<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1998
REGISTRATION NO. 333-60419
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
TUT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------
CALIFORNIA 3661 94-2958543
(PENDING REINCORPORATION (PRIMARY STANDARD (I.R.S. EMPLOYER
INTO DELAWARE) INDUSTRIAL IDENTIFICATION NUMBER)
CLASSIFICATION CODE
(STATE OR OTHER NUMBER)
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
2495 ESTAND WAY
PLEASANT HILL, CA 94523
(925) 682-6510
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-----------------
SALVATORE D'AURIA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2495 ESTAND WAY
PLEASANT HILL, CA 94523
(925) 682-6510
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-----------------
COPIES TO:
STEVEN E. BOCHNER, ESQ. PATRICK A. POHLEN, ESQ.
JEFFREY A. HERBST, ESQ. COOLEY GODWARD LLP
SUSAN P. KRAUSE, ESQ. FIVE PALO ALTO SQUARE
STEPHANIE L. RUBY, ESQ. 3000 EL CAMINO REAL
WILSON SONSINI GOODRICH & ROSATI PALO ALTO, CALIFORNIA 94306
PROFESSIONAL CORPORATION (650) 843-5000
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
-----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), 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, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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 or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated September 10, 1998
PROSPECTUS
2,500,000 SHARES
LOGO
[LOGO OF TUT SYSTEMS]
COMMON STOCK
-------------
All of the shares of Common Stock offered hereby are being sold by Tut
Systems, Inc. ("Tut," "Tut Systems" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$14.00 and $16.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market, subject to
notice of issuance, under the symbol "TUTS."
-------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,000,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery and acceptance by the Underwriters and to
certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1998.
-------------
LEHMAN BROTHERS
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
SALOMON SMITH BARNEY
, 1998
<PAGE>
LOGO
[LOGO OF TUT SYSTEMS]
FAST COPPER(TM)
SENDING DATA FASTER AND FARTHER
HOMERUN(R)
THE FIRST SPECIFICATION FOR HOME NETWORKING
CHOSEN BY THE HOME PHONELINE NETWORK ALLIANCE
LICENSED BY 3COM, AMD, AT&T WIRELESS,
COMPAQ, INTEL, NATIONAL SEMICONDUCTOR, ROCKWELL AND OTHERS
EXPRESSO GS(TM)
A COMPACT, FLEXIBLE PLATFORM
SUPPORTING MULTIPLE XDSL SPEEDS, DISTANCES
AND APPLICATIONS
EXPRESSO MDU(TM)
COMBINING HOMERUN WITH THE EXPRESSO PLATFORM
FOR MULTI-TENANT APPLICATIONS
------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
------------------
This Prospectus contains trademarks of the Company, including
"Expresso(TM)," "Expresso GS(TM)," "Expresso MDU(TM)," "HomeRun(R),"
"FastCopper(TM)," "SmartWire(TM)" and "All-Rate DSL.(TM)" All rights reserved.
All other trade names and trademarks appearing in this Prospectus are the
property of their respective holders.
2
<PAGE>
[Gate 1 -- Graphic depicting backbone network "cloud" with multiple
- -----
applications connected to it, including "Internet", "Telecommuting", "Data Base
Access", "Corporate Intranet", "On-Line Shopping" and "Electronic Commerce".]
Captions:
[USING JUST A SINGLE PAIR OF COPPER WIRE, ADVANCED COMMUNICATION PRODUCTS FROM
TUT SYSTEMS TAKE HIGH-SPEED DATA SERVICES WHERE THEY NEED TO GO...
[arrows pointing to] ACROSS LOCAL LOOPS TO BUSINESS RESIDENTIAL CUSTOMERS
[arrows pointing to] ACROSS PRIVATE COPPER NETWORKS
- TO EVERY BUILDING ON CAMPUS
- TO EVERY TENANT WITH AN MDU
- TO EVERY RJ-11 TELEPHONE JACK IN A HOME]
[xDSL NETWORKING
---------------
Tut's Expresso GS system is used by ITOCs, ISPs, and CLECs to provide
high-speed data services over last mile telephone wires. Currently supporting
symmetric DSL (SDSL) service at 1.2 Mbps, Expresso GS has the flexibility and
bandwith to incorporate additional xDSL technologies in the future.
Key features of Expresso GS include SmartWire to maximize the transmission rate
over all distances up to 24,700 feet and All-Rate DSL that allows service
providers to offer a low bandwith, entry level service that can be expanded to
higher bandwith capabilities as a subscriber's need for speed grows.]
<PAGE>
[Gate 2 -- Graphic depicting three types of Private Copper Networks, including
------
Corporate Campus Networking, MDU Networking and Home Networking.]
Captions:
[CORPORATE CAMPUS NETWORKING
---------------------------
Tut's XL product line extends Ethernet LANs across corporate and educational
campuses from building to building, from floor to floor - at native 10 Mbps
speeds to distances of 1,500 feet - at lesser speeds up to 24,700 feet.]
[MDU NETWORKING
--------------
Located in the basement of an apartment building, hotel or dormitory, Tut's
Expresso MDU empowers every RJ-11 jack in the building with high-speed Internet
access.
With Tut's innovative HomeRun technology, a secure LAN is provided for each
living unit over the existing telephone lines.]
[HOME NETWORKING
---------------
The Company's HomeRun technology, an in-home application of FastCopper,
enables a cost-effective Ethernet LAN to be quickly implemented over the
telephone wire found in a home. PCs, PC peripherals, and high-speed Internet
access can be shared over this "no new wires" LAN.]
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus. Except as set forth in
the Financial Statements and the Notes thereto or as otherwise indicated, all
information in this Prospectus assumes: (i) the reincorporation of the Company
in Delaware prior to the closing of the offering; (ii) a four for one reverse
stock split of the Company's Common Stock to be effected prior to the closing
of the offering; (iii) the exercise of an outstanding warrant to purchase
666,836 shares of Preferred Stock held by Microsoft Corporation ("Microsoft")
which will expire upon the closing of the offering if not exercised earlier;
(iv) the automatic conversion of all outstanding shares of the Company's
Preferred Stock into Common Stock upon the closing of this offering; (v) the
filing and effectiveness upon closing of this offering of the Company's Second
Amended and Restated Certificate of Incorporation authorizing a class of
undesignated preferred stock; and (vi) no exercise of the Underwriters' over-
allotment option. See "Description of Capital Stock" and "Underwriting."
THE COMPANY
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of telephone
companies, as well as the copper telephone wires in homes, businesses and other
buildings. These products incorporate Tut's proprietary FastCopper technology
in a cost-effective, scalable and easy to deploy solution to exploit the
underutilized bandwidth of copper telephone wires. The Company's products
include Expresso high bandwidth access multiplexers, associated modems and
routers, XL Ethernet extension products and integrated network management
software. The Company's HomeRun technology, an in home application of
FastCopper, has been chosen as the initial specification for a home networking
standard to be promoted by the Home Phoneline Network Alliance ("Home PNA"), a
non-profit corporation formed to provide a forum for the creation of an open
standard and specification for home networking products and services. The
founding members of the Home PNA are 3Com Corporation ("3Com"), Advanced Micro
Devices, Inc. ("AMD"), AT&T Wireless Services, Inc. ("AT&T Wireless"), Compaq
Computer Corporation ("Compaq"), Epigram Inc., International Business Machines
Corporation, Intel Corporation, Hewlett-Packard Company, Lucent Technologies
Inc., Rockwell Semiconductor Systems Inc. ("Rockwell") and Tut Systems.
The Company's products and technologies cost-effectively meet high-speed
bandwidth requirements for a variety of users:
. Large corporations, universities and other institutions use the
Company's XL products to extend Ethernet networks between separate
buildings beyond conventional Ethernet distance limitations.
. Independent telephone companies, Internet service providers and
competitive local exchange carriers use the Company's Expresso GS
systems to provide high-speed data access services, including Internet
access, to business and residential customers over existing copper
telephone wires traditionally used for voice service. Expresso GS
systems cost-effectively multiplex, or aggregate, these high-speed data
access services onto higher bandwidth regional and national backbone
networks.
. Owners and operators of multiple dwelling units ("MDUs"), including real
estate investment trusts ("REITs"), universities, hotels and independent
landlords, can utilize the Company's Expresso MDU systems to deliver
high-speed data access to their tenants over existing copper telephone
wires.
. Leading semiconductor, computer hardware and consumer electronics
manufacturers, such as 3Com, AMD, AT&T Wireless, Compaq, Intel, National
Semiconductor, Inc., and Rockwell, have licensed the Company's HomeRun
technology to enable the development of HomeRun-compatible integrated
circuits and consumer products, including PCs, peripherals, modems (56
Kbps, ISDN, xDSL, cable and wireless), Internet telephones and
television-based web browsers.
3
<PAGE>
Tut Systems' objective is to be the leading provider of advanced
communications products for high-speed data access that exploit the large
existing infrastructures of copper telephone wires which lead into and reside
within homes, businesses and other buildings. To achieve this objective, the
Company intends to: (i) penetrate high growth markets with the Company's
Expresso GS and Expresso MDU products; (ii) continue to develop innovative
technology and systems enhancements using the Company's rapid product
development capabilities and FastCopper technology; (iii) leverage the
Company's HomeRun technology and strategic partnerships in the home networking
market; (iv) participate in industry standards setting activities; and
(v) expand the Company's international presence.
The Company shipped its first XL product in 1992, its first Expresso product
in early 1997 and its first Expresso GS in the second quarter of 1998. The
Company expects to ship its Expresso MDU configured with HomeRun line cards in
the fourth quarter of 1998.
The Company's offices are located at 2495 Estand Way, Pleasant Hill,
California 94523, and its telephone number is (925) 682-6510. The Company was
incorporated in California on August 19, 1983 and began operations in August
1991. The Company intends to reincorporate in Delaware prior to the closing of
the offering. Unless the context otherwise requires, the terms "Tut," "Tut
Systems," and the "Company" refer to Tut Systems, Inc. Information contained on
the Company's web site does not constitute part of this prospectus.
For a discussion of certain risks related to the offering, see "Risk Factors"
beginning on page 6.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company.......... 2,500,000 shares
Common Stock to be outstanding after the of- 10,842,578 shares(/1/)
fering......................................
Use of Proceeds.............................. For general corporate purposes,
including working capital and
capital expenditures, enhancing
research and development and
attracting key personnel. In
addition, $2,500,000 of the
proceeds from the offering will
be paid by the Company to a
third party to purchase certain
intellectual property
previously subject to ongoing
royalties. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... TUTS
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes:
(i) 1,048,927 shares of Common Stock issuable upon exercise of stock
options outstanding as of June 30, 1998 at a weighted average exercise
price of $2.03 per share and (ii) 176,045 shares, 1,000,000 shares and
250,000 shares reserved for issuance under the Company's 1992 Stock Plan,
1998 Stock Plan and 1998 Employee Stock Purchase Plan, respectively. See
"Management--Stock Plans", "Description of Capital Stock" and Notes 12, 14
and 17 of Notes to Financial Statements included elsewhere in this
Prospectus.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
-------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues....................... $ 3,445 $ 4,454 $ 6,221 $ 2,536 $ 4,513
Gross margin................... 1,757 2,256 2,993 1,305 2,110
Loss from operations........... (3,443) (4,607) (9,351) (3,467) (7,011)
Net loss....................... (3,390) (4,427) (9,157) (3,311) (6,801)
Dividend accretion on preferred
stock......................... 694 1,137 1,627 796 1,262
Net loss attributable to common
stockholders.................. $(4,084) $(5,564) $(10,784) $ (4,107) $ (8,063)
Pro forma net loss per share,
basic and diluted(/1/)........ $ (1.41) $ (0.83)
Shares used in computing pro
forma net loss per share, ba-
sic and diluted(/1/).......... 6,490 8,198
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
(UNAUDITED)
-----------------------------------------
ACTUAL PRO FORMA(/2/) AS ADJUSTED(/3/)
-------- -------------- ----------------
BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash, cash equivalents and short-
term investments................... $ 6,789 $13,457 $44,832
Working capital..................... 9,438 16,106 47,481
Total deferred revenue.............. 942 942 942
Long-term debt including current
portion............................ 411 411 411
Redeemable convertible preferred
stock and warrant.................. 44,673 -- --
Total stockholders' equity (defi-
cit)............................... (34,337) 17,004 50,879
</TABLE>
- --------
(1) See Note 2 of Notes to Financial Statements included elsewhere in this
Prospectus.
(2) Pro forma to reflect the exercise of an outstanding warrant to purchase
666,836 shares of Preferred Stock held by Microsoft, which warrant will
expire upon the closing of the offering if not exercised earlier, and the
conversion upon the closing of the offering of all outstanding shares of
Preferred Stock into 8,119,550 shares of Common Stock.
(3) As adjusted to reflect (2) and the application of the net proceeds from the
sale of Common Stock offered by the Company hereby (assuming no exercise of
the Underwriters' over-allotment option) and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered hereby. This Prospectus contains forward-
looking statements which involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
below and elsewhere in this Prospectus.
HISTORY OF LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE RESULTS
The Company has incurred losses since it commenced operations in August
1991. The Company incurred net losses attributable to common stockholders of
$4.1, $5.6, $10.8 and $8.1 million in fiscal 1995, 1996, 1997 and for the six
months ended June 30, 1998, respectively. As of June 30, 1998, the Company had
an accumulated deficit of $36.2 million. To date, the Company has derived
substantially all of its revenues from the sale of its XL products and has
incurred substantial expenditures relating to the development of its HomeRun
technology as well as the development, manufacturing start up and marketing of
its Expresso products. The Company's ability to increase revenues or achieve
profitability in the future will depend primarily on its ability to increase
sales of its Expresso GS and Expresso MDU products in the service provider and
multiple dwelling unit ("MDU") markets, respectively, reduce manufacturing
costs and successfully introduce and sell enhanced versions of its existing
products and new products. In particular, the success of the Company's
Expresso MDU products will depend, in part, on the timely and widespread
adoption of the Company's HomeRun technology as an embedded technology in
integrated circuits and consumer products. The Company does not expect to
begin shipment of its Expresso MDU products incorporating HomeRun technology
until the fourth quarter of 1998. There can be no assurance that the Company
will be able to successfully produce or market these or other new products in
commercial quantities, complete product development when anticipated, increase
sales or reduce the cost of goods sold in response to pricing and competitive
pressures. There can also be no assurance that the Company will increase
revenues or achieve profitability and the failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FLUCTUATIONS IN REVENUES AND OPERATING RESULTS
The Company's revenues and operating results have fluctuated in the past and
may fluctuate in the future as a result of several factors, some of which are
outside of the Company's control. Factors which could cause the Company's
revenues or operating results to fluctuate from period to period include:
market acceptance of the Company's products, the timing or cancellation of
orders from, or shipments to, existing and new customers, the timing of new
product and service introductions by the Company, its customers, its partners
or its competitors, lack of adequate distribution channels for the Company's
products, variations in the Company's sales or distribution channels,
variations in the mix of products offered by the Company, competitive
pressures, including pricing pressures from the Company's partners and
competitors, changes in the pricing policies of the Company's suppliers, the
availability and cost of key components and the timing of personnel hiring. In
addition, as a result of significant technical evaluations, which typically
last 60 to 90 days, the sales cycle associated with the Company's newer
products is typically lengthy. Because of the lengthy sales cycle and the
potential large size of customers' orders, if orders forecasted for a specific
customer for a particular quarter do not occur in that quarter, the Company's
operating results for that quarter could be materially adversely affected.
In recent periods, the Company has significantly increased and it intends to
continue increasing certain of its operating expenditures, including its sales
and marketing, research and development and general and administrative
expenditures, as it begins to market its Expresso GS and Expresso MDU
products, and it enhances its existing products and introduces new products to
meet the growing bandwidth demands of its customers. There can be no assurance
that the Company will generate a sufficient level of revenue to offset these
expenditures or that the Company will be able to adjust spending in a timely
manner to respond to any unanticipated decline in revenue. The Company's
expenditures for sales and marketing, research and
6
<PAGE>
development, and general administrative functions are based in part on
projections of future product revenues and, in the near term, are relatively
fixed. The Company also anticipates that orders for its products may vary
significantly from period to period. As a result, operating expenses and
inventory levels in any given period could be disproportionately high. In some
circumstances, customers may delay purchasing the Company's current products
in favor of next-generation products, which could have a material adverse
effect on the Company's business, financial condition and results of operation
in any given period.
The market for high-speed data access products and services has been
characterized, and is likely to continue to be characterized by, erosion of
average selling prices ("ASPs") due to a number of factors, including
competition and rapid technological change. The Company anticipates that ASPs
for its products will decrease over time due to competitive pressures and
volume pricing agreements. Decreasing ASPs could cause the Company to
experience decreased revenues despite an increase in the number of units sold.
In particular, sales prices of some of the Company's XL products have
decreased recently as a result of increased competition, and the Company
expects this trend to continue in the near future. As a result, the Company
does not expect that its revenues for the third quarter of 1998 will
significantly increase, if at all, from the revenues experienced during the
second quarter of 1998. Further price reductions may be necessary to remain
competitive. Moreover, as part of its Expresso MDU strategy, the Company plans
to sell a limited number of HomeRun products to accelerate the deployment and
adoption of its Expresso MDU systems. These products have lower gross margins
than the Company's other product lines and, as a result, are anticipated to
cause the Company's gross margins to be lower than they otherwise would be
over the next two quarters. There can be no assurance that the Company will be
able to sustain or improve its gross margins in the future, or that the
Company will be able to offset future price declines with cost reductions. As
a result, the Company may experience substantial period to period fluctuations
in future operating results and declines in gross margin, each of which
individually, or together with other factors, would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company recently began licensing its HomeRun technology to
semiconductor, computer hardware and consumer electronics manufacturers for
incorporation in integrated circuits and consumer products, including PCs,
peripherals, modems, Internet telephones and television-based web browsers.
Adoption of the HomeRun technology or sales of products containing the
Company's HomeRun technology cannot be predicted and, therefore, there can be
no assurance that significant license and royalty revenues will be
forthcoming. In addition, certain of the Company's licensees may sell products
based on the Company's technology to competitors or potential competitors of
the Company. There can be no assurance that the Company's HomeRun technology
will be successfully deployed on a widespread basis or that such licensing
will not result in an erosion of the potential market for the Company's
products.
The occurrence of these or other factors could materially adversely affect
the Company's business, financial condition and results of operations. As a
result, the Company believes that period to period comparisons are not
necessarily meaningful and should not be relied upon as indications of future
performance. Fluctuations in the Company's revenues or operating results may
cause volatility in the price of the Company's common stock. Further, it is
likely that in some future quarter the Company's revenues or operating results
will be below the expectations of public market analysts. In such event, the
market price of the Company's common stock would likely be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
UNPROVEN COMMERCIAL ACCEPTANCE OF CERTAIN OF THE COMPANY'S PRODUCTS
The Company's strategy involves developing high-speed data access products
for several targeted applications, including campus, service provider and MDU
applications. To date, the Company has sold a limited number of its Expresso
GS products. Sales of the Company's XL products, which are used principally in
corporate and educational campus applications, account for substantially all
of the Company's revenues. For the six months ended June 30, 1998, sales of
the Company's XL products accounted for 83.6% of the Company's total revenues.
Shipments of the Company's Expresso GS products began in May 1998, and the
Company
7
<PAGE>
expects to commence shipments of its Expresso MDU products incorporating the
Company's HomeRun technology in the fourth quarter of 1998. The Company must
devote a substantial amount of human and capital resources in order to achieve
commercial acceptance of its Expresso GS and Expresso MDU products in the
service provider and MDU markets, respectively. In addition, there can be no
assurance that the Company will be able to simultaneously or effectively
address evolving demands in these markets or that customers in any such
markets will not purchase or otherwise choose to implement competing
technologies or products.
The success of the Company's products involves several risks and
uncertainties, many of which are outside of the Company's control, including
successful completion of product trials, the Company's ability to educate
existing and potential customers and end users about the benefits of the
Company's FastCopper technology, including HomeRun, and derivative products.
The success of the Company's Expresso products will depend on the ability of
its customers to market and sell high-speed data services to end users. There
can be no assurance that any of these events will occur or that such events
will result in a meaningful or sustainable level of market acceptance of the
Company's products. Any material inability on the part of the Company to
achieve market acceptance of its products would have a material adverse effect
on the Company's business, financial condition and results of operations.
RISK OF COMPETING TECHNOLOGIES; DEPENDENCE ON CORE TECHNOLOGY
The market for high-speed data access products and services is characterized
by several competing technologies, including fiber optic cables, coaxial
cables, satellites and other wireless facilities, that offer competing
solutions which provide fast access, high reliability and are cost-effective
for certain users. Since all of the Company's products are based on the use of
copper telephone wire, and since there are physical limits to the speed and
distance over which data can be transmitted over this wire, the Company's
products may not be a viable solution for customers requiring service at
performance levels beyond the current limits of copper telephone wire.
Commercial acceptance of any one of these competing solutions or any
technological advancement or product introduction that provides faster access,
greater reliability, increased cost-effectiveness or other advantages over
technologies that utilize existing telephone copper wires could decrease the
demand for the Company's products and reduce ASPs and gross margins associated
with the Company's products. The occurrence of any one or more of these events
could materially adversely affect the Company's business, financial condition
and results of operations.
The Company's FastCopper technology is used in its XL, Expresso, Expresso
GS, Expresso MDU and HomeRun products. Any defect or deficiency in the
Company's FastCopper or other transmission technologies used by the Company
could manifest itself in one or more of the Company's products and could
reduce the functionality, effectiveness or marketability of the Company's
products. Such defects or deficiencies could cause orders for the Company's
products to be canceled or delayed, reduce revenues, or render the Company's
products obsolete. In such event, the Company would be required to devote
substantial financial and other resources for a significant period of time in
order to develop new or additional technologies to support its products. There
can be no assurance that the Company would be successful in developing such
technologies in a timely manner, if at all, or that such technologies would be
sufficient to allow the Company to remain competitive, or that such
technologies would be capable of simultaneous deployment across the Company's
products. Any of these events, individually or in the aggregate, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTY OF DEMAND FOR HIGH-SPEED DATA ACCESS SERVICES; DEPENDENCE ON
INTERNET
The Internet has recently begun to develop and is rapidly evolving. As a
result, the market for high-speed data access is characterized by an
increasing number of market entrants that have introduced or developed, or are
in the process of introducing or developing, products and systems that provide
access to on-line and other data services. Further, the commercial market for
products designed for high-speed data access to the Internet has only recently
begun to develop, and the Company's success will depend in large part on the
increased use of the Internet and the need for high-speed access networks.
Critical issues concerning the increased use of the
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Internet--including security, reliability, cost, ease of access and quality of
service--remain unresolved and are likely to affect the development of the
market for the Company's products. As a result, the future growth rate, if
any, or the ultimate size of the markets for these products cannot be
accurately predicted. If such markets fail to develop, or develop more slowly
than expected, the Company's business, financial condition and results of
operations would be materially adversely affected. See "Business--Industry
Background."
RAPID TECHNOLOGICAL CHANGE; EVOLVING INDUSTRY STANDARDS
The Company's future success will depend on its ability to develop,
introduce and market enhancements to its existing products and to introduce
new products in a timely manner to meet customer requirements. The markets for
high-speed data access products are characterized by rapid technological
developments, frequent enhancements to existing products and new product
introductions, changes in end user requirements and evolving industry
standards. The emerging nature of these products and services and their rapid
evolution will require the Company to continually improve the performance,
features and reliability of its products, particularly in response to
competitive product offerings. There can be no assurance that the Company will
be able to respond quickly and effectively to these developments. The
introduction or market acceptance of products incorporating superior
technologies or the emergence of alternative technologies and new industry
standards could render the Company's existing products, as well as products
currently under development, obsolete and unmarketable. In addition, the
Company may have only a limited amount of time to penetrate certain markets,
and there can be no assurance that the Company will be successful in achieving
widespread acceptance of its products before competitors offer products and
services similar or superior to the Company's products. Any failure by the
Company to anticipate or respond on a cost-effective and timely basis to
technological developments, changes in industry standards or end user
requirements, or any significant delays in product development or
introduction, could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, any failure to
release new products or to upgrade or enhance existing products on a timely
basis could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Core
Technologies and Products."
The emergence of new industry standards, whether through adoption by
official standards committees or widespread use by telephone companies or
other service providers, could require the Company to redesign its products.
If such standards become widespread and the Company's products are not in
compliance, the Company's customers and potential customers may not purchase
the Company's products, which would materially adversely affect its business,
financial condition and results of operations. The rapid development of new
standards increases the risk that competitors could develop products that
would reduce the competitiveness of the Company's products. The failure of the
Company to develop and introduce new products or enhancements directed at new
industry standards could have a material adverse effect on its business,
financial condition and results of operations.
COMPETITION
The markets for the Company's products are intensely competitive,
continually evolving and subject to rapid technological change. The Company
believes that it and its products face the following competitive factors:
price, product features and enhancements (including improvements in product
performance, reliability, size, compatibility and scalability), breadth of
product lines, product ease of deployment, conformance to industry standards,
sales and distribution capability and technical support and service. There can
be no assurance that the Company will have the financial resources, technical
expertise or marketing, manufacturing, distribution and support capabilities
to compete successfully. The Company expects that competition in each of its
markets will increase in the future. The Company's principal competitors
include or are expected to include PairGain Technologies, Inc., Paradyne
Corporation, Cisco Systems, Inc., Ascend Communications, Inc., Westell
Technologies Inc. and a number of other public and private companies. Many of
the Company's competitors and potential competitors have substantially greater
name recognition and technical, financial and marketing resources than the
Company. Such competitors may undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and devote substantially more resources
to developing new products than the
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Company. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive
pressures faced will not materially adversely affect the Company's business,
financial condition and results of operations. In addition, certain of the
Company's licensees may sell products based on the Company's technology to
competitors or potential competitors of the Company. Such competitors may
cause an erosion in the potential market for the Company's products. This
competition could result in price reductions, reduced profit margins and loss
of market share, which would materially adversely affect the Company's
business, financial condition and results of operations.
Tut Systems also competes with technologies using alternative transmission
media such as coaxial cable, wireless facilities and fiber optic cable. To the
extent that telecommunications service providers choose to install fiber optic
cable or other transmission media in the last mile, or to the extent that
homes and businesses install other transmission media within buildings, the
Company expects that demand for its copper telephone wire-based products will
decline. These competitive pressures from alternative transmission
technologies may further necessitate price reductions of the Company's
existing and future products.
DEPENDENCE ON STRATEGIC RELATIONSHIPS
The success of the Company is, and will be, dependent in part upon its
strategic partnerships, including the Company's collaborative arrangement with
leading semiconductor, computer hardware and consumer electronics
manufacturers, through the Home Phoneline Network Alliance, and agreements
with certain licensees of the Company's HomeRun technology. The members of the
Home PNA are not obligated to license, sell or otherwise promote the Company's
products or technologies. In particular successful or wide scale adoption of
HomeRun technology is dependent on the development and marketing of HomeRun-
enabled integrated circuits and consumer products, including PCs, peripherals,
modems (56 Kbps, ISDN, xDSL, cable and wireless), Internet telephones and
television-based web browsers, by such strategic partners. In addition, the
success of the Company is, and will continue to be, dependent in part on a
licensing and cooperative marketing agreement with Microsoft Corporation
("Microsoft").
The amount and timing of resources which these strategic partners devote to
these activities will not be within the control of the Company. There can be
no assurance that strategic partners will perform their obligations as
expected or that any revenue will be derived from strategic arrangements. If
any of the Company's strategic partners breaches or terminates its agreement
with the Company or otherwise fails to conduct its collaborative activities in
a timely manner, the development, commercialization or marketing of the
product which is the subject of the agreement may be delayed and the Company
may be required to undertake unforeseen additional responsibilities or to
devote additional resources to development, commercialization or marketing of
its products. The inability to enter into strategic relationships or the
failure of a strategic partner to perform its obligations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
There can be no assurance that the Company will be able to negotiate
acceptable strategic agreements in the future, that the resulting
relationships will be successful or that the Company will continue to maintain
or develop strategic relationships or to replace strategic partners in the
event any such relationships are terminated. The Company's failure to maintain
any strategic relationship could materially and adversely affect the Company's
business, financial condition and results of operations.
DEPENDENCE ON INDEPENDENT DISTRIBUTORS
In 1997 and the first six months of 1998, the Company derived approximately
26% of its revenues from sales to Tech Data Corporation ("Tech Data") and
Merisel, Inc. ("Merisel"), two independent distributors of the Company's
products. These independent distributors are not contractually bound to
purchase the Company's products and therefore could discontinue carrying the
Company's products at any time in favor of competitive products or for any
other reason. In addition, the Company remains subject to the risk of product
returns from these distributors and other customers. The Company expects that
the sale of its products to a limited number of distributors and value-added
resellers, including Tech Data and Merisel, may continue to account for a
substantial
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percentage of revenues for the foreseeable future. Any reduction, delay or
loss of orders from Tech Data or Merisel could have a material adverse effect
on the Company's revenues and on its business, financial condition and results
of operations.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company does not manufacture any of its products, but instead relies on
contract manufacturers to assemble, test and package the Company's products.
Any interruption in the operations of one or more of these contract
manufacturers would adversely affect the Company's ability to meet its
scheduled product deliveries to customers. In addition, as the Company makes
enhancements to its existing products and introduces new products, there can
be no assurance that these manufacturers will be able to meet the
technological or delivery requirements for such products. These contract
manufacturers have had only limited experience manufacturing the Company's
Expresso products. In addition, the Company's inability to accurately forecast
the actual demand for its products could result in supply, manufacturing or
testing capacity constraints. Such constraints could result in delays in the
delivery of the Company's products or the loss of existing or potential
customers, either of which could have a material adverse effect on the
Company's business, operating results or financial condition. There can be no
assurance that the Company or any third party manufacturer will be successful
in manufacturing the Company's products in commercial quantities or in
sufficient volumes to meet anticipated demand.
Substantially all of the Company's products are assembled and tested by the
Company's contract manufacturers. Although the Company performs random spot
testing on manufactured products, the Company relies on its contract
manufacturers for assembly and primary testing of its products. Any product
shortages or quality assurance problems could increase the costs of
manufacture, assembly or testing of the Company's products and could have a
material adverse effect on the Company's business, financial condition or
results of operation.
DEPENDENCE ON SOLE SOURCE SUPPLIERS
The Company currently procures all of its raw materials from outside
suppliers through its contract manufacturers and AMS, Inc. In procuring
components, the Company, AMS, Inc. and the Company's contract manufacturers
rely on some suppliers that are the sole source of those components. For
example, all of the field programmable gate array supplies used in the
Company's products are purchased from Xilinx, Inc. In addition, ACT Networks,
Inc. is the sole supplier of a bridge router component used in certain of the
Company's XL and Expresso products. The Company's Expresso products are also
dependent on various sole source offerings from Metalink US Inc., Motorola,
Inc., Osicom Technologies, Inc., RELTEC Corporation, SaRonix, and Wind River
Systems, Inc. The Company enters into purchase orders with its suppliers for
materials based on forecasts, but has no guaranteed supply arrangements with
these suppliers. Any extended interruption in the supply of any of the key
components currently obtained from a single or limited source could affect the
Company's ability to meet its scheduled product deliveries to customers, and
thus have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that, as the
Company's demand for such parts and supplies increase, the Company or its
manufacturers will be able to obtain such parts and supplies in a timely
manner in the future. In addition, financial or other difficulties facing such
suppliers or significant worldwide demand for such components could adversely
affect the availability of such components. If the Company or its
manufacturers were unable to obtain a sufficient supply of components from
their current sources, the Company could experience difficulties in obtaining
alternative sources or in altering product designs to use alternative
components. Resulting delays or reductions in product shipments could damage
customer relationships and could adversely affect the Company's business,
financial condition or results of operations. Further, the Company may also be
subject to increases in component costs, which could also have a material
adverse effect on its gross margin or results of operations.
MANAGEMENT OF GROWTH
The Company's growth has placed, and in the future may continue to place, a
significant strain on the Company's engineering, managerial, administrative,
operational, financial and marketing resources, and increased
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demands on its systems and controls. To exploit the market for its products,
the Company must develop new and enhanced products while managing anticipated
growth in sales by implementing effective planning and operating processes. To
manage its anticipated growth, the Company must, among other things, continue
to implement and improve its operational, financial and management information
systems, hire and train additional qualified personnel, continue to expand and
upgrade core technologies and effectively manage multiple relationships with
various customers, suppliers and other third parties. There can be no
assurance that the Company's systems, procedures or controls will be adequate
to support the Company's operations or that the Company's management will be
able to achieve the rapid execution necessary to exploit fully the market for
the Company's products or systems. Any failure of the Company to manage its
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS
Sales to customers outside of the United States accounted for approximately
15.8% and 16.5% of revenues in 1997 and the first six months of 1998,
respectively, and the Company expects sales to customers outside of the United
States to increase in the future. International sales are subject to a number
of risks, including changes in foreign government regulations and
communications standards, export license requirements, tariffs and taxes,
other trade barriers, difficulty in collecting accounts receivable, difficulty
in managing foreign operations, and political and economic instability. To the
extent the Company's customers may be impacted by currency devaluations or
general economic crises such as the economic crisis currently affecting many
Asian economies, the ability of such customers to purchase the Company's
products could be materially adversely affected. Payment cycles for
international customers are typically longer than those for customers in the
United States. There also can be no assurance that foreign markets for the
Company's products will not develop more slowly than currently anticipated. In
addition, if the relative value of the U.S. dollar in comparison to the
currency of the Company's foreign customers should increase, the resulting
effective price increase of the Company's products to such foreign customers
could result in decreased sales, which could have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company anticipates that its foreign sales will generally be invoiced in
U.S. dollars and, accordingly, the Company currently does not plan to engage
in foreign currency hedging transactions. However, as the Company expands its
current international operations, it may allow payment in foreign currencies
and exposure to losses in foreign currency transactions may increase. The
Company may choose to limit such exposure through the purchase of forward
foreign exchange contracts or other hedging strategies. There can be no
assurance that any currency hedging strategy would be successful in avoiding
exchange related losses. See "Business--Customers and Markets."
DEPENDENCE ON PROPRIETARY TECHNOLOGY; PROTECTION OF INTELLECTUAL PROPERTY
RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company relies on a combination of patent,
copyright and trade secret laws and nondisclosure agreements to protect its
proprietary technology. The Company currently holds 11 United States patents
and has 8 United States patent applications pending. There can be no assurance
that patents will be issued with respect to pending or future patent
applications or that the Company's patents will be upheld as valid or will
prevent the development of competitive products. The Company seeks to protect
its intellectual property rights by limiting access to the distribution of its
software, documentation and other proprietary information. In addition, the
Company enters into confidentiality agreements with its employees and certain
customers, vendors and strategic partners. There can be no assurance that the
steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technologies. The Company is also subject to the
risk of adverse claims and litigation alleging infringement of the
intellectual property rights of others. In this regard, there can be no
assurance that third parties will not assert infringement claims in the future
with respect to the Company's current or future products or that any such
claims will not require the Company
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to enter into license arrangements or result in protracted and costly
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms.
REGULATION OF THE COMMUNICATIONS INDUSTRY; OTHER REGULATORY APPROVALS OR
CERTIFICATIONS
The Company and its customers are subject to varying degrees of federal,
state and local regulation. The jurisdiction of the Federal Communications
Commission ("FCC") extends to the communications industry, including products
such as those sold by the Company. The FCC has promulgated regulations that,
among other things, set installation and equipment standards for
communications systems. There can be no assurance that future regulations
adopted by the FCC or other regulatory bodies will not have a material adverse
effect on the Company. Further, regulation of the Company's customers may
adversely impact the Company's business, operating results and financial
condition. For example, FCC regulatory policies affecting the availability of
data and Internet services and other terms on which telecommunications
companies conduct their business, may impede the Company's penetration of
certain markets. Changes in, or the failure by the Company to comply with,
applicable domestic and international regulations could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, the increasing demand for communications systems has
exerted pressure on regulatory bodies worldwide to adopt new standards for
such products and services, generally following extensive investigation of and
deliberation over competing technologies. The delays inherent in this
governmental approval process may cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company's
customers, which in turn may have a material adverse effect on the sale of
products by the Company to such customers.
In the United States, in addition to complying with FCC regulations, the
Company's products are required to meet certain safety requirements. For
example, the Company is required to have certain of its products certified by
Underwriters Laboratory in order to meet federal requirements relating to
electrical appliances to be used inside the home, and certain products must be
Network Equipment Building Standard ("NEBS") certified before they may be
deployed by certain customers. Outside of the United States, the Company's
products are subject to the regulatory requirements of each country in which
the products are manufactured or sold. These requirements are likely to vary
widely, and there can be no assurance that the Company will be able to obtain
on a timely basis or at all such regulatory approvals as may be required for
the manufacture, marketing and sale of its products. Any delay in or failure
to obtain such approvals could have a material adverse effect on the Company's
business, financial condition or results of operations.
ABILITY TO PROVIDE CUSTOMER SUPPORT
The Company's ability to achieve its planned sales growth and retain current
and future customers will depend in part upon the quality of its customer
support operations. The Company's customers generally require significant
support and training with respect to the Company's products, particularly in
the initial deployment and implementation stage. The Company has limited
experience with widespread deployment of its products to a diverse customer
base, and there can be no assurance that it will have adequate personnel to
provide the levels of support that its customers may require during initial
product deployment or on an ongoing basis. In addition, the Company relies on
a third party for a substantial portion of its customer support functions. An
inability to provide sufficient support to its customers could delay or
prevent the successful deployment of the Company's products. Failure to
provide adequate support could have an adverse impact on the Company's
reputation and relationship with its customers, could prevent the Company from
gaining new customers and could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business--Marketing, Sales and Customer Support."
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent in part on Matthew Taylor, the
Company's Chairman of the Board and Chief Technical Officer, and Salvatore
D'Auria, the Company's President and Chief Executive
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Officer, and on other key management and technical personnel, the loss of one
or more of whom could adversely affect the Company's business. The Company
does not have employment contracts with any of its executive officers and the
Company only maintains a "key person" life insurance policy on Matthew Taylor.
The Company believes that its future success will depend in large part upon
its continued ability to attract, retain and motivate highly skilled
employees, who are in great demand. There can be no assurance that the Company
will be able to do so.
RISKS ASSOCIATED WITH YEAR 2000 PROBLEM
In less than two years, computer systems and/or software used by many
companies may need to be upgraded to accept four digit entries to distinguish
21st century dates from 20th century dates. As is the case with most other
companies using computers in their operations, the Company recognizes the need
to ensure that its operations will not be adversely impacted by software
and/or system failures related to such "Year 2000" noncompliance. Within the
past twelve months, the Company has been upgrading components of its own
internal computer and related information and operational systems and
continues to assess the need for further system redesign and believes it is
taking the appropriate steps to ensure Year 2000 compliance. Based on
information currently available, the Company believes that the costs
associated with Year 2000 compliance, and the consequences of incomplete or
untimely resolution of the Year 2000 problem, will not have a material adverse
effect on the Company's business, financial condition and results of
operations in any given year. However, even if the internal systems of the
Company are not materially affected by the Year 2000 problem, the Company's
business, financial condition and results of operations could be materially
adversely affected through disruption in the operation of the enterprises with
which the Company interacts. There can be no assurance that third party
computer products used by the Company are Year 2000 compliant. Further, even
though the Company believes that its current products are Year 2000 compliant,
there can be no assurance that under actual conditions such products will
perform as expected or that future products will be Year 2000 compliant. Any
failure of the Company's products to be Year 2000 compliant could result in
the loss of or delay in market acceptance of the Company's products and
services, increased service and warranty costs to the Company or payment by
the Company of compensatory or other damages which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
NO PRIOR PUBLIC TRADING MARKET
Prior to this offering, there has been no public market for the Common Stock
offered hereby, and there can be no assurance that an active trading market
will develop or, if one does develop, that it will be maintained. The initial
public offering price, which will be established by negotiations between the
Company and the Underwriters, may not be indicative of the market price of the
shares of Common Stock after the offering. See "Underwriters."
POSSIBLE VOLATILITY OF STOCK PRICE
Equity markets, particularly the market for high-technology companies,
recently have experienced significant price and volume fluctuations that are
unrelated to the operating performance of individual companies. These broad
market fluctuations may adversely affect the market price of the Common Stock
offered hereby. In addition, the market price of the shares of common stock is
likely to be highly volatile. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations, new products or
new services by the Company or by its partners, competitors or customers or
its competitors developments with respect to patents or proprietary rights,
announcement of litigation by or against the Company, changes in stock market
analyst recommendations regarding the Company or its competitors, and general
market conditions may have a significant effect on the market price of the
Company's Common Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control
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of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common
Stock. Certain of these provisions provide for a classified board of
directors, eliminate cumulative voting in the election of directors and
restrict the Company's stockholders from acting by written consent. In
addition, upon completion of this offering, the Company's Board of Directors
will have the authority to issue up to 5,000,000 shares of preferred stock and
to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing flexibility in connection with possible financings or
acquisitions or other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. The Company has no current plans to issue shares
of preferred stock. The Company's Bylaws and indemnification agreements
provide that the Company will indemnify officers and directors against losses
they may incur in legal proceedings resulting from their service to the
Company. These provisions may make it more difficult for stockholders to take
certain corporate actions and could have the effect of delaying or preventing
a change in control of the Company.
MANAGEMENT'S BROAD DISCRETION OVER USE OF PROCEEDS OF THE OFFERING
The Company currently has no specific plans for a significant portion of the
net proceeds of this offering. Consequently, the Company's management will
have the discretion to allocate the net proceeds to uses that stockholders may
not deem desirable, and there can be no assurance that the net proceeds can or
will be invested to yield a significant return. Substantially all of the
proceeds of the offering will be invested in short term, interest-bearing,
investment grade securities for an indefinite period of time. See "Use of
Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this offering could materially
and adversely affect the market price of the Common Stock. Such sales also
might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate. Upon the closing of the offering and assuming no exercise
of options after July 15, 1998, the Company will have outstanding 10,849,766
shares of Common Stock, 11,224,766 shares if the Underwriters' over-allotment
option is exercised. Of these shares, the 2,500,000 shares sold by the Company
in the offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless purchased by "affiliates" of the Company as that term is defined
in Rule 144 of the Securities Act (the "Affiliates"). The remaining 7,682,930
shares of Common Stock held by existing shareholders and 559,471 shares
subject to outstanding vested options will be "restricted securities" as that
term is defined in Rule 144 of the Securities Act ("Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144 or 701
promulgated under the Securities Act. Other than the shares offered hereby (i)
no shares will be eligible for sale prior to 180 days after the date of this
Prospectus, except in certain limited exceptions, without the prior written
consent of the representative of the Underwriters, and (ii) 8,156,804
(including the 559,471 shares issuable upon exercise of outstanding vested
options) shares will be eligible for sale 180 days after the date of this
Prospectus upon expiration of the lock-up agreements with the representative
of the Underwriters. All officers, directors, stockholders and option holders
have agreed not to sell or otherwise dispose of any shares of Common Stock,
for a period of 180 days after the date of this Prospectus (the "Lock-up
Period"), without the prior written consent of the representative of the
Underwriters. Prior to the expiration of the Lock-up Period, the Company
intends to file a registration statement on Form S-8 which will permit the
resale in the public market of shares so registered, subject to compliance
with Rule 144 in the case of Affiliates of the Company. See "Shares Eligible
for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution of $10.31 per share in the net tangible book value of the
Common Stock from the assumed initial public offering price of $15.00 per
share. To the extent outstanding options are exercised, there will be further
dilution. See "Dilution."
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" including statements
containing the words "believes," "anticipates," "expects" and words of similar
import. All statements other than statements of historical fact included in
this Prospectus, including without limitation, such statements under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and located
elsewhere herein, regarding the Company or any of the transactions described
herein, including the timing, financing, strategies and effects of such
transactions, are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from expectations are disclosed in this Prospectus, including,
without limitation, in conjunction with the forward-looking statements in this
Prospectus and/or under "Risk Factors." The Company does not intend to update
these forward-looking statements.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock being offered by the Company hereby are estimated to be
approximately $33,875,000 ($39,106,250 if the Underwriters' over-allotment
option is exercised in full), assuming the shares offered hereby are sold at a
public offering price of $15.00 per share and after deduction of the estimated
underwriting discount and estimated offering expenses. The Company expects to
use the net proceeds of this offering for general corporate purposes,
including working capital and capital expenditures, enhancing research and
development and attracting key personnel. In addition, $2,500,000 of the
proceeds from the offering will be paid by the Company to a third party to
purchase certain intellectual property previously subject to ongoing
royalties. Pending use of such net proceeds for the foregoing purposes, the
Company intends to invest such net proceeds in investment grade interest
bearing marketable securities.
DIVIDEND POLICY
The Company has not paid dividends in the past and the Company intends to
retain earnings, if any, and will not pay cash dividends in the foreseeable
future. The Company's loan and security agreement with a commercial bank
prohibits the payment of dividends. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, results of operations,
capital requirements, general business conditions and such other factors as
the Board of Directors may deem relevant.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998: (i) on an actual basis; (ii) on a pro forma basis; and (iii) on an
as adjusted basis. This table should be read in conjunction with the Company's
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------
(UNAUDITED)
AS
ACTUAL PRO FORMA(/2/) ADJUSTED(/3/)
-------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, net of current portion.. $ 164 $ 164 $ 164
Redeemable convertible preferred stock,
no par value:
Authorized 7,531,320 shares; Issued
and outstanding 6,354,786 shares (ac-
tual); no shares (pro forma and as
adjusted)............................ 42,573 -- --
Redeemable convertible preferred stock
warrant................................ 2,100 -- --
Stockholders' equity (deficit):
Convertible preferred stock, no par
value:
Authorized 1,718,680 shares; Issued
and outstanding 1,097,928 shares
(actual); no shares (pro forma and
as adjusted)....................... 1,567 -- --
Common stock, $0.001 par value:
Authorized 100,000,000 shares; Is-
sued and outstanding 223,028 shares
(actual); 8,342,578 shares (pro
forma); 10,842,578 shares (as ad-
justed)(1)......................... -- 8 11
Additional paid in capital.............. 1,917 54,817 88,689
Deferred compensation................... (1,655) (1,655) (1,655)
Accumulated deficit..................... (36,166) (36,166) (36,166)
-------- ------- -------
Total stockholders' equity (deficit).... (34,337) 17,004 50,879
-------- ------- -------
Total capitalization.................... $10,500 $17,168 $51,043
======== ======= =======
</TABLE>
- --------
(1) Excludes: (i) 1,437,500 shares of Common Stock reserved for issuance under
the Company's 1992 Stock Plan, under which options to purchase 1,048,927
shares at a weighted average exercise price of $2.03 which were
outstanding as of June 30, 1998; (ii) 176,045, 1,000,000 and 250,000
shares, available for issuance pursuant to the 1992 Stock Plan, 1998 Stock
Plan and 1998 Employee Stock Purchase Plan, respectively. See
"Management--Stock Plans," "Description of Capital Stock--Options" and
Note 14 of Notes to Financial Statements.
(2) Pro forma to reflect exercise of an outstanding warrant to purchase
666,836 shares of Preferred Stock held by Microsoft, which warrant will
expire upon the closing of the offering if not exercised earlier, and the
conversion upon the closing of the offering of all outstanding shares of
Preferred Stock into 8,119,550 shares of Common Stock.
(3) As adjusted to reflect (2) above and the application of the net proceeds
from the sale of Common Stock offered by the Company hereby (assuming no
exercise of the Underwriters' over-allotment option and assuming an
offering price of $15.00 per share). See "Use of Proceeds" and
"Capitalization."
18
<PAGE>
DILUTION
Pro forma net tangible book value per share represents total assets less
total liabilities, divided by the number of shares outstanding as of June 30,
1998 (assuming the exercise of the outstanding warrant and conversion into
Common Stock of all of the Company's outstanding shares of Preferred Stock).
The Company's pro forma net tangible book value at June 30, 1998 was
approximately $17,004,000 or approximately $2.04 per share. Without taking
into account any changes in such net tangible book value per share after June
30, 1998, other than to give effect to the sale of the shares of Common Stock
offered hereby at an assumed initial public offering price of $15.00 per share
and the receipt of the net proceeds of such sale, the pro forma net tangible
book value at June 30, 1998 would have been approximately $50,879,000 or
approximately $4.69 per share. This represents an immediate increase in net
tangible book value per share of $2.65 to existing stockholders and an
immediate dilution of $10.31 per share to new investors. The following table
sets forth this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $15.00
Pro forma net tangible book value per share as of June 30,
1998....................................................... $2.04
Increase per share attributable to new investors............ 2.65
-----
Pro forma net tangible book value per share after the Offer-
ing.......................................................... 4.69
------
Dilution per share to new investors........................... $10.31
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the differences between existing stockholders and new investors with respect
to the total number of shares of Common Stock and Preferred Stock (all of
which Preferred Stock will be converted into Common Stock upon the closing of
the Offering) purchased from the Company, the total consideration paid and the
average price per share paid (assuming the sale of 2,500,000 shares of Common
Stock at an initial public offering price of $15.00 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 8,342,578 77% $46,100,360 55% $ 5.53
New investors............... 2,500,000 23 37,500,000 45 15.00
---------- --- ----------- ---
Total..................... 10,842,578 100% $83,600,360 100% $ 7.71
========== === =========== ===
</TABLE>
The above calculations do not give effect to the exercise of outstanding
options to purchase 1,048,927 shares of Common Stock at a weighted average
exercise price of $2.03 per share outstanding on June 30, 1998. To the extent
that these options become exercisable or are exercised, there will be further
dilution to new investors. See "Risk Factors--Immediate and Substantial
Dilution," "Management--Stock Plans" and "Description of Capital Stock--
Options."
19
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the Company as of December
31, 1996 and 1997 and for each of the three years in the period ended December
31, 1997 are derived from the financial statements of the Company that have
been audited by PricewaterhouseCoopers LLP, independent accountants, and are
included elsewhere in this Prospectus. The selected financial data set forth
below for the Company as of December 31, 1993, 1994 and 1995 and for each of
the two years in the period ended December 31, 1994 are derived from the
audited financial statements not included elsewhere herein. The statement of
operations data for the six months ended June 30, 1997 and 1998 and the
balance sheet data at June 30, 1998 are derived from unaudited financial
statements included elsewhere in this Prospectus. The data set forth below
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements and
related Notes thereto included in this Prospectus. The results of operations
for the six months ended June 30, 1998 are not necessarily indicative of
results that may be expected for the full year.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
-------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 1,821 $ 3,690 $ 3,445 $ 4,454 $ 6,221 $ 2,536 $ 4,513
Cost of goods sold...... 919 2,679 1,688 2,198 3,228 1,231 2,403
-------- ------- ------- ------- -------- ------- -------
Gross margin........... 902 1,011 1,757 2,256 2,993 1,305 2,110
-------- ------- ------- ------- -------- ------- -------
Operating expenses:
Sales and marketing.... 1,437 3,361 2,645 3,068 5,147 2,325 3,928
Research and develop-
ment.................. 427 595 993 2,012 3,562 1,337 2,764
General and administra-
tive.................. 1,091 1,269 1,562 1,783 2,375 1,110 1,424
Noncash compensation
expense............... 1,260 1,005
-------- ------- ------- ------- -------- ------- -------
Total operating ex-
penses................ 2,955 5,225 5,200 6,863 12,344 4,772 9,121
-------- ------- ------- ------- -------- ------- -------
Loss from operations... (2,053) (4,214) (3,443) (4,607) (9,351) (3,467) (7,011)
Other income (expense),
net.................... 3 15 54 181 195 157 211
-------- ------- ------- ------- -------- ------- -------
Loss before income tax-
es.................... (2,050) (4,199) (3,389) (4,426) (9,156) (3,310) (6,800)
Income tax expense...... 1 1 1 1 1 1 1
-------- ------- ------- ------- -------- ------- -------
Net loss............... (2,051) (4,200) (3,390) (4,427) (9,157) (3,311) (6,801)
Dividend accretion on
preferred stock........ 55 344 694 1,137 1,627 796 1,262
-------- ------- ------- ------- -------- ------- -------
Net loss attributable to
common stockholders.... $ (2,106) $(4,544) $(4,084) $(5,564) $(10,784) $(4,107) $(8,063)
======== ======= ======= ======= ======== ======= =======
Net loss per share at-
tributable to common
stockholders, basic and
diluted................ $(101.90) $(54.13) $(32.56) $(37.51) $ (59.36) $(25.20) $(36.65)
======== ======= ======= ======= ======== ======= =======
Shares used in computing
net loss per share
attributable to common
stockholders, basic and
diluted................ 21 84 125 148 182 163 220
======== ======= ======= ======= ======== ======= =======
Pro forma net loss per
share, basic and dilut-
ed(/1/)................ $ (1.41) $ (0.83)
======== =======
Shares used in computing
pro forma net loss per
share, basic and
diluted(/1/)........... 6,490 8,198
======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1998
---------------------------------------------- -----------------------------------------
1993 1994 1995 1996 1997 ACTUAL PRO FORMA(/2/) AS ADJUSTED(/3/)
------- ------- -------- -------- -------- -------- -------------- ----------------
BALANCE SHEET DATA: (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents
and short-term
investments............ $ 441 $ 240 $ 1,531 $ 8,950 $ 10,285 $ 6,789 $ 13,457 $ 44,832
Working capital (defi-
cit)................... 408 (714) 1,771 8,357 11,066 9,438 16,106 47,481
Total assets............ 1,481 2,103 3,198 10,689 15,168 13,894 20,562 54,437
Redeemable convertible
preferred stock and
warrant................ 1,817 5,676 12,381 24,684 38,871 44,673 -- --
Long-term debt, net of
current portion........ 353 9 55 190 140 164 164 164
Accumulated deficit..... (3,127) (7,671) (11,755) (17,319) (28,103) (36,166) (36,166) (36,166)
Total stockholders' eq-
uity (deficit)......... (1,558) (6,065) (10,137) (15,694) (26,444) (34,337) 17,004 50,879
</TABLE>
- -------
(1) See Note 2 of Notes to Financial Statements included elsewhere in this
Prospectus.
(2) Pro forma to reflect the exercise of an outstanding warrant held by
Microsoft, which warrant will expire upon the closing of the offering if
not exercised earlier, and the conversion upon the closing of the offering
of all outstanding shares of Preferred Stock into 8,119,550 shares of
Common Stock.
(3) As adjusted to reflect (2) above and the application of the net proceeds
from the sale of Common Stock offered by the Company hereby (assuming no
exercise of the Underwriters' over-allotment option). See "Use of
Proceeds" and "Capitalization."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward- looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this
Prospectus. See "Risk Factors."
OVERVIEW
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of
telephone companies, as well as the copper telephone wires in homes,
businesses and other buildings. The Company's Expresso and XL products include
high-bandwidth access multiplexers, associated modems and routers, Ethernet
extension products and integrated network management software.
The Company commenced operations in August 1991. To date, substantially all
of the Company's revenues have been derived from sales of its XL Ethernet LAN
extension products to the corporate and campus markets. In early 1997, the
Company introduced the first products in its Expresso product line. These
products were aimed at the service provider markets. By the end of 1997,
approximately 100 Expresso systems had been shipped for trials or purchase to
independent telephone companies, Internet service providers and corporate and
campus users. During the quarter ended June 30, 1998, the Company initiated
several trials and commenced selling its Expresso GS system. To facilitate the
commercial acceptance of HomeRun technology and its acceptance as a home
networking standard, the Company has entered into strategic alliances and
several licensing agreements whereby the Company's HomeRun technology is
expected to be incorporated into integrated circuits and consumer products,
including PCs, peripherals, modems (56 Kbps, ISDN, xDSL, cable and wireless),
Internet telephones and television-based web browsers. The Company expects to
begin shipment of its Expresso MDU products incorporating its HomeRun
technology in the fourth quarter of 1998. During the quarter ended March 31,
1998, the Company began licensing its HomeRun technology to certain leading
semiconductor, computer hardware and consumer electronics manufacturers.
The Company generates revenues primarily from the sale of products and, to a
lesser extent, through the licensing of HomeRun technology. The Company
generally recognizes revenues from product sales upon shipment. Estimated
sales returns and warranty costs, based on historical experience by product,
are recorded at the time revenues are recognized. License and royalty revenues
consist of non-refundable up-front license fees, some of which may offset
initial royalty payments, and royalties. Currently, license and royalty
revenues are comprised entirely of non-refundable license fees paid in
advance. Such revenues are recognized ratably over the period during which
post-contract customer support is expected to be provided or upon delivery and
transfer of agreed upon technical specifications in contracts where
essentially no further support obligations exist. Future license and royalty
revenues are expected to consist primarily of royalties based on products sold
by the Company's licensees. The Company does not expect that such license and
royalty revenues will constitute a substantial portion of the Company's
revenues in future periods.
Sales prices of some of the Company's XL products have decreased recently as
a result of increased competition. Further price reductions may be necessary
to remain competitive. Although the Company has been able to offset most price
declines with reductions in its manufacturing costs, there can be no assurance
that the Company will be able to offset further price declines with cost
reductions. In addition, certain of the Company's licensees may sell products
based on the Company's technology to competitors or potential competitors of
the Company. There can be no assurance that the Company's HomeRun technology
will be successfully deployed on a widespread basis or that such licensing
will not result in an erosion of the potential market for the Company's
products. See "Risk Factors."
21
<PAGE>
Sales to customers outside of the United States accounted for approximately
15.8% and 16.5% of revenues in 1997 and the first six months of 1998,
respectively, and the Company expects sales to customers outside of the United
States to increase in the future. To date, substantially all sales have been
denominated in U.S. dollars.
Tut Systems expects to continue to evaluate product line expansion and new
product opportunities, engage in extensive research, development and
engineering activities and focus on cost-effective design of its products.
Accordingly, the Company will continue to make significant expenditures on
sales and marketing and research and development activities.
The Company has generated net operating losses to date and, as of June 30,
1998, had an accumulated deficit of $36.2 million. The ability of the Company
to generate income from operations will be primarily dependent on increases in
sales volume, reductions in certain manufacturing costs and the growth of
high-speed data access solutions in the service provider and MDU markets. In
view of the Company's limited history of product revenues from new markets,
reliance on growth in deployment of high-speed data access solutions and the
unpredictability of orders and subsequent revenues, the Company believes that
period to period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance. Failure to generate significant revenues from new products,
whether due to lack of market acceptance, competition, technological change or
otherwise, or the inability to reduce manufacturing costs, will have a
material adverse effect on the Company's business, financial condition and
results of operations.
In less than two years, computer systems and/or software used by many
companies may need to be upgraded to accept four digit entries to distinguish
21st century dates from 20th century dates. As is the case with most other
companies using computers in their operations, the Company recognizes the need
to ensure that its operations will not be adversely impacted by software
and/or system failures related to such "Year 2000" noncompliance. Within the
past twelve months, the Company has been upgrading components of its own
internal computer and related information and operational systems and
continues to assess the need for further system redesign and believes it is
taking the appropriate steps to ensure Year 2000 compliance. Based on
information currently available, the Company believes that the costs
associated with Year 2000 compliance, and the consequences of incomplete or
untimely resolution of the Year 2000 problem, will not have a material adverse
effect on the Company's business, financial condition and results of
operations in any given year. However, even if the internal systems of the
Company are not materially affected by the Year 2000 problem, the Company's
business, financial condition and results of operations could be materially
adversely affected through disruption in the operation of the enterprises with
which the Company interacts. There can be no assurance that third party
computer products used by the Company are Year 2000 compliant. Further, even
though the Company believes that its current products are Year 2000 compliant,
there can be no assurance that under actual conditions such products will
perform as expected or that future products will by Year 2000 compliant. Any
failure of the Company's products to be Year 2000 compliant could result in
the loss of or delay in market acceptance of the Company's products and
services, increased service and warranty costs to the Company or payment by
the Company of compensatory or other damages which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has experienced and expects to continue to experience,
fluctuations in its operating results on a quarterly and an annual basis.
Historically, the Company's quarterly and annual revenues have been and are
expected to be unpredictable due to a number of factors including: long sales
cycles for certain products; competitive pricing pressures; promotional
pricing, service, marketing or other terms offered to customers; accuracy of
customer forecasts and end-user demand; personnel changes; quality control of
products sold; and regulatory changes or delays in obtaining required
regulatory approvals; the size and timing of customer orders and subsequent
shipments; customer order deferrals in anticipation of new products or
technologies; timing of product introductions or enhancements by the Company
or its competitors; market acceptance of new products; technological changes
in the communications equipment industry; changes in the Company's operating
expenses; customers' capital spending; delays of orders by customers;
customers' delay in or failure to pay accounts receivable; and general
economic conditions. Finally, the industry in which the Company competes has
been characterized by declining prices as a result of increased competition.
There can be no assurance that the
22
<PAGE>
Company will be able to offset any future price declines with cost reductions.
See "Risk Factors--Fluctuations in Revenues and Operating Results."
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's statements
of operations as a percentage of total revenues for the period indicated:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -------------------
1995 1996 1997 1997 1998
----- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............. 49.0 49.3 51.9 48.5 53.2
----- ------ ------ -------- --------
Gross margin................. 51.0 50.7 48.1 51.5 46.8
Operating expenses:
Sales and marketing.......... 76.8 68.9 82.7 91.7 87.0
Research and development..... 28.8 45.2 57.3 52.7 61.3
General and administrative... 45.3 40.0 38.2 43.8 31.6
Noncash compensation ex-
pense....................... -- -- 20.2 -- 22.3
----- ------ ------ -------- --------
Total operating expenses... 150.9 154.1 198.4 188.2 202.2
----- ------ ------ -------- --------
Loss from operations......... (99.9) (103.4) (150.3) (136.7) (155.4)
Other income (expense), net.... 1.5 4.0 3.1 6.2 4.7
----- ------ ------ -------- --------
Loss before income taxes..... (98.4) (99.4) (147.2) (130.5) (150.7)
Income tax expense............. 0.0 0.0 0.0 0.0 0.0
----- ------ ------ -------- --------
Net loss..................... (98.4)% (99.4)% (147.2)% (130.5)% (150.7)%
===== ====== ====== ======== ========
</TABLE>
Six Months Ended June 30, 1998 and 1997
Revenues. The Company generates revenues primarily from the sale of products
and, to a lesser extent, through the licensing of HomeRun technology. The
Company's total revenues increased to $4.5 million for the six months ended
June 30, 1998 from $2.5 million for the six months ended June 30, 1997. This
increase was primarily due to an increase in sales of XL products, and an
increase in sales of Expresso and initial sales of Expresso GS products.
License and royalty revenues were $0.4 million for the six months ended 1998.
There were no license and royalty revenues in periods prior to 1998. License
and royalty revenues to date consist of the currently recognized portion of
fees from total license contracts of $1.3 million. Approximately $0.9 million
of such fees have been deferred at June 30, 1998. Sales prices of some of the
Company's XL products have decreased recently as a result of increased
competition, and the Company expects that this trend will continue in the near
future. As a result, the Company does not expect that its revenues for the
third quarter of 1998 will significantly increase, if at all, from the
revenues recognized during the second quarter of 1998.
Cost of Goods Sold/Gross Margin. Cost of goods sold consists of raw
materials, contract manufacturing, personnel costs, test and quality assurance
for products, and cost of licensed technology included in the products. The
Company's cost of goods sold increased to $2.4 million for the six months
ended June 30, 1998 from $1.2 million for the six months ended June 30, 1997
primarily due to increased production of the Company's XL products, increased
production of its Expresso and initial production of its Expresso GS product
lines. The Company's gross margin increased to $2.1 million (46.8% of
revenues) for the six months ended June 30, 1998 from $1.3 million (51.5% of
revenues) for the six months ended June 30, 1997. The decrease in gross margin
as a percentage of revenues was primarily due to the change in product mix to
include Expresso and Expresso GS products which have lower average gross
margins than the XL products combined with the increased costs of raw
materials and contract manufacturing associated with initial Expresso and
Expresso GS product introductions. As part of its Expresso MDU strategy, the
Company plans to sell a limited number of HomeRun
23
<PAGE>
products to accelerate the deployment and adoption of its Expresso MDU
systems. These products have lower gross margins than the Company's other
product lines and, as a result, are anticipated to result in lower overall
gross margins over the next two quarters.
Sales and Marketing. Sales and marketing expenses primarily consist of
personnel costs including commissions and costs related to customer support,
travel, trade-shows, promotions and outside services. The Company's sales and
marketing expenses increased to $3.9 million for the six months ended June 30,
1998 from $2.3 million for the six months ended June 30, 1997, primarily due
to additional hiring as well as attendant cost increases for travel and trade
show participation incurred to expand the Company's sales and marketing
efforts. The Company intends to increase sales and marketing expenses as it
adds personnel to support its domestic and international sales and marketing
efforts.
Research and Development. Research and development expenses primarily
consist of personnel costs related to engineering and technical support,
contract consultants, outside testing services, equipment and supplies
associated with enhancing existing products and developing new products.
Research and development costs are expensed as incurred. The Company's
research and development expenses increased to $2.8 million for the six months
ended June 30, 1998 from $1.3 million for the six months ended June 30, 1997,
primarily due to increased expenditures from further development of the
Expresso GS and Expresso MDU products, development of HomeRun-related
products, preparation of HomeRun technology for licensing and potential
standardization and enhancement of certain XL products. The Company intends to
increase investment in research and development programs in future periods for
the purpose of enhancing current products, reducing the cost of current
products and developing new products.
General and Administrative. General and administrative expenses primarily
consist of personnel costs for administrative officers and support personnel,
and legal, accounting and consulting fees. The Company's general and
administrative expenses increased to $1.4 million for the six months ended
June 30, 1998 from $1.1 million for the six months ended June 30, 1997,
primarily due to increases in personnel and other costs in support of the
expanded operations of the Company. The Company intends to increase general
and administrative expenditures as a result of additional reporting
requirements imposed on the Company as a public entity and increased
infrastructure costs as the Company expands its business.
Noncash Compensation Expense. Noncash compensation expense primarily
consists of expenses related to the grant of a warrant to purchase up to
666,836 shares of Common Stock in consideration for technology endorsement,
marketing and certain development support by Microsoft with respect to the
Company's HomeRun technology and related products. Noncash compensation
expense also consists of the recognition of expense related to certain
employee stock option grants, based on the difference between the deemed fair
value of common stock and the option exercise price at the date of grant. The
Company's noncash compensation expense was $1.0 million for the six months
ended June 30, 1998. There was no similar expense for the six months ended
June 30, 1997. The Company intends to recognize $1.7 million in additional
expenses related to employee stock options ratably over a period of four
years. Such deferred expense has been recorded as a reduction of equity in the
balance sheet.
Other Income (Expense), Net. Other income, net consists of interest income
on cash balances, offset by interest associated with equipment lines of
credit. The Company's other income, net remained constant at $0.2 million for
the six months ended June 30, 1998 and for the six months ended June 30, 1997.
Years Ended December 31, 1997, 1996, and 1995
Revenues. The Company's product revenues increased to $6.2 million for the
year ended December 31, 1997 from $4.5 million for the year ended December 31,
1996, and from $3.4 million for the year ended December 31, 1995. The increase
in 1997 was primarily due to increased sales of the Company's XL products
combined with initial sales of its Expresso products. The increase in 1996 was
primarily due to increased sales of XL products.
24
<PAGE>
Cost of Goods Sold/Gross Margin. The Company's cost of goods sold increased
to $3.2 million for the year ended December 31, 1997 from $2.2 million for the
year ended December 31, 1996, primarily due to increased production of the
Company's XL products and initial production of the Expresso product line, and
from $1.7 for the year ended December 31, 1995, primarily due to increased
production of XL products. The Company's gross margin increased to $3.0
million (48.1% of revenues) for the year ended December 31, 1997 from $2.3
million (50.7% of revenues) for the year ended December 31, 1996 and from $1.8
million (51.0% of revenues) for the year ended December 31, 1995. The decrease
in gross margin as a percent of revenues in 1997 was primarily due to the
change in product mix to include Expresso products which have lower average
gross margins than the XL products combined with the increased costs of raw
materials and contract manufacturing associated with initial Expresso product
introductions. Gross margin as a percent of revenues remained relatively
constant between 1996 and 1995.
Sales and Marketing. The Company's sales and marketing expenses increased to
$5.1 million for the year ended December 31, 1997 from $3.1 million for the
year ended December 31, 1996 and from $2.6 million for the year ended December
31, 1995. The increase in 1997 was primarily due to increased hiring of sales
and marketing personnel, expansion of travel and attendance at trade shows,
increases in personnel related to customer support activities and expanded
efforts in international markets. The increase in 1996 was primarily due to
increases in sales and marketing personnel and related costs.
Research and Development. The Company's research and development expenses
increased to $3.6 million for the year ended December 31, 1997 from $2.0
million for the year ended December 31, 1996 and from $1.0 million for the
year ended December 31, 1995. The increase in 1997 was primarily due to
increases in expenditures from further development of the Expresso GS and
Expresso MDU products, development of HomeRun technology and related product
prototypes and enhancement to various XL products. The increase in 1996 was
primarily due to initial efforts related to the development of the Expresso
platform.
General and Administrative. The Company's general and administrative
expenses increased to $2.4 million for the year ended December 31, 1997 from
$1.8 million for the year ended December 31, 1996 and from $1.6 million for
the year ended December 31, 1995. The increase in 1997 was primarily due to
additions of administrative personnel and increases in other costs related to
the Company's growth. The increase in 1996 was primarily due to increases in
support personnel.
Noncash Compensation Expense. Noncash compensation expense primarily
consists of expenses related to the grant of a warrant to purchase 666,836
shares of Common Stock in consideration for technology endorsement, marketing
and certain development support by Microsoft covering the Company's HomeRun
technology and related products. To a lesser extent, noncash compensation
expense consists of the recognition of expense related to certain employee
stock option grants, based on the difference between the deemed fair value of
common stock and the option exercise price at the date of grant. The Company's
noncash compensation expense was $1.3 million for the year ended December 31,
1997. There was no noncash compensation expense for the years ended December
31, 1996 and 1995.
Other Income (Expense), Net. The Company's other income, net remained
constant at $0.2 million for the year ended December 31, 1997 and for the year
ended December 31, 1996 and increased from $0.1 million for the year ended
December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through the sale of preferred equity securities for an aggregate of $39.0
million net of offering costs.
At June 30, 1998, the Company had cash and cash equivalents of $3.8 million
and short-term investments of $3.0 million. In addition, the Company has a
line of credit with the ability to borrow the lesser of $2.5 million
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or 70% of qualified accounts receivable. Under such terms, the Company had
available to borrow approximately $1.6 million at June 30, 1998 and had no
outstanding draws thereunder. The Company has approximately $0.4 million
outstanding on a separate equipment line of credit. The current portion of
such borrowings is $0.2 million.
Net decrease in cash and cash equivalents in the six months ended June 30,
1998 of $1.6 million resulted primarily from a net loss of $6.8 million, net
changes in working capital, and purchase of property and equipment, offset by
noncash compensation expense, net proceeds from maturities of short term
investments, and net proceeds from the sale of preferred securities. Net
decrease in cash and cash equivalents in the six months ended June 30, 1997 of
$30,000 resulted primarily from a net loss of $3.3 million, net changes in
working capital, and the purchase of property and equipment, offset by net
proceeds from maturities of short term investments and borrowings on a line of
credit to finance equipment purchases.
Net increase in cash and cash equivalents in 1997 of $4.0 million resulted
primarily from net proceeds from the sale of preferred securities, net
proceeds from maturities of short term investments, and noncash compensation
expense, offset by a net loss of $9.2 million, net changes in working capital,
and purchase of property and equipment. Net decrease in cash and cash
equivalents in 1996 of $0.1 million resulted primarily from a net loss of $4.4
million, the purchases of short term investments from financing proceeds, and
purchase of property and equipment, offset by net changes in working capital
and net proceeds from the sale of preferred securities. Net increase in cash
and cash equivalents in 1995 of $1.3 million resulted primarily from net
proceeds from the sale of preferred securities, offset by a net loss of $3.4
million, net changes in working capital and the purchase of property and
equipment.
On July 31, 1998, the Company entered into an agreement to purchase certain
intellectual property previously subject to ongoing royalties for a total of
$2.5 million to be paid upon consummation of the offering.
In future periods, the Company generally anticipates significant increases
in working capital on a period to period basis primarily as a result of
planned increased product sales and higher relative levels of inventory. The
Company will also continue to expend significant amounts on property and
equipment related to the expansion of systems infrastructure and office
equipment to support Company growth and lab and test equipment to support on-
going research and development operations.
The Company believes that its cash and cash equivalents balances, short term
investments and funds available under its existing line of credit will be
sufficient to satisfy its cash requirements for at least the next 12 months.
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BUSINESS
The following contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth above under "Risk Factors" and elsewhere in
this Prospectus.
OVERVIEW
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of
telephone companies, as well as the copper telephone wires in homes,
businesses and other buildings. These products incorporate Tut's proprietary
FastCopper technology in a cost-effective, scalable and easy to deploy
solution to exploit the underutilized bandwidth of copper telephone wires. The
Company's products include Expresso high-bandwidth access multiplexers,
associated modems and routers, XL Ethernet extension products and integrated
network management software. The Company's HomeRun technology, an in home
application of FastCopper, has been chosen as the initial specification for a
home networking standard to be promoted by the Home Phoneline Network Alliance
("Home PNA"), a non-profit corporation formed to provide a forum for the
creation of an open standard and specification for home networking products
and services. The founding members of the Home PNA are 3Com Corporation
("3Com"), Advanced Micro Devices, Inc. ("AMD"), AT&T Wireless Services, Inc.
("AT&T Wireless"), Compaq Computer Corporation ("Compaq"), Epigram Inc.
("Epigram"), International Business Machines Corporation ("IBM"), Intel
Corporation ("Intel"), Hewlett-Packard Company ("Hewlett-Packard"), Lucent
Technologies Inc. ("Lucent"), Rockwell Semiconductor Systems, Inc.
("Rockwell") and Tut Systems.
The Company's products and technologies cost-effectively meet high-speed
bandwidth requirements for a variety of users:
. Large corporations, universities and other institutions use the Company's
XL products to extend Ethernet networks between separate buildings beyond
conventional Ethernet distance limitations.
. Independent telephone companies, Internet service providers and
competitive local exchange carriers use the Company's Expresso GS systems
to provide high-speed data access services, including Internet access, to
business and residential customers over existing copper telephone wires
traditionally used for voice service. Expresso GS systems cost-
effectively multiplex, or aggregate, these high-speed data access
services onto higher bandwidth regional and national backbone networks.
. Owners and operators of multiple dwelling units ("MDUs"), including real
estate investment trusts ("REITs"), universities, hotels and independent
landlords, can utilize the Company's Expresso MDU systems to deliver
high-speed data access to their tenants over existing copper telephone
wires.
. Leading semiconductor, computer hardware and consumer electronics
manufacturers, such as 3Com, AMD, AT&T Wireless, Compaq, Intel, National
Semiconductor, Inc. ("National") and Rockwell, have licensed the
Company's HomeRun technology to enable the development of HomeRun-
compatible integrated circuits and consumer products, including PCs,
peripherals, modems (56 Kbps, ISDN, xDSL, cable and wireless), Internet
telephones and television-based web browsers.
The Company shipped its first XL product in 1992, its first Expresso product
in early 1997, and its first Expresso GS in the second quarter of 1998. The
Company expects to ship its Expresso MDU configured with HomeRun line cards in
the fourth quarter of 1998.
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INDUSTRY BACKGROUND
Increasing Demand for High-Speed Data Access
In recent years, there has been a dramatic increase in demand by businesses
and consumers for high-speed data access to the Internet and to private
corporate networks. This demand is being driven by the growth in users who are
accessing networks for a variety of applications, including communications via
the Internet and corporate intranets, electronic commerce, and telecommuting.
These applications often require the transmission of large, multimedia
intensive files, necessitating the need for high-speed data access services.
The number of devices accessing the Internet will grow six-fold to over 500
million between the years 1997 and 2002 according to projections from
International Data Corporation. The Company believes that a substantial
percentage of these devices will be connecting to the Internet at speeds
greater than 56 Kbps. Additionally, the increase in the number of homes with
multiple access devices is fueling demand for networking capabilities at home,
including the ability to share peripherals and a single high-speed Internet
access connection.
Increasingly, individuals have experienced the value of high-speed Internet
access from their work locations via 1.544 Mbps T1 access lines. These
individuals are often demanding the same level of speed from their home or
laptop connection as they experience from their work location. However, remote
access to the Internet using dial-up connections over copper telephone wires
has been limited to speeds of 56 Kbps.
LOGO
[Graphic depicting "The Networked Infrastructure", including the "Backbone
Network", "The Last Mile", and "Beyond the Last Mile".]
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The Backbone Network
To meet this increasing need for speed, telecommunication service providers
have significantly upgraded the backbone network over the past several years
with high bandwidth fiber optic cables and high-speed switches. However, this
high bandwidth, fiber-based backbone does not extend all the way to end users.
As a result, connecting users to this backbone at high speeds remains a
limiting factor in overall data transmission performance.
The Last Mile -- Local Loop
Typically, end users are connected to the backbone network by the local loop
copper wire infrastructure built and maintained by telephone companies. This
last mile of copper telephone wire infrastructure extends to and reaches
millions of homes, businesses and other buildings. This infrastructure was
originally designed for the transport of low bandwidth, analog voice signals.
However, as advanced xDSL technologies continue to become available, it is
becoming possible to use this same infrastructure for the delivery of high-
speed digital signals and data services. And, as a result of recent state and
federal initiatives to deregulate many aspects of telecommunications, the
local loop is no longer intricately tied to only services provided by the
incumbent local exchange carrier ("ILEC"). The local loop is now available to
CLECs, and sometimes ISPs, on an "unbundled" tariff basis. This means that
these aggressive new service providers can now purchase individual pairs of
last mile copper wire, add xDSL-based products at each end, and leverage the
huge embedded last mile copper infrastructure to deliver high-speed services
directly to their customers.
Beyond the Last Mile -- Private Copper Networks
The need for data services of any type extends beyond the local loop all the
way to an end user, or to multiple end users located throughout a property.
The most widely available medium for delivering data services throughout a
property to end users is the copper wire already in place for telephone
service. These private copper networks ("PCNs") are found in corporate and
educational campuses, apartment buildings, hotels and single family homes.
Throughout multi-building corporate and educational campuses, a PCN of
single-pair telephone wires typically connects users and buildings to each
other and to the public switched telephone network for voice transmission.
Within each building there often exists PCNs of two-pair data-grade copper
wires for the provisioning of Ethernet local area networks ("LANs"). Although
there is typically a great need to interconnect these separate LANs, the lack
of data-grade wires between buildings and the 328-foot distance limitation of
standard 2-pair Ethernet precludes the simple interconnection of these LANs.
As a result, there is demand for innovative data technologies and products
that can use the large installed base of inter-building telephone wires to
enable high-speed Ethernet interconnections on corporate, educational and
other multi-building campuses.
Within apartments, hotels, dormitories, and other multiple dwelling units
("MDUs"), the PCN generally consists of one or two pairs of telephone wires
connecting each living unit to a central wiring location. This concentration
of wires can provide a convenient access point and significant economies of
scale to service providers and property owners for the delivery of high-speed
Internet access and other services to the many tenants of MDUs.
Within single-family homes, a PCN of telephone wire generally leads to many
RJ-11 outlets over a random tree and branch configuration. Historically, this
private copper network has been restricted to a single use at a time, either
for standard telephone service or low speed analog modem use. If residents
require simultaneous use of both voice and data service, then a second
telephone wire and service need to be installed. To the extent that new
technologies can eliminate the speed and application restrictions of home PCNs
and allow for the simultaneous use of voice telephony service and high speed
data access, single-family homes will be able to attain similar levels of
performance for sharing peripherals and high-speed Internet access as is now
common in office environments.
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THE TUT SYSTEMS SOLUTION
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of
telephone companies and the copper telephone wires in homes, businesses and
other buildings. The Company's products utilize its proprietary FastCopper
technology to exploit the underutilized bandwidth of existing last mile and
PCN infrastructures by reducing the noise, radio frequency interference and
signal cross talk inherent in high-speed data transmission over copper
telephone wires. FastCopper technology is found in a number of the Company's
cost-effective, scalable and easy to deploy products to meet the needs of
diverse customers.
Tut's XL products extend Ethernet networks across corporate and educational
campuses, medical and hospital complexes and other multi-building or multi-LAN
premises without having to install additional wires or fiber optic cable. The
Company believes that its XL1500 product series are the only products that
transmit data at speeds up to 10Mbps over a single pair of copper telephone
wires at distances up to 1,500 feet. Other of the Company's XL products extend
Ethernet LANs at varying speeds to distances up to 24,700 feet.
The Company's Expresso GS system is used by telecommunications service
providers, including ITOCs, ISPs and CLECs, to provide high-speed data
services, including Internet access, to both business and residential
customers over the existing copper-based last mile infrastructure
traditionally used for telephone service. Taking advantage of the Company's
proprietary SmartWire and All-Rate DSL features on Expresso GS, service
providers can reach geographically dispersed subscribers and offer a range of
bandwidth and price options to such subscribers. The Company believes that
Expresso GS offers service providers a low initial deployment cost, enabling
the delivery of high-speed services to a variety of markets throughout the
service area.
The Company will offer its Expresso MDU system, which can be integrated with
its proprietary HomeRun technology, to provide low cost, high-speed bandwidth
to multiple tenants within an MDU. Expresso MDU is a compact system including
integrated AC power, secure high-speed switching, and WAN interfaces for
deployment in the basements of apartment buildings, in wiring rooms of hotels
and in other locations where access lines are centrally concentrated. The
Company believes that Expresso MDU is the only single-box solution allowing
owners of MDUs to deliver secure high-speed data and LAN services for multiple
tenants in MDUs.
The Company's HomeRun technology enables a cost-effective Ethernet LAN to be
quickly implemented over the telephone wires found in a business or residence,
without interfering with existing telephone service that may be running over
these same wires. This proprietary technology has been adopted as the first
generation standard for home networking over copper telephone wires by the
Home PNA and is licensed to leading semiconductor, computer hardware and
consumer electronics manufacturers. HomeRun technology can be embedded in
integrated circuits and consumer products, including PCs, peripherals, modems
(56 Kbps, ISDN, xDSL, cable and wireless), Internet telephones and television-
based web browsers, thereby lowering the cost of deploying the Company's
Expresso MDU system and facilitating the commercial acceptance of the
Company's products.
STRATEGY
Tut Systems' objective is to be the leading provider of advanced
communications products for high-speed data access that exploit the large
existing infrastructures of copper telephone wires which lead into and reside
within private homes, businesses and other premises. Key elements of the
Company's business strategy are as follows:
Penetrate High Growth Markets with Expresso GS and Expresso MDU. The Company
aggressively markets its Expresso line of high-speed access products to fast
growing service providers, including ISPs and CLECs, who can benefit from
highly scalable Internet access solutions with low initial deployment costs.
The Company uses its direct sales force to target the largest service
providers and MDU owners and operators, and reaches smaller service providers
through its value added resellers ("VARS"). The Company intends to use
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large regional and national service providers to sell Expresso MDU systems to
smaller MDU owners. The Company seeks to increase the demand for its Expresso
systems from service providers and MDU owners and operators by reducing the
total cost of service deployment through the licensing of its HomeRun
technology to manufacturers of integrated circuits and consumer products,
including PCs, peripherals, modems (56 Kbps, ISDN, xDSL, cable and wireless),
Internet telephones and television-based web browsers.
Develop Innovative Technology and Systems Enhancements. The Company uses its
rapid product development capabilities and its FastCopper technology to
enhance existing products and develop future generations of products. Tut
seeks to extend its FastCopper technology to enable higher data speeds over
longer distances. The Company plans to enhance the Expresso platform by
incorporating additional xDSL technologies such as discrete multitone ("DMT")
asynchronous digital subscriber line ("ADSL") and G.lite (a consumer focused
version of ADSL), higher speed wide area network ("WAN") interfaces and new
features for its network management software.
Leverage HomeRun Technology and Partnerships. In June 1998, the Company's
HomeRun technology was selected as the initial specification for a home
networking standard to be promoted by the Home PNA. The Company has licensed
HomeRun to leading semiconductor, computer hardware, and consumer electronics
manufacturers including 3Com, AMD, AT&T Wireless, Compaq, Intel, National and
Rockwell. The Company expects that its licensees will embed HomeRun technology
into integrated circuits and consumer products, including PCs, peripherals,
modems (56 Kbps, ISDN, xDSL, cable and wireless), Internet telephones and
television-based web browsers. The Company believes that the availability of
these devices will reduce the total cost of deploying services based on
HomeRun enabled versions of Expresso MDU. The Company's relationships with its
licensees also enable the Company to better anticipate market trends,
comprehend customer requirements, gain early access to next generation
technology and accelerate product development and market acceptance of new
technologies.
Drive Industry Standards. The Company's membership in industry alliances
such as the Home PNA and the Universal ADSL Working Group, a committee that is
working to establish communications standards for G.lite, facilitates the
creation of easy to use, affordable, high-speed home networking solutions over
existing copper telephone wires. HomeRun technology and products have been
specifically designed to be compatible with, and to extend the benefits of,
G.lite implementations of ADSL. The Company believes that its participation in
standards setting activities provides valuable insight and leads to
relationships that can assist the Company in achieving early to market
advantage in the development and sale of future standards based products.
Standards participation also provides the Company with the ability to sponsor
its own intellectual property for integration in future networking standards.
Expand International Presence. The Company believes that its Expresso MDU
product line, which has been developed in conformance with certain
international standards, can serve a substantial market for high-speed data
access products outside of the United States. The Company markets its Expresso
MDU products through its established base of international distributors and is
actively adding new distributors who focus on the MDU market.
CORE TECHNOLOGIES AND PRODUCTS
FastCopper Technology
High-speed digital signals are severely distorted and subject to noise,
radio frequency interference, signal crosstalk and echos when transmitted over
long lengths of ordinary copper telephone wires. The Company has developed a
broad base of proprietary FastCopper technology to address noise and
distortion problems so that high-speed data access can be achieved over a
single pair of ordinary copper telephone wires used throughout the local loop,
and in corporate and educational campuses, apartment buildings, hotels and
single family homes. FastCopper technology encompasses three main areas of
expertise to maximize transmission rates at minimum costs over existing copper
telephone wires: (i) noise reduction, (ii) analog and digital signal
processing to reduce distortion, and (iii) digital modulation techniques.
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The Company uses its FastCopper technology, along with commercially
available components, to build its high-speed data access products. In the
XL1500 product series, the Company applied its noise reduction and signal
processing expertise to build a 10 Mbps, 1,500 foot Ethernet LAN extension
product to operate over a single pair of copper telephone wires. For its
Expresso products, the Company pioneered the use of rate adaptive synchronous
digital subscriber line ("SDSL") technology and recently introduced SDSL
products which extend to distances up to 24,700 feet without the use of
repeaters. For HomeRun, the Company developed a proprietary modulation
technique to transmit high-speed data signals over random tree and branch
networks typically found in single family homes.
XL Products
Tut Systems' XL LAN extenders and connectivity products provide low cost,
high-speed networking across private copper networks residing in corporate and
educational campuses, medical and hospital complexes and other multi-building
or multi-LAN premises. The XL products enable Ethernet connections from 600
feet to over 24,000 feet using existing ordinary copper telephone wires. These
products connect individual LAN networks across a campus, or connect a
specific private copper network to the local loop.
XL products include:
. The XL600 series which allows quick, economical networking of remote
workstations using a single pair of copper telephone wires and provides
10 Mbps Ethernet transmissions across distances up to 600 feet.
. The XL1500 series which provides an economic solution for interconnecting
LAN segments in a campus environment at 10 Mbps for distances up to 1,500
feet on a single pair of copper telephone wires.
. The XL12000 which supports 2 Mbps transmission rates over distances up to
12,000 feet.
. The new XL-2412 which provides transmission on campuses at speeds of 1.2
Mbps at distances up to 12,000 feet, or 192 Kbps at distances up to
24,700 feet, using a single pair of copper telephone wires and standard
10Base-T Ethernet LAN interfaces.
LOGO
[Graphic depicting "The Networked Campus"]
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The Company expects to make SNMP-based management available for its newer
XL12000 and XL-2412 products to support wide scale and remote management of XL
products across large environments.
The Company recently introduced its new WL-2000 product, a wireless Ethernet
bridge which enables high-speed LAN connections over distances of several
miles without the need for a physical copper connection.
Expresso System Platforms
The Company's Expresso GS and Expresso MDU products are designed to be used
by ITOCs, ISPs, CLECs and MDU owners and operators to provide high-speed data
services to large numbers of end users over local loop and private copper
network infrastructures. Expresso GS is DC-powered and intended for use by
service providers to serve last mile applications using xDSL technologies.
Expresso MDU is AC-powered and can be integrated with the Company's HomeRun
technology into a low cost and flexible Expresso platform. This system
provides owners of private copper networks with an easy to deploy and scalable
means to distribute high-speed data access to tenants over the copper
telephone wires found in MDUs.
An Expresso GS or Expresso MDU system consists of a compact, modular
central-site shelf with an SNMP management card, optional switching,
multiplexing and WAN interface cards, and up to 17 xDSL or HomeRun line cards.
The 10 1/2 inch-high (6 rack units) system is available with two mounting
options, either 19 inches wide (for data center and international
installations) or 23 inches wide (for telephone company installations).
LOGO
[Grapic depicting the Expresso GS/MDU System]
Each Expresso GS or Expresso MDU backplane supports a total bandwidth
capacity of 6.8 Gbps. Each line card slot supports 400 Mbps of bandwidth. This
high bandwidth permits the Expresso platform to accommodate future high-speed
access technologies such as very high bit rate digital subscriber line
("VDSL"). Different line technologies can be mixed and matched in any one
Expresso GS or Expresso MDU shelf on a line card by line card basis.
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Each Expresso GS and Expresso MDU shelf can support up to 136 line side
subscriber connections making the Expresso GS and Expresso MDU platforms among
the highest density xDSL platforms in the industry. Multiple Expresso GS and
Expresso MDU shelves can be interconnected via 10 or 100Base-T Ethernet
connections, allowing systems to accommodate hundreds of subscribers onto a
common WAN interface.
The network management system for Expresso GS and Expresso MDU allows
efficient end to end remote network management and service configuration via
either Telnet or SNMP-based management systems. In addition to a broad range
of configuration options, the Expresso platform provides an extensive set of
diagnostic tools including such capabilities as per line bit error rate tests,
validation of copper wire connectivity and remote modem and router tests.
Customers can upgrade Tut software, residing in both the Expresso shelf as
well as in remote M-1100 series routers, as required from remote network
management centers.
Expresso GS
An Expresso GS configuration for local loop applications includes a compact
and modular system with xDSL line cards connected to remote M-1100 series
routers. The M-1100 series routers connect users' PCs or LANs to the Expresso
GS system over a local loop that may extend up to 24,700 feet using the
Company's current SDSL line technology. The Company's dynamic SmartWire SDSL
rate adaptation enables all subscribers to be served at the highest attainable
speeds over each loop. Through Expresso's All-Rate DSL feature, a service
provider can offer tiered access services in increments of 64 Kbps to meet the
varying bandwidth and price requirements of each subscriber. All-Rate DSL
allows service providers to offer a low cost, low bandwidth, entry level
service that can expand to higher bandwidth capabilities as a subscriber's
need for bandwidth expands. The Company's M-1100 router provides a standard
10Base-T interface for connection to users PCs or LANs. The M-1100HR router
will provide users with a HomeRun interface enabling multiple HomeRun-enabled
devices to connect to the Expresso GS system.
LOGO
[Graphic depicting "The Networked Community"]
Expresso MDU
Expresso MDU will integrate the Company's HomeRun technology with its
flexible Expresso platform to provide owners of MDUs with easy to deploy,
scalable and cost-effective solutions to distribute high-speed data access to
multiple tenants over private copper networks within MDUs. The Company expects
to ship its Expresso MDU product configured with HomeRun line cards in the
fourth quarter of 1998.
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The Expresso MDU platform shares all of the features and architecture of the
Expresso GS while adding UL-approved AC power options for deployment in
residential locations (e.g. the basement wiring room of a apartment building).
Expresso MDU can be equipped with HomeRun line cards to provide a secure
Ethernet LAN for each living unit within an MDU. The Company has developed a
HomeRun adapter that converts HomeRun signals to a standard 10Base-T Ethernet
interface. Consumer products, such as PCs, peripherals, Internet telephones
and television-based web browsers, that are HomeRun-enabled can connect to the
Expresso MDU over existing copper telephone wires within an MDU, without the
need for any separate modem or network interface card ("NIC").
LOGO
[The Graphic depicting "The Networked MDU"]
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HomeRun High-Speed Home Network Technology
HomeRun creates a cost-effective Ethernet LAN over the random topology of
home telephone wires, without disturbing existing telephone service and/or
G.lite service running simultaneously over these same wires. With HomeRun,
multiple devices can share peripherals and/or a single high-speed Internet
access connection on a 1 Mbps Ethernet LAN. HomeRun supports Internet
connections through ISDN or xDSL wireline technologies, a wireless modem or a
cable modem. The Company developed its HomeRun technology using its
proprietary signal processing expertise and digital modulation technique.
Tut's products which incorporate HomeRun technology include 10Base-T adapters
and NICs. The Company has also made HomeRun technology available to third
party vendors for integration into their own products, including integrated
circuits, PCs, peripherals, modems (56Kbps, ISDN, xDSL, cable and wireless),
Internet telephones and television-based web browsers. HomeRun is either
licensed directly to such vendors or is available indirectly via chip sets
from the Company's semiconductor licensees. Since HomeRun is Ethernet standard
at the media access control layer, the Company's licensees can readily
incorporate HomeRun into multiple consumer device designs at a low incremental
cost.
LOGO
[Graphic depicting "The Networked Home"]
CUSTOMERS AND MARKETS
The Company targets its development, marketing and sales efforts to service
providers and end users across four market categories, each characterized by a
common demand for high-speed data access:
Corporations and Campuses
Corporate and educational campuses, medical and hospital complexes, and
other multi-building and multi-LAN premises often have a need to interconnect
Ethernet LAN networks that reside in separate buildings or locations across
distances longer than the standard Ethernet limitation of 328 feet. These
connections can be made over copper wire, fiber optic cable, or wireless
radio. Most campus facilities have copper telephone wires and, if properly
equipped, these wires can be used to interconnect standard 10Base-T Ethernet
LANs at native 10 Mbps speeds. As a result, copper telephone wire solutions
for LAN extensions are a cost-effective option for corporation and campus
institutions.
The Company markets its XL products to domestic and international end users
for LAN extensions over existing copper telephone wires. The Company has more
than 500 domestic customers for the XL product line,
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including such Fortune 500 companies as AT&T Corp., Chevron Corporation,
Chrysler Corporation, Lockheed Martin Corporation and Texaco, Inc., and such
institutions as the U.S. Army and the U.S. Navy.
Service Providers
Service providers, including ITOCs, ISPs and CLECs, own, or have low cost
access to, the local loop of copper wire infrastructure and are continually
seeking additional ways to generate revenue from this infrastructure. Many
service providers view the demand for high-speed data access as a key source
of new revenue.
To address this opportunity, the Company began selling Expresso systems to
smaller ITOC customers in 1997. The newly released Expresso GS system
addresses both the ITOC market as well as the faster growing ISP and CLEC
opportunities. To date, the Company has sold over 70 Expresso and Expresso GS
systems.
Multiple Dwelling Units
MDU owners and operators can recognize economies of scale by providing high-
speed services to multiple MDU tenants from a single point of service. MDUs
include apartment complexes, hotels, college dormitories and military housing
complexes. The Company believes that the potential international MDU market is
particularly large and represents a strategic opportunity for the Company.
The Company's potential customers in the MDU market include both service
providers who seek to sell services to MDU tenants and owners of MDU complexes
who seek to offer advanced amenities to their tenants, increase property
value, and/or gain additional revenue from the property. The Company expects
to ship its Expresso MDU product configured with HomeRun line cards to owners
of apartment complexes and hotels in the fourth quarter of 1998.
Home Networking
The growth in the demand for high-speed data access, the decreasing cost of
PCs and the proliferation of Internet access devices in homes are creating an
emerging demand for home networking and access solutions. Home networks must
be designed to allow the sharing of files, the sharing of peripherals such as
printers, the simultaneous, uninterrupted use of voice service and, perhaps
most importantly, the sharing of Internet and remote corporate network access.
Home network consumers desire a low cost, easy to implement network solution
that does not require any new wires to be installed throughout the home.
The Company is actively licensing its HomeRun technology to members of the
Home PNA and others. The Home PNA has recently chosen HomeRun as the initial
specification for a home networking standard. The founding members of the Home
PNA are 3Com, AMD, AT&T Wireless, Compaq, Epigram, Hewlett Packard, IBM,
Intel, Lucent, Rockwell and Tut Systems.
MARKETING, SALES AND CUSTOMER SUPPORT
Marketing
The Company seeks to increase demand for its products, expand company and
product visibility in the market and establish cooperative marketing programs.
The Company expects to pursue and expand market opportunities in the United
States with its strategic partners, customers and distributors. For example,
Microsoft, a strategic partner and stockholder of the Company, has entered
into a Licensing and Cooperative Marketing Agreement in which it has agreed to
support HomeRun through multiple levels of marketing support, the fostering of
strategic alliances including introductions, facilitation and endorsement, and
technical assistance in the development of products. The success of the
Company is, and will continue to be, dependent in part on the success of this
agreement. See "Risk Factors--Dependence on Strategic Relationships." Certain
of the Company's ITOC customers are expanding their business through
unregulated ISP subsidiaries with broader market coverage, and certain of the
Company's ISP customers are expanding their market coverage by becoming CLECs.
The Company believes this evolution offers the opportunity to continue to sell
Expresso-based systems
37
<PAGE>
to existing customers as they expand and grow. In 1998, the Company
implemented its Express.connect cooperative marketing program. Through the
Express.connect program, the Company provides marketing support to its service
provider and MDU customers to aid them in generating demand for services based
on the Company's products. The Express.connect program includes direct mail
campaigns, local media support and business to business telemarketing on
behalf of the Company's customers.
In addition to customer-specific sales efforts, the Company's marketing
activities include attendance at major industry trade shows and conferences
(e.g. NetworkWorld, Interop, Hitech, Comnet and SuperComm), the distribution
of sales and product literature, operation of a web site, advertising in trade
journals and catalogs, direct marketing and ongoing communications with its
customers, the press and industry analysts.
Sales
Tut Systems sells its products through multiple sales channels in the United
States, including a select group of regional VARs, systems integrators and
distributors, data networking catalogs and directly to the largest end users.
Internationally, the Company sells and markets its products through sales
agents, VARs, systems integrators and distributors. In 1997, the Company
focused its international sales efforts on a few select areas, including Japan
and Korea. In the first half of 1998, the Company established new sales
channels in Canada, Europe, South America, Australia and Asia. In 1997 and the
first six months of 1998, the Company derived approximately 26% of its
revenues from sales to Tech Data Corporation ("Tech Data") and Merisel, Inc.
("Merisel"), two independent distributors of the Company's products. The
Company expects that the sale of its products to a limited number of
distributors and VARs, including Tech Data and Merisel, may continue to
account for a substantial percentage of revenues for the foreseeable future.
See "Risk Factors--Dependence on Independent Distributors."
In 1997 all direct sales of the Company's products were accomplished via a
telemarketing sales organization based in Beaverton, Oregon. In late 1997 and
1998 the Company hired experienced sales and service personnel for its New
York, Atlanta, Chicago, Dallas and Denver regional sales offices. The Company
also intends to add to its existing telemarketing sales force as well as add
resources to develop additional business with the federal government. The
Company recently added a Director of International Sales to further develop
the Company's international sales channels.
Customer Support
The Company believes that consistent high-quality service and support is a
key factor in attracting and retaining customers. Service and technical
support of the Company's products is coordinated by the customer support
organization located in Pleasant Hill, California. Telecommunications and
Networking Systems Engineers provide critical technical support to its
customers. The Company's Systems Application Engineers, located in each of the
Company's sales regions, support pre- and post-sales activities. Tut Systems
also employs a nationwide third party support organization to handle inquiries
from a large number of customers and provide first level telephone technical
support and on-site installation and support services. Customers can also
access technical information and receive technical support through the
Internet.
38
<PAGE>
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on enhancing its
existing products and developing new products. The Company's research and
development organization emphasizes early stage system engineering. The
product development process begins with a comprehensive functional product
specification based on input from the sales and marketing organizations. The
Company incorporates feedback from end users, distribution channels, and
through participation in industry events, industry organizations and standards
development bodies such as the Home PNA in its product development process.
Key elements of the Company's research and development strategy include:
. Core Designs. The Company seeks to develop platform architectures and
core designs which allow for cost-effective deployment and flexible
upgrades that meet the needs of multiple markets and applications. These
designs emphasize quick time to market and future cost reduction
potential. The Expresso GS platform is a direct result of this strategy.
. Product Line Extensions. The Company seeks to extend its existing product
lines through product modifications and enhancements in order to meet the
needs of particular customers and markets. Products resulting from the
Company's product line extension efforts include the new XL-2412 product
derived from the M-1100 series router for Expresso GS, and the Expresso
MDU which will combine the Company's Expresso GS platform with AC power
and the Company's HomeRun technology for use in MDU markets.
. Use of Industry Standard Components. The Company's design philosophy
emphasizes the use of industry standard hardware and software components
whenever possible to reduce time to market, decrease the cost of goods
and lessen the risks inherent in new design. The Company maximizes the
use of third party software for operating systems and routing software,
allowing the Company's software engineers to concentrate on hardware-
specific drivers, user interface software and advanced features.
. New Technologies. The Company seeks to enhance its Expresso platform by
incorporating additional xDSL technologies (such as ADSL, VDSL and
G.lite), higher speed WAN interfaces and new network management software
features. The Company also seeks to develop new products incorporating
the Company's FastCopper expertise to meet the needs of markets with
heavily installed copper wire infrastructures.
MANUFACTURING
The Company does not manufacture any of its own products, but instead relies
on contract manufacturers to assemble, test and package the Company's
products. The Company requires ISO 9002 registration for these contract
manufacturers as a condition of qualification. The Company audits the
contractor's manufacturing process performance through audits, testing and
inspections and monitors contractor quality through incoming testing and
inspection of packaged products. In addition, the Company monitors the
reliability of its products through in house repair, reliability audit testing
and field data analysis.
The Company currently procures all of its raw materials from outside
suppliers through its contract manufacturers and AMS, Inc. In procuring
components, the Company, AMS, Inc. and its contract manufacturers rely on some
suppliers that are the sole source of those components. For example, all of
the field programmable gate array supplies used in the Company's products are
purchased from Xilinx, Inc. In addition, ACT Networks, Inc. is the sole
supplier of a bridge router component used in certain of the Company's XL and
Expresso products. The Company's Expresso products are also dependent on
various sole source offerings from Osicom Technologies, Inc., Metalink US
Inc., Motorola, Inc., RELTEC Corporation, SaRonix and Wind River Systems,
Inc. See "Risk Factors--Dependence on Sole Source Suppliers."
The Company forecasts its product requirements to maintain sufficient
product inventory to allow it to meet the short delivery times demanded by its
large and diverse customer base, typically one to four days between receipt of
order and shipment to the customer. The Company's future success will depend
in significant part on its ability to obtain manufacturing on time, at low
costs and in sufficient quantities to meet demand. See "Risk Factors--
Dependence on Contract Manufacturers."
39
<PAGE>
COMPETITION
The markets for the Company's products are intensely competitive,
continually evolving and subject to rapid technological change. The Company
believes that it and its products face the following competitive factors:
conformance to industry standards, breadth of product lines, implementation of
additional product features and enhancements (including improvements in
product performance, reliability, size, and scalability), low cost and easy to
deploy and use products, sales and distribution capability, technical support
and service and general industry and economic conditions. Although the Company
believes that it currently competes favorably with respect to all of these
factors, there can be no assurance that the Company will have the financial
resources, technical expertise or marketing, manufacturing, distribution and
support capabilities to compete successfully in the future. The Company
expects that competition in each of its markets will increase in the future.
The Company's principal competitors include or are expected to include
PairGain Technologies, Inc., Paradyne Corporation, Cisco Systems, Inc., Ascend
Communications, Inc., Westell Technologies, Inc. and a number of other public
and private companies. Many of the Company's competitors and potential
competitors have substantially greater name recognition and technical,
financial and marketing resources than the Company. Such competitors may
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and devote substantially more resources to developing new products
than the Company. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced will not materially adversely affect the Company's business,
financial condition and results of operations. In addition, certain of the
Company's licensees may sell aspects of the Company's technology to
competitors or potential competitors of the Company. Such competitors may
cause an erosion in the potential market for the Company's products. This
competition could result in price reductions, reduced profit margins and loss
of market share, which would materially adversely affect the Company's
business, financial condition and results of operations.
Tut Systems also competes with technologies using alternative transmission
media such as coaxial cable, wireless facilities and fiber optic cable. To the
extent that telecommunications service providers choose to install fiber optic
cable or other transmission media in the last mile, or to the extent that
homes and businesses install other transmission media within buildings, the
Company expects that demand for its copper telephone wire-based products will
decline. These competitive pressures from alternative transmission
technologies may further necessitate price reductions of the Company's
existing and future products.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company relies on a combination of patent,
copyright and trade secret laws and non-disclosure agreements to protect its
proprietary technology. The Company currently holds 11 United States patents
and has 8 United States patent applications pending. There can be no assurance
that patents will be issued with respect to pending or future patent
applications or that the Company's patents will be upheld as valid or will
prevent the development of competitive products. The Company seeks to protect
its intellectual property rights by limiting access to the distribution of its
software, documentation and other proprietary information. In addition, the
Company enters into confidentiality agreements with its employees and certain
customers, vendors and strategic partners. There can be no assurance that the
steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technologies. The Company is also subject to the
risk of adverse claims and litigation alleging infringement of the
intellectual property rights of others. In this regard, there can be no
assurance that third parties will not assert infringement claims in the future
with respect to the Company's current or future products or that any such
claims will not require the Company to enter into license arrangements or
result in protracted and costly litigation, regardless of the merits of such
claims. No assurance can be given that any necessary licenses will be
available or that, if available, such licenses can be obtained on commercially
reasonable terms.
40
<PAGE>
EMPLOYEES
As of June 30, 1998, the Company employed 86 persons, including 10 in
operations, 41 in marketing, sales and customer support, 25 in research and
development and 10 in finance and administration. The Company also employs a
number of contract employees, especially for software engineering and systems
verification. None of the Company's employees is represented by a labor union
and the Company has experienced no work stoppages to date. The Company does
not have any employment contracts with its executive officers.
FACILITIES
The Company's principal administrative and engineering facilities are
located in one leased building totaling approximately 23,000 square feet
located in Pleasant Hill, California. In addition, the Company leases sales
and administrative facilities totaling approximately 2,600 square feet in
Beaverton, Oregon. The current lease for the Pleasant Hill facility expires in
May 2001, with an option to renew for two years, and the lease for the Oregon
facility expires in March 2002. The Company also has sales offices in the
vicinity of New York, Atlanta, Chicago, Dallas and Denver. The Company is
currently considering the lease of additional facilities to add 4,100
additional square feet of space. The Company believes that with this
additional space, its facilities will be adequate to meet its requirements for
the foreseeable future and that suitable additional or substitute space will
be available as needed.
LEGAL PROCEEDINGS
As of the date of this Prospectus, the Company is not involved in any
material legal proceedings.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Salvatore D'Auria....... 43 President, Chief Executive Officer and Director
Matthew Taylor.......... 39 Chairman of the Board, Chief Technical Officer and Secretary
Nelson Caldwell......... 41 Vice President of Finance and Chief Financial Officer
Allen Purdy............. 49 Vice President of Sales
Thomas Warner........... 41 Vice President of Engineering
Nicholas Berberi........ 42 Vice President of Customer Support
Craig Bender............ 56 Vice President of Market Development
Craig Stouffer.......... 35 Vice President of Marketing
Shaw Matthews........... 56 Vice President of Operations
Clifford H. Higgerson... 58 Director
Saul Rosenzweig(/1/).... 73 Director
David Spreng(/1/)....... 37 Director
George Middlemas........ 52 Director
Brion Applegate(/2/).... 44 Director
Roger Moore(/2/)........ 56 Director
Neal Douglas(/2/)....... 40 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Salvatore D'Auria has served as President, Chief Executive Officer and a
director of the Company since August 1994. He served as the Company's Chief
Operating Officer from May 1994 to August 1994. From August 1993 to May 1994,
Mr. D'Auria performed various consulting services for networking software
companies. Mr. D'Auria joined Central Point Software in October 1989 as
Director of Product Marketing and was appointed as Vice President of Marketing
in April 1990, and held various Vice President positions until August 1993.
From 1980 to 1989, Mr. D'Auria served in various marketing and management
positions at Hewlett-Packard. Mr. D'Auria holds a B.S. in Physics from
Clarkson University.
Matthew Taylor is a co-founder of the Company and has served as Chairman of
the Board of Directors, Chief Technical Officer and Secretary of the Company
since August 1994. From April 1989 to August 1994, Mr. Taylor was President
and Chief Executive Officer of the Company. Prior to that time, Mr. Taylor was
the Vice President of Engineering and a co-founder of Alameda Instruments,
Inc., a semiconductor equipment company, from 1987 to 1989. Mr. Taylor holds a
B.S. in Biology and an M.S. in Engineering Science from the University of
California at Berkeley.
Nelson Caldwell has served as Vice President of Finance and Chief Financial
Officer of the Company since June 1997. From May 1995 to May 1997, Mr.
Caldwell served as Chief Financial Officer and Secretary of Telechips
Corporation ("Telechips"), a computer telephony device company. Mr. Caldwell
also served as the interim President and Chief Executive Officer and a
director of Telechips from February 1997 to May 1997. Telechips filed for
bankruptcy under Chapter 7 of the Federal Bankruptcy Code on June 30, 1997.
Prior to that time, Mr. Caldwell held various positions at Coopers & Lybrand
L.L.P. from June 1989 through April 1995, most recently as Manager in the
Business Assurance practice. Mr. Caldwell holds a B.S. in Business
Administration from California State University, Chico, and is a Certified
Public Accountant.
Allen Purdy has served as Vice President of Sales of the Company since
January 1997. Prior to joining the Company, Mr. Purdy was Regional Sales
Manager and, most recently, Director of Sales of Applied Digital Access, Inc.,
a provider of network management and testing equipment for the
telecommunications industry, from November 1992 to January 1997, and was a
Regional Sales Manager with TeleSciences, Inc. from June 1989 to November
1992. Mr. Purdy holds a B.S. in Industrial Engineering from Rutgers University
and an M.B.A. from Rider College.
42
<PAGE>
Thomas Warner has served as Vice President of Engineering of the Company
since February 1997. Prior to that time, Mr. Warner served in various
positions at Ericsson Fiber Access, a division of Ericsson Inc. from March
1990 through February 1997, most recently as Vice President of Systems
Management. Mr. Warner holds a B.S.E.E. from the University of Illinois at
Champaign-Urbana.
Nicholas Berberi has served as Vice President of Customer Support of the
Company since January 1996. From September 1995 until January 1996, Mr.
Berberi served as a Vice President of a business unit of the Company. Mr.
Berberi was Director of Product Marketing from August 1994 to September 1995,
and a Product Marketing Manager from July 1991 to August 1994 at VLSI
Technology, Inc., a semiconductor company. From June 1989 to July 1991, he was
a Product Marketing Manager at Hitachi America, Ltd. Mr. Berberi holds a
B.S.E.E. from Syracuse University.
Craig Bender has served as Vice President of Market Development of the
Company since June 1997. Prior to that time, Mr. Bender was with Integrated
Network Corporation ("INC") where he served as Vice President of Marketing
from 1988 to 1992, as Vice President of International Business Development
from 1992 to 1996 and as Vice President of INC's DAGAZ division until 1997.
Mr. Bender holds a B.S.E.E. from Syracuse University, an M.S.E.E. from the
University of California at Los Angeles and an AT&T-sponsored Executive M.B.A.
from Pace University.
Craig Stouffer has served as Vice President of Marketing of the Company
since April 1998. Before joining the Company, Mr. Stouffer was a co-founder of
Vergent Inc., a telecommunications switching equipment company, and served as
its President from January 1997 to November 1997. From October 1989 to
December 1996, Mr. Stouffer served as President and Chief Executive Officer
and was also a co-founder and director of Mobius Computer Corporation, a
producer of network servers. Prior to that time, Mr. Stouffer served in
various technical and marketing roles at Hewlett-Packard. Mr. Stouffer holds
B.S. degrees in both Computer Science and Theoretical Physics from Indiana
University.
Shaw Matthews has served as Vice President of Operations of the Company
since June 1998. He served as the Company's Director of Operations from August
1997 to June 1998, and as a Quality Manager of the Company from February 1996
to August 1997. From October 1988 to February 1996, Mr. Matthews was a
Consulting Engineering Manager of Storage Technology Corporation
("StorageTek"), and from October 1982 to October 1988, Mr. Matthews served in
various engineering and operating positions at StorageTek. Mr. Matthews holds
a B.S. in Mathematics from the University of Illinois at Chicago and an M.S.
in Operations Research from the Illinois Institute of Technology.
Clifford H. Higgerson has served as a director of the Company since July
1993. Since 1991, Mr. Higgerson has been a general partner of Vanguard Venture
Partners ("Vanguard"), a venture capital firm specializing in high technology
start-ups. Since 1986, Mr. Higgerson has also been a partner of Communications
Ventures, Inc. Mr. Higgerson also is a director of Advanced Fibre
Communications, Ciena Corporation, a manufacturer of multiplexing systems, and
Digital Microwave Corporation. Mr. Higgerson earned his B.S. in Electrical
Engineering from the University of Illinois and an M.B.A. in Finance from the
University of California at Berkeley.
Saul Rosenzweig has served as a director of the Company since July 1993. Mr.
Rosenzweig has been a general partner of Rosetree Partners, a venture
investing group, since 1982. He has also served as President of RZGroup, Inc.,
a communications management firm, since 1981. Mr. Rosenzweig holds B.S.
degrees in Naval Science and in Industrial Management from Georgia Institute
of Technology.
David Spreng has served as a director of the Company since February 1994.
Mr. Spreng has served as President of IAI Ventures, Inc. since March 1996, and
has served in various capacities at Investment Advisers, Inc. ("IAI") since
1989. Mr. Spreng is also a director of GalaGen, Inc., a pharmaceutical
company, and PACE Health Management. Mr. Spreng holds a B.S. in Finance and
Accounting from the University of Minnesota.
George Middlemas has served as a director of the Company since April 1995.
Mr. Middlemas has been Managing General Partner of Apex Partners, a venture
capital firm, since 1991. Prior to that time, Mr. Middlemas
43
<PAGE>
served as Vice President and principal with Inco Venture Capital Management,
and a vice president and member of the investment committee of Citicorp
Venture Capital. Mr. Middlemas holds an M.B.A from Harvard University, an M.A.
in Political Science from the University of Pittsburgh and a B.A. in History
and Political Science from The Pennsylvania State University. Mr. Middlemas
serves on the Boards of Directors of e.Spire Communications, Inc., a network
company, Pure Cycle Corporation, a water and water recycling technology
company, and Security Dynamics Technologies, Inc., an enterprise network and
data security products company.
Brion Applegate has served as a director of the Company since August 1996.
Mr. Applegate was a co-founder of Spectrum and has served as a Managing
General Partner since February 1993. Prior to that time, he was a General
Partner of funds managed by Burr, Egan, Deleage & Co., a venture capital firm,
from 1982 to 1993. Mr. Applegate holds a B.A. in Liberal Arts from Colgate
University and an M.B.A. from Harvard University.
Roger Moore has served as a director of the Company since March 1997. Mr.
Moore has served as President, Chief Executive Officer and a director of VINA
Technologies, Inc., a telecommunications equipment company, since July 1998.
From January 1996 to July 1998, he served as President and Chief Executive
Officer of Illuminet, Inc., a provider of network, database and billing
services to the communications industry, since January 1996. From November
1985 to December 1995, Mr. Moore served in various executive capacities at
Northern Telecom Ltd., including Vice President, Major Accounts and President,
Northern Telecom Japan. Mr. Moore holds a B.S. in General Science from
Virginia Polytechnic Institute and State University.
Neal Douglas has served as a director of the Company since December 1997.
Since January 1993, he has been a General Partner of AT&T Ventures, a venture
capital firm. From May 1989 to January 1993, Mr. Douglas was a partner of New
Enterprise Associates, a venture capital firm. Additionally, he was a Member
of the Technical Staff at Bell Laboratories. He also serves as a director of
Cellnet Data Systems, Inc., a provider of fixed network wireless information
services, First Virtual Corporation, an Internet video applications company,
and several privately held companies. He received a B.S. in Electrical
Engineering from Cornell University, an M.S. in Electrical Engineering from
Stanford University, and an M.B.A from the University of California at Los
Angeles.
The Company's executive officers are appointed by the Board of Directors and
serve until their successors are elected or appointed.
There are no family relationships among any of the Company's directors or
executive officers.
BOARD OF DIRECTORS
Upon the closing of the offering, the Company will have authorized nine
directors. In accordance with the terms of the Company's Certificate of
Incorporation, the terms of office of the Board of Directors will be divided
into three classes: Class I, whose term will expire at the annual meeting of
stockholders to be held in 1999, Class II, whose term will expire at the
annual meeting of stockholders to be held in 2000, and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2001. The
Class I directors are Messrs. Higgerson, Spreng and Applegate, the Class II
directors are Messrs. Middlemas, Douglas and Taylor, and the Class III
directors are Messrs. D'Auria, Rosenzweig and Moore. 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.
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. This
classification of the Board of Directors may have the effect of delaying or
preventing changes in control or management of the Company. Directors may be
removed for cause by the affirmative vote of the holders of a majority of the
Common Stock.
BOARD COMMITTEES
The Board of Directors has two committees, an Audit Committee and a
Compensation Committee. Since April 1998, the Board's Audit Committee has
consisted of Messrs. Rosenzweig and Spreng. The Audit Committee reviews the
Company's annual audit and meets with the Company's independent auditors to
review
44
<PAGE>
the Company's internal accounting procedures and financial management
practices. Since April 1998, the Compensation Committee has consisted of
Messrs. Applegate, Moore and Douglas. The Compensation Committee makes
recommendations concerning salaries, stock options, incentives and other forms
of compensation for directors, officers and other employees of the Company,
subject to ratification by the full Board of Directors. The Compensation
Committee is also empowered to administer the Company's various stock plans.
Prior to the creation of the Compensation Committee, all decisions concerning
salaries, incentives and other forms of compensation for directors, officers
and other employees of the Company required a vote by the entire Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee are Messrs. Applegate,
Moore and Douglas. None of the members of the Compensation Committee of the
Board of Directors is currently or has been, at any time since the formation
of the Company, an officer or employee of the Company. During the year ended
December 31, 1997, no executive officer of the Company (i) served as a member
of the compensation committee (or other board committee performing similar
functions or, in the absence of any such committee, the board of directors) of
another entity, one of whose executive officers served on the Company's
Compensation Committee, (ii) served as a director of another entity, one of
whose executive officers served on the Company's Compensation Committee, or
(iii) served as a member of the compensation committee (or other board
committee performing similar functions or, in the absence of any such
committee, the board of directors) of another entity, one of whose executive
officers served as a director of the Company.
DIRECTOR COMPENSATION
Directors currently receive no cash fees for services provided in that
capacity but are reimbursed for out- of-pocket expenses they incur in
connection with attendance at meetings of the Board of Directors. In addition,
in the past, certain directors have been granted stock options for their
service on the Board. The Company does not intend to pay cash fees for the
services of its Board members in the immediate future, nor to provide for the
automatic grant of stock options to its directors. However, directors are
eligible to receive discretionary option grants pursuant to the 1998 Stock
Plan and employee directors will also be eligible to participate in the 1998
Employee Stock Purchase Plan. See "--Stock Plans."
45
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation
earned by the Company's Chief Executive Officer and its four other most highly
compensated executive officers during the year ended December 31, 1997 (the
Chief Executive Officer and such other executive officers are hereinafter
referred to as the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION NUMBER OF
--------------------------- SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION SALARY BONUS OTHER(/1/) OPTIONS COMPENSATION
------------------ -------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Salvatore D'Auria....... $150,000 $25,000 -- -- $31,250(/2/)
President and Chief
Executive Officer
Matthew Taylor.......... 114,088 29,975 -- -- --
Chairman of the Board,
Chief Technical Officer
and Secretary
Allen Purdy............. 109,846 64,837 -- 56,250 --
Vice President of Sales
Nicholas Berberi........ 130,150 14,700 -- 6,250 --
Vice President of
Customer Support
Thomas Warner........... 115,903 21,813 -- 70,000 --
Vice President of
Engineering
</TABLE>
- --------
(1) Other annual compensation in the form of perquisite and other personal
benefits, securities or property has been omitted in those cases where the
aggregate amount of such compensation is the lesser of either $50,000 or
10% of the total of annual salary and bonus reported for the Named
Executive Officer.
(2) Represents the principal portion of certain indebtedness between the
Company and Mr. D'Auria which was forgiven during the year ended December
31, 1997. See "Certain Transactions."
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<PAGE>
Stock Option Information. The following table sets forth certain information
for the fiscal year ended December 31, 1997 with respect to each grant of
stock options to the Named Executive Officers:
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
NUMBER OF APPRECIATION
SECURITIES % OF TOTAL FOR OPTION
UNDERLYING OPTIONS EXERCISE TERM(/4/)
OPTIONS GRANTED IN PRICE PER EXPIRATION ---------------
NAME GRANTED(/1/) 1997(/2/) SHARE(/3/) DATE 5% 10%
---- ------------ ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Salvatore D'Auria....... -- -- -- -- -- --
President and Chief
Executive Officer
Matthew Taylor.......... -- -- -- -- -- --
Chairman of the Board,
Chief Technical Officer
and Secretary
Allen Purdy............. 56,250 14.4% $0.52 1/22/07 $18,395 $46,617
Vice President of Sales
Nicholas Berberi........ 6,250 1.6 0.52 1/1/07 2,044 5,180
Vice President of
Customer Support
Thomas Warner........... 70,000 18.0 0.52 2/17/07 22,892 58,012
Vice President of
Engineering
</TABLE>
- --------
(1) The options granted to Messrs. Purdy, Berberi and Warner have vesting
schedules as follows: 25% vest on the first anniversary of the date of
grant and 1/48th per month thereafter.
(2) In 1997 the Company granted employees, consultants and directors options
to purchase an aggregate of 389,313 shares of Common Stock.
(3) The exercise price per share of each option was equal to the fair value of
the Common Stock on the date of grant as determined in good faith by the
Board of Directors on such date based upon such factors as the purchase
price paid by investors for shares of the Company's preferred stock, the
absence of a trading market for the Company's securities and the Company's
financial outlook and results of operations. Such exercise prices are
significantly lower than prices paid by investors purchasing shares of the
Company's preferred stock in transactions taking place approximately
contemporaneously with the grant of such options. In making its
determination as to the exercise price of such options, the Board
considered the fact that the Company's preferred stock carried certain
rights, preferences and privileges, including a preference upon
liquidation, sale or merger, enhanced voting rights and antidilution
rights, and purchasers of such preferred stock received additional
contractual rights, including registration rights and information rights.
(4) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), shown are the gains or "option spreads" that would
exist for the respective options granted. These gains are based on the
assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the option was granted over the full option term. These
assumed annual compound rates of stock price appreciation are mandated by
the rules of the Commission and do not represent the Company's estimate or
projection of future Common Stock prices.
47
<PAGE>
Aggregate Option Exercises and Option Values. The following table sets forth
information with respect to the Named Executive Officers concerning option
exercises for the fiscal year ended December 31, 1997 and exercisable and
unexercisable options held as of December 31, 1997:
AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1997 DECEMBER 31, 1997(/1/)
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Salvatore D'Auria....... -- -- 154,375 30,000 $253,175 $49,200
President & Chief
Executive Officer
Matthew Taylor.......... -- -- -- -- -- --
Chairman of the Board,
Chief Technical Officer
and Secretary
Allen Purdy............. -- -- -- 56,250 -- 83,250
Vice President of Sales
Nicholas Berberi........ -- -- 13,672 17,578 20,781 20,316
Vice President of
Customer Support
Thomas Warner........... -- -- -- 70,000 -- 103,600
Vice President of
Engineering
</TABLE>
- --------
(1) The fair market value of the Company's Common Stock as determined by the
Board of Directors on or about December 31, 1997 was $2.00 per share.
STOCK PLANS
1992 Stock Plan
The 1992 Stock Plan, as amended (the "1992 Stock Plan"), provides for the
grant of incentive stock options, within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), to employees of the
Company and nonstatutory stock options and stock purchase rights ("SPRs") to
employees, directors and consultants of the Company. A total of 1,437,500
shares of Common Stock have been reserved for issuance under the Company's
1992 Stock Plan. Under the 1992 Stock Plan, as of June 30, 1998, options to
purchase an aggregate of 1,048,927 shares were outstanding, 212,528 shares of
Common Stock had been purchased pursuant to exercises of stock options and
stock purchase rights and 176,045 shares were available for future grant. The
Board of Directors has determined that no further options will be granted
under the 1992 Stock Plan after the completion of this offering.
The 1992 Stock Plan is administered by the Board of Directors, or a
committee appointed by the Board of Directors, which determines the terms of
options granted, including the exercise price and the number of shares subject
to each option. The Board of Directors also determines the schedule upon which
options become exercisable. The exercise price of incentive stock options
granted under the 1992 Stock Plan must be at least equal to the fair market
value of the Company's Common Stock on the date of grant. However, for any
employee holding more than 10% of the voting power of all classes of the
Company's stock ("10% stockholder"), the exercise price may be no less than
110% of the fair market value. The exercise price of a nonstatutory stock
option may not be less than 85% of the fair market value of the Common Stock
on the date such option is granted; provided, however, the exercise price of a
nonstatutory stock option granted to a 10% stockholder may not be less than
110% of the fair market value of the Common Stock on the date such option is
granted. The maximum term of options granted under the 1992 Stock Plan is ten
years.
Options and SPRs granted under the 1992 Stock Plan are not transferable by
the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the
48
<PAGE>
1992 Stock Plan must generally be exercised within three months after the end
of optionee's status as an employee, director or consultant of the Company, or
within twelve months after such optionee's termination by disability or death,
respectively, to the extent optionee is vested on the date of termination, but
in no event later than the expiration of the option's term.
The 1992 Stock Plan provides that in the event of a merger of the Company
with or into another corporation, or a sale of substantially all of the
Company's assets, each outstanding option or SPR shall be assumed or an
equivalent option or SPR substituted by the successor corporation. If the
outstanding options or SPRs are not assumed or substituted, the options or
SPRs will terminate upon the closing of the merger. The Board of Directors may
amend or modify the 1992 Stock Plan at any time, except that without the
consent of the stockholders, no amendment or modification shall adversely
affect rights and obligations with respect to outstanding options. Unless
sooner terminated by the Board of Directors, the 1992 Stock Plan will
terminate in 2002.
1998 Stock Plan
The Company's 1998 Stock Plan was adopted by the Board of Directors in July
1998 and will be submitted for approval to the stockholders in August 1998. A
total of 1,000,000 shares of Common Stock, plus annual increases (beginning in
2000) equal to the lesser of: (i) 375,000 shares, (ii) 3% of the outstanding
shares, or (iii) a lesser amount determined by the Board of Directors, are
currently reserved for issuance pursuant to the 1998 Stock Plan. Unless
terminated sooner, the 1998 Stock Plan will terminate automatically in 2008.
The 1998 Stock Plan provides for the discretionary grant of incentive stock
options, within the meaning of Section 422 of the Code, to employees and for
the grant of nonstatutory stock options and SPRs to employees, directors and
consultants.
The 1998 Stock Plan may be administered by the Board of Directors or a
committee of the Board (as applicable, the "Administrator"), which committee
shall, in the case of options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, 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 or SPRs
granted, including the exercise price of the option or SPR, the number of
shares subject to each option or SPR, the exercisability thereof, and the form
of consideration payable upon such exercise. In addition, the Administrator
has the authority to amend, suspend or terminate the 1998 Stock Plan, provided
that no such action may affect any share of Common Stock previously issued and
sold or any option previously granted under the 1998 Stock Plan.
The exercise price of all incentive stock options granted under the 1998
Stock Plan must be at least equal to the fair market value of the Common Stock
on the date of grant. The exercise price of nonstatutory stock options and
SPRs granted under the 1998 Stock Plan is determined by the Administrator, but
with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the exercise price must be at least equal to the fair market value of
the Common Stock on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted must be at least equal 110% of the fair market value on the
grant date and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1998 Stock Plan may not
exceed ten years.
In the case of SPRs, unless the Administrator determines otherwise, the
restricted stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment or consulting relationship with the Company for any
reason (including death or disability). The purchase price for shares
repurchased pursuant to the restricted stock purchase agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall
lapse at a rate determined by the Administrator.
49
<PAGE>
Options and SPRs granted under the 1998 Stock Plan are generally not
transferable by the optionee, and each option and SPR is exercisable during
the lifetime of the optionee only by such optionee. Options granted under the
1998 Stock Plan must generally be exercised within three months after the end
of optionee's status as an employee, director or consultant of the Company, or
within one year after such optionee's termination by disability or death,
respectively, but in no event later than the expiration of the option's term.
The 1998 Stock Plan provides that in the event of a merger of the Company
with or into another corporation, or a sale of substantially all of the
Company's assets, each outstanding option and SPR shall be assumed or an
equivalent option substituted for by the successor corporation. If the
outstanding options and SPRs are not assumed or substituted for by the
successor corporation, the Administrator shall provide for the optionee to
have the right to exercise the option or SPR as to all of the optioned stock,
including shares as to which it would not otherwise be exercisable. If the
Administrator makes an option or SPR exercisable in full in the event of a
merger or sale of assets, the Administrator shall notify the optionee that the
option or SPR shall be fully exercisable for a period of fifteen days from the
date of such notice, and the option or SPR will terminate upon the expiration
of such period.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
was adopted by the Board of Directors in July 1998 and will be submitted for
approval to the stockholders in August 1998. A total of 250,000 shares of
Common Stock has been reserved for issuance under the 1998 Purchase Plan, plus
annual increases (beginning in 1999) equal to the lesser of: (i) 250,000
shares, (ii) 2% of the outstanding shares, or (iii) a lesser amount determined
by the Board.
The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains successive six-month offering periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period which commences on the
first trading day on or after the effective date of this Offering and ends on
the last trading day on or before April 30, 1999.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 21 hours per week.
However, any employee who (i) immediately after grant owns stock possessing 5%
or more of the total combined voting power or value of all classes of the
capital stock of the Company, or (ii) whose rights to purchase stock under all
employee stock purchase plans of the Company accrues at a rate which exceeds
$25,000 worth of stock for each calendar year may be not be granted an option
to purchase stock under the 1998 Purchase Plan. The 1998 Purchase Plan permits
participants to purchase Common Stock through payroll deductions of up to 15%
of the participant's "compensation." Compensation is defined as the
participant's base straight time gross earnings and commissions, but exclusive
of overtime, bonuses and any other compensation. The maximum number of shares
a participant may purchase during a single offering period is 1,250 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each offering period. The price of stock
purchased under the 1998 Purchase Plan is generally 85% of the lower of the
fair market value of the Common Stock at the beginning or end of the offering
period. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company.
Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
outstanding option may be assumed or substituted for by the successor
corporation. 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.
50
<PAGE>
The Board of Directors has the authority to amend or terminate the 1998
Purchase Plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 1998 Purchase Plan, provided that the Board
of Directors may terminate an offering period on any exercise date if the
Board determines that the termination of the 1998 Purchase Plan is in the best
interests of the Company and its stockholders. The 1998 Purchase Plan will
become effective on the consummation of the offering and will terminate in ten
years from such date, unless sooner terminated by the Board of Directors.
401(K) PLAN
The Company maintains a retirement and deferred savings plan for its
employees (the "401(k) Plan") that is intended to qualify as a tax-qualified
plan under the Code. The 401(k) Plan provides that each participant may
contribute up to 15% of his or her pre-tax gross compensation (up to a
statutory limit, which was $10,000 in calendar year 1998). Under the 401(k)
Plan, the Company may make discretionary matching contributions. The Company
did not make any contributions to the 401(k) Plan in 1997. A matching
contribution made by the Company vests at 25% per year commencing on the first
anniversary of a participant's date of employment with the Company. All
amounts contributed by participants and earnings on such contributions are
fully vested at all times.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides for the indemnification
of directors to the maximum extent permitted by Delaware law. 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.
The Company's Bylaws provide that the Company shall indemnify its directors,
officers, employees and other agents to the fullest extent permitted by law.
The Company believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. The
Company's Bylaws also permit it to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the Bylaws permit such
indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company arising out of such person's services as a director, officer,
employee, agent or fiduciary of the Company, any subsidiary of the Company or
any other company or enterprise to which the person provides services at the
request of the Company. The agreements do not provide for indemnification in
cases where (i) the claim is brought by the indemnified party; (ii) the
indemnified party has not acted in good faith; (iii) the claim arises under
Section 16(b) of the Exchange Act; or (iv) the indemnified party has engaged
in acts, omissions or transactions for which the indemnified party is
prohibited from receiving indemnification under the agreement or applicable
law. The Company believes that these provisions and agreements are necessary
to attract and retain qualified persons as directors and executive officers.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted, and the Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
51
<PAGE>
CERTAIN TRANSACTIONS
On March 31, 1995 and May 15, 1995 the Company sold an aggregate of
1,306,282 shares of Series E Preferred Stock, at a per share price of $4.60,
in a private placement equity financing with certain stockholders and
directors of the Company, including: (i) an aggregate of 207,576 shares
purchased by an entity affiliated with Apex Investment Funds ("Apex"), a
principal stockholder of the Company, of which Mr. Middlemas, a director of
the Company, is Managing General Partner; (ii) an aggregate of 490,185 shares
purchased by entities affiliated with First Analysis Corporation (including
shares purchased by Apex), a principal stockholder of the Company; (iii) an
aggregate of 108,696 shares purchased by entities affiliated with Investment
Advisers, Inc. ("IAI"), a principal stockholder of the Company, of which Mr.
Spreng, a director of the Company, is President; (iv) an aggregate of 86,957
shares purchased by Vanguard IV, L.P. ("Vanguard"), a principal stockholder of
the Company, of which Mr. Higgerson, a director of the Company is a general
partner; and (v) an aggregate of 16,305 shares purchased by Spectrum Equity
Investors, L.P., a principal stockholder of the Company and for which Brion
Applegate, a director of the Company, serves as managing general partner. See
"Principal Stockholders."
On April 17, 1995 the Company loaned to Salvatore D'Auria, the Company's
President and Chief Executive Officer, an aggregate of $125,000 pursuant to a
Loan Agreement and Secured Promissory Note (the "Loan Agreement"). The loan
did not bear interest. Pursuant to the Loan Agreement, the Company forgave 25%
of the principal amount of the loan each year. As of the date hereof, the loan
has been discharged in full.
On August 9, 1996 and October 7, 1996 the Company sold an aggregate of
2,306,158 shares of Series F Preferred Stock, at a per share purchase price of
$5.00, in a private placement equity financing with certain stockholders and
directors of the Company, including: (i) an aggregate of 300,000 shares
purchased by entities affiliated with Apex, a principal stockholder of the
Company, of which Mr. Middlemas, a director of the Company, is Managing
General Partner; (ii) an aggregate of 360,000 shares purchased by entities
affiliated with First Analysis Corporation (including shares purchased by
Apex), a principal stockholder of the Company; (iii) an aggregate of 260,000
shares purchased by entities affiliated with IAI, a principal stockholder of
the Company, of which Mr. Spreng, a director of the Company, is President; and
(iv) an aggregate of 150,696 shares purchased by Vanguard, a principal
stockholder of the Company, of which Mr. Higgerson is a general partner. See
"Principal Stockholders."
On August 27, 1997 the Company and Microsoft entered into a Licensing and
Cooperative Marketing Agreement (the "Microsoft License Agreement") pursuant
to which the Company and Microsoft agreed to cooperate in the development and
marketing of future implementations of the Company's HomeRun technology. Each
party will own a half interest in the other's technology embodied in works
made jointly by them. In connection with the Microsoft License Agreement, the
Company issued Microsoft a warrant to purchase up to 666,836 shares of Series
G Preferred Stock at an exercise price of $10.00 per share. This warrant
expires, if not earlier exercised, on the closing of this offering. Microsoft
is a principal stockholder of the Company. See "Principal Stockholders."
From December 1997 through May 1998, the Company sold an aggregate of
1,250,006 shares of Series G Preferred Stock, at a per share purchase price of
$12.00, in a private placement equity financing with certain stockholders and
directors of the Company, including: (i) an aggregate of 125,000 shares
purchased by AT&T Ventures, a major stockholder of the Company and of which
Neal Douglas, a director of the Company, is a general partner; (ii) an
aggregate of 416,667 shares purchased by Microsoft; (iii) an aggregate of
28,835 shares purchased by entities affiliated with Apex, a principal
stockholder of the Company of which Mr. Middlemas, a director of the Company,
is Managing General Partner; (iv) an aggregate of 47,650 shares purchased by
entities affiliated with First Analysis Corporation (including shares
purchased by Apex); (v) an aggregate of 50,000 shares purchased by IAI, a
principal stockholder of the Company of which Mr. Spreng, a director of the
Company, is President; (vi) an aggregate of 8,334 shares purchased by
Vanguard, a principal stockholder of the Company, of which Mr. Higgerson is a
general partner; and (vii) an aggregate of 41,667 shares purchased by Spectrum
Equity Investors, L.P., a principal stockholder of the Company and for which
Brion Applegate, a director of the Company, serves as managing general
partner. See "Principal Stockholders."
52
<PAGE>
In the past, the Company has granted options to its executive officers and
directors. The Company intends to grant options to its officers and directors
in the future. See "Management--Option Grants During Year Ended December 31,
1997" and "Management--Director Compensation."
The Company has entered into indemnification agreements with its officers
and directors containing provisions which may require the Company, among other
things, to indemnify its officers and directors against certain liabilities
that may arise by reason of their status or service as officers or directors
(other than liabilities arising from willful misconduct of a culpable nature)
and to advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified. The Company also intends to
execute such agreements with its future directors and executive officers. See
"Management--Limitation of Liability and Indemnification Matters."
All of the Company's securities referenced above were purchased or sold at
prices equal to the fair market value of such securities, as determined by the
Company's Board of Directors, on the date of issuance.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 30, 1998, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, certain
information with respect to the beneficial ownership of the Common Stock as to
(i) each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING(/2/)
------------------------
NUMBER OF SHARES BEFORE THE AFTER THE
BENEFICIAL OWNER BENEFICIALLY OWNED(/1/) OFFERING OFFERING(/3/)
---------------- ----------------------- ---------- -------------
<S> <C> <C> <C>
5% Beneficial Owners
Microsoft Corporation(/4/)... 1,083,503 13.0% 10.0%
First Analysis Corpora-
tion(/5/)................... 897,835 10.8 8.3
Investment Advisers,
Inc.(/6/)................... 864,098 10.4 8.0
Vanguard IV, L.P.(/7/)....... 658,592 7.9 6.1
AT&T Ventures(/8/)........... 625,000 7.5 5.8
Spectrum Equity Investors,
L.P.(/9/)................... 541,667 6.5 5.0
Apex Investment
Funds(/1//0/)............... 536,411 6.4 4.9
Officers and Directors
David Spreng(/1//1/)......... 864,098 10.4 8.0
Clifford H.
Higgerson(/1//2/)........... 658,592 7.9 6.1
Neal Douglas(/1//3/)......... 625,000 7.5 5.8
Brion Applegate(/1//4/)...... 541,667 6.5 5.0
George Middlemas(/1//5/)..... 536,411 6.4 4.9
Matthew Taylor(/1//6/)....... 368,370 4.4 3.4
Salvatore D'Auria(/1//7/).... 193,750 2.3 1.8
Saul Rosenzweig(/1//8/)...... 110,913 1.3 1.0
Thomas Warner(/1//9/)........ 27,968 * *
Allen Purdy(/2//0/).......... 23,827 * *
Nicholas Berberi(/2//1/)..... 20,935 * *
Roger Moore(/2//2/).......... 3,333 * *
All officers and directors as
a group (16 per-
sons)(/2//3/)............... 3,995,983 46.1% 35.8%
</TABLE>
- --------
* Less than 1%.
(1) Except pursuant to applicable community property laws or as indicated in
the footnotes to this table, to the Company's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
(2) Applicable percentage ownership based on 8,342,578 shares of Common Stock
outstanding as of June 30, 1998 (including 666,836 shares issuable upon
exercise of a warrant), together with applicable options for such
stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission ("Commission"), based on
factors including voting and investment power with respect to shares.
Shares of Common Stock subject to options currently exercisable, or
exercisable within 60 days after June 30, 1998 are not deemed outstanding
for computing the percentage ownership of any other person.
(3) After giving effect to the issuance of 2,500,000 shares of Common Stock
offered hereby (assuming no exercise of the Underwriters' over-allotment
option).
(4) The address of record for Microsoft Corporation is One Microsoft Way,
Building 8, Redmond, WA 98502-6399. Includes 666,836 shares issuable upon
exercise of an outstanding warrant. If not previously exercised, such
warrant will terminate upon the closing of the offering.
(5) The address of record for First Analysis Corporation is 233 S. Wacker
Drive, Suite 9500, Chicago, IL 60606. Consists of 377,601 shares held by
Apex Investment Fund II, L.P., 158,810 shares held by Apex Investment
Fund III, L.P., 156,926 shares held by The Productivity Fund II, L.P.,
204,498 shares held by Environmental Private Equity Fund. First Analysis
Corporation disclaims beneficial ownership of these shares except to the
extent of its proportional partnership interest therein.
54
<PAGE>
(6) The address of record for each member of Investment Advisors, Inc. is
3700 First Bank Place, 601 Second Avenue South, Minneapolis, MN 55402.
Consists of 396,376 shares held by and 2,000 shares issuable pursuant to
options exercisable within 60 days of June 30, 1998 and held by IAI
Investment Funds VI, Inc. (IAI Emerging Growth Fund), 258,697 shares held
by and 2,049 shares issuable pursuant to options exercisable within 60
days of June 30, 1998 and held by IAI Investment Funds IV, Inc. (IAI
Regional Fund), 87,581 shares held by and 1,500 shares issuable pursuant
to options exercisable within 60 days of June 30, 1998 and held by IAI
Investment Funds VIII, Inc. (IAI Value Fund), 58,387 shares held by and
1,000 shares issuable pursuant to options exercisable within 60 days of
June 30, 1998 and held by IAI Investment Funds VI, Inc. (IAI Midcap
Growth Fund), and 55,556 shares held by and 952 shares issuable pursuant
to options exercisable within 60 days of June 30, 1998 and held by IAI
Investment Funds VII, Inc. (IAI Growth & Income Fund). These mutual funds
are part of an affiliated group of registered investment corporations
referred to collectively as the IAI Mutual Funds and are managed by
Investment Advisers, Inc. Investment Advisers, Inc. is a registered
investment adviser under the Investment Advisers Act of 1940 and an
affiliate of IAI Ventures.
(7) The address of record for Vanguard IV, L.P. is 555 University Avenue,
Palo Alto, CA 94301. Includes 7,500 shares issuable pursuant to options
exercisable within 60 days of June 30, 1998.
(8) The address of record for AT&T Ventures is 3000 Sand Hill Road, Building
One, Suite 285, Menlo Park, CA 94025. Consists of 312,500 shares held by
AT&T Venture Fund II, L.P. and 312,500 shares held by Venture Fund I,
L.P.
(9) The address of record for Spectrum Equity Investors, L.P. is 300 Draker
Landing Road, Suite 251, Greenbrae, CA 94904.
(10) The address of record for each member of Apex Investment Funds is 233 S.
Wacker Drive, Suite 9500, Chicago, IL 60606. Consists of 377,601 shares
held by Apex Investment Fund II, L.P. and 158,810 shares held by Apex
Investment Fund III, L.P.
(11) Consists of 856,597 held by and 7,501 shares issuable pursuant to options
exercisable within 60 days of June 30, 1998 and held by the IAI Mutual
Funds. Mr. Spreng is Senior Vice President of Investment Advisers, Inc.
and President of IAI Ventures. Mr. Spreng disclaims beneficial ownership
of these shares except to the extent of his proportional partnership
interest therein.
(12) Consists of 651,092 shares held by and 7,500 shares issuable pursuant to
options exercisable within 60 days of June 30, 1998 and held by Vanguard
IV, L.P. Mr. Higgerson is a general partner of Vanguard IV, L.P. Mr.
Higgerson disclaims beneficial ownership of these shares except to the
extent of his proportional partnership interest therein.
(13) Consists of 625,000 shares held by AT&T Ventures. Mr. Douglas is a
general partner of AT&T Ventures. Mr. Douglas disclaims beneficial
ownership of these shares except to the extent of his proportional
partnership interest therein.
(14) Consists of 541,667 shares held by Spectrum Equity Investors, L.P. Mr.
Applegate is a managing general partner of Spectrum Equity Investors,
L.P. Mr. Applegate disclaims beneficial ownership of these shares except
to the extent of his proportional partnership interest therein.
(15) Consists of 536,411 shares held by Apex Investment Funds. Mr. Middlemas
is the Managing General Partner of Apex Investment Funds. Mr. Middlemas
disclaims beneficial ownership of these shares except to the extent of
his proportional partnership interest therein.
(16) Includes 1,562 shares issuable pursuant to options exercisable within 60
days of June 30, 1998.
(17) Consists of 193,750 shares issuable pursuant to options or rights
exercisable within 60 days of June 30, 1998.
(18) Includes 12,500 shares issuable pursuant to options exercisable within 60
days of June 30, 1998. Also includes 92,413 shares held by Rosetree
Partners General Partnership. Mr. Rosenzweig is a general partner of
Rosetree Partners General Partnership. Mr. Rosenzweig disclaims
beneficial ownership of these shares except to the extent of his
proportional partnership interest therein.
(19) Consists of 27,968 shares issuable pursuant to options exercisable within
60 days of June 30, 1998.
(20) Consists of 23,827 shares issuable pursuant to options exercisable within
60 days of June 30, 1998.
(21) Consists of 20,935 shares issuable pursuant to options exercisable within
60 days of June 30, 1998.
(22) Consists of 3,334 shares issuable pursuant to options exercisable within
60 days of June 30, 1998.
(23) Includes an aggregate of 324,420 shares issuable pursuant to options
exercisable within 60 days of June 30, 1998. Also includes an aggregate
of 541,667 shares held by Spectrum Equity Investors, L.P., 536,411 shares
held by Apex Investment Funds, 651,092 shares held by Vanguard IV, L.P.,
856,596 shares held by Investment Advisers, Inc., 625,000 shares held by
AT&T Ventures, and 92,413 shares held by Rosetree Partners General
Partnership.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, the total number of shares of all classes
of stock which the Company has authority to issue will be 100,000,000 shares
of Common Stock, $0.001 par value, and 5,000,000 shares of undesignated
preferred stock, $0.001 par value. As of June 30, 1998, there were 7,675,742
shares of Common Stock outstanding (assuming conversion into Common Stock of
all outstanding shares of Preferred Stock), which were held of record by 192
stockholders, and no shares of undesignated preferred stock outstanding. Upon
completion of this offering and assuming no exercise of options after June 30,
1998, the Company will have outstanding 10,842,578 shares of Common Stock,
11,217,578 shares if the Underwriter's over-allotment option is exercised.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of Common
Stock have no preemptive or subscription rights and there are no redemption
rights with respect to such shares.
PREFERRED STOCK
The Company's Board of Directors is authorized, without further stockholder
action, to issue Preferred Stock in one or more series and to fix the voting
rights, liquidation preferences, dividend rights, repurchase rights,
conversion rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences, of the Preferred Stock.
Although there is no current intention to do so, the Board of Directors of
the Company may, without stockholder approval, issue shares of a class or
series of Preferred Stock with voting and conversion rights which could
adversely affect the voting power or dividend rights of the holders of Common
Stock and may have the effect of delaying, deferring or preventing a change in
control of the Company.
OPTIONS
As of June 30, 1998, the Company had outstanding options to purchase a total
of 1,048,927 shares of Common Stock pursuant to the 1992 Stock Plan at a
weighted average exercise price of $2.03 per share and had issued no options
pursuant to the 1998 Stock Plan. Recommendations for option grants under the
1992 Stock Plan and the 1998 Stock Plan (collectively, the "Stock Plans") or
otherwise are made by the Compensation Committee, subject to ratification by
the full Board of Directors. The Compensation Committee may issue options with
varying vesting schedules, but all options granted pursuant to the Stock Plans
must be exercised within ten years from the date of grant.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of approximately 8,786,636 shares of Common Stock (the
"Registrable Securities") or their transferees are entitled to certain
registration rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of the Fourth
Amended and Restated Shareholders' Rights Agreement between the Company and
the holders of the Registrable Securities. If, following this offering, the
Company registers any of its Common Stock either for its own account or for
the account of other security holders, the holders of Registrable Securities
are entitled to include their shares of Common Stock in the registration. A
holder's right to include shares in an underwritten registration statement is
subject to the ability of the underwriters to limit the number of shares
included in the offering. Beginning 180 days after the closing of this
offering, a holder or holders of Registrable Securities may also require the
Company to register all or a
56
<PAGE>
portion of the Registrable Securities on Form S-3 when use of such form
becomes available to the Company, provided, among other limitations, that the
proposed aggregate selling price is at least $1,000,000. All registration
expenses and all selling expenses relating to Registrable Securities,
including the reasonable fees and disbursements of one counsel for the selling
holders (not to exceed $20,000), must be borne by the Company, except that the
Company shall only be responsible for the first two registrations in any
twelve-month period at the request of the holders of Registrable Securities.
If such holders, by exercising their registration rights, cause a large number
of securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for the Company's Common Stock. If
the Company were to initiate a registration and include Registrable Securities
pursuant to the exercise of piggyback registration rights, the sale of such
Registrable Securities may have an adverse effect on the Company's ability to
raise capital.
CERTAIN CHARTER AND BYLAWS PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for
a period of three years following the date that such stockholder became an
interested stockholder, unless: (1) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; or (2)
upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding shares owned (i) by persons who are directors and also
officers and (ii) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (3) at subsequent to
such time the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
The Company's Certificate of Incorporation requires that any action required
or permitted to be taken by the stockholders of the Company must be effected
at a duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. In addition, as provided by the Company's
Bylaws, special meetings of the stockholders of the Company may be called only
by the Board of Directors. The Certificate of Incorporation also provides
that, beginning upon the closing of this offering, the Board of Directors will
be divided into three classes, with each class serving staggered three-year
terms. These provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of the Company. See "Risk Factors--
Certain Antitakeover Provisions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Common Stock will be
American Stock Transfer & Trust Company located at 40 Wall Street, New York,
New York 10005, and its telephone number is (212) 936-5100.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the offering and assuming no exercise of options after
July 15, 1998, the Company will have outstanding 10,849,766 shares of Common
Stock, 11,224,766 shares if the Underwriter's over-allotment option is
exercised. Of these shares, the 2,500,000 shares sold by the Company in the
offering will be freely tradable without restriction or further registration
under the Securities Act unless purchased by affiliates of the Company as that
term is defined in Rule 144 of the Securities Act (the "Affiliates"). The
remaining 7,682,930 shares of Common Stock held by existing shareholders and
559,471 shares subject to outstanding vesting options will be "restricted
securities" as that term is defined in Rule 144 (the "Restricted Shares"). All
officers and directors and the overwhelming majority of stockholders and
option holders of the Company have agreed not to offer, pledge, sell, contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly (or enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of), any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of
Common Stock, for a period of 180 days after the date of this Prospectus (the
"Lock-up Period"), without the prior written consent of the representative of
the Underwriters. The representative of the Underwriters, in its sole
discretion at any time and without notice, may release any or all shares from
the lock-up agreements and permit holders of the shares to resell all or any
portion of their shares at any time prior to the expiration of the Lock-up
Period. See "Underwriting." The number of shares of Common Stock available for
sale in the public market is further limited by restrictions under the
Securities Act.
Because of the restrictions noted above, on the date of this Prospectus, no
shares other than the 2,500,000 shares (2,875,000 shares if the Underwriter's
over-allotment option is exercised) offered hereby will be eligible for sale.
Beginning 180 days after the date of this Prospectus (or earlier with the
prior written consent of the representative of the Underwriters), 8,156,804
shares, including 559,471 shares issuable upon exercise of outstanding vested
options, will be eligible for sale in the public market subject to Rule 144
and Rule 701 of the Securities Act.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned Restricted Shares for at least one year from the later of the date such
Restricted Shares are acquired from the Company and (if applicable) the date
they were acquired from an affiliate, is entitled to sell, within any three
month period, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of Common Stock or the average weekly trading volume
in the Nasdaq National Market System during the four calendar weeks preceding
the filing of Form 144 with respect to such sale. Sales under Rule 144 are
also subject to certain requirements as to the manner and notice of sales and
the availability of public information concerning the Company. All shares,
including Restricted Shares, held by affiliates of the Company eligible for
sale in the public market under Rule 144 are subject to the foregoing volume
limitations and other restrictions. In addition, an individual that is not
deemed to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned for at least one year the
shares proposed to be sold, would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Exchange Act, in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144. Prior to the expiration of
the Lock-up Period, the Company intends to register on a registration
statement on Form S-8 (i) a total of 250,000 shares of Common Stock reserved
for issuance under the 1998 Purchase Plan and (ii) assuming no exercise of
options after July 15, 1998, 1,041,739 shares of Common Stock subject to
outstanding options under the 1992 Stock Plan and 1,000,000 shares reserved
for future issuance pursuant to the 1998 Stock Plan. Such registration will
permit the resale in the public market of shares so registered by non-
affiliates without restriction under the Securities Act.
Prior to this offering, there has been no public market for the Common Stock
of the Company, and any sale of substantial amounts of Common Stock in the
open market may adversely affect the market price of the Common Stock offered
hereby.
58
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, the Underwriters
named below, for whom Lehman Brothers Inc., Dain Rauscher Wessels, a division
of Dain Rauscher Incorporated, and Smith Barney Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase
from the Company, and the Company has agreed to sell to each Underwriter, the
aggregate number of shares set forth opposite the name of each such
Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc. .............................................
Dain Rauscher Wessels.............................................
a division of Dain Rauscher Incorporated
Smith Barney Inc. ................................................
-----
Total...........................................................
=====
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the initial public offering price
set forth on the cover page hereof, and to certain dealers at such initial
public offering price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other Underwriters or to certain other
brokers or dealers. After the initial offering to the public, the offering
price and other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions, including the condition that no stop order suspending the
effectiveness of the Registration Statement is in effect and no proceedings
for such purpose are pending before or threatened by the Commission and that
there has been no material adverse change or any development involving a
prospective material adverse change in the condition of the Company, taken as
a whole, from that set forth in the Registration Statement, and that certain
certificates, opinions and letters have been received from the Company and its
counsel and independent auditors.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities
under the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 375,000 shares of Common Stock, exercisable solely to cover over-
allotments, at the initial public offering price, less the underwriting
discounts and commissions shown on the cover page hereof. Such option may be
exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that such option is exercised, each Underwriter will
be committed, subject to certain conditions, to purchase a number of the
additional shares of Common Stock that is proportionate to such Underwriter's
initial commitment as indicated in the preceding table.
All of the directors, officers and substantially all of the stockholders and
optionholders of the Company have each agreed, subject to certain limited
exceptions, not to offer, sell, contract to sell, make any short sale, pledge
or otherwise dispose (or enter into any transaction which is designed to, or
could be expected to, result in the disposition by any person) of, directly or
indirectly, any shares of Common Stock (including, without limitation, shares
which may be deemed to be beneficially owned in accordance with the rules and
regulations of the Securities and Exchange Commission under the Securities
Act), or any security convertible into or exercisable
59
<PAGE>
for Common Stock, or any rights to purchase or acquire, Common Stock of the
Company (other than pursuant to bona fide gifts to persons who agree in
writing to be bound by the provisions of the agreement) for a period of 180
days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. In addition, certain of the stockholders and
optionholders are subject to separate 180-day lock-up agreements with the
Company. The Company has agreed that it will not release any of such
stockholders or optionholders from these lock-up agreements without the prior
consent of Lehman Brothers Inc. Except for the Common Stock to be sold in the
offering, the Company has agreed, with certain limited exceptions relating to
the grant of options and issuance of Common Stock pursuant to the Company's
stock option plans and stock purchase plans, not to offer for sale, sell or
otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any person
at any time in the future of), directly or indirectly, any shares of Common
Stock or other capital stock or any securities convertible into or
exchangeable or exercisable for, or any rights to acquire, Common Stock or
other capital stock, prior to the expiration of 180 days from the date of this
Prospectus without the prior written consent of Lehman Brothers Inc.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock offered hereby for sale to certain officers, directors,
employees, business associates and related parties of the Company at the
initial public offering price set forth on the cover page of this Prospectus.
Such persons must commit to purchase no later than the close of business on
the day following the date hereof. The number of shares available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares.
Until the distribution of the shares is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase shares of Common Stock. As an exception to
these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock. In addition, if the Representatives
over-allot (sell more shares of Common Stock than are set forth on the cover
page of this Prospectus), and thereby create a short position in the Common
Stock in connection with this offering, the Representatives may reduce that
short position by purchasing Common Stock in the open market. The
Representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option described herein.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of the Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering. In general, purchases
of shares of Common Stock for the purpose of stabilization or to reduce a
syndicate short position could cause the price of the Common Stock to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the offering. Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
Prior to this offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price of the Common
Stock, in addition to prevailing market conditions, will be the Company's
historical performance, capital structure, estimates of the business potential
and earnings prospects of the Company, an assessment of the Company's
management, consideration of the above factors in relation to market valuation
of companies in related businesses and other factors deemed relevant.
60
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C. ("WSG&R"). WS Investment
Company, an investment fund for the benefit of certain attorneys of WSG&R,
owns an aggregate of 11,840 shares of Series C Preferred Stock of the Company.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Cooley Godward LLP.
EXPERTS
The balance sheets as of December 31, 1997 and 1996 and the statements of
operations, stockholders' deficit, and cash flows for each of the three years
in the period ended December 31, 1997, included in this prospectus, have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement, of which
this Prospectus constitutes a part, under the Securities Act with respect to
the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information
with respect to the Company and the Common Stock offered hereby. The
Registration Statement, including exhibits filed therewith, may be inspected
without charge at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1034, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and its public reference facilities in New York, New York and Chicago,
Illinois, at prescribed rates. In addition, the Commission maintains a World
Wide Web site that contains reports, proxy and information statements that are
filed electronically with the Commission. The address of the site is
http://www.sec.gov.
61
<PAGE>
TUT SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Tut Systems, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations and stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of Tut Systems, Inc. at December
31, 1996 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1997, 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.
San Jose, California
March 16, 1998, except for Note 17,
as to which the date is July 24, 1998
------------------
To the Stockholders and Board of Directors of Tut Systems, Inc.:
The financial statements included herein have been adjusted to give effect
to the reincorporation of the Company in Delaware as described more fully in
Note 17 to the financial statements. The above report is in the form that will
be signed by PricewaterhouseCoopers LLP upon effectiveness of such
reincorporation assuming that, from March 16, 1998, except for Note 17, as to
which the date is July 24, 1998 to the effective date of such reincorporation,
no other events shall have occurred that would affect the accompanying
financial statements or notes thereto.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 24, 1998
F-2
<PAGE>
TUT SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ JUNE 30, JUNE 30,
1996 1997 1998 1998
-------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 1,409 $ 5,395 $ 3,805 $ 10,473
Short-term investments.............. 7,541 4,890 2,984 2,984
Accounts receivable, net of
allowance for doubtful accounts of
$20, $29, and $38 in 1996, 1997 and
1998, respectively................. 604 1,626 3,142 3,142
Inventories......................... 255 1,424 1,770 1,770
Prepaid expenses and other.......... 57 332 289 289
-------- -------- -------- --------
Total current assets.............. 9,866 13,667 11,990 18,658
Property and equipment, net........... 774 1,345 1,676 1,676
Deferred offering costs............... -- -- 87 87
Other assets.......................... 49 156 141 141
-------- -------- -------- --------
Total assets...................... $ 10,689 $ 15,168 $ 13,894 $ 20,562
======== ======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND WARRANT, AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................... $ 887 $ 1,640 $ 1,221 $ 1,221
Accrued liabilities................. 416 747 984 984
Lines of credit..................... 206 214 247 247
Deferred revenue.................... -- -- 100 100
-------- -------- -------- --------
Total current liabilities......... 1,509 2,601 2,552 2,552
Lines of credit, net of current
portion.............................. 190 140 164 164
Deferred revenue, net of current
portion.............................. -- -- 842 842
-------- -------- -------- --------
Total liabilities................. 1,699 2,741 3,558 3,558
-------- -------- -------- --------
Commitments (Notes 10 and 11).
Redeemable convertible preferred
stock, no par value, 7,531 shares
authorized, 5,105, 6,047, and 6,355
shares issued and outstanding in
1996, 1997, and 1998, respectively,
and none in pro forma (liquidation
value: $42,573 at June 30, 1998)..... 24,684 37,611 42,573 --
Redeemable convertible preferred stock
warrant.............................. -- 1,260 2,100 --
-------- -------- -------- --------
24,684 38,871 44,673 --
-------- -------- -------- --------
Stockholders' equity (deficit):
Convertible preferred stock, no par
value, 1,719 shares authorized,
1,098 shares issued and outstanding
in 1996, 1997, 1998 and none in pro
forma (liquidation value: $1,567 at
June 30, 1998)..................... 1,567 1,567 1,567 --
Common stock, $0.001 par value,
100,000 shares authorized, 156,
218, 223 and 8,343 shares issued
and outstanding in 1996, 1997, 1998
and pro forma, respectively........ -- -- -- 8
Additional paid in capital............ 58 92 1,917 54,817
Deferred compensation................. -- -- (1,655) (1,655)
Accumulated deficit................... (17,319) (28,103) (36,166) (36,166)
-------- -------- -------- --------
Total stockholders' equity
(deficit)........................ (15,694) (26,444) (34,337) 17,004
-------- -------- -------- --------
Total liabilities and
stockholders' deficit............ $ 10,689 $ 15,168 $ 13,894 $ 20,562
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TUT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product..................... $ 3,445 $ 4,454 $ 6,221 $ 2,536 $ 4,095
License and royalty......... -- -- -- -- 418
------- ------- -------- -------- --------
Total revenues............ 3,445 4,454 6,221 2,536 4,513
------- ------- -------- -------- --------
Cost of goods sold:
Product..................... 1,688 2,198 3,228 1,231 2,382
License and royalty......... -- -- -- -- 21
------- ------- -------- -------- --------
Total cost of goods sold.. 1,688 2,198 3,228 1,231 2,403
------- ------- -------- -------- --------
Gross margin.................. 1,757 2,256 2,993 1,305 2,110
------- ------- -------- -------- --------
Operating expenses:
Sales and marketing......... 2,645 3,068 5,147 2,325 3,928
Research and development.... 993 2,012 3,562 1,337 2,764
General and administrative.. 1,562 1,783 2,375 1,110 1,424
Noncash compensation
expense.................... -- -- 1,260 -- 1,005
------- ------- -------- -------- --------
Total operating expenses.. 5,200 6,863 12,344 4,772 9,121
------- ------- -------- -------- --------
Loss from operations...... (3,443) (4,607) (9,351) (3,467) (7,011)
Interest expense.............. (30) (40) (61) (15) (23)
Other income, net............. 84 221 256 172 234
------- ------- -------- -------- --------
Loss before income taxes.. (3,389) (4,426) (9,156) (3,310) (6,800)
Income tax expense............ 1 1 1 1 1
------- ------- -------- -------- --------
Net loss.................. (3,390) (4,427) (9,157) (3,311) (6,801)
Dividend accretion on
preferred stock.............. 694 1,137 1,627 796 1,262
------- ------- -------- -------- --------
Net loss attributable to
common stockholders.......... $(4,084) $(5,564) $(10,784) $ (4,107) $ (8,063)
======= ======= ======== ======== ========
Net loss per share
attributable to common
stockholders, basic and
diluted...................... $(32.56) $(37.51) $ (59.36) $ (25.20) $ (36.65)
======= ======= ======== ======== ========
Shares used in computing net
loss attributable to common
stockholders, basic and
diluted...................... 125 148 182 163 220
======= ======= ======== ======== ========
Pro forma net loss per share,
basic and diluted............ $ (1.41) $ (0.83)
======== ========
Shares used in computing pro
forma net loss per share,
basic and diluted............ 6,490 8,198
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TUT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK
-----------------
SERIES A-C COMMON STOCK ADDITIONAL
----------------- ------------- PAID IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------- -------- ------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995................... 1,098 $ 1,567 108 $ 39 $ (7,671) $ (6,065)
Common stock issued for
cash upon exercise of
options................ 34 12 12
Dividend accretion...... (694) (694)
Net loss................ (3,390) (3,390)
------- -------- --- ------ ------ ------- -------- --------
Balance, December 31,
1995................... 1,098 1,567 142 51 (11,755) (10,137)
Common stock issued for
cash upon exercise of
options................ 13 6 6
Conversion of preferred
stock into common
stock.................. 1 1 1
Dividend accretion...... (1,137) (1,137)
Net loss................ (4,427) (4,427)
------- -------- --- ------ ------ ------- -------- --------
Balance December 31,
1996................... 1,098 1,567 156 58 (17,319) (15,694)
Common stock issued for
cash upon exercise of
options................ 62 34 34
Dividend accretion...... (1,627) (1,627)
Net loss................ (9,157) (9,157)
------- -------- --- ------ ------ ------- -------- --------
Balance, December 31,
1997................... 1,098 1,567 218 92 (28,103) (26,444)
Common stock issued for
cash upon exercise of
options (unaudited).... 5 5 5
Unearned compensation
related to stock
options (unaudited).... 1,820 (1,820)
Amortization related to
unearned compensation
(unaudited)............ 165 165
Dividend accretion
(unaudited)............ (1,262) (1,262)
Net loss (unaudited).... (6,801) (6,801)
------- -------- --- ------ ------ ------- -------- --------
Balance, June 30, 1998
(unaudited)............ 1,098 $ 1,567 223 $ -- $1,917 $(1,655) $(36,166) $(34,337)
======= ======== === ====== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TUT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $(3,390) $(4,427) $(9,157) $ (3,311) $ (6,801)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................. 90 238 398 170 255
Provision for (reduction in)
doubtful accounts............ (103) (94) 14 -- 27
Amortization of discounts on
investments.................. -- (53) (152) (95) (144)
Noncash compensation expense.. -- -- 1,260 -- 1,005
Change in assets and
liabilities:
Accounts receivable.......... 514 49 (1,036) (310) (1,543)
Inventories.................. (45) 285 (1,169) (533) (346)
Prepaid expenses and other
assets...................... 43 14 (382) (43) 58
Accounts payable............. (1,066) 484 753 (197) (419)
Deferred revenue............. -- -- -- -- 942
Accrued liabilities.......... (101) 312 331 485 150
------- ------- ------- -------- --------
Net cash used in operating
activities................. (4,058) (3,192) (9,140) (3,834) (6,816)
------- ------- ------- -------- --------
Cash flows from investing
activities:
Purchase of property and
equipment..................... (302) (565) (969) (557) (586)
Purchase of short-term
investments................... -- (7,488) (6,543) (1,664) (1,950)
Proceeds from maturities of
short-term investments........ -- -- 9,346 5,543 4,000
------- ------- ------- -------- --------
Net cash provided by (used
in) investing activities... (302) (8,053) 1,834 3,322 1,464
------- ------- ------- -------- --------
Cash flows from financing
activities:
Payment on lines of credit..... (810) (395) (1,130) (71) (200)
Proceeds from lines of credit.. 447 344 1,088 536 257
Proceeds from issuances of
common and preferred stock,
net........................... 6,015 11,174 11,334 17 3,705
------- ------- ------- -------- --------
Net cash provided by
financing activities....... 5,652 11,123 11,292 482 3,762
------- ------- ------- -------- --------
Net increase (decrease) in
cash and cash equivalents.. 1,292 (122) 3,986 (30) (1,590)
Cash and cash equivalents,
beginning of period............ 239 1,531 1,409 1,409 5,395
------- ------- ------- -------- --------
Cash and cash equivalents, end
of period...................... $ 1,531 $ 1,409 $ 5,395 $ 1,379 $ 3,805
======= ======= ======= ======== ========
Supplemental disclosure of cash
flow information:
Interest paid during the
period........................ $ 30 $ 40 $ 61 $ 15 $ 23
======= ======= ======= ======== ========
Income taxes paid during the
period........................ $ 1 $ 1 $ 1 $ 1 $ 1
======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS ENDED JUNE
30, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY:
Tut Systems, Inc. (the "Company") was founded in 1983 and began operations
in August 1991. The Company designs, develops and markets advanced
communications products which enable high-speed data access over the copper
infrastructure of telephone companies, as well as the copper telephone wires
in homes, businesses and other buildings. The Company's products incorporate
high-bandwidth access multiplexers, associated modems and routers, Ethernet
extension products and integrated network management software.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Information:
The accompanying financial statements at June 30, 1998 and for the six
months ended June 30, 1998 and 1997, together with the related notes, are
unaudited but include all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary for a fair
presentation, in all material respects, of the financial position and the
operating results and cash flows for the interim date and periods presented.
Results for the interim period ended June 30, 1998 are not necessarily
indicative of results for the entire fiscal year or future periods.
Cash, Cash Equivalents and Short-Term Investments:
Cash, cash equivalents, and short-term investments are stated at cost or
amortized cost, which approximates fair value, and consist primarily of money
market funds, commercial paper and debt securities. The Company includes in
cash and cash equivalents all highly liquid investments which mature within
three months of their purchase date. Investments maturing between three and
twelve months from the date of purchase are classified as short-term
investments.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. As of December 31, 1996 and 1997, debt securities were classified as
held-to-maturity as the Company intends to, and has the ability to hold these
securities to maturity. Held-to-maturity securities are stated at amortized
cost, which approximates fair market value. The estimated fair values of cash
equivalents and short-term investments are based on quoted market prices.
Inventories:
Inventories are stated at the lower of cost, using the average cost method,
or market.
Advertising Expenses:
The Company accounts for advertising costs as expense in the period in which
they are incurred. Advertising expense for the years ended December 31, 1995,
1996 and 1997 was $187, $116 and $94, respectively.
F-7
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
Property and equipment:
Property and equipment are carried at cost. The Company provides for
depreciation by charges to expense which are sufficient to write off the cost
of the assets over their estimated useful lives on the straight-line basis.
Leasehold improvements are amortized over the lesser of the lease term or the
estimated useful life of the improvement. Useful lives by principal
classifications are as follows:
<TABLE>
<S> <C>
Office equipment.................................................. 5 years
Computers and software............................................ 3-5 years
Test equipment.................................................... 5 years
Leasehold improvements............................................ 5 years
</TABLE>
When assets are sold or otherwise disposed of, the cost and accumulated
depreciation and amortization are removed from the asset and allowance for
depreciation and amortization accounts, and any gain or loss on such sale or
disposal, is credited or charged to income.
Maintenance, repairs, and minor renewals are charged to expense as incurred.
Expenditures which substantially increase an asset's useful life are
capitalized.
Revenue Recognition:
Product Revenues:
The Company generally recognizes revenue from product sales upon shipment if
collection of the resulting receivable is probable and product returns are
reasonably estimated. No revenue is recognized on products shipped on a trial
basis. The Company's products generally carry a one year to two year warranty
from the date of purchase. Estimated sales returns and warranty costs, based
on historical experience by product, are recorded at the time the product
revenue is recognized.
License and Royalty Revenues:
The Company has entered into nonexclusive technology agreements with various
licensees. These agreements provide the licensees the right to use the
Company's proprietary technology to manufacture or have products manufactured
using the proprietary technology and to receive customer support for specified
periods and any changes or improvement to the technology over the term of the
agreement.
Contract fees for the services provided under these licensing agreements are
generally comprised of license fees and nonrefundable, prepaid royalties which
are recognized when the proprietary technology is delivered if there are no
significant vendor obligations. If the licensing agreements contain post-
contract customer support, the Company recognizes the contract fees ratably
over the five year period during which the post-contract customer support is
expected to be provided. This period represents the estimated life of the
technology. The Company begins to recognize revenue under the contract, once
it has delivered the implementation package which contains all information
needed to use the Company's proprietary technology in the licensee's process.
The remaining obligations are primarily to provide the licensee with any
changes or improvements to the technology and technical advice on
specifications, testing, debugging and enhancements.
F-8
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
The Company recognizes royalties upon notification of sale by its licensees.
The terms of the royalty agreements generally require licensees to give
notification to the Company and to pay royalties within 60 days of the end of
the quarter during which the sales take place.
Research and Development:
Research and development expenditures are charged to expense as incurred.
Income Taxes:
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. Deferred tax assets and liabilities are
determined based on the difference between the financial statement bases and
the tax bases of assets and liabilities using enacted tax rates. A valuation
allowance is established to reduce a deferred tax asset to the amount that is
expected more likely than not to be realized.
Net Loss Per Share and Unaudited Pro Forma Stockholders' Equity (Deficit):
Historical basic and diluted net loss per share are computed using the
weighted average number of common shares outstanding. Options, warrant and
preferred stock were not included in the computation of diluted net loss per
share because the effect would be antidilutive.
Pro forma net loss per share has been computed as described above and also
gives effect to the exercise of an outstanding warrant to acquire 666,836
shares of redeemable convertible preferred stock which expires upon the
closing of the Company's initial public offering and, even if antidilutive, to
common equivalent shares from preferred stock that will automatically convert
upon the closing of the Company's initial public offering (using the as-if-
converted method). If the offering contemplated by this Prospectus is
consummated, all of the convertible preferred stock and redeemable convertible
preferred stock outstanding, after giving effect to the exercise of the
warrant, as of the closing date will automatically be converted into an
aggregate of approximately 8,120 shares of common stock based on the shares of
convertible preferred stock outstanding at June 30, 1998. Unaudited pro forma
stockholders' equity at June 30, 1998, as adjusted for the exercise of the
redeemable convertible preferred stock warrant and the conversion of preferred
stock and redeemable preferred stock and is disclosed on the balance sheet.
F-9
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share attributable to common stockholders
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
HISTORICAL NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCK-
HOLDERS, BASIC AND DILUTED:
Net loss attributable to common
stockholders................... $(4,084) $(5,564) $(10,784) $(4,107) $(8,063)
======= ======= ======== ======= =======
Shares used in computing net
loss attributable to common
stockholders, basic and
diluted........................ 125 148 182 163 220
======= ======= ======== ======= =======
Net loss per share attributable
to common stockholders, basic
and diluted.................... $(32.56) $(37.51) $ (59.36) $(25.20) $(36.65)
======= ======= ======== ======= =======
Antidilutive securities
including options, warrant, and
preferred stock not included in
historical net loss per share
attributable to common
stockholders calculations...... 4,403 6,654 8,537 6,937 9,171
======= ======= ======== ======= =======
PRO FORMA NET LOSS PER SHARE:
Net loss attributable to common
stockholders................... $(10,784) $(8,063)
Less: dividend accretion on re-
deemable convertible preferred
stock.......................... 1,627 1,262
-------- -------
Pro forma net loss.............. $ (9,157) $(6,801)
======== =======
Shares used in computing net
loss attributable to common
stockholders, basic and
diluted........................ 182 220
Adjustment to reflect the effect
of the assumed conversion of
weighted average shares of
redeemable convertible
preferred stock and convertible
preferred stock outstanding
after the exercise of the
redeemable convertible
preferred stock warrant........ 6,308 7,978
-------- -------
Shares used in computing pro
forma net loss per share, basic
and diluted.................... 6,490 8,198
======== =======
Pro forma net loss per share,
basic and diluted.............. $ (1.41) $ (0.83)
======== =======
</TABLE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 requires that all items that are to be required to be recognized
under accounting standards as components of comprehensive financial
statements. FAS 130 is effective for fiscal years beginning after December 15,
1997. There was no difference between the Company's net loss and its total
comprehensive loss for the six months ended June 30, 1997 and 1998.
F-10
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
In addition, during June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (FAS 131). FAS 131 replaces
FAS 14, "Financial Reporting for Segments of a Business Enterprise" and
changes the way the public companies report segment information. FAS 131 is
effective for fiscal years beginning after December 15, 1997 and has been
adopted by the Company for the year ending December 31, 1998.
3. CONCENTRATIONS OF CREDIT RISK:
The Company operates in one business segment, designing, developing and
marketing advanced communications products which enable high-speed data access
in homes, businesses and other buildings. The markets for high-speed data
access products are characterized by rapid technological developments,
frequent new product introductions, changes in end user requirements and
evolving industry standards. The Company's future success will depend on its
ability to develop, introduce and market enhancements to its existing products
to introduce new products in a timely manner which meet customer requirements
and to respond to competitive pressures and technological advances. Further,
the emergence of new industry standards, whether through adoption by official
standards committees or widespread use by telephone companies or other service
providers, could require the Company to redesign its products.
A relatively small number of resellers account for a significant percentage
of the Company's revenues. The Company expects that the sale of its products
to a limited number of resellers may continue to account for a high percentage
of revenues for the foreseeable future.
The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company had significant accounts
receivable balances due from certain customers as a percentage of total
accounts receivable at December 31, 1996 and 1997, as follows:
<TABLE>
<CAPTION>
CUSTOMER 1996 1997
-------- ---- ----
<S> <C> <C>
A.................................................................. 13% 16%
B.................................................................. 28% 10%
C.................................................................. 10%
</TABLE>
Currently, the Company relies on contract manufacturers and some single
source suppliers of materials for certain product components. As a result,
should the Company's current manufacturers or suppliers not produce and
deliver inventory for the Company to sell on a timely basis, operating results
could be adversely impacted.
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company invests its excess cash in debt instruments of the U.S. Treasury,
governmental agencies and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
F-11
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. INVESTMENTS:
The amortized cost and fair value of the Company's investments consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Corporate debt securities..................................... $1,520 --
Commercial paper.............................................. 5,020 $4,890
Government debt securities.................................... 1,001 --
------ ------
$7,541 $4,890
====== ======
</TABLE>
All of the Company's investments mature within one year. The cost of
marketable securities approximates fair value of the securities and the amount
of unrealized gains or losses was not significant at December 31, 1996 or
1997.
5. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods..................................... $ 206 $ 1,236 $1,451
Raw material....................................... 49 188 319
----- ------- ------
$ 255 $ 1,424 $1,770
===== ======= ======
</TABLE>
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Office equipment............................................. $ 142 $ 226
Computers and software....................................... 607 921
Test equipment............................................... 337 570
Leasehold improvements....................................... 94 432
------ ------
1,180 2,149
Less accumulated depreciation and amortization............... (406) (804)
------ ------
$ 774 $1,345
====== ======
</TABLE>
F-12
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Compensation................................................... $ 285 $ 495
Accrued royalties.............................................. 67 56
Other.......................................................... 64 196
------ ------
$ 416 $ 747
====== ======
</TABLE>
8. LINES OF CREDIT:
Under a revolving line of credit arrangement with a commercial bank (the
Bank), the Company may borrow up to the lesser of $2,500 or 70% of qualified
trade accounts receivable. As of December 31, 1996 and 1997, no borrowings
were outstanding under this line of credit. Interest is charged at the Bank's
prime rate (8.25% and 8.5% as of December 31, 1996 and 1997, respectively),
plus 1.0% and 0.75% per annum for December 31, 1996 and 1997, respectively.
This line expires August 15, 1998.
The Company also borrowed $97 on an equipment loan from the same Bank that
expired January 2, 1998. The loan bears interest at the Bank's prime rate
(8.5% at December 31, 1997), plus 2.5% per annum and is being amortized over a
two-year period. Amortization commenced in February 1996. At December 31,
1997, $4 was outstanding under this loan.
In August 1996, the Company obtained the right to borrow an additional $500
for the purchase of equipment. Borrowings outstanding on February 15, 1997 are
being amortized over a two-year period commencing March 15, 1997. Borrowings
outstanding on August 15, 1997 are being amortized over a two-year period
commencing September 15, 1997. At December 31, 1997, $350 was outstanding
under this loan, bearing interest at the Bank's prime rate (8.5% at December
31, 1997), plus 1.5% per annum. In August 1997, the Company obtained the right
to borrow an additional $200 for the purchase of equipment. As of February 28,
1998, the Company borrowed $200 at the Bank's prime rate of 8.5% plus 1.25%
per annum. The outstanding borrowing will be amortized over a two-year period
commencing March 10, 1998.
Principal maturities at December 31, 1997 on the equipment loans are as
follows:
<TABLE>
<S> <C>
1998.................................................................. $ 214
1999.................................................................. 140
-----
Total principal amounts due........................................... 354
Less current portion.................................................. (214)
-----
Long-term portion..................................................... $ 140
=====
</TABLE>
Both agreements require the maintenance of specific ratios and a minimum
tangible net worth. The loans are collateralized by substantially all assets
of the Company. The Company is also required to maintain its primary banking
relationship with this Bank including its main operating account.
F-13
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. LINES OF CREDIT, continued:
In September, October, and November of 1997, the Company was in violation of
certain ratio covenants. All violations were cured on December 16, 1997. The
Bank waived all violations occurring in 1997.
9. INCOME TAXES:
Income tax expense for 1995, 1996 and 1997 consists of the state franchise
tax expense of $1.
The primary components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Net operating loss carryforwards........................... $ 5,455 $ 8,661
Research and experimentation credit carryforwards.......... 179 306
Other...................................................... 8 14
------- -------
Total deferred tax asset................................. 5,642 8,981
Valuation allowance........................................ (5,642) (8,981)
------- -------
Net deferred tax asset..................................... $ -- $ --
======= =======
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and the amount of which are uncertain. Because management is not
certain that unused net operating losses and research and experimentation
credits will be utilized in future periods, a valuation allowance, in the
amount equal to the net deferred tax asset as of December 31, 1996 and 1997,
has been established to reflect these uncertainties. The change in the
valuation allowance was a net valuation allowance increase of $1,204, $1,570
and $3,339 for the years ended December 31, 1995, 1996 and 1997, respectively.
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $23,200 and $8,900 for federal and state income taxes purposes,
respectively. These federal and state net operating losses expire by 2013 and
2002, respectively. At December 31, 1997, the Company also has research and
experimentation tax credit carryforwards of approximately $148 and $158 for
federal and state income tax purposes, respectively. These credits expire by
2013 and 2002, respectively.
Utilization of net operating loss and tax credit carryforwards are subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended and similar state
provisions. The annual limitation may result in the expiration of net
operating loss and tax credit carryforwards before full utilization.
The reconciliation of income tax benefit attributable to continuing
operations computed at the U.S. federal statutory rates to income tax benefit
for the fiscal years ended December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Tax benefit at U.S. statutory rate.............. $(1,153) $(1,505) $(3,113)
Loss for which no tax benefit is currently
recognizable................................... 1,153 1,505 3,113
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
F-14
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. LEASE OBLIGATIONS:
The Company leases office, manufacturing and warehouse space under
noncancelable operating leases that expire through 2002.
Minimum future lease payments under operating leases at December 31, 1997
are as follows:
<TABLE>
<S> <C>
1998.................................................................... $134
1999.................................................................... 53
2000.................................................................... 54
2001.................................................................... 56
2002.................................................................... 56
----
$353
====
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 was $143,
$173 and $267, respectively.
11. ROYALTY OBLIGATION:
The Company has acquired the rights, title, and interests in two patents
from a founder and stockholder of the Company. These two patents give the
Company exclusive control of the Balun technology required in the Company's
products. As amended in March 1996, retroactive to June 1995, the agreement
states that beginning January 1, 1996, the Company will pay a 1% royalty based
on the net sales price of products sold utilizing the patented technology
until the founder has been paid an aggregate of $750, at which time the
royalty percentage reduces to .25%. If annual royalties are less than $100 in
any one year, the Company shall have the right to pay the difference between
the royalty and $100. If the Company elects not to pay the $100 minimum, the
patents will be reconveyed to the founder upon his written request. In this
event, the Company will retain a paid-up nonexclusive license to use the
patents. The royalty payments are due 30 days after each quarter-end. The
agreement will remain in effect until the patents expire.
For 1996 and 1997, respectively, the royalty owed based on 1% of net sales
was approximately $44 and $62, respectively. The Company elected to pay the
difference between the actual royalty and the $100 minimum, and made such
payment in January 1997 and 1998, respectively. Royalty expense for 1995 was
$100.
12. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANT:
The Company will be required to redeem its Series D, E, F, and G preferred
stock (redeemable stock) on or at any time after June 25, 2002, upon the
election of the holders of outstanding shares of the redeemable stock. Such
election requires the redeemable stockholders to vote together as one class
and requires the approval of the redemption to be at least 67% of the
outstanding shares of redeemable stock. Any such redemption of the redeemable
stock shall require the redemption of the Series D, E, F and G preferred stock
by the Company at $3.60, $4.60, $5.00 and $12.00 per share, respectively, plus
any accrued and unpaid dividends. Additional features of the redeemable stock
are described further in Note 13.
In August 1997, the Company entered into a Licensing and Cooperative
Marketing Agreement with a software company (Software Company) covering the
use and promotion of certain of the Company's technology and future products
related to in-home networking. In exchange for endorsement of the technology,
marketing,
F-15
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
12. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANT, continued
and certain development support, the Company granted the Software Company a
warrant to purchase 667 shares of Series G convertible preferred stock at an
exercise price of $10.00 per share. The warrant expires upon the earliest of
(i) August 2002, (ii) sale or merger of the company, or (iii) an initial
public offering. The warrant vests in three increments of 30%, 40% and 30%
each upon achievement of certain agreed upon milestones. The warrant has been
valued using the Black-Scholes method. As of December 31, 1997, 60% of the
warrant has vested and an expense of $1,260 was recorded by the Company.
13. STOCKHOLDERS' EQUITY:
Preferred Stock:
In 1996, the Company amended its articles of incorporation to increase the
number of authorized shares of preferred stock to 7,500. In 1997, the Company
amended the articles of incorporation to increase the number of authorized
share of preferred stock to 9,250. The Company has designated 1,719, 1,313,
2,500, and 2,000 shares as Series D, E, F, and G, respectively, which are
redeemable and reserved 667 shares for Series G warrant (see Note 12).
Authorized shares of preferred stock of 380 remain undesignated.
The following is a summary of Series A--C convertible preferred stock
authorized, issued, and outstanding:
<TABLE>
<CAPTION>
SHARES ISSUED AND
OUTSTANDING
-------------------------
DECEMBER 31,
SHARES ------------- JUNE 30,
SERIES AUTHORIZED 1996 1997 1998
------ ---------- ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
A....................................... 500 500 500 500
B....................................... 89 89 89 89
C....................................... 750 509 509 509
----- ------ ------ -----
1,339 1,098 1,098 1,098
===== ====== ====== =====
</TABLE>
Dividends:
The Series A, B, C, D, E, F and G preferred stockholders are entitled to
$.20, $.20, $.24, $.25, $.32, $.35 and $.84 per share of noncumulative
dividends, respectively. However, the Series D, E, F and G preferred stock
dividends become cumulative in the event of liquidation of the Company or upon
a two-thirds vote of the Series D, E, F and G preferred stockholders, on or
after June 25, 2002, requiring the redemption of the Series D, E, F and G
preferred stock by the Company at $3.60, $4.60, $5.00 and $12.00 per share,
respectively, plus the cumulative dividends. As of December 31, 1996 and 1997,
the Company has accreted $2,230 and $3,857, respectively in dividends under
the terms of the Series D, E, F and G preferred stock agreements.
Conversion and Rights:
Each share of preferred stock may be converted into common stock at the
option of the stockholder. The preferred stock automatically converts to
common stock immediately prior to the public offering of shares of the
Company's common stock at a price not less than $12.00 per share and an
aggregate offering price of not less than $15,000. The preferred stock has the
same voting rights as the common stock. Generally, the Company cannot issue
stock with preferences greater than the current preferred stock or issue a
preferred or common stock dividend without the two-thirds consent of the
preferred stockholders.
F-16
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
13. STOCKHOLDERS' EQUITY, continued:
The Series A, B, C, D, E, F and G preferred stockholders have the right to
participate in any registration of Company stock subject to underwriter
restrictions and the right of first refusal on new security issuances.
Liquidation:
Upon the liquidation, dissolution, or winding up of the Company (either
voluntary or involuntary), the holders of Series B, C, D, E, F and G preferred
stock are entitled to receive out of the assets of the Company available for
distribution to its stockholders, an amount equal to $2.24, $2.68, $3.60,
$4.60, $5.00, and $12.00 per share of Series B, C, D, E, F and G,
respectively, plus any declared but unpaid dividends, including all cumulative
dividends due to the holders of the Series D, E, F and G, preferred stock. To
the extent any assets remain in the Company after such distributions, then the
holders of Series A preferred stock are entitled to receive an amount equal to
$2.24 per share, plus any declared but unpaid dividends. Thereafter, any
remaining distributions will be made ratably to all common stockholders.
Redemption:
The Series A, B, and C preferred stock may be redeemed at the option of the
Company and consent of two-thirds of the Series D, E, F and G Preferred
stockholders after September 30, 1997. The redemption may be in
whole but not in part of the Series A, B, and C preferred stock, and the
redemption value will include any accrued and unpaid dividends.
Common Stock Reserved:
The Company has reserved common stock for issuance upon conversion of
redeemable and preferred stock as follows:
<TABLE>
<CAPTION>
SHARES RESERVED
-------------------------
DECEMBER 31,
------------- JUNE 30,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
A.................................................. 500 500 500
B.................................................. 89 89 89
C.................................................. 750 750 750
D.................................................. 1,719 1,719 1,719
E.................................................. 1,313 1,313 1,313
F.................................................. 2,500 2,500 2,500
G.................................................. -- 2,000 2,000
------ ------ -----
6,871 8,871 8,871
====== ====== =====
</TABLE>
14. STOCK OPTION PLAN:
In November 1993, the Company adopted the 1992 Stock Plan (the Plan), under
which the Company may grant both incentive stock options and nonstatutory
stock options to employees, consultants and directors. Options issued under
the Plan can have an exercise price of no less than 85% of the fair market
value, as defined under the Plan, of the stock at the date of grant. The Plan
allows for the issuance of a maximum of 750 shares of the Company's common
stock. In January 1997, the Plan was amended to increase the maximum number of
shares that may be issued to 1,250. This number of shares of common stock has
been reserved for issuance under the Plan. Generally, stock options are
granted with vesting periods of four years and have an expiration date of ten
years from the date of grant.
F-17
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
14. STOCK OPTION PLAN, continued:
Activity under the 1992 Plan is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------------------------
WEIGHTED
SHARES NUMBER AVERAGE
AVAILABLE OPTIONS OF AGGREGATE EXERCISE
FOR GRANT EXERCISED SHARES PRICE PER SHARE PRICE PRICE
--------- --------- ------ --------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995................... 232 105 413 $0.28-$0.36 $ 149 $0.36
Options granted......... (144) -- 144 0.48 70 0.49
Options exercised....... -- 34 (34) 0.36- 0.48 (12) 0.35
Options terminated...... 17 -- (17) 0.36- 0.48 (6) 0.35
---- --- ----- ------
Balance, December 31,
1995................... 105 139 506 0.28- 0.48 201 0.40
Options granted......... (115) -- 115 0.48- 0.52 57 0.50
Options exercised....... -- 13 (13) 0.36- 0.48 (6) 0.46
Options terminated...... 157 -- (157) 0.36- 0.52 (73) 0.46
---- --- ----- ------
Balance, December 31,
1996................... 147 152 451 0.28- 0.52 179 0.40
Options authorized...... 500 -- -- -- -- --
Options granted......... (389) -- 389 0.52- 2.00 254 0.65
Options exercised....... -- 56 (56) 0.36- 0.48 (21) 0.38
Options terminated...... 59 -- (59) 0.36- 0.52 (27) 0.46
---- --- ----- ------
Balance, December 31,
1997................... 317 208 725 0.28- 2.00 385 0.53
Options authorized (un-
audited)............... 188 -- -- -- -- --
Options granted (unau-
dited)................. (334) -- 334 2.00-12.00 1,748 5.23
Options exercised (unau-
dited)................. -- 5 (5) 0.48- 2.40 (5) 1.00
Options terminated (un-
audited)............... 5 -- (5) 0.52 (2) 0.40
---- --- ----- ------
Balance, June 30, 1998
(unaudited)............ 176 213 1,049 $0.28-$12.00 $2,126 $2.03
==== === ===== ======
</TABLE>
In addition to the 1992 Plan, the Company granted an option to purchase 6
shares at $2.24. Such options were exercised in 1997.
In connection with the grant of options for the purchase of 356 shares of
common stock to employees during the period from December 1997 through June
1998, the Company recorded aggregate deferred compensation of $1,820
representing the difference between the deemed fair value of the common stock
and the option exercise price at date of grant. Such deferred compensation
will be amortized over the vesting period relating to these options.
Accordingly, the Company amortized zero and $165 for the year ended December
31, 1997 and the six month period June 30, 1998, respectively.
The Company uses the Black-Scholes method to value options granted to
consultants. The total estimated fair value of such grants during the periods
presented was not significant and was expensed over the applicable vesting
periods.
At December 31, 1995, 1996 and 1997, vested options to purchase 348, 267 and
288 shares of common stock, respectively were unexercised. The weighted
average exercise price of these options was $.36 per share for each of 1996
and 1997.
F-18
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
14. STOCK OPTION PLAN, continued:
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
--------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.28-$.52 699 6.20 $0.44 288 $0.36
$2.00 26 10.00 $2.00 -- --
</TABLE>
The following information concerning the Company's stock option plan is
provided in accordance with SFAS 123. The Company accounts for the Plan in
accordance with APB No. 25 and related Interpretations.
The fair value of each option grant has been estimated on the date of grant
using the minimum value method. Weighted average assumptions used in
determining the fair value for grants in 1995, 1996 and 1997 include risk-free
interest rates of 6.1%, 6.7% and 6.7%, respectively, and an expected life of 5
years, 5 years and 4 years, respectively. Volatility and dividend yields are
not factors in the Company's minimum value calculation.
The weighted average fair value of options granted in 1995, 1996 and 1997
was $.12, $.16 and $.12 per share, respectively.
Had compensation expense for the stock plans been determined based on the
fair value at the grant date for options granted in 1995, 1996 and 1997,
consistent with the provisions of SFAS 123, the pro forma net loss would have
been reported as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders--
as reported.................................. $(4,084) $(5,564) $(10,784)
Net loss attributable to common stockholders--
pro forma.................................... (4,085) (5,571) (10,798)
Net loss per share attributable to common
stockholders--
as reported.................................. (32.56) (37.51) (59.36)
Net loss per share attributable to common
stockholders--
pro forma.................................... (32.57) (37.55) (59.44)
</TABLE>
15. 401(K) PLAN:
In April 1995, the Company adopted the Tut Systems, Inc. 401(k) Plan (the
401(k) Plan) covering all eligible employees. Contributions are limited to 15%
of each employee's annual compensation. Contributions to the 401(k) Plan by
the Company are discretionary. The Company did not make any contributions for
the years ended December 31, 1995, 1996 and 1997.
F-19
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO JUNE 30, 1998 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
16. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION:
The Company currently targets its sales efforts to both public and private
network providers and users across four related market segments. The Company
has one reportable segment. Revenue by geographic region is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1995 1996 1997 1998
------ ------ ------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
United States............................ $2,977 $3,489 $5,236 $3,768
Foreign.................................. 468 965 985 745
------ ------ ------ ------
$3,445 $4,454 $6,221 $4,513
====== ====== ====== ======
</TABLE>
Three reseller customers accounted for 26%, 19% and 15%, respectively, of
the Company's revenue for the year ended December 31, 1995. Three reseller
customers accounted for 16%, 14% and 11%, respectively, of the Company's
revenue for the year ended December 31, 1996. Two reseller customers accounted
for 14% and 12%, respectively, of the Company's revenue for the year ended
December 31, 1997. Two reseller customers accounted for 14% and 12%,
respectively, of the Company's revenue for the six months ended June 30, 1998.
17. SUBSEQUENT EVENTS:
On March 3, 1998, the Company extended its existing lease for its
headquarters location for three years beginning June 1, 1998 to May 31, 2001.
Rental payments are $17 per month through November 1999 and $18 per month from
December 1999 through May 2001. The new lease contains an option to extend for
an additional two years at a rate to be determined.
Between January 1, 1998 and June 30, 1998 the Company issued 308 shares of
Series G redeemable convertible preferred stock, resulting in cash proceeds of
approximately $3,700 to the Company.
In March 1998, the Company increased the number of shares reserved for
issuance under the 1992 Stock Plan by 188 shares for an aggregate of 1,438
shares.
In June 1998, the remainder of the warrant to a Software Company (see Note
12) vested and an expense of $840 was recorded by the Company.
In July 1998, the Company's Board of Directors (i) authorized management of
the Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public, (ii) approved a four for one reverse split of its common and preferred
stock which will be effected prior to the closing of the public offering,
(iii) approved the reincorporation of the Company from California to Delaware.
All share data and stock option plan information have been restated to reflect
the reverse split and the reincorporation.
In July 1998, the Company's Board of Directors (i) adopted the 1998 Stock
Plan pursuant to which 1,000 additional shares (plus annual increases
beginning in 2000 of, the lesser of an additional 3% of the outstanding common
stock, 375 shares or a lesser amount determined by the Board of Directors) of
the Company's common stock have been reserved for future issuance to selected
employees, directors and non-employee directors and consultants, (ii)
authorized the adoption of the 1998 Employee Stock Purchase Plan pursuant to
which 250 shares (plus at each year end, the lesser of 2% of the outstanding
common stock or 250 shares or a lesser amount determined by the Board of
Directors) of the Company's common stock have been reserved for issuance to
eligible employees. These actions will be given effect prior to the effective
date of the Company's Initial Public Offering and will be submitted for
approval by the Stockholders in August 1998.
In July 1998, the Company issued 37 options to employees to purchase common
stock under the 1992 plan.
F-20
<PAGE>
[Graphic depicting the Company's Expresso GS, Expresso MDU and XL products]
Caption:
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of
telephone companies and the copper telephone wires in homes, businesses and
other buildings. The Company's products utilize its proprietary FastCopper
technology to exploit the underutilized bandwidth of existing last mile and
PCN infrastructures by reducing the noise, radio frequency interference and
signal cross talk inherent in high-speed data transmission over copper
telephone wires. FastCopper technology is found in a number of the Company's
cost-effective, scalable and easy to deploy products to meet the needs of
diverse customers.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECU-
RITIES TO WHICH IT RELATES OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI-
TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Disclosure Regarding Forward-Looking Statements.......................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 27
Management............................................................... 42
Certain Transactions..................................................... 52
Principal Stockholders................................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 58
Underwriting............................................................. 59
Legal Matters............................................................ 61
Experts.................................................................. 61
Available Information.................................................... 61
Index to Financial Statements............................................ F-1
</TABLE>
------------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
LOGO
[LOGO OF TUT SYSTEMS]
COMMON STOCK
------------------
PROSPECTUS
, 1998
------------------
LEHMAN BROTHERS
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
SALOMON SMITH BARNEY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC Registration Fee............................................. $ 13,570
NASD Filing Fee.................................................. 5,100
The Nasdaq National Market System Listing Fee.................... 80,000
Printing and Shipping Fees....................................... 200,000
Legal Fees and Expenses.......................................... 375,000
Accounting Fees and Expenses..................................... 225,000
Registrar and Transfer Agent Fees................................ 15,000
Miscellaneous.................................................... 86,330
----------
Total.......................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation provides for the
indemnification of directors to the maximum extent permissible under Delaware
law. 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.
The Registrant's Certificate of Incorporation provides for the
indemnification of directors to the maximum extent permissible under Delaware
law.
The Company's Bylaws provide that the Company shall indemnify its directors,
officers, employees and other agents to the fullest extent permitted by law.
The Company believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. The
Company's Bylaws also permit it to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the Bylaws permit such
indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to the indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company arising out of such person's services as a director, officer,
employee, agent or fiduciary of the Company, any subsidiary of the Company or
any other company or enterprise to which the person provides services at the
request of the Company. The agreements do not provide for indemnification in
cases where (i) the claim is brought by the indemnified party, (ii) the
indemnified party has not acted in good faith; (iii) the claim arises under
Section 16(b) of the Exchange Act; or (iv) the indemnified party has engaged
in acts, omissions or transactions for which the indemnified party is
prohibited from receiving indemnification under the agreement or applicable
law. The Company believes that these provisions and agreements are necessary
to attract and retain qualified persons as directors and executive officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) In the three years prior to the date of this Registration Statement, the
Registrant has issued and sold the following unregistered securities. The
transactions set forth below do not reflect a four for one reverse split of
the Registrant's Common Stock to be effected prior to the effectiveness of the
offering.
II-1
<PAGE>
(1) During the period from June 30, 1995 to date, the Registrant has
issued options to purchase 3,791,450 shares of Common Stock to directors,
employees and consultants pursuant to the Registrant's 1992 Stock Plan.
(2) On September 9, 1995, the Registrant sold 46,750 shares of Common
Stock upon the exercise of options at a price of $0.09 per share.
(3) On February 21, 1996, the Registrant sold 3,187 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(4) On April 25, 1996, the Registrant sold 16,944 shares of Common Stock
upon the exercise of options at prices ranging from $0.09 per share to
$0.12 per share.
(5) On August 9, 1996, the Registrant sold 8,699,191 shares of Series F
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to 20 investors at an as-converted price of $1.25
per share, payable in cash.
(6) On October 7, 1996, the Registrant sold 475,436 shares of Series F
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to 5 investors at an as-converted price of $1.25
per share, payable in cash.
(7) On October 14, 1996, the Registrant sold 29,792 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(8) On December 17, 1996, the Registrant sold 2,025 shares of Common
Stock upon the exercise of options at a price of $0.09 per share.
(9) On January 2, 1997, the Registrant sold 7,500 shares of Common Stock
upon the exercise of options at a price of $0.13 per share.
(10) On February 4, 1997, the Registrant sold 11,667 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(11) On February 27, 1997, the Registrant sold 6,771 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(12) On June 16, 1997, the Registrant sold 1,500 shares of Common Stock
upon the exercise of options at a price of $0.09 per share.
(13) On July 11, 1997, the Registrant sold 30,000 shares of Common Stock
upon the exercise of options at a price of $0.09 per share.
(14) On August 18, 1997, the Registrant sold 9,937 shares of Common Stock
upon the exercise of options at a price of $0.12 per share.
(15) On August 27, 1997, the Registrant issued a warrant to purchase up
to 2,667,343 shares of Series G Preferred Stock, which will automatically
convert to Common Stock upon the closing of this offering, exercisable at a
price of $2.50 per share to Microsoft Corporation in connection with the
licensing and marketing arrangement entered into between the two companies.
The warrant expires, if not earlier exercised, on the closing of this
offering.
(16) On September 2, 1997, the Registrant sold 9,302 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(17) On September 15, 1997, the Registrant sold 127,607 shares of Common
Stock upon the exercise of options at a price of $0.09 per share.
(18) On October 21, 1997, the Registrant sold 15,625 shares of Common
Stock upon the exercise of options at a price of $0.12 per share.
(19) On November 17, 1997, the Registrant sold 2,500 shares of Common
Stock upon the exercise of options at a price of $0.13 per share.
II-2
<PAGE>
(20) On December 1, 1997, the Registrant sold 822 shares of Common Stock
upon the exercise of options at a price of $0.12 per share.
(21) On December 16, 1997, the Registrant sold 3,752,098 shares of Series
G Preferred Stock, which will automatically convert to Common Stock upon
the closing of this offering, to 20 investors at an as-converted price of
$3.00 per share, payable in cash.
(22) On December 31, 1997, the Registrant sold 14,500 shares of Series G
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to 3 investors at an as-converted price of $3.00
per share, payable in cash.
(23) On January 23, 1998, the Registrant sold 2,708 shares of Common
Stock upon the exercise of options at a price of $0.13 per share.
(24) On January 30, 1998, the Registrant sold 7,333 shares of Series G
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to 2 investors at an as-converted price of $3.00
per share, payable in cash.
(25) On March 10, 1998, the Registrant sold 1,600 shares of Common Stock
upon the exercise of options at a price of $0.12 per share.
(26) On March 16, 1998, the Registrant sold 891,079 shares of Series G
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to 6 investors at an as-converted price of $3.00
per share, payable in cash.
(27) On April 10, 1998, the Registrant sold 5,417 shares of Common Stock
upon the exercise of options at a price of $0.13 per share.
(28) On April 16, 1998, the Registrant sold 333,333 shares of Series G
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to one investor at an as-converted price of $3.00
per share, payable in cash.
(29) On April 19, 1998, the Registrant sold 1,042 shares of Common Stock
upon the exercise of options at a price of $0.60 per share.
(30) On May 22, 1998, the Registrant sold 1,657 shares of Series G
Preferred Stock, which will automatically convert to Common Stock upon the
closing of this offering, to one investor at an as-converted price of $3.00
per share, payable in cash.
(31) On June 22, 1998, the Registrant sold 5,833 shares of Common Stock
upon the exercise of options at a price of $0.13 per share.
(32) On June 30, 1998, the Registrant sold 1,000 shares of Common Stock
upon the exercise of options at a price of $0.09 per share.
(33) On July 8, 1998, the Registrant sold 12,500 shares of Common Stock
upon the exercise of options at a price of $0.12 per share.
(34) On July 10, 1998, the Registrant sold 28,749 shares of Common Stock
upon the exercise of options at prices of $0.09, $0.12 and $0.13 per share.
(35) On July 14, 1998, the Registrant sold 2,080 shares of Common Stock
upon the exercise of options at a price of $0.12 per share.
(36) On July 16, 1998, the Registrant sold 194,000 shares of Common Stock
upon the exercise of options at prices of $0.09 and $0.12 per share.
(37) On July 29, 1998, the Registrant sold 104,896 shares of Common Stock
upon the exercise of options at prices of $0.13 and $0.60 per share.
(38) On August 17, 1998, the Registrant sold 5,972 shares of Common Stock
upon the exercise of options at prices of $0.12 and $0.13 per share.
II-3
<PAGE>
(39) On August 18, 1998, the Registrant sold 15,044 shares of Common
Stock upon the exercise of options at prices of $0.09 and $0.13 per share.
(40) On August 19, 1998, the Registrant sold 43,752 shares of Common
Stock upon the exercise of options at a price of $0.13 per share.
(b) There were no underwriters, brokers or finders employed in connection
with any of the transactions set forth above.
(c) The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D or Regulation S promulgated thereunder (with
respect to items 5, 6, 15, 21, 22, 24, 26, 28, and 30), or Rule 701
promulgated under Section 3(b) of the Securities Act (with respect to all
other items listed above) as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the instruments representing such securities issued in such transactions.
All recipients had adequate access, through their relationships with the
Company, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of Registrant, as
amended, as currently in effect.
3.2 Form of Restated Certificate of Incorporation of Registrant, to be
in effect upon the consummation of the reincorporation of
Registrant in Delaware.
3.3* Form of Second Amended and Restated Restated Certificate of
Incorporation of Registrant, to be filed immediately following the
closing of the offering made under this Registration Statement.
3.4* Amended and Restated Bylaws of Registrant, as currently in effect.
3.5* Form of Bylaws of Registrant, to be in effect upon the consummation
of the reincorporation of Registrant in Delaware.
4.1 Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* 1992 Stock Plan, as amended, and form of Stock Option Agreement
thereunder.
10.2* 1998 Stock Plan and forms of Stock Option Agreement and Stock
Purchase Agreement thereunder.
10.3* 1998 Employee Stock Purchase Plan.
10.4* American Capital Marketing, Inc. 401(k) Plan.
10.5* Fourth Amended and Restated Shareholders' Rights Agreement, dated
December 16, 1997, Between Registrant and certain stockholders.
10.6* Lease by and between Pleasant Hill Industrial Park Associates, a
California Limited Partnership, and Registrant dated April 4, 1995,
as amended.
10.7* Office Building Lease between Petula Associates, Ltd., an Iowa
corporation, and Principal Mutual Life Insurance Co., an Iowa
corporation, doing business as RC Creekside Phase VI and Registrant
dated April 25, 1997.
10.8+* Licensing and Cooperative Marketing Agreement Between Microsoft
Corporation and Registrant dated August 27, 1997, as modified and
restated on July 30, 1998.
10.9* Form of Indemnification Agreement to be entered into between
Registrant and each director and officer.
10.10* Agreement and General Release between Registrant and And Yet, Inc.
dated July 31, 1998.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.11+* Software License Agreement between RouterWare, Inc. and Registrant
dated December 16, 1997.
10.12* Home Phoneline Promoters Agreement by and between IBM Corporation,
Hewlett-Packard Company, Compaq Computer Corporation, Advanced
Micro Devices, Inc., Intel Corporation, Epigram, Inc., AT&T
Wireless Services Inc., 3Com Corporation, Rockwell Semiconductor
Systems, Inc. and Lucent Technologies Inc. dated June 1, 1998.
10.13+* Master Agreement between Registrant and Compaq Computer
Corporation dated April 21, 1998 including supplements thereto.
10.14* Loan Agreement, General Security Agreement, and Collateral
Assignment and Patent Mortgage and Security Agreement with
Imperial Bank, each dated August 16, 1997.
11.1* Calculation of earnings per share (contained in Note 2 of Notes to
Financial Statements).
21.1* List of Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- --------
+ Confidential treatment requested for portions of these agreements. Omitted
portions have been filed separately with the Securities and Exchange
Commission.
* Previously filed on July 31, 1998.
** To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S> <C>
*Schedule II --Valuation and Qualifying Accounts..................... S-2
</TABLE>
- --------
* Previously filed on July 31, 1998.
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
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 provisions, 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 such director, officer or controlling person in
connection with the securities being registered, 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 Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, 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
of 1933, 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-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PLEASANT
HILL, STATE OF CALIFORNIA, ON THE 10TH DAY OF SEPTEMBER, 1998.
Tut Systems, Inc.
By: /s/ Nelson Caldwell
-----------------------------------
NELSON CALDWELL
VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Salvatore D'Auria President, Chief Executive September 10, 1998
______________________________________ Officer and Director
SALVATORE D'AURIA (Principal Executive
Officer)
/s/ Nelson Caldwell Vice President, Finance and September 10, 1998
______________________________________ Chief Financial Officer
NELSON CALDWELL (Principal Financial and
Accounting Officer)
* Matthew Taylor Chairman of the Board, Chief September 10, 1998
______________________________________ Technical Officer and
MATTHEW TAYLOR Secretary
* Clifford H. Higgerson Director September 10, 1998
______________________________________
CLIFFORD H. HIGGERSON
* Saul Rosenzweig Director September 10, 1998
______________________________________
SAUL ROSENZWEIG
* David Spreng Director September 10, 1998
______________________________________
DAVID SPRENG
* George Middlemas Director September 10, 1998
______________________________________
GEORGE MIDDLEMAS
* Brion Applegate Director September 10, 1998
______________________________________
BRION APPLEGATE
* Roger Moore Director September 10, 1998
______________________________________
ROGER MOORE
* Neal Douglas Director September 10, 1998
______________________________________
NEAL DOUGLAS
*By: /s/ Nelson Caldwell
------------------------------------
NELSON CALDWELL
(ATTORNEY-IN-FACT)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation of Registrant,
as amended, as currently in effect.
3.2 Form of Restated Certificate of Incorporation of Registrant, to
be in effect upon the consummation of the reincorporation of
Registrant in Delaware.
3.3* Form of Second Amended and Restated Restated Certificate of
Incorporation of Registrant, to be filed immediately following
the closing of the offering made under this Registration
Statement.
3.4* Amended and Restated Bylaws of Registrant, as currently in
effect.
3.5* Form of Bylaws of Registrant, to be in effect upon the
consummation of the reincorporation of Registrant in Delaware.
4.1 Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1* 1992 Stock Plan, as amended, and form of Stock Option Agreement
thereunder.
10.2* 1998 Stock Plan and forms of Stock Option Agreement and Stock
Purchase Agreement thereunder.
10.3* 1998 Employee Stock Purchase Plan.
10.4* American Capital Marketing, Inc. 401(k) Plan.
10.5* Fourth Amended and Restated Shareholders' Rights Agreement,
dated December 16, 1997, Between Registrant and certain
stockholders.
10.6* Lease by and between Pleasant Hill Industrial Park Associates,
a California Limited Partnership, and Registrant dated April 4,
1995, as amended.
10.7* Office Building Lease between Petula Associates, Ltd., an Iowa
corporation, and Principal Mutual Life Insurance Co., an Iowa
corporation, doing business as RC Creekside Phase VI and
Registrant dated April 25, 1997.
10.8+* Licensing and Cooperative Marketing Agreement Between Microsoft
Corporation and Registrant dated August 27, 1997, as modified
and restated on July 30, 1998.
10.9* Form of Indemnification Agreement to be entered into between
Registrant and each director and officer.
10.10* Agreement and General Release between Registrant and And Yet,
Inc. dated July 31, 1998.
10.11+* Software License Agreement between RouterWare, Inc. and
Registrant dated December 16, 1997.
10.12* Home Phoneline Promoters Agreement by and between IBM
Corporation, Hewlett-Packard Company, Compaq Computer
Corporation, Advanced Micro Devices, Inc., Intel Corporation,
Epigram, Inc., AT&T Wireless Services Inc., 3Com Corporation,
Rockwell Semiconductor Systems, Inc. and Lucent Technologies
Inc. dated June 1, 1998.
10.13+* Master Agreement between Registrant and Compaq Computer
Corporation dated April 21, 1998 including supplements thereto.
10.14* Loan Agreement, General Security Agreement, and Collateral
Assignment and Patent Mortgage and Security Agreement with
Imperial Bank, each dated August 16, 1997.
11.1* Calculation of earnings per share (contained in Note 2 of Notes
to Financial Statements).
21.1* List of Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- --------
+ Confidential treatment requested for portions of these agreements. Omitted
portions have been filed separately with the Securities and Exchange
Commission.
* Previously filed on July 31, 1998.
** To be filed by amendment.
<PAGE>
EXHIBIT 3.2
-----------
RESTATED CERTIFICATE OF INCORPORATION
OF
TUT SYSTEMS, INC.
Stephanie L. Ruby certifies that:
A. She is the sole incorporator of Tut Systems, Inc., a corporation
organized and existing under the laws of the state of Delaware (the
"Corporation").
B. The original Certificate of Incorporation of the Corporation was filed
with the Secretary of State of the State of Delaware on July 6, 1998 (the
"Original Certificate").
C. As of the date hereof, the Corporation has not received any payment
for any of its stock.
D. Pursuant to Sections 241 and 245 of the General Corporation Law of
Delaware, this Restated Certificate of Incorporation restates and integrates and
further amends the provisions of the Original Certificate.
E. The text of the Original Certificate is hereby amended and restated in
its entirety to read as follows:
ARTICLE I
---------
The name of this Corporation is Tut Systems, Inc. (the "Corporation").
ARTICLE II
----------
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, Wilmington, County of New Castle. The name of its
registered agent at such office is The Corporation Trust Company.
<PAGE>
ARTICLE III
-----------
The nature of the business or purposes to be conducted or promoted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
ARTICLE IV
----------
This Corporation is authorized to issue two classes of shares of stock
which shall be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares that this Corporation is authorized to issue is
Twenty-One Million Seven Hundred Fifty Thousand and Two (21,750,002) shares.
The number of shares of Common Stock authorized is Twelve Million Five Hundred
Thousand (12,500,000) shares, $0.001 par value. The number of shares of
Preferred Stock authorized is Nine Million Two Hundred Fifty Thousand and Two
(9,250,002) shares, $0.001 par value.
The shares of Preferred Stock authorized by this Certificate of
Incorporation may be issued from time to time in one or more series. For any
wholly unissued series of Preferred Stock, the Board of Directors is hereby
authorized to fix and alter the rights, preferences, privileges and restrictions
thereof, including but not limited to the dividend rights, dividend rates,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption prices, and liquidation preferences, the
number of shares constituting any such series and the designation thereof, or
any of them. Without limitation of the generality of the foregoing, the Board
of Directors shall have the power to fix the number of authorized but
undesignated shares comprising any wholly unissued series of Preferred Stock,
and to fix and alter the rights, preferences, privileges and restrictions of any
such unissued series of Preferred Stock (including, but not limited to the
dividend rights, dividend rates, conversion rights, voting rights, rights and
terms of redemption and sinking fund provisions, redemption prices, and
liquidation preferences of such series) in such manner as the Board of Directors
determines, which rights, preferences, privileges and restrictions may, in the
sole discretion of the Board of Directors, subject to Section 8 hereof, be
superior to, on a parity with, or junior to the rights, preferences, privileges
and restrictions of any other series of Preferred Stock.
The Board of Directors is hereby authorized to increase or decrease the
number of shares of any series of Preferred Stock when the number of shares of
such series was originally fixed by designation of the Board of Directors. The
Board of Directors is authorized to decrease the number of shares of any series
of Preferred Stock when the number of shares was not originally fixed by
designation of the Board of Directors. Any such increase or decrease shall be
subject to the limitations and restrictions stated in the resolution of the
Board of Directors originally fixing the number of shares of such series, or in
the Certificate of Incorporation, as the case may be; provided, that the number
of shares of any series shall not be decreased below the number of shares of
such series then outstanding. If the number of shares of any series is so
decreased, then the shares constituting such decrease shall resume the status of
authorized but undesignated shares of Preferred Stock.
-2-
<PAGE>
Section 1. Title of Series and Number of Shares. The first series of
------------------------------------
Preferred Stock shall be comprised of 500,001 shares and shall be designated
Series A Preferred Stock (the "Series A Preferred"). The second series of
Preferred Stock shall be comprised of 89,021 shares and shall be designated
Series B Preferred Stock (the "Series B Preferred"). The third series of
Preferred Stock shall be comprised of 750,000 shares and shall be designated
Series C Preferred Stock (the "Series C Preferred"). The fourth series of
Preferred Stock shall be comprised of 1,718,820 shares and shall be designated
Series D Preferred Stock (the "Series D Preferred"). The fifth series of
Preferred Stock shall be comprised of 1,312,500 shares and shall be designated
Series E Preferred Stock (the "Series E Preferred"). The sixth series of
Preferred Stock shall be comprised of 2,500,000 shares and shall be designated
Series F Preferred Stock (the "Series F Preferred"). The seventh series of
Preferred Stock shall be comprised of 2,000,000 shares and shall be designated
Series G Preferred Stock (the "Series G Preferred"). The Board of Directors
may issue the remaining undesignated Preferred Stock in one or more series as
permitted by the Certificate of Incorporation. As used herein, the term
"Preferred Stock" without designation shall refer to shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series
E Preferred, Series F Preferred and Series G Preferred.
Section 2. Dividend Rights of Preferred Stock. The holders of the
----------------------------------
outstanding Series A Preferred, Series B Preferred and Series C Preferred
shall be entitled, when, as and if declared by the Board of Directors of the
Corporation, to noncumulative dividends out of funds legally available
therefor of $0.20 for each share of Series A Preferred, $0.20 for each share
of Series B Preferred, and $0.24 for each share of Series C Preferred held by
them. The right to dividends on shares of Series A Preferred, Series B
Preferred and Series C Preferred under this Section shall not be cumulative,
and no right shall accrue to the holders of Series A Preferred, Series B
Preferred and Series C Preferred under this Section by reason of the fact that
dividends on such shares are not declared in any prior period. The holders of
the outstanding Series D Preferred, Series E Preferred, Series F Preferred and
Series G Preferred shall be entitled, when, as and if declared by the Board of
Directors of the Corporation, to dividends out of funds legally available
therefor of $0.252 for each share of Series D Preferred, $0.324 for each share
of Series E Preferred, $0.352 for each share of Series F Preferred, and $0.84
for each share of Series G Preferred held by them, which dividends shall be
cumulative only in the event of: (i) the mandatory redemption of the Series D
Preferred, Series E Preferred, Series F Preferred and Series G Preferred by
the Corporation pursuant to Section 7 hereof; or (ii) a liquidation,
dissolution or winding up of the Corporation under Section 3 hereof, either
voluntary or involuntary. Except as described in the immediately preceding
sentence, the right to dividends on shares of Series D Preferred, Series E
Preferred, Series F Preferred or Series G Preferred under this Section shall
not be cumulative, and no right shall otherwise accrue to the holders of
Series D Preferred, Series E Preferred, Series F Preferred or Series G
Preferred under this Section by reason of the fact that dividends on such
shares are not declared in any prior period. No dividend or distribution shall
be declared or paid on any shares of Common Stock (other than dividends
payable solely in Common Stock of the Corporation) unless at the same time an
equivalent dividend or distribution is paid or declared and set aside for
payment on the Preferred Stock (on an as-if converted to Common Stock basis).
-3-
<PAGE>
Section 3. Liquidation Preference. In the event of any liquidation,
----------------------
dissolution, or winding up of the Corporation, either voluntary or
involuntary, distributions to the stockholders of the Corporation shall be
made in the following manner:
(a) The holders of the Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred, Series F Preferred and Series G
Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Series A Preferred or Common Stock by reason of their ownership
of such stock, the sum of $2.24 plus declared and unpaid dividends, if any,
for each share of Series B Preferred then held by them, the sum of $2.68 plus
declared and unpaid dividends, if any, for each share of Series C Preferred
then held by them, the sum of $3.60 plus accrued and unpaid dividends, if any,
for each share of Series D Preferred then held by them, the sum of $4.60 plus
accrued and unpaid dividends, if any, for each share of Series E Preferred
then held by them, the sum of $5.00 plus accrued and unpaid dividends, if any,
for each share of Series F Preferred then held by them, and the sum of $12.00
plus accrued and unpaid dividends, if any, for each share of Series G
Preferred then held by them. If upon the occurrence of such event, the assets
and funds available for distribution among the holders of the Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred, Series
F Preferred and Series G Preferred shall be insufficient to permit the payment
to such holders of the full preferential amounts, then the entire assets and
funds of the Corporation legally available for distribution to the
stockholders shall be distributed among the holders of the Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, Series F Preferred
and Series G Preferred pro rata to the full preferential amount each such
holder is entitled to receive.
(b) After payment of the full preferential amounts to the
holders of the Series B Preferred, Series C Preferred, Series D Preferred,
Series E Preferred, Series F Preferred and Series G Preferred as aforesaid,
the holders of the Series A Preferred shall be entitled to receive, prior and
in preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership of
such stock, the sum of $2.24 plus declared and unpaid dividends, if any, for
each share of the Series A Preferred then held by them. If upon the occurrence
of such event, the assets and funds available for distribution among the
holders of the Series A Preferred shall be insufficient to permit the payment
to such holders of the full preferential amount, then the entire remaining
assets and funds of the Corporation legally available for distribution to the
stockholders shall be distributed among the holders of the Series A Preferred
pro rata to the full preferential amount each such holder is entitled to
receive.
(c) After payment has been made to the holders of the Preferred
Stock of the full preferential amounts as to which they shall be entitled as
aforesaid, then the holders of Common Stock shall be entitled to share in the
remaining assets and funds of the Corporation legally available for
distribution, pro rata to the number of shares of Common Stock held by each
such holder.
(d) For purposes of this Section 3, a merger or consolidation
of the Corporation with or into any other corporation as a result of which
consolidation or merger the stockholders of the Corporation hold securities
representing less than fifty percent (50%) of the voting securities of
-4-
<PAGE>
the surviving corporation (a "Merger"), or a sale of all or substantially all of
the assets of the Corporation, shall be treated as a liquidation, dissolution
or winding up of the Corporation.
(e) Any securities to be delivered to the holders of the
Preferred Stock pursuant to Section 3(d) above shall be valued as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability:
(A) If traded on a national securities exchange or
the National Market System of the National Association of Securities Dealers,
Inc. ("NMS"), the value shall be deemed to be the average of the closing
prices of the securities on such exchange or the NMS over the 30-day period
ending three (3) days prior to the closing;
(B) If actively traded over-the-counter (but not
on the NMS), the value shall be deemed to be the average of the closing bid or
sale prices (whichever are applicable) over the 30-day period ending three (3)
days prior to the closing; and
(ii) In all other cases the fair market value of
securities shall be determined by the Board of Directors acting in good faith,
provided that if such value is objected to in writing received by the
Corporation from holders of more than fifty percent (50%) of the outstanding
shares of Preferred Stock within twenty (20) days after written notice is sent
to the holders of Preferred Stock, then the value shall be determined by an
independent appraiser selected by the Board of Directors and paid for by the
Corporation.
(f) In the event the requirements of Section 3(d) are not
complied with, the Corporation shall forthwith either:
(i) cause such closing to be postponed until such time
as the requirements of this Section 3 have been complied with, or
(ii) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Preferred Stock shall revert to
and be the same as such rights, preferences and privileges existing immediately
prior to the date of the first notice referred to in Section 5(j) hereof.
Section 4. Voting Rights.
-------------
(a) General. Except as otherwise required by law and except as
-------
required in Sections 4(b) and 8 hereof, the holders of Common Stock and
Preferred Stock shall vote together as a single class. Each holder of shares of
Common Stock shall be entitled to one vote for each share of Common Stock held
by such holder. Each holder of Preferred Stock shall be entitled to such number
of votes for the Preferred Stock held by him on the record date fixed for such
meeting, or on the
-5-
<PAGE>
effective date of such written consent, as shall be equal to the whole number
of shares of the Corporation's Common stock into which his shares of Preferred
Stock are convertible, in accordance with the terms of the Corporation's
Restated Certificate of Incorporation, immediately after the close of business
on the record date fixed for such meeting or the effective date of such
written consent.
(b) Board Seats. The number of directors constituting the Board
-----------
of Directors shall be fixed at ten (10). The holders of the Common Stock,
voting as a separate class, shall be entitled to elect one (1) director of the
Corporation. The holders of the Series A Preferred, voting as a separate class,
shall be entitled to elect one (1) director of the Corporation. The holders of
the Series B Preferred and Series C Preferred, voting together as a single
class, shall be entitled to elect one (1) director of the Corporation. The
holders of the Series D Preferred, voting as a separate class, shall be entitled
to elect two (2) directors of the Corporation. The holders of the Series G
Preferred, voting as a separate class, shall be entitled to elect one (1)
director of the Corporation. The holders of the Common Stock, the Series A
Preferred, the Series B Preferred, the Series C Preferred, the Series D
Preferred, the Series E Preferred, the Series F Preferred, and the Series G
Preferred, voting together as a single class, shall be entitled to elect four
(4) directors of the Corporation.
Section 5. Conversion. The holders of the Preferred Stock shall have
----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Preferred Stock shall be
----------------
convertible into Common Stock, at the option of the holder thereof, at any time
after the date of issuance of such share at the office of the Corporation or any
transfer agent for the Preferred Stock. Each share of Preferred Stock shall be
convertible into the number of fully paid and nonassessable shares of Common
Stock which results from dividing the Conversion Price (as hereinafter defined)
per share in effect for such series at the time of conversion into the per share
Conversion Value (as hereinafter defined) of such series. The Conversion Values
of the Preferred Stock shall be $2.24 per share of Series A Preferred, $2.24 per
share of Series B Preferred, $2.68 per share of Series C Preferred, $3.60 per
share of Series D Preferred, $4.60 per share of Series E Preferred, $5.00 per
share of Series F Preferred and $12.00 per share of Series G Preferred. The
initial Conversion Prices of the Preferred Stock shall be $2.24 per share of
Series A Preferred, $2.24 per share of Series B Preferred, $2.68 per share of
Series C Preferred, $3.60 per share of Series D Preferred, $4.60 per share of
Series E Preferred, $5.00 per share of Series F Preferred and $12.00 per share
of Series G Preferred The initial Conversion Price of the Preferred Stock shall
be subject to adjustment from time to time as provided below. The number of
shares of Common Stock into which a share of a series of Preferred Stock is
convertible is hereinafter referred to as the "Conversion Rate" of each such
series.
(b) Automatic Conversion. Each share of Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at its then effective
Conversion Rate immediately prior to the closing of the sale of Common Stock of
the Corporation in an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offering and sale of Common Stock for the account of the Corporation to the
public at a price per share (prior to underwriter commissions and offering
expenses) of not less than $12.00
-6-
<PAGE>
(appropriately adjusted for stock splits, combinations and similar events) and
an aggregate offering price to the public of not less than $15,000,000. Each
share of a series of Preferred Stock shall be automatically converted into
shares of Common Stock at its then effective Conversion Rate upon the
affirmative vote of the holders of at least sixty-seven percent (67%) of the
shares of such series of Preferred Stock, voting as a separate series, or at
such time after June 30, 1993 as there are less than 100,000 shares of such
series outstanding. Each share of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred and Series F
Preferred shall be automatically converted into shares of Common Stock at the
respective Conversion Rates then in effect upon the affirmative vote of the
holders of at least eighty percent (80%) of the voting power of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series
E Preferred and Series F Preferred, voting together as a single class. In
addition, each share of Preferred Stock shall be automatically converted into
shares of Common Stock at the respective Conversion Rates then in effect upon
the affirmative vote of the holders of at least ninety-three percent (93%) of
the voting power of the outstanding shares of Preferred Stock, voting together
as a single class. In the event of the automatic conversion of the Preferred
Stock upon a public offering as described above, the person(s) entitled to
receive the Common Stock issuable upon such conversion of Preferred Stock
shall not be deemed to have converted such Preferred Stock until immediately
prior to the closing of such sale of securities.
(c) Mechanics of Conversion. Before any holder of Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock and
receive certificates therefor, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of
any transfer agent for the Preferred Stock and shall give written notice to
the Corporation at such office that such holder elects to convert the same;
provided, however, that in the event of an automatic conversion pursuant to
Section 5(b), the outstanding shares of the series of Preferred Stock so
converted shall be converted automatically without any further action by the
holders of such shares and whether or not the certificates representing such
shares are surrendered to the Corporation or its transfer agent, and provided
further that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such automatic conversion
unless the certificates evidencing such shares of Preferred Stock are either
delivered to the Corporation or its transfer agent as provided above, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall, as soon as
practicable after such delivery, or such agreement and indemnification in the
case of a lost certificate, issue and deliver at such office to such holder of
Preferred Stock, a certificate or certificates for the number of shares of
Common Stock to which the holder shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result
of a conversion into fractional shares of Common Stock. Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of such surrender of the shares of Preferred Stock to be converted, or in
the case of automatic conversion as provided in Section 5(b), and the person
or persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders
of such shares of Common Stock on such date.
-7-
<PAGE>
(d) Fractional Shares. In lieu of any fractional shares to
-----------------
which the holder of Preferred Stock would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the fair
market value of one share of Common Stock, as determined by the Board of
Directors of the Corporation. Whether or not fractional shares are issuable
upon such conversion shall be determined on the basis of the total number of
shares of Preferred Stock of each holder at the time converting into Common
Stock and the number of shares of Common Stock issuable upon such aggregate
conversion.
(e) Adjustments to the Series C, D, E, F and G Conversion Prices
-------------------------------------------------------------
With Respect to Certain Diluting Issuances.
- ------------------------------------------
(i) Special Definitions. For purposes of this Section
-------------------
5(e) of Article III, the following definitions apply:
(A) "Options" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire either Common or
Convertible Securities (defined below).
(B) "Original Issue Date" shall mean the date on
which the first share of Series G Preferred is first issued.
(C) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities convertible into or
exchangeable for Common.
(D) "Additional Shares of Common" shall mean all
shares of Common issued (or, pursuant to Section 5(e)(iii) of this Article
III, deemed to be issued) by the Corporation after the Original Issue Date,
other than:
(1) shares of Common Stock issued or
issuable to officers, directors or employees of the Corporation pursuant to
stock option or stock purchase plans or agreements on terms approved by the
Board of Directors of the Corporation, or those independent contractors or
consultants with which the Corporation shall have an agreement approved by a
resolution of the Board of Directors pursuant to which such independent
contractor or consultant shall perform services for the Corporation;
(2) as a dividend or distribution on the
Preferred Stock;
(3) by reason of a stock split, reverse
stock split, stock dividend or other adjustment covered by Section 5(f)
hereof;
(4) by reason of a reorganization,
reclassification, exchange, substitution or other adjustment covered by
Section 5(g) hereof; or
-8-
<PAGE>
(5) which are otherwise excluded by the
affirmative vote or written consent of (i) the holders of at least sixty-seven
percent (67%) of the shares of Series C Preferred then outstanding, with
respect to issuances which would affect the Series C Conversion Price, (ii)
the holders of at least sixty-seven percent (67%) of the shares of Series D
Preferred then outstanding, with respect to issuances which would affect the
Series D Conversion Price, (iii) the holders of at least sixty-seven percent
(67%) of the shares of Series E Preferred then outstanding, with respect to
issuances which would affect the Series E Conversion Price; (iv) the holders
of at least sixty-seven percent (67%) of the shares of Series F Preferred then
outstanding, with respect to issuances which would affect the Series F
Conversion Price; and (v) the holders of at least sixty-seven percent (67%) of
the shares of Series G Preferred then outstanding, with respect to issuances
which would affect the Series G Conversion Price.
(E) "Common" shall mean Common Stock of the
Corporation.
(ii) No Adjustment for Conversion Price. Any provision
----------------------------------
herein to the contrary notwithstanding, no adjustment in the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion
Price, the Series F Conversion Price or the Series G Conversion Price shall be
made in respect of the issuance of Additional Shares of Common if the
consideration per share for an Additional Share of Common issued or deemed to
be issued by the Corporation is equal to or greater than the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion
Price, the Series F Conversion Price or the Series G Conversion Price,
respectively, in effect on the date of, and immediately prior to, such issue.
(iii) Deemed Issue of Additional Shares of Common. In the
-------------------------------------------
event the Corporation at any time or from time to time after the Original
Issue Date shall issue any Options or Convertible Securities or shall fix a
record date for the determination of holders of any class of securities then
entitled to receive any such Options or Convertible Securities, then the
maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein designed to protect against
dilution) of Common issuable upon the exercise of such Options or, in the case
of Convertible Securities and Options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be Additional Shares of Common
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that in
any such case in which Additional Shares of Common are deemed to be issued:
(A) no further adjustments in the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion
Price, the Series F Conversion Price or the Series G Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of Common
upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
-9-
<PAGE>
(B) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase
or decrease in the consideration payable to the Corporation, or decrease or
increase in the number of shares of Common issuable, upon the exercise,
conversion or exchange thereof, the Series C Conversion Price, the Series D
Conversion Price, the Series E Conversion Price, the Series F Conversion Price
and the Series G Conversion Price computed upon the original issue thereof (or
upon the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the
Series C Conversion Price, the Series D Conversion Price, Series E Conversion
Price, the Series F Conversion Price and the Series G Conversion Price shall
affect Common previously issued upon conversion of the Series C Preferred, the
Series D Preferred, Series E Preferred, Series F Preferred or Series G
Preferred, respectively);
(C) upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the Series C Conversion Price, the Series D
Conversion Price, the Series E Conversion Price, the Series F Conversion Price
and the Series G Conversion Price computed upon the original issue thereof (or
upon the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed as if:
(1) in the case of Convertible Securities
or Options for Common, the only Additional Shares of Common issued were the
shares of Common, if any, actually issued upon the exercise of such Options or
the Conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the Corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or exchanged, plus the additional consideration, if any, actually received by
the Corporation upon such conversion or exchange; and
(2) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Corporation for the Additional Shares of Common
deemed to have been then issued was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration deemed to have been received by the Corporation (determined
pursuant to Section 5(e)(v) of this Article III) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(D) no readjustment pursuant to clause (B) or (C)
above shall have the effect of increasing the Series C Conversion Price, the
Series D Conversion Price, the Series E Conversion Price, the Series F
Conversion Price or the Series G Conversion Price to an amount which exceeds
the lower of (a) the Series C Conversion Price, the Series D Conversion Price,
the
-10-
<PAGE>
Series E Conversion Price, the Series F Conversion Price or the Series G
Conversion Price, respectively, on the original adjustment date, or (b) the
Series C Conversion Price, the Series D Conversion Price, Series E Conversion
Price, the Series F Conversion Price or the Series G Conversion Price that
would have resulted from any issuance of Additional Shares of Common between
the original adjustment date and such readjustment date.
(E) in the case of any Options which expire by
their terms not more than 30 days after the date of issue thereof, no
adjustment of the Series C Conversion Price, the Series D Conversion Price,
the Series E Conversion Price, the Series F Conversion Price or the Series G
Conversion Price shall be made until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the same manner provided
in clause (C) above.
(iv) Adjustment of Conversion Price Upon Issuance of
-----------------------------------------------
Additional Shares of Common.
- ---------------------------
(A) Series C Preferred, Series D Preferred,
---------------------------------------
Series E Preferred, Series F Preferred and Series G Preferred. In the event
- -------------------------------------------------------------
the Corporation, at any time after the Original Issue Date, shall issue
Additional Shares of Common (including Additional Shares of Common deemed to
be issued pursuant to Section 5(e)(iii) of this Article IV) without
consideration or for consideration per share less than the Series C Conversion
Price, Series D Conversion Price, Series E Conversion Price, Series F
Conversion Price or Series G Conversion Price in effect on the date of and
immediately prior to such issue, then and in such event, the Series C
Conversion Price, Series D Conversion Price, the Series E Conversion Price
Series F Conversion Price or Series G Conversion Price, as the case may be,
shall be reduced, concurrently with such issue, to the Conversion Price
(calculated to the nearest one-hundredth of a cent) determined by dividing (X)
an amount equal to the sum of (1) the product derived by multiplying the
Conversion Price of the Series C Preferred, Series D Preferred, Series E
Preferred, Series F Preferred or Series G Preferred, as the case may be, in
effect immediately prior to such issue or sale times the number of shares of
Common Stock Outstanding (as defined below) immediately prior to such issue or
sale, plus (2) the consideration, if any, received by the Corporation upon
such issue or sale, by (Y) an amount equal to the sum of (3) the number of
shares of Common Stock Outstanding immediately prior to such issue or sale,
plus (4) the number of shares of Common Stock issued or deemed to have been
issued in such issue and sale; provided, however, that the application of the
provisions of this Section 5(e)(iv) may be waived by any holder of Series C
Preferred, Series D Preferred, Series E Preferred, Series F Preferred or
Series G Preferred. For the purposes of the calculations set forth in this
Section 5(e)(iv), the number of shares of Common Stock Outstanding at any time
shall be equal to the number of shares of Common Stock outstanding at such
time plus the number of shares of Common Stock issuable upon the conversion of
all Convertible Securities then outstanding.
(v) Determination of Consideration for Options and
----------------------------------------------
Convertible Securities. The consideration per share received by the
- ----------------------
Corporation for Additional Shares of Common deemed to have been issued
pursuant to Section 5(e)(iii) of this Article III, relating to Options and
Convertible Securities shall be determined by dividing:
-11-
<PAGE>
(A) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options
or Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without
regard to any provision contained therein designed to protect against
dilution) payable to the Corporation upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities by
(B) the maximum number of shares of Common (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against the dilution) issuable upon the
exercise of such Options or conversion or exchange of such Convertible
Securities.
(f) Adjustments for Subdivisions, Combinations or Consolidation
-----------------------------------------------------------
of Preferred Stock and Common Stock. In the event the outstanding shares of
- -----------------------------------
Preferred Stock or Common Stock shall be subdivided (by stock split, stock
dividend, reclassification or otherwise) into a greater number of shares of
Preferred Stock or Common Stock, the Conversion Prices of the affected series
then in effect shall, concurrently with the effectiveness of such subdivision,
be proportionately decreased. In the event the outstanding shares of Preferred
Stock or Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Preferred Stock or Common Stock,
the Conversion Prices of the affected series then in effect shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased.
(g) Adjustments for Reorganization, Reclassification, Exchange
----------------------------------------------------------
and Substitution. If the shares of Common Stock issuable upon conversion of any
- ----------------
shares of Preferred Stock shall be changed into the same or a different number
of shares of any other class or classes of stock or other securities or
property, whether by reorganization, reclassification or otherwise (other than a
subdivision or combination of shares provided for in Section 5(f) of this
Article III), the Conversion Prices of the effected series of Preferred Stock
then in effect shall, concurrently with the effectiveness of such reorganization
or reclassification, be proportionately adjusted such that the shares of
Preferred Stock shall be convertible into, in lieu of the number of shares of
Common Stock which the holders thereof would otherwise have been entitled to
receive upon such conversion, a number of shares of such other class or classes
of stock or other securities or property equivalent to the number of shares of
Common Stock that would have been issuable to the holders of Preferred Stock if
their shares of Preferred Stock had been converted immediately before such
change; and, in any such case, appropriate adjustment (as determined by the
Board of Directors) shall be made in the application of the provisions herein
set forth with respect to the rights and interest thereafter of the holders of
Preferred Stock, to the end that the provisions set forth herein (including the
provisions with respect to changes in and other adjustments of the Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Preferred Stock.
-12-
<PAGE>
(h) No Impairment. The Corporation will not through any
-------------
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 5 and in the
taking of all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the holders of Preferred Stock against impairment.
This provision shall not restrict the Corporation's right to amend its
Certificate of Incorporation with the requisite stockholder consent.
(i) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 5,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon written request at any time
of any holder of Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) all such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of such holder's shares of
Preferred Stock.
(j) Notices of Record Date. In the event that the Corporation
----------------------
shall propose at any time:
(i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the holders of
any class or series of its stock any additional shares of stock of any class
or series or other rights;
(iii) to effect any reclassification or recapitalization
of its Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send to the
holders of the Preferred Stock:
(A) at least 20 days' prior written notice of the
date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto and the amount and character of such
-13-
<PAGE>
dividend, distribution or right) or for determining rights to vote in respect
of the matters referred to in (iii) and (iv) above; and
(B) in the case of the matters referred to in
(iii) and (iv) above, at least 20 days' prior written notice of the date when
the same shall take place (and specifying the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon the occurrence of such event or the record
date for the determination of such holders if such record date is earlier).
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Preferred Stock at
the address for each such holder as shown on the books of the Corporation.
(k) Reservation of Stock Issuable Upon Conversion. The
---------------------------------------------
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of Preferred Stock such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Preferred Stock; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of
Preferred Stock, the Corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be
sufficient for such purpose.
(l) Reissuance of Converted Shares. Shares of Preferred Stock
------------------------------
which have been converted into Common Stock after the original issuance
thereof shall be canceled.
Section 6. Redemption of Series A, Series B and Series C Preferred.
-------------------------------------------------------
(a) The Corporation, at the option of the Board of Directors
and with the consent of sixty-seven percent (67%) of the outstanding shares of
Series D Preferred, Series E Preferred, Series F Preferred and Series G
Preferred, voting as a single class, may at any time it may lawfully do so,
but in no event prior to September 30, 1997, redeem in whole but not in part
the Series A Preferred, Series B Preferred and Series C Preferred by paying in
cash for each such share of Series A Preferred, Series B Preferred and Series
C Preferred to be redeemed a price equal to the Conversion Value of each share
of the Series A Preferred, Series B Preferred and Series C Preferred (as
appropriately adjusted for any stock dividends, stock splits, recapitalization
or consolidation of the Series A Preferred, Series B Preferred and Series C
Preferred) together with any declared and unpaid dividend with respect
thereto. The amount payable upon the redemption of the Series A Preferred,
Series B Preferred and Series C Preferred is hereinafter referred to as the
"Redemption Price" of the respective series of Preferred Stock.
(b) At least thirty (30) days prior to the date fixed for any
redemption of Series A Preferred, Series B Preferred and Series C Preferred,
written notice shall be mailed, postage prepaid
-14-
<PAGE>
to each holder of record of Series A Preferred, Series B Preferred and Series
C Preferred to be redeemed at the post office address last shown on the
records of the Corporation, notifying such holder of the election of the
Corporation to redeem such shares, specifying the Redemption Date, the
applicable Redemption Price, and the date on which such holders' Conversion
Rights (as defined in Section 5) as to such shares terminate and calling upon
such holder to surrender to the Corporation, in the manner and at the place
designated, the certificate or certificates representing the shares to be
redeemed (such notice is hereinafter referred to as the "Redemption Notice").
On or after the Redemption Date, each holder of Series A Preferred, Series B
Preferred and Series C Preferred to be redeemed shall surrender the
certificate or certificates representing such shares to the Corporation, in
the manner and at the place designated in the Redemption Notice, and thereupon
the Redemption Price of such shares shall be payable to the order of the
person whose name appears on such certificate or certificates as the owner of
such shares and each surrendered certificate shall be canceled. From and after
the Redemption Date, all rights of the holders of the Series A Preferred,
Series B Preferred and Series C Preferred designated for redemption in the
Redemption Notice as holders of Series A Preferred, Series B Preferred and
Series C Preferred of the Corporation (except the right to receive the
Redemption Price without interest upon surrender of their certificate or
certificates) shall cease and terminate with respect to such shares, and such
shares shall not subsequently be transferred on the books of the Corporation
or be deemed to be outstanding for any purpose whatsoever.
(c) On or prior to the Redemption Date, the Corporation shall
deposit the Redemption Price of all shares of Series A Preferred, Series B
Preferred and Series C Preferred designated for redemption in the Redemption
Notice and not yet redeemed with a bank or trust company having an aggregate
capital and surplus in excess of fifty million ($50,000,000) as a trust fund
for the benefit of the respective holders of the shares designated for
redemption and not yet redeemed, with irrevocable instructions and authority
to the bank or trust company to pay the applicable Redemption Price for such
shares to their respective holders on or after the Redemption Date upon
receipt of notification from the Corporation that such holder has surrendered
his share certificate to the Corporation pursuant to Section 6(b). Such
instructions shall also provide that any funds deposited by the Corporation
pursuant to Section 6(c) for the redemption of shares subsequently converted
into shares of Common Stock pursuant to Section 5 no later than the first day
preceding the Redemption Date shall be returned to the Corporation forthwith
upon such conversion. The balance of any funds deposited by the Corporation
pursuant to this Section 6(c) remaining unclaimed at the expiration of one
year following the Redemption Date shall be returned to the Corporation upon
its request expressed in the resolution of its Board of Directors.
Section 7. Mandatory Redemption of Series D, Series E Preferred Stock,
-----------------------------------------------------------
Series F Preferred and Series G Preferred. On or at any time after June 25,
- ------------------------------------------
2002, upon the election of the holders of at least sixty-seven percent 67% of
the outstanding shares of Series D Preferred, Series E Preferred, Series F
Preferred and Series G Preferred, voting together as a class, such holders may
require the Corporation to redeem their shares to the extent legally
permissible. Such redemption shall be made in two equal installments. One-half
of the number of shares of Series D Preferred, Series E Preferred, Series F
Preferred and Series G Preferred outstanding on the date of the first
-15-
<PAGE>
scheduled redemption (the "First Redemption Date") shall be redeemed on such
date and on the first anniversary thereof (the First Redemption Date and the
first anniversary thereof being referred to herein as a "Redemption Date") to
the extent funds are legally available therefor.
Any such redemption of Series D Preferred shall be effected at a redemption
price equal to $3.60 per share plus any accrued and unpaid dividends (the total
of such amount and such dividends being referred to herein as the "Redemption
Price" applicable to such series). Any such redemption of Series E Preferred
shall be effected at a redemption price equal to $4.60 per share plus any
accrued and unpaid dividends (the total of such amount and such dividends being
referred to herein as the "Redemption Price" applicable to such series). Any
such redemption of Series F Preferred shall be effective at a redemption price
equal to $5.00 per share plus any accrued and unpaid dividends (the total of
such amount and such dividends being referred to herein as the "Redemption
Price" applicable to such series). Any such redemption of Series G Preferred
shall be effective at a redemption price equal to $12.00 per share plus any
accrued and unpaid dividends (the total of such amount and such dividends being
referred to herein as the "Redemption Price" applicable to such series).
At least thirty (30) days but not more than sixty (60) days prior to each
Redemption Date, a notice shall be mailed by the Corporation (the "Redemption
Notice") to the holders of Series D Preferred, Series E Preferred, Series F
Preferred and Series G Preferred by means of first class mail, postage paid,
addressed to the holders of record of the shares to be redeemed, at their
respective addresses then appearing on the books of the Corporation. Each such
notice shall specify (i) the number of shares as to which such holder has the
right to request redemption, (ii) the Redemption Date, and (iii) the Redemption
Price applicable to such series. The number of shares as to which each holder
shall have the right to request redemption on each Redemption Date shall be
determined by multiplying the total number of shares to be redeemed on that
Redemption Date by a fraction, (x) the numerator of which shall be the aggregate
number of shares of Series D Preferred, Series E Preferred, Series F Preferred
Stock and Series G Preferred held by such holder immediately prior to the First
Redemption Date and (y) the denominator of which shall be the aggregate number
of shares of Series D Preferred, Series E Preferred, Series F Preferred and
Series G Preferred outstanding immediately prior to the First Redemption Date.
Each holder who desires to have his or her shares redeemed pursuant to this
Section 7 shall so request by written notice to the Corporation within twenty-
five (25) days after delivery of the Redemption Notice. The holder of any
shares of Series D Preferred, Series E Preferred, Series F Preferred and Series
G Preferred so redeemed shall not be entitled to receive payment of the
Redemption Price for such shares until such holder shall cause to be delivered,
to the place specified in the Redemption Notice, (i) the certificates
representing such shares of Preferred Stock or affidavits of lost certificates
and (ii) transfer instrument(s) satisfactory to the corporation and sufficient
to transfer such shares to the Corporation free of any adverse interest.
Upon the redemption of any share, pursuant to this Section 7, such share
shall (provided the Redemption Price of such shares, plus any accrued and unpaid
dividends to the Redemption Date has
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<PAGE>
been paid or properly provided for) be deemed to cease to be outstanding, and
all rights of any person other than the Corporation in such share shall be
extinguished on the Redemption Date for such share (plus all rights to receive
future dividends with respect to such share), except for the right to receive
the Redemption Price, without interest, in accordance with the provisions of
this Section 7.
Any shares of Series D Preferred, Series E Preferred, Series F Preferred
and Series G Preferred as to which the holder does not affirmatively elect to
have redeemed as set forth herein shall remain outstanding with all rights,
preferences, privileges and restrictions set forth herein.
Section 8. Protective Covenants.
--------------------
(a) So long as there remains outstanding a number of shares of
Series B Preferred and Series C Preferred equal to 20% of the aggregate number
of shares of such series issued by the Corporation, the Corporation shall not,
without the affirmative vote or written consent of the holders of at least
sixty-seven percent (67%) of the voting power of the outstanding shares of
Series B Preferred and Series C Preferred, voting together as a single class,
(i) authorize or issue any shares of capital stock having rights, preferences
and privileges senior to the Series B Preferred or the Series C Preferred
(where, for this purpose, a security equivalent to the Series B Preferred or
Series C Preferred in all respects, other than with respect to the price of
such security and items directly related thereto (including without limitation
a liquidation preference or dividend right calculated as a percentage
thereof), shall not be considered senior to the Series B Preferred or Series C
Preferred, as applicable); or (ii) declare any dividend on the Preferred Stock
or Common Stock.
(b) So long as there remains outstanding a number of shares of
Series B Preferred equal to 20% of the aggregate number of shares of such
series issued by the Corporation, the Corporation shall not increase the
number of shares or alter the rights, preferences, privileges or restrictions
of the Series B Preferred without the affirmative vote or written consent of
the holders of at least sixty-seven percent (67%) of the voting power of the
outstanding shares of Series B Preferred, voting as a separate class.
(c) So long as there remains outstanding a number of shares of
Series C Preferred equal to 20% of the aggregate number of shares of such
series issued by the Corporation, the Corporation shall not increase the
number of shares or alter the rights, preferences, privileges or restrictions
of the Series C Preferred without the affirmative vote or written consent of
the holders of at least sixty-seven percent (67%) of the voting power of the
outstanding shares of Series C Preferred, voting as a separate class.
(d) So long as there remains outstanding a number of shares of
Series D Preferred equal to twenty percent (20%) of the aggregate number of
such series issued by the Corporation, the Corporation shall not, without the
affirmative vote or written consent of the holders of at least sixty-seven
percent (67%) of the voting power of the outstanding shares of Series D
Preferred, voting as a separate class, (i) authorize or issue any shares of
capital stock having rights, preferences and
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<PAGE>
privileges senior to the Series D Preferred (where, for this purpose, a
security equivalent to the Series D Preferred in all respects, other than with
respect to the price of such security and items directly related thereto
(including without limitation a liquidation preference or dividend right
calculated as a percentage thereof), shall not be considered senior to the
Series D Preferred); (ii) increase the number of shares or alter the rights,
preferences, privileges or restrictions of the Series D Preferred; or (iii)
declare any dividend on the Preferred Stock or Common Stock.
(e) So long as there remains outstanding a number of shares of
Series E Preferred equal to twenty percent (20%) of the aggregate number of
such series issued by the Corporation, the Corporation shall not, without the
affirmative vote or written consent of the holders of at least sixty-seven
percent (67%) of the voting power of the outstanding shares of Series E
Preferred, voting as a separate class, (i) authorize or issue any shares of
capital stock having rights, preferences and privileges senior to the Series E
Preferred (where, for this purpose, a security equivalent to the Series E
Preferred in all respects, other than with respect to the price of such
security and items directly related thereto (including without limitation a
liquidation preference or dividend right calculated as a percentage thereof),
shall not be considered senior to the Series E Preferred); (ii) increase the
number of shares or alter the rights, preferences, privileges or restrictions
of the Series E Preferred; or (iii) declare any dividend on the Preferred
Stock or Common Stock.
(f) So long as there remains outstanding a number of shares of
Series F Preferred equal to twenty percent (20%) of the aggregate number of
such series issued by the Corporation, the Corporation shall not, without the
affirmative vote or written consent of the holders of at least sixty-seven
percent (67%) of the voting power of the outstanding shares of Series F
Preferred, voting as a separate class, (i) authorize or issue any shares of
capital stock having rights, preferences and privileges senior to the Series F
Preferred (where, for this purpose, a security equivalent to the Series F
Preferred in all respects, other than with respect to the price of such
security and items directly related thereto (including without limitation a
liquidation preference or dividend right calculated as a percentage thereof),
shall not be considered senior to the Series F Preferred); (ii) increase the
number of shares or alter the rights, preferences, privileges or restrictions
of the Series F Preferred; or (iii) declare any dividend on the Preferred
Stock or Common Stock.
(g) So long as there remains outstanding a number of shares of
Series G Preferred equal to twenty percent (20%) of the aggregate number of
such series issued by the Corporation, the Corporation shall not, without the
affirmative vote or written consent of the holders of at least sixty-seven
percent (67%) of the voting power of the outstanding shares of Series F
Preferred, voting as a separate class, (i) authorize or issue any shares of
capital stock having rights, preferences and privileges senior to the Series G
Preferred (where, for this purpose, a security equivalent to the Series G
Preferred in all respects, other than with respect to the price of such
security and items directly related thereto (including without limitation a
liquidation preference or dividend right calculated as a percentage thereof),
shall not be considered senior to the Series G Preferred); (ii) increase the
number of shares or alter the rights, preferences, privileges or restrictions
of the Series G Preferred; or (iii) declare any dividend on the Preferred
Stock or Common Stock.
-18-
<PAGE>
(h) The Corporation shall not, without the affirmative vote or
written consent of the holders of at least sixty percent (60%) of the voting
power of the outstanding shares of Preferred Stock, voting together as a
single class, (i) authorize or issue any shares of capital stock having
rights, preferences and privileges on a parity with the Series D Preferred,
Series E Preferred, Series F Preferred or Series G Preferred; or (ii) effect
any reclassification or recapitalization of Common Stock outstanding involving
a change in the Common Stock.
(i) The Corporation shall not, without the affirmative vote or
written consent of the holders of at least seventy percent (70%) of the voting
power of the outstanding shares of Preferred Stock, voting together as a
single class, effect any sale of all or substantially all of the assets of the
Corporation or any Merger (as defined in Section 3 above) of the Corporation
with or into another corporation.
ARTICLE V
---------
The Corporation is to have perpetual existence.
ARTICLE VI
----------
Section 1. The management of the business and the conduct of the
affairs of the Corporation shall be vested in the Board of Directors. The
number of directors which shall constitute the whole Board of Directors shall
be fixed in the manner designated in the Bylaws of the Corporation.
Section 2. In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to make,
alter, amend or repeal the Bylaws of the Corporation.
Section 3. Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
ARTICLE VII
-----------
Section 1. To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director
of the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
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<PAGE>
Section 2. The Corporation may indemnify to the fullest extent
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he, his testator or intestate is or was a director,
officer, employee or agent of the Corporation or any predecessor of the
Corporation or serves or served at any other enterprise as a director,
officer, employee or agent at the request of the Corporation or any
predecessor to the Corporation.
Section 3. Neither any amendment nor repeal of this Article VII, nor
the adoption of any provision of this Corporation's Restated Certificate of
Incorporation inconsistent with this Article VII, shall eliminate or reduce
the effect of this Article VII, in respect of any matter occurring, or any
action or proceeding accruing or arising or that, but for this Article VII,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
ARTICLE VIII
------------
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX
----------
Vacancies created by newly created directorships, created in accordance
with the Bylaws of this Corporation, may be filled by the vote of a majority,
although less than a quorum, of the directors then in office, or by a sole
remaining director.
ARTICLE X
---------
Section 1. At any time following the closing of the first sale of
Common Stock of the Corporation pursuant to a registration statement declared
effective by the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Initial Public Offering"), stockholders of the
Corporation may not take any action by written consent in lieu of a meeting
and any action contemplated by stockholders after such time must be taken at a
duly called annual or special meeting of stockholders.
Section 2. Effective upon the Company's Initial Public Offering, the
number of directors which constitute the whole Board of Directors of the
Corporation shall be fixed exclusively by one or more resolutions adopted from
time to time by the Board of Directors. Upon the closing of the first sale of
Common Stock of the Corporation pursuant to a registration statement declared
effective by the Securities and Exchange Commission pursuant to the Securities
Act of 1933, as amended, the
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<PAGE>
Board of Directors shall be divided into three classes designated as Class I,
Class II, and Class III, respectively. Directors shall be assigned to each
class in accordance with a resolution or resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders following the date
thereof, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three years. At the second
annual meeting of stockholders following the date thereof, the term of office
of the Class II directors shall expire and Class II directors shall be elected
for a full term of three years. At the third annual meeting of stockholders
following the date thereof, the term of office of the Class III directors
shall expire and Class III directors shall be elected for a full term of three
years. At each succeeding annual meeting of stockholders, directors shall be
elected for a full term of three years to succeed the directors of the class
whose terms expire at such annual meeting.
Section 3. Advance notice of new business and stockholder nominations
for the election of directors shall be given in the manner and to the extent
provided in the Bylaws of the Corporation.
ARTICLE XI
----------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
-21-
<PAGE>
IN WITNESS WHEREOF, the corporation has caused this Certificate to be
signed by Stephanie L. Ruby, its incorporator, this August 10, 1998.
TUT SYSTEMS, INC.
By:_______________________________________
Stephanie L. Ruby, Incorporator
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<PAGE>
COMMON STOCK COMMON STOCK
NUMBER SHARES
TUT [LOGO OF TUT SYSTEMS]
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR CERTAIN DEFINITIONS
THE STATE OF DELAWARE AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND
RESTRICTIONS ON SHARES
CUSIP 901103 10 1
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
TUT SYSTEMS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ MATTHEW TAYLOR /s/ SALVATORE D'AURIA
CHAIRMAN, CHIEF TECHNICAL OFFICER PRESIDENT AND CHIEF EXECUTIVE OFFICER
AND SECRETARY
[SEAL]
TUT SYSTEMS, INC.
CORPORATE
SEAL
JULY 6,
1998
*DELAWARE*
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the
Certificate of Incorporation of the Corporation and by any certificate of
designation, and the number of shares constituting each class and series and
the designations thereof, may be obtained by the holder hereof upon request
and without charge from the Corporation at its principal office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ............. Custodian ..............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with rights of under Uniform Gifts to Minors
survivorship and not as tenants Act ..................................
in common (State)
UNIF TRF MIN ACT -- ........... Custodian (until age .....)
(Cust)
............... under Uniform Transfers
(Minor)
to Minors Act .........................
(State)
Additional abbreviations may also be used though not in the above list.
</TABLE>
FOR VALUE RECEIVED, _____________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ________________
_________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By ____________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM, PURSUANT TO
S.E.C. RULE 17Ad-18.
<PAGE>
TUT SYSTEMS, INC. EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement to Amendment No. 1
to Form S-1 (File No. 333-60419) of our reports dated March 16, 1998 except
for Note 17, as to which the date is July 24, 1998, on our audits of the
financial statements and financial statement schedule of Tut Systems, Inc. We
also consent to the references to our firm under the captions "Experts" and
"Selected Financial Data."
/s/ PricewaterhouseCoopers LLP
San Jose, California
September 8, 1998
