase Agreements. These shares are
subject to a right of repurchase at the option of the Company if the founder
departs prior to vesting. This right of repurchase lapses ratably over a 48
month period. The Restricted Stock Purchase Agreement also includes provisions
which accelerate vesting upon a change in control of the Company. In connection
with the termination of employment of a founder, the Company accelerated the
lapsing of the right of repurchase of 343,750 shares of Common Stock. The
intrinsic value of these shares amounted to $1,030,000 and has been recognized
as compensation expense in the year ended March 31, 1999. At March 31, 1999 and
September 30, 1999, 362,500 and 145,000 (unaudited) shares, respectively, were
subject to the rights of repurchase.
Convertible Preferred Stock
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 6,710,224 shares of Preferred Stock of which 2,678,500,
1,339,250, 1,992,476 and 700,000 shares are designated Series A, Series B,
Series C, and Series D, respectively.
The rights with respect to voting, dividends, liquidation and conversion of
the Preferred Stock are as follows:
Voting
Each share of Series A, B , C and D Convertible Preferred Stock has the same
number of votes as the number of shares of Common Stock into which that Series
of Preferred Stock is convertible. So long as 500,000 shares of Series C
Preferred are outstanding, the holders of Series C Convertible Preferred,
voting as a separate class, are entitled to elect one director.
Dividends
Holders of Series A, B , C and D Convertible Preferred Stock are entitled to
receive non-cumulative dividends at the annual rate of $0.05, $0.10, $0.18 and
$0.35 per share, respectively, when and as declared by the Board of Directors.
Such dividends are payable prior and in preference to any dividends for Common
Stock declared by the Board of Directors. There have been no dividends declared
to date.
Liquidation
In the event of any liquidation or winding up of the Company, including a
merger or sale of significant assets, the holders of Series A, B, C and D
Convertible Preferred Stock shall be entitled to receive prior and in
preference to any distribution of any of the assets of the Company to the
holders of Common Stock an amount of $1.00, $2.00, $3.61 and $7.00 per share
for each share of Series A, B, C and D Convertible Preferred Stock,
respectively, plus all declared but unpaid dividends, if any. If assets are
insufficient to permit payment in full of a particular series, then
distribution would occur in proportion to the original issue price of the
respective series of Preferred Stock held by such holders.
After paying the amounts due the holders of shares of Convertible Preferred
Stock, the remaining assets available for distribution shall be distributed to
the holders of Common Stock.
F-13
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Conversion
Each share of Convertible Preferred Stock is convertible into Common Stock
at the option of the holder or upon the consent of the holders of at least two-
thirds of the then outstanding Convertible Preferred Stock. The number of fully
paid and nonassessable shares of Common Stock into which each share of Series
A, B, C and D Convertible Preferred Stock may be converted shall be determined
by dividing the gross issue proceeds by the original issue price. In addition,
the Series D Preferred Stock conversion price was adjusted to $2.50 per share
as a result of the Company not meeting certain performance criteria specified
in the agreement. At March 31, 1999, the Series A, B, C and D conversion prices
were $0.50, $1.00, $1.81 and $2.50, respectively.
Such conversion is automatic upon the effective date of a public offering of
Common Stock for which the aggregate proceeds are at least $10,000,000 and the
offering price per share is at least $2.00 per share for the Series A and B
Preferred, $3.50 per share for the Series C and $2.50 per share for the Series
D Preferred. A total of 13,254,458 shares of Common Stock have been reserved
for issuance upon the conversion of Preferred Stock.
NOTE 6--EMPLOYEE BENEFIT PLANS:
Stock option plan
In 1996, the Company's Board of Directors (the "Board") adopted the 1996
Stock Plan (the "Plan"). The Plan, as amended, provides for the granting of
stock options and stock purchase rights to employees, consultants and
directors. At March 31, 1999 and September 30, 1999, 2,560,000 and
6,160,000 (unaudited) shares, respectively, of Common Stock was reserved for
issuance under the Plan. The Plan is administered by the Board and allows for
the granting of both nonstatutory stock options ("NSOs") and incentive stock
options ("ISOs"). ISOs are granted at exercise prices which are not less than
100% of the fair value on the date of grant, as determined by the Board. NSOs
are granted at prices not less than 85% of the fair market value on the date of
grant, as determined by the Board. The Plan provides that the options shall be
exercisable over a period not to exceed ten years and shall vest over a period
of four years. ISO's granted to a person owning more than 10% of the combined
voting power of all classes of stock of the Company must be issued at prices
not less than 110% of the fair market value of the stock on the date of grant
for a term not to exceed five years. The options generally vest 25% one year
after the date of grant and the remaining shares vest in equal monthly amounts
over the following 36 months.
Stock purchase rights may be granted either alone, in addition to, or in
tandem with other awards granted under the Plan. Stock purchase rights are
granted at prices not less than 100% of the estimated fair value of the shares
on the date of grant, as determined by the Board, and must be exercised at the
time of execution of the restricted stock purchase agreement. Shares purchased
through the exercise of stock purchase rights are subject to repurchase by the
Company, to the extent that such shares are unreleased from the Company's
repurchase option, at the original purchase price paid by the purchaser in the
event the purchaser's employment with the Company is terminated for any reason.
Shares purchased through the exercise of stock purchase rights are released
from the Company's repurchase option at a rate of 25% after the first year and
in equal monthly amounts over the following 36 months. There were 24,000 stock
purchase rights to purchase common stock at $0.10 per share, granted in fiscal
1998. There were no stock purchase rights granted in fiscal 1999 and 1,300,000
(unaudited) stock purchase rights to purchase Common Stock at $1.50 per share
granted in the six months ended September 30, 1999. The Company repurchased
28,750 shares of Common Stock issued due to exercise of repurchase rights at
$0.05 during fiscal 1999, and none (unaudited) in the six months ended
September 30, 1999. Shares issued due to exercise of purchase rights subject to
repurchase were 132,750, 49,000, and 1,333,000 (unaudited) at March 31, 1998,
1999 and September 30, 1999, respectively.
F-14
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In the six-month period ended September 30, 1999, the Company issued
1,211,500 (unaudited) shares of Common Stock upon certain employees' exercise
of their stock options prior to the corresponding vesting dates. All such
Common Stock are subject to the Company's repurchase, to the extent that such
shares are unreleased from the Company's repurchase option, at the original
purchase price paid by the purchaser in the event the purchaser's employment
with Company is terminated for any reason. Shares purchased through the
exercise of stock purchase rights are released from the Company's repurchase
option at a rate of 25% after the first year and in equal monthly amounts over
the following 36 months. The Company did not repurchase any shares issued on
the early exercise stock options during the six-month period ended September
30, 1999 (unaudited). Shares issued on the early exercise of stock options
subject to repurchase were 1,025,146 (unaudited), as of September 30, 1999.
F-15
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option activity, including the stock
purchase rights and excluding founder's stock and restricted stock issued in
conjunction with early exercise of stock options, under the Plan:
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)................ (3,116,400) 3,116,400 1.33
Exercised (unaudited).............. -- (2,564,626) 1.00
Cancelled (unaudited).............. 139,574 (139,574) 0.94
---------- ---------- -----
Balance at September 30, 1999
(unaudited)....................... 1,226,108 2,150,600 $0.71
========== ========== =====
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
F-16
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
average expected option life of 4 years, and a zero dividend yield for fiscal
1998 and 1999, respectively. The difference between the net loss, as reported,
and pro forma net loss determined under SFAS 123 was not material for all
periods presented.
Deferred stock compensation
In connection with certain stock option grants during the period September
1, 1998, to March 31, 1999, the Company recorded deferred stock compensation
costs totaling $2,350,000 being the difference between the exercise price and
the deemed fair value at the date of grant which is being recognized over the
vesting period of the related options of four years. Amortization expense
associated with deferred stock compensation totaled $225,000 for the year ended
March 31, 1999. Future amortization of deferred compensation expense is
estimated to be approximately (unaudited) $5.6 million, $5.3 million, $2.3
million, $1.0 million and $0.2 million in the years ended March 31, 2000, 2001,
2002, 2003 and 2004 respectively.
401(k) Savings plan
The Company has a savings plan that qualifies as a deferred salary
arrangement under Section 401 (k) of the Internal Revenue Code (the "Plan").
Contributions made by the Company are determined annually by the Board of
Directors. No contributions have been made to the Plan by the Company.
NOTE 7--COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities and equipment under noncancelable
operating and capital leases with various expiration dates through 2005.
Effective June 1, 1999, the Company entered into a noncancelable operating
lease for new office facilities, which expires in May 2004. Rent expense for
the years ended March 31, 1998 and 1999 was $71,000, and $96,000, respectively.
Future minimum lease payments under all noncancelable operating and capital
leases at an implicit interest of 7.8% per annum, including the operating lease
entered into subsequent to March 31, 1999, are as follows (in thousands):
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
F-17
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
and the remaining 14,741,886 for Preferred Stock. Of the 14,741,886 shares
authorized for issuance of Preferred Stock, 5,357,000, 2,678,500, 3,844,952,
881,434, and 1,840,000 shares are designated for Series A, B, C, D, and E
Preferred Stock, respectively.
In July 1999, the Company issued 607,920 shares of Series E Convertible
Preferred Stock at $12.50 per share for net proceeds of approximately
$7,573,000. The rights of Series E are similar to Series D except, among other
differences, the holders of Series E are entitled to noncumulative dividends of
$0.625 per share when and if declared and the liquidation preference is $12.50
per share. Each share of Series E Convertible Preferred Stock is convertible
into Common Stock at the conversion price of $6.25 per share. Such conversion
is automatic upon the effective date of public offering of Common Stock for
which the aggregate proceeds are at least $10,000,000 and the offering price
per share is at least $6.25 per share.
Acquisition of certain assets from E/O Networks, Inc
In July 1999, the Company acquired certain assets and assumed certain
liabilities relating to the FDS product line of E/O Networks, Inc., which
developed, manufactured, and marketed a digital loop access system. E/O
Networks, Inc. filed bankruptcy under Chapter 11 in April 1999. The cash
purchase price of approximately $5.6 million has been allocated to the tangible
and intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The fair value of intangible
assets was determined by an independent consultant using a combination of
methods, including estimates based on risk-adjusted income approach for
acquired research and development, completed technology, and customer list, and
on the cost replacement approach for acquired work force.
The allocation of the purchase price is summarized below:
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 amount allocated to in-process research and development represents the
purchased in-process technology for projects that, as of the date of the
acquisition, had not yet reached technological feasibility and had no
alternative future use. Based on preliminary assessments, the value of these
projects was determined by estimating the resulting net cash flows from the
sale of the products resulting from the completion of the projects, reduced by
the portion of the revenue attributable to core technology and the percentage
completion of the project. The resulting cash flows were then discounted back
to their present value at appropriate discount rates.
The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specification including function, features and technical performance
requirements. The resulting net cash flows from such products are based on
estimates of revenue, cost of revenue, research and developments costs, sales
and marketing costs, and income taxes from such projects.
F-18
GODIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The amount allocated to in-process research and development was charged to
the statement of operations in the period of the acquisition.
The following unaudited pro forma financial information reflects the results
of operations for the six month period ended September 30, 1998 and 1999, as if
the acquisition had occurred on April 1, 1998. These pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of what operating results would have been had the acquisitions actually taken
place on April 1, 1998, and may not be indicative of future operating results,
(in thousands except share and per share amounts).
Six Month
Period Ended
Year ended September 30,
March 31, 1999 1999
-------------- -------------
(unaudited)
Pro forma financial information (unaudited)
Net revenues.................................. $ 16,780 $ 14,422
========== ===========
Loss from operations.......................... $ (13,210) $ (6,416)
========== ===========
Net loss...................................... $ (13,275) $ (6,430)
========== ===========
Net loss per share:
Basic and diluted........................... $ (5.58) $ (1.95)
========== ===========
Weighted average shares outstanding:
Basic and diluted........................... 2,376,984 3,292,200
========== ===========
Update program (unaudited)
In July 1999, the Company was informed by a customer that certain systems
could experience failures during lightning storms. Although these systems were
in compliance with Telcordia (Bellcore) specification, the Company found these
specifications, in regard to lightning resistance, to be inadequate. The
Company has redesigned these systems specifications to be better able to
withstand such operating conditions. As a result, the Company voluntarily
adopted a program by which certain customers may receive modified field units.
The Company estimated the related expenses to be approximately $2.9 million
which was charged to cost of revenues in the quarter ended September 30, 1999.
Increase of stock options available for grant (unaudited)
In August 1999, the Company amended its 1996 Stock Plan to increase the
number of shares of Common Stock reserved for issuance under the Plan to
6,160,000.
Related party transactions (unaudited)
From July through October 1999, the Company lent an aggregate $2,475,000
evidenced by full recourse promissory notes to certain executives in
conjunction with their purchases of the Company's Common Stock upon exercise of
their stock options prior to vesting date (see Note 6). The notes bear interest
of 5.82% through 5.98% per annum and are due at various dates from July 2004
through July 2005 or 90 days following termination of the executive's
employment with the Company. The notes are collateralized by the related
2,506,500 shares of Common Stock issued, which are subject to the Company's
right of repurchase. The net amount outstanding has been reflected as a
separate component of stockholders' equity.
F-19
GO DIGITAL NETWORKS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred stock compensation (unaudited)
In connection with certain stock option grants during the six months ended
September 30, 1999, the Company recorded deferred stock compensation cost
totaling $12,080,000 which is being recognized over the vesting period of the
related options of four years. Amortization expense associated with deferred
stock compensation totaled $1,550,000 for the six months ended September 30,
1999.
F-20
GODIGITAL NETWORKS CORPORATION
PRO FORMA COMBINED FINANCIAL INFORMATION
Overview
Acquisition of certain assets and assumption of certain liabilities from E/O
Networks, Inc.
The accompanying unaudited Pro Forma Combined Statements of Operations of
the Company for the year ended March 31, 1999 and the six month period ended
September 30, 1999 were prepared by the Company to illustrate the estimated
effects of the acquisition from E/O Networks, Inc. of certain assets and
assumption of certain liabilities relating to part of the FDS product line (the
"FDS Business") described in the notes to the Pro Forma Combined Financial
Information. A Pro Forma Combined Balance Sheet has not been presented as the
acquired assets and assumed liabilities of the FDS product line are included in
balance sheet of GoDigital Networks Corporation as of September 30, 1999. The
Pro Forma Combined Statement of Operations gives effect to the transaction as
if it had taken place on April 1, 1998.
For the purposes of the accompanying unaudited Pro Forma Combined Statements
of Operations the results of operations of the FDS Business for the year ended
December 31, 1998 and six month period ended June 30, 1999 have been combined
with the results of operations of GoDigital for the year ended March 31, 1999
and the six month period ended September 30, 1999, respectively.
The Pro Forma Combined Statement of Operations do not purport to represent
what the results of operations would have been had in fact the transaction
occurred on such date or to project the results of operations of the Company
for any future period. The Pro Forma Combined Statement of Operations of the
Company should be read in together with the Financial Statements of the Company
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
F-21
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-22
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-23
GODIGITAL NETWORKS CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(Unaudited)
NOTE 1--BASIS OF PRESENTATION:
Effective July 1999, the Company acquired from E/O Networks certain assets
and assumed certain liabilities relating to part of the FDS product line. The
FDS product line is a digital loop access system.
The allocation of the cash purchase price is summarized below (in
thousands):
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-24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
GoDigital Networks Corporation
In our opinion, the accompanying statement of financial position and the
related statements of operations present fairly, in all material respects, the
financial position of the FDS Business, acquired by GoDigital Networks
Corporation from E/O Networks, Inc. (the "Company"), at December 31, 1997 and
1998, and the results of operations for each of the two years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of GoDigital's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying financial statements were prepared to comply with the rules
and regulations of the Securities and Exchange Commission and on the basis of
presentation as described in Note 1, to present the financial position and
results of operations of the FDS Business acquired by GoDigital Networks
Corporation from E/O Networks, Inc.
PricewaterhouseCoopers LLP
San Jose, California
November 17, 1999
F-25
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-26
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-27
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION:
Effective July 26, 1999, GoDigital Networks Corporation ("GoDigital")
acquired from E/O Networks, Inc. ("E/O Networks") certain assets and assumed
certain liabilities relating to part of the FDS product line (the "FDS
Business"). E/O Networks had filed for bankruptcy under Chapter 11 on April 13,
1999. The FDS product line is a digital loop access system.
Historically, financial statements were not prepared for the FDS Business.
The accompanying financial statements were prepared to comply with the rules
and regulations of the Securities and Exchange Commission. These statements are
derived from E/O Networks historical accounting records. Throughout the period
covered by the financial statements, the FDS Business was wholly-owned and
operated by E/O Networks, Inc.
Under the terms of the Acquisition Agreement, GoDigital acquired certain
tangible and intangible assets relating to the FDS Business. The acquired
assets excluded accounts receivable and cash. GoDigital assumed responsibility
for certain FDS Business product warranty obligations under certain contracts,
all other liabilities remained with E/O Networks.
The FDS Business was not operated as a separate, discrete business of E/O
Networks and accordingly all financing and treasury functions were handled at
E/O Networks corporate level. Cash requirements of the business were provided
entirely by E/O Networks and cash generated by the FDS Business was remitted
directly to E/O Networks. Given these constraints, it is not possible to
determine cash balances associated with the Business. In addition, E/O Networks
was responsible for certain liabilities related to facilities, functions and
services used by the FDS Business as well as other E/O Networks businesses. It
is not possible to allocate these shared liabilities to the FDS Business.
The Statement of Financial Position of the FDS Business includes all assets
and liabilities that are specifically attributable to the FDS Business or can
be allocated to the FDS Business and are reflective of E/O Networks historical
cost information. All other unallocable assets and liabilities including cash
comprise E/O Networks net investment in the FDS Business and have been
disclosed in the Statement of Financial Position as Owner's Net Investment in
lieu of Stockholders Equity. In addition, due to the constraints outlined
above, certain supplemental cash flow information related to the FDS Business
has been presented (See Note 5) in lieu of a Statement of Cash Flows.
The Statement of Operations includes all revenues and costs directly
attributable to the FDS Business, including costs for facilities, functions and
services used by the FDS Business at a site shared with other E/O Networks
operations. The results of operations also includes costs for certain functions
and services performed by E/O Networks corporate level including officers and
employees salaries, rent, depreciation, advertising, accounting and legal
services which have been allocated to the FDS Business based on usage. The only
costs excluded from the Statement of Operations for the FDS Business relate to
direct expenses specifically attributable to other businesses of E/O Networks
that were not acquired and interest expense (See Note 6).
All of the allocations and estimates in the Financial Statements are based
on assumptions that management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the
costs that would have resulted if the FDS Business had been operated as a
separate entity.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-28
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentration of credit risk
The FDS Business provides credit in the form of trade accounts receivable to
its customers. The FDS Business generally does not require collateral to
support customer receivables. The FDS Business performs ongoing credit
evaluations of its customers and maintains allowances which management believes
are adequate for potential credit losses.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight line method over estimated useful lives as follows:
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 components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from nonowner sources. To date, the FDS Business has not had
any transactions that are required to be reported in comprehensive income
(loss) as compared to its reported net loss, and accordingly net loss is equal
to comprehensive net loss for all periods presented.
F-29
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income taxes
The taxable loss of the FDS Business was included in the tax return of E/O
Networks. As such, separate income tax returns were not prepared or filed for
the FDS Business.
The FDS Business accounts for income taxes under the asset and liability
method as if the FDS Business were a separate tax paying entity. Under the
basis of presentation of these financial statements, tax due to/due from E/O
Networks is indicated as a component of Owner's Net Investment.
Segment information
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. During each period presented, the FDS Business operated in
a single business segment in the United States.
Unaudited interim results
The accompanying statement of financial position as of June 30, 1999 and the
statement of operations for the six months ended June 30, 1999 and 1998 are
unaudited. In the opinion of management, these statements have been prepared on
the same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the FDS Business' financial position and its results of operations for the
interim periods. The data included in notes to the financial statements for
these periods is unaudited.
NOTE 3--RELATED PARTY TRANSACTIONS:
The financial statements include significant transactions with E/O Networks
involving transactions and services (cash management, administration,
facilities, purchasing, legal and accounting) that were provided to the FDS
Business. The costs of these transactions and services have been directly
charged and/or allocated to the FDS Business using methods that management
believes are reasonable. Such charges and allocations are not necessarily
indicative of the costs that would have been incurred if the FDS Business had
been a separate entity. All operating expenses in the financial statements
relate to amounts paid by E/O Networks and have been allocated to the FDS
Business. In addition FDS Business employees participated in benefits plans
provided by E/O Networks including 401(k) plans and stock options, the cost of
which is included as part of FDS operating expenses.
NOTE 4--BALANCE SHEET COMPONENTS:
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
====== ====== ======
F-30
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 5--SUPPLEMENTAL CASH FLOW INFORMATION:
As described in Note 1, the Business did not have a separate cash management
system and all cash payments and cash receipts were handled by E/O Networks at
the corporate level. In addition, E/O Networks corporate systems are not
designed to track liabilities and payments on a business specific basis. Given
these constraints, the following data are presented to facilitate analysis of
key components of cash flow activity.
Year Ended Six Month Period
December 31, Ended 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.
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.
F-31
FDS BUSINESS
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 7--COMMITMENTS AND CONTINGENCIES:
The Business does not have any material lease commitments.
The Business is subject to various lawsuits and claims with respect to such
matters as product liabilities, governmental regulations and other actions
arising out of the normal course of business. While the effect on future
financial results is not subject to reasonable estimation because considerable
uncertainty exists, in the opinion of management, the ultimate liabilities
resulting from such lawsuits and claims will not materially affect the
financial statements of the FDS Business.
NOTE 8--SUBSEQUENT EVENTS:
On July 26, 1999, certain assets and liabilities comprising the FDS Business
were acquired by GoDigital Networks Corporation for approximately $5.6 million.
F-32
[GoDigital Logo]
Delivering Long Range Network Access
[GDSL-8 Graphic]
GDSL-8
The GDSL-8 uses DSL technology to transport eight digital access lines used for
voice and CLASS services, high-speed analog modem access, and fax services as
far as 25 miles from the central phone office on one copper line.
[GDSL-3i Graphic]
GDSL-3i
The GDSL-3i transports three 144 Kbps IDSL lines as far as 25 miles from the
central phone office on one copper line.
[FDS FiberReach Distribution System Graphic]
FDS FiberReach Distribution System
The FDS FiberReach transports multiple IDSL lines or digital access lines, to
multiple drop points along a 150 mile, 40 Mbps, fiber ring. FDS FiberReach
systems can be used in combination with GDSL Systems for combined fiber/copper
long range transmission applications.
1
[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............................................. $15,568
NASD filing fee.................................................. 6,100
Nasdaq National Market listing fee............................... *
Printing and engraving costs..................................... *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... 3,000
Transfer Agent and Registrar fees................................ *
Miscellaneous expenses........................................... *
-------
Total.......................................................... $ *
=======
- -----------------------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article XI of the Registrant's Restated Certificate of Incorporation
provides for the indemnification of the Registrant's directors and officers to
the fullest extent permissible under Delaware law.
The Registrant intends to enter into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Restated Certificate of Incorporation, and intends to enter
into indemnification agreements with any new directors and executive officers
in the future.
Item 15. Recent Sales of Unregistered Securities
Since our incorporation in February 1996, we have sold and issued the
following securities:
(1) On March 1, 1996, we issued 3,120,000 shares of common stock to three
founding stockholders for an aggregate consideration of $1,560.00.
(2) On March 12, 1996, we issued 120,000 shares of common stock to a
consultant for an aggregate consideration of $60.00.
(3) On April 6, 1996, we issued 2,678,000 shares of Series A Preferred Stock
to ten investors for an aggregate consideration of $2,678,500.00.
II-1
(4) On December 11, 1996, we issued 1,339,250 shares of Series B Preferred
Stock to ten investors for an aggregate consideration of $2,678,500.00.
(5) On August 5, 1997, we issued 1,992,476 shares of Series C Preferred
Stock to twelve investors for an aggregate consideration of $7,192,838.36.
(6) On September 22, 1998, we issued 428,574 shares of Series D Preferred
Stock to three investors for an aggregate consideration of $3,000,018.00, and
on October 15, 1998, we issued 12,143 shares of Series D Preferred Stock to
three investors for an aggregate consideration of $85,001.00.
(7) On July 30, 1999, we issued 530,000 shares of Series E Preferred Stock
to fifteen investors for an aggregate consideration of $6,625,000.00, and on
August 12, 1999, we issued 77,920 shares of Series E Preferred Stock to one
investor for an aggregate consideration of $974,000.00.
(8) On September 14, 1999, we issued an aggregate of 6,000 shares of common
stock to four consultants as consideration for past services rendered.
(9) Since our incorporation, we have issued, and there remain outstanding,
options to purchase an aggregate of 2,150,600 shares of common stock with
exercise prices ranging from $0.18 to $4.50 per share. Since our incorporation,
options to purchase 2,858,292 shares of common stock have been exercised for an
aggregate consideration of $2,578,838.78.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering.
The issuance of securities described in Items 15(1) through (6) and (8) were
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving a public
offering. The issuance of securities described in Item 15(7) were exempt from
registration under the Securities Act in reliance on Regulation D of the
Securities Act as transactions by an issuer not involving a public offering.
The issuance of securities described in Item 15(9) were exempt from
registration under the Securities Act in reliance on Section 4(2) or Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
Number
- -------
1.1* Form of Underwriting Agreement
3.1 Restated Certificate of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1* Specimen of Common Stock Certificate
4.2 Third Amended and Restated Shareholder Rights Agreement
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1 Form of Indemnification Agreement between the Registrant and each of its directors and officers
10.2*+ Purchase Agreement by and between BCTel and the Registrant
10.3* Multi-Tenant Industrial Triple Net Lease, dated as of June 1, 1999, by and between the Registrant
and Catellus Development
10.4 Amended and Restated 1996 Stock Plan and forms of agreements thereunder
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
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.3* Consent of Counsel (see Exhibit 5.1)
24.1 Power of Attorney (see page II-5 of this filing)
27.1 Financial Data Schedules
- -----------------------
+ The Registrant will request confidential treatment with respect to certain
portions of this exhibit. The omitted portions will be separately filed with
the Commission.
* To be filed by amendment
(b) Financial Statement Schedules
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 Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-3
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 Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fremont,
State of California, on the 17 day of November, 1999.
GoDigital Networks Corporation
/s/ Dennis Haar
By: _________________________________
Dennis Haar,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dennis Haar and T. Olin Nichols and each of
them, his attorneys-in-fact, each with the power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Francis I. Akers Chairman of the Board November 17, 1999
____________________________________ President, Chief
Francis I. Akers Development Officer and
Director
/s/ Dennis Haar President, Chief Executive November 17, 1999
____________________________________ Officer and Director
Dennis Haar (Principal Executive
Officer)
/s/ T. Olin Nichols Vice President, Finance, November 17, 1999
____________________________________ Chief Financial Officer
T. Olin Nichols (Principal Financial
Officer)
/s/ Douglas Carlisle Director November 17, 1999
____________________________________
Douglas Carlisle
/s/ James Flach Director November 17, 1999
____________________________________
James Flach
/s/ Gregorio Reyes Director November 17, 1999
____________________________________
Gregorio Reyes
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 Bylaws of the Registrant
4.1* Specimen of Common Stock Certificate
4.2 Third Amended and Restated Shareholder Rights Agreement
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2*+ Purchase Agreement by and between BC Tel and the Registrant
10.3* Multi-Tenant Industrial Triple Net Lease, dated as of June 1, 1999, by
and between the Registrant and Catellus Development
10.4 Amended and Restated 1996 Stock Plan and form of agreements thereunder
10.5 1999 Employee Stock Purchase Plan
10.6 Change of Control Severance Agreement by and between the Registrant
and each of its officers
10.7 Change of Control Severance Agreement by and between Dennis Haar and
the Registrant
10.8*+ Product Purchase Agreement between GTE Communication Systems
Corporation and the Registrant
10.9*+ Agreement for Products by and between US West Communications, Inc. and
E/O Networks
10.10*+ Assignment, Assumption and Acceptance of Agreement for Products by and
among US West Communications, Inc., E/O Networks and the Registrant
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.3* Consent of Counsel (see Exhibit 5.1)
24.1 Power of Attorney (see page II-5 of this filing)
27.1 Financial Data Schedules
- -----------------------
+ 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