<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1998
REGISTRATION NO. 333-60419
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
TUT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------
3661 94-2958543
DELAWARE (PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
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.
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- -------------------------------------------------------------------------------
<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 December 18, 1998
PROSPECTUS
2,500,000 SHARES
[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 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,
DAVICOM, COMPAQ, INTEL, LUCENT, MOTOROLA, NATIONAL SEMICONDUCTOR, ROCKWELL,
TDK 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 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; (ii) the automatic conversion of all outstanding shares
of the Company's Preferred Stock into Common Stock upon the closing of this
offering; (iii) 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 (iv) 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., Intel Corporation ("Intel"),
International Business Machines Corporation, Hewlett-Packard Company, Lucent
Technologies Inc. ("Lucent"), Conexant Systems, Inc., formerly known as
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 the existing local
loop copper wire infrastructure. 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 within the premises.
. Leading semiconductor, computer hardware and consumer electronics
manufacturers, such as 3Com, AMD, AT&T Wireless, Compaq, Davicom
Semiconductor, Inc., Intel, Lucent, Motorola, Inc., National
Semiconductor, Inc., Rockwell and TDK Semiconductor Corp., 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 shipped its first Expresso MDU systems configured with HomeRun line
cards in the third quarter of 1998, and configured with LongRun 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, began operations in August 1991
and reincorporated in Delaware in September 1998. 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
offering.................................... 10,956,286 shares(/1/)
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 September 30, 1998.
Excludes: (i) 1,002,593 shares issuable upon exercise of stock options
outstanding as of September 30, 1998 at a weighted average exercise price
of $2.95 per share and (ii) 108,686 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, 13,
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>
NINE MONTHS ENDED
SEPTEMBER 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 $ 4,419 $ 7,203
Gross margin.................. 1,757 2,256 2,993 2,182 3,418
Loss from operations.......... (3,443) (4,607) (9,351) (5,549) (10,801)
Net loss...................... (3,390) (4,427) (9,157) (5,370) (10,535)
Dividend accretion on pre-
ferred stock................. 694 1,137 1,627 1,195 1,923
Net loss attributable to com-
mon stockholders............. $(4,084) $(5,564) $(10,784) $ (6,565) $ (12,458)
Pro forma net loss per share,
basic and diluted(/1/)....... $ (1.15) $ (1.26)
Shares used in computing pro
forma net loss per share, ba-
sic and diluted(/1/)......... 7,994 8,366
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
(UNAUDITED)
-----------------------------------------
ACTUAL PRO FORMA(/2/) AS ADJUSTED(/3/)
-------- -------------- ----------------
BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash, cash equivalents and short-
term investments................... $ 3,417 $10,085 $41,460
Working capital..................... 5,215 11,883 43,258
Total deferred revenue.............. 1,492 1,492 1,492
Long-term debt including current
portion............................ 352 352 352
Redeemable convertible preferred
stock and warrant.................. 45,334 -- --
Total stockholders' equity (defi-
cit)............................... (38,567) 13,435 47,310
</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 667
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 8,120 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 $12.5 million in fiscal 1995, 1996, 1997 and for the
nine months ended September 30, 1998, respectively. As of September 30, 1998,
the Company had an accumulated deficit of $40.6 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 shipped
its first Expresso MDU systems configured with HomeRun line cards in the third
quarter of 1998, and configured with LongRun line cards in the fourth quarter
of 1998. However, 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. Further price reductions
may be necessary to remain competitive. 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 and Expresso MDU 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 nine months ended
September 30, 1998, sales of the Company's XL products accounted for 79.9% of
the Company's total revenues. Shipments of the Company's Expresso GS products
began in May 1998, and the Company began shipping its Expresso MDU products
incorporating the Company's HomeRun technology in the third 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.
7
<PAGE>
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, HomeRun and LongRun 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 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."
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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 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.
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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 nine 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 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
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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 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
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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 16.3% of revenues in 1997 and the first nine months of 1998,
respectively. 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 12 United States patents
and has 14 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. 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.
According to the terms of this agreement, if the offering has not been
consummated by November 30, 1998, the agreement to purchase such intellectual
property can be canceled by any party thereto upon written notice. Although no
such election to terminate has been made to date, the Company is currently in
negotiations to amend the agreement to provide that it cannot be terminated
until a later date. In the event that the agreement is terminated by either
party prior to the consummation of this offering, the Company's business,
financial condition and results of operations would be materially adversely
affected.
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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 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
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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 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
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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 based on shares,
options and warrants outstanding at September 30, 1998, the Company will have
outstanding 10,956,286 shares of Common Stock, 11,331,286 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 8,456,286 shares of Common Stock held by existing
shareholders and 350,580 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)
7,703,853 shares, and an additional 350,580 shares issuable upon exercise of
outstanding vested options, 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 $10.68 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
September 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>
SEPTEMBER 30, 1998
--------------------------------------
(UNAUDITED)
AS
ACTUAL PRO FORMA(/2/) ADJUSTED(/3/)
-------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, net of current portion.. $ 60 $ 60 $ 60
Redeemable convertible preferred stock,
$0.001 no par value:
Authorized 7,531,320 shares; Issued
and outstanding 6,354,786 shares (ac-
tual); no shares (pro forma and as
adjusted)............................ 43,234 -- --
Redeemable convertible preferred stock
warrant................................ 2,100 -- --
Stockholders' equity (deficit):
Convertible preferred stock, $0.001
par value:
Authorized 1,339,020 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 336,736 shares
(actual); 8,456,286 shares (pro
forma); 10,956,286 shares (as ad-
justed)(1)......................... -- 8 11
Additional paid in capital.............. 1,968 55,529 89,401
Deferred compensation................... (1,541) (1,541) (1,541)
Accumulated deficit..................... (40,561) (40,561) (40,561)
-------- ------- -------
Total stockholders' equity (deficit).... (38,567) 13,435 47,310
-------- ------- -------
Total capitalization.................... $6,827 $13,495 $47,370
======== ======= =======
</TABLE>
- --------
(1) Excludes: (i) 1,111,279 shares of Common Stock reserved for issuance under
the Company's 1992 Stock Plan, under which options to purchase 1,002,593
shares at a weighted average exercise price of $2.95 were outstanding as
of September 30, 1998; (ii) 108,686, 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 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 September
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 September 30, 1998 was
approximately $13,435,000 or approximately $1.59 per share. Without taking
into account any changes in such net tangible book value per share after
September 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 September 30, 1998 would have been
approximately $47,310,000 or approximately $4.32 per share. This represents an
immediate increase in net tangible book value per share of $2.73 to existing
stockholders and an immediate dilution of $10.68 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 September
30, 1998................................................... $1.59
Increase per share attributable to new investors............ 2.73
-----
Pro forma net tangible book value per share after the Offer-
ing.......................................................... 4.32
------
Dilution per share to new investors........................... $10.68
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 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....... 8,456,286 77% $45,789,000 55% $ 5.41
New investors............... 2,500,000 23 37,500,000 45 15.00
---------- --- ----------- ---
Total..................... 10,956,286 100% $83,289,000 100% $ 7.61
========== === =========== ===
</TABLE>
The above calculations do not give effect to the exercise of outstanding
options to purchase 1,002,593 shares of Common Stock at a weighted average
exercise price of $2.95 per share outstanding on September 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 nine months ended September 30, 1997 and 1998 and the
balance sheet data at September 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 nine months ended September 30, 1998 are not necessarily indicative of
results that may be expected for the full year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $ 4,419 $ 7,203
Cost of goods sold...... 919 2,679 1,688 2,198 3,228 2,237 3,785
-------- ------- ------- ------- -------- ------- --------
Gross margin........... 902 1,011 1,757 2,256 2,993 2,182 3,418
-------- ------- ------- ------- -------- ------- --------
Operating expenses:
Sales and marketing.... 1,437 3,361 2,645 3,068 5,147 3,674 6,265
Research and develop-
ment.................. 427 595 993 2,012 3,562 2,367 4,729
General and administra-
tive.................. 1,091 1,269 1,562 1,783 2,375 1,690 2,106
Noncash compensation
expense............... 1,260 1,119
-------- ------- ------- ------- -------- ------- --------
Total operating ex-
penses................ 2,955 5,225 5,200 6,863 12,344 7,731 14,219
-------- ------- ------- ------- -------- ------- --------
Loss from operations... (2,053) (4,214) (3,443) (4,607) (9,351) (5,549) (10,801)
Other income (expense),
net.................... 3 15 54 181 195 180 267
-------- ------- ------- ------- -------- ------- --------
Loss before income tax-
es.................... (2,050) (4,199) (3,389) (4,426) (9,156) (5,369) (10,534)
Income tax expense...... 1 1 1 1 1 1 1
-------- ------- ------- ------- -------- ------- --------
Net loss............... (2,051) (4,200) (3,390) (4,427) (9,157) (5,370) (10,535)
Dividend accretion on
preferred stock........ 55 344 694 1,137 1,627 1,195 1,923
-------- ------- ------- ------- -------- ------- --------
Net loss attributable to
common stockholders.... $ (2,106) $(4,544) $(4,084) $(5,564) $(10,784) $(6,565) $(12,458)
======== ======= ======= ======= ======== ======= ========
Net loss per share at-
tributable to common
stockholders, basic and
diluted................ $(101.90) $(54.13) $(32.56) $(37.51) $ (59.36) $(38.67) $ (50.53)
======== ======= ======= ======= ======== ======= ========
Shares used in computing
net loss per share
attributable to common
stockholders, basic and
diluted................ 21 84 125 148 182 170 247
======== ======= ======= ======= ======== ======= ========
Pro forma net loss per
share, basic and dilut-
ed(/1/)................ $ (1.15) $ (1.26)
======== ========
Shares used in computing
pro forma net loss per
share, basic and
diluted(/1/)........... 7,994 8,366
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 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 $ 3,417 $ 10,085 $ 41,460
Working capital (defi-
cit)................... 408 (714) 1,771 8,357 11,066 5,215 11,883 43,258
Total assets............ 1,481 2,103 3,198 10,689 15,168 12,070 18,738 52,613
Redeemable convertible
preferred stock and
warrant................ 1,817 5,676 12,381 24,684 38,871 -- -- --
Long-term debt, net of
current portion........ 353 9 55 190 140 60 60 60
Accumulated deficit..... (3,127) (7,671) (11,755) (17,319) (28,103) (40,561) (40,561) (40,561)
Total stockholders' eq-
uity (deficit)......... (1,558) (6,065) (10,137) (15,694) (26,444) (38,567) 13,435 47,310
</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. During the
quarter ended September 30, 1998, the Company initiated several trials and
commenced selling its Expresso MDU system which incorporates HomeRun
technology and is designed for apartment complexes, hotels, college
dormitories and military complexes. 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. 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 16.3% of revenues in 1997 and the first nine 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 September
30, 1998, had an accumulated deficit of $40.6 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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 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 50.6 52.5
----- ------ ------ -------- --------
Gross margin................. 51.0 50.7 48.1 49.4 47.5
Operating expenses:
Sales and marketing.......... 76.8 68.9 82.7 83.1 87.0
Research and development..... 28.8 45.2 57.3 53.6 65.7
General and administrative... 45.3 40.0 38.2 38.3 29.2
Noncash compensation ex-
pense....................... -- -- 20.2 -- 15.6
----- ------ ------ -------- --------
Total operating expenses... 150.9 154.1 198.4 175.0 197.5
----- ------ ------ -------- --------
Loss from operations......... (99.9) (103.4) (150.3) (125.6) (150.0)
Other income (expense), net.... 1.5 4.0 3.1 4.1 3.7
----- ------ ------ -------- --------
Loss before income taxes..... (98.4) (99.4) (147.2) (121.5) (146.3)
Income tax expense............. 0.0 0.0 0.0 0.0 0.0
----- ------ ------ -------- --------
Net loss..................... (98.4)% (99.4)% (147.2)% (121.5)% (146.3)%
===== ====== ====== ======== ========
</TABLE>
Nine Months Ended September 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 $7.2 million for the nine months ended
September 30, 1998 from $4.4 million for the nine months ended September 30,
1997. This increase was primarily due to an increase in sales of XL products,
and an increase in sales of Expresso, initial sales of Expresso GS and initial
sales of Expresso MDU products. License and royalty revenues were $0.6 million
for the nine 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 $2.1
million. Approximately $1.5 million of such fees have been deferred at
September 30, 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 $3.8 million for the nine months
ended September 30, 1998 from $2.2 million for the nine months ended September
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
and Expressu MDU product lines. The Company's gross margin on an absolute
basis increased to $3.4 million for the nine months ended September 30, 1998
from $2.2 million for the nine months ended September 30, 1997. Gross margin
as a percentage of revenues decreased to 47.5% of revenues for the nine months
ended September 30, 1998 from 49.4% of revenues for the nine months ended
September 30, 1997 primarily due to the change in product mix to include
Expresso products which have lower average gross margins than the XL products.
Increased costs of raw materials and contract manufacturing associated with
initial Expresso product introductions contributed to this decrease in gross
margins. The Company expects that the continued introduction of Expresso GS
and Expresso MDU products will result in lower overall gross margins over the
next quarter.
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
23
<PAGE>
Company's sales and marketing expenses increased to $6.3 million for the nine
months ended September 30, 1998 from $3.7 million for the nine months ended
September 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 $4.7 million for the nine
months ended September 30, 1998 from $2.4 million for the nine months ended
September 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 $2.1 million for the nine months ended
September 30, 1998 from $1.7 million for the nine months ended September 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 $1.1 million for the nine months
ended September 30, 1998. There was no similar expense for the nine months
ended September 30, 1997. The Company intends to recognize $1.5 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 increased to $0.3 for the nine months
ended September 30, 1998 from $0.2 million for the nine months ended September
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.
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 on an absolute basis
increased to $3.0 million for the year ended December 31, 1997
24
<PAGE>
from $2.3 million for the year ended December 31, 1996 and from $1.8 million
for the year ended December 31, 1995. Gross margin as a percentage of revenues
decreased to 48.1% of revenues for the year ended December 31, 1997 from 50.7%
of revenues for the year ended December 31, 1996 and from 51.0% of revenues
for the year ended December 31, 1997. 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 September 30, 1998, the Company had cash and cash equivalents of $3.4
million. In addition, the Company has a line of credit with the ability to
borrow the lesser of $2.5 million or 70% of qualified accounts receivable. At
September 30, 1998, the Company had no outstanding draws thereunder. During
October 1998, the Company borrowed $1.3 million on the line of credit. In
October and November 1998, the Company was in violation of certain ratio
covenants related to the line of credit. The bank has since waived these
violations. The Company expects to cure all violations by the end of December
1998. The Company has approximately $0.4 million outstanding on a separate
equipment line of credit. The current portion of such borrowings is
$0.3 million.
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During December 1998, the Company entered into an agreement with a lending
institution to provide the Company with a credit facility of up to $7.5
million. The credit facility is composed of two revolvers: a formula revolver
of up to the lesser of $3.0 million or 85% of qualified accounts receivable
bearing interest at prime plus 2.0% per annum; a non-formula revolver of up to
$4.5 million bearing interest at prime plus 3.5% per annum. The credit
facility requires a minimum monthly interest payment of $10,000. The term of
the credit facility is 18 months and is automatically renewed for additional
terms of one year unless 60 days' written notice is given by either party.
Loan fees total $135,000 of which $97,500 is due upon funding and $37,500 is
due upon the first anniversary of the loan. In addition, the Company granted
the lending institution a warrant to purchase 55,000 shares of the Company's
common stock at an exercise price of $14.00 per share. The warrant is
exercisable for five years from the date of issuance. The Company intends to
use a portion of the proceeds from this credit facility to pay off its
existing lines of credit.
Net decrease in cash and cash equivalents in the nine months ended September
30, 1998 of $2.0 million resulted primarily from a net loss of $10.5 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 nine months ended September 30,
1997 of $0.2 million resulted primarily from a net loss of $5.4 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. According to the
terms of this agreement, if the offering has not been consummated by November
30, 1998, the agreement to purchase such intellectual property can be canceled
by any party thereto upon written notice. Although no such election to
terminate has been made to date, the Company is currently in negotiations to
amend the agreement to provide that it cannot be terminated until a later
date.
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 and funds
available under its credit facility 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") Intel Corporation ("Intel"), International Business Machines
Corporation ("IBM"), 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 the existing local loop copper
wire infrastructure. 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 within the premises.
. Leading semiconductor, computer hardware and consumer electronics
manufacturers, such as 3Com, AMD, AT&T Wireless, Compaq, Davicom
Semiconductor, Inc. ("Davicom"), Intel, Lucent, Motorola, Inc.
("Motorola"), National Semiconductor, Inc. ("National Semiconductor"),
Rockwell and TDK Semiconductor Corp. ("TDK"), 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 shipped its first Expresso MDU systems configured with HomeRun line
cards in the third quarter of 1998, and configured with LongRun 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 five-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.
[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 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's Expresso MDU system, which is integrated with its proprietary
HomeRun technology, provides 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 recently introduced LongRun line card, when used as part of the
Expresso MDU system, extends the delivery of these services to tenants in
garden style apartment complexes.
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 GS and Expresso MDU 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, Davicom, Intel,
Lucent, Motorola, National Semiconductor, Rockwell and TDK. 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.
[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, when integrated with the Company's HomeRun
technology, 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, HomeRun or LongRun
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).
[Graphic 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.
[Graphic depicting "The Networked Community"]
Expresso MDU
Expresso MDU integrates 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 shipped its
first Expresso MDU systems configured with HomeRun line cards in the third
quarter of 1998, and configured with LongRun 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 and/or LongRun 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").
[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.
[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 100 Expresso and Expresso GS
systems.
Multiple Dwelling Units
MDU owners and service providers 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. To date, the Company
has sold over 30 Expresso MDU systems configured with a combination of HomeRun
and LongRun line cards to owners of apartment complexes and hotels.
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
37
<PAGE>
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 to existing
customers as they expand and grow.
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 1998, the Company established new sales channels in Canada,
Europe, South America, Australia and Asia. In the first nine months of 1998,
the Company derived approximately 16.3% of its revenues from customers in
international markets. The Company believes that its Expresso MDU product line
in particular can serve a substantial market for high-speed data access
products outside of the United States.
In 1997 and the first nine 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.
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<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 combines 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 12 United States patents
and has 14 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.
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.
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<PAGE>
According to the terms of this agreement, if the offering has not been
consummated by November 30, 1998, the agreement to purchase such intellectual
property can be canceled by any party thereto upon written notice. Although no
such election to terminate has been made to date, the Company is currently in
negotiations to amend the agreement to provide that it cannot be terminated
until a later date. In the event that the agreement is terminated by either
party prior to the consummation of the offering, the Company's business,
financial condition and results of operations would be materially adversely
affected.
EMPLOYEES
As of September 30, 1998, the Company employed 94 persons, including 10 in
operations, 43 in marketing, sales and customer support, 27 in research and
development and 14 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
recently entered into an agreement to lease additional facilities, adding
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........... 42 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... 59 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.
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<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
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<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."
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<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."
46
<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 1,437,501
shares of Common Stock have been reserved for issuance under the Company's
1992 Stock Plan. Under the 1992 Stock Plan, as of September 30, 1998, options
to purchase an aggregate of 1,002,593 shares were outstanding, 326,239 shares
of Common Stock had been purchased pursuant to exercises of stock options and
stock purchase rights and 108,686 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 was approved by 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 was approved by 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 September 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 12.8% 9.9%
First Analysis Corpora-
tion(/5/)................... 897,835 10.6 8.2
Investment Advisers,
Inc.(/6/)................... 864,098 10.2 7.9
Vanguard IV, L.P.(/7/)....... 658,592 7.8 6.0
AT&T Ventures(/8/)........... 625,000 7.4 5.7
Spectrum Equity Investors,
L.P.(/9/)................... 541,667 6.4 4.9
Apex Investment Funds(/10/).. 536,411 6.3 4.9
Officers and Directors
David Spreng(/11/)........... 864,098 10.2 7.9
Clifford H. Higgerson(/12/).. 658,592 7.8 6.0
Neal Douglas(/13/)........... 625,000 7.4 5.7
Brion Applegate(/14/)........ 541,667 6.4 5.0
George Middlemas(/15/)....... 536,411 6.3 4.9
Matthew Taylor(/16/)......... 369,152 4.4 3.4
Salvatore D'Auria(/17/)...... 198,437 2.3 1.8
Saul Rosenzweig(/18/)........ 110,913 1.3 1.0
Thomas Warner(/19/).......... 33,203 * *
Allen Purdy(/20/)............ 28,125 * *
Nicholas Berberi(/21/)....... 23,203 * *
Roger Moore(/22/)............ 3,958 * *
All officers and directors as
a group (16 persons)(/23/).. 4,024,189 46.0% 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 8,456,286 shares of Common Stock
outstanding as of September 30, 1998 (including 666,836 shares issuable
upon exercise of a warrant held by Microsoft), 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 September 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 held by Microsoft. 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.
(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 September 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 658,592 shares 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 2,344 shares issuable pursuant to options exercisable within 60
days of September 30, 1998. Also includes 40,000 shares owned by Mr.
Taylor which are subject to rights to purchase held by certain third
parties.
(17) Consists of 198,437 shares issuable pursuant to options or rights
exercisable within 60 days of September 30, 1998.
(18) Includes 104,913 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) Includes 6,979 shares issuable pursuant to options exercisable within 60
days of September 30, 1998.
(20) Consists of 28,125 shares issuable pursuant to options exercisable within
60 days of September 30, 1998.
(21) Consists of 23,203 shares issuable pursuant to options exercisable within
60 days of September 30, 1998.
(22) Consists of 3,958 shares issuable pursuant to options exercisable within
60 days of September 30, 1998.
(23) Includes an aggregate of 291,760 shares issuable pursuant to options
exercisable within 60 days of September 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, 658,592 shares held by
Vanguard IV, L.P., 856,597 shares held by Investment Advisers, Inc.,
625,000 shares held by AT&T Ventures, and 104,913 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 September 30, 1998, there were
8,456,286 shares of Common Stock outstanding (assuming exercise of a warrant
to purchase 666,836 shares of Preferred Stock and assuming conversion into
Common Stock of all outstanding shares of Preferred Stock), which were held of
record by 210 stockholders, and no shares of undesignated preferred stock
outstanding. Upon completion of this offering and assuming no exercise of
options after September 30, 1998, the Company will have outstanding 10,956,286
shares of Common Stock, 11,331,286 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 September 30, 1998, the Company had outstanding options to purchase a
total of 1,002,593 shares of Common Stock pursuant to the 1992 Stock Plan at a
weighted average exercise price of $2.95 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 based on outstanding shares, options
and warrants at September 30, 1998, the Company will have outstanding
10,956,286 shares of Common Stock (11,331,286 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 8,456,286 shares of Common
Stock held by existing shareholders and 350,580 shares subject to outstanding
vested 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), 7,703,853
shares and an additional 350,580 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 September 30, 1998, 1,002,593 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 ("Dain Rauscher Wessels"), 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.............................................
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
March 16, 1998, except for Note 17,
as to which the date is December 17, 1998
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.
/s/ PricewaterhouseCoopers LLP
F-2
<PAGE>
TUT SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998 1998
-------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 1,409 $ 5,395 $ 3,417 $ 10,085
Short-term investments....... 7,541 4,890 -- --
Accounts receivable, net of
allowance for doubtful
accounts of $20, $29, and
$43 in 1996, 1997 and 1998,
respectively................ 604 1,626 2,863 2,863
Inventories.................. 255 1,424 2,739 2,739
Prepaid expenses and other... 57 332 271 271
-------- -------- -------- --------
Total current assets....... 9,866 13,667 9,290 15,958
Property and equipment, net.... 774 1,345 1,842 1,842
Deferred offering costs........ -- -- 817 817
Other assets................... 49 156 121 121
-------- -------- -------- --------
Total assets............... $ 10,689 $ 15,168 $ 12,070 $ 18,738
======== ======== ======== ========
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
WARRANT, AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable............. $ 887 $ 1,640 $ 2,041 $ 2,041
Accrued liabilities.......... 416 747 1,418 1,418
Lines of credit.............. 206 214 292 292
Deferred revenue............. -- -- 324 324
-------- -------- -------- --------
Total current liabilities.. 1,509 2,601 4,075 4,075
Lines of credit, net of current
portion....................... 190 140 60 60
Deferred revenue, net of
current portion............... -- -- 1,168 1,168
-------- -------- -------- --------
Total liabilities.......... 1,699 2,741 5,303 5,303
-------- -------- -------- --------
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:
$43,234 at September 30,
1998)......................... 24,684 37,611 43,234 --
Redeemable convertible
preferred stock warrant....... -- 1,260 2,100 --
-------- -------- -------- --------
24,684 38,871 45,334 --
-------- -------- -------- --------
Stockholders' equity (deficit):
Convertible preferred stock,
no par value, 1,339 shares
authorized, 1,098 shares
issued and outstanding in
1996, 1997, 1998 and none in
pro forma (liquidation
value: $1,567 at September
30, 1998)................... 1,567 1,567 1,567 --
Common stock, $0.001 par
value, 100,000 shares
authorized, 156, 218, 337
and 8,456 shares issued and
outstanding in 1996, 1997,
1998 and pro forma,
respectively................ -- -- -- 8
Additional paid in capital..... 58 92 1,968 55,529
Deferred compensation.......... -- -- (1,541) (1,541)
Accumulated deficit............ (17,319) (28,103) (40,561) (40,561)
-------- -------- -------- --------
Total stockholders' equity
(deficit)................. (15,694) (26,444) (38,567) 13,435
-------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)................. $ 10,689 $ 15,168 $ 12,070 $ 18,738
======== ======== ======== ========
</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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product..................... $ 3,445 $ 4,454 $ 6,221 $ 4,419 $ 6,585
License and royalty......... -- -- -- -- 618
------- ------- -------- -------- ---------
Total revenues............ 3,445 4,454 6,221 4,419 7,203
------- ------- -------- -------- ---------
Cost of goods sold:
Product..................... 1,688 2,198 3,228 2,237 3,733
License and royalty......... -- -- -- -- 52
------- ------- -------- -------- ---------
Total cost of goods sold.. 1,688 2,198 3,228 2,237 3,785
------- ------- -------- -------- ---------
Gross margin.................. 1,757 2,256 2,993 2,182 3,418
------- ------- -------- -------- ---------
Operating expenses:
Sales and marketing......... 2,645 3,068 5,147 3,674 6,265
Research and development.... 993 2,012 3,562 2,367 4,729
General and administrative.. 1,562 1,783 2,375 1,690 2,106
Noncash compensation
expense.................... -- -- 1,260 -- 1,119
------- ------- -------- -------- ---------
Total operating expenses.. 5,200 6,863 12,344 7,731 14,219
------- ------- -------- -------- ---------
Loss from operations...... (3,443) (4,607) (9,351) (5,549) (10,801)
Interest expense.............. (30) (40) (61) (38) (33)
Other income, net............. 84 221 256 218 300
------- ------- -------- -------- ---------
Loss before income taxes.. (3,389) (4,426) (9,156) (5,369) (10,534)
Income tax expense............ 1 1 1 1 1
------- ------- -------- -------- ---------
Net loss.................. (3,390) (4,427) (9,157) (5,370) (10,535)
Dividend accretion on
preferred stock.............. 694 1,137 1,627 1,195 1,923
------- ------- -------- -------- ---------
Net loss attributable to
common stockholders.......... $(4,084) $(5,564) $(10,784) $ (6,565) $ (12,458)
======= ======= ======== ======== =========
Net loss per share
attributable to common
stockholders, basic and
diluted...................... $(32.56) $(37.51) $ (59.36) $ (38.67) $ (50.53)
======= ======= ======== ======== =========
Shares used in computing net
loss attributable to common
stockholders, basic and
diluted...................... 125 148 182 170 247
======= ======= ======== ======== =========
Pro forma net loss per share,
basic and diluted............ $ (1.15) $ (1.26)
======== =========
Shares used in computing pro
forma net loss per share,
basic and diluted............ 7,994 8,366
======== =========
</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).... 119 56 56
Unearned compensation
related to stock
options (unaudited).... 1,820 (1,820)
Amortization related to
unearned compensation
(unaudited)............ 279 279
Dividend accretion
(unaudited)............ (1,923) (1,923)
Net loss (unaudited).... (10,535) (10,535)
------- -------- --- ------ ------ ------- -------- --------
Balance, September 30,
1998 (unaudited)....... 1,098 $ 1,567 337 $ -- $1,968 $(1,541) $(40,561) $(38,567)
======= ======== === ====== ====== ======= ======== ========
</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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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) $ (5,370) $ (10,535)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 90 238 398 274 441
Provision for (reduction in)
doubtful accounts........... (103) (94) 14 (1) 14
Amortization of discounts on
investments................. -- (53) (152) (120) (185)
Noncash compensation
expense..................... -- -- 1,260 -- 1,119
Change in assets and
liabilities:
Accounts receivable......... 514 49 (1,036) (864) (1,251)
Inventories................. (45) 285 (1,169) (692) (1,315)
Prepaid expenses and other
assets..................... 43 14 (382) (186) 96
Accounts payable............ (1,066) 484 753 422 401
Deferred revenue............ -- -- -- -- 1,492
Accrued liabilities......... (101) 312 331 534 (146)
------- ------- ------- -------- ---------
Net cash used in operating
activities................ (4,058) (3,192) (9,140) (6,003) (9,869)
------- ------- ------- -------- ---------
Cash flows from investing
activities:
Purchase of property and
equipment.................... (302) (565) (969) (813) (938)
Purchase of short-term
investments.................. -- (7,488) (6,543) (1,664) (1,765)
Proceeds from maturities of
short-term investments....... -- -- 9,346 7,672 6,840
------- ------- ------- -------- ---------
Net cash provided by (used
in) investing activities.. (302) (8,053) 1,834 5,195 4,137
------- ------- ------- -------- ---------
Cash flows from financing
activities:
Payment on lines of credit.... (810) (395) (1,130) (672) (224)
Proceeds from lines of
credit....................... 447 344 1,088 1,248 222
Proceeds from issuances of
common and preferred stock,
net.......................... 6,015 11,174 11,334 31 3,756
------- ------- ------- -------- ---------
Net cash provided by
financing activities...... 5,652 11,123 11,292 607 3,754
------- ------- ------- -------- ---------
Net increase (decrease) in
cash and cash
equivalents............... 1,292 (122) 3,986 (201) (1,978)
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 $ 1,208 $ 3,417
======= ======= ======= ======== =========
Supplemental disclosure of cash
flow information:
Interest paid during the
period....................... $ 30 $ 40 $ 61 $ 38 $ 33
======= ======= ======= ======== =========
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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS ENDED
SEPTEMBER 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 September 30, 1998 and for the nine
months ended September 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 September 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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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 667 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 September 30, 1998. Unaudited pro
forma stockholders' equity at September 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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- ---------------------
1995 1996 1997 1997 1998
------- ------- -------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
HISTORICAL NET LOSS PER
SHARE ATTRIBUTABLE TO COM-
MON STOCKHOLDERS, BASIC
AND DILUTED:
Net loss attributable to
common stockholders....... $(4,084) $(5,564) $(10,784) $ (6,565) $ (12,458)
======= ======= ======== ========= ==========
Shares used in computing
net loss attributable to
common stockholders, basic
and diluted............... 125 148 182 170 247
======= ======= ======== ========= ==========
Net loss per share
attributable to common
stockholders, basic and
diluted................... $(32.56) $(37.51) $ (59.36) $ (38.67) $ (50.53)
======= ======= ======== ========= ==========
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 7,573 9,123
======= ======= ======== ========= ==========
PRO FORMA NET LOSS PER
SHARE:
Net loss attributable to
common stockholders....... $(10,784) $ (12,458)
Less: dividend accretion on
redeemable convertible
preferred stock........... 1,627 1,923
-------- ----------
Pro forma net loss......... $ (9,157) $ 10,535
======== ==========
Shares used in computing
net loss attributable to
common stockholders, basic
and diluted............... 182 247
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... 7,812 8,120
-------- ----------
Shares used in computing
pro forma net loss per
share, basic and diluted.. 7,994 8,366
======== ==========
Pro forma net loss per
share, basic and diluted.. $ (1.15) $ (1.26)
======== ==========
</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 nine months ended September 30, 1997 and 1998.
F-10
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
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.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs which are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact of SOP 98-1
on its financial statements and related disclosures.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"
(SOP 98-5). This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The Company
believes the adoption of SOP 98-1 will not have a material impact on its
results of operations.
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.
F-11
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
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.
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,
------------- SEPTEMBER 30,
1996 1997 1998
------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods................................... $ 206 $ 1,236 $1,940
Work in process.................................. -- -- 581
Raw material..................................... 49 188 218
----- ------- ------
$ 255 $ 1,424 $2,739
===== ======= ======
</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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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 ------------- SEPTEMBER 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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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,
------------- SEPTEMBER 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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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)................. (402) -- 402 2.00-15.00 2,633 6.55
Options exercised (unau-
dited)................. -- 119 (119) 0.36- 2.40 (56) 0.47
Options terminated (un-
audited)............... 5 -- (5) 0.52 (2) 0.40
---- --- ----- ------
Balance, September 30,
1998 (unaudited)....... 108 327 1,003 $0.28-$15.00 $2,960 $2.95
==== === ===== ======
</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 $279 for the year ended December
31, 1997 and the nine month period September 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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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 SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 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>
NINE MONTHS
ENDED SEPTEMBER 30,
1995 1996 1997 1998
------ ------ ------ -------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
United States....................... $2,977 $3,489 $5,236 $6,030
Foreign............................. 468 965 985 1,173
------ ------ ------ ------
$3,445 $4,454 $6,221 $7,203
====== ====== ====== ======
</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 nine months ended September 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.
During December 1998, the Company leased additional space under the same
terms. Aggregate rental payments are $20 per month through November 1999 and
$21 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
F-20
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION PERTAINING TO SEPTEMBER 30, 1998 AND THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
17. SUBSEQUENT EVENTS, continued:
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.
On September 29, 1998, the reincorporation of the Company from California to
Delaware and a four for one reverse stock split of the Company's stock were
completed.
In October and November 1998, the Company issued 6 options to employees to
purchase common stock under the 1992 plan.
In November 1998, the Company extended its existing line of credit with the
Bank through January 15, 1999.
During December 1998, the Company entered into an agreement with a lending
institution to provide the Company with a credit facility of up to $7.5
million. The credit facility is composed of two revolvers: a formula revolver
of up to the lesser of $3.0 million or 85% of qualified accounts receivable
bearing interest at prime plus 2.0%; a non-formula revolver up to $4.5 million
bearing interest at prime plus 3.5%. The credit facility requires a minimum
monthly interest payment of $10,000. The term of the credit facility is
eighteen months and is renewable for additional terms of one year unless 60
days' written notice is given by either party. Loan fees total $135,000 of
which $97,500 is due upon funding and $37,500 is due upon the first
anniversary of the loan. In addition, the Company granted the lending
institution a warrant to purchase 55,000 shares of the Company's common stock
at an exercise price of $14.00 per share. The warrant is exercisable for 5
years from the date of issuance. The warrant has been valued using the Black-
Scholes method and its value will be amortized over the term of the loan using
the effective interest method. The Company intends to use a portion of the
proceeds from this credit facility to pay off its existing lines of credit.
F-21
<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 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 occurring prior to September 29, 1998 do not
reflect a four for one reverse split of the Registrant's Common Stock effected
on such date.
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.
(41) On August 26, 1998, the Registrant sold 917 shares of Common Stock
upon the exercise of options at a price of $0.09 per share.
(42) On August 28, 1998, the Registrant sold 2,531 shares of Common Stock
upon the exercise of options at a prices of $0.12 and $0.13 per share.
(43) On September 17, 1998, the Registrant sold 3,395 shares of Common
Stock upon the exercise of options at a prices of $0.12 and $0.13 per
share.
(44) On September 18, 1998, the Registrant sold 11,000 shares of Common
Stock upon the exercise of options at a price of $0.09 per share.
(45) On September 22, 1998, the Registrant sold 7,500 shares of Common
Stock upon the exercise of options at a price of $0.09 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* Restated Certificate of Incorporation of Registrant, as currently
in effect.
3.2* Form of Second Amended and Restated Certificate of Incorporation of
Registrant, to be filed immediately following the closing of the
offering made under this Registration Statement.
3.3* Bylaws of Registrant, as currently in effect.
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
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 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.
10.15** Loan and Security Agreement, Streamlined Facility Agreement,
Revolving Credit Note, Patent and Trademark Security Agreement,
Security Agreement in Copyrighted Works and Stock Subscription
Warrant between Registrant and TransAmerica Business Credit
Corporation, each dated December 18, 1998.
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.
** To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <S> <C>
*Schedule II --Valuation and Qualifying Accounts..................... S-2
</TABLE>
- --------
* Previously filed.
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.
II-5
<PAGE>
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-6
<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 18TH DAY OF DECEMBER, 1998.
Tut Systems, Inc.
/s/ Nelson Caldwell
By:
-----------------------------------
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 December 18, 1998
______________________________________ Officer and Director
SALVATORE D'AURIA (Principal Executive
Officer)
/s/ Nelson Caldwell Vice President, Finance and December 18, 1998
______________________________________ Chief Financial Officer
NELSON CALDWELL (Principal Financial and
Accounting Officer)
* Matthew Taylor Chairman of the Board, Chief December 18, 1998
______________________________________ Technical Officer and
MATTHEW TAYLOR Secretary
* Clifford H. Higgerson Director December 18, 1998
______________________________________
CLIFFORD H. HIGGERSON
* Saul Rosenzweig Director December 18, 1998
______________________________________
SAUL ROSENZWEIG
* David Spreng Director December 18, 1998
______________________________________
DAVID SPRENG
* George Middlemas Director December 18, 1998
______________________________________
GEORGE MIDDLEMAS
* Brion Applegate Director December 18, 1998
______________________________________
BRION APPLEGATE
* Roger Moore Director December 18, 1998
______________________________________
ROGER MOORE
* Neal Douglas Director December 18, 1998
______________________________________
NEAL DOUGLAS
/s/ Nelson Caldwell
*By:
--------------------------------------------------
NELSON CALDWELL
(ATTORNEY-IN-FACT)
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
March 16, 1998
To the Stockholders and Board of Directors of Tut Systems, Inc.
In connection with our audits of the financial statements of Tut Systems,
Inc. as of December 31, 1996 and 1997, and for each of the three years in the
period ended December 31, 1997, which financial statements are included in the
Prospectus, we have also audited the financial statement schedule listed in
Item 16(b) herein. In our opinion, this financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
S-1
<PAGE>
SCHEDULE II
TUT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT (REDUCTIONS) BALANCE AT
BEGINNING TO COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
---------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995.. $ 261 $ (103) $ (25) $ 133
Year ended December 31, 1996.. 133 (94) (19) 20
Year ended December 31, 1997.. 20 14 (5) 29
Valuation allowance for deferred
tax assets:
Year ended December 31, 1995.. $2,868 $1,204 $ -- $4,072
Year ended December 31, 1996.. 4,072 1,570 -- 5,642
Year ended December 31, 1997.. 5,642 3,339 -- 8,981
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1** Form of Underwriting Agreement.
3.1* Restated Certificate of Incorporation of Registrant, as
currently in effect.
3.2* Form of Second Amended and Restated Certificate of
Incorporation of Registrant, to be filed immediately following
the closing of the offering made under this Registration
Statement.
3.3* Bylaws of Registrant, as currently in effect.
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 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.
10.15** Loan and Security Agreement, Streamlined Facility Agreement,
Revolving Credit Note, Patent and Trademark Security Agreement,
Security Agreement in Copyrighted Works and Stock Subscription
Warrant between Registrant and TransAmerica Business Credit
Corporation, each dated December 18, 1998.
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.
** To be filed by amendment.
<PAGE>
EXHIBIT 10.6
[LETTERHEAD OF WENBERG REALTY COMPANY APPEARS HERE]
This Lease, made at SAN FRANCISCO, CALIFORNIA this 4TH day of APRIL, 1995, by
and between PLEASANT HILL INDUSTRIAL PARK ASSOCIATES A CALIFORNIA
LIMITED PARTNERSHIP
PARTIES and TUTSYSTEMS, INC.
hereinafter called respectively Lessor and Lessee, without regard
to number or gender,
PURPOSE WITNESSETH: That Lessor hereby leases to Lessee, and Lessee
hires from Lessor, for the purpose of conducting therein the
development, sales and distribution of electronic products and
related uses and for no other purpose, those certain premises
with the appurtenances, situated in the City of Pleasant Hill
PREMISES County of Contra Costa, State of California, and more
particularly described as follows, to-wit
Approximately 11,170 square feet more commonly known and
designated as 2495 Estand Way, Pleasant Hill, California.
TERM The term shall be for THREE (3)---------------------------
years commencing on the 1st day of JUNE , 1995, and ending on the
31st day of MAY , 19 98, at the following rent in lawful money of
the United States of America, which Lessee agrees to pay to
Lessor, without deduction or offset, at such place or places as
may be designated from time to time by Lessor, in installments as
follows:
RENT
The sum of NINE THOUSAND ONE HUNDRED TWENTY-SEVEN AND 50/100
($9,127.50) DOLLARS on the first day of June, 1995 and the
further sum of NINE THOUSAND ONE HUNDRED TWENTY-SEVEN AND 50/L00
($9,127.50) DOLLARS on the first day of each and every month
thereafter to and including the first day of November, 1996;
thereafter the sum of NINE THOUSAND NINE HUNDRED SEVENTY-NINE AND
40/100 ($9,979.40) DOLLARS on the first day of December, 1996 and
the further sum of NINE THOUSAND NINE HUNDRED SEVENTY-NINE AND
40/100 ($9,979.40) DOLLARS on the first day of each and every,
month thereafter to and including the first day of May, 1998.
LEASE All rent payments should be made payable to LOWENBERG
-----------------------------------------------------
CORPORATION.
------------
It is further mutually agreed between the parties as follows:
POSSESSION 1. If Lessor, for any reason whatsoever, cannot deliver
possession of the said premises to Lessee at the commence of
the said term. as hereinbefore specified, this lease shall not be
void or voidable, nor shall Lessor be liable Lessee for any loss
or damage resulting therefrom; but in that event there shall be a
proportionate deduction of recovering the period between the
commencement of the said term and the time when Lessor can
deliver possession.
WASTE 2. Lessee shall not commit, or suffer to be committed, any
ALTERATIONS waste upon the said premises, or any nuisance, or other act or
thing which may disturb the quiet enjoyment of any other tenant
in the building in which the demised premises may be located.
Lessee shall not make, or suffer to be made, any alterations of
the said premises, or any part thereon without the written
consent of Lessor first had and obtained, and any additions to,
or alterations of, the stud premises except movable furniture and
trade fixtures, shall become at once a part of the realty and
belong to Lessor.
<PAGE>
ABANDONMENT 3. Lessee shall not vacate or abandon the premises at any
time during the term; and if Lessee shall abandon, vacate or
surrender said premises, or be dispossessed by process of law, or
otherwise, any personal property belonging to Lessor and left on
the premises shall be deemed to be abandoned, at the option of
Lessor, except such property as may be under a security agreement
with Lessor.
USES 4. Lessee shall not use, or permit said premises, or any
PROHIBITED part thereof, to be used, for any purpose or purposes other than
the purpose or purposes for which the said premises are hereby
leased; and no use shall be made or permitted to made of the said
premises, nor acts done, which will increase the existing rate of
insurance upon the building in which said premises may be
located, or cause a cancellation of any insurance policy covering
said building, or any part there nor shall Lessee sell, or permit
to be kept, used, or sold, in or about said premises, any article
which may be prohibited the standard form of fire insurance
policies. Lessee shall, at his sole cost and expense, comply with
any and all requirements, pertaining to said premises, of any
insurance organization or company, necessary for the maintenance
reasonable fire and public liability insurance, covering said
building and appurtenances.
FREE 5. Lessee shall keep the demised premises and the property
FROM LIENS in which the demised premises are situated, free from: any liens
arising out of any work performed, materials furnished, or
obligations incurred by Lessee.
COMPLIANCE 6. Lessee shall, at his sole cost and expense, comply with
WITH all of the requirements of all Municipal, State and Federal
GOVERNMENTAL authorities now in force, or which may hereafter be in force,
REGULATIONS pertaining to the said premises, and shall faithfully observe
in the use of the premises all Municipal ordinances and State and
Federal statutes now in force or which may hereafter in force.
The judgment of any court of competent jurisdiction, or the
admission of Lessee in any action or proceed against Lessee.
whether Lessor be a party thereto or not, that Lessee has
violated any such ordinance or statute in the of the premises,
shall be conclusive of that fact as between Lessor and Lessee.
INDEMNIFICA- 7. Lessee, as a material part of the consideration to be
TION OF rendered to Lessor, hereby waives all claims against Lessor for
LESSOR damages to goods, wares, merchandise and other personal property,
in, upon or about said premises and for injures to persons in or
about said premises, from any cause arising at any time, and
Lessee will hold Lessor exempt and harm from any damage or injury
to any person, or to the goods, wares, merchandise and other
personal property of any per arising from the use of the premises
by Lessee, or from the failure of Lessee to keep the premises in
good condition repair, as herein provided.
UTILITIES 8. Lessee shall pay for all water, gas, heat, light, power,
telephone service, sewer service charge and all other services:
supplied to the said premises, together with any taxes thereon.
ENTRY BY 9. Lessee shall permit Lessor and his agents to enter into
LESSOR and upon said premises at all reasonable times for the pose of
inspecting the same or for the purpose of maintaining the
building in which said premises are situated, or for purpose of
making repairs, alterations or additions to any other portion of
said building, including the erection maintenance of such
scaffolding, canopies, fences and props as may be required, or
for the purpose of posting notice non-liability for alterations,
additions, or repairs, or for the purpose of placing upon the
property in which the premises are located any usual or ordinary
for sale signs, without any rebate of rent and without any
liability to Lessee for any loss of occupation or quiet enjoyment
of the premises thereby occasioned; and shall permit Lessor, at
any within thirty days prior to the expiration of this lease, to
place upon said premises any usual or ordinary "to signs.
DESTRUCTION 10. In the event of a partial destruction of the said
OF premises during the said term. from any cause. Lessor forthwith
PREMISES repair the same. provided such repairs can be made within sixty
(60)days under the laws and regulations State, Federal, County or
Municipal authorities, but such partial destruction shall in no
wise annul or void this lease except that Lessee shall be
entitled to a proportionate deduction of rent while such repairs
are being made, such proportionate deduction to be based upon the
extent to which the making of such repairs shall interfere with
the business carried on by Lessee in the said premises. If such
repairs cannot be made in sixty (60) days, Lessor may, at his
option, same within a reasonable time, this lease continuing in
full force and effect and the rent to be proportionately rebate
aforesaid in this paragraph provided. In the event that Lessor
does not so elect to make such repairs which cannot made in sixty
(60) days, or such repairs cannot be made under such laws and
regulations, this lease may be terminate the option of either
party. In the event that the building in which the demised
premises may. be situated be destroy the extent of not less than
33 1/3% of the replacement cost thereof, Lessor may elect to
terminate this lease, whether demised premises be injured or not.
A total destruction of the building in which the said premises
may be situated terminate this lease. Lessee waives any right to
terminate this lease as a result of any statutory provision now
or here in effect pertaining to the damage or destruction of the
demised premises or the building of which the demised premises
are a portion except as expressly provided herein.
ASSIGNMENT 11. Lessee may assign this lease or any interest therein and
AND may also sublet the whole of said premises, provide written
SUBLETTING consent of Lessor to any such assignment or subletting is first
obtained by Lessee. If, during the term of this Lessee requests
the written consent of Lessor to any such assignment or
subletting, Lessor's consent thereto shall unreasonably be
withheld. A consent to one assignment or subletting shall not be
deemed to be a consent to any subsequent assignment or
subletting, and any such subsequent assignment or subletting
without Lessor's consent shall be and shall, at Lessor's option,
terminate this lease. This lease shall not, nor any interest
therein, be assignable the interest of Lessee by operation of law
without the written consent of Lessor, but such shall not
unreasonably be withheld. In the event that the demised premises
are assigned or subleased at a rental consideration in excess of
the then current rent, then all of such excess shall be paid to
the lessor as additional rent thereunder.
<PAGE>
INSOLVENCY 12. In addition to any and all rights or remedies of Lessor
OR hereunder or as provided by law, the term of this Lease may be
BANKRUPTCY ended at the option of Lessor and Lessor, at its option, may
reenter and take possession of the demised premise and remove all
persons therefrom and, upon the exercise of such option by
Lessor, Lessee shall have no further claim in or to the demised
premises, and the Lease Agreement and any interest in or to the
demised premises shall no longer be an asset of the Lessee or any
successor in interest, if any one or more of the following events
occur:
(a) Lessee admits in writing its inability to pay its debts
as they come due;
(b) Lessee makes, to its unsecured creditors generally, an
offer of settlement, extension or composition;
(c) Lessee makes an assignment for the benefit of creditors;
(d) Lessee files any petition or action for relief under the
provisions of any bankruptcy, reorganization, insolvency or
moratorium law, or any other law or laws for the relief of, or
relating to, debtors;
(e) Lessee is the subject of an involuntary petition or
similar action for relief under any bankruptcy, reorganization
insolvency, or moratorium law, or any other law or laws for the
relief of, or relating to, debtors;
(f) A receiver or trustee is appointed, with or without
Lessee's consent, to take possession of all or part of the assets
or properties of Lessee.
In the event that any one or more of the preceding events
shall occur, failure by Lessor to assert immediately its right to
reenter and take possession of the demised premises or to
exercise any other rights or remedies granted to Lessor by law,
or hereunder shall not constitute a waiver of any such right or
remedy nor shall Lessor be estopped to assert, at a late time,
any such right or remedy.
DEFAULT 13. In the event of any breach of this lease by Lessee, then
Lessor, besides other rights and remedies he may have shall have
the immediate right of re-entry and may remove all persons and
property from the premises. If Lessor`s right (re-entry is
exercised following abandonment of the premises by Lessee, then
Lessor may consider any personal property belonging to Lessee and
left on the premises to also have been abandoned, in which case
Lessor may dispose of all such personal property in any manner
Lessor shall deem proper and is hereby relieved of all liability
for doing so.
If Lessee breaches this lease and abandons the property
before the end of the term, or if Lessee's right to possession
terminated by Lessor because of a breach of the lease, then in
either such case, Lessor may recover from Lessee a damages
suffered by Lessor, as the result of Lessee's failure to perform
his obligations hereunder, including, but not, restricted to, the
worth at the time of the award by the court having jurisdiction
thereof of the amount by which the re then unpaid hereunder for
the balance of the lease term exceeds the amount of such rental
loss for the same period which Lessee proves could be reasonably
avoided by Lessor, and in such case, Lessor, prior to the award,
may relet the premises for the purpose of mitigating damages
suffered by Lessor because of Lessee s failure to perform his
obligation hereunder; provided, however, that even though Lessee
has abandoned the premises raises following such breach, this
lease shall nevertheless continue in full force and effect for as
long as Lessor does not terminate Lessee's right of possession,
or until such termination, Lessor may enforce all his rights and
remedies under this lease, including the right to recover the
rent from Lessee as it becomes due hereunder.
REPAIRS 14. Lessee shall, at his sole cost, keep and maintain said
premises and appurtenances and every part thereof (excepting
exterior walls and roofs which Lessor agrees to repair),
including glazing, silks adjacent to said premise parking areas,
driveways, lighting standards, landscaping and Striping. any
store front and the interior of the premises in good and sanitary
order, condition and repair, hereby waiving the benefits of any
statute now or hereafter in effect which would otherwise afford
Lessee. the right to make repairs at Lessor's expense or to
terminate this lease because Lessor s failure to keep the
premises in good order, condition and repair. By entry hereunder,
Lessee accepts the premises as being in good and sanitary order,
condition and repair and agrees on the last day of said term. or
sooner termination of this lease, to surrender unto Lessor all
and singular said premises with said appurtenances in the same
condition when received, reasonable use and wear thereof and
damage by fire. act of God or by the elements excepted, and
remove all of Lessee's signs from said premises.
ADVERTISE- 15. Lessee shall not conduct or permit to be conducted any
MENTS AND sale by auction on said premises. Lessee shall not place permit
SIGNS to be placed any projecting sign, marquee or awning on the front
of the said premises without the written consent of Lessor;
Lessee, upon request of Lessor, shall immediately remove any sign
or decoration which Lessee has placed permitted to be placed in,
on, or about the front of the premises and which, in the opinion
of Lessor, is objectionable offensive, and if Lessee fails so to
do, Lessor may enter upon said premises and remove the same.
Lessor has reserved to exclusive right to the two exterior
sidewalls, rear wall and roof of said premises, and Lessee shall
not place or permit to be placed upon the said sidewalls, rear
wall or roof, any sign, advertisement or notice without the
written consent of Lessor.
SURRENDER 16. The voluntary or other surrender of this lease by
OF LEASE Lessee, or a mutual cancellation thereof, shall not work merger,
and shall, at the option of the Lessor, terminate all or any
existing subleases or subtenancies, or may, at the option of
Lessor. operate as an assignment to him of any or all such
subleases or subtenancies.
CONDEMNATION 17. If any part of the demised premises shall be taken or
condemned for a public or quasi-public use, and a part thereof
remains which is susceptible of occupation hereunder, this lease
shall, as to the part so taken, terminate as of the date title
shall vest in the condemnor, and the rent payable hereunder shall
be adjusted so that the Lessee shall be required to pay for the
remainder of the term only such portion of such rent as the value
of the part remaining after condemnation bears to the value of
the entire premises at the date of condemnation; but in such
event Lessor shall have the option to terminate this lease as of
the date when title to the part so condemned vests in the
condemnor. If all of
<PAGE>
demised premises, or such part thereof be taken or condemned so
that there does not remain a portion susceptible for occupation
hereunder, this lease shall thereupon terminate. If a part or all
of the demised premises be taken or co condemned, all
compensation awarded upon such condemnation or taking shall go to
the Lessor and the Lessee shall ha no claim thereto, and the
Lessee hereby irrevocably assigns and transfers to the Lessor any
right to compensation damages to which the Lessee may become
entitled during the term hereof by reason of the condemnation of
all or a part of the demised premises.
ATTORNEY'S 18. In case suit is brought by either party because of the
FEES breach of any term, covenant or condition herein contained the
prevailing party shall be entitled to recover against the other
party a reasonable attorney's fee to be fixed by the court
ARBITRATION 19. In the event of a dispute between Lessor and Lessee
relative to the provisions of this lease, the matter shall
determined by competent and disinterested arbitrators, one of
whom shall be selected and paid by Lessor and c selected and paid
by Lessee. Each party shall notify the other party the name and
address of the arbitrator so select within 15 days after a
written request for arbitration has been given by one party to
the other. In the event these two c not agree within 30 days
after their appointment, the arbitrators shall select a competent
and disinterested party as ~ third arbitrator, the expense to be
borne equally by Lessor and Lessee. In the event these two do not
so select a third arbitrator within the next 15 days. then the
third arbitrator shall be appointed by the President of the
Chamber of Commerce of San Francisco, State of California, upon
the request of either party. The decision of any two of the three
arbitrators so chosen shall be final and conclusive on the
parties hereto. The decision of the arbitrators shall be in
writing and a copy thereof shall be given to Lessor and Lessee
within 90 days after the date of the request for arbitration.
SECURITY 20. Lessee shall deposit with Lessor upon execution hereof
DEPOSIT the sum of $10,223.25 to be transferred from existing deposits on
------------------------------------------------------
2446 and 2450 Estand Way, Pleasant Hill, CA (Lease dated 7/26
-------------------------------------------------------------
Extensions dated ($10,223.25) Dollars as security for Lessee's
-----------------------------
faithful performance of Lessee's obligations hereunder, Lessee
fails to pay rent or other charges due hereunder, or otherwise
defaults with respect to any provision of this lea Lessor may
use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default, for the payment
of any other sum to which Lessor may become obligated by reason
of Lessee's default, or to compensation Lessor for any loss or
damage which Lessor may suffer thereby. If Lessor so uses or
applies all or any portion of such deposit. Lessee shall within
ten (10) days after written demand therefor, deposit cash with
Lessor in an amount sufficient to restore said deposit to the
full amount hereinabove stated and Lessee's failure to do so
shall be a breach of this Lessee and Lessor may at its option
terminate this lease. Lessor shall not be required to keep said
deposit separate from general accounts. If Lessee performs all of
Lessee's obligations hereunder, said deposit or so much thereof
as had theretofore been applied by Lessor, shall be returned
without payment of interest or other increment for its use, to
Lessor (or, at Lessors option, to the last assignee, if any, of
Lessee's interest hereunder) within fifteen (15) days after the
expiration of the term thereof, or after Lessee has vacated the
premises, whichever is later.
TAXES AND 21. In the event that in any tax year during the term of
ASSESSMENTS this lease the amount of the Municipal, State or County Federal
Estate taxes including the amount of any general or special
assessments, or levies or charges made by any municipal political
subdivision for local improvements shall exceed the amount of
such taxes including such general or special assessments, levies
or charges for the fiscal year 1994 - 1995, the Lessee shall pay
to the Lessor for such year upon demand an amount equal to 12 %
of the total increase in such taxes, assessments, levies and
charges upon whole of the land and building upon and within which
the leased premises are situate, whether such increase is caused
increased or added rate or increased assessed valuation or by
increase in, or by reason of any new, general or special
assessment. It is understood that, if the right to pay any
assessments in installments is given to Lessor then for the poses
of this paragraph it shall be deemed that the same are paid in
such installments regardless of whether or not Lessor may pay the
same in one sum or in any larger amounts than the installment
basis.
It is agreed that any increase in taxes caused by an
increase in assessed valuation due to work done in the demised
premises by Lessee or by work done in any other parts of the
building by Lessor or any other tenant in the building s not be
included in computing the amount of increase in taxes to be paid
by Lessee under the preceding paragraph of Paragraph 21, but
shall be computed separately in the following manner:
1. Any increase in taxes caused by an increase in assessed
valuation due to the work done by Lessee in the demised premises
at any time during said term shall be borne entirely by Lessee.
2. If there is any increase in taxes caused by work done in
any other parts of the building by Lessor or by any of tenant in
the building, the Lessee shall not be responsible for any portion
of such increase in taxes.
The amount of Lessee's obligation under this paragraph for
the year in which this lease terminates shall be prorated. in the
proportion that the period this lease is in effect during the tax
year in which this lease terminates bears to the tax year.
Lessee also shall pay, before delinquency, any and all taxes
levied or assessed and which become payable during term hereof
upon Lessee's equipment, furniture, fixtures and other personal
property located in the premises: In a tion to rental and other
charges to be paid by Lessee hereunder, Lessee shall reimburse to
Lessor, upon demand, any all taxes payable by Lessor (other than
net income taxes) whether or not now customary or within the
contemplation the parties hereto; (a) upon, allocable to, or
measured by or on the rental patentable hereunder, including,
without limitation, any gross income tax or excise tax levied by
the State, any political subdivision thereof, or Federal
Government respect to the receipt of such rental: or (b) upon or
with respect to the possession, leasing, operation, management
<PAGE>
maintenance, alteration, repair, use or occupancy by Lessee of
the premises or any portion thereof; or (c) upon or measured by
the value of Lessee's equipment, furniture, fixtures and other
personal property located in the premises or by the cost or
value of any leasehold improvements located in the premises; or
(d) upon this transaction or any document to which Lessee is a
party creating or transferring an interest or an estate in the
premises; or (e) any tax or charge made by any authority having
jurisdiction upon any automobile parking facilities used by
Lessee and any sewer tax, water control tax or Environmental
Quality Control charge.
ADJUSTMENT 22. The monthly rental in the amount of $9,979.40, set forth
IN RENT above shall be increased on JUNE 1, 1998
in the same proportion that the Consumer Price Index figure
published by the United States Department of Labor Bureau of
Labor Statistics, all items retail for San Francisco-Oakland for
the month prior to the adjustment month bears to the Consumer
Price Index figure for the month prior to the month in which
lease commences (1967 = 100) hereinafter called "basic index
figure, provided, however, that in no event shall the monthly
rental for any such period be less than the monthly rental being
paid by Lessee immediately prior to such adjustment.
If prior to the effective date of any rental adjustment the
Bureau of Labor Statistics should revise or change the methods or
basic data used in calculating the said index, in such a way as
to affect the direct comparabiluty of such revised or changed
index, with the original index used herein, then the Bureau shall
be requested to furnish a conversion factor designed to adjust to
the new basis, the said original index.
If said Consumer Price Index, as now constituted, compiled
and published shall cease to be compiled and publish during the
term hereof, then the Bureau of Labor Statistics shall be
requested to furnish a statement conveying the basis index figure
to a figure that would be comparable in another index published
by the Bureau of Labor Statistics and such other index shall be
used in computing the rental increase provided above.
If no such conversion or other index is available, then the
said rental increase shall be determined by arbitration the
manner provided in Paragraph 19 hereof.
INSURANCE 23. Lessee agrees during the full term of this lease to
carry comprehensive bodily injury insurance covering the demised
premises, its appurtenances and ways immediately adjoining,
including any parking areas and driveways that may be used by
Lessee, in a single limit of $1,000,000 for injury or death to
any number of persons in any one occurrence, property damage
insurance in the amount of $100,000.00 and plate glass insurance
in Companies satisfactory to the Lessor, in the joint names of
the Lessor and Lessee, and to pay the premiums therefor and to
deliver said policies or certificates thereof, unto the Lessor,
and the failure of the Lessee either to effect said insurance in
the names here called for or to pay the premiums therefor or to
deliver said policies, or certificates, thereof, unto the Lessor
shall permit the Lessor to effect said insurance and to pay the
requisite premiums therefor, which premiums shall be repayable un
him with the next installment of rental, and failure to repay the
same shall carry with it the same consequence as failure to pay
any installment of rental. Each insurer mentioned in this
paragraph shall agree, by endorsement upon the policy or policies
issued by it, or by independent instrument furnished to the
Lessor, that it will give the Lessor 30 days written notice
before the policy or policies in question shall be altered or
cancelled.
NOTICE 24. Whenever it is required that any notice be given
hereunder, the same shall be sufficiently served by depositing
the same in the United States Mail, postage prepaid, and
addressed to the addresses set forth below:
To Lessor at: 44 Montgomery Street
San Francisco, California 94104
To Lessee at: 2495 Estand Way
Pleasant Hill, CA 94522
or to such other addresses as a party may designate by written
notice to the other party in the manner herein provided.
LESSOR'S 25. The term "Lessor", as used in this Paragraph, shall mean
LIABILITY only the owner or owners at the time in question of the fee title
or its interest in a ground lease of the Premises, and in the
event of any transfer of such title or interest, Lessor herein
named (and in case of any subsequent transfers the then grantor)
shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be
performed, provided that any funds in the hands Lessor or the
then grantor at the time of such transfer, in which Lessee has an
interest, shall be delivered to the grant. The obligations
contained in this Lease to be performed by Lessor shall be
binding on Lessor's Successors and assigns only during their
respective periods of ownership.
WAIVER 26. The waiver by Lessor of any breach of any term, covenant
or condition herein contained shall not be deemed be a waiver of
Such term. covenant or condition or any subsequent breach of the
same or any other term, covenant condition therein contained. The
subsequent acceptance of rent hereunder by Lessor shall not be
deemed to be a wavier of any preceding breach by Lessee of any
term, covenant or condition of this lease, other than the failure
of Lessee to ??? the particular rental so accepted, regardless of
Lessors knowledge of such preceding breach at the time of
acceptance such rent.
<PAGE>
HOLD OVER 27. Any holding over after the expiration of the said term,
with the consent of Lessor, shall be construed to be a tenancy
from month to month, at a rental in the amount of the last
monthly rental plus all other charges payable hereunder, and
shall otherwise be on the terms and conditions herein specified,
so far as applicable.
SUCCESSORS 28. The covenants and conditions herein contained shall,
subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of all
of the parties hereto; and all of the parties hereto shall be
jointly and severally liable hereunder.
TIME 29. Time is of the essence of this lease.
CAPTIONS 30. The captions in the margins of this lease are for
convenience only and are not a part of this lease and do not in
any way limit or amplify the terms and provisions of this lease.
SUBORDINATION 31. The Lessee covenants that this lease is and at all times
shall be subject and subordinate to the lien of any mortgage or
deed of trust now existing or which the Lessor or any subsequent
owner of the demised premises shall make covering said demised
premises or the building of which said premiums are a part, and
to any and all advances made or to be made under or upon said
mortgage or deed of trust, and to the interest thereon.
Notwithstanding such subordination Lessee's right to quiet
possession of the premises shall not be disturbed if Lessee is
not in default hereunder and so long as Lessee shall pay the rent
and observe and perform all of the provisions of this lease.
ESTOPPEL 32. Lessee shall at any time and from time to time upon not
CERTIFICATE less than ten (10) days prior written notice from Lessor execute,
acknowledge and deliver to Lessor a statement in writing (i)
certifying that this Lease is unmodified and in full force and
effect (or, if modified stating the nature of such modification
and certifying that this Lease as so modified, is in full force
and effect) and the dates to which the rental and other charges
are paid in advance, if any, and (ii) acknowledging that there
are not, to Lessee's knowledge, any uncured defaults on the part
of Lessor hereunder, or specifying such defaults if any are
claimed. Any such statement may be relied upon by any prospective
purchaser or encumbrancer of all or any portion of the real
property of which the premises are a part. Lessee s failure to
deliver such statement within such time shall be conclusive upon
Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that
there are no uncured defaults in Lessor's performance, and (iii)
that not more than one month's rental has been paid in advance
SPECIAL 33. Special provisions of this Lease numbered --------34
PROVISIONS ---------through ----------40--------are attached hereto and are
made a part hereof.
34. All base rent, additional rent and all other sums which may
from time to time become due and payable by Lessee to Lessor
under any of the provisions of this Lease shall bear interest
from and after the due date thereof at the greater of ten percent
(10%), or the maximum rate of interest permitted by law.
35. During the full term of this Lease, Lessee shall carry, at
its expense, insurance against loss and damage by fire with an
"All Risk" endorsement for the full insurable value of Lessee's s
merchandise, trade fixtures, furnishings, operating equipment and
personal property, including wall coverings, carpeting and
drapes, if installed by Lessee.
IN WITNESS WHEREOF, the parties hereto have executed this lease
the day and year first above written.
LESSORS LESSEES
PLEASANT HILL INDUSTRIAL PARK TUTSYSTEMS, INC.
ASSOCIATES, A CALIFORNIA LIMITED
PARTNERSHIP BY:/S/ MICHAEL SULLIVAN, V.P.
- ------------------------------------- -------------------------------
LOWENBERG HOLDINGS, GENERAL PARTNER
WILLIAM J. LOWENBERG, ITS PRESIDENT
- -------------------------------------- --------------------------------
- -------------------------------------- --------------------------------
This lease has been prepared for submission to your attorney for his
approval. No representation or recommendation is made by Lowenberg Realty
Company, or its agents or employees as to the legal sufficiency, legal effect,
or tax consequences of this lease or the transaction relating thereto.
<PAGE>
36. Lessee warrants that it shall not make any use of the
Premises which may cause contamination of the building and
improvements, the soil or ground water and hereby indemnifies and
agrees to hold Lessor harmless from any claim for damages arising
from any contamination caused by Lessee's use Of the Premises
including, but not limited to, damage to Lessor's property, the
property of any third party or personal injury to any person, and
any attorneys' fees in connection with any actions which may
arise from any contamination caused by, Lessee or Lessee's
agents. The indemnification given hereunder shall be continuing
and shall survive the termination of the Lease term.
37. Provided Lessee has satisfactorily performed all terms and
conditions of this Lease, Lessee shall have the option to extend
this Lease for one additional consecutive two-year term, at a
rental to be based on the Consumer Price Index and in accordance
with Paragraph 22 of the herein Lease.
Lessee to provide Lessor written notice of its intention to
exercise this option on or before 90 days prior to the expiration
of the initial term of this Lease.
38. If Lessee does not exercise the option to renew as per
Paragraph 37 of this Lease, then Lessee shall pay and deliver to
Lessor on or before the last day of this Lease a check in the
amount of $10,000 for unamortized tenant improvements.
39. Lessor agrees to grant to Lessee a First Right of Refusal on
approximately 5000 square feet currently vacant (adjacent to
their existing space).
Lessee agrees to take this space on an "as is" basis, at a rate
of 65c per square foot per month.
If Lessee, within 3 calendar days after receipt of Lessor's
notice, indicates in writing its agreement to lease the spaces
the space shall be included within the premises and leased to
the. Lessee pursuant to the provisions of this Lease. However,
the rent payable under this lease shall be increased by the
amount of rent attributed to the additional space leased by
Lessee. The parties shall immediately execute an amendment to he
Lease stating the addition of the expansion space, to the
premises.
If the Lessee does not indicate within three calendar days its
agreement to lease the additional space, Lessor thereafter shall
have the right to lease the space to a third party, and this
option to expand premises shall be of no further force and
effect.
40. Each Option granted to Lessee in this Lease is personal to
Lessee and may not be exercised or be assigned voluntarily or
involuntarily, by or to any person or entity other than Lessee.
-7-
<PAGE>
EXTENSION OF LEASE
------------------
This EXTENSION OF LEASE made this 3rd day of March, 1998, by and between
PLEASANT HILL INDUSTRIAL PARK ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP,
LESSOR, AND TUTSYSTEMS, INC., LESSEE herein after respectively called "Lessor"
and "Lessee".
WITNESSETH
1. On April 4, 1995 a Lease was executed and on November 11, 1998 an Amendment
to Lease was executed by and between PLEASANT HILL INDUSTRIAL PARK
ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP, Lessor, and TUTSYSTEMS, INC.,
Lessee, for those certain premises commonly known and desigated as 2495
Estand Way, Pleasant Hill, CA.
2. The parties do hereby agree to:
a. Extend the term of the Lease three years from June 1, 1998 to May 31,
2001.
b. The monthly rental shall be payable as follows to LOWENBERG
CORPORATION: The sum of SEVENTEEN THOUSAND TWO HUNDRED SEVENTY-FOUR AND
80/100 ($17,274.80) DOLLARS commencing on the first day of June, 1998
and continuing on the first day of each and every month thereafter to
and including the first day of November, 1999; thereafter, the sum of
EIGHTEEN THOUSAND FOUR HUNDRED ELEVEN AND 30/100 ($18,411.30) DOLLARS
commencing the first day of December 1999 and continuing on the first
day of each and every month thereafter to and including the first day
of May 2001. As additional rent Lessee agrees to pay $200 per month for
water.
c. Provided Lessee has satisfactorily performed all terms and conditions
of this Lease, Lessee shall have the option to extend this Lease for
one additional consecutive two (2) year term at a rental rate to be
negotiated. Lessee to provide Lessor written notice of its intention to
exercise this option on or before 120 days prior to the expiration of
the initial term of this Lease.
d. Each Option granted to Lessee in this Lease are personal to Lessee and
may not be exercised or be assigned voluntarily or involuntarily, by or
to any person or entity other than Lessee.
3. All other terms and conditions of the above Lease shall remain the same.
IN WITNESS WHEREOF, the undersigned "Lessor" and "Lessee" have executed these
presents the day and year first above mentioned.
Lessor: PLEASANT HILL INDUSTRIAL PARK LESSEE: TUTSYSTEMS, INC.
ASSOCIATES, A CALIFORNIA
LIMITED PARTNERSHIP
By /s/William J. Lowenberg By /s/ Nelson B. Caldwell
----------------------------------- -----------------------------------
LOWENBERG HOLDINGS, GENERAL PARTNER
WILLIAM J. LOWENBERG, ITS PRESIDENT
<PAGE>
AMENDMENT TO LEASE
------------------
This AMENDMENT TO LEASE made this 11th day of November, 1996, by and between
PLEASANT HILL INDUSTRIAL PARK ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP,
LESSOR, AND TUTSYSTEMS, INC., LESSEE herein after respectively called "Lessor"
and Lessee".
WITNESSETH
1. On April 4, 1995 a Lease was executed by and between PLEASANT HILL
INDUSTRIAL PARK ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP, lessor, and
TUTSYSTEMS, INC., lessee, for those certain premises commonly known and
designated as 2495 Estand Way, Pleasant Hill, CA.
2. The parties do hereby agree to:
a. Increase the rentable square footage by 10,560 square feet as Lessee
--------
agrees to lease the adjacent space to the north of their current unit
in addition to 2495 Estand Way, Pleasant Hill, California. The new
total square footage commencing January 1, 1997 is 22,730 square foot.
b. The monthly rental shall be payable as follows to LOWENBERG
CORPORATION: The sum of SIXTEEN THOUSAND FIVE HUNDRED SEVENTY-NINE AND
40/100 Dollars ($16,579.40) DOLLARS commencing on the first day of
January, 1997 and continuing on the first day of each and every month
thereafter to and including the first day of May, 1998. As additional
rent Lessee agrees to pay $150 per month for water.
c. Lessee shall deposit with Lessor upon execution hereof the sum of Six
Thousand Three Hundred Fifty-Six and 15/100 ($6,356.15) Dollars
payable to Lowenberg Corporation as additional security deposit making
a new total of $16,579.40.
d. The Lessor, at its sole cost and expense shall complete the demolition
in the expansion space and deliver the space in shell condition. Also
the Lessor shall provide two five-ton HVAC units as per plans dated
October 25, 1996 by Craig Hudson. These units were specified as per
Title 24.
e. Provided Lessee has satisfactorily performed all terms and conditions
of this Lease, Lessee shall have the option to extend this Lease for
one additional consecutive 18 month term at a rental rate of 76c per
square foot per month. Lessee to provide Lessor written notice of its
intention to exercise this option on or before 120 days prior to the
expiration of the initial term of this Lease.
f. Paragraphs 8, 14 and 21 of the Lease dated April 4, 1995 shall be
amended to reflect this increase in square footage by increasing
Lessee's percentage of occupancy and prorate share to 22.7% of all
expenses outlined in the paragraphs above.
<PAGE>
3. Lessor and Lessee further agree to delete Paragraphs 22, 37, and 39 of the
Lease dated April 4, 1995. It is further understood and agreed that
Paragraph 38 of said Lease now applies solely to Paragraph 2e of this
Amendment to Lease.
4. All other terms and conditions of the above Lease shall remain the same.
IN WITNESS WHEREOF, the undersigned "Lessor" and "Lessee" have executed these
presents the day and year first above mentioned.
LESSOR: PLEASANT HILL INDUSTRIAL PARK LESSEE: TUTSYSTEMS, INC.
ASSOCIATES, A CALIFORNIA
LIMITED PARTNERSHIP
BY /s/ William J. Lowenberg BY /S/ Sean Laskey
------------------------------------- ---------------------------
LOWENBERG HOLDINGS, GENERAL PARTNER SEAN LASKEY
WILLIAM J. LOWENBERG, ITS PRESIDENT DIRECTOR OF OPERATIONS
<PAGE>
AMENDMENT TO LEASE
------------------
This AMENDMENT OF LEASE made this 17th day of November, 1998, by and between
PLEASANT HILL INDUSTRIAL PARK ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP,
LESSOR, AND TUTSYSTEMS, INC., LESSEE herein after respectively called "Lessor"
and "Lessee."
WITNESSETH
1. On April 4, 1995 a Lease was executed, on November 11, 1998 an Amendment
to Lease was executed and on March 3, 1998 an Extension of Lease was
executed by and between PLEASANT HILL INDUSTRIAL PARK ASSOCIATES, A
CALIFORNIA LIMITED PARTNERSHIP, Lessor, and TUTSYSTEMS, INC., Lessee for
those certain premises commonly known and designated as 2495 Estand Way,
Pleasant Hill, CA.
2. The parties do hereby agree to:
a. Increase the rentable square footage by 4,100 square feet as Lessee
--------
agrees to lease 2447 Estand Way, Pleasant Hill, California. The new
total square footage commencing December 1, 1998 is 26,830 square
feet.
b. The monthly rental will be payable as follows to LOWENBERG
CORPORATION: The sum of NINETEEN THOUSAND NINE HUNDRED THIRTY-NINE AND
80/100 ($19,939.80) DOLLARS commencing on the first day of December
1998 and continuing on the first day of each and every month
thereafter to and including the first day of November 1999; thereafter
the sum of TWENTY-ONE THOUSAND SEVENTY SIX AND 30/100 ($21,076.30)
DOLLARS commencing on the first day of December 1999 and continuing on
the first day of each and every month thereafter to and including the
first day of May 2000; thereafter the sum of TWENTY-ONE THOUSAND ONE-
HUNDRED NINETY-NINE AND 30/100 ($21,199.30) DOLLARS commencing on the
first day of June 2000 and continuing on the first day of each and
every month thereafter to and including the first day of May 2001. As
additional rent Lessee agrees to pay $250 per month for water.
c. Paragraphs 8, 14, and 21 of the lease dated April 14, 1995 shall be
amended to reflect this increase in square footage by increasing
Lessee's percentage of occupancy and pro rata share to 26.8% of all
expenses outlined in the paragraphs above.
3. All other terms and conditions of the above Lease shall remain the same.
IN WITNESS WHEREOF, the undersigned "Lessor" and "Lessee" have executed these
presents the day and year first above mentioned.
LESSOR: PLEASANT HILL INDUSTRIAL PARK LESSEE: TUTSYSTEMS, INC.
ASSOCIATES, A CALIFORNIA
LIMITED PARTNERSHIP
By: By: /s/ Shaw Matthews
------------------------------- -----------------
LOWENBERG HOLDINGS, GENERAL PARTNER
WILLIAM J. LOWENBERG, ITS PRESIDENT
<PAGE>
TUT SYSTEMS, INC. EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement to Amendment No. 2
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 December 17, 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."
San Jose, California
December 17, 1998
