<PAGE>
Filed pursuant to Rule 424(b)(4)
Registration No. 333-60419
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. See
"Underwriting" for a discussion of the factors 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............................... $18.00 $1.26 $16.74
- --------------------------------------------------------------------------------
Total(3)................................ $45,000,000 $3,150,000 $41,850,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</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 $1,200,000 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 $51,750,000, $3,622,500 and
$48,127,500, 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 February 3, 1999.
------------------
Lehman Brothers
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Salomon Smith Barney
January 29, 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) 1,005,113 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) 95,670 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 5, 12,
13 and 14 of Notes to Financial Statements included elsewhere in this
Prospectus.
4
<PAGE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
Statement of Operations Data:
<S> <C> <C> <C>
Total revenues.................................... $ 4,454 $ 6,221 $ 10,555
Gross margin...................................... 2,256 2,993 4,746
Loss from operations.............................. (4,607) (9,351) (13,956)
Net loss.......................................... (4,427) (9,157) (13,747)
Dividend accretion on preferred stock............. 1,137 1,627 2,584
Net loss attributable to common stockholders...... $(5,564) $(10,784) $(16,331)
Pro forma net loss per share, basic and dilut-
ed(/1/).......................................... $ (1.63)
Shares used in computing pro forma net loss per
share, basic and
diluted(/1/)..................................... 8,389
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------
Actual Pro forma(/2/) As Adjusted(/3/)
-------- -------------- ----------------
(unaudited)
Balance Sheet Data:
<S> <C> <C> <C>
Cash and cash equivalents........... $ 4,452 $11,120 $49,270
Working capital..................... 7,173 13,841 51,991
Total deferred revenue.............. 2,660 2,660 2,660
Long-term debt including current
portion............................ 4,262 4,262 4,262
Redeemable convertible preferred
stock and warrant.................. 45,995 -- --
Total stockholders' equity (defi-
cit)............................... (41,839) 10,824 51,474
</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
$5.6, $10.8 and $16.3 million in fiscal 1996, 1997 and 1998 respectively. As
of December 31, 1998, the Company had an accumulated deficit of $44.4 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 year ended December 31,
1998, sales of the Company's XL products accounted for 65.9% 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."
8
<PAGE>
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.
9
<PAGE>
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 1998, the Company derived approximately 26% and 18% respectively
of its revenues from the combined 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
10
<PAGE>
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
11
<PAGE>
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 18.5% of revenues in 1997 and 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.
12
<PAGE>
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
13
<PAGE>
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 one year, 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 was 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
14
<PAGE>
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 and directors, and the
overwhelming majority of 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 $13.31 per share in the net tangible book value of the
Common Stock from the initial public offering price of $18.00 per share. To
the extent outstanding options are exercised, there will be further dilution.
See "Dilution."
15
<PAGE>
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.
16
<PAGE>
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 $40,650,000 ($46,927,500 if the Underwriters' over-allotment
option is exercised in full) 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
December 31, 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>
December 31, 1998
--------------------------------------
(in thousands)
As
Actual Pro forma(/2/) Adjusted(/3/)
-------- -------------- -------------
(unaudited)
<S> <C> <C> <C>
Long-term debt, net of current portion.. $ 4,262 $ 4,262 $ 4,262
Redeemable convertible preferred stock,
$0.001 par value:
Authorized 7,531,320 shares; Issued
and outstanding 6,354,786 shares (ac-
tual); no shares (pro forma and as
adjusted)............................ 43,895 -- --
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 347,217 shares
(actual); 8,466,767 shares (pro
forma); 10,966,767 shares (as ad-
justed)(1)......................... -- 8 11
Additional paid in capital.............. 2,455 56,677 97,324
Deferred compensation................... (1,427) (1,427) (1,427)
Accumulated deficit..................... (44,434) (44,434) (44,434)
-------- -------- --------
Total stockholders' equity (deficit).... (41,839) 10,824 51,474
-------- -------- --------
Total capitalization.................... $ 8,418 $ 15,086 $ 55,736
======== ======== ========
</TABLE>
- --------
(1) Excludes: (i) an outstanding warrant to purchase 55,000 shares of Common
Stock; (ii) 1,005,113 shares issuable upon exercise of stock options
outstanding as of December 31, 1998 at a weighted average exercise price
of $3.13 per share; (ii) 95,670, 1,000,000 and 250,000 shares reserved 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 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 December
31, 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 December 31, 1998 was
approximately $10,824,000 or approximately $1.28 per share. Without taking
into account any changes in such net tangible book value per share after
December 31, 1998, other than to give effect to the sale of the shares of
Common Stock offered hereby at an initial public offering price of $18.00 per
share and the receipt of the net proceeds of such sale, the pro forma net
tangible book value at December 31, 1998 would have been approximately
$51,474,000 or approximately $4.69 per share. This represents an immediate
increase in net tangible book value per share of $3.41 to existing
stockholders and an immediate dilution of $13.31 per share to new investors.
The following table sets forth this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $18.00
Pro forma net tangible book value per share as of December
31, 1998................................................... $1.28
Increase per share attributable to new investors............ 3.41
-----
Pro forma net tangible book value per share after the Offer-
ing.......................................................... 4.69
------
Dilution per share to new investors........................... $13.31
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
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.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 8,466,767 77% $45,779,000 50% $ 5.41
New investors............... 2,500,000 23 45,000,000 50 18.00
---------- --- ----------- ---
Total..................... 10,966,767 100% $90,779,000 100% $ 8.28
========== === =========== ===
</TABLE>
The above calculations do not give effect to the exercise of outstanding
options to purchase 1,005,113 shares of Common Stock at a weighted average
exercise price of $3.13 per share outstanding on December 31, 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, 1997 and 1998 and for each of the three years in the period ended December
31, 1998 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, 1994, 1995 and 1996 and for each of
the two years in the period ended December 31, 1995 are derived from the
audited financial statements not included elsewhere herein. 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.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues.................. $ 3,690 $ 3,445 $ 4,454 $ 6,221 $ 10,555
Total cost of goods sold........ 2,679 1,688 2,198 3,228 5,809
------- ------- ------- -------- --------
Gross margin................... 1,011 1,757 2,256 2,993 4,746
------- ------- ------- -------- --------
Operating expenses:
Sales and marketing............ 3,361 2,645 3,068 5,147 8,462
Research and development....... 595 993 2,012 3,562 6,200
General and administrative..... 1,269 1,562 1,783 2,375 2,807
Noncash compensation expense... -- -- -- 1,260 1,233
------- ------- ------- -------- --------
Total operating expenses....... 5,225 5,200 6,863 12,344 18,702
------- ------- ------- -------- --------
Loss from operations........... (4,214) (3,443) (4,607) (9,351) (13,956)
Other income (expense), net..... 15 54 181 195 210
------- ------- ------- -------- --------
Loss before income taxes....... (4,199) (3,389) (4,426) (9,156) (13,746)
Income tax expense.............. 1 1 1 1 1
------- ------- ------- -------- --------
Net loss....................... (4,200) (3,390) (4,427) (9,157) (13,747)
Dividend accretion on preferred
stock.......................... 344 694 1,137 1,627 2,584
------- ------- ------- -------- --------
Net loss attributable to common
stockholders................... $(4,544) $(4,084) $(5,564) $(10,784) $(16,331)
======= ======= ======= ======== ========
Net loss per share attributable
to common stockholders, basic
and diluted.................... $(54.13) $(32.56) $(37.51) $ (59.36) $ (60.62)
======= ======= ======= ======== ========
Shares used in computing net
loss per share attributable to
common stockholders, basic and
diluted........................ 84 125 148 182 269
======= ======= ======= ======== ========
Pro forma net loss per share,
basic and diluted(/1/)......... $ (1.63)
========
Shares used in computing pro
forma net loss per share, basic
and diluted(/1/)............... 8,389
========
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, 1998
------------------------------------- -----------------------------------------
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>
Cash, cash equivalents
and short-term
investments............ $ 240 $ 1,531 $ 8,950 $ 10,285 $ 4,452 $ 11,120 $ 49,270
Working capital (defi-
cit)................... (714) 1,771 8,357 11,066 7,173 13,841 51,991
Total assets............ 2,103 3,198 10,689 15,168 15,257 21,925 62,575
Redeemable convertible
preferred stock and
warrant................ 5,676 12,381 24,684 38,871 45,995 -- --
Long-term debt, net of
current portion........ 9 55 190 140 4,262 4,262 4,262
Accumulated deficit..... (7,671) (11,755) (17,319) (28,103) (44,434) (44,434) (44,434)
Total stockholders' eq-
uity (deficit)......... (6,065) (10,137) (15,694) (26,444) (41,839) 10,824 51,474
</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 18.5% of revenues in 1997 and 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 December
31, 1998, had an accumulated deficit of $44.4 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 one year, 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
December 31,
------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Total revenues....................................... 100.0% 100.0% 100.0%
Total cost of goods sold............................. 49.3 51.9 55.0
------ ------ ------
Gross margin....................................... 50.7 48.1 45.0
Operating expenses:
Sales and marketing................................ 68.9 82.7 80.2
Research and development........................... 45.2 57.3 58.7
General and administrative......................... 40.0 38.2 26.6
Noncash compensation expense....................... -- 20.2 11.7
------ ------ ------
Total operating expenses......................... 154.1 198.4 177.2
------ ------ ------
Loss from operations............................... (103.4) (150.3) (133.2)
Other income (expense), net.......................... 4.0 3.1 2.0
------ ------ ------
Loss before income taxes........................... (99.4) (147.2) (130.2)
Income tax expense................................... 0.0 0.0 0.0
------ ------ ------
Net loss........................................... (99.4)% (147.2)% (130.2)%
====== ====== ======
</TABLE>
Years Ended December 31, 1998, 1997, and 1996
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 $10.6 million for the year ended
December 31, 1998 from $6.2 million for the year ended December 31, 1997 and
from $4.5 million for the year ended December 31, 1996. The increase in 1998
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 $0.8 million for the year ended December 31, 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 $3.5 million. Approximately $2.7 million of such
fees have been deferred at December 31, 1998. The increase in 1997 was
primarily due to increased sales of the Company's XL products combined with
initial sales of its Expresso products.
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 $5.8 million for the year ended
December 31, 1998 from $3.2 million for the year ended December 31, 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,
and 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. The Company's gross margin on an absolute basis
increased to $4.7 million for the year ended December 31, 1998 from $3.0
million for the year ended December 31, 1997 and from $2.3 million for the
year ended December 31, 1996. Gross margin as a percentage of revenues
decreased to 45.0% of revenues for the year ended December 31, 1998 from 48.1%
of revenues for the year ended December 31, 1997 and from 50.7% of revenues
for the year ended December 31, 1996. The decrease in
23
<PAGE>
gross margin as a percent of revenues in 1998 was 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 margin. 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. The decrease in gross
margin as a percentage 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.
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 $8.5 million for the year ended December 31,
1998 from $5.1 million for the year ended December 31, 1997 and from $3.1
million for the year ended December 31, 1996. The increases in both 1998 and
1997 were 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 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 $6.2 million for the year ended
December 31, 1998 from $3.6 million for the year ended December 31, 1997 and
from $2.0 million for the year ended December 31, 1996. The increase in 1998
was 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 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 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 $2.8 million for the year ended December
31, 1998 from $2.4 million for the year ended December 31, 1997 and from $1.8
million for the year ended December 31, 1996. The increases in both 1998 and
1997 were primarily due to additions of administrative personnel and increases
in other costs related to the Company's growth. 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 $1.2 million for the year ended
December 31, 1998. 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 year ended December 31, 1996. The Company intends to recognize
$1.4 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.
24
<PAGE>
Other Income (Expense), Net. Other income (expense), net consists of
interest income on cash balances, offset by interest expense associated with
credit facilities. The Company's other income (expense), net was $0.2 million
for each of the years ended December 31, 1998, 1997 and 1996.
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 December 31, 1998, the Company had cash and cash equivalents of $4.5
million. In addition, the Company has a credit facility to borrow 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. The
Company has approximately $4.3 million borrowed against the credit facility as
of December 31, 1998.
Net decrease in cash and cash equivalents in the year ended December 31,
1998 of $0.9 million resulted primarily from a net loss of $13.7 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, net proceeds from the sale of preferred securities and net
borrowings from credit facilities. 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.
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.
25
<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"), 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. ("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.
26
<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".]
27
<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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The Tut Systems Solution
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of
telephone companies and the copper telephone wires in homes, businesses and
other buildings. The Company's products utilize its proprietary FastCopper
technology to exploit the underutilized bandwidth of existing last mile and
PCN infrastructures by reducing the noise, radio frequency interference and
signal cross talk inherent in high-speed data transmission over copper
telephone wires. FastCopper technology is found in a number of the Company's
cost-effective, scalable and easy to deploy products to meet the needs of
diverse customers.
Tut's XL products extend Ethernet networks across corporate and educational
campuses, medical and hospital complexes and other multi-building or multi-LAN
premises without having to install additional wires or fiber optic cable. The
Company believes that its XL1500 product series are the only products that
transmit data at speeds up to 10Mbps over a single pair of copper telephone
wires at distances up to 1,500 feet. Other of the Company's XL products extend
Ethernet LANs at varying speeds to distances up to 24,700 feet.
The Company's Expresso GS system is used by telecommunications service
providers, including ITOCs, ISPs and CLECs, to provide high-speed data
services, including Internet access, to both business and residential
customers over the existing copper-based last mile infrastructure
traditionally used for telephone service. Taking advantage of the Company's
proprietary SmartWire and All-Rate DSL features on Expresso GS, service
providers can reach geographically dispersed subscribers and offer a range of
bandwidth and price options to such subscribers. The Company believes that
Expresso GS offers service providers a low initial deployment cost, enabling
the delivery of high-speed services to a variety of markets throughout the
service area.
The Company's Expresso MDU system, which is integrated with its proprietary
HomeRun technology, provides low cost, high-speed bandwidth to multiple
tenants within an MDU. Expresso MDU is a compact system including integrated
AC power, secure high-speed switching, and WAN interfaces for deployment in
the basements of apartment buildings, in wiring rooms of hotels and in other
locations where access lines are centrally concentrated. The Company believes
that Expresso MDU is the only single-box solution allowing owners of MDUs to
deliver secure high-speed data and LAN services for multiple tenants in MDUs.
The Company's recently introduced LongRun line card, when used as part of the
Expresso MDU system, extends the delivery of these services to tenants in
garden style apartment complexes.
The Company's HomeRun technology enables a cost-effective Ethernet LAN to be
quickly implemented over the telephone wires found in a business or residence,
without interfering with existing telephone service that may be running over
these same wires. This proprietary technology has been adopted as the first
generation standard for home networking over copper telephone wires by the
Home PNA and is licensed to leading semiconductor, computer hardware and
consumer electronics manufacturers. HomeRun technology can be embedded in
integrated circuits and consumer products, including PCs, peripherals, modems
(56 Kbps, ISDN, xDSL, cable and wireless), Internet telephones and television-
based web browsers, thereby lowering the cost of deploying the Company's
Expresso MDU system and facilitating the commercial acceptance of the
Company's products.
Strategy
Tut Systems' objective is to be the leading provider of advanced
communications products for high-speed data access that exploit the large
existing infrastructures of copper telephone wires which lead into and reside
within private homes, businesses and other premises. Key elements of the
Company's business strategy are as follows:
Penetrate High Growth Markets with Expresso GS and Expresso MDU. The Company
aggressively markets its Expresso GS and Expresso MDU products to fast growing
service providers, including ISPs and CLECs, who can benefit from highly
scalable Internet access solutions with low initial deployment costs. The
Company uses its direct sales force to target the largest service providers
and MDU owners and operators, and reaches smaller service providers through
its value added resellers ("VARS"). The Company intends to use
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large regional and national service providers to sell Expresso MDU systems to
smaller MDU owners. The Company seeks to increase the demand for its Expresso
systems from service providers and MDU owners and operators by reducing the
total cost of service deployment through the licensing of its HomeRun
technology to manufacturers of integrated circuits and consumer products,
including PCs, peripherals, modems (56 Kbps, ISDN, xDSL, cable and wireless),
Internet telephones and television-based web browsers.
Develop Innovative Technology and Systems Enhancements. The Company uses its
rapid product development capabilities and its FastCopper technology to
enhance existing products and develop future generations of products. Tut
seeks to extend its FastCopper technology to enable higher data speeds over
longer distances. The Company plans to enhance the Expresso platform by
incorporating additional xDSL technologies such as discrete multitone ("DMT")
and G.lite (a consumer focused version of asynchronous digital subscriber line
("ADSL")), higher speed wide area network ("WAN") interfaces and new features
for its network management software.
Leverage HomeRun Technology and Partnerships. In June 1998, the Company's
HomeRun technology was selected as the initial specification for a home
networking standard to be promoted by the Home PNA. The Company has licensed
HomeRun to leading semiconductor, computer hardware, and consumer electronics
manufacturers including 3Com, AMD, AT&T Wireless, Compaq, Davicom, Intel,
Lucent, Motorola, National Semiconductor, Rockwell and TDK. The Company
expects that its licensees will embed HomeRun technology into integrated
circuits and consumer products, including PCs, peripherals, modems (56 Kbps,
ISDN, xDSL, cable and wireless), Internet telephones and television-based web
browsers. The Company believes that the availability of these devices will
reduce the total cost of deploying services based on HomeRun enabled versions
of Expresso MDU. The Company's relationships with its licensees also enable
the Company to better anticipate market trends, comprehend customer
requirements, gain early access to next generation technology and accelerate
product development and market acceptance of new technologies.
Drive Industry Standards. The Company's membership in industry alliances
such as the Home PNA and the Universal ADSL Working Group, a committee that is
working to establish communications standards for G.lite, facilitates the
creation of easy to use, affordable, high-speed home networking solutions over
existing copper telephone wires. HomeRun technology and products have been
specifically designed to be compatible with, and to extend the benefits of,
G.lite implementations of ADSL. The Company believes that its participation in
standards setting activities provides valuable insight and leads to
relationships that can assist the Company in achieving early to market
advantage in the development and sale of future standards based products.
Standards participation also provides the Company with the ability to sponsor
its own intellectual property for integration in future networking standards.
Expand International Presence. The Company believes that its Expresso MDU
product line, which has been developed in conformance with certain
international standards, can serve a substantial market for high-speed data
access products outside of the United States. The Company markets its Expresso
MDU products through its established base of international distributors and is
actively adding new distributors who focus on the MDU market.
Core Technologies and Products
FastCopper Technology
High-speed digital signals are severely distorted and subject to noise,
radio frequency interference, signal crosstalk and echos when transmitted over
long lengths of ordinary copper telephone wires. The Company has developed a
broad base of proprietary FastCopper technology to address noise and
distortion problems so that high-speed data access can be achieved over a
single pair of ordinary copper telephone wires used throughout the local loop,
and in corporate and educational campuses, apartment buildings, hotels and
single family homes. FastCopper technology encompasses three main areas of
expertise to maximize transmission rates at minimum costs over existing copper
telephone wires: (i) noise reduction, (ii) analog and digital signal
processing to reduce distortion, and (iii) digital modulation techniques.
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The Company uses its FastCopper technology, along with commercially
available components, to build its high-speed data access products. In the
XL1500 product series, the Company applied its noise reduction and signal
processing expertise to build a 10 Mbps, 1,500 foot Ethernet LAN extension
product to operate over a single pair of copper telephone wires. For its
Expresso products, the Company pioneered the use of rate adaptive synchronous
digital subscriber line ("SDSL") technology and recently introduced SDSL
products which extend to distances up to 24,700 feet without the use of
repeaters. For HomeRun, the Company developed a proprietary modulation
technique to transmit high-speed data signals over random tree and branch
networks typically found in single family homes.
XL Products
Tut Systems' XL LAN extenders and connectivity products provide low cost,
high-speed networking across private copper networks residing in corporate and
educational campuses, medical and hospital complexes and other multi-building
or multi-LAN premises. The XL products enable Ethernet connections from 600
feet to over 24,000 feet using existing ordinary copper telephone wires. These
products connect individual LAN networks across a campus, or connect a
specific private copper network to the local loop.
XL products include:
. The XL600 series which allows quick, economical networking of remote
workstations using a single pair of copper telephone wires and provides
10 Mbps Ethernet transmissions across distances up to 600 feet.
. The XL1500 series which provides an economic solution for interconnecting
LAN segments in a campus environment at 10 Mbps for distances up to 1,500
feet on a single pair of copper telephone wires.
. The XL12000 which supports 2 Mbps transmission rates over distances up to
12,000 feet.
. The new XL-2412 which provides transmission on campuses at speeds of 1.2
Mbps at distances up to 12,000 feet, or 192 Kbps at distances up to
24,700 feet, using a single pair of copper telephone wires and standard
10Base-T Ethernet LAN interfaces.
[Graphic depicting "The Networked Campus"]
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The Company expects to make SNMP-based management available for its newer
XL12000 and XL-2412 products to support wide scale and remote management of XL
products across large environments.
The Company recently introduced its new WL-2000 product, a wireless Ethernet
bridge which enables high-speed LAN connections over distances of several
miles without the need for a physical copper connection.
Expresso System Platforms
The Company's Expresso GS and Expresso MDU products are designed to be used
by ITOCs, ISPs, CLECs and MDU owners and operators to provide high-speed data
services to large numbers of end users over local loop and private copper
network infrastructures. Expresso GS is DC-powered and intended for use by
service providers to serve last mile applications using xDSL technologies.
Expresso MDU is AC-powered and, when integrated with the Company's HomeRun
technology, provides owners of private copper networks with an easy to deploy
and scalable means to distribute high-speed data access to tenants over the
copper telephone wires found in MDUs.
An Expresso GS or Expresso MDU system consists of a compact, modular
central-site shelf with an SNMP management card, optional switching,
multiplexing and WAN interface cards, and up to 17 xDSL, HomeRun or LongRun
line cards. The 10 1/2 inch-high (6 rack units) system is available with two
mounting options, either 19 inches wide (for data center and international
installations) or 23 inches wide (for telephone company installations).
[Graphic depicting the Expresso GS/MDU System]
Each Expresso GS or Expresso MDU backplane supports a total bandwidth
capacity of 6.8 Gbps. Each line card slot supports 400 Mbps of bandwidth. This
high bandwidth permits the Expresso platform to accommodate future high-speed
access technologies such as very high bit rate digital subscriber line
("VDSL"). Different line technologies can be mixed and matched in any one
Expresso GS or Expresso MDU shelf on a line card by line card basis.
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Each Expresso GS and Expresso MDU shelf can support up to 136 line side
subscriber connections making the Expresso GS and Expresso MDU platforms among
the highest density xDSL platforms in the industry. Multiple Expresso GS and
Expresso MDU shelves can be interconnected via 10 or 100Base-T Ethernet
connections, allowing systems to accommodate hundreds of subscribers onto a
common WAN interface.
The network management system for Expresso GS and Expresso MDU allows
efficient end to end remote network management and service configuration via
either Telnet or SNMP-based management systems. In addition to a broad range
of configuration options, the Expresso platform provides an extensive set of
diagnostic tools including such capabilities as per line bit error rate tests,
validation of copper wire connectivity and remote modem and router tests.
Customers can upgrade Tut software, residing in both the Expresso shelf as
well as in remote M-1100 series routers, as required from remote network
management centers.
Expresso GS
An Expresso GS configuration for local loop applications includes a compact
and modular system with xDSL line cards connected to remote M-1100 series
routers. The M-1100 series routers connect users' PCs or LANs to the Expresso
GS system over a local loop that may extend up to 24,700 feet using the
Company's current SDSL line technology. The Company's dynamic SmartWire SDSL
rate adaptation enables all subscribers to be served at the highest attainable
speeds over each loop. Through Expresso's All-Rate DSL feature, a service
provider can offer tiered access services in increments of 64 Kbps to meet the
varying bandwidth and price requirements of each subscriber. All-Rate DSL
allows service providers to offer a low cost, low bandwidth, entry level
service that can expand to higher bandwidth capabilities as a subscriber's
need for bandwidth expands. The Company's M-1100 router provides a standard
10Base-T interface for connection to users PCs or LANs. The M-1100HR router
will provide users with a HomeRun interface enabling multiple HomeRun-enabled
devices to connect to the Expresso GS system.
[Graphic depicting "The Networked Community"]
Expresso MDU
Expresso MDU integrates the Company's HomeRun technology with its flexible
Expresso platform to provide owners of MDUs with easy to deploy, scalable and
cost-effective solutions to distribute high-speed data access to multiple
tenants over private copper networks within MDUs. The Company shipped its
first Expresso MDU systems configured with HomeRun line cards in the third
quarter of 1998, and configured with LongRun line cards in the fourth quarter
of 1998.
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The Expresso MDU platform shares all of the features and architecture of the
Expresso GS while adding UL-approved AC power options for deployment in
residential locations (e.g. the basement wiring room of a apartment building).
Expresso MDU can be equipped with HomeRun and/or LongRun line cards to provide
a secure Ethernet LAN for each living unit within an MDU. The Company has
developed a HomeRun adapter that converts HomeRun signals to a standard
10Base-T Ethernet interface. Consumer products, such as PCs, peripherals,
Internet telephones and television-based web browsers, that are HomeRun-
enabled can connect to the Expresso MDU over existing copper telephone wires
within an MDU, without the need for any separate modem or network interface
card ("NIC").
[The Graphic depicting "The Networked MDU"]
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HomeRun High-Speed Home Network Technology
HomeRun creates a cost-effective Ethernet LAN over the random topology of
home telephone wires, without disturbing existing telephone service and/or
G.lite service running simultaneously over these same wires. With HomeRun,
multiple devices can share peripherals and/or a single high-speed Internet
access connection on a 1 Mbps Ethernet LAN. HomeRun supports Internet
connections through ISDN or xDSL wireline technologies, a wireless modem or a
cable modem. The Company developed its HomeRun technology using its
proprietary signal processing expertise and digital modulation technique.
Tut's products which incorporate HomeRun technology include 10Base-T adapters
and NICs. The Company has also made HomeRun technology available to third
party vendors for integration into their own products, including integrated
circuits, PCs, peripherals, modems (56Kbps, ISDN, xDSL, cable and wireless),
Internet telephones and television-based web browsers. HomeRun is either
licensed directly to such vendors or is available indirectly via chip sets
from the Company's semiconductor licensees. Since HomeRun is Ethernet standard
at the media access control layer, the Company's licensees can readily
incorporate HomeRun into multiple consumer device designs at a low incremental
cost.
[Graphic depicting "The Networked Home"]
Customers and Markets
The Company targets its development, marketing and sales efforts to service
providers and end users across four market categories, each characterized by a
common demand for high-speed data access:
Corporations and Campuses
Corporate and educational campuses, medical and hospital complexes, and
other multi-building and multi-LAN premises often have a need to interconnect
Ethernet LAN networks that reside in separate buildings or locations across
distances longer than the standard Ethernet limitation of 328 feet. These
connections can be made over copper wire, fiber optic cable, or wireless
radio. Most campus facilities have copper telephone wires and, if properly
equipped, these wires can be used to interconnect standard 10Base-T Ethernet
LANs at native 10 Mbps speeds. As a result, copper telephone wire solutions
for LAN extensions are a cost-effective option for corporation and campus
institutions.
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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
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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 1998, the Company derived
approximately 18.5% 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 1998, the Company derived approximately 26% and 18% respectively
of its revenues from the combined 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
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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
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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
39
<PAGE>
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.
40
<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 Licensing Business Development
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.
41
<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 the Managing General Partner of Crescendo Venture
Management, LLC since September 1998. Mr. Spreng served as President of IAI
Ventures, Inc. from March 1996 to September 1998 and 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.
42
<PAGE>
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 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 and Chief Executive Officer of Illuminet, Inc.
("Illuminet"), a provider of network, database and billing services to the
communications industry, since October 1998, and as a director of Illuminet
since September 1998. Mr. Moore also served as President and Chief Executive
Officer of Illuminet from January 1996 to August 1998. From September 1998 to
October 1998, Mr. Moore served as President, Chief Executive Officer and a
director of VINA Technologies, Inc., a telecommunications equipment company.
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, FVC.COM, Inc., 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.
43
<PAGE>
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 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."
44
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth the compensation
earned by the Company's Chief Executive Officer and its four other most highly
compensated executive officers during the year ended December 31, 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."
45
<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.
46
<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 1,437,500
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 1,005,113 shares were outstanding, 336,717 shares
of Common Stock had been purchased pursuant to exercises of stock options and
stock purchase rights and 95,670 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
47
<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 September 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.
48
<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 September 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.
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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.
50
<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; (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; 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; (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."
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<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.
52
<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
Clifford H. Higgerson(/11/).. 658,591 7.8 6.0
Neal Douglas(/12/)........... 625,000 7.4 5.7
Brion Applegate(/13/)........ 541,667 6.4 5.0
George Middlemas(/14/)....... 536,411 6.3 4.9
Matthew Taylor(/15/)......... 365,246 4.3 3.3
Salvatore D'Auria(/16/)...... 203,125 2.3 1.8
Saul Rosenzweig(/17/)........ 110,913 1.3 1.0
Thomas Warner(/18/).......... 38,437 * *
Allen Purdy(/19/)............ 32,422 * *
Nelson Caldwell(/20/)........ 18,229 * *
Roger Moore(/21/)............ 4,583 * *
David Spreng................. -- -- --
All officers and directors as
a group (16 persons)(/22/).. 3,184,526 36.3% 28.2%
</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.
53
<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.
(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 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.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) Includes 201,076 shares issuable pursuant to options or rights
exercisable within 60 days of September 30, 1998.
(17) 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.
(18) Includes 12,213 shares issuable pursuant to options exercisable within 60
days of December 31, 1998.
(19) Consists of 32,422 shares issuable pursuant to options exercisable within
60 days of December 31, 1998.
(20) Includes 7,031 shares issuable pursuant to options exercisable within 60
days of December 31, 1998.
(21) Consists of 4,583 shares issuable pursuant to options exercisable within
60 days of December 31, 1998.
(22) 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., 625,000 shares held by AT&T Ventures, and 104,913
shares held by Rosetree Partners General Partnership.
54
<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 1,005,113 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
55
<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.
56
<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.
57
<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. ............................................. 810,000
Dain Rauscher Wessels............................................. 495,000
Salomon Smith Barney Inc. ........................................ 495,000
BancBoston Robertson Stephens Inc. ............................... 70,000
Credit Suisse First Boston Corporation............................ 70,000
A.G. Edwards & Sons, Inc. ........................................ 70,000
Everen Securities, Inc............................................ 70,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................. 70,000
SG Cowen Securities Corporation................................... 70,000
Warburg Dillon Read LLC........................................... 70,000
Fahnestock & Co. Inc.............................................. 35,000
Edward D. Jones & Co., L.P........................................ 35,000
Raymond James & Associates, Inc................................... 35,000
SoundView Technology Group, Inc................................... 35,000
C.E. Unterberg, Towbin............................................ 35,000
Wedbush Morgan Securities Inc..................................... 35,000
---------
Total........................................................... 2,500,000
=========
</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 $0.75 per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $0.26 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
58
<PAGE>
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 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 155,000
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 was negotiated among the
Company and the Representatives. Among the factors considered in
59
<PAGE>
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, were 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.
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, 1998 and 1997 and the statements of
operations, stockholders' deficit, and cash flows for each of the three years
in the period ended December 31, 1998, 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.
60
<PAGE>
TUT SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Tut Systems, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations and stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of Tut Systems, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1998, 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
San Jose, California
January 13, 1999
F-2
<PAGE>
TUT SYSTEMS, INC.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, Pro forma
------------------ December 31,
1997 1998 1998
-------- -------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 5,395 $ 4,452 $ 11,120
Short-term investments...................... 4,890 -- --
Accounts receivable, net of allowance for
doubtful accounts of $29 and $115 in 1997
and 1998, respectively..................... 1,626 3,194 3,194
Inventories................................. 1,424 3,787 3,787
Prepaid expenses and other.................. 332 499 499
-------- -------- --------
Total current assets...................... 13,667 11,932 18,600
Property and equipment, net................... 1,345 1,790 1,790
Deferred offering costs....................... -- 955 955
Other assets.................................. 156 580 580
-------- -------- --------
Total assets.............................. $ 15,168 $ 15,257 $ 21,925
======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND WARRANT, AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable............................ $ 1,640 $ 2,421 $ 2,421
Accrued liabilities......................... 747 1,758 1,758
Lines of credit............................. 214 -- --
Deferred revenue............................ -- 580 580
-------- -------- --------
Total current liabilities................. 2,601 4,759 4,759
Lines of credit, net of current portion....... 140 4,262 4,262
Deferred revenue, net of current portion...... -- 2,080 2,080
-------- -------- --------
Total liabilities......................... 2,741 11,101 11,101
-------- -------- --------
Commitments (Notes 10 and 11)
Redeemable convertible preferred stock, $0.001
par value, 7,531 shares authorized, 6,047 and
6,355 shares issued and outstanding in 1997
and 1998, respectively, and none in pro forma
(liquidation value: $43,895 at December 31,
1998)........................................ 37,611 43,895 --
Redeemable convertible preferred stock
warrant...................................... 1,260 2,100 --
-------- -------- --------
38,871 45,995 --
-------- -------- --------
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par
value, 1,339 shares authorized, 1,098
shares issued and outstanding in 1997, 1998
and none in pro forma (liquidation value:
$1,567 at December 31, 1998)............... 1,567 1,567 --
Common stock, $0.001 par value, 100,000
shares authorized, 218, 347 and 8,467
shares issued and outstanding in 1997, 1998
and pro forma, respectively................ -- -- 8
Additional paid in capital.................... 92 2,455 56,677
Deferred compensation......................... -- (1,427) (1,427)
Accumulated deficit........................... (28,103) (44,434) (44,434)
-------- -------- --------
Total stockholders' equity (deficit)...... (26,444) (41,839) 10,824
-------- -------- --------
Total liabilities and stockholders' equity
(deficit)................................ $ 15,168 $ 15,257 $ 21,925
======== ======== ========
</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>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenues:
Product........................................ $ 4,454 $ 6,221 $9,790
License and royalty............................ -- -- 765
------- -------- --------
Total revenues............................... 4,454 6,221 10,555
------- -------- --------
Cost of goods sold:
Product........................................ 2,198 3,228 5,733
License and royalty............................ -- -- 76
------- -------- --------
Total cost of goods sold..................... 2,198 3,228 5,809
------- -------- --------
Gross margin..................................... 2,256 2,993 4,746
------- -------- --------
Operating expenses:
Sales and marketing............................ 3,068 5,147 8,462
Research and development....................... 2,012 3,562 6,200
General and administrative..................... 1,783 2,375 2,807
Noncash compensation expense................... -- 1,260 1,233
------- -------- --------
Total operating expenses..................... 6,863 12,344 18,702
------- -------- --------
Loss from operations......................... (4,607) (9,351) (13,956)
Interest expense................................. (40) (61) (117)
Other income, net................................ 221 256 327
------- -------- --------
Loss before income taxes..................... (4,426) (9,156) (13,746)
Income tax expense............................... 1 1 1
------- -------- --------
Net loss..................................... (4,427) (9,157) (13,747)
Dividend accretion on preferred stock............ 1,137 1,627 2,584
------- -------- --------
Net loss attributable to common stockholders..... $(5,564) $(10,784) $(16,331)
======= ======== ========
Net loss per share attributable to common
stockholders, basic and diluted................. $(37.51) $ (59.36) $ (60.62)
======= ======== ========
Shares used in computing net loss attributable to
common stockholders, basic and diluted.......... 148 182 269
======= ======== ========
Pro forma net loss per share, basic and diluted.. $ (1.63)
========
Shares used in computing pro forma net loss per
share, basic and diluted........................ 8,389
========
</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,
1996................... 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 ............... 129 63 63
Unearned compensation
related to stock
options................ 1,820 (1,820)
Amortization related to
unearned compensation.. 393 393
Common stock warrant
issued................. 480 480
Dividend accretion ..... (2,584) (2,584)
Net loss ............... (13,747) (13,747)
------- -------- --- ------ ------ ------- -------- --------
Balance, December 31,
1998 .................. 1,098 $ 1,567 347 $ -- $2,455 $(1,427) $(44,434) $(41,839)
======= ======== === ====== ====== ======= ======== ========
</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>
Years Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(4,427) $(9,157) $(13,747)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 238 398 606
Provision for (reduction in) doubtful accounts... (94) 14 104
Provision for excess and obsolete inventory...... 12 72 203
Amortization of discounts on investments......... (53) (152) (204)
Noncash compensation expense..................... -- 1,260 1,233
Change in assets and liabilities:
Accounts receivable............................. 49 (1,036) (1,672)
Inventories..................................... 273 (1,241) (2,566)
Prepaid expenses and other assets............... 14 (382) (1,066)
Accounts payable................................ 484 753 781
Deferred revenue................................ -- -- 2,660
Accrued liabilities............................. 312 331 1,011
------- ------- --------
Net cash used in operating activities.......... (3,192) (9,140) (12,657)
------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment................ (565) (969) (1,051)
Purchase of short-term investments................ (7,488) (6,543) (3,906)
Proceeds from maturities of short-term
investments...................................... -- 9,346 9,000
------- ------- --------
Net cash provided by (used in) investing
activities.................................... (8,053) 1,834 4,043
------- ------- --------
Cash flows from financing activities:
Payment on lines of credit........................ (395) (1,130) (1,754)
Proceeds from lines of credit..................... 344 1,088 5,662
Proceeds from issuances of common and preferred
stock, net....................................... 11,174 11,334 3,763
------- ------- --------
Net cash provided by financing activities...... 11,123 11,292 7,671
------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................... (122) 3,986 (943)
Cash and cash equivalents, beginning of period..... 1,531 1,409 5,395
------- ------- --------
Cash and cash equivalents, end of period........... $ 1,409 $ 5,395 $ 4,452
======= ======= ========
Supplemental disclosure of cash flow information:
Interest paid during the period................... $ 40 $ 61 $ 68
======= ======= ========
Income taxes paid during the period............... $ 1 $ 1 $ 1
======= ======= ========
Noncash financing activities:
Common stock warrant issued....................... $ 480
========
</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)
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.
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, 1997, debt securities were classified as held-to-
maturity as the Company intended to, and had the ability to hold these
securities to maturity. The Company had no short-term investments at December
31, 1998. 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, 1996,
1997 and 1998 was $116, $94 and $127, respectively.
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>
F-7
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
2. Summary of Significant Accounting Policies, continued:
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.
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.
F-8
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
2. Summary of Significant Accounting Policies, continued:
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, warrants 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 December 31, 1998. Unaudited pro
forma stockholders' equity at December 31, 1998, as adjusted for the exercise
of the redeemable convertible preferred stock warrant and the conversion of
preferred stock and redeemable preferred stock, is disclosed on the balance
sheet.
F-9
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
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>
Years ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Historical net loss per share attributable to com-
mon stockholders, basic and diluted:
Net loss attributable to common stockholders...... $(5,564) $(10,784) $(16,331)
======= ======== ========
Shares used in computing net loss attributable to
common stockholders, basic and diluted........... 148 182 269
======= ======== ========
Net loss per share attributable to common
stockholders, basic and diluted.................. $(37.51) $ (59.36) $ (60.62)
======= ======== ========
Antidilutive securities including options,
warrants, and preferred stock not included in
historical net loss per share attributable to
common stockholders calculations................. 6,654 8,537 9,180
======= ======== ========
Pro forma net loss per share:
Net loss attributable to common stockholders...... $(16,331)
Less: dividend accretion on redeemable convertible
preferred stock.................................. 2,584
--------
Pro forma net loss................................ $(13,747)
========
Shares used in computing net loss attributable to
common stockholders, basic and diluted........... 269
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.................................... 8,120
--------
Shares used in computing pro forma net loss per
share, basic and diluted......................... 8,389
========
Pro forma net loss per share, basic and diluted... $ (1.63)
========
</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 years ended December 31, 1996, 1997 and 1998.
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.
F-10
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
2. Summary of Significant Accounting Policies, continued:
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 98-5 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 three customers individually representing 16%,
10% and 10% of total accounts receivable at December 31, 1997. The Company had
no customers with accounts receivable balances greater than 10% at December
31, 1998.
Currently, the Company relies on contract manufacturers and some single
source suppliers of materials for certain product components. As a result,
should the Company's current manufacturers or suppliers not produce and
deliver inventory for the Company to sell on a timely basis, operating results
could be adversely impacted.
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company invests its excess cash in debt instruments of the U.S. Treasury,
governmental agencies and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
F-11
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
4. Investments:
The amortized cost and fair value of the Company's investments at December
31, 1997 consisted of $4,890 of commercial paper, all of which matured within
one year. The Company had no investments at December 31, 1998. The cost of
marketable securities approximated the fair value of the securities and the
amount of unrealized gains or losses was not significant at December 31, 1997.
5. Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Finished goods................................................. $1,236 $1,856
Work in process................................................ -- 1,616
Raw material................................................... 188 315
------ ------
$1,424 $3,787
====== ======
</TABLE>
6. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Office equipment............................................. $ 226 $ 519
Computers and software....................................... 921 1,143
Test equipment............................................... 570 860
Leasehold improvements....................................... 432 454
------ ------
2,149 2,976
Less accumulated depreciation and amortization............... (804) (1,186)
------ ------
$1,345 $1,790
====== ======
</TABLE>
7. Accrued Liabilities:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
-------------
<S> <C> <C>
Compensation.................................................. $ 495 $ 936
Accrued offering costs........................................ -- 340
Accrued royalties............................................. 56 32
Other......................................................... 196 450
----- -------
$ 747 $ 1,758
===== =======
</TABLE>
F-12
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
8. Lines of Credit:
The Company has a credit facility of up to $7,500 with a lending
institution. The credit facility is composed of two revolvers: a formula
revolver of up to the lesser of $3,000 or 85% of qualifying accounts
receivable and a non-formula revolver up to $4,500. The credit facility
requires a minimum monthly interest payment of $10. 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. The loans under this
credit facility are collateralized by substantially all assets of the Company.
The Company granted the lending institution a warrant to purchase 55 shares of
the Company's common stock at an exercise price of $14.00 per share on
December 21, 1998. The warrant is exercisable for 5 years from the date of
issuance and has been valued using the Black-Scholes method.
Amounts outstanding under lines of credit are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1998
----- ------
<S> <C> <C>
Lending institution credit facility; non-formula revolver of
$4,500, interest at prime plus 3.5% (11.25% at December 31,
1998)......................................................... $ -- $4,262
Lending institution credit facility; the lower of $3,000 or 85%
of qualifying accounts receivable; interest at prime plus 2%.. -- --
Bank equipment credit line of $700; repaid and cancelled in
1998.......................................................... 354 --
----- ------
$ 354 $4,262
===== ======
</TABLE>
9. Income Taxes:
The income tax provision for each of 1996, 1997 and 1998 of $1 relates to the
state franchise tax fee.
The components of the net deferred tax assets as of December 31, 1997 and 1998
are as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------ -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $8,320 11,171
Research and development credit............................ 306 977
Deferred research and development costs.................... 341 402
Deferred revenue........................................... -- 1,035
Other...................................................... 14 686
------ -------
8,981 14,271
Less valuation allowance.................................... (8,981) (14,271)
------ -------
Net deferred tax assets..................................... $ -- --
====== =======
</TABLE>
Due to the uncertainty surrounding the realization of the tax attributes in~
tax returns, the Company has placed a full valuation allowance against its
otherwise recognizable net deferred tax assets.
At December 31,1998, the Company has approximately $31,120 in federal and
$10,180 in state net operating loss (NOL) carryforwards to reduce future
taxable income. At December 31, 1998, the Company also has research and
experimentation tax credit carryforwards of approximately $568 and $410 for
federal and state income tax purposes, respectively. The NOL and credit
carryforwards expire in 1998 to 2018.
NOL carryforwards of $7,000 and $2,000 for federal and state income tax
purposes, respectively, are subject to annual limitations due to a change in
ownership as defined under the Tax Reform Act of 1986.
F-13
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
10. Lease Obligations:
The Company leases office, manufacturing and warehouse space under
noncancelable operating leases that expire through 2002. 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. The new lease contains
an option to extend for an additional two years at a rate to be determined.
Minimum future lease payments under operating leases at December 31, 1998
are as follows:
<TABLE>
<S> <C>
1999.................................................................... $294
2000.................................................................... 307
2001.................................................................... 162
2002.................................................................... 56
----
$819
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 was $173,
$267 and $314, 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 1997 and 1998, respectively, the royalty fees based on 1% of net sales
were approximately $62 and $100, respectively. The Company elected to pay the
difference between the actual royalty and the $100 minimum for 1997.
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-14
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
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 and 1998, 60%
and 100% of the warrant had vested and an expense of $1,260 and $2,100 was
recorded by the Company, respectively.
13. Stockholders' Equity (Deficit):
Stock Split:
In September 1998, in connection with the Company's reincorporation from
California to Delaware, the Company effected a four for one reverse split of
its common and preferred stock. All share data and stock option plan
information have been restated to reflect the reverse split and the
reincorporation.
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 -----------------
Series Authorized 1996 1997 1998
------ ---------- ----- ----- -----
<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, 1997 and 1998,
the Company has accreted $3,857 and $6,441, 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
F-15
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
13. Stockholders' Equity (Deficit), continued:
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.
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,
-----------------
1996 1997 1998
----- ----- -----
<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>
F-16
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
14. Stock Option Plans:
In November 1993, the Company adopted the 1992 Stock Plan (the 1992 Plan),
under which the Company may grant both incentive stock options and
nonstatutory stock options to employees, consultants and directors. Options
issued under the 1992 Plan can have an exercise price of no less than 85% of
the fair market value, as defined under the 1992 Plan, of the stock at the
date of grant. The 1992 Plan allows for the issuance of a maximum of 750
shares of the Company's common stock. In January 1997, the 1992 Plan was
amended to increase the maximum number of shares that may be issued to 1,250.
In March 1998, the 1992 Plan was amended to increase the maximum number of
shares that may be issued to 1,438. This number of shares of common stock has
been reserved for issuance under the 1992 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.
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 September 1998. At December 31, 1998, the Company has reserved
250 shares of common stock for issuance under the 1998 Purchase Plan. The 1998
Purchase Plan is subject to annual increases, subject to certain limitations.
The Company had no activity in the 1998 Purchase Plan for the year ended
December 31, 1998.
The Company's 1998 Stock Plan (the 1998 Plan) was adopted by the Board of
Directors in July 1998 and was approved by the stockholders in September 1998
and has rights and privileges similar to the 1992 Plan. The 1998 Plan allows
for issuance of 1,000 shares of common stock with annual increases starting in
2000, subject to certain limitations. The Company had no activity in the 1998
Plan for the year ended December 31, 1998.
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,
1996................... 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 ..... 188 -- -- -- -- --
Options granted ........ (414) -- 414 2.00-15.00 2,822 6.82
Options exercised ...... -- 129 (129) 0.36- 2.40 (63) 0.49
Options terminated ..... 5 -- (5) 0.52 (2) 0.40
---- --- ----- ------
Balance, December 31,
1998 .................. 96 337 1,005 $0.28-$15.00 $3,142 $3.13
==== === ===== ======
</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
F-17
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
14. Stock Option Plans, continued:
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 $393 for the year ended December 31, 1997 and the year ended December
31, 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, 1996, 1997 and 1998 vested options to purchase 267, 288 and
385 shares of common stock, respectively were unexercised. The weighted
average exercise price of these options was $0.36 and $0.65 per share for 1997
and 1998, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<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>
$0.28-$0.52 569 7.24 $ 0.46 350 $ 0.42
$2.00-$3.60 246 9.13 $ 2.50 32 $ 2.37
$8.00-$12.00 148 9.47 $11.07 2 $ 8.84
$15.00 42 9.75 $15.00 1 $15.00
</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 1996, 1997 and 1998 include risk-free
interest rates of 6.7%, 6.7% and 5.4%, respectively, and an expected life of 5
years, 4 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 1996, 1997 and 1998
was $.16, $.12 and $2.13 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 1996, 1997 and 1998,
consistent with the provisions of SFAS 123, the pro forma net loss would have
been reported as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common
stockholders--as reported................... $(5,564) $(10,784) $(16,331)
Net loss attributable to common
stockholders--pro forma..................... (5,571) (10,798) (16,496)
Net loss per share attributable to common
stockholders--
as reported................................. (37.51) (59.36) (60.62)
Net loss per share attributable to common
stockholders--
pro forma................................... (37.55) (59.44) (61.24)
</TABLE>
F-18
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
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, 1996, 1997 and 1998.
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>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
United States.......................................... $3,489 $5,236 $ 8,601
Foreign................................................ 965 985 1,954
------ ------ -------
$4,454 $6,221 $10,555
====== ====== =======
</TABLE>
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. One reseller customer accounted for 10%
of the Company's revenue for the year ended December 31, 1998.
F-19
<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.
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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................................................................. 26
Management............................................................... 41
Certain Transactions..................................................... 51
Principal Stockholders................................................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 58
Legal Matters............................................................ 60
Experts.................................................................. 60
Available Information.................................................... 60
Index to Financial Statements............................................ F-1
</TABLE>
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Through and including February 23, 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.
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2,500,000 Shares
[LOGO OF TUT SYSTEMS]
Common Stock
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PROSPECTUS
January 29, 1999
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Lehman Brothers
Dain Rauscher Wessels
a division of Dain Rauscher
Incorporated
Salomon Smith Barney
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