<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1999
REGISTRATION NO. 333-60419
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
TUT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------
DELAWARE 3661 94-2958543
(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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 January 8, 1999
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 , 1999.
-------------
LEHMAN BROTHERS
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
SALOMON SMITH BARNEY
, 1999
<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,
COMPAQ, DAVICOM, GLOBESPAN, 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 high-speed backbone network "cloud" with multiple
- -----
applications connected to it, labeled "Corporate Intranets", "Electronic
Commerce", "Telecommuting" and "Internet", and connected to graphic depicting
Private Copper Network labeled "Service Providers".]
Captions:
[THE LAST MILE-LOCAL LOOP]
[BEYOND THE LAST MILE-PRIVATE COPPER NETWORKS]
[SERVICE PROVIDERS:
- ------------------
Tut's Expresso GS system is used by ITOCs, ISPs, and CLECs to provide high-
speed data services over "last mile" telephone wires and is designed to accept
all variations of xDSL service such as SDSL, ADSL, and others. Its 6.8 GBPS
backplane facilitates future expandability and many years of service
deployment.]
[Tut Systems--High-Speed Copper Wire Access Solutions for "The Last Mile" and
Beyond...]
<PAGE>
[Gate 2 -- Graphic depicting three types of Private Copper Networks, labeled
------
"Corporate Campus", "Home Networking" and "Multiple Dwelling Unit (MDU)".]
Captions:
[CORPORATE CAMPUS
----------------
Tut's XL product line extends Ethernet LANs across corporate and educational
campuses from building to building, from floor to floor, at standard 10 Mbps
speeds to distances of 1,500 feet - at lesser speeds up to 24,700 feet.]
[HOME NETWORKING
---------------
The Company's HomeRun technology enables a cost-effective Ethernet LAN to be
quickly implemented over the existing telephone wire found in a home. PCs, PC
peripherals, and high-speed Internet access are easily shared across this "no
new wires" LAN.]
[MULTIPLE DWELLING UNIT (MDU)
- -------------- --------------
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.
Using Tut's innovative HomeRun technology, a secure LAN is brought to each
living unit over existing telephone wires.]
<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., GlobeSpan 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 in August 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 of-
fering...................................... 10,966,767 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 December 31, 1998.
Excludes: (i) an outstanding warrant to purchase 55,000 shares of Common
Stock, (ii) 1,005,112 shares issuable upon exercise of stock options
outstanding as of December 31, 1998 at a weighted average exercise price of
$3.13 per share and (iii) 95,686 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 12 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. This
agreement was extended on December 23, 1998 in consideration for the
assignment by the Company of two of its pending patent applications.
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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 December 31, 1998, the Company will have
outstanding 10,966,767 shares of Common Stock, 11,341,767 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 8,466,767 shares of Common Stock held by existing
shareholders, 384,560 shares subject to outstanding vested options and 55,000
shares of Common Stock subject to an outstanding warrant 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) except for 25,000 shares which are immediately saleable, no
other shares, except in certain limited exceptions, will be eligible for sale
prior to 180 days after the date of this Prospectus without the prior written
consent of Lehman Brothers Inc., and (ii) 7,774,931 shares and 384,560 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 Lehman Brothers Inc. 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 the exercise of an outstanding warrant to purchase
666,836 shares of Preferred Stock held by Microsoft, which warrant will
expire upon the closing of the offering if not exercised earlier, and the
conversion upon the closing of the offering of all outstanding shares of
Preferred Stock into 8,119,550 shares of Common Stock.
(3) As adjusted to reflect (2) and the application of the net proceeds from
the sale of Common Stock offered by the Company hereby (assuming no
exercise of the Underwriters' over-allotment option and assuming an
offering price of $15.00 per share) and the application of the estimated
net proceeds therefrom. See "Use of Proceeds."
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 to purchase
666,836 shares of Preferred Stock held by Microsoft, which warrant will
expire upon the closing of the offering if not exercised earlier, and the
conversion upon the closing of the offering of all outstanding shares of
Preferred Stock into 8,119,550 shares of Common Stock.
(3) As adjusted to reflect (2) above and the application of the net proceeds
from the sale of Common Stock offered by the Company hereby (assuming no
exercise of the Underwriters' over-allotment option) and the application
of the estimated net proceeds therefrom. 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 and
Expresso products, and initial sales of Expresso GS and Expresso MDU products
which were introduced in the second quarter and third quarter, respectively.
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 and
Expresso products, and initial production of its Expresso GS and Expresso MDU
products. 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 also 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.
23
<PAGE>
Sales and Marketing. Sales and marketing expenses primarily consist of
personnel costs including commissions and costs related to customer support,
travel, trade-shows, promotions and outside services. The Company's sales and
marketing expenses increased to $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
24
<PAGE>
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 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 had 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
25
<PAGE>
violation of certain ratio covenants related to the line of credit. The bank
has since waived these violations. The Company had approximately $0.4 million
outstanding on a separate equipment line of credit. All such borrowings were
paid off and the lines were terminated during December 1998.
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 borrowed
approximately $4.3 million against the credit facility in December 1998.
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. This agreement was
extended on December 23, 1998 in consideration for the assignment of two of
the Company's pending patent applications.
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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<PAGE>
RECENT FINANCIAL RESULTS
The following table summarizes the Company's operating results for the
quarter and year ended December 31, 1998 and for the comparable periods in the
prior year. The summary data for the year ended December 31, 1997 are derived
from audited financials contained elsewhere herein. All other summary data are
derived from unaudited financials.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------- ------------------
1997 1998 1997 1998
------ ------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Revenues.................................. $1,802 $3,352 $ 6,221 $ 10,555
Loss from operations...................... (3,802) (3,155) (9,351) (13,956)
Net loss attributable to common
stockholders............................. (4,219) (3,873) (10,784) (16,331)
Pro forma net loss per share, basic and
diluted.................................. $(0.38) $ (1.63)
Shares used in computing pro forma net
loss per share, basic and diluted(1)..... 8,512 8,444
</TABLE>
- --------
(1) See Note 2 to Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in per share
computations.
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<PAGE>
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"), GlobeSpan Semiconductor Inc.
("GlobeSpan"), 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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<PAGE>
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".]
29
<PAGE>
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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<PAGE>
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
31
<PAGE>
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.
32
<PAGE>
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"]
33
<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
37
<PAGE>
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, 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
38
<PAGE>
success of this agreement. See "Risk Factors--Dependence on Strategic
Relationships." Certain of the Company's ITOC customers are expanding their
business through unregulated ISP subsidiaries with broader market coverage,
and certain of the Company's ISP customers are expanding their market coverage
by becoming CLECs. The Company believes this evolution offers the opportunity
to continue to sell Expresso-based systems 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.
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
39
<PAGE>
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."
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
40
<PAGE>
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 12 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. This
agreement was extended on December 23, 1998 in consideration for the
assignment by the Company of two of its pending patent applications.
EMPLOYEES
As of December 31, 1998, the Company employed 95 persons, including 10 in
operations, 43 in marketing, sales and customer support, 28 in research and
development and 14 in finance and administration. The Company
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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 in Pleasant
Hill, 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.
42
<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......... 42 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 Licensing Business
Development of the Company since July 1998. From February 1996 to July 1998,
Mr. Berberi served as Vice President of Customer Support. 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 1987 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
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<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, 1998, 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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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, 1998 (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....... $187,500 $110,000 -- 75,000 $18,230(/2/)
President and Chief
Executive Officer
Matthew Taylor.......... 149,808 35,100 -- 12,500 --
Chairman of the Board,
Chief Technical Officer
and Secretary
Thomas Warner........... 140,000 25,875 -- 13,750 --
Vice President of
Engineering
Allen Purdy............. 138,962 71,875 -- 12,500 --
Vice President of Sales
Nelson Caldwell......... 118,442 31,625 -- 12,500 --
Vice President, Finance
and Chief Financial
Officer
</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, 1998. See "Certain Transactions."
47
<PAGE>
Stock Option Information. The following table sets forth certain information
for the fiscal year ended December 31, 1998 with respect to each grant of
stock options to the Named Executive Officers:
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM(/4/)
OPTIONS GRANTED IN PRICE PER EXPIRATION ---------------------
NAME GRANTED(/1/) 1998(/2/) SHARE(/3/) DATE 5% 10%
---- ------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Salvatore D'Auria....... 75,000 18.1% $2.40 2/18/08 $ 113,201 $ 286,874
President and Chief
Executive Officer
Matthew Taylor.......... 12,500 3.0 2.40 2/18/08 18,867 47,812
Chairman of the Board,
Chief Technical Officer
and Secretary
Thomas Warner........... 13,750 3.3 2.40 2/18/08 20,754 52,593
Vice President of
Engineering
Allen Purdy............. 12,500 3.0 2.40 2/18/08 18,867 47,812
Vice President of Sales
Nelson Caldwell......... 6,250 1.5 2.40 2/18/08 9,433 23,906
Vice President, Finance 6,250 1.5 15.00 9/16/08 58,959 149,413
and Chief
Financial Officer
</TABLE>
- --------
(1) The options granted to Messrs. D'Auria, Taylor, Warner, Purdy and Caldwell
vest as to 1/48th of the shares for each month which expires from the date
of grant.
(2) In 1998 the Company granted employees, consultants and directors options
to purchase an aggregate of 413,825 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.
48
<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, 1998 and exercisable and
unexercisable options held as of December 31, 1998:
AGGREGATE OPTION EXERCISES IN 1998 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, 1998 DECEMBER 31, 1998(/1/)
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Salvatore D'Auria....... 2,049 $29,997 197,951 59,375 $2,866,128 $748,125
President & Chief
Executive Officer
Matthew Taylor.......... -- -- 2,604 9,896 32,810 124,690
Chairman of the Board,
Chief Technical Officer
and Secretary
Thomas Warner........... 26,224 377,031 8,724 48,802 123,629 686,189
Vice President of
Engineering
Allen Purdy............. -- -- 29,557 39,193 423,090 548,910
Vice President of Sales
Nelson Caldwell......... 11,198 158,681 4,947 33,855 58,367 401,727
Vice President, Finance
and Chief Financial
Officer
</TABLE>
- --------
(1) The fair market value of the Company's Common Stock as determined by the
Board of Directors on or about December 31, 1998 was $15.00 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 December 31, 1998, options
to purchase an aggregate of 1,005,112 shares were outstanding, 336,720 shares
of Common Stock had been purchased pursuant to exercises of stock options and
stock purchase rights and 95,686 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
49
<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.
50
<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.
51
<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 1998. 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.
52
<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."
53
<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,
1998" 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.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of December 31, 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/)................... 864,097 10.2 7.9
Vanguard IV, L.P.(/7/)....... 658,591 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/)........... 864,097 10.2 7.9
Clifford H. Higgerson(/12/).. 658,591 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/)......... 365,246 4.3 3.3
Salvatore D'Auria(/17/)...... 203,125 2.3 1.8
Saul Rosenzweig(/18/)........ 110,913 1.3 1.0
Thomas Warner(/19/).......... 38,437 * *
Allen Purdy(/20/)............ 32,422 * *
Nelson Caldwell(/21/)........ 18,229 * *
Roger Moore(/22/)............ 4,583 * *
All officers and directors as
a group (16 persons)(/23/).. 4,048,623 46.1% 35.9%
</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 8,466,767 shares of Common Stock
outstanding as of December 31, 1998 (including 666,836 shares issuable
upon exercise of a warrant held by Microsoft but excluding 55,000 shares
issuable upon exercise of a warrant held by a lender), 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
December 31, 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.,
and 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.
55
<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 December 31, 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 December 31, 1998 and held by IAI Investment Funds IV, Inc. (IAI
Regional Fund), 87,580 shares held by and 1,500 shares issuable pursuant
to options exercisable within 60 days of December 31, 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 December 31, 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 December 31, 1998 and
held by IAI Investment Funds VII, Inc. (IAI Growth & Income Fund). These
mutual funds are part of an affiliated group of registered investment
corporations referred to collectively as the IAI Mutual Funds and are
managed by Investment Advisers, Inc. Investment Advisers, Inc. is a
registered investment adviser under the Investment Advisers Act of 1940
and an affiliate of IAI Ventures.
(7) The address of record for Vanguard IV, L.P. is 555 University Avenue,
Palo Alto, CA 94301. Includes 7,500 shares held by Vanguard Venture
Partners.
(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 856,596 shares held by and 7,501 shares issuable pursuant to
options exercisable within 60 days of December 31, 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 658,591 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 3,125 shares issuable pursuant to options exercisable within 60
days of December 31, 1998. Also includes 40,000 shares owned by Mr.
Taylor but which are subject to an option to purchase such shares held by
certain third parties.
(17) Includes 201,076 shares issuable pursuant to options or rights
exercisable within 60 days of September 30, 1998.
(18) Consists of 104,913 shares held by Rosetree Partners General Partnership
and 6,000 shares held by Rosebranch 1998 Limited Partnership. Mr.
Rosenzweig is a general partner of Rosetree Partners General Partnership
and is Co-Trustee of the general partner of Rosebranch 1998 Limited
Partnership. Mr. Rosenzweig disclaims beneficial ownership of these
shares except to the extent of his proportional partnership interest
therein.
(19) Includes 12,213 shares issuable pursuant to options exercisable within 60
days of December 31, 1998.
(20) Consists of 32,422 shares issuable pursuant to options exercisable within
60 days of December 31, 1998.
(21) Includes 7,031 shares issuable pursuant to options exercisable within 60
days of December 31, 1998.
(22) Consists of 4,583 shares issuable pursuant to options exercisable within
60 days of December 31, 1998.
(23) Includes an aggregate of 317,153 shares issuable pursuant to options
exercisable within 60 days of December 31, 1998. Also includes an
aggregate of 541,667 shares held by Spectrum Equity Investors, L.P.,
536,411 shares held by Apex Investment Funds, 658,591 shares held by
Vanguard IV, L.P., 856,596 shares held by Investment Advisers, Inc.,
625,000 shares held by AT&T Ventures, and 104,913 shares held by Rosetree
Partners General Partnership.
56
<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 December 31, 1998, there were
8,466,767 shares of Common Stock outstanding (assuming exercise of a warrant
to purchase 666,836 shares of Preferred Stock but excluding an outstanding
warrant to purchase 55,000 shares of Common Stock), which were held of record
by 214 stockholders, and no shares of undesignated preferred stock
outstanding. Upon completion of this offering and assuming no exercise of
options after December 31, 1998, the Company will have outstanding 10,966,767
shares of Common Stock, 11,341,767 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 December 31, 1998, the Company had outstanding options to purchase a
total of 1,005,112 shares of Common Stock pursuant to the 1992 Stock Plan at a
weighted average exercise price of $3.13 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 (the "Rights Agreement")
between the Company and the holders of the Registrable Securities. The Company
has also agreed to provide registration rights which are substantially similar
to those contained in the Rights Agreement to the holder of a warrant to
purchase 55,000 shares of Common Stock. 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
57
<PAGE>
to register all or a 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.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the offering and based on outstanding shares, options
and warrants at December 31, 1998, the Company will have outstanding
10,966,767 shares of Common Stock (11,341,767 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 8,466,767 shares of Common
Stock held by existing shareholders, 384,560 shares subject to outstanding
vested options and 55,000 shares subject to an outstanding warrant 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 Lehman
Brothers, Inc. Lehman Brothers Inc., 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,
25,000 shares, in addition to 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), 7,774,931 shares and 384,560 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 December 31, 1998, 1,005,112 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.
59
<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 Salomon 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.............................................
Salomon 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
60
<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.
61
<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.
62
<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>
[Inside Back Cover: Graphic including photograph of the Company's Expresso GS,
Expresso MDU and XL products]
Captions:
[High-Speed Copper Wire Access Solutions for "The Last Mile" and Beyond....]
[EXPRESSO GS
For service providers, Tut offers the economical Expresso GS family of
products for the delivery of high-speed access services over ordinary "last
mile" local loop facilities. With integrated switching, routing, and WAN
functions, the Expresso GS is a complete solution in one chassis.]
[HOMERUN
For sharing multiple resources and high-speed access to the Internet within a
single-family home, Tut offers its innovative HomeRun technology to partners
for incorporation into PC, PC-peripheral, high-speed modem, and other
networking products.]
[XL
For private copper networks residing in corporate and educational campuses,
medical and hospital complexes, or other multibuilding premises, Tut offers a
family of XL products that enable Ethernet connections from 600 feet to over
24,000 feet using ordinary copper telephone wires.]
[EXPRESSO MDU
For owners and operators of private copper networks within apartments,
hotels, college dormitories, and similar multitenant housing complexes, Tut
offers the Expresso MDU and HomeRun products to enable both a secure LAN and
high-speed Internet access for each living unit.]
<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................................................................. 28
Management............................................................... 43
Certain Transactions..................................................... 53
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 60
Legal Matters............................................................ 62
Experts.................................................................. 62
Available Information.................................................... 62
Index to Financial Statements............................................ F-1
</TABLE>
------------------
THROUGH AND INCLUDING , 1999 (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
, 1999
------------------
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.
(46) On November 24, 1998, the Registrant sold 1,250 shares of Common
Stock upon the exercise of options at a price of $2.00 per share.
(47) On November 30, 1998, the Registrant sold 1,187 shares of Common
Stock upon the exercise of options at a price of $0.48 per share.
(48) On December 4, 1998, the Registrant sold 416 shares of Common Stock
upon the exercise of options at a price of $0.52 per share.
(49) On December 18, 1998, the Registrant issued a warrant to purchase
55,000 shares of Common Stock exercisable at a price of $14.00 per share to
TBCC Funding Trust II, a Delaware Business Trust, in connection with the
loan and security arrangement entered into between TransAmerica Business
Credit Corporation and the Registrant. The warrant expires on December 18,
2003.
(50) On December 22, 1998, the Registrant sold 2,049 shares of Common
Stock upon the exercise of options at a price of $0.36 per share.
(51) On December 29, 1998, the Registrant sold 1,329 shares of Common
Stock upon the exercise of options at prices of $0.48 and $0.52 per share.
(52) On December 30, 1998, the Registrant sold 4,250 shares of Common
Stock upon the exercise of options at prices of $0.36, $0.48 and $0.52 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, 30 and 49), 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.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
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.
10.16 Extension Agreement among Registrant, And Yet, Inc. and Marty
Graham dated December 21, 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.
II-5
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
*Schedule II --Valuation and Qualifying Accounts..................... S-2
- --------
* 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.
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 8TH DAY OF JANUARY, 1999.
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 January 8, 1999
______________________________________ Officer and Director
SALVATORE D'AURIA (Principal Executive
Officer)
/s/ Nelson Caldwell Vice President, Finance and January 8, 1999
______________________________________ Chief Financial Officer
NELSON CALDWELL (Principal Financial and
Accounting Officer)
* Matthew Taylor Chairman of the Board, Chief January 8, 1999
______________________________________ Technical Officer and
MATTHEW TAYLOR Secretary
* Clifford H. Higgerson Director January 8, 1999
______________________________________
CLIFFORD H. HIGGERSON
* Saul Rosenzweig Director January 8, 1999
______________________________________
SAUL ROSENZWEIG
* David Spreng Director January 8, 1999
______________________________________
DAVID SPRENG
* George Middlemas Director January 8, 1999
______________________________________
GEORGE MIDDLEMAS
* Brion Applegate Director January 8, 1999
______________________________________
BRION APPLEGATE
* Roger Moore Director January 8, 1999
______________________________________
ROGER MOORE
* Neal Douglas Director January 8, 1999
______________________________________
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.
10.16 Extension Agreement among Registrant, And Yet, Inc. and Marty
Graham dated December 21, 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.
<PAGE>
EXHIBIT 1.1
2,875,000 SHARES
TUT SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
January __, 1999
Lehman Brothers Inc.
Dain Raucher Wessels
Salomon Smith Barney
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Tut Systems, Inc., a Delaware corporation (the "Company"), proposes to
sell 2,500,000 shares (the "Firm Stock") of Common Stock, par value $.001 per
share, of the Company (the "Common Stock"). In addition, the Company proposes
to grant to the Underwriters named in Schedule 1 hereto (the "Underwriters") an
option to purchase up to an additional 375,000 shares of Common Stock on the
terms and for the purposes set forth in Section 2 (the "Option Stock"). The
Firm Stock and the Option Stock, if purchased, are hereinafter collectively
called the "Stock." This is to confirm the agreement concerning the purchase of
the Stock from the Company by the Underwriters. The Company is successor by
merger to Tut Systems, Inc., a California corporation (the "Predecessor"), as a
result of a reincorporation transaction that became effective on September 29,
1998 (the "Reincorporation").
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1 with respect to the
Stock has (i) been prepared by the Company in conformity with the
requirements of the United States Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations
(the "Rule and Regulations") of the United States Securities and
Exchange Commission (the "Commission") thereunder, (ii) been
filed with the Commission under the Securities Act and (iii)
become effective under the Securities Act. Copies of such
registration statement and the amendment(s) thereto have been
delivered by the Company to you as the representatives (the
"Representatives") of the Underwriters. As used in this
Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent post-
effective amendment thereto, if any, was declared effective by
the Commission; "Effective Date" means the date of the Effective
Time; "Preliminary Prospectus" means each prospectus included in
such registration statement, or amendments thereof, before it
became effective under the Securities Act and any prospectus
filed with the Commission by the Company
-1-
<PAGE>
with the consent of the Representatives pursuant to Rule 424(a)
of the Rules and Regulations; "Registration Statement" means such
registration statement, as amended at the Effective Time,
including all information contained in the final prospectus filed
with the Commission pursuant to Rule 424(b) of the Rules and
Regulations in accordance with Section 5(a) hereof and deemed to
be a part of the registration statement as of the Effective Time
pursuant to paragraph (b) of Rule 430A of the Rules and
Regulations; and "Prospectus" means such final prospectus, as
first filed with the Commission pursuant to paragraph (1) or (4)
of Rule 424(b) of the Rules and Regulations. The Commission has
not issued any order preventing or suspending the use of any
Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration
Statement or the Prospectus will, when they become effective or
are filed with the Commission, as the case may be, conform in all
respects to the requirements of the Securities Act and the Rules
and Regulations and do not and will not, as of the applicable
effective date (as to the Registration Statement and any
amendment thereto) and as of the applicable filing date (as to
the Prospectus and any amendment or supplement thereto) contain
an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading; provided that no
representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus or
any further amendments to the Registration Statement or
Prospectus, in reliance upon and in conformity with written
information furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion
therein.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business
and is in good standing as a foreign corporation in each
jurisdiction in which its ownership or lease of property or the
conduct of its business requires such qualification, except where
the failure to be so qualified would not have a material adverse
effect on the business, financial condition or results of
operations of the Company, and has all power and authority
necessary to own or hold its properties and to conduct the
business as described in the Registration Statement and
Prospectus; and the Company has no subsidiaries.
(d) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description
thereof contained in the Prospectus.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment
therefor as provided herein, will be duly
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and validly issued, fully paid and non-assessable; and the Stock
will conform to the description thereof contained in the
Prospectus.
(f) This Agreement has been duly authorized, executed and
delivered by the Company.
(g) The execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated
hereby will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which the Company is a party, or
by which the Company is bound or to which any of the property or
assets of the Company is subject, nor will such actions result in
any violation of the provisions of the charter or by-laws of the
Company or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Company or any of its properties or assets; and except for the
registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act, the
National Association of Securities Dealers, Inc. and applicable
state securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated
hereby.
(h) There are no contracts, agreements or understandings between
the Company and any person granting such person the right (other
than rights which have been waived or satisfied) to require the
Company to include such securities in the securities registered
pursuant to the Registration Statement. Except as described in
the Prospectus there are no contracts, agreements or
understandings between the Company and any person granting such
person the right to require the Company to register or include
such securities pursuant to any other registration statement
filed by the Company under the Securities Act.
(i) Except as described in the Prospectus, the Company has not
sold or issued any shares of Common Stock during the six-month
period preceding the date of the Prospectus, including any sales
pursuant to Rule 144A under, or Regulations D or S of, the
Securities Act, other than shares issued pursuant to employee
benefit plans, qualified stock options plans or other employee
compensation plans or pursuant to outstanding options, rights or
warrants.
(j) The Company has not sustained, since the date of the latest
audited financial statements included in the Prospectus, any
material loss or interference with its business including from
fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since such date, there has
not been any material change in the capital stock
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or long-term debt of the Company or any material adverse change,
or any development reasonably likely to involve a prospective
material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity or results
of operations of the Company, otherwise than as set forth or
contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement
or included in the Prospectus present fairly the financial
condition and results of operations of the entities purported to
be shown thereby, at the dates and for the periods indicated, and
have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout
the periods involved.
(l) PricewaterhouseCoopers LLP, whose report appears in the
Prospectus and who have delivered the initial letter referred to
in Section 7(h) hereof, are independent public accountants as
required by the Securities Act and the Rules and Regulations.
(m) The Company has good and marketable title in fee simple to
all real property and good and marketable title to all personal
property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such
property and do not materially interfere with the use made and
proposed to be made of such property by the Company as described
in the Prospectus; and all real property and buildings held under
lease by the Company are held by them under valid, subsisting and
enforceable leases, with such exceptions as are not material and
do not interfere with the use made and proposed to be made of
such property and buildings by the Company as described in the
Prospectus.
(n) The Company carries, or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of
its business and the value of its respective property and as is
customary for companies engaged in similar businesses in similar
industries.
(o) The Company owns or possesses adequate rights to use all
material patents, patent applications, trademarks, service marks,
trade names, trademark registrations, service mark registrations,
copyrights and licenses (the "Intellectual Property") necessary
for the conduct of its business, except where the failure to so
own or possess such Intellectual Property would not, singularly
or in the aggregate, have a material adverse effect on the
business, financial condition or results of operations of the
Company, and the Company has no reason to believe that the
conduct of its business will conflict with the Intellectual
Property Rights of others, and have not received any notice of
any claim of conflict with, any such Intellectual Property Rights
of others.
(p) There are no legal or governmental proceedings pending to
which the Company is a party or of which any property or assets
of the Company is the
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subject which, if determined adversely to the Company, might have
a material adverse effect on the business financial position or
results of operations of the Company; and to the best of the
Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others.
(q) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or
filed as exhibits to the Registration Statement.
(r) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other
hand, which is required to be described in the Prospectus which
is not so described.
(s) No labor disturbance by the employees of the Company exists
or, to the knowledge of the Company, is imminent which might be
expected to have a material adverse effect on the business
financial position, or results of operations of the Company.
(t) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA");
no "reportable event" (as defined in ERISA) has occurred with
respect to any "pension plan" (as defined in ERISA) for which the
Company would have any liability; the Company has not incurred
and does not expect to incur liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any
"pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
(u) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date
hereof and has paid all taxes due thereon, and no tax deficiency
has been determined adversely to the Company which has had (nor
does the Company have any knowledge of any tax deficiency which,
if determined adversely to the Company, might have a material
adverse effect on the business, financial position, results of
operations of the Company.
(v) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise
be disclosed in the Prospectus, the Company has not (i) issued or
granted any securities, (ii) incurred any liability or
obligation, direct or contingent, other than liabilities and
obligations which were
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incurred in the ordinary course of business, (iii) entered into
any transaction not in the ordinary course of business or (iv)
declared or paid any dividend on its capital stock.
(w) The Company (i) makes and keeps accurate books and records
and (ii) maintains internal accounting controls which provide
reasonable assurance that (A) transactions are executed in
accordance with management's authorization, (B) transactions are
recorded as necessary to permit preparation of its financial
statements and to maintain accountability for its assets, (C)
access to its assets is permitted only in accordance with
management's authorization and (D) the reported accountability
for its assets is compared with existing assets at reasonable
intervals.
(x) The Company is not (i) in violation of its charter or by-
laws, (ii) in default in any material respect, and no event has
occurred which, with notice or lapse of time or both, would
constitute such a default, in the due performance or observance
of any term, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which it is a party or by which it is bound or to
which any of its properties or assets is subject or (iii) in
violation in any respect of any law, ordinance, governmental
rule, regulation or court decree to which it or its property or
assets may be subject or has failed to obtain any license,
permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its
property or to the conduct of its business.
(y) Neither the Company, nor any director, officer, agent,
employee or other person associated with or acting on behalf of
the Company, has used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official
or employee from corporate funds; violated or is in violation of
any provision of the Foreign Corrupt Practices Act of 1977; or
made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(z) To the Company's knowledge, there has been no storage,
disposal, generation, manufacture, refinement, transportation,
handling or treatment of toxic wastes, medical wastes, hazardous
wastes or hazardous substances by the Company (or any of its
predecessors in interest) at, upon or from any of the property
now or previously owned or leased by the Company in violation of
any applicable law, ordinance, rule, regulation, order, judgment,
decree or permit or which would require remedial action under any
applicable law, ordinance, rule, regulation, order, judgment,
decree or permit, except for any violation or remedial action
which would not have, or could not be reasonably likely to have,
singularly or in the aggregate with all such violations and
remedial actions, a material adverse effect on the general
affairs, management, financial position, stockholders' equity or
results of operations of the Company; to the Company's knowledge,
there has been no material spill, discharge, leak, emission,
injection,
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<PAGE>
escape, dumping or release of any kind onto such property or into
the environment surrounding such property of any toxic wastes,
medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company or with respect to
which the Company has knowledge, except for any such spill,
discharge, leak, emission, injection, escape, dumping or release
which would not have or would not be reasonably likely to have,
singularly or in the aggregate with all such spills, discharges,
leaks, emissions, injections, escapes, dumpings and releases, a
material adverse effect on the business, financial position, or
results of operations of the Company; and the terms "hazardous
wastes", "toxic wastes", "hazardous substances" and "medical
wastes" shall have the meanings specified in any applicable
local, state, federal and foreign laws or regulations with
respect to environmental protection.
(aa) The Company is not an "investment company" within the
meaning of such term under the Investment Company Act of 1940 and
the rules and regulations of the Commission thereunder.
(bb) The execution and delivery of the Agreement and Plan of
Merger dated as of September 29, 1998 (the "Merger Agreement")
between the Company and the Predecessor, effecting the
reincorporation of the Predecessor under the laws of the State of
Delaware, was duly authorized by all necessary corporate action
on the part of each of the Company and the Predecessor. Each of
the Company and the Predecessor had all corporate power and
authority to execute and deliver the Merger Agreement and the
Certificate of Merger between the Company and the Predecessor
complying with Section 252 of the Delaware General Corporation
Law and referencing the Merger Agreement (the "Certificate of
Merger"), to file the Certificate of Merger with the Secretary of
State of California and the Secretary of State of Delaware and to
consummate the reincorporation contemplated by the Merger
Agreement, and the Merger Agreement at the time of execution and
filing constituted a valid and binding obligation of each of the
Company and the Predecessor, enforceable in accordance with its
terms. The merger of the Predecessor with and into the Company
has been consummated in compliance with applicable law. The
Company has succeeded to all of the rights, privileges, powers
and franchises, and is subject to all of the restrictions,
disabilities and duties, of the Predecessor. The Company has
succeeded to all of the contract rights of the Predecessor, and
all required consents with respect to such contracts have been
obtained. All of the previously outstanding shares of capital
stock of the Predecessor have been converted into that number of
shares of capital stock of the Company having the same rights,
preferences and privileges (except for differences resulting from
the reverse stock split described in the Prospectus, applicable
law and applicable by-laws) as described in the Prospectus. All
of the previously outstanding options and warrants of the
Predecessor are exercisable for that number of shares of Common
Stock of the Company as described in the Prospectus. The
consummation of the Reincorporation did not conflict with, or
result in any breach of, or constitute a default under (nor
constitute any event which with notice, lapse of time or both
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<PAGE>
would constitute a breach of or default under), any indenture,
mortgage, deed of trust, loan agreement, or other agreement or
instrument material to the Company's business as described in the
Registration Statement and Prospectus to which the Company is a
party or by which it is bound or to which any of its properties
or assets is subject. The consummation of the Reincorporation
did not and will not conflict with, or result in a violation of,
any federal, state, local or foreign law, regulation or rule or
any decree, judgment or order applicable to the Company, or
immediately prior to the Reincorporation, the Predecessor, the
result of which could have a material adverse effect on the
business, financial position, or results of operations of the
Company. The issuance of capital stock by the Company in the
Reincorporation was in compliance with all applicable state
securities or blue sky laws and was exempt from registration
under the Securities Act.
2. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 2,500,000 shares of
the Firm Stock to the several Underwriters and each of the Underwriters,
severally and not jointly, agrees to purchase the number of shares of the Firm
Stock set opposite that Underwriter's name in Schedule 1 hereto. The respective
purchase obligations of the Underwriters with respect to the Firm Stock shall be
rounded among the Underwriters to avoid fractional shares, as the
Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 375,000 shares of Option Stock. Such option is granted for the
purpose of covering over-allotments in the sale of Firm Stock and is exercisable
as provided in Section 4 hereof. Shares of Option Stock shall be purchased
severally for the account of the Underwriters in proportion to the number of
shares of Firm Stock set opposite the name of such Underwriters in Schedule 1
hereto. The respective purchase obligations of each Underwriter with respect to
the Option Stock shall be adjusted by the Representatives so that no Underwriter
shall be obligated to purchase Option Stock other than in 100 share amounts.
The price of both the Firm Stock and any Option Stock shall be $_____ per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on any Delivery Date (as hereinafter defined), as the case may be,
except upon payment for all the Stock to be purchased on such Delivery Date as
provided herein.
3. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
It is understood that _______ shares of the Firm Stock will initially
be reserved by the several Underwriters for offer and sale upon the terms and
conditions set forth in the Prospectus and in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. to employees
and persons having business relationships with the Company, who have heretofore
delivered to the Representatives offers or indications of interest to purchase
shares of Firm Stock in form satisfactory to the Representatives, and that any
allocation of such Firm Stock among such persons will be made in
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<PAGE>
accordance with timely directions received by the Representatives from the
Company; provided, that under no circumstances will the Representatives or any
Underwriter be liable to the Company or to any such person for any action taken
or omitted in good faith in connection with such offering to employees and
persons having business relationships with the Company. It is further understood
that any shares of such Firm Stock which are not purchased by such persons will
be offered by the Underwriters to the public upon the terms and conditions set
forth in the Prospectus.
4. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of Wilson, Sonsini, Goodrich &
Rosati, at 10:00 A.M., New York City time, on the fourth full business day
following the date of this Agreement or at such other date or place as shall be
determined by agreement between the Representatives and the Company. This date
and time are sometimes referred to as the "First Delivery Date." On the First
Delivery Date, the Company shall deliver or cause to be delivered certificates
representing the Firm Stock to the Representatives for the account of each
Underwriter against payment to or upon the order of the Company of the purchase
price by wire transfer in immediately available funds. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Firm Stock shall be registered in such names and in such
denominations as the Representatives shall request in writing not less than two
full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Stock,
the Company shall make the certificates representing the Firm Stock available
for inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the First Delivery Date.
The option granted in Section 2 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the Representatives. Such notice
shall set forth the aggregate number of shares of Option Stock as to which the
option is being exercised, the names in which the shares of Option Stock are to
be registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as a "Second Delivery Date" and the First Delivery
Date and any Second Delivery Date are sometimes each referred to as a "Delivery
Date."
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on such
Second Delivery Date. On such Second Delivery Date, the Company shall deliver
or cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall
be registered in such names and in such denominations as the Representatives
shall request in the aforesaid written notice. For the purpose of expediting
the checking and packaging of the certificates for the Option Stock, the Company
shall make the certificates representing the Option Stock
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<PAGE>
available for inspection by the Representatives in New York, New York, not later
than 2:00 P.M., New York City time, on the business day prior to such Second
Delivery Date.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule
424(b) under the Securities Act not later than Commission's close
of business on the second business day following the execution
and delivery of this Agreement or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Securities
Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted
herein; to advise the Representatives, promptly after it receives
notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been
filed and to furnish the Representatives with copies thereof; to
advise the Representatives, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or
of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or the
Prospectus or for additional information; and, in the event of
the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the
Prospectus or suspending any such qualification, to use promptly
its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration
Statement as originally filed with the Commission, and each
amendment thereto filed with the Commission, including all
consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably
request: (i) conformed copies of the Registration Statement as
originally filed with the Commission and each amendment thereto
(in each case including exhibits other than this Agreement and
the computation of per share earnings) and (ii) each Preliminary
Prospectus, the Prospectus and any amended or supplemented
Prospectus; and, if the delivery of a prospectus is required at
any time after the Effective Time in connection with the offering
or sale of the Stock or any other securities relating thereto and
if at such time any events shall have occurred as a result of
which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary to amend or supplement
the Prospectus in order to comply with the Securities Act, to
notify the Representatives and, upon their
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request, to file such document and to prepare and furnish without
charge to each Underwriter and to any dealer in securities as
many copies as the Representatives may from time to time
reasonably request of an amended or supplemented Prospectus which
will correct such statement or omission or effect such
compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested
by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to
furnish a copy thereof to the Representatives and counsel for the
Underwriters and obtain the consent of the Representatives to the
filing;
(f) As soon as practicable after the Effective Date, to make
generally available to the Company's security holders and to
deliver to the Representatives an earnings statement of the
Company (which need not be audited) complying with Section 11(a)
of the Securities Act and the Rules and Regulations (including,
at the option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished
by the Company to its shareholders and all public reports and all
reports and financial statements furnished by the Company to the
principal national securities exchange upon which the Common
Stock may be listed pursuant to requirements of or agreements
with such exchange or to the Commission pursuant to the Exchange
Act or any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for
offering and sale under the securities laws of such jurisdictions
as the Representatives may request and to comply with such laws
so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete
the distribution of the Stock; provided that in connection
therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of
process in any jurisdiction;
(i) For a period of 180 days from the date of the Prospectus, not
to, directly or indirectly, (1) offer for sale, sell, pledge 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) any
shares of Common Stock or securities convertible into or
exchangeable for Common Stock (other than the Stock and shares
issued pursuant to currently outstanding options, warrants or
rights under employee benefit plans, qualified stock option plans
or
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other employee compensation plans existing on the date
hereof), or sell or grant options, rights or warrants with
respect to any shares of Common Stock or securities convertible
into or exchangeable for Common Stock (other than the grant of
options pursuant to option plans existing on the date hereof), or
(2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock,
whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of Common Stock or other securities,
in cash or otherwise, in each case without the prior written
consent of Lehman Brothers Inc.; and to cause each officer and
director of the Company to furnish to the Representatives, prior
to the First Delivery Date, a letter or letters, in form and
substance satisfactory to counsel for the Underwriters, pursuant
to which each such person shall agree not to, directly or
indirectly, (x) offer for sale, sell, pledge 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) any shares of Common Stock or
securities convertible into or exchangeable for Common Stock or
(y) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock,
whether any such transaction described in clause (x) or (y) above
is to be settled by delivery of Common Stock or other securities,
in cash or otherwise, in each case for a period of 180 days from
the date of the Prospectus, without the prior written consent of
Lehman Brothers Inc.;
(j) Prior to the Effective Date, to apply for the inclusion of
the Stock on the National Market System and to use its best
efforts to complete that listing, subject only to official notice
of issuance and evidence of satisfactory distribution, prior to
the First Delivery Date;
(k) To file with the Commission all reports containing such
information as may be required under Rule 463 under the
Securities Act;
(l) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus; and
(m) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an
"investment company" within the meaning of such term under the
Investment Company Act of 1940 and the rules and regulations of
the Commission thereunder.
6. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus, all as provided in
this Agreement; (d) the costs of producing and distributing this Agreement
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and any other related documents in connection with the offering, purchase, sale
and delivery of the stock; (e) the filing fees incident to, and the reasonable
fees and expenses of counsel for the Underwriters in connection with, securing
any required review by the National Association of Securities Dealers, Inc. of
the terms of sale of the Stock; (f) any applicable listing or other fees; (g)
the fees and expenses of qualifying the Stock under the securities laws of the
several jurisdictions as provided in Section 5(h) and of preparing, printing and
distributing a Blue Sky Memorandum (including related fees and expenses of
counsel to the Underwriters); and (h) all other costs and expenses incident to
the performance of the obligations of the Company under this Agreement; provided
that, except as provided in this Section 6 and in Section 11 the Underwriters
shall pay their own costs and expenses, including the costs and expenses of
their counsel, any transfer taxes on the Stock which they may sell and the
expenses of advertising any offering of the Stock made by the Underwriters, and
any transfer taxes payable in connection with its respective sales of Stock to
the Underwriters and reimburse the Company for its pro rata share of the fees
and expenses paid by the Company in connection with the offering of the Stock.
7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
contained herein, to the performance by the Company of its obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 5(a); no stop order
suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the
Prospectus or otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration
Statement or the Prospectus or any amendment or supplement
thereto contains an untrue statement of a fact which, in the
opinion of Cooley Godward LLP, counsel for the Underwriters, is
material or omits to state a fact which, in the opinion of such
counsel, is material and is required to be stated therein or is
necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the
Stock, the Registration Statement and the Prospectus, and all
other legal matters relating to this Agreement and the
transactions contemplated hereby shall be reasonably satisfactory
in all material respects to counsel for the Underwriters, and the
Company shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to
pass upon such matters.
(d) Wilson Sonsini Goodrich & Rosati shall have furnished to the
Representatives its written opinion, as counsel to the Company,
addressed to the Underwriters and dated such Delivery Date, in
form and substance reasonably satisfactory to the
Representatives, to the effect that:
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(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business
and is in good standing as a foreign corporation in each
jurisdiction in which its ownership or lease of property or the
conduct of its business requires such qualification, except where
the failure to be so qualified would not have a material adverse
effect on the business, financial condition or results of
operations of the Company, and has all power and authority
necessary to own or hold its properties and to conduct the
business in which it is engaged; and the Company has no
subsidiaries;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the shares of Stock being
delivered on such Delivery Date) have been duly and validly
authorized and issued, are fully paid and non-assessable and
conform to the description thereof contained in the Prospectus;
the Common Stock to be issued upon conversion of the Preferred
Stock and upon exercise of the warrant issued to Microsoft
Corporation when issued and delivered will be duly and validly
issued, fully paid and non-assessable;
(iii) There are no preemptive or other rights to subscribe
for or to purchase, nor any restriction upon the voting or
transfer of, any shares of the Stock pursuant to the Company's
Articles of Incorporation, by-laws, any agreement material to the
Company's business as described in the Registration Statement and
Prospectus, or, to such counsel's knowledge, any other
instrument;
(iv) There are no legal or governmental proceedings pending
to which the Company is a party or of which any property or
assets of the Company is the subject which, if determined
adversely to the Company, might have a material adverse effect on
the business, financial position, and results of operations of
the Company; and, to such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(v) The Registration Statement was declared effective
under the Securities Act as of the date and time specified in
such opinion, the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and
Regulations specified in such opinion on the date specified
therein and no stop order suspending the effectiveness of the
Registration Statement has been issued and, to the knowledge of
such counsel, no proceeding for that purpose is pending or
threatened by the Commission;
(vi) The Registration Statement and the Prospectus and any
further amendments or supplements thereto made by the Company
prior to such Delivery Date (other than the financial statements,
financial data and related schedules therein, as to which such
counsel need express no opinion) comply as
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<PAGE>
to form in all material respects with the requirements of the
Securities Act and the Rules and Regulations;
(vii) The statements in the Registration Statement and
Prospectus under the captions "Certain Transactions,"
"Description of Capital Stock" and "Shares Eligible for Future
Sale" and in the Registration Statement in Items 14 and 15,
insofar as they are descriptions of contracts, agreements or
other legal documents, or refer to statements of law or legal
conclusion, are accurate and present fairly the information
required to be shown;
(viii) To such counsel's knowledge, after due inquiry,
there are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as exhibits to
the Registration Statement or incorporated therein by reference
as permitted by the Rules and Regulations;
(ix) This Agreement has been duly authorized, executed and
delivered by the Company;
(x) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance
by the Company with all of the provisions of this Agreement and
the consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, or other
agreement material to the Company's business as described in the
Registration Statement and Prospectus, or other instrument known
to such counsel to which the Company is a party or by which the
Company is bound or to which any of the property or assets of the
Company is subject, nor will such actions result in any violation
of the provisions of the charter or by-laws of the Company or any
statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over
the Company or any of its properties or assets; and, except for
the registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase
and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated
hereby; and
(xi) To such counsel's knowledge, after due inquiry, there
are no contracts, agreements or understandings between the
Company and any person granting such person the right (other than
rights which have been waived or satisfied) to require the
Company to include such securities in the securities registered
pursuant to the Registration Statement. To such counsel's
knowledge,
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<PAGE>
after due inquiry, except as described in the Prospectus there
are no contracts, agreements or understandings between the
Company and any person granting such person the right to require
the Company to register or include such securities pursuant to
any other registration statement filed by the Company under the
Securities Act.
In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the Federal laws of the
United States of America, the laws of the state of California and
the General Corporation Law of the State of Delaware. Such
counsel shall also have furnished to the Representatives a
written statement, addressed to the Underwriters and dated such
Delivery Date, in form and substance satisfactory to the
Representatives, to the effect that (i) such counsel has acted as
counsel to the Company on a regular basis, has acted as counsel
to the Company in connection with previous financing transactions
and has acted as counsel to the Company in connection with the
preparation of the Registration Statement, and (ii) although such
counsel has not verified the accuracy, completeness or fairness
of the statements contained in the Registration Statement or
Prospectus (except for those matters referred to in subsections
(vi), (vii) and (xi) of this Section 7(d)), based on the
foregoing, no facts have come to the attention of such counsel
which lead it to believe that the Registration Statement (other
than the financial statements, financial data and related
schedules therein, as to which such counsel need express no
opinion), as of the Effective Date, contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading, or that the Prospectus (other
than the financial statements, financial data and related
schedules therein, as to which such counsel need express no
opinion), as of the Delivery Date, contains any untrue statement
of a material fact or omits to state a material fact required to
be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
made, not misleading.
(e) Blakely, Sokoloff, Taylor & Zafman LLP shall have furnished
to the Representatives its written opinion as patent counsel to
the Company addressed to the Underwriters and dated such Delivery
Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
Such counsel is familiar with the technology used by the
Company in its business and the manner of its use thereof and has
read the Registration Statement and the Prospectus, including
particularly the portions of the Registration Statement and the
Prospectus referring to patents, trade secrets, trademarks,
service marks or other proprietary information or materials and:
(i) The statements in the Registration Statement and the
Prospectus under the captions "Risk Factors -- Dependence on
Proprietary Technology; Protection of Intellectual Property
Rights," "Use of Proceeds," "Certain Transactions" and
"Business -- Proprietary Rights" and under the caption
"Business" generally to the extent such statements relate solely
to patent matters
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<PAGE>
(the "Intellectual Property Portion") to the best of such
counsel's knowledge and belief, are accurate statements or
summaries of the matters therein set forth and nothing has come
to such counsel's attention that causes such counsel to believe
that the Intellectual Property Portion of the Registration
Statement, as of the Effective Date, contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Intellectual
Property Portion of the Prospectus, as of the Delivery Date,
contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(ii) There are no legal or governmental proceedings
pending relating to patent rights, trade secrets, trademarks,
service marks or other proprietary information or materials of
the Company which, if determined adversely to the Company, might
have a material adverse effect on the business, financial
position or results of the operations of the Company and to the
best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or others;
(iii) To such counsel's knowledge, after due inquiry,
there are no contracts or other documents, relating to the
Company's patents, trade secrets, trademarks, service marks or
other proprietary information or materials of a character
required to be filed as an exhibit to the Registration Statement
or required to be described in the Registration Statement or the
Prospectus that are not filed or described as required;
(iv) To such counsel's knowledge, the Company is not
infringing or otherwise violating any patents, trade secrets,
trademarks, service marks or other proprietary information or
materials, of others; and
(v) To such counsel's knowledge, the Company owns or
possesses sufficient licenses or other rights to use all patents,
trade secrets, trademarks, service marks or other proprietary
information or materials necessary to conduct the business now
being or proposed to be conducted by the Company as described in
the Prospectus.
(f) The Representatives shall have received from Cooley Godward
LLP, counsel for the Underwriters, such opinion or opinions,
dated such Delivery Date, with respect to the issuance and sale
of the Stock, the Registration Statement, the Prospectus and
other related matters as the Representatives may reasonably
require, and the Company shall have furnished to such counsel
such documents as they reasonably request for the purpose of
enabling them to pass upon such matters.
(g) At the time of execution of this Agreement, the
Representatives shall have received from PricewaterhouseCoopers
LLP a letter, in form and substance reasonably satisfactory to
the Representatives, addressed to the Underwriters and dated the
date hereof (i) confirming that they are independent public
accountants
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<PAGE>
within the meaning of the Securities Act and are in compliance
with the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission,
and (ii) stating, as of the date hereof (or, with respect to
matters involving changes or developments since the respective
dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the
date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(h) With respect to the letter of PricewaterhouseCoopers LLP
referred to in the preceding paragraph and delivered to the
Representatives concurrently with the execution of this Agreement
(the "initial letter"), the Company shall have furnished to the
Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such
Delivery Date (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in
compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of
the Commission, (ii) stating, as of the date of the bring-down
letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date
not more than five days prior to the date of the bring-down
letter), the conclusions and findings of such firm with respect
to the financial information and other matters covered by the
initial letter, and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
(i) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the
Board, its President or a Vice President and its Chief Financial
Officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery
Date; the Company has complied with all its agreements contained
herein; and the conditions set forth in Sections 7(a), 7(j) and
7(l) have been fulfilled; and
(ii) They have carefully examined the Registration Statement
and the Prospectus and, in their opinion (A) as of the Effective
Date, the Registration Statement and Prospectus did not include
any untrue statement of a material fact and did not omit to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (B) since the
Effective Date no event has occurred which should have been set
forth in a supplement or amendment to the Registration Statement
or the Prospectus.
(j) (1) The Company shall not have sustained since the date of
the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental
action, order or
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<PAGE>
decree, otherwise than as set forth or contemplated in the
Prospectus or (2) since such date there shall not have been any
change in the capital stock or long-term debt of the Company or
any change, or any development involving a prospective change, in
or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company,
otherwise than as set forth or contemplated in the Prospectus,
the effect of which, in any such case described in clause (1) or
(2), is, in the reasonable judgment of the Representatives, so
material and adverse as to make it impracticable or inadvisable
to proceed with the public offering or the delivery of the Stock
being delivered on such Delivery Date on the terms and in the
manner contemplated in the Prospectus.
(k) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading
in securities generally on the New York Stock Exchange or the
American Stock Exchange or in the over-the-counter market, or
trading in any securities of the Company on any exchange or in
the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such
market by the Commission, by such exchange or by any other
regulatory body or governmental authority having jurisdiction,
(ii) a banking moratorium shall have been declared by Federal or
state authorities, (iii) the United States shall have become
engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been
a declaration of a national emergency or war by the United States
or (iv) there shall have occurred such a material adverse change
in general economic, political or financial conditions (or the
effect of international conditions on the financial markets in
the United States shall be such) as to make it, in the reasonable
judgment of a majority in interest of the several Underwriters,
impracticable or inadvisable to proceed with the public offering
or delivery of the Stock being delivered on such Delivery Date on
the terms and in the manner contemplated in the Prospectus.
(l) The National Market System shall have approved the Stock for
inclusion, subject only to official notice of issuance.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each
Underwriter, its officers and employees and each person, if any,
who controls any Underwriter within the meaning of the Securities
Act, from and against any loss, claim, damage or liability, joint
or several, or any action in respect thereof (including, but not
limited to, any loss, claim, damage, liability or action relating
to purchases and sales of Stock), to which that Underwriter,
officer, employee or controlling person may become subject, under
the Securities Act or otherwise,
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<PAGE>
insofar as such loss, claim, damage, liability or action arises
out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any
Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (B) in
any blue sky application or other document prepared or executed
by the Company (or based upon written information furnished by
the Company) specifically for the purpose of qualifying any or
all of the Stock under the securities laws of any state or other
jurisdiction (any such application, document, or information
being hereinafter called a "Blue Sky Application"), (ii) the
omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in
any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or
necessary to make the statements therein not misleading, or (iii)
any act or failure to act or any alleged act or failure to act by
any Underwriter in connection with, or relating in any manner to,
the Stock or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon matters covered
by clause (i) or (ii) above (provided that the Company shall not
be liable under this clause (iii) to the extent that it is
determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its
gross negligence or willful misconduct), and shall reimburse each
Underwriter and each such officer, employee or controlling person
promptly upon demand for any legal or other expenses reasonably
incurred by that Underwriter, officer, employee or controlling
person in connection with investigating or defending or preparing
to defend against any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the
Company shall not be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of,
or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in
any such amendment or supplement, in reliance upon and in
conformity with written information concerning such Underwriter
furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein
which information consists solely of the information specified in
Section 8(e). The foregoing indemnity agreement is in addition to
any liability which the Company may otherwise have to any
Underwriter or to any officer, employee or controlling person of
that Underwriter.
(b) Each Underwriter, severally and not jointly, shall indemnify
and hold harmless the Company, its officers and employees, each
of its directors, and each person, if any, who controls the
Company within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several,
or any action in respect thereof, to which the Company or any
such director, officer or controlling person may become subject,
under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises
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out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any
Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (B) in
any Blue Sky Application or (ii) the omission or alleged omission
to state in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact
required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
written information concerning such Underwriter furnished to the
Company through the Representatives by or on behalf of that
Underwriter specifically for inclusion therein, and shall
reimburse the Company and any such director, officer or
controlling person for any legal or other expenses reasonably
incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending
or preparing to defend against any such loss, claim, damage,
liability or action as such expenses are incurred. The foregoing
indemnity agreement is in addition to any liability which any
Underwriter may otherwise have to the Company or any such
director, officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim or the commencement of any
action, the indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the claim
or the commencement of that action; provided, however, that the
failure to notify the indemnifying party shall not relieve it
from any liability which it may have under this Section 8 except
to the extent it has been materially prejudiced by such failure
and, provided further, that the failure to notify the
indemnifying party shall not relieve it from any liability which
it may have to an indemnified party otherwise than under this
Section 8. If any such claim or action shall be brought against
an indemnified party, and it shall notify the indemnifying party
thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense
thereof with counsel reasonably satisfactory to the indemnified
party. After notice from the indemnifying party to the
indemnified party of its election to assume the defense of such
claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any legal or other
expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs
of investigation; provided, however, that the Representatives
shall have the right to employ counsel to represent jointly the
Representatives and those other Underwriters and their respective
officers, employees and controlling persons who may be subject to
liability arising out of any claim in respect of which indemnity
may be sought by the Underwriters against the Company under this
Section 8 if, in the reasonable judgment of the Representatives,
it is advisable for the Representatives and those Underwriters,
officers, employees and controlling
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persons to be jointly represented by separate counsel, and in
that event the fees and expenses of such separate counsel shall
be paid by the Company. No indemnifying party shall (i) without
the prior written consent of the indemnified parties (which
consent shall not be unreasonably withheld), settle or compromise
or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such
settlement, compromise or consent includes an unconditional
release of each indemnified party from all liability arising out
of such claim, action, suit or proceeding, or (ii) be liable for
any settlement of any such action effected without its written
consent (which consent shall not be unreasonably withheld), but
if settled with the consent of the indemnifying party or if there
be a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by
reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall
for any reason be unavailable to or insufficient to hold harmless
an indemnified party under Section 8 (a) or 8(c) in respect of
any loss, claim, damage or liability, or any action in respect
thereof, referred to therein, then each indemnifying party shall,
in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of
such loss, claim, damage or liability, or action in respect
thereof, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other from the offering of the
Stock or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to
in clause (i) above but also the relative fault of the Company,
on the one hand and the Underwriters on the other with respect to
the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations. The relative benefits
received by the Company, on the one hand and the Underwriters on
the other with respect to such offering shall be deemed to be in
the same proportion as the total net proceeds from the offering
of the Stock purchased under this Agreement (before deducting
expenses) received by the Company, on the one hand, and the total
underwriting discounts and commissions received by the
Underwriters with respect to the shares of the Stock purchased
under this Agreement, on the other hand, bear to the total gross
proceeds from the offering of the shares of the Stock under this
Agreement, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault shall be determined
by reference to whether the untrue or alleged untrue statement of
a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, or
the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the
Underwriters agree that it
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would not be just and equitable if contributions pursuant to this
Section were to be determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by
any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid
or payable by an indemnified party as a result of the loss,
claim, damage or liability, or action in respect thereof,
referred to above in this Section shall be deemed to include, for
purposes of this Section 8(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8(d), no
Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Stock
underwritten by it and distributed to the public was offered to
the public exceeds the amount of any damages which such
Underwriter has otherwise paid or become liable to pay by reason
of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 8(f) of the Securities Act) shall
be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations
to contribute as provided in this Section 8(d) are several in
proportion to their respective underwriting obligations and not
joint.
(e) The Underwriters severally confirm and the Company
acknowledges that the statements with respect to the public
offering of the Stock by the Underwriters set forth on the cover
page of, the legend concerning over-allotments on the inside
front cover page of and the concession and reallowance figures
appearing under the caption "Underwriting" in, the Prospectus are
correct and constitute the only information concerning such
Underwriters furnished in writing to the Company by or on behalf
of the Underwriters specifically for inclusion in the
Registration Statement and the Prospectus.
9. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining non-
defaulting Underwriter shall not be obligated to purchase more than 110% of the
number of shares of the Stock which it agreed to purchase on such Delivery Date
pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the remaining Underwriters
or other underwriters satisfactory to the Representatives do not elect to
purchase the shares which the
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<PAGE>
defaulting Underwriter or Underwriters agreed but failed to purchase on such
Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the
obligation of the Underwriters to purchase, and of the Company to sell, the
Option Stock) shall terminate without liability on the part of any non-
defaulting Underwriter or the Company, except that the Company will continue to
be liable for the payment of expenses to the extent set forth in Sections 8 and
11. As used in this Agreement, the term "Underwriter" includes, for all purposes
of this Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 9, purchases Firm Stock which a
defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Stock of a defaulting
or withdrawing Underwriter, either the Representatives or the Company may
postpone the Delivery Date for up to seven full business days in order to effect
any changes that in the opinion of counsel for the Company or counsel for the
Underwriters may be necessary in the Registration Statement, the Prospectus or
in any other document or arrangement.
10. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 7(j) or 7(k), shall have occurred
or if the Underwriters shall decline to purchase the Stock for any reason
permitted under this Agreement.
11. Reimbursement of Underwriters' Expenses. If the Company shall
fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company is
not fulfilled, the Company will reimburse the U.S. Underwriters for all
reasonable out-of-pocket expenses (including fees and disbursements of counsel)
incurred by the Underwriters in connection with this Agreement and the proposed
purchase of the Stock, and upon demand the Company shall pay the full amount
thereof to the Representative(s). If this Agreement is terminated pursuant to
Section 9 by reason of the default of one or more Underwriters, the Company
shall not be obligated to reimburse any defaulting Underwriter on account of
those expenses.
-24-
<PAGE>
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three
World Financial Center, New York, New York 10285, Attention:
Syndicate Department (Fax: 212-526-6588), with a copy, in the
case of any notice pursuant to Section 8(c), to the Director of
Litigation, Office of the General Counsel, Lehman Brothers Inc.,
3 World Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex
or facsimile transmission to the address of the Company set forth
in the Registration Statement, Attention: Salvatore D'Auria; Fax:
(925) 682-1841;
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Underwriters by Lehman Brothers Inc.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, and
their respective successors. This Agreement and the terms and provisions
hereof are for the sole benefit of only those persons, except that (A) the
representations, warranties, indemnities and agreements of the Company contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act and (B) the indemnity agreement of the Underwriters contained
in Section 8(b) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 13, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on behalf on them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Stock and shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
-25-
<PAGE>
16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF NEW YORK.
Each party irrevocably agrees that any legal suit, action or
proceeding arising out of or based upon this Agreement or the transactions
contemplated hereby ("Related Proceedings") may be instituted in the federal
courts of the United States of America located in the City of New York or the
courts of the State of New York in each case located in the Borough of Manhattan
in the City of New York (collectively, the "Specified Courts"), and irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. The parties further agree that service of
any process, summons, notice or document by mail to such party's address set
forth above shall be effective service of process for any lawsuit, action or
other proceeding brought in any such court. The parties hereby irrevocably and
unconditionally waive any objection to the laying of venue of any lawsuit,
action or other proceeding in the Specified Courts, and hereby further
irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such lawsuit, action or other proceeding brought in any such
court has been brought in an inconvenient forum.
17. Waiver of Immunity. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
18. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
19. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
-26-
<PAGE>
If the foregoing correctly sets forth the agreement between the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
TUT SYSTEMS, INC.
By ____________________________________
Salvatore D'Auria, President and
Chief Executive Officer
Accepted:
LEHMAN BROTHERS INC.
Dain Raucher Wessels
Salomon Smith Barney
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By LEHMAN BROTHERS INC.
By ________________________________
Authorized Representative
-27-
<PAGE>
SCHEDULE 1
Number of
Underwriters Shares
------------ ---------
Lehman Brothers Inc. ..............................
Dain Raucher Wessels...............................
Salomon Smith Barney...............................
---------
Total............................................
=========
-28-
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT 10.15
TBCC
LOAN AND SECURITY AGREEMENT
BORROWER: TUT SYSTEMS, INC.,
A Delaware corporation
ADDRESS: 2495 ESTAND WAY
PLEASANT HILL, CALIFORNIA 94523
DATE: DECEMBER 18, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into as of the above date, between
the above borrower (the "Borrower"), having its chief executive office and
principal place of business at the address shown above, and TRANSAMERICA
BUSINESS CREDIT CORPORATION, a Delaware corporation, ("TBCC") having its
principal office at 9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018
and having an office at 15260 Ventura Blvd., Suite 1240, Sherman Oaks, CA
91403. The Schedule to this Agreement (the "Schedule") being signed concurrently
is an integral part of this Agreement. (Definitions of certain terms used in
this Agreement are set forth in Section 9 below.) The parties agree as follows:
1. LOANS.
-----
1.1. Loans. TBCC, subject to the terms and conditions of this Agreement,
-----
agrees to make loans (the "Loans") to Borrower, from time to time during the
period from the date of this Agreement to the Maturity Date set forth in the
Schedule, at Borrower's request, in an aggregate principal amount at any one
time outstanding not to exceed the Credit Limit shown on the Schedule. If at any
time the total outstanding Loans and other monetary Obligations exceed said
limit, Borrower shall repay the excess immediately without demand. Borrower
shall use the proceeds of all Loans solely for lawful general business purposes.
1.2. Due Date. The Loans, all accrued interest and all other monetary
--------
Obligations shall be payable in full on the Maturity Date. Borrower may borrow,
repay and reborrow Loans (other than any Term Loans), in whole or in part, in
accordance with the terms of this Agreement.
1.3. Loan Account. TBCC shall maintain an account on its books in the name
------------
of Borrower (the "Loan Account") All Loans and advances made by TBCC to Borrower
or for Borrower's account and all other monetary Obligations will be charged to
the Loan Account. All amounts received by TBCC from Borrower or for Borrower's
account will be credited to the Loan Account. TBCC will send Borrower a monthly
statement reflecting the activity in the Loan Account, and each such monthly
statement shall be an account stated between Borrower and TBCC and shall be
final conclusive and binding absent manifest error.
1.4. Collection of Receivables. Borrower shall remit to TBCC all Collections
-------------------------
including all checks, drafts and other documents and instruments evidencing
remittances in payment (collectively referred to as "Items of Payment") within
one Business Day after receipt, in the same form as received, with any necessary
endorsements. For purposes of calculating interest due to TBCC, credit will be
given for Collections and all other proceeds of Collateral and other payments to
TBCC on the Business Day receipt cleared funds. For all purposes of this
Agreement any cleared funds received by TBCC later than 10:00 a.m. (California
time) on any Business Day shall be deemed to have been received on the following
Business Day and any applicable interest or fee shall continue to accrue.
Borrower's Loan Account will be credited only with the net amounts actually
received in payment of Receivables, and such payments shall be credited to the
Obligations in such order as TBCC shall determine in its discretion. Pending
delivery to TBCC, Borrower will not commingle any Items of Payment with any of
its other funds or property, but will segregate them from the other assets of
Borrower and will hold them in trust and for the account and as the property of
TBCC. Borrower hereby agrees to endorse any Items of Payment upon the request of
TBCC.
* of
1.5. Reserves. TBCC may, from time to time, in its Good Faith business
--------
judgment (i) establish and modify reserves against Eligible Receivables and
Eligible Inventory, (ii) modify advance rates with respect to Eligible
Receivables and Eligible Inventory, (iii) modify the standards of eligibility
set forth in the definitions of Eligible Receivables and Eligible Inventory, and
(iv) establish reserves against available Loans.
1.6. Term.
----
(a) The term of this Agreement shall be from the date of this Agreement to
the Maturity Date set forth in the
-1-
<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
Schedule, unless sooner terminated in accordance with the terms of this
Agreement, provided that the Maturity Date shall automatically be extended, and
this Agreement shall automatically and continuously renew, for successive
additional terms of one year each, unless one party gives written notice to the
other, not less than sixty days prior to the next Maturity Date, that such party
elects to terminate this Agreement effective on the next Maturity Date. On the
Maturity Date or on any earlier termination of this Agreement Borrower shall pay
in full all Obligations, and notwithstanding any termination of this Agreement
all of TBCC's security interests and all of TBCC's other rights and remedies
shall continue in full force and effect until payment and performance in full of
all Obligations.
(b) This Agreement may be terminated prior to the Maturity Date as follows:
(i) by Borrower, effective three Business Days after written notice of
termination is given to TBCC; or (ii) by TBCC at any time after the occurrence
of an Event of Default, without notice, effective immediately. If this Agreement
is terminated by Borrower or by TBCC under this Section 1.6(b). Borrower shall
pay to TBCC a termination fee (the "Termination Fee") in the amount shown on the
Schedule. The Termination Fee shall be due and payable on the effective date of
termination Notwithstanding the foregoing, Borrower shall have no right to
terminate this Agreement at any time that any principal of, or interest on any
of the Loans or any other monetary Obligations are outstanding, except upon
prepayment of all Obligations and the satisfaction of all other conditions set
forth in the Loan Documents.
1.7. Payment Procedures. Borrower hereby authorizes TBCC to charge the Loan
------------------
Account with the amount of all interest, fees, expenses and other payments to be
made hereunder and under the other Loan Documents. TBCC may, but shall not be
obligated to, discharge Borrower's payment obligations hereunder by so charging
the Loan Account. Whenever any payment to be made hereunder is due on a day that
is not a Business Day, the payment may be made on the next succeeding Business
Day and such extension of time shall be included in the computation of the
amount of interest due.
1.8. Conditions to Initial Loan. The obligation of TBCC to make the initial
--------------------------
Loan is subject to the satisfaction of the following conditions prior to or
concurrent with such initial Loan, and Borrower shall cause all such conditions
to be satisfied by the Closing Deadline set forth in the Schedule:
(a) Except for the filling of termination statements under the Code by the
existing lender to Borrower whose loans are being repaid with the Loan proceeds,
no consent or authorization of, filing with or other act by or in respect of any
Governmental Authority or any other Person is required in connection, with the
execution, delivery, performance, validity or enforceability of this Agreement,
or the other Loan Documents or the consummation of the transactions contemplated
hereby or thereby or the continuing operations of the Borrower following the
consummation of such transactions.
(b) TBCC and its counsel shall have performed (i) a review satisfactory to
TBCC of all of the Material Contracts and other assets of the Borrower, the
financial condition of the Borrower, including all of its tax, litigation,
environmental and other potential contingent liabilities, and the corporate and
capital structure of the Borrower and (ii) a pre-closing audit and collateral
review, in each case with results satisfactory to TBCC.
(c) TBCC shall have received the following, each dated the date of the
initial Loan or as of an earlier date acceptable to TBCC, in form and substance
satisfactory to TBCC and its counsel: (i) a Depository Account Agreement (as
TBCC shall designate), duly executed by the Borrower and its bank on TBCC's
standard form; (ii) acknowledgment copies of Uniform Commercial Code financing
statements (naming TBCC as secured party and the Borrower as debtor), duly filed
in all jurisdictions that TBCC deems necessary or desirable to perfect and
protect the Liens created hereunder, and evidence that all other filings,
registrations and recordings have been made in the appropriate governmental
offices, and all other action has been taken, which shall be necessary to
create, in favor of TBCC, a perfected first priority Lien on the Collateral;
(iii) the opinion of counsel for the Borrower covering such matters incident to
the transactions contemplated by this Agreement as TBCC may specify in its
discretion; (iv) certified copies of all policies of insurance required by this
Agreement and the other Loan Documents, together with loss payee endorsements
for all such policies naming TBCC as lender loss payee and an additional
insured; (v) copies of the Borrower's articles or certificate of incorporation,
certified as true, correct and complete by the secretary of state of Borrower's
state of incorporation within 45 days of the date hereof; (vi) copies of the
bylaws of the Borrower and a copy of the resolutions of the Board of Directors
of the Borrower authorizing the execution, delivery and performance of this
Agreement, the other Loan Documents, and the transactions contemplated hereby
and thereby, attached to which is a certificate of the Secretary or an Assistant
Secretary of the Borrower certifying (A) that such copies of the bylaws and
resolutions are true, complete and accurate copies thereof, have not been
amended or modified since the date of such certificate and are in full force and
effect and (B) the incumbency, names and true signatures of the officers of the
Borrower; (vii) a good standing certificate from the Secretary of State of
Borrower's state of incorporation and each state in which the Borrower is
qualified as a foreign corporation, each dated within ten days of the date
hereof; (viii) the additional documents and agreements, if any, listed in the
Schedule, and (ix) such other agreements and instruments as TBCC deems necessary
in its sole and absolute discretion in connection with the transactions
contemplated hereby.
1.9. Conditions to Lending. The obligation of TBCC to make any Loan is
---------------------
subject to the satisfaction of the following conditions precedent:
(a) There shall be no pending or, to the knowledge of Borrower after due
inquiry, threatened litigation, proceeding, inquiry or other action relating to
this Agreement, or any
-2-
<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
other Loan Document, or which could be expected to have a Material Adverse
Effect in the judgment of TBCC;
(b) Borrower shall be in compliance with all Requirements of Law and Material
Contracts, other than such noncompliance that could not have a Material Adverse
Effect;
(c) The Liens in favor of TBCC shall have been duly perfected and shall
constitute first priority Liens, except for Permitted Liens;
(d) All representations and warranties contained in this Agreement and the
other Loan Documents shall be true and correct on and as of the date of such
Loan as if then made, other than representations and warranties that expressly
relate solely to an earlier date, in which case they shall have been true and
correct as of such earlier date;
(e) No Default or Event of Default shall have occurred and be continuing or
would result from the making of the requested Loan as of the date of such
request; and
(f) No Material Adverse Effect shall have occurred.
2. INTEREST AND FEES.
-----------------
2.1. Interest. Borrower shall pay TBCC interest on all outstanding Loans and
--------
other monetary Obligations, at the interest rate set forth in the Schedule.
Interest shall be payable monthly in arrears on the first Business Day of each
month, and on the Maturity Date. Following the occurrence and during the
continuance of any Event of Default, the interest rate applicable to all
Obligations shall be increased by two percent annum.
2.2. Fees. Borrower shall pay TBCC the fees set forth in the Schedule.
----
2.3. Calculations. All interest and fees under this Agreement shall be
------------
calculated on the basis of a year of 360 days for the actual number of days
elapsed in the period for which such interest or fees are payable.
2.4. Taxes. Any and all payments by Borrower under this Agreement or any
-----
other Loan Document shall be made free and clear of and without deduction for
any and all present or future taxes, levies, imposts, deductions, charges or
withholdings and penalties, interest and all other liabilities with respect
thereto, excluding in the case of TBCC, taxes imposed on its net income and
franchise taxes imposed on it by the jurisdiction under the laws of which TBCC
is organized or any political subdivision thereof.
3. SECURITY.
--------
3.1. Grant of Security Interest. To secure the payment and performance when
--------------------------
due of all of the Obligations. Borrower hereby grants to TBCC a security
interest in all of its present and future Receivables, Investment Property,
Inventory, Equipment, Other Property, and other Collateral, wherever located.
3.2. Other Liens: Location of Collateral. Borrower represents, warrants and
-----------------------------------
covenants that all of the Collateral is, and will at all times continue to be,
free and clear of all Liens, other than Permitted Liens and Liens in favor of
TBCC. All Collateral is and will continue to be maintained at the locations
shown on the Schedule.
3.3. Receivables.
-----------
(a) Schedules and Other Actions. As often as requested by TBCC, Borrower
---------------------------
shall execute and deliver to TBCC written schedules of Receivables and Eligible
Receivables (but the failure to execute or deliver any schedule shall not affect
or limit TBCC's security interest in all Receivables). On TBCC's request,
Borrower shall also furnish to TBCC copies of invoices to customers and shipping
and delivery receipts. Borrower shall deliver to TBCC the originals of all
letters of credit, notes, and instruments in its favor and such endorsements or
assignments as TBCC may reasonable request and, upon the request of TBCC,
Borrower shall deliver to TBCC all certificated securities with respect to any
Investment Property, with all necessary endorsements, and obtain such account
control agreements with securities intermediaries and take such other action
with respect to any Investment Property, as TBCC shall request, in form and
substance satisfactory to TBCC. Upon request of TBCC Borrower additionally shall
obtain consents from any letter of credit issuers with respect to the assignment
to TBCC of any letter of credit proceeds.
(b) Records Collections. Borrower shall report all customer credits to TBCC,
-------------------
on the regular reports to TBCC in the form from time to time specified by TBCC.
Borrower shall notify TBCC of all returns and recoveries of merchandise and of
all all claims asserted with respect to merchandise, on its regular reports to
TBCC. Borrower shall not settle or adjust any dispute or claim, or grant any
discount, credit or allowance or accept any return of merchandise, except in the
ordinary course of its business, without TBCC's prior written consent.
(c) Representations. Borrower represents and warrants to TBCC that each
---------------
Receivable with respect to which Loans are requested by Borrower shall, on the
date each Loan is requested and made, represent an undisputed, bona fide,
existing, unconditional obligation of the account debtor created by the sale,
delivery, and acceptance of goods, the licensing of software or the rendition of
services, in the ordinary course of Borrower's business, and meet the Minimum
eligibility Requirements set forth in Section 9.1(n) below.
3.4. Inventory. Borrower shall maintain full, accurate and complete records
---------
respecting the Inventory describing the kind, type and quantity of the Inventory
and Borrower's cost therefor, withdrawals therefrom and additions thereto,
including a perpetual inventory for work in process and finished goods.
3.5. Equipment. Borrower shall at all times keep correct and accurate
---------
records itemizing and describing the location, kind, type, age and condition of
the Equipment, Borrower's cost therefor and accumulated depreciation thereof and
retirements, sales, or other dispositions thereof. Borrower shall keep all of
its Equipment in a satisfactory state of repair and satisfactory operating
condition in accordance with
-3-
<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
industry standards, ordinary wear and tear excepted. No Equipment shall be
annexed or affixed to or become part of any realty, unless the owner of the
realty has executed and delivered a Landlord Waiver in such form as TBCC shall
specify. Where Borrower is permitted to dispose of any Equipment under this
Agreement or by any consent thereto hereafter given by TBCC. Borrower shall do
so at arm's length, in good faith and by obtaining the maximum amount of
recovery practicable therefor and without impairing the operating integrity or
value of the remaining Equipment.
3.6. Investment Property. Borrower shall have the right to retain all
-------------------
Investment Property payments and distributions, unless and until a Default or an
Event of Default has occurred. If a Default or an Event of Default exists,
Borrower shall hold all payments on, and proceeds of, and distributions with
respect to, Investment Property in trust for TBCC, and Borrower shall deliver
all such payments, proceeds and distributions to TBCC, immediately upon receipt,
in their original form, duly endorsed, to be applied to the Obligations in such
order as TBCC shall determine. Upon the request of TBCC, any such distributions
and payments with respect to any Investment Property held in any securities
account shall be held and retained in such securities accounts as part of the
Collateral.
3.7. Further Assurances. Borrower will perform any and all steps that TBCC
------------------
may reasonably request to perfect TBCC's security interests in the Collateral,
including, without limitation, executing and filing financing and continuation
statements in form and substance satisfactory to TBCC. TBCC is hereby authorized
by Borrower to sign Borrower's name or file any financing statements or similar
documents or instruments covering the Collateral whether or not Borrower's
signature appears thereon. Borrower agrees, from time to time, at TBCC's
request, to file notices of Liens, financing statements, similar documents or
instruments, and amendments, renewals and continuations thereof, and cooperate
with TBCC, in connection with the continued perfection and protection of the
Collateral. If any Collateral is in the possession or control of any Person
other than a public warehouseman where the warehouse receipt is in the name of
or held by TBCC, Borrower shall notify such Person of TBCC's security interest
therein and, upon request, instruct such Person or Persons to hold all such
Collateral for the account of TBCC and subject to TBCC's instructions. If so
requested by TBCC, Borrower will deliver to TBCC warehouse receipts covering any
Collateral located in warehouses showing TBCC as the beneficiary thereof and
will also cause the warehouseman to execute and deliver such agreements as TBCC
may request relating to waivers of liens by such warehouseman and the release of
the Inventory to TBCC on its demand. Borrower shall defend the Collateral
against all claims and demands of all Persons.
3.8. Power of Attorney. Borrower hereby appoints and constitutes TBCC as
-----------------
Borrower's attorney-in-fact (i) to request at any time from account debtors
verification of information concerning Receivables and the amount owing thereon,
(ii) upon the occurrence and during the continuance of an Event of Default, to
convey any item of Collateral to any purchaser thereof, (iii) to give or sign
Borrower's name to any notices or statements necessary or desirable to create or
continue the Lien on any Collateral granted hereunder, (iv) to execute and
deliver to any securities intermediary or other Person any entitlement order,
account control agreement or other notice, document or instrument with respect
to any Investment Property, and (v) to make any payment or take any act
necessary or desirable to protect or preserve any Collateral. TBCC's authority
hereunder shall include, without limitation, the authority to execute and give
receipt for any certificate of ownership or any document, transfer title to any
item of Collateral and take any other actions arising from or incident to the
powers granted to TBCC under this Agreement. This power of attorney is coupled
with an interest and is irrevocable.
4. Representations and Warranties of Borrower. Borrower represents and
------------------------------------------
warrants as follows:
4.1. Organization, Good Standing and Qualification. Borrower (i) is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State set forth above, (ii) has the corporate power and authority to own
its properties and assets and to transact the businesses in which it is engaged
and (iii) is duly qualified, authorized to do business and in good standing in
each jurisdiction where it is engaged in business, except to the extent that the
failure to so qualify or be in good standing would not have a Material Adverse
Effect.
4.2. Locations of Offices, Records and Collateral. The address of the
--------------------------------------------
principal place of business and chief executive office of Borrower is, and the
books and records of Borrower and all of its chattel paper and records relating
to Collateral are maintained exclusively in the possession of Borrower at, the
address of Borrower specified in the heading of this Agreement. Borrower has
places of business, and Collateral is located, only at such address and at the
addresses set forth in the Schedule and at any additional locations reported to
TBCC as provided in Section 5.8(c) as to which TBCC has taken all necessary
action to perfect and protect its security interests in the Collateral at any
such locations.
4.3. Authority. Borrower has the requisite corporate power and authority to
---------
execute, deliver and perform its obligations under each of the Loan Documents.
All corporate action necessary for the execution, delivery and performance by
Borrower on the Loan Documents has been taken.
4.4. Enforceability. This Agreement is, and, when executed and delivered,
--------------
each other Loan Document will be, the legal, valid and binding obligation of
Borrower enforceable in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and general principles of equity.
4.5. No conflict. The execution, delivery and performance of each Loan
-----------
Document by Borrower does not and will not contravene (i) any of the Governing
Documents, (ii) any Requirement of Law or (iii) any Material Contract
-4-
<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
and will not result in the imposition of any Liens other than in favor of TBCC.
4.6. Consents and Filings. No consent, authorization or approval of, or
--------------------
filing with or other act by, any shareholders of Borrower or any Governmental
Authority or other Person is required in connection with the execution,
delivery, performance, validity or enforceability of this Agreement or any other
Loan Document, the consummation of the transactions contemplated hereby or
thereby or the continuing operations of Borrower following such consummation,
except (i) those that have been obtained or made, (ii) the filing of financing
statements under the Uniform Commercial Code and (iii) any necessary filings
with the U.S. Copyright Office and the U.S. Patent and Trademark Office.
4.7. Solvency. Borrower is Solvent and will be Solvent upon the completion
--------
of all transactions contemplated to occur on or before the date of this
Agreement (including, without limitation, the Loans to be made on the date of
this Agreement).
4.8. Financial Data. Borrower has provided to TBCC complete and accurate
--------------
Financial Statements, which have been prepared in accordance with GAPP
consistently applied throughout the periods involved and fairly present the
financial position and results of operations of Borrower for each of the periods
covered, subject, in the case of any quarterly financial statements, to normal
year-end adjustments and the absence of notes. Borrower has no Contingent
Obligation or liability for taxes, unrealized losses, unusual forward or long-
term commitments or long-term leases, which is not reflected in such Financial
Statements or the footnotes thereto. Since the last date covered by such
Financial Statements, there has been no sale, transfer or other disposition by
Borrower of any material part of its business or property and no purchase or
other acquisition of any business or property (including any capital stock of
any other Person) material in relation to the financial condition of Borrower at
said date. Since said date, (i) there has been no change, occurrence,
development or event which has had or could reasonably be expected to have a
Material Adverse Effect and (ii) none of the capital stock of Borrower has been
redeemed, retired, purchased or otherwise acquired for value by Borrower.
4.9. Accuracy and Completeness of Information. All data, reports and
----------------------------------------
information previously, now or hereafter furnished by or on behalf of Borrower
to TBCC or the Auditors are or will be true and accurate in all material
respects on the date as of which such data, reports and information are dated or
certified, and not incomplete by omitting to state any material fact necessary
to make such data, reports and information not materially misleading at such
time. There are no facts now known to Borrower which individually or in the
aggregate would reasonably be expected to have a Material Adverse Effect and
which have not been disclosed in writing to TBCC.
4.10. No Joint Ventures Partnerships or Subsidiaries. Borrower is not
----------------------------------------------
engaged in any joint venture or partnership with any other Person. Borrower has
no Subsidiaries.
4.11. Corporate and Trade Name. During the past five years, Borrower has not
------------------------
been known by or used any other corporate, trade or fictitious name except for
its name as set forth on the signature page of this Agreement and the other
names specified in the Schedule.
4.12. No Actual or Pending Material Modification of Business. There exists
------------------------------------------------------
no actual or, to the best of Borrower's knowledge after due inquiry, threatened
termination, cancellation or limitation of, or any modification or change in the
business relationship of Borrower with any customer or group of customers whose
purchases individually or in the aggregate are material to the operation of
Borrower's business or with any material supplier.
4.13. No Broker's or Finder's Fees. No broker or finder brought about this
----------------------------
Agreement or the Loans. No broker's or finder's fees or commissions will be
payable by Borrower to any Person in connection with the transactions
contemplated by this Agreement.
4.14. Taxes and Tax Returns. Borrower has properly completed and timely
---------------------
filed all income tax returns it is required to file. The information filed is
complete and accurate in all material respects. All deductions taken in such
income tax returns are appropriate and in accordance with applicable laws and
regulations, except deductions that may have been disallowed but are being
challenged in good faith and for which adequate reserves have been made in
accordance with GAAP. All taxes, assessments, fees and other governmental
charges for periods beginning prior to the date of this Agreement have been
timely paid (or, if not yet due, adequate reserves therefor have been
established in accordance with GAAP) and Borrower has no liability for taxes in
excess of the amounts so paid or reserves so established. No deficiencies for
taxes have been claimed, proposed or assessed by any taxing or other
Governmental Authority against Borrower and no notice of any tax Lien has been
filed. There are no pending or threatened audits, investigations or claims for
or relating to any liability for taxes and there are no matters under discussion
with any Governmental Authority which could result in an additional liability
for taxes. No extension of a statute of limitations relating to taxes,
assessments, fees or other governmental charges is in effect with respect to
Borrower. Borrower is not a party to and does not have any obligations under any
written tax sharing agreement or agreement regarding payments in lieu of taxes.
4.15. No Judgments or Litigation. Except as set forth in the Schedule, no
--------------------------
judgments, orders, writs or decrees are outstanding against Borrower, nor is
there now pending or, to the knowledge of Borrower after due inquiry, threatened
litigation, contested claim, investigation, arbitration, or governmental
proceeding by or against Borrower that (i) could individually or in the
aggregate be likely in the reasonable business judgment of TBCC to have a
Material Adverse Effect or (ii) purports to affect the legality, validity or
enforceability of this Agreement, any other Loan Document or the consummation of
the transactions contemplated hereby or thereby.
-5-
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TBCC LOAN AND SECURITY AGREEMENT
---------------------------------------------------------------------------
4.16. Investments: Contracts. Borrower (i) has not committed to make any
----------------------
Investment; (ii) is not a party to any indenture, agreement, contract,
instrument or lease or subject to any charter, by-law or other corporate
restriction or any injunction, order, restriction or decree, which would
materially and adversely affect its business, operations, assets or financial
condition; (iii) is not a party to any take or pay contract as to which it is
the purchaser; or (iv) has no material contingent or long-term liability,
including management contracts (excluding employment contracts of full-time
individual officers or employees), which could have a Material Adverse Effect.
4.17. No Defaults: Legal Compliance. Borrower is not in default under any
-----------------------------
term of any Material Contract or in violation of any Requirement of Law, nor is
Borrower subject to any investigation with respect to a claimed violation of any
Requirement of Law.
4.18. Rights in Collateral: Priority of Liens. All Collateral is owned or
---------------------------------------
leased by Borrower, free and clear of any and all Liens in favor of third
parties, other than Permitted Liens. The Liens granted to TBCC pursuant to the
Loan Documents constitute valid, enforceable and perfected first-priority Liens
on the Collateral, except for Permitted Liens.
4.19. Intellectual Property. Set forth in the written Representations and
---------------------
Warranties of Borrower previously delivered to TBCC is a complete and accurate
list of all patents, trademarks, trade names, service marks and copyrights
(registered and unregistered), and all applications therefor and licenses
thereof, of Borrower. Borrower owns or licenses all material patents,
trademarks, service-marks, logos, tradenames, trade secrets, know-how,
copyrights, or licenses and other rights with respect to any of the foregoing,
which are necessary or advisable for the operation of its business as presently
conducted or proposed to be conducted. To the best of its knowledge after due
inquiry, Borrower has not infringed any patent, trademark, service-mark,
tradename, copyright, license or other right owned by any other Person by the
sale or use of any product, process, method, substance, part or other material
presently contemplated to be sold or used, where such sale or use would
reasonably be expected to have a Material Adverse Effect and no claim or
litigation is pending, or to the best of Borrower's knowledge, threatened
against or affecting Borrower that contests its right to sell or use any such
product, process, method, substance, part or other material.
4.20. Labor Matters. There are no existing or threatened strikes, lockouts
-------------
or other disputes relating to any collective bargaining or similar agreement to
which Borrower is a party which would, individually or in the aggregate, be
reasonably likely to have a Material Adverse Effect.
4.21. Licenses and Permits. Borrower has obtained and holds in full force
--------------------
and effect, all franchises, licenses, leases, permits, certificates,
authorizations, qualifications, easements, rights of way and other rights and
approvals which are necessary or advisable for the operation of its business as
presently conducted and as proposed to be conducted, except where the failure to
possess any of the foregoing (individually or in the aggregate) would not have a
Material Adverse Effect.
4.22. Government Regulation. Borrower is not subject to regulation under the
---------------------
Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, the Investment Company Act of 1940, or any other
Requirement of Law that limits its ability to incur indebtedness or its ability
to consummate the transactions contemplated by this Agreement and the other Loan
Documents.
4.23. Business and Properties. The business of Borrower is not affected by
-----------------------
any fire, explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or of the public enemy or other
casualty (whether or not covered by insurance) that could reasonably be expected
to have a Material Adverse Effect.
4.24. Affiliate Transactions. Borrower is not a party to or bound by any
----------------------
agreement or arrangement (whether oral or written) to which any Affiliate of
Borrower is a party except (i) in the ordinary course of and pursuant to the
reasonable requirements of the business of Borrower and (ii) upon fair and
reasonable terms no less favorable to Borrower than it could obtain in a
comparable arm's-length transaction with an unaffiliated Person.
4.25. Survival of Representations. All representations made by Borrower in
---------------------------
this Agreement and in any other Loan Document executed and delivered by it in
connection herewith shall survive the execution and delivery hereof and thereof
and the closing of the transactions contemplated hereby and thereby.
5. AFFIRMATIVE COVENANTS OF THE BORROWER. Until termination of this Agreement
-------------------------------------
and payment and satisfaction of all Obligations:
5.1. Corporate Existence. Borrower shall (i) maintain its corporate
-------------------
existence, (ii) maintain in full force and effect all material licenses, bonds,
franchises, leases, trademarks, qualifications and authorizations to do
business, and all material patents, contracts and other rights necessary or
advisable to the profitable conduct of its business, and (iii) continue in, and
limit its operations to, the same lines of business as presently conducted by
it.
5.2. Maintenance of Property. Borrower shall keep all property useful and
-----------------------
necessary to its business in good working order and condition (ordinary wear and
tear excepted) in accordance with its past operating practices.
5.3. Affiliate Transactions. Borrower shall conduct transactions with any of
----------------------
its Affiliates on an arm's-length basis or other basis no less favorable to
Borrower and which are approved by the board of directors of Borrower.
5.4. Taxes. Borrower shall pay when due (i) all tax assessments, and other
-----
governmental charges and levies imposed against it or any of its property and
(ii) all lawful claims that, if unpaid, might by law become a Lien upon its
property; provided, however, that, unless such tax as-
-------- -------
-6-
<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
---------------------------------------------------------------------------
sessment, charge, levy or claim has become a Lien on any of the property of
Borrower, it need not be paid if it is being contested in good faith, by
appropriate proceedings diligently conducted and an adequate reserve or other
appropriate provision shall have been made therefor as required in accordance
with GAAP.
5.5. Requirements of Law. Borrower shall comply with all Requirements of Law
-------------------
applicable to it, including, without limitation, all applicable Federal, State,
local or foreign laws and regulations, including, without limitation, those
relating to environmental matters, employee matters, the Employee Retirement
Income Security Act of 1974, and the collection, payment and deposit of
employees' income, unemployment and social security taxes, provided that
--------
Borrower shall not be deemed in violation hereof if Borrower's failure to comply
with any of the foregoing would not require more than $50,000 to cure the same.
5.6. Insurance. Borrower shall maintain public liability insurance, business
---------
interruption insurance, third party property damage insurance and replacement
value insurance on its assets (including the Collateral) under such policies of
insurance, with such insurance companies, in such amounts and covering such
risks as are at all times satisfactory to TBCC in its commercially reasonable
judgment, all of which policies covering the Collateral shall name TBCC as an
additional insured and lender loss payee in case of loss, and contain other
provisions as TBCC may reasonably require to protect fully TBCC's interest in
the Collateral and any payments to be made under such policies.
5.7. Books and Records: Inspections. Borrower shall (i) maintain books and
------------------------------
records (including computer records) pertaining to the Collateral in such
detail, form and scope as is consistent with good business practice and (ii)
provide TBCC and its agents access to the premises of Borrower at any time and
from time to time, during normal business hours and upon reasonable notice under
the circumstances, and at any time on and after the occurrence of a Default or
Event of Default, for the purposes of (A) inspecting and verifying the
Collateral, (B) inspecting and copying (at Borrower's expense) any and all
records pertaining thereto, and (C) discussing the affairs, finances and
business of Borrower with any officer, employee or director of Borrower or with
the Auditors. Borrower shall reimburse TBCC for the reasonable travel and
related expenses of TBCC's employees or, at TBCC's option, of such outside
accountants or examiners as may be retained by TBCC to verify or inspect
Collateral, records or documents of Borrower on a regular basis or for a special
inspection if TBCC deems the same appropriate. If TBCC's own employees are used,
Borrower shall also pay therefor $600 per person per day (or such other amount
as shall represent TBCC's then current standard charge for the same), or, if
outside examiners or accountants are used, Borrower shall also pay TBCC such sum
as TBCC may be obligated to pay as fees therefor.
5.8. Notification Requirements. Borrower shall give TBCC the following
-------------------------
notices and other documents:
(a) Notice of Defaults. Borrower shall give TBCC written notice of any
------------------
Default or Event of Default within two Business Days after becoming aware of the
same.
(b) Proceedings or Adverse Changes. Borrower shall give TBCC written notice
------------------------------
of any of the following, promptly, and in any event within five Business Days
after Borrower becomes aware of any of the following: (i) any proceeding being
instituted or threatened by or against it in any federal, state, local or
foreign court or before any commission or other regulatory body involving a sum,
together with the sum involved in all other similar proceedings, in excess of
$50,000 in the aggregate, (ii) any order, judgment or decree being entered
against Borrower or any of its properties or assets involving a sum, together
with the sum of all other orders, judgments or decrees, in excess of $50,000 in
the aggregate, and (iii) any actual or prospective change, development or event
which has had or could reasonably be expected to have a Material Adverse Effect.
(c) Change of Name or Chief Executive Office: Opening Additional Places of
----------------------------------------------------------------------
Business. Borrower shall give TBCC at least 30 days prior written notice of any
- --------
change of Borrower's corporate name or its chief executive office or of the
opening of any additional place of business.
(d) Casualty Loss. Borrower shall (i) provide written notice to TBCC,
-------------
within ten Business Days, of any material damage to, the destruction of or any
other material loss to any asset or property owned or used by Borrower other
than any such asset or property with a net book value (individually or in the
aggregate) less than $10,000 or any condemnation, confiscation or other taking,
in whole or in part, or any event that otherwise diminishes so as to render
impracticable or unreasonable the use of such asset or property owned or used by
Borrower together with the amount of the damage, destruction, loss or diminution
in value and (ii) diligently file and prosecute its claim or claims for any
award or payment in connection with any of the foregoing.
(e) Intellectual Property. Borrower shall promptly give TBCC written notice
---------------------
of any copyright registration made by it, any rights Borrower may obtain to any
copyrightable works, new trademarks or any new patentable inventions, and of any
renewal or extension of any trademark registration, or if it shall otherwise
become entitled to the benefit of any patent or patent application or trademark
or trademark application.
(f) Deposit Accounts and Security Accounts. Borrower shall promptly give
--------------------------------------
TBCC written notice of the opening of any new bank account or other deposit
account, and any new securities account.
5.9. Qualify to Transact Business. Borrower shall qualify to transact
----------------------------
business as a foreign corporation in each jurisdiction where the nature or
extent of its business or the ownership of its property requires it to be so
qualified or authorized and where failure to qualify or be authorized would have
a Material Adverse Effect.
5.10. Financial Reporting. Borrower shall timely deliver to TBCC the
-------------------
following financial information: the
-7-
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TBCC LOAN AND SECURITY AGREEMENT
---------------------------------------------------------------------------
information set forth in the Schedule, and, when requested by TBCC in its good-
faith judgment, any further information respecting Borrower or any Collateral.
Borrower authorizes TBCC to communicate directly with its officers, employees
and Auditors and to examine and make abstracts from its books and records.
Borrower authorizes its Auditors to disclose to TBCC any and all financial
statements, work papers and other information of any kind that they may have
with respect to Borrower and its business and financial and other affairs.
Borrower shall deliver a letter addressed to the Auditors requesting them to
comply with the provisions of this paragraph when requested by TBCC.
5.11. Payment of Liabilities. Borrower shall pay and discharge, in the
----------------------
ordinary course of business, all Indebtedness, except where the same may be
contested in good faith by appropriate proceedings and adequate reserves with
respect thereto have been provided on the books and records of Borrower in
accordance with GAAP.
5.12. Patents, Trademarks, Etc. Borrower shall do and cause to be done all
------------------------
things necessary to preserve, maintain and keep in full force and effect all of
its registrations of trademarks, service marks and other marks, trade names and
other trade rights, patents, copyrights and other intellectual property in
accordance with prudent business practices.
5.13. Proceeds of Collateral. Without limiting any of the other terms of
----------------------
this Agreement, and without implying any consent to any sale or other transfer
of Collateral in violation of any provision of this Agreement, Borrower shall
deliver to TBCC all proceeds of any sale or other transfer or disposition of any
Collateral, immediately upon receipt of the same and in the same form as
received, with any necessary endorsements, and Borrower will not commingle any
such proceeds with any of its other funds or property, but will segregate them
from the other assets of Borrower and will hold them in trust and for the
account and as the property of TBCC.
5.14. Solvency. Borrower shall be Solvent at all times.
--------
6. NEGATIVE COVENANTS. Until termination of this Agreement and payment and
------------------
satisfaction of all Obligations
6.1. Contingent Obligations. Borrower will not directly or indirectly,
----------------------
incur, assume, or suffer to exist any Contingent Obligation, excluding
indemnities given in connection with this Agreement or the other Loan Documents
in favor of TBCC or in connection with the sale of Inventory or other asset
dispositions permitted hereunder.
6.2. Corporate Changes. Borrower will not, directly or indirectly, merge
-----------------
or consolidate with any Person, or liquidate or dissolve (or suffer any
liquidation or dissolution).
6.3. Change in Nature of Business. Borrower will not at any time make any
----------------------------
material change in the lines of its business as carried on at the date of this
Agreement or enter into any new line of business.
6.4. Sales of Assets. Borrower will not, directly or indirectly, in any
---------------
fiscal year, sell, transfer or otherwise dispose of any assets, or grant any
option or other right to purchase or otherwise acquire any assets other than (i)
Equipment with an aggregate value of less the $25,000, (ii) sales of Inventory
in the ordinary course of business and (iii) licenses or sublicenses of
intellectual property in the ordinary course of Borrower's business.
6.5. Cancellation of Debt. Borrower will not cancel any claim or debt owed
--------------------
to it, except in the ordinary course of business.
6.6 Loans to Other Persons. Borrower will not at any time make loans or
----------------------
advance any credit (except to trade debtors in the ordinary course of business)
to any Person in excess of * in the aggregate at any time for all such
loans**
* $50,000
** UNLESS CONSENTED TO IN WRITING BY lENDER, WHICH CONSENT SHALL NOT BE
UNREASONABLY BE WITHHELD.
6.7. Liens. Borrower will not, directly or indirectly, at any time create,
-----
incur, assume or suffer to exist any Lien on or with respect to any of the
Collateral, other than: Liens created hereunder and by any other Loan Document;
and Permitted Liens.
6.8 Dividends Stock Redemptions. Borrower will not, directly or
---------------------------
indirectly, pay any dividends or distributions on, purchase, redeem or retire
any shares of any class of its capital stock or any warrants, options or rights
to purchase any such capital stock, whether now or hereafter outstanding
(Stock), or make any payment on account of or set apart assets for a sinking or
other analogous fund for, the purchase, redemption, defeasance, retirement or
other acquisition of its Stock, or make any other distribution in respect
thereof, either directly or indirectly, whether in cash or property or in
obligations of Borrower, except for dividends paid solely in stock of the
Borrower*.
* OTHER THAN THE FOLLOWING: (1) REPURCHASE OF SHARES FROM EMPLOYEES OF
BORROWER IN THE ORDINARY COURSE OF BUSINESS; (2) THE RETIREMENT OF THE CLASSES
OF PREFERRED STOCK OF THE BORROWER, WHICH SHALL CONSTITUTE A NON-CASH
TRANSACTION; AND (3) AS THE LENDER OTHERWISE CONSENTS TO FROM TIME TO TIME
6.9. Investments in Other Persons. Borrower will not, directly or
----------------------------
indirectly, at any time make or hold any Investment in any Person (whether in
cash, securities or other property of any kind) other than*
* AS SET FORTH IN THE WRITTEN INVESTMENT POLICY OF THE COMPANY AS PROVIDED TO
THE LENDER ON OR PRIOR TO THE DATE HEREOF
6.10 Partnerships; Subsidiaries; Joint Ventures; Management Contracts.
----------------------------------------------------------------
Borrower will not at any time create any direct or indirect Subsidiary, enter
into any joint
-8-
<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
venture or similar arrangement or become a partner in any general or limited
partnership or enter into any management contract (other than an employment
contract for the employment of an officer or employee entered into in the
regular course of Borrower's business) permitting third party management rights
with respect to Borrower's business.*
* , OTHER THAN AS CONSENTED TO BY THE LENDER, WHICH CONSENT SHALL NOT BE
UNREASONABLY WITHHELD.
6.11. Fiscal Year. Borrower will not change its fiscal year.
-----------
6.12. Accounting Changes. Borrower will not at any time make or permit any
------------------
change in accounting policies or reporting practices, except as required by
GAAP.
6.13. Broker's or Finder's Fees. Borrower will not pay or incur any broker's
-------------------------
or finder's fees in connection with this Agreement or the transactions
contemplated hereby.
6.14. Unusual Terms of Sale. Borrower will not sell goods or products on
---------------------
extended terms, consignment terms, on a progress billing or bill and hold basis,
or on any other unusual terms.
6.15. Amendments or Material Contracts. Borrower will not amend, modify,
--------------------------------
cancel or terminate, or permit the amendment, modification, cancellation or
termination of, any Material Contract, if such amendment, modification,
cancellation or termination could have a Material Adverse Effect.
6.16. Sale and Leaseback Obligations. Borrower will not at any time create,
------------------------------
incur or assume any obligations as lessee for the rental of real or personal
property in connection with any sale and leaseback transaction.
6.17. Acquisition of Stock or Assets. Borrower will not acquire or commit or
------------------------------
agree to acquire all or any stock, securities or assets of any other Person
other than Inventory and Equipment acquired in the ordinary course of business*.
* , EXCEPT WITH THE WRITTEN CONSENT OF THE LENDER.
7. EVENTS OF DEFAULT.
-----------------
7.1. Events of Default. The occurrence of any of the following events shall
-----------------
constitute an Event of Default:
(a) Borrower shall fail to pay any principal, interest, fees, expenses or
other Obligations when payable, whether at stated maturity, by acceleration, or
otherwise; or
(b) Borrower shall default in the performance or observance of any
agreement, covenant, condition, provision or term contained in Section 1.1, 1.2,
1.4, 3.3, 5.7, 5.13, 6 (and its Sections and subsections), or 8.1 of this
Agreement, or Borrower shall fail to perform any nonmonetary Obligation which by
its nature cannot be cured, or
(c) Borrower shall default in the performance or observance of any other
agreement, covenant, condition, provision or term of this Agreement (other than
those referred to in Section 7.1(a) above or Section 7.1(b) above) or any other
Loan Document, and such failure continues uncured for a period of * Business
Days after the date it occurs; or
* TEN DAYS
(d) Borrower or any Guarantor shall dissolve, wind up or otherwise cease to
conduct its business; or
(e) Borrower or any Guarantor shall become the subject of (i) an Insolvency
Event except as set forth in clause (e) of the definition of Insolvency Event or
(ii) an Insolvency Event as set forth in clause (e) of the definition of
Insolvency Event that is not dismissed within sixty days; or
(f) any representation or warranty made by or on behalf of Borrower or any
Guarantor to TBCC, under this Agreement or otherwise, shall be incorrect or
misleading in any material respect when made or deemed made; or
(g) A change in the ownership or control of more than 20% of the voting
stock of the Borrower compared to such ownership on the date of this Agreement*
*EXCEPT AS THE lENDER MAY OTHERWISE AGREE TO FROM TIME TO TIME AND EXCEPT AS
OCCURS UPON THE CONSUMMATION INITIAL PUBLIC OFFERING OF THE COMMON STOCK OF THE
BORROWER
(h) any judgment or order for the payment of money shall be rendered
against Borrower and shall not be stayed, vacated, bonded or discharged within
thirty days; or
(i) any defined "Event of Default" shall occur under any other Loan
Document; or Borrower or any Guarantor shall deny or disaffirm its obligations
under any of the Loan Documents or any Liens granted in connection therewith or
shall otherwise challenge any of its obligations under any of the Loan
Documents, or any Liens granted in any of the Collateral shall be determined to
be void, voidable or invalid, are subordinated or are not given the priority
contemplated by this Agreement; or
(j) any Loan Document shall for any reason cease to create a valid and
perfected Lien on the Collateral purported to be covered thereby, of first
priority (except for Permitted Liens); or
(k) the Auditors for Borrower shall deliver a Qualified opinion on any
Financial Statement, or
(l) Borrower or any Guarantor (i) shall fail to pay any Indebtedness owing
to TBCC under any other agreement with TBCC or note or instrument in favor of
TBCC, when due (whether at scheduled maturity or by required prepayment,
acceleration, demand or otherwise), or (ii) shall otherwise be in breach of or
default in any of its obligations under any such agreement, note or instrument
with respect to any such Indebtedness; or
(m) Borrower or any Guarantor (i) shall fail to pay any Indebtedness in
excess of $50,000 owing to any Person other than TBCC or any interest or premium
thereon, when due (whether at scheduled maturity or by required prepayment,
acceleration, demand or otherwise), or (ii) shall
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otherwise be in breach or default in any of its obligations under any agreement
with respect to any such Indebtedness, if the effect of such breach, default or
failure to pay is to cause such Indebtedness to become due or redeemed or permit
the holder or holders of such Indebtedness (or a trustee or agent on behalf of
such holder or holders) to declare such Indebtedness due or require such
Indebtedness to be redeemed prior to its stated maturity, or
(n) the occurrence of any event or condition that, in TBCC's judgment,
could reasonably be expected to have a Material Adverse Effect.
TBCC may cease making any Loans hereunder during any of the above cure periods,
and thereafter if any Event of Default has occurred and is continuing.
7.2 Remedies. Upon the occurrence and during the continuance of an Event of
--------
Default, TBCC shall have all rights and remedies under applicable law and the
Loan Documents, and TBCC may do any or all of the following.
(a) Declare all Obligations to be immediately due and payable (except with
respect to any Event of Default with respect to Borrower set forth in Section
7.1(e), in which case all Obligations shall automatically become immediately due
and payable) without presentment, demand, protest or any other action or
obligation of TBCC;
(b) Cease making any Loans or other extensions of credit to Borrower of any
kind;
(c) Take possession of all documents, instruments, files and records
(including the copying of any computer records) relating to the Receivables or
other Collateral and use (at the expense of Borrower) such supplies or space of
Borrower at Borrower's places of business necessary to administer and collect
the Receivables and other Collateral;
(d) Accelerate or extend the time of payment, compromise, issue credits or
bring suit on the Receivables and other Collateral (in the name of Borrower or
TBCC) and otherwise administer and collect the Receivables and other Collateral;
(e) Collect, receive, dispose of and realize upon any Investment Property,
including withdrawal of any and all funds from any securities accounts;
(f) Sell, assign and deliver the Receivables and other Collateral, with or
without advertisement, at public or private sale, for cash, on credit or
otherwise, subject to applicable law; and
(g) Foreclose on the security interests created pursuant to the Loan
Documents by any available procedure, take possession of any or all of the
Collateral, with or without judicial process and enter any premises where any
Collateral may be located for the purpose of taking possession of or removing
the same.
(h) TBCC may bid or become a purchaser at any sale, free from any right of
redemption, which right is expressly waived by Borrower, if permitted under
applicable law. If notice of intended disposition of any Collateral is required
by law, it is agreed that ten days' notice shall constitute reasonable
notification. Borrower will assemble the Collateral and make it available at
such locations as TBCC may specify, whether at the premises of Borrower or
elsewhere, and will make available to TBCC the premises and facilities of
Borrower for the purpose of TBCC's taking possession of or removing the
Collateral or putting the Collateral in salable form.
(i) Borrower recognizes that TBCC may be unable to make a public sale of
any or all of the Investment Property, by reasons of prohibitions contained in
applicable securities laws or otherwise, and expressly agrees that a private
sale to a restricted group of purchasers for investment and not with a view to
any distribution thereof shall be considered a commercially reasonable sale.
7.3. Receivables. Upon the occurrence and during the continuance of an Event
-----------
of Default, or at any time that TBCC believes in good faith that fraud has
occurred or that Borrower has failed to deliver the proceeds of Receivables or
other Collateral to TBCC as required by this Agreement or any other Loan
Document, TBCC may (i) settle or adjust disputes or claims directly with account
debtors for amounts and upon terms which it considers advisable, and (ii) notify
account debtors on the Receivables and other Collateral that the Receivables and
Collateral have been assigned to TBCC, and that payments in respect thereof
shall be made directly to TBCC. If an Event of Default has occurred and is
continuing or TBCC reasonably believes in good faith that fraud has occurred, or
that Borrower has failed to deliver the proceeds of Receivables or other
Collateral to TBCC as required by this Agreement or any other Loan Document,
Borrower hereby irrevocably authorizes and appoints TBCC, or any Person TBCC may
designate, as its attorney-in-fact, at Borrower's sole cost and expense, to
exercise, all of the following powers, which are coupled with an interest and
are irrevocable, until all of the Obligations have been indefeasibly paid and
satisfied in full in cash: (A) to receive, take, endorse, sign, assign and
deliver, all in the name of TBCC or Borrower, any and all checks, notes, drafts,
and other documents or instruments relating to the Collateral; (B) to receive,
open and dispose of all mail addressed to Borrower and to notify postal
authorities to change the address for delivery thereof to such address as TBCC
may designate; and (C) to take or bring, in the name of TBCC or Borrower, all
steps, actions, suits or proceedings deemed by TBCC necessary or desirable to
enforce or effect collection of Receivables and other Collateral or file and
sign Borrower's name on a proof of claim in bankruptcy or similar document
against any obligor of Borrower.
7.4. Right of Setoff. In addition to all rights of offset that TBCC may have
---------------
under applicable law, upon the occurrence and during the continuance of any
Event of Default, and whether or not TBCC has made any demand or the
Obligations of Borrower have matured, TBCC shall have the right to appropriate
and apply to the payment of the Obligations of Borrower all deposits and other
obligations then or thereafter owing by TBCC to or for the credit or the account
of Borrower. In the event that TBCC exercises any of its rights under this
Section, TBCC shall
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TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
provide notice to Borrower of such exercise, provided that the failure to give
such notice shall not affect the validity of the exercise of such rights.
7.5. License for Use of Software and Other Intellectual Property. After the
-----------------------------------------------------------
occurrence and during the continuance of an Event of Default, unless expressly
prohibited by any licensor thereof, TBCC is hereby granted a license to use all
computer software programs, data bases, processes, trademarks, tradenames and
materials used by Borrower in connection with its businesses or in connection
with the Collateral.
7.6. No Marshalling; Deficiencies; Remedies Cumulative. The net cash proceeds
-------------------------------------------------
resulting from TBCC's exercise of any of its rights with respect to Collateral,
including any and all Collections (after deducting all of TBCC's reasonable
expenses related thereto), shall be applied by TBCC to such of the Obligations
in such order as TBCC shall elect in its sole and absolute discretion, whether
due or to become due. Borrower shall remain liable to TBCC for any deficiencies
and TBCC shall remit to Borrower or its successor or assign, any surplus
resulting therefrom. The remedies specified in this Agreement are cumulative,
may be exercised in such order and with respect to such Collateral as TBCC may
deem desirable and are not intended to be exclusive, and the full or partial
exercise of any of them shall not preclude the full or partial exercise of any
other available remedy under this Agreement, under any other Loan Document, at
equity or at law.
7.7. Waivers. Borrower hereby waives any bonds, security or sureties required
-------
by any statute, rule or any other law as an incident to any taking of possession
by TBCC of any Collateral. Borrower also waives any damages (direct,
consequential or otherwise) occasioned by the enforcement of TBCC's rights under
this Agreement or any other Loan Document including the taking of possession of
any Collateral or the giving of notice to any account debtor or the collection
of any Receivable or other Collateral (other than damages that are the result of
acts or omissions constituting gross negligence or willful misconduct of TBCC).
These waivers and all other waivers provided for in this Agreement and the other
Loan Documents have been negotiated by the parties and Borrower acknowledges
that it has been represented by counsel of its own choice and has consulted such
counsel with respect to its rights hereunder.
7.8. Right to Make Payments. In the event that Borrower shall fail to purchase
----------------------
or maintain insurance required hereunder, or to pay any tax, assessment,
government charge or levy, except as the same may be otherwise permitted
hereunder, or in the event that any Lien prohibited hereby shall not be paid in
full or discharged, or in the event that Borrower shall fail to perform or
comply with any other covenant, promise or obligation to TBCC hereunder or
under any other Loan Document, TBCC may (but shall not be required to) perform,
pay, satisfy, discharge or bond the same for the account of Borrower, and all
amounts so paid by TBCC shall be treated as a Loan hereunder to Borrower and
shall constitute part of the Obligations.
8. ASSIGNMENTS AND PARTICIPATIONS.
------------------------------
8.1. Assignments. Borrower shall not assign this Agreement or any right or
-----------
obligation hereunder without the prior written consent of TBCC. TBCC may assign
(without the consent of Borrower) to one or more Persons all or a portion of its
rights and obligations under this Agreement and the other Loan Documents.
8.2. Participations. TBCC may sell participations in or to all or a portion of
--------------
its rights and obligations under this Agreement (including, without limitation,
all or a portion of the Loans); provided, however, that TBCC's obligations under
this Agreement shall remain unchanged.
8.3. Disclosure. TBCC may, in connection with any permitted assignment or
----------
participation or proposed assignment or participation pursuant to this
Agreement, disclose to the assignee or participant or proposed assignee or
participant any information relating to Borrower furnished to TBCC by or on
behalf of Borrower.
9. DEFINITIONS.
-----------
9.1. General Definitions. As used herein, the following terms shall have the
-------------------
meanings herein specified (to be equally applicable to both the singular and
plural forms of the terms defined):
(a) Affiliate means as to any Person, any other Person who directly or
---------
indirectly controls, is under common control with, is controlled by or is a
director or officer of such Person. As used in this definition, "control"
(including its correlative meanings, "controlled by" and "under common control
with") means possession, directly or indirectly, of the power to direct or cause
the direction of management or policies (whether through ownership of voting
securities or partnership or other ownership interests, by contract or
otherwise), provided that, in any event, any Person who owns directly or
indirectly twenty percent (20%) or more of the securities having ordinary voting
power for the election of the members of the board of directors or other
governing body of a corporation or twenty percent (20%) or more of the
partnership or other ownership interests of any other Person (other than as a
limited partner of such other Person) will be deemed to control such
corporation, partnership or other Person.
(b) Agreement means this Loan and Security Agreement, as amended,
---------
supplemented or otherwise modified from time to time.
(c) Auditors means a nationally recognized firm of independent public
--------
accountants selected by Borrower and reasonably satisfactory to TBCC.
(d) Bankruptcy Code means Title 11 of the United States Code entitled
---------------
"Bankruptcy," as that title may be amended from time to time, or any successor
statute .
(e) Borrowing means a borrowing of Loans.
---------
(f) Business Day means any day other than a Saturday, Sunday or any other
------------
day on which commercial banks in Chicago, Illinois are required or permitted by
law to close.
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TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
(g) Cash Equivalents means (i) securities issued, guaranteed or insured
----------------
by the United States or any of its agencies with maturities of not more than one
year from the date acquired; (ii) certificates of deposit with maturities of not
more than one year from the date acquired, issued by any U.S. federal or state
chartered commercial bank of recognized standing which has capital and
unimpaired surplus in excess of $100,000,000; (iii) investments in money market
funds registered under the Investment Company Act of 1940; and (iv) other
instruments, commercial paper or investments acceptable to TBCC in its sole
discretion.
(h) Collateral means Receivables, Investment Property, Inventory,
----------
Equipment, and Other Property, and all additions and accessions thereto and
substitutions and replacements therefor and improvements thereon, and all
proceeds (whether cash or other property) and products thereof, including,
without limitation, all proceeds of insurance covering the same and all tort
claims in connection therewith, and all records, files, computer programs and
files, data and writings relating to the foregoing, and all equipment containing
the foregoing.
(i) Collections means all cash, funds, checks, notes, instruments, any
-----------
other form of remittance tendered by account debtors in respect of payment of
Receivables and any other payments received by Borrower with respect to any
other Collateral.
(j) Compliance Certificate means a certificate as to compliance with the
----------------------
Obligations, on TBCC's standard form (in effect from time to time).
(k) Contingent Obligations means any direct, indirect, contingent or non-
----------------------
contingent guaranty or obligation for the Indebtedness of another Person, except
endorsements in the ordinary course of business.
(l) Default means any of the events specified in Section 7.1, whether or
-------
not any of the requirements for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.
(m) Eligible Inventory means Inventory of Borrower which TBCC in its sole
------------------
discretion deems eligible for borrowing, based on such considerations as TBCC in
its sole discretion may deem appropriate from time to time and less any such
reserves as TBCC, in its sole discretion, may require. Without limiting the fact
that the determination of which Inventory is eligible for borrowing is a matter
of TBCC's sole discretion, the following are the minimum requirements for
Inventory to be Eligible Inventory. (i) the Inventory must consist of finished
goods, in good, new and salable condition which is not perishable, not obsolete
or unmerchantable, and is not comprised of raw materials, work in process,
packaging materials or supplies; (ii) the Inventory must meet all applicable
governmental standards; (iii) the Inventory must have been manufactured in
compliance with the Fair Labor Standards Act; (iv) the Inventory must conform in
all respects to the warranties and representations set forth in this Agreement;
(v) the Inventory must at all times be subject to TBCC's duly perfected, first
priority security interest; and (vi) the Inventory must be in Borrower's
exclusive possession, separately identifiable from goods of others, and situated
at Borrower's chief executive office or at one of the other Borrower locations
set forth on the Schedule. The value of Eligible Inventory shall be computed at
the lower of cost (computed on a "first in, first out" basis) or wholesale
market value.
(n) Eligible Receivables means and includes only those Receivables which
--------------------
TBCC in its sole discretion deems eligible for borrowing, based on such
considerations as TBCC in its sole discretion may deem appropriate from time to
time and less any such reserves as TBCC, in its sole discretion, may require.
Without limiting the fact that the determination of which Receivables are
eligible for borrowing is a matter of TBCC's sole discretion, the following (the
"Minimum Eligibility Requirements") are the minimum requirements for a
--------------------------------
Receivable to be an Eligible Receivable: (i) the Receivable must not be
outstanding for more than 90 days from its invoice date, (ii) the Receivable
must not represent progress billings, or be due under a fulfillment or
requirements contract with the account debtor, (iii) the Receivable must not be
subject to any contingencies (including Receivables arising from sales on
consignment, guaranteed sale or other terms pursuant to which payment by the
account debtor may be conditional) (iv) the Receivable must not be owing from an
account debtor with whom the Borrower has any dispute (whether or not relating
to the particular Receivable), (v) the Receivable must not be owing from an
Affiliate of Borrower, (vi) the Receivable must not be owing from an account
debtor which is subject to any insolvency or bankruptcy proceeding, or whose
financial condition is not acceptable to TBCC, or which, fails or goes out of a
material portion of its business, (vii) the Receivable must not be owing from
the United States or any department, agency or instrumentality thereof (unless
there has been compliance, to TBCC's satisfaction, with the United States
Assignment of Claims Act), * (ix) the Receivable must not be owing from an
account debtor to whom Borrower is or may be liable for goods purchased from
such account debtor or otherwise, (x) the Receivable must not violate any
representation or warranty set forth in this Agreement, and (xi) the Receivable
must not be one in which TBCC does not have a first priority, valid, perfected
Lien. Without limiting the generality of the foregoing, Borrower must be in
compliance with all requirements of the Loan Documents regarding registration
with the U.S. Copyright Office of any copyrightable software in order for any
Receivable arising from any licensing of such software to constitute an Eligible
Receivable hereunder. Receivables owing from one account debtor will not be
deemed Eligible Receivables to the extent they exceed 25% of the total eligible
Receivables outstanding. In addition, if more than 50% of the Receivables owing
from an account debtor are outstanding more than 90 days from their invoice date
(without regard to unapplied credits) or are otherwise not
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<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
eligible Receivables, then all Receivables owing from that account debtor will
be deemed ineligible for borrowing. TBCC may, from time to time, in its sole
discretion, revise the Minimum Eligibility Requirements, upon written notice to
the Borrower.
(o) Equipment means all machinery, equipment, furniture, fixtures,
---------
conveyors, tools, materials, storage and handling equipment, hydraulic presses,
cutting equipment, computer equipment and hardware, including central processing
units, terminals, drives, memory units, printers, keyboards, screens,
peripherals and input our output devices, molds, dies, stamps, vehicles, and
other equipment of every kind and nature and wherever situated now or hereafter
owned by Borrower or in which Borrower may have any interest as lessee or
otherwise (to the extent of such interest), together with all additions and
accessions thereto, all replacements and all accessories and parts therefor, all
manuals, blueprints, know-how, warranties and records in connection therewith,
all rights against suppliers, warrantors, manufacturers, sellers or others in
connection therewith, and together with all substitutes for any of the
foregoing.
(p) Event of Default means the occurrence of any of the events specified
----------------
in Section 7.1.
(q) Financial Statements means the balance sheets, profit and loss
--------------------
statements, statements of cash flow, and statements of changes in intercompany
accounts, if any, for the period specified, prepared in accordance with GAAP and
consistent with prior practices.
(r) GAAP means generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board that are applicable to the
circumstances as of the date of determination. Whenever any accounting term is
used herein which is not otherwise defined, it shall be interpreted in
accordance with GAAP.
(s) Good Faith means "good faith" as defined in the Uniform Commercial
----------
Code, from time to time in effect in the State of Illinois.
(t) Governing Documents means the articles or certificate of
-------------------
incorporation and by-laws of Borrower.
(u) Governmental Authority means any nation or government, any state or
----------------------
other political subdivisions thereof or any entity exercising executive,
legislative, judicial, regulatory or administrative functions thereof or
pertaining thereto.
(v) Guarantor means any present or future guarantor of any or all of the
---------
Obligations.
(w) Indebtedness means, with respect to any Person, as of the date of
------------
determination any indebtedness, liability or obligation of such Person
(including without limitation obligations under capital leases and Contingent
Obligations).
(x) Insolvency Event means, with respect to any Person, the occurrence of
----------------
any of the following: (a) such Person shall be adjudicated insolvent or
bankrupt, or shall generally fail to pay or admit in writing its inability to
pay its debts as they become due, (b) such Person shall seek dissolution or
reorganization or the appointment of a receiver, trustee, custodian or
liquidator for it or a substantial portion of its property, assets or business
or to effect a plan or other arrangement with its creditors, (c) such Person
shall make a general assignment for the benefit of its creditors, or consent to
or acquiesce in the appointment of a receiver, trustee, custodian or liquidator
for a substantial portion of its property, assets or business, (d) such Person
shall file a voluntary petition under any bankruptcy, insolvency or similar law
or take any corporate or similar act in furtherance thereof, or (e) such Person,
or a substantial portion of its property, assets or business shall become the
subject of an involuntary proceeding or petition for its dissolution,
reorganization, and such proceeding is not dismissed or stayed within sixty
days, or the appointment of a receiver, trustee, custodian or liquidator, and
such receiver is not dismissed within sixty days.
(y) Inventory means all present and future goods intended for sale, lease
---------
or other disposition by Borrower including, without limitation, all raw
materials, work in process, finished goods and other retail inventory, goods in
the possession of outside processors or other third parties, goods consigned to
Borrower to the extent of its interest therein as consignee, materials and
supplies of any kind, nature or description which are or might be used in
connection with the manufacture, packing, shipping, advertising, selling or
finishing of any such goods, and all documents of title or documents
representing the same.
(z) Investment in any Person means, as of the date of determination
----------
thereof, any payment or contribution, or commitment to make a payment or
contribution, by any Person, including, without limitation, property contributed
or committed to be contributed by any Person, on its account for or in
connection with its acquisition of any stock, bonds, notes, debentures,
partnership or other ownership interest or any other security of the Person in
whom such Investment is made or any evidence of indebtedness by reason of a
loan, advance, extension of credit, guaranty or other similar obligation for any
debt, liability or indebtedness of such Person in whom the Investment is made.
(aa) Investment Property means any and all investment property of
-------------------
Borrower, including all securities, whether certificated or uncertificated,
security entitlements, securities accounts, commodity contracts and commodity
accounts, and all financial assets held in any securities account or otherwise,
wherever located, and whether now existing or hereafter acquired or arising.
(bb) Lien means any lien, claim, charge, pledge, security interest,
----
assignment, hypothecation, deed of trust, mortgage, lease, conditional sale,
retention of title or other preferential arrangement having substantially the
same economic effect as any of the foregoing, whether voluntary or imposed by
law.
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TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
(cc) Loan Account has the meaning specified in Section 1.3.
------------
(dd) Loan Documents means this Agreement and all present and future
--------------
documents and instruments delivered or to be delivered by Borrower or any of its
Affiliates or any Guarantor under, in connection with or relating to this
Agreement, as each of the same may be amended, supplemented or otherwise
modified from time to time.
(ee) Loans means the loans and financial accommodations made by TBCC
-----
hereunder.
(ff) Material Adverse Effect means (i) a material adverse effect on the
-----------------------
business, prospects, operations, results of operations, assets, liabilities or
condition (financial or otherwise) of Borrower, (ii) the impairment of
Borrower's ability to perform its obligations under the Loan Documents to which
it is a party or of TBCC to enforce the Obligations or realize upon the
Collateral or (iii) a material adverse effect on the value of the Collateral or
the amount which TBCC would be likely to receive (after giving consideration to
delays in payment and costs of enforcement) in the liquidation of the
Collateral.
(gg) Material Contract means any contract or other arrangement to which
-----------------
Borrower is a party (other than the Loan Documents) for which breach,
nonperformance, cancellation or failure to renew could have a Material Adverse
Effect.
(hh) Obligations means and includes all loans (including the Loans),
-----------
advances, debts, liabilities, obligations, covenants and duties owing by
Borrower to TBCC of any kind or nature, present or future, whether or not
evidenced by any note, guaranty or other instrument, which may arise under, out
of, or in connection with, this Agreement, any other Loan Document or any other
agreement executed in connection herewith or therewith, whether or not for the
payment of money, whether arising by reason of an extension of credit, opening,
guaranteeing or confirming of a letter of credit, loan, guaranty,
indemnification or in any other manner, whether direct or indirect (including
those acquired by assignment, purchase, discount or otherwise), whether absolute
or contingent, due or to become due, now due or hereafter arising and however
acquired. The term includes, without limitation, all interest (including
interest accruing on or after an Insolvency Event, whether or not an allowed
claim), charges, expenses, commitment, facility, closing and collateral
management fees, letter of credit fees, reasonable attorneys' fees, and any
other sum properly chargeable to Borrower under this Agreement, the other Loan
Documents or any other agreement executed in connection herewith or therewith.
(ii) Other Property means all present and future, instruments, documents,
--------------
documents of title, securities, bonds, notes, promissory notes, drafts,
acceptances, letters of credit and rights to receive proceeds of letters of
credit, deposit accounts, chattel paper, certificates, insurance policies,
insurance proceeds, leases, computer tapes, causes of action, judgments, claims
against third parties, leasehold rights in any personal property, books,
ledgers, files and records, general intangibles (including without limitation,
all contract rights, tax refunds, rights to receive tax refunds, patents, patent
applications, copyrights (registered and unregistered), royalties, licenses,
permits, franchise rights, authorizations, customer lists, rights of
indemnification, contribution and subrogation, computer programs, discs and
software, trade secrets, computer service contracts, trademarks, trade names,
service marks and names, logos, goodwill, deposits, choses in action, designs,
blueprints, plans, know-how, telephone numbers and rights thereto, credits,
reserves, and all forms of obligations whatsoever now or hereafter owing to
Borrower), all property at any time in the possession or under the control of
TBCC, and all security given by Borrower to TBCC pursuant to any other Loan
Document or agreement.
(jj) Permitted Liens means such of the following as to which no
---------------
enforcement, collection, execution, levy or foreclosure proceeding shall have
been commenced and be continuing: (i) Liens for taxes, assessments and other
governmental charges or levies or the claims or demands of landlords, carriers,
warehousemen, mechanics, laborers, materialmen and other like Persons arising by
operation of law in the ordinary course of business for sums which are not yet
due and payable, (ii) deposits or pledges to secure the payment of workmen's
compensation, unemployment insurance or other social security benefits or
obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business (but nothing in this clause (ii) shall permit the
creation of Liens on Receivables, Investment Property, Inventory or Other
Property), (iii) zoning restrictions, easements, encroachments, licenses,
restrictions or covenants on the use of property which do not materially impair
either the use of the property in the operation of the business of Borrower or
the value of the property, (iv) rights of general application reserved to or
vested in any municipality or other governmental, statutory or public authority
to control or regulate property, or to use property in a manner which does not
materially impair the use of the property for the purposes for which it is held
by Borrower, (v) state and municipal Liens for personal property taxes which are
not yet due and payable, and (vi) Purchase Money Liens.
(kk) Person means any individual, sole proprietorship, partnership, joint
------
venture, limited liability company, trust, unincorporated organization, joint
stock company, association, corporation, institution, entity, party or
government (including any division, agency or department thereof) or any other
legal entity, whether acting in an individual, fiduciary or other capacity, and,
as applicable, the successors, heirs and assigns of each.
(ll) Plan means any employee benefit plan, program or arrangement
----
maintained or contributed to by Borrower or with respect to which it may incur
liability.
(mm) Purchase Money Lien means a Lien on any item of Equipment created
-------------------
substantially simultaneously with the acquisition of such Equipment for the
purpose of financing
-14-
<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
such acquisition, provided that such Lien shall attach only to the Equipment
acquired.
(nn) Qualification or Qualified means, with respect to any report of
------------- ---------
Auditors covering Financial Statements, a material qualification to such report
(i) resulting from a limitation on the scope of examination of such Financial
Statements or the underlying data, (ii) as to the capability of Borrower to
continue operations as a going concern or (iii) which could be eliminated by
changes in Financial Statements or notes thereto covered by such report (such as
by the creation of or increase in a reserve or a decrease in the carrying value
of assets) and which if so eliminated by the making of any such change and after
giving effect thereto would result in a Default or an Event of Default.
(oo) Receivables means all present and future accounts and accounts
-----------
receivable, together with all security therefor and guaranties thereof and all
rights and remedies relating thereto, including any right of stoppage in
transit.
(pp) Requirement of Law means (a) the Governing Documents, (b) any law,
------------------
treaty, rule, regulation, order or determination of an arbitrator, court or
other Governmental Authority or (c) any franchise, license, lease, permit,
certificate, authorization, qualification, easement, right of way, right or
approval binding on Borrower or any of its property.
(qq) Schedule means the Schedule to this Agreement being signed
--------
concurrently by Borrower and TBCC, as amended from time to time.
(rr) Solvent means when used with respect to any Person that as of the
-------
date as to which such Person's solvency is to be measured: (a) the fair salable
value of its assets is in excess of the total amount of its liabilities
(including contingent liabilities as valued in accordance with applicable law)
as they become absolute and matured, (b) it has sufficient capital to conduct
its business; and (c) it is able to meet its debts as they mature.
(ss) Subsidiary means, as to any Person, a corporation or other entity in
----------
which that Person directly or indirectly owns or controls shares of stock or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or appoint other managers of such corporation or other
entity.
9.2. Accounting Terms and Determinations. Unless otherwise defined or
-----------------------------------
specified herein, all accounting terms used in this Agreement shall be construed
in accordance with GAAP, applied on a basis consistent in all material respects
with the Financial Statements delivered to TBCC on or before the date of this
Agreement. All accounting determinations for purposes of determining compliance
with this Agreement shall be made in accordance with GAAP as in effect on the
date of this Agreement and applied on a basis consistent in all material
respects with the audited Financial Statements delivered to TBCC on or before
the date of this Agreement. The Financial Statements required to be delivered
hereunder, and all financial records, shall be maintained in accordance with
GAAP. If GAAP shall change from the basis used in preparing the audited
Financial Statements delivered to TBCC on or before the date of this Agreement,
the Compliance Certificates required to be delivered pursuant to this Agreement
shall include calculations setting forth the adjustments necessary to
demonstrate how Borrower is in compliance with the Financial Covenants (if any)
based upon GAAP as in effect on the date of this Agreement.
9.3. Other Terms: Headings: Construction. Unless otherwise defined herein,
-----------------------------------
terms used herein that are defined in the Uniform Commercial Code, from time to
time in effect in the State of Illinois, shall have the meanings set forth
therein. Each of the words "hereof," "herein," and "hereunder" refer to this
Agreement as a whole. The term "including", whenever used in this Agreement,
shall mean "including (but not limited to)". An Event of Default shall
"continue" or be "continuing" unless and until such Event specified therefor
under Section 7.1. References to Articles, Sections, Annexes, Schedules, and
Exhibits are internal references to this Agreement, and to its attachments,
unless otherwise specified. The headings and any Table of Contents are for
convenience only and shall not affect the meaning or construction of any
provisions of this Agreement. This Agreement has been fully reviewed and
negotiated between the parties and no uncertainty or ambiguity in any term or
provision of this Agreement shall be construed strictly against TBCC or Borrower
under any rule of construction or otherwise.
10. GENERAL PROVISIONS
------------------
10.1. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
-------------
AGREEMENT AND THE OTHER LOAN DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER
SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BY THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS.
10.2. SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE BORROWER AND TBCC,
--------------------------
WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY
BY STATE AND FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS, AND THE COURTS TO
WHICH AN APPEAL THEREFROM MAY BE TAKEN, PROVIDED, HOWEVER, THAT TBCC SHALL HAVE
THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE
BORROWER OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED BY TBCC IN GOOD
FAITH TO ENABLE TBCC TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A JUDGMENT OR
OTHER COURT ORDER IN FAVOR OF TBCC. THE BORROWER AGREES THAT IT WILL NOT ASSERT
ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT
-15-
<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
BY TBCC. THE BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF
THE COURT IN WHICH TBCC HAS COMMENCED A PROCEEDING, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON FORUM NON
CONVENIENS.
10.3. SERVICE OF PROCESS. THE BORROWER HEREBY IRREVOCABLY DESIGNATES CT
------------------
CORPORATION SYSTEM, 1209 ORANGE STREET, WILMINGTON, DELAWARE 19801, AS THE
DESIGNEE AND AGENT OF THE BORROWER TO RECEIVE, FOR AND ON BEHALF OF THE
BORROWER, SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. IT IS UNDERSTOOD THAT A COPY OF SUCH
PROCESS SERVED ON SUCH AGENT AT ITS ADDRESS WILL BE PROMPTLY FORWARDED BY MAIL
TO THE BORROWER. BUT THE FAILURE OF THE BORROWER TO RECEIVE SUCH COPY SHALL NOT
AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. NOTHING HEREIN SHALL AFFECT THE
RIGHT OF THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
10.4. LIMITATION OF LIABILITY. TBCC SHALL HAVE NO LIABILITY TO THE BORROWER
-----------------------
(WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE) FOR LOSSES SUFFERED BY THE
BORROWER IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THE
TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT,
OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH. UNLESS IT IS DETERMINED BY
A FINAL AND NONAPPEALABLE JUDGMENT OR COURT ORDER BINDING ON TBCC THAT THE
LOSSES WERE THE RESULT OF ACTS OR OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF TBCC. THE BORROWER HEREBY WAIVES ALL FUTURE CLAIMS AGAINST
TBCC FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES.
10.5. Delays: Partial Exercise of Remedies. No delay or omission of TBCC to
------------------------------------
exercise any right or remedy hereunder shall impair any such right or operate as
a waiver thereof. No single or partial exercise by TBCC of any right or remedy
shall preclude any other or further exercise thereof, or preclude any other
right or remedy.
10.6. Notices. Except as otherwise provided herein, all notices and
-------
correspondence hereunder shall be in writing and sent by certified or registered
mail, return receipt requested, by overnight delivery service, with all charges
prepaid, or by telecopier followed by a hard copy sent by regular mail, to the
parties at their addresses set forth in the heading to this Agreement. All such
notices and correspondence shall be deemed given (i) if sent by certified or
registered mail, three Business Days after being postmarked, (ii) if sent by
overnight delivery service, when received at the above stated addresses or when
delivery is refused and (iii) if sent by telecopier transmission, when receipt
of such transmission is acknowledged. Borrower's and TBCC's telecopier numbers
for purpose of notice hereunder are set forth in the Schedule; each party's
number may be changed by written notice to the other party.
10.7. Indemnification; Reimbursement of Expenses of Collection. Borrower
--------------------------------------------------------
hereby indemnifies and agrees, whether or not any of the transactions
contemplated by this Agreement or the other Loan Documents are consummated, to
defend and hold harmless (on an after-tax basis) TBCC, its successors and
assigns and their respective directors, officers, agents, employees, advisors,
shareholders, attorneys and Affiliates (each, an "Indemnified Party") from and
-----------------
against any and all losses, claims, damages, liabilities, deficiencies,
obligations, fines, penalties, actions (whether threatened or existing),
judgments, suits (whether threatened or existing) or expenses (including,
without limitation, reasonable fees and disbursements of counsel, experts,
consultants and other professionals) incurred by any of them (collectively,
"Claims") (except, in the case of each Indemnified Party, to the extent that any
------
Claim is determined in a final and non-appealable judgment by a court of
competent jurisdiction to have directly resulted from such Indemnified Party's
gross negligence or willful misconduct) arising out of or by reason of (i) any
litigation, investigation, claim or proceeding which arises out of or is related
to (A) Borrower, or this Agreement, any other Loan Document or the transactions
contemplated hereby or thereby, (B) any actual or proposed use by Borrower of
the proceeds of the Loans, or (C) TBCC's entering into this Agreement or any
other Loan Document or any other agreements and documents relating hereto,
including, without limitation, amounts paid in settlement, court costs and the
reasonable fees and disbursements of counsel incurred in connection with any
such litigation, investigation, claim or proceeding, (ii) any remedial or other
action taken by Borrower in connection with compliance by Borrower, or any of
its properties, with any federal, state or local environmental laws, rules or
regulations, and (iii) any pending, threatened or actual action, claim,
proceeding or suit by any shareholder or director of Borrower or any actual or
purported violation of Borrower's charter, by-laws or any other agreement or
instrument to which Borrower is a party or by which any of its properties is
bound. In addition and without limiting the generality of the foregoing.
Borrower shall, upon demand, pay to TBCC all reasonable costs and expenses
incurred by TBCC (including the reasonable fees and disbursements of counsel and
other professionals) in connection with the preparation, execution, delivery,
administration, modification and amendment of the Loan Documents, and pay to
TBCC all reasonable costs and expenses (including the reasonable fees and
disbursements of counsel and other professionals) paid or incurred by TBCC in
order to enforce or defend any of its rights under or in respect of this
Agreement, any other Loan Document or any other document or instrument now or
hereafter executed and delivered in connection herewith, collect the Obligations
or
-16-
<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
otherwise administer this Agreement, foreclose or otherwise realize upon the
Collateral or any part thereof, prosecute actions against, or defend actions by,
account debtors; commence, intervene in, or defend any action or proceeding;
initiate any complaint to be relieved of the automatic stay in bankruptcy; file
or prosecute any probate claim, bankruptcy claim, third-party claim, or other
claim; examine, audit, copy, and inspect any of the Collateral or any of
Borrower's books and records; protect, obtain possession of, lease, dispose of,
or otherwise enforce TBCC's security interest in, the Collateral; and otherwise
represent TBCC in any litigation relating to Borrower. Without limiting the
generality of the foregoing, Borrower shall pay TBCC a fee with respect to each
wire transfer in the amount of $15 plus all bank charges and a fee of $15 for
all returned checks plus all bank charges. If either TBCC or Borrower files any
lawsuit against the other predicated on a breach of this Agreement, the
prevailing party in such action shall be entitled to recover its reasonable
costs and attorneys' fees, including (but not limited to) reasonable attorneys'
fees and costs incurred in the enforcement of, execution upon or defense of any
order, decree, award or judgment. If and to the extent that the Obligations of
Borrower hereunder are unenforceable for any reason, Borrower hereby agrees to
make the maximum contribution to the payment and satisfaction of the Obligations
which is permissible under applicable law. Borrower's obligations under Section
2 4 and this Section shall survive any termination of this Agreement and the
other Loan Documents and the payment in full of the Obligations, and are in
addition to, and not in substitution of, any of the other Obligations.
10.8. Amendments and Waivers. Any provision of this Agreement or any other
----------------------
Loan Document may be amended or waived if, but only if, such amendment or waiver
is in writing and signed by Borrower and TBCC and then any such amendment or
waiver shall be effective only to the extent set forth therein. The failure of
TBCC at any time or times to require Borrower to strictly comply with any of the
provisions of this Agreement or any other present or future agreement between
Borrower and TBCC shall not waive or diminish any right of TBCC later to demand
and receive strict compliance therewith. Any waiver of any default shall not
waive or affect any other default, whether prior or subsequent, and whether or
not similar. None of the provisions of this Agreement or any other agreement now
or in the future executed by Borrower and delivered to TBCC shall be deemed to
have been waived by any act or knowledge of TBCC or its agents or employees, but
only by a specific written waiver signed by an authorized officer of TBCC and
delivered to Borrower.
10.9. Counterparts; Telecopied Signatures. This Agreement and any waiver or
-----------------------------------
amendment hereto may be executed in counterparts and by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but both of which shall together constitute one and the same
instrument. This Agreement and each of the other Loan Documents and any notices
given in connection herewith or therewith may be executed and delivered by
telecopier or other facsimile transmission all with the same force and effect as
if the same was a fully executed and delivered original manual counterpart.
10.10. Severability. In case any provision in or obligation under this
------------
Agreement or any other Loan Document shall be invalid, illegal or unenforceable
in any jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.
10.11. Joint and Several Liability. If Borrower consists of more than one
---------------------------
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
10.12. Maximum Rate. Notwithstanding anything to the contrary contained
------------
elsewhere in this Agreement or in any other Loan Document, the parties hereto
hereby agree that all agreements between them under this Agreement and the other
Loan Documents, whether now existing or hereafter arising and whether written or
oral, are expressly limited so that in no contingency or event whatsoever shall
the amount paid, or agreed to be paid, to TBCC for the use, forbearance, or
detention of the money loaned to Borrower and evidenced hereby or thereby or for
the performance or payment of any covenant or obligation contained herein or
therein, exceed the maximum non-usurious interest rate, if any, that at any time
or from time to time may be contracted for, taken, reserved, charged or received
on the Obligations, under the laws of the State of Illinois (or the laws of any
other jurisdiction whose laws may be mandatory applicable notwithstanding other
provisions of this Agreement and the other Loan Documents), or under applicable
federal laws which may presently or hereafter be in effect and which allow a
higher maximum non-usurious interest rate than under the laws of the State of
Illinois (or such other jurisdiction), in any case after taking into account, to
the extent permitted by applicable law, any and all relevant payments or charges
under this Agreement and the other Loan Documents executed in connection
herewith, and any available exemptions, exceptions and exclusions (the "Highest
Lawful Rate"). If due to any circumstance whatsoever, fulfillment of any
provisions of this Agreement or any of the other Loan Documents at the time
performance of such provision shall be due shall exceed the Highest Lawful Rate,
then, automatically, the obligation to be fulfilled shall be modified or reduced
to the extent necessary to limit such interest to the Highest Lawful Rate, and
if from any such circumstance TBCC should ever receive anything of value deemed
interest by applicable law which would exceed the Highest Lawful Rate, such
excessive interest shall be applied to the reduction of the principal amount
then outstanding hereunder or on account of any other then outstanding
Obligations and not to the payment of interest, or if such excessive interest
exceeds the principal unpaid balance then outstanding hereunder and such other
then outstanding Obligations, such excess shall be refunded to Borrower. All
sums paid or agreed to be paid to TBCC for the use, forbearance, or detention of
the Obligations and other indebtedness of Borrower to TBCC shall, to the extent
-17-
<PAGE>
TBCC LOAN AND SECURITY AGREEMENT
----------------------------------------------------------------------
permitted by applicable law, be armortized, prorated, allocated and spread
throughout the full term of such indebtedness, until payment in full thereof, so
that the actual rate of interest on account of all such indebtedness does not
exceed the Highest Lawful Rate throughout the entire term of such indebtedness.
The terms and provisions of this Section shall control every other provision of
this Agreement, the other Loan Documents and all other agreements between the
parties hereto
10.13. Entire Agreement; Successors and Assigns. This Agreement and the other
----------------------------------------
Loan Documents constitute the entire agreement between the parties, supersede
any prior written and verbal agreements between them, and shall bind and benefit
the parties and their respective successors and permitted assigns. There are no
------------
oral understandings, oral representations or oral agreements between the parties
- --------------------------------------------------------------------------------
which are not set forth in this Agreement or in other written agreements signed
- -------------------------------------------------------------------------------
by the parties in connection herewith.
- -------------------------------------
10.14. MUTUAL WAIVER OF JURY TRIAL. TBCC AND BORROWER EACH HEREBY WAIVE THE
---------------------------
RIGHT TO TRAIL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; OR (ii) ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN TBCC AND BORROWER; OR (iii) ANY CONDUCT,
ACTS OR OMISSIONS OF TBCC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC OR
BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT
OR OTHERWISE.
BORROWER:
TUT SYSTEMS, INC.
By /s/ Nelson B. Caldwell
--------------------------
Title CFO
-----------------------
TBCC:
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By__________________________
Title_______________________
Form-10
Version.-2
-18-
<PAGE>
TBCC
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: TUT SYSTEMS, INC.
ADDRESS: 2495 ESTAND WAY
PLEASANT HILL, CALIFORNIA 94523
DATE: DECEMBER 18, 1998
This Schedule is an integral part of the Loan and Security Agreement between
TRANSAMERICA BUSINESS CREDIT CORPORATION ("TBCC") and the above borrower (the
"Borrower") of even date.
1. CREDIT LIMIT (Section 1.1):
An amount (the "Credit Limit") not to exceed the
sum of (A) and (B) below:
(A) an amount (the "Formula Revolver Loans") up to
the lesser of: (i) $3,000,00 at any one time
outstanding; or (ii) 85% of the amount of
Borrower's Eligible Receivables (as defined in
Section 9.1(n) above);
PLUS
(B) an amount (the "Non-Formula Revolver Loans") up
to the aggregate amount of $4,500,000.
2. INTEREST. (Section 2.1): Formula Revolver Loans. The interest rate in effect
----------------------
throughout each calendar month with respect to
Formula Revolver Loans during the term of this
Agreement shall be the highest "Base Rate" in
effect during such month, plus 2.00% per annum; and
Non-Formula Revolver Loans. The interest rate in
--------------------------
effect throughout each calendar month with respect
to Non-Formula Revolver Loans during the term of
this Agreement shall be the highest "Base Rate" in
effect during such month, plus 3.50% per annum;
PROVIDED that provided that the interest rate in
effect in each month with respect to Formula
Revolver Loans and Non-Formula Revolver Loans shall
not be less than 8.00% per annum, and the interest
charged for each month with respect to Formula
Revolver Loans and Non-Formula Revolver Loans
shall be a minimum of $10,000 in the aggregate,
regardless of the amount of the Obligations
outstanding.
<PAGE>
TBCC SCHEDULE TO LOAN AND SECURITY AGREEMENT
---------------------------------------------------------------------------
Interest shall be calculated on the basis of a 360-
day year for the actual number of days elapsed.
"Base Rate" shall mean the higher of (a) the
highest prime, base or equivalent rate of interest
announced from time to time by Citibank, N.A.,
First National Bank of Chicago and Blank of America
National Trust and Savings Association (which may
not be the lowest rate of interest charged by such
bank) and (b) the published annualized rate for 90-
day dealer commercial paper which appears in the
"Money Rates" section of The Wall Street Journal.
-----------------------
3. FEES (Section 2.2):
Loan Fee: $135,000, of which $97,500 shall be
payable concurrently herewith and the remaining
amount, $37,500, shall be due and payable upon the
date that is the first anniversary hereof.
Termination Fee: An amount equal to $10,000
multiplied by each month (or portion thereof) from
the effective date of termination to the Maturity
Date, which Termination Fee shall be payable on the
date of termination.
4. MATURITY DATE (Section 1.6):
JUNE 30, 2000 (the "Maturity Date"), subject to
automatic renewal and early termination as provided
in Section 1.6 above.
5. REPORTING (Section 5.10): Borrower shall provide TBCC with the following
reports:
(a). Monthly Financial Statements. Monthly unaudited
----------------------------
financial statements, as soon as available, and in
any event within 30 days after the end of each
month.
(b). Monthly Receivable Agings. Monthly Receivable
-------------------------
agings, aged by invoice date, within 20 days after
the end of each month.
(c). Monthly Payable Agings. Monthly accounts payable
----------------------
agings, aged by invoice date, and outstanding or
held check registers within 20 days after the end
of each month.
(d). Monthly Compliance Certificates. As soon as
-------------------------------
available, but not later than thirty days after the
end of each month, a Compliance Certificate, with
an attached schedule of calculations demonstrating
compliance or indicating non-compliance with any
Financial Covenants.
(e). Quarterly Financial Statements. Quarterly unaudited
------------------------------
financial statements, as soon as available, and in
any event within 45 days after the end of each
fiscal quarter of Borrower.
(f). Annual Financial Statements. As soon as available,
---------------------------
but not later than 90 days after the end of the
Borrower's fiscal year, (A) Borrower's annual
audited Financial Statements; (B) a comparison in
reasonable detail to the prior year's audited
Financial Statements; (C) the Auditors' opinion
without Qualification, a
-2-
<PAGE>
TBCC Schedule to Loan and Security Agreement
--------------------------------------------------------------------------
Management Letter and a statement indicating that
the Auditors have not obtained knowledge of the
existence of any Default or Event of Default during
their audit; (D) a narrative discussion of
Borrower's financial condition and results of
operations and the liquidity and capital resources
for such fiscal year.
6. BORROWER INFORMATION:
(a) Prior Names of Borrower (Section 4.1l): Tut
Systems, Inc., a California corporation;
Tutankhamon Electronics, Inc.
(b) Prior Trade Names of Borrower (Section 4.11): None.
(c) Existing Trade Names of Borrower (Section 4.1l):
None.
(d) Other Places of Business and Locations of
Collateral (Section 4.2): See Representations and
Warranties form from Borrower dated December 8,
1998.
7. FACSIMILE NUMBERS:
Borrower: (925) 682-4125
TBCC: (818) 995-9148
8. CLOSING DEADLINE (Section 1.8): Not Applicable
9. ADDITIONAL PROVISIONS:
(a) Warrants. Concurrently herewith, Borrower shall
--------
provide to TBCC and its participant, if designated by
TBCC in writing to the Borrower, five year warrants to
purchase, in the aggregate for both such parties, 55,000
shares of common stock of the Borrower with an initial
exercise price of $14.00 per share together with
registration rights, with such warrant and related
documentation as are acceptable to TBCC in its
discretion.
Borrower: TBCC:
TUT SYSTEMS, INC. TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Nelson B. Caldwell By:_________________________________
-----------------------------
President or Vice President Title_______________________________
-3-
<PAGE>
- --------------------------------------------------------------------------------
REVOLVING CREDIT NOTE
$7,500,00 CHICAGO, ILLINOIS DECEMBER 18, 1998
FOR VALUE RECEIVED, TUT SYSTEMS, INC., a DELAWARE corporation having its
chief executive office and principal place of business at 2495 ESTAND WAY,
PLEASANT HILL, CALIFORNIA 94523 (the "Borrower"), hereby unconditionally and
absolutely promises to pay to the order of TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation ("TBCC"), on the Maturity Date, at TBCC's
office at 9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018, or at
such other location as TBCC may from time to time designate, in lawful money of
the United States of America and in immediately available funds, the principal
amount equal to $7,500,00 or such greater or lesser amount as represents the
aggregate unpaid principal amount of all Loans made by TBCC to the Borrower
under the revolving credit facility made available pursuant to the Loan and
Security Agreement between TBCC and Borrower dated DECEMBER 18, 1998 (the "Loan
Agreement"). The Borrower further promises to pay interest in like money and
funds at TBCC's office specified above (or at such other location as TBCC may
from time to time designate) on the unpaid principal amount hereof from time to
time outstanding from and including the date hereof until paid in full (both
before and after judgment) at the rates and on the dates set forth in the Loan
Agreement. All capitalized terms used herein which are not defined herein shall
have the meanings ascribed to such terms in the Loan Agreement.
The holder of this Note is authorized to record the date and amount of each
Loan evidenced by this Note, the date and amount of each payment or prepayment
of principal hereof and the interest rate with respect thereto on a schedule
attached hereto, or on a continuation of such schedule attached hereto and made
a part hereof, and any such notation shall be conclusive and binding for all
purposes absent manifest error; provided, however, that the failure of TBCC to
-------- -------
make any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or under the Loan Agreement.
Whenever any payment to be made hereunder shall be stated to be due on a day
that is not a Business Day, the payment may be made on the next succeeding
Business Day and such extension of time shall be included in the computation of
the amount of interest due hereunder.
This Note is entitled to the benefit of all terms and conditions of, and the
security of all security interests, liens, mortgages, deeds of trust and rights
granted pursuant to, the Loan Agreement and the other Loan Documents, and is
subject to optional and mandatory prepayment as provided therein.
Upon the occurrence of any one or more Events of Default, all amounts then
remaining unpaid on this Note may be declared to be or may automatically become
immediately due and payable as provided in the Loan Agreement.
The Borrower acknowledges that the holder of this Note may assign, transfer
or sell all or a portion of its rights and interests to and under this Note to
one or more Persons as provided in the Loan Agreement and that such Persons
shall thereupon become vested with all of the rights and benefits of TBCC in
respect hereof as to all or that portion of this Note which is so assigned,
transferred or sold.
In the event of any conflict between the terms hereof and the terms and
provisions of the Loan Agreement, the terms and provisions of the Loan Agreement
shall control.
The Borrower and all other parties that at any time may be liable hereupon in
any capacity, jointly or severally, waive presentment, demand for payment,
protest and notice of dishonor of this Note and authorize the holder hereof,
without notice, to increase or decrease the rate of interest on any amount owing
under this Note in accordance with the Loan Agreement. The Borrower further
waives promptness, diligence, notice of acceptance and any other notice with
respect to any of the Obligations and any requirement that TBCC exhaust any
rights or take any action against any other Person or any collateral. The
Borrower further hereby waives notice of or proof of reliance by TBCC upon this
Note, and the Obligations shall conclusively be deemed to have been created,
contracted, incurred, renewed, extended, amended or waived in reliance upon this
Note. The Borrower shall make all payments hereunder and under the Loan
Agreement without defense, offset or counterclaim. No failure to exercise
<PAGE>
TBCC REVOLVING CREDIT NOTE
---------------------------------------------------------------------------
and no delay in exercising any rights hereunder on the part of the holder hereof
shall operate as a waiver of such rights. This Note may not be changed orally,
but only by an agreement in writing, which is signed by the party or parties
against whom enforcement of any waiver, change, modification or discharge is
sought.
THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS NOTE AND THE OTHER LOAN
DOCUMENTS AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS NOTE,
WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BY
THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) AND DECISIONS
OF THE STATE OF ILLINOIS.
ALL DISPUTES ARISING UNDER OR IN CONNECTION WITH THIS NOTE AND ANY OTHER LOAN
DOCUMENT BETWEEN THE BORROWER AND TBCC, WHETHER SOUNDING IN CONTRACT, TORT,
EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATED
IN CHICAGO, ILLINOIS, AND THE COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN;
PROVIDED, HOWEVER, THAT TBCC SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BY
APPLICABLE LAW, TO PROCEED AGAINST THE BORROWER OR ITS PROPERTY IN ANY LOCATION
REASONABLY SELECTED BY TBCC IN GOOD FAITH TO ENABLE TBCC TO REALIZE ON SUCH
PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF TBCC. THE
BORROWER AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR
CROSS-CLAIMS IN ANY PROCEEDING BROUGHT BY TBCC. THE BORROWER WAIVES ANY
OBJECTION THAT THE BORROWER MAY HAVE THE LOCATION OF THE COURT IN WHICH TBCC HAS
COMMENCED A PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE
LAYING OF VENUE OR BASED ON FORUM NON CONVENIENS.
THE BORROWER HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, 1209 ORANGE
STREET, WILMINGTON, DELAWARE 19801 AS THE DESIGNEE AND AGENT OF THE BORROWER TO
RECEIVE, FOR AND ON BEHALF OF THE BORROWER SERVICE OF PROCESS IN ANY LEGAL
ACTION OR PROCEEDING WITH RESPECT TO THIS NOTE OR ANY OTHER LOAN DOCUMENT. IT IS
UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT AT ITS ADDRESS WILL
BE PROMPTLY FORWARDED BY MAIL TO THE BORROWER, BUT THE FAILURE OF THE BORROWER
TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS.
NOTHING HEREIN SHALL AFFECT THE RIGHT OF TBCC TO SERVE LEGAL PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW.
THE BORROWER AND, BY ITS ACCEPTANCE HEREOF, TBCC EACH HEREBY WAIVE THE RIGHT
TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN
ANY WAY RELATING TO: (I) THIS NOTE; OR (II) ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN TBCC AND BORROWER; OR (III) ANY CONDUCT, ACTS OR
OMISSIONS OF TBCC OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC OR BORROWER; IN EACH
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
TUT SYSTEMS, INC.
By: /s/ Nelson B. Caldwell
--------------------------
Title: CEO
-----------------
-2-
<PAGE>
TBCC
STREAMLINED FACILITY AGREEMENT
December 18, 1998
Tut Systems, Inc,
2495 Estand Way
Pleasure Hill, California 94523
Ladies and Gentlemen:
This Streamlined Facility Agreement (this "Agreement") is entered into
between Transamerica Business Credit Corporation ("TBCC"), and Tut Systems, Inc.
("Borrower"), in connection with the Loan and Security Agreement between TBCC
and Borrower dated December 18, 1998 (the "Loan Agreement"). (This Agreement,
the Loan Agreement, and all other written documents and agreements between TBCC
and Borrower are referred to herein collectively as the "Loan Documents".
Capitalized terms used but not defined in this Agreement, shall have the
meanings set forth in the Loan Agreement.)
This will confirm our agreement that the following provisions (the
"Streamlined Provisions") shall apply, effective on the date hereof, until
terminated as provided below:
1. Borrower will provide TBCC with a monthly Borrowing Base Certificate,
in such form as TBCC shall from time to time specify, within* days after the
end of each month, and TBCC shall not require more frequent schedules of
Receivables or other Collateral reporting with respect to the Receivables,
except for the information required in connection with an advance request. In
the event, as of the end of any month, the total of all Loans and all other
Obligations exceeds the Credit Limit, Borrower shall immediately pay the amount
of the excess to TBCC.
* 20
2. Delivery of the proceeds of Receivables within one Business Day after
receipt, as called for by Section 1.4 of the Loan Agreement, will not be
required.
3. TBCC will also not require any Depository Account Agreement or Blocked
Account Agreement, as called for by Section 1.8 of the Loan Agreement. In
addition, Borrower will not he required to provide TBCC with copies of invoices
to customers or shipping and delivery receipts, as called for by Section 3.3(a)
of the Loan Agreement, or to report customer credits, returns and recoveries of
merchandise as called for by Section 3.3(b) of the Loan Agreement.
The Streamlined Provisions shall immediately terminate if any Default or
Event of Default occurs and is continuing. Upon any termination of the
Streamlined Provisions, without limiting TBCC's other rights and remedies,
Borrower shall, then and thereafter, provide TBCC with such other or additional
reporting of Receivables as TBCC shall request under Section
<PAGE>
3.3(a) of the Loan Agreement, comply in all respects with Section 3.3(b), and
deliver all proceeds of Receivable to TBCC, within one Business Day after
receipt, as called for by Section 1.4 of the Loan Agreement. Additionally,
Borrower and its bank shall execute and deliver a Blocked Account Agreement or
Depository Account Agreement (as TBCC shall designate), in form and substance
satisfactory to TBCC.
Please confirm your agreement to the foregoing by signing the enclosed copy
of this Agreement and returning it to us.
Sincerely yours,
Transamerica Business Credit Corporation
By:_______________________
Title:____________________
Acknowledged and Agreed.
Tut Systems, Inc.
By: /s/ Nelson B. Caldwell
------------------------------
Title CFO
---------------------------
- -3
-2-
<PAGE>
NOTICE OF SECURITY INTEREST
DECEMBER 18, 1998
Certified Mail, Return Receipt Requested
CIBC Oppenheimber
580 California Street
Suite 2200
San Francisco, California 94104
Re: Tut Systems Inc.
----------------
Gentlemen:
Notice is hereby given that your above-named customer has granted a
security interest in all of its present and future deposit accounts maintained
with your institution, general and special, and of every other kind, to
Transamerica Business Credit Corporation
15260 Ventura Blvd., Suite 1240
Sherman Oaks, CA 91403
Please contact the undersigned at 818-995-3225 if you have any questions
about this matter.
Sincerely yours,
Transamerica Business Credit Corporation
By ______________________
Title ___________________
Acknowledged and Agreed:
Tut Systems, Inc.
By /s/ Nelson B. Caldwell
-------------------------------
Title CFO
----------------------------
<PAGE>
NOTICE OF SECURITY INTEREST
DECEMBER 18, 1998
Certified Mail, Return Receipt Requested
Monarch Funds
P. O. Box 446
Portland, Maine 04112
Re: Tut Systems, Inc.
-----------------
Gentlemen:
Notice is hereby given that your above-named customer has granted a
security interest in all of its present and future deposit accounts maintained
with your institution, general and special, and of every other kind, to
Transamerica Business Credit Corporation
15260 Ventura Blvd., Suite 1240
Sherman Oaks, CA 91403
Please contact the undersigned at 818-995-3225 if you have any questions
about this matter.
Sincerely yours,
Transamerica Business Credit Corporation
By _____________________________
Title __________________________
Acknowledged and Agreed:
Tut Systems, Inc.
By /s/ Nelson B. Caldwell
-----------------------------
Title CFO
--------------------------
<PAGE>
NOTICE OF SECURITY INTEREST
DECEMBER 18, 1998
Certified Mail, Return Receipt Requested
Bank of America
P. O. Box 37176
San Francisco, California 94137-0001
Re: Tut Systems, Inc.
-----------------
Gentlemen:
Notice is hereby given that your above-named customer has granted a
security interest in all of its present and future deposit accounts maintained
with your institution, general and special, and of every other kind, to
Transamerica Business Credit Corporation
15260 Ventura Blvd., Suite 1240
Sherman Oaks, CA 91403
Please contact the undersigned at 818-995-3225 if you have any questions
about this matter.
Sincerely yours,
Transamerica Business Credit Corporation
By __________________________
Title _______________________
Acknowledged and Agreed:
Tut Systems, Inc.
By: /s/ Nelson B. Caldwell
-----------------------------
Title CFO
---------------------------
<PAGE>
NOTICE OF SECURITY INTEREST
DECEMBER 18, 1998
Certified Mail, Return Receipt Requested
Imperial Bank
226 Airport Parkway
San Jose, California 95110-1024
Re: Tut Systems, Inc.
-----------------
Gentlemen:
Notice is hereby given that your above-named customer has granted a
security interest in all of its present and future deposit accounts maintained
with your institution, general and special, and of every other kind, to
Transamerica Business Credit Corporation
15260 Ventura Blvd., Suite 1240
Sherman Oaks, CA 91403
Please contact the undersigned at 818-995-3225 if you have any questions
about this matter.
Sincerely yours,
Transamerica Business Credit Corporation
By __________________________
Title _______________________
Acknowledged and Agreed:
Tut Systems, Inc.
By /s/ Nelson B. Caldwell
------------------------------
Title CFO
----------------------------
<PAGE>
PATENT AND TRADEMARK SECURITY AGREEMENT
This PATENT AND TRADEMARK SECURITY AGREEMENT ("Agreement"), dated as of December
18, 1998, is entered into between TUT SYSTEMS, INC., a Delaware corporation
("Grantor"), which has a mailing address at 2495 Estand Way, Pleasant Hill,
California 94523, and TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware
corporation, ("TBCC") having its principal office at 9399 West Higgins Road,
Suite 600, Rosemont, Illinois 60018 and having an office at 15260 Venrura Blvd.,
Suite 1240, Sherman Oaks, California 91403.
RECITALS
A. Grantor and TBCC are contemporaneously herewith, entering into that
certain Loan and Security Agreement ("Loan Agreement") and other instruments,
documents and agreements contemplated thereby or related thereto (collectively,
together with the Loan Agreement, the "Loan Documents"); and
B. Grantor is the owner of certain intellectual property, identified
below, in which Grantor is granting a security interest to TBCC.
NOW THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth and for other
good and valuable consideration, the parties hereto mutually agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. The following terms, as used in this Agreement, have the
following meanings:
"Code" means the Illinois Uniform Commercial Code, as amended and
----
supplemented from time to time, and any successor statue.
"Collateral" means all of the following, whether now owned or
----------
hereafter acquired:
(i) Each of the trademarks and rights and interest which are capable
of being protected as trademarks (including trademarks, service marks,
designs, logos, indicia, tradenames, corporate names, company names,
business names, fictitious business names, trade styles, and other source
or business identifiers, and applications pertaining thereto), which are
presently, or in the future may be, owned, created, acquired, or used
(whether pursuant to a license or otherwise) by Grantor, in whole or in
part, and all trademark rights with respect thereto throughout the world,
including all proceeds thereof (including license royalties and proceeds of
infringement suits), and rights to renew and extend such trademarks and
trademark rights;
(ii) Each of the patents and patent applications which are presently,
or in the future may be, owned, issued, acquired, or used (whether pursuant
to a license or otherwise) by Grantor, in whole or in part, and all patent
rights with respect thereto throughout the world, including all proceeds
thereof (including license royalties and proceeds of infringement suits),
foreign filing rights, and rights to extend such patents and patent
rights*;
-1-
<PAGE>
*, OTHER THAN FOR PATENT APPLICATIONS FILED WITH UNITED STATES PATENT
AND TRADEMARK OFFICE HAVING THE FOLLOWING NUMBERS: 024883 AND 899220
(iii) All of Grantor's right to the trademarks and trademark
registrations listed on Exhibit A attached hereto, as the same may be
---------
updated hereafter from time to time;
(iv) All of Grantor's right, title, and interest, in and to the
patents and patent applications listed on Exhibit B attached hereto, as
---------
the same may be updated hereafter from time to time;
(v) All of Grantor's right, title and interest to register
trademark claims under any state or federal trademark law or regulation of
any foreign country and to apply for, renew, and extend the trademark
registrations and trademark rights, the right (without obligation) to sue
or bring opposition or cancellation proceedings in the name of Grantor or
in the name of TBCC for past, present, and future infringements of the
trademarks, registrations, or trademark rights and all rights (but not
obligations) corresponding thereto in the United States and any foreign
country;
(vi) All of Grantor's right, title, and interest in all patentable
inventions, and to file applications for patent under federal patent law or
regulation of any foreign country, and to request reexamination and/or
reissue of the patents, the right (without obligation) to sue or bring
interference proceedings in the name of Grantor or in the name of TBCC for
past, present, and future infringements of the patents, and all rights (but
not obligations) corresponding thereto in the United States and any foreign
country;
(vii) the entire goodwill of or associated with the businesses now or
hereafter conducted by Grantor connected with and symbolized by any of the
aforementioned properties and assets;
(viii) All general intangibles relating to the foregoing and all other
intangible intellectual or other similar property of the Grantor of any
kind or nature, associated with or arising out of any of the aforementioned
properties and assets and not otherwise described above; and
(ix) All products and proceeds of any and all of the foregoing
(including, without limitation, license royalties and proceeds of
infringement suits) and, to the extent not otherwise included, all payments
under insurance, or any indemnity, warranty, or guaranty payable by reason
of loss or damage to or otherwise with respect to the Collateral,
"Obligations" means all obligations, liabilities, and indebtedness of
-----------
Grantor to TBCC, whether direct, indirect, liquidated, or contingent, and
whether arising under this Agreement, the Loan Agreement, any other of the Loan
Documents, or otherwise, including all reasonable costs and expenses as set
forth in the Loan Agreement.
1.2 CONSTRUCTION. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular including the plural, and the term "including" is not limiting. The
words "hereof," "herein," "hereby," "hereunder," and other similar terms refer
to this Agreement as a whole and not to any particular provision of this
Agreement. Any initially capitalized terms used but not defined herein shall
have the meaning set forth in the Loan Agreement. Any reference herein to any of
the Loan Documents includes any and all alterations, amendments, extensions,
modifications, renewals, or supplements thereto or thereof, as applicable.
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against TBCC or Grantor, whether under any role of
construction or
-2-
<PAGE>
otherwise. On the contrary, this Agreement has been reviewed by Grantor, TBCC,
and their respective counsel, and shall be construed and interpreted according
to the ordinary meaning of the words used so as to fairly accomplish the
purposes and intentions of TBCC and Grantor. Headings have been set forth herein
for convenience only, and shall not be used in the construction of this
Agreement.
2. GRANT OF SECURITY INTEREST.
To secure the complete and timely payment and performance of all
Obligations, and without limiting any other security interest Grantor has
granted to TBCC, Grantor hereby grants, assigns, and conveys to TBCC a security
interest in Grantor's entire right, title, and interest in and to the
Collateral.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Grantor hereby represents, warrants, and covenants that:
3.1 TRADEMARKS; PATENT. A true and complete schedule setting forth all
federal and state trademark registrations owned or controlled by Grantor or
licensed to Grantor, together with a summary description and full information in
respect of the filing or issuance thereof and expiration dates is set forth on
Exhibit A; and a true and complete schedule setting forth all patent and
- ---------
patent applications owned or controlled by Grantor or licensed to Grantor,
together with a summary description and full information in respect of the
filing or issuance thereof and expiration dates is set forth on Exhibit B.
---------
3.2 VALIDITY; ENFORCEABILILY. Each of the patents and trademarks is valid
and enforceable, and Grantor is not presently aware of any past, present, or
prospective claim by any third party that any of the patents or trademarks are
invalid or unenforceable, or that the use of any patents or trademarks violates
the rights of any third person, or of any basis for any such claims.
3.3 TITLE. Grantor is the sole and exclusive owner of the entire and
unencumbered right, title, and interest in and to each of the patents, patent
applications, trademarks, and trademark registrations, free and clear of any
liens, charges, and encumbrances, including pledges, assignments, licenses, shop
rights, and covenants by Grantor not to sue third persons.
3.4 NOTICE. Grantor has used and will continue to use proper statutory
notice in connection with its use of each of the patents and trademarks.
3.5 QUALITY. Grantor has used and will continue to use consistent
standards of high quality (which may be consistent with Grantor's past
practices) in the manufacture, sale, and delivery of products and services sold
or delivered under or in connection with the trademarks, including, to the
extent applicable, in the operation and maintenance of its merchandising
operations, and will continue to maintain the validity of the trademarks.
3.6 PERFECTION OF SECURITY INTEREST. Except for the filing of appropriate
financing statements (all of which filings have been made) and filings with the
United States Patent and Trademark Office necessary to perfect the security
interests created hereunder, no authorization, approval, or other action by, and
no notice to or filing with, any governmental authority or regulatory body is
required either for the grant by Grantor of the security interest hereunder or
for the execution, delivery, or performance of this Agreement by Grantor or for
the perfection of or the exercise by TBCC of its rights hereunder to the
Collateral in the United States.
4. AFTER-ACQUIRED PATENT OR TRADEMARK RIGHTS.
-3-
<PAGE>
If Grantor shall obtain rights to any new trademarks, any new patentable
inventions or become entitled to the benefit of any patent application or patent
for any reissue, division, or continuation, of any patent, the provisions of
this Agreement shall automatically apply thereto. Grantor shall give prompt
notice in writing to TBCC with respect to any such new trademarks or parents, or
renewal or extension of any trademark registration. Grantor shall bear any
expenses incurred in connection with future patent applications or trademark
registrations. Without limiting Grantor's obligation under this Section 4,
Grantor authorizes TBCC to modify this Agreement by amending Exhibits A or B
---------------
to include any such new patent or trademark rights. Notwithstanding the
foregoing, no failure to so modify this Agreement or amend Exhibits A or B shall
---------------
in any way affect, invalidate or detract from TBCC's continuing security
interest in all Collateral, whether or not listed on Exhibit A or B.
--------------
5. LITIGATION AND PROCEEDINGS.
Grantor shall commence and diligently prosecute in its own name, as the
real party in interest, for its own benefit, and its own expense, such suits,
administrative proceedings, or other action for infringement or other damages as
are in its reasonable business judgment necessary to protect the Collateral.
Grantor shall provide to TBCC any information with respect thereto requested by
TBCC. TBCC shall provide at Grantor's expense all necessary cooperation in
connection with any such suits, proceedings, or action, including, without
limitation, joining as a necessary party. Following Grantor's becoming aware
thereof, Grantor shall notify TBCC of the institution of, or any adverse
determination in, any proceeding in the United States Patent and Trademark
Office, or any United States, state, or foreign court regarding Grantor's claim
of ownership in any of the patents or trademarks, its right to apply for the
same, or its right to keep and maintain such patent or trademark rights.
6. POWER OF ATTORNEY.
Grantor, hereby appoints TBCC as Grantor's true and lawful attorney, with
full power of substitution, to do any or all of the following, in the name,
place and stead of Grantor*: (a) file this Agreement (or an abstract hereof) or
any other document describing TBCC's interest in the Collateral with the United
States Patent and Trademark Office; (b) execute any modification of this
Agreement pursuant to Section 4 of this Agreement; (c) take any action and
execute any instrument which TBCC may deem necessary or advisable to accomplish
the purposes of this Agreement**; and (d) following an Event of Default*** (as
defined in the Loan Agreement), (i) endorse Grantor's name on all applications,
documents, papers and instruments necessary for TBCC to use or maintain the
Collateral; (ii) ask, demand, collect, sue for, recover, impound, receive, and
give acquittance and receipts for money due or to become due under or in respect
of any of the Collateral; (iii) file any claims or take any action or institute
any proceedings that TBCC may deem necessary or desirable for the collection of
any of the Collateral or otherwise enforce TBCC's rights with respect to any of
the Collateral, and (iv) assign, pledge, convey, or otherwise transfer title in
or dispose of the Collateral to any person.
* PROVIDED THAT WITH RESPECT TO THE ACTIONS SET FORTH IN (A), (B) AND (C)
BELOW SUCH POWER OF ATTORNEY SHALL BE EFFECTIVE ONLY AFTER TBCC HAS GIVEN
GRANTOR THREE BUSINESS DAYS NOTICE OF ITS INTENT TO DO SO
** REGARDING CLAUSES (A) AND (B) ABOVE
*** AND DURING THE CONTINUANCE THEREOF
7. RIGHT TO INSPECT.
-4-
<PAGE>
Grantor grants to TBCC and its employees and agents the right to visit
Grantor's plants and facilities which manufacture, inspect, or store products
sold under any of the patents or trademarks, and to inspect the products and
quality control records relating thereto at reasonable times during regular
business hours.
8. SPECIFIC REMEDIES.
Upon the occurrence* of any Event of Default (as defined in the Loan
Agreement), TBCC shall have, in addition to, other rights given by law or in
this Agreement, the Loan Agreement, or in any other Loan Document, all of the
rights and remedies with respect to the Collateral of a secured party under the
Code, including the following:
* AND DURING THE CONTINUANCE
8.1 NOTIFICATION. TBCC may notify licensees to make royalty payments on
license agreements directly to TBCC;
8.2 SALE. TBCC may sell or assign the Collateral and associated goodwill
at public or private sale for such amounts, and at such time or times as TBCC
deems advisable. Any requirement of reasonable notice of any disposition of the
Collateral shall be satisfied if such notice is sent to Grantor five (5) days
prior to such disposition. Grantor shall be credited with the net proceeds of
such sale only when they are actually received by TBCC, and Grantor shall
continue to be liable for any deficiency remaining after the Collateral is sold
or collected. If the sale is to be a public sale, TBCC shall also give notice of
the time and place by publishing a notice one time at least five (5) days before
the date of the sale in a newspaper of general circulation in the county in
which the sale is to be held. To the maximum extent permitted by applicable law,
TBCC may be the purchaser of any or all of the Collateral and associated
goodwill at any public sale and shall be entitled, for the purpose of bidding
and making settlement or payment of the purchase price for all or any portion of
the Collateral sold at any public sale, to use and apply all or any part of the
Obligations as a credit on account of the purchase price of any collateral
payable by TBCC at such sale.
9. GENERAL PROVISIONS.
9.1 EFFECTIVENESS. This Agreement shall be binding and deemed effective
when executed by Grantor and TBCC.
9.2 NOTICES. Except to the extent otherwise provided herein, all notices,
demands, and requests that either party is required or elects to give to the
other shall be in writing and shall be governed by the notice provisions of the
Loan Agreement.
9.3 NO WAIVER. No course of dealing between Grantor and TBCC, nor any
failure to exercise nor any delay in exercising, on the part of TBCC, any right,
power, or privilege under this Agreement or under the Loan Agreement or any
other agreement, shall operate as a waiver. No single or partial exercise of any
right, power, or privilege under this Agreement or under the Loan Agreement or
any other agreement by TBCC shall preclude any other or further exercise of such
right, power, or privilege or the exercise of any other right, power, or
privilege by TBCC.
9.4 RIGHTS ARE CUMULATIVE. All of TBCC's rights and remedies with respect
to the Collateral whether established by this Agreement, the Loan Agreement, or
any other documents or agreements, or by law shall be cumulative and may be
exercised concurrently or in any order.
9.5 SUCCESSORS. The benefits and burdens of this Agreement shall inure to
the benefit of and be binding upon the respective successors and permitted
assigns of the parties; provided that
-5-
<PAGE>
Grantor may not transfer any of the Collateral or any rights hereunder, without
the prior written consent of TBCC, except as specifically permitted *.
* BY THIS AGREEMENT
9.6 SEVERABILITY. The provisions of this Agreement are severable. If any
provision of this Agreement is held invalid or unenforceable in whole or in part
in any jurisdiction, then such invalidity or unenforceability shall affect only
such provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such provision or part thereof in any other jurisdiction, or any
other provision of this Agreement in any jurisdiction.
9.7 ENTIRE AGREEMENT. This Agreement is subject to modification only by a
writing signed by the parties, except as provided in Section 4 of this
Agreement. To the extent that any provision of this Agreement conflicts with any
provision of the Loan Agreement, the provision giving TBCC greater rights or
remedies shall govern, it being understood that the purpose of this Agreement is
to add to, and not detract from, the rights granted to TBCC under the Loan
Agreement. This Agreement, the Loan Agreement, and the documents relating
thereto comprise the entire agreement of the parties with respect to the matters
addressed in this Agreement.
9.8 FEES AND EXPENSES. Grantor shall pay to TBCC on demand all costs and
expenses that TBCC pays or incurs in connection with the negotiation,
preparation, consummation, administration, enforcement, and termination of this
Agreement, including: (a) reasonable attorneys' and paralegals' fees and
disbursements of counsel to TBCC; (b) costs and expenses (including reasonable
attorneys' and paralegals' fees and disbursements) for any amendment,
supplement, waiver, consent, or subsequent closing in connection with this
Agreement and the transactions contemplated hereby; (c) costs and expenses of
lien and title searches; (d) taxes, fees, and other charges for filing this
Agreement at the United States Patent and Trademark Office, or for filing
financing statements, and continuations, and other actions to perfect, protect,
and continue the security interest created hereunder; (e) sums paid or incurred
to pay any amount or take any action required of Grantor under this Agreement
that Grantor fails to pay or take; (f) costs and expenses of preserving and
protecting the Collateral; and (g) costs and expenses (including reasonable
attorneys' and paralegals' fees and disbursements) paid or incurred to enforce
the security interest created hereunder, sell or otherwise realize upon the
Collateral, and otherwise enforce the provisions of this Agreement, or to defend
any claims made or threatened against the TBCC arising out of the transactions
contemplated hereby (including preparations for the consultations concerning any
such matters). The foregoing shall not be construed to limit any other
provisions of this Agreement or the Loan Documents regarding costs and expenses
to be paid by Grantor. The parties agree that reasonable attorneys' and
paralegals' fees and costs incurred in enforcing any judgment are recoverable as
a separate item in addition to fees and costs incurred in obtaining the judgment
and that the recovery of such attorneys' and paralegals' fees and costs is
intended to survive any judgment, and is not to be deemed merged into any
judgment.
9.9 INDEMNITY. Grantor shall protect, defend, indemnify, and hold
harmless TBCC and TBCC's assigns from all liabilities, losses, and costs
(including without limitation reasonable attorneys' fees) incurred or imposed on
TBCC relating to the matters in this Agreement.
9.10 FURTHER ASSURANCES. At TBCC's request, Grantor shall execute and
deliver to TBCC any further instruments or documentation, and perform any acts,
that may be reasonably necessary or appropriate to implement this Agreement, the
Loan Agreement or any other agreement, and the documents relating thereto,
including without limitation any instrument or documentation reasonably
necessary or appropriate to create, maintain, perfect, or effectuate TBCC's
security interests in the Collateral.
-6-
<PAGE>
9.11 RELEASE. At such time as Grantor shall completely satisfy all of
the Obligations and the Loan Agreement shall be terminated, TBCC shall execute
and deliver to Grantor all assignments and other instruments as may be
reasonably necessary or proper to terminate TBCC's security interest in the
Collateral, subject to any disposition of the Collateral which may have been
made by TBCC pursuant to this Agreement. For the purpose of this Agreement, the
Obligations shall be deemed to continue if Grantor enters into any bankruptcy or
similar proceeding at a time when any amount paid to TBCC could be ordered to be
repaid as a preference or pursuant to a similar theory, and shall continue until
it is finally determined that no such repayment can be ordered.
9.12 GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF
THIS AGREEMENT AND ANY DISPUTE ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT, WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE
GOVERNED BY THE INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS. ALL
DISPUTES BETWEEN THE GRANTOR AND TBCC, WHETHER SOUNDING IN CONTRACT, TORT,
EQUITY OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATED
1N CHICAGO, ILLINOIS, AND THE COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN;
PROVIDED, HOWEVER, THAT TBCC SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BY
APPLICABLE LAW, TO PROCEED AGAINST THE GRANTOR OR ITS PROPERTY IN ANY LOCAT1ON
REASONABLY SELECTED BY TBCC IN GOOD FAITH TO ENABLE TBCC TO REALIZE ON SUCH
PROPERTY, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF TBCC. THE
GRANTOR AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR
CROSS-CLAIM IN ANY PROCEEDING BROUGHT BY TBCC. THE GRANTOR WAIVES ANY OBJECTION
THAT 1T MAY HAVE TO THE LOCATION OF THE COURT IN WHICH TBCC HAS COMMENCED A
PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON FORUM NON CONVENIENS.
9.13 WAIVER OF RIGHT TO JURY TRIAL. TBCC AND GRANTOR EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN TBCC AND GRANTOR; OR (III) ANY CONDUCT,
ACTS OR OMISSIONS OF TBCC OR GRANTOR OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH TBCC OR
GRANTOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first written above.
TRANSAMERICA BUSINESS TUT SYSTEMS, INC.
CREDIT CORPORATION
By________________________ By: /s/ Nelson B. Caldwell
---------------------------
Title_____________________ Title CEO
-------------------------
-7-
<PAGE>
EXHIBIT "A"
U.S. TRADEMARKS
REGISTERED
<TABLE>
<CAPTION>
MARK REG. NO. REG. DATE
- ---- -------- ---------
<S> <C> <C>
Fast Copper Technology 2,118,251 Dec. 2, 1997
Silver Streak 1,889,180 Apr. 11, 19
TUT Systems 1,916,130 Sep. 5, 1995
Tutankhamon 1,856,196 Sep. 27, 1994
</TABLE>
<PAGE>
EXHIBIT "A"
U.S. TRADEMARKS
PENDING
<TABLE>
<CAPTION>
MARK SERIAL NO. FILING DATE
- ---- ---------- -----------
<S> <C> <C>
Expresso 282,693 4/25/97
Home Run 165,243 9/13/96
Immaculate Connection 039,734 3/19/90
Magik Net 9/10/90
SLC 005,833 10/13/95
</TABLE>
<PAGE>
EXHIBIT "B"
U.S. PATENTS
REGISTERED
<TABLE>
<CAPTION>
TITLE
- ----- REG. DATE REG. NO.
----------- ---------
<S> <C> <C>
Local Area Network Amplifier for Twisted Mar. 2, 1993 5,191,300
Pair Lines
Network Monitor and Test Apparatus Nov. 9, 1993 5,260,664
EMI Suppression Coding Feb. 1, 1994 5,238,807
Network Monitor and Test Apparatus Sep. 13, 1994 5,347,225
Network Monitor and Test Apparatus Nov. 15, 1994 5,365,515
Flat Cable to Flat Parallel Wire Cable Jan. 3, 1995 5,379,005
EMI Suppression Coding Jun. 6, 1995 5,422,919
Enhanced Collision Detection for Ethernet Sep. 12, 1995 5,450,594
Network
Flat Cable to Flat Parallel Wire Cable Nov. 14, 1995 5,467,061
Common Mode Current Cancellation in Dec. 24, 1996 5,587,692
Twisted Pairs
Time Dependent Encoding System Dec. 9, 1997 5,696,790
Circuit For Preventing Base Line Wander Sep. 22, 1998 5,812,597
Of Digital Signals in a Network Receiver
</TABLE>
<PAGE>
EXHIBIT "B"
U.S. PATENTS
REGISTERED
<TABLE>
<CAPTION>
TITLE REG. DATE REG. NO.
- ----- --------- --------
<S> <C> <C>
Local Area Network Amplifier for Twisted Mar. 2, 1993 5,191,300
Pair Lines
Network Monitor and Test Apparatus Nov. 9, 1993 5,260,664
EMI Suppression Coding Feb. 1, 1994 5,238,807
Network Monitor and Test Apparatus Sep. 13, 1994 5,347,225
Network Monitor and Test Apparatus Nov. 15, 1994 5,365,515
Flat Cable to Flat Parallel Wire Cable Jan. 3, 1995 5,379,005
EMI Suppression Coding Jun. 6, 1995 5,422,919
Enhanced Collision Detection for Ethernet
Network Sep. 12, 1995 5,450,594
Flat Cable to Flat Parallel Wire Cable Nov. 14, 1995 5,467,061
Common Mode Current Cancellation in
Twisted Pairs Dec. 24, 1996 5,587,692
Time Dependent Encoding System Dec. 9, 1997 5,696,790
Circuit For Preventing Base Line Wander
Of Digital Signals in a Network Receiver Sep. 22, 1998 5,812,597
</TABLE>
<PAGE>
EXHIBIT "B"
U.S. PATENTS
PENDING
<TABLE>
<CAPTION>
Title DOCKET FILE NO. SERIAL NO.
- ----- --------------- ----------
<S> <C> <C>
Apparatus and Method for Selecting Different 85710.P024 08/845,560
Communication Speeds on a Data Signal Line
Method and Apparatus for Encoding a Bit Sequence 85710.P025 08/925,205
For Transmission Over Pots Wiring
Encoding/Detection Method for Digital Data 85710.P026 08/899,220
Method and Apparatus for Detecting Collisions on a 85710.P027 08/925,043
Network
Encoding/Detection Method for Digital Data 09/024,883
Transmitter with a Signal Having Multiple Levels
Method and Apparatus for Dynamically Varying
The Noise Sensitivity of a Receiver 85710.P030
Method and Apparatus for Installing a Software
Upgrade Within a Memory Resource Associated
With a Computer System 85710.P031
</TABLE>
<PAGE>
EXHIBIT "B"
U.S. PATENTS
PENDING
<TABLE>
<CAPTION>
Title DOCKET FILE NO. SERIAL NO.
- ----- --------------- ----------
<S> <C> <C>
Method and Apparatus for Transmitting and
Receiving a Symbol Over Pots Wiring Using a
Multi-Cycle Waveform 85710.P032
Method and Apparatus for Detecting Collisions
On a Network Using Multi-Cycle Waveform Pulses 85710.P033
</TABLE>
<PAGE>
EXHIBIT "B"
U.S. PATENTS
PENDING
<TABLE>
<CAPTION>
Title DOCKET FILE NO. SERIAL NO.
- ----- -------------- ----------
<S> <C> <C>
Method and Apparatus for the Secure Switching
Of a Packet within a Communications Network 85710.P034
Method and Apparatus for Automatically Reducing
Cross-Talk Between Wires Coupled to a Common
Network Device 85710.P035
Method and Apparatus for Automatically Determining
A Peak Voltage Level for a Data Signal Propagated
on a Carrier Medium 85710.P036
Method and Apparatus for Detecting a Data Signal
on A Carrier Medium 85710.P037
Method and Apparatus for Detecting Reception of
First And Second Portions of a Frame Utilizing
First and Second Levels of Receiver Sensitivity 85710.P038
</TABLE>
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
TO PURCHASE COMMON STOCK OF
TUT SYSTEMS, INC. (THE "COMPANY")
DATE OF INITIAL ISSUANCE: December 18, 1998
THIS CERTIFIES THAT for value received, TBCC FUNDING TRUST II, A DELAWARE
BUSINESS TRUST OR its registered assigns (hereinafter called the "Holder") is
entitled to purchase from the Company, at any time during the Term of this
Warrant, Fifty-Five Thousand (55,000) shares of common stock, $.001 par value,
of the Company (the "Common Stock"), at the Warrant Price, payable as provided
herein. The exercise of this Warrant shall be subject to the provisions,
limitations and restrictions herein contained, and may be exercised in whole or
in part.
SECTION 1. DEFINITIONS.
-----------
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
COMMON STOCK - shall mean and include the Company's authorized Common
------------
Stock, $.001 par value, as constituted at the date hereof.
EXCHANGE ACT - shall mean the Securities Exchange Act of 1934, as amended
------------
from time to time.
SECURITIES ACT - the Securities Act of 1933, as amended.
--------------
TERM OF THIS WARRANT - shall mean the period beginning on the date of
--------------------
initial issuance hereof and ending on December 18, 2003.
WARRANT PRICE - $14.00 per share, subject to adjustment in accordance with
-------------
Section 5 hereof.
WARRANTS - this Warrant and any other Warrant or Warrants are issued
--------
in connection with a Loan and Security Agreement dated December 18, 1998 by and
between the Company and Transamerica Business Credit Corporation (the "Loan
Agreement") to the original holder of this Warrant, or any transferees from such
original holder or this Holder.
WARRANT SHARES - shares of Common Stock purchased or purchasable by the
--------------
Holder of this Warrant upon the exercise hereof.
SECTION 2. EXERCISE OF WARRANT.
-------------------
2.1. PROCEDURE FOR EXERCISE OF WARRANT. To exercise this Warrant in whole
---------------------------------
or in part (but not as any fractional share of Common Stock), the Holder shall
deliver to the Company at its office referred to in Section 13 hereof at any
time and from time to time during the Term of this Warrant: (i) the Notice of
Exercise in the form attached hereto, (ii) cash, certified or official bank
check payable to the order of the Company, wire transfer of funds to the
Company's account, or evidence of any indebtedness
<PAGE>
of the Company to the Holder (or any combination of any of the foregoing) in the
amount of the Warrant Price for each share being purchased, and (iii) this
Warrant. Notwithstanding any provisions herein to the contrary, if the Current
Market Price (as defined in Section 5) is greater than the Warrant Price (at the
date of calculation, as set forth below), in lieu of exercising this Warrant as
hereinabove permitted, the Holder may elect to receive shares of Common Stock
equal to the value (as determined below) of this Warrant (or the portion thereof
being canceled) by surrender of this Warrant at the office of the Company
referred to in Section 13 hereof, together with the Notice of Exercise, in which
event the Company shall issue to the Holder that number of shares of Common
Stock computed using the following formula:
CS = WCS x (CMP-WP)
-------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the Holder
WCS equals the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being exercised, the
portion of the Warrant being exercised (at the date of such
calculation)
CMP equals the Current Market Price (at the date of such calculation)
WP equals the Warrant Price (as adjusted to the date of such calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
2.2 TRANSFER RESTRICTION LEGEND. Each certificate for Warrant Shares shall
---------------------------
bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold or
transferred in The absence of such registration or an exemption
therefrom under said Act."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the holder thereof (which counsel shall be reasonably satisfactory
to counsel for the Company) the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. COVENANTS AS TO COMMON STOCK. The Company covenants and agrees that
----------------------------
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when
-2-
<PAGE>
due and payable any and all federal and state taxes which may be payable in
respect of the issue of this Warrant or any Common Stock or certificates
therefor issuable upon the exercise of this Warrant. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved, free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant.
The Company further covenants and agrees that if any shares of capital stock to
be reserved for the purpose of the issuance of shares upon the exercise of this
Warrant require registration with or approval of any governmental authority
under any federal or state law before such shares may be validly issued or
delivered upon exercise, then the Company will in good faith and as
expeditiously as possible endeavor to secure such registration or approval, as
the case may be. If and so long as the Common Stock issuable upon the exercise
of this Warrant is listed on any national securities exchange, the Company will,
if permitted by the rules of such exchange, list and keep listed on such
exchange, upon official notice of issuance, all shares of such Common Stock
issuable upon exercise of this Warrant.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
------------------------------
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
SECTION 5. ADJUSTMENT OF WARRANT PRICE. The Warrant Price shall be subject to
---------------------------
adjustment from time to time as follows:
(i) [Reserved]
(ii) [Reserved]
(iii) If at any time during the Term of this Warrant, the number of shares of
Common Stock outstanding is increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split-up of shares of Common Stock, then,
following the record date fixed for the determination of holders of Common Stock
entitled to receive such stock dividend, subdivision or split-up, the Warrant
Price shall be appropriately decreased so that the number of shares of Common
Stock issuable upon the exercise hereof shall be increased in proportion to such
increase in outstanding shares.
(iv) If, any time during the Term of this Warrant, the number of shares of
Common Stock outstanding is decreased by a combination of the outstanding shares
of Common Stock, then, following the record date for such combination, the
Warrant Price shall appropriately increase so that the number of shares of
Common Stock issuable upon the exercise hereof shall be decreased in proportion
to such decrease in outstanding shares.
(v) In case, at any time during the Term of this Warrant, the Company shall
declare a cash dividend upon its Common Stock payable otherwise than out of
earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock and of which the denominator shall be such Current
Market Price.
-3-
<PAGE>
(vi) All calculations under this Section 5 shall be made to the nearest cent
or to the nearest one-tenth (1/10) of a share, as the case may be.
(vii) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the
Common Stock is listed or admitted to trading or as reported by Nasdaq (or if
the Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (vii) are available for the period required hereunder, the
Current Market Price shall be determined in good faith by the Board of Directors
of the Company or, if such determination cannot be made, by a nationally
recognized independent investment banking firm selected by the Board of
Directors of the Company (or if such selection cannot be made, by a nationally
recognized independent investment banking firm selected by the American
Arbitration Association in accordance with its rules).
(viii) [Reserved]
(ix) Adjustments made pursuant to clauses (iii), (iv) and (v) above shall be
made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(x) In the event the Company shall propose to take any action of the types
described in clauses (iii), (iv) or (v) of this Section 5, the Company shall
forward, at the same time and in the same manner, to the Holder of this Warrant
such notice, if any, which the Company shall give to the holders of capital
stock of the Company.
(xi) In any case in which the provisions of this Section 5 shall require
that an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event issuing to the
Holder of all or any part of this Warrant which is exercised after such record
date and before the occurrence of such event the additional shares of capital
stock issuable upon such exercise by reason of the adjustment required by such
event over and above the shares of capital stock issuable upon such exercise
before giving effect to such adjustment exercise; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
SECTION 6. OWNERSHIP.
---------
6.1. OWNERSHIP OF THIS WARRANT. The Company may deem and treat the person
-------------------------
in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. TRANSFER AND REPLACEMENT. This Warrant and all rights hereunder are
------------------------
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 13
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it of
-4-
<PAGE>
the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality of a state or
local government or an institutional holder or a nominee for such an
instrumentality or institutional holder an irrevocable agreement of indemnity by
such Holder shall be sufficient for all purposes of this Section 6, and no
evidence of loss or theft or destruction shall be necessary. This Warrant shall
be promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Except as otherwise provided above, in the
case of the loss, theft or destruction of a Warrant, the Company shall pay all
expenses, taxes and other charges payable in connection with any transfer or
replacement of this Warrant, other than stock transfer taxes (if any) payable in
connection with a transfer of this Warrant, which shall be payable by the
Holder. Holder will not transfer this Warrant and the rights hereunder except in
compliance with federal and state securities laws.
SECTION 7. MERGERS, CONSOLIDATION, SALES. In the case of any proposed
-----------------------------
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such consolidation,
merger, sale, reorganization or reclassification) be issued or payable with
respect to or in exchange for the number of shares of such Common Stock
purchasable hereunder immediately before such consolidation, merger, sale,
reorganization or reclassification. In any such case appropriate provision shall
be made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof shall thereafter be applicable as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of this Warrant.
SECTION 8. NOTICE OF DISSOLUTION OR LIQUIDATION. In case of any distribution of
------------------------------------
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. NOTICE OF EXTRAORDINARY DIVIDENDS. If the Board of Directors of the
---------------------------------
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date. The provisions of
this Section 9 shall not apply to distributions made in connection with
transactions covered by Section 7.
SECTION 10. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
-----------------
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. SPECIAL ARRANGEMENTS OF THE COMPANY. The Company covenants and
-----------------------------------
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
-5-
<PAGE>
11.1. WILL RESERVE SHARES. The Company will reserve and set apart and have
-------------------
available for issuance at all times, free from preemptive or other preferential
rights, the number of shares of authorized but unissued Common Stock deliverable
upon the exercise of this Warrant.
11.2. WILL NOT AMEND CERTIFICATE. The Company will not amend its
--------------------------
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. WILL BIND SUCCESSORS. This Warrant shall be binding upon any
--------------------
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. REGISTRATION RIGHTS; ETC. The Company agrees to provide to the
------------------------
Holder written registration rights, substantively the same as now exist for all
other registration rights holders with respect to the common stock of the
Company, on or before May 1, 1999, which shall be in form reasonably acceptable
to Holder.
SECTION 13. NOTICES. Any notice or other document required or permitted to be
-------
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at 15260 Ventura Blvd., Suite 1240, Sherman Oaks,
California 91403, with a copy to Holder at Riverway II, West Office Tower, 9399
West Higgins Road, Rosemont, Illinois 60018, Attention: Legal Department or to
such other address as shall have been furnished to the Company in writing by the
Holder. Any notice or other document required or permitted to be given or
delivered to the Company shall be delivered at, or sent by certified or
registered mail to, the Company at 2495 Estand Way, Pleasant Hill, California
94523, or to such other address as shall have been furnished in writing to the
Holder by the Company. Any notice so addressed and mailed by registered or
certified mail shall be deemed to be given when so mailed. Any notice so
addressed and otherwise delivered shall be deemed to be given when actually
received by the addressee.
SECTION 14. NO RIGHTS AS STOCKHOLDER: LIMITATION OF LIABILITY. This Warrant
-------------------------------------------------
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
SECTION 15. LAW GOVERNING. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
-------------
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE W1TH THE LAWS OF THE
STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 16. MISCELLANEOUS.
-------------
(a) This Warrant and any provision hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by both parties
(or any respective predecessor in interest thereof). The headings in this
Warrant are for purposes of reference only and shall not affect the meaning or
construction of any of the provisions hereof.
(b) All capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Loan Agreement.
-6-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly
authorized officer on December 18, 1998.
TUT SYSTEMS, INC.
By: /s/ Nelson B. Caldwell
----------------------
Title: CEO
------------------
-7-
<PAGE>
FORM OF NOTICE OF EXERCISE
[TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase ___ shares of Common
Stock which the undersigned is entitled in purchase by the terms of the within
Warrant according to the conditions thereof, and herewith
[check one]
. makes payment of $_______ therefor; or
. directs the Company to issue ______ shares, and
to withhold ____ shares in lieu of payment of the
Warrant Price, as described in Section 2.1 of the
Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following
denominations:
___________________________
[Type Name of Holder]
By: _______________________
Title: ____________________
Dated: _____________________
-8-
<PAGE>
FORM OF ASSIGNMENT
(ENTIRE)
[TO BE SIGNED ONLY UPON TRANSFER OF ENTIRE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED __________________________ hereby sells, assigns and
transfers unto ___________________ all rights of the undersigned under and
pursuant to the within Warrant, and the undersigned does hereby irrevocably
constitute and appoint ___________________________ Attorney to transfer the said
Warrant on the books of the Company, with full power of substitution.
____________________________
[Type Name of Holder]
By: _______________________
Title: ____________________
Dated: ______________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-9-
<PAGE>
FORM OF ASSIGNMENT
(PARTIAL)
[TO BE SIGNED ONLY UPON PARTIAL TRANSFER OF WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _____________ hereby sells, assigns and transfers unto
__________________ (i) the rights of the undersigned to purchase _____ shares
of Common Stock under and pursuant to the within Warrant, and (ii) on a
non-exclusive basis, all other rights of the undersigned under and pursuant to
the within it being understood that the undersigned shall retain, severally (and
not jointly) with the transferee(s) named herein, all right assigned on such
non-exclusive basis. The undersigned does hereby irrevocably constitute and
appoint ___________________ Attorney to transfer the said Warrant on the books
of the Company, with full power of substitution.
__________________________
[Type Name of Holder]
By: ______________________
Title: ___________________
Dated: ______________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-10-
<PAGE>
EXHIBIT 10.16
EXTENSION AGREEMENT
-------------------
This Extension Agreement entered into on the 21st day of December,
1998 by and between TUT SYSTEMS, INC., a Delaware corporation, having a place of
business at 2495 Estand Way, Pleasant Hill, CA 94523 (hereinafter "TUT") and AND
YET, INC., a California corporation, having a place of business at 3060 Buena
Vista Way, Berkeley, California, 94708 (hereinafter "AND YET") and Marty Graham
of 3060 Buena Vista Way, Berkeley, California 94708 (hereinafter "GRAHAM") is
made with respect to the following facts.
A. The Parties enter into an Agreement and General Release dated
July 31, 1998 and August 12, 1998 (Prior Agreement).
B. The Parties wish to extend the Prior Agreement with certain
changes set forth below.
NOW, THEREFORE, the Parties agree as follows.
1. Paragraph 2 of the Prior Agreement is amended to change November 30,
1998 to June 30, 1999.
2. TUT hereby assigns to AND YET, INC. all of its right, title and
interest in the following patent applications. A separate assignment is attached
and incorporated by reference into this Agreement.
Title Serial No. Filing Date
----- --------- -----------
"ENCODING/DETECTION METHOD 09/024,883 2/17/98
FOR DIGITAL DATA TRANSMITTER
WITH A SIGNAL HAVING
MULTIPLE LEVELS"
"ENCODING/DETECTION METHOD 08/889,220 7/23/97
FOR DIGITAL DATA"
1
<PAGE>
3. TUT shall obtain a release for GRAHAM from the lockup Agreement to
permit GRAHAM to sell 25,000 shares (post reverse split) of TUT stock, such
release to be obtained prior to an IPO.
4. In all other respects the Parties affirm the terms and conditions
of the Prior Agreement.
Agreed to by:
Date: 12/23/98 /s/ Martin H. Graham
-------------- _______________________________________
Martin H. Graham
Date: 12/18/98 /s/ Matthew Taylor
-------------- _______________________________________
Matthew Taylor
TUT SYSTEMS, INC.
Consent of spouse:
Date: 12/23/98 /s/ Selma Graham
-------------- _______________________________________
Selma Graham
Date: 12/23/98 And Yet, Inc.
--------------
/s/ Martin H. Graham
By: ____________________________________
Martin H. Graham
<PAGE>
TUT SYSTEMS, INC. EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement to Amendment No. 3
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
January 6, 1999
