<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
Commission File Number: 333-60419
TUT SYSTEMS, INC.
-----------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2958543
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2495 Estand Way, Pleasant Hill, California 94523
------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (925) 682-6510
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of May 3, 1999, 11,462,069 shares of the Registrant's Common Stock,
$0.001 par value per share, were issued and outstanding.
<PAGE>
TUT SYSTEMS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Condensed Financial Statements (unaudited):
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998......... 1
Condensed Statements of Operations for the three months Ended March 31, 1999
and March 31, 1998.......................................................... 2
Condensed Statements of Cash Flows for the three months Ended March 31, 1999
and March 31, 1998.......................................................... 3
Notes to Unaudited Condensed Financial Statements........................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................. 20
PART II. OTHER INFORMATION
Item 2. Changes in Securities....................................................... 21
Item 6. Exhibits and Reports on Form 8-K............................................ 21
</TABLE>
Signature
Index to Exhibits
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
TUT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 47,263 $ 4,452
Short-term investments............................................................. 3,110 --
Accounts receivable, net of allowance for doubtful accounts of $165 and $115 in
1999 and 1998, respectively....................................................... 4,094 3,194
Inventories........................................................................ 3,479 3,787
Prepaid expenses and other......................................................... 898 499
-------- --------
Total current assets........................................................... 58,844 11,932
Property and equipment, net........................................................... 1,801 1,790
Deferred offering costs............................................................... -- 955
Other assets.......................................................................... 2,500 580
-------- --------
Total assets................................................................... $ 63,145 $ 15,257
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
WARRANT, AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................... $ 2,206 $ 2,421
Accrued liabilities................................................................ 1,898 1,758
Deferred revenue................................................................... 493 580
-------- --------
Total current liabilities...................................................... 4,597 4,759
Lines of credit, net of current portion............................................... 1,380 4,262
Deferred revenue, net of current portion.............................................. 2,603 2,080
-------- --------
Total liabilities.............................................................. 8,580 11,101
-------- --------
Redeemable convertible preferred stock, $0.001 par value, 7,531 shares authorized,
none and 6,355 shares issued and outstanding in 1999 and 1998, respectively.......... -- 43,895
Redeemable convertible preferred stock warrant........................................ -- 2,100
-------- --------
-- 45,995
-------- --------
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value, 5,000 shares authorized,
none and 1,098 shares issued and outstanding in 1999 and 1998, respectively....... -- 1,567
Common stock, $0.001 par value, 100,000 shares authorized, 11,454 and 347 shares
issued and outstanding in 1999 and 1998, respectively............................. 11 --
Additional paid in capital............................................................ 103,848 2,455
Deferred compensation................................................................. (1,313) (1,427)
Accumulated deficit................................................................... (47,981) (44,434)
-------- --------
Total stockholders' equity (deficit)........................................... 54,565 (41,839)
-------- --------
Total liabilities and stockholders' equity (deficit)........................... $ 63,145 $ 15,257
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
TUT SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
----------------------
<S> <C> <C>
Revenues:
Product............................................................................. $ 3,573 $ 1,696
License and royalty................................................................. 318 164
------- -------
Total revenues.................................................................. 3,891 1,860
------- -------
Cost of goods sold:
Product............................................................................. 2,239 1,012
License and royalty................................................................. 3 --
------- -------
Total cost of goods sold........................................................ 2,242 1,012
------- -------
Gross margin........................................................................... 1,649 848
------- -------
Operating expenses:
Sales and marketing................................................................. 2,401 1,831
Research and development............................................................ 1,671 1,443
General and administrative.......................................................... 987 642
Noncash compensation expense........................................................ 114 66
------- -------
Total operating expenses........................................................ 5,173 3,982
------- -------
Loss from operations............................................................ (3,524) (3,134)
Interest expense....................................................................... (176) (10)
Other income........................................................................... 389 124
------- -------
Loss before income taxes........................................................ (3,311) (3,020)
Income tax expense..................................................................... 1 --
------- -------
Net loss........................................................................ (3,312) (3,020)
Dividend accretion on preferred stock.................................................. 235 604
------- -------
Net loss attributable to common stockholders........................................... $(3,547) $(3,624)
======= =======
Net loss per share attributable to common stockholders, basic and diluted (Note 3)..... $(.45) $(16.53)
======= =======
Shares used in computing net loss attributable to common stockholders,
basic and diluted (Note 3)............................................................ 7,872 219
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
TUT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................ $(3,312) $(3,020)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................................... 176 122
Provision for (reduction in) allowance for doubtful accounts...................... 50 (16)
Provision for excess and obsolete inventory........................................ 107 --
Amortization of discounts on investments........................................... (14) (77)
Noncash compensation expense....................................................... 114 66
Change in assets and liabilities:..................................................
Accounts receivable............................................................... (950) (165)
Inventories....................................................................... 201 (381)
Prepaid expenses and other assets................................................. (1,364) 147
Accounts payable.................................................................. (215) (135)
Deferred revenue.................................................................. 436 321
Accrued liabilities............................................................... 140 376
------- -------
Net cash used in operating activities.......................................... (4,631) (2,762)
------- -------
Cash flows from investing activities:
Purchase of property and equipment.................................................. (187) (333)
Purchase of short-term investments.................................................. (3,096) (1,949)
------- -------
Net cash used in investing activities.......................................... (3,283) (2,282)
------- -------
Cash flows from financing activities:
Payment on lines of credit.......................................................... (2,882) --
Proceeds from lines of credit....................................................... -- 139
Proceeds from issuances of common and preferred stock, net.......................... 53,607 2,698
------- -------
Net cash provided by financing activities...................................... 50,725 2,837
------- -------
Net increase (decrease) in cash and cash equivalents........................... 42,811 (2,207)
Cash and cash equivalents, beginning of period....................................... 4,452 5,395
------- -------
Cash and cash equivalents, end of period............................................. $47,263 $ 3,188
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
1. The Company:
Tut Systems, Inc. (the "Company") was founded in 1983 and began operations
in August 1991. The Company designs, develops and markets advanced
communications products which enable high-speed data access over the copper
infrastructure of telephone companies, as well as the copper telephone wires in
homes, businesses and other buildings. The Company's products incorporate high-
bandwidth access multiplexers, associated modems and routers, Ethernet extension
products and integrated network management software.
2. Basis of Presentation:
The accompanying condensed interim financial statements as of March 31,
1999 and 1998 are unaudited. The unaudited interim condensed financial
statements have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
Company's financial position, results of operations and cash flows as of and for
the three months ended March 31, 1999 and 1998. These condensed financial
statements and notes thereto are unaudited and should be read in conjunction
with the Company's audited financial statements included in the Company's
Prospectus, filed with the Securities and Exchange Commission on January 28,
1999. The balance sheet as of December 31, 1998 was derived from audited
financial statements, but does not include all required disclosures required by
generally accepted accounting principles. The results for the three months ended
March 31, 1999 are not necessarily indicative of the expected results for any
other interim period or the year ending December 31, 1999.
4
<PAGE>
TUT SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(unaudited)
3. Summary of Significant Accounting Policies:
Net Loss Per Share and Pro Forma Net Loss Before Dividend Accretion:
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provision of SFAS No. 128, basic and diluted
net loss per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Options, warrants and preferred stock were not
included in the computation of diluted net loss per share because the effect
would be antidilutive.
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net loss per share attributable to common stockholders, basic and diluted:
Net loss attributable to common stockholders......................................... $(3,547) $(3,624)
Net loss per share attributable to common stockholders, basic and diluted............ $ (.45) $(16.53)
======= =======
Shares used in computing net loss attributable to common stockholders, 7,872 219
basic and diluted................................................................ ======= =======
Antidilutive securities including options, warrants and preferred stock not included 1,017 8,968
in net loss per share attributable to common stockholders calculations.............. ======= =======
</TABLE>
Pro forma net loss per share before dividend accretion has been computed as
described above except that it assumes the conversion of preferred stock
outstanding into common stock during the relevant periods.
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Pro forma net loss per share before dividend accretion:
Net loss attributable to common stockholders......................................... $(3,547) $(3,624)
Dividend accretion on redeemable convertible preferred stock......................... 235 604
------- -------
Pro forma net loss before dividend accretion on redeemable convertible preferred $(3,312) $(3,020)
stock............................................................................... ======= =======
Shares used in computing net loss attributable to common stockholders, 7,872 219
basic and diluted..................................................................
Adjustment to reflect the assumed conversion of preferred stock...................... 2,401 7,369
------- -------
Shares used in computing pro forma net loss before dividend accretion on 10,273 7,588
preferred stock, basic and diluted.................................................. ======= =======
Pro forma net loss per share, before dividend accretion, basic and diluted........... $(.32) $(.40)
======= =======
</TABLE>
5
<PAGE>
TUT SYSTEMS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(unaudited)
4. Initial Public Offering and Conversion of Redeemable Convertible Preferred
Stock and Warrant:
In January 1999, the Company completed its initial public offering and
issued 2,875 shares of its common stock at a price of $18.00 per share. The
Company received approximately $47.0 million in cash, net of underwriting
discounts, commissions and other offering costs. Additionally, prior to the
initial public offering, a warrant to purchase 667 shares of Series G
convertible preferred stock at an exercise price of $10.00 per share was
exercised for approximately $6.7 million. Simultaneously with the closing of
the initial public offering, all of the Company's convertible preferred stock
and redeemable convertible preferred stock was automatically converted into an
aggregate of 8,120 shares of common stock.
5. Royalty Obligation
The Company has acquired the rights, title and interests in two patents
from a founder and stockholder of the Company. Under a previous agreement, the
Company was required to pay on-going royalties based on the net sales price of
products sold utilizing the patented technology. In February 1999, the Company
paid the founder $2.5 million as a lump sum payment for all its future royalty
obligations. This payment, net of the current portion, is included in other
assets at March 31, 1999. The Company is amortizing the amount ratably over
five years. This period represents the estimated useful life of the patented
technology.
6. Inventories:
<TABLE>
<CAPTION>
Inventories consist of the following: March 31, December 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Finished goods................................................................ $1,591 $1,856
Work in progress.............................................................. 1,286 1,616
Raw material.................................................................. 602 315
------ ------
$3,479 $3,787
====== ======
</TABLE>
6
<PAGE>
Item 2. 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 related Notes thereto included elsewhere in this Form 10-Q.
This discussion 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,
but are not limited to, those discussed below, as well as those discussed in the
Company's Registration Statement on Form S-1. The Company disclaims any
obligation to update information contained in any forward-looking statement.
Overview
Tut Systems, Inc. (the "Company") designs, develops and markets advanced
communications products and technology 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 also licenses its HomeRun technology, which
enables the creation of an in-home Ethernet LAN over existing telephone wires.
The Company generates revenues primarily from the sale of products and, to
a lesser extent, through the licensing of its 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 primarily 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 to customers outside of the United States accounted for approximately
18.5% and 21.4% of revenues in 1998 and the first quarter of 1999, 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.
The Company 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.
Sales prices of some of the Company's products continue to face downward
pressure as a result of increased competition. Price reductions may be necessary
to remain competitive. Although the Company has been able to offset most price
declines to date 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 continue to 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 Company has generated net operating losses to date and, as of March 31,
1999, had an accumulated deficit of $48.0 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
7
<PAGE>
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.
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 periods indicated:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1999 1998
------ -------
<S> <C> <C>
Total revenues...................................................................... 100.0% 100.0%
Total cost of goods sold............................................................ 57.6 54.4
------ -------
Gross margin...................................................................... 42.4 45.6
Operating expenses:
Sales and marketing............................................................... 61.7 98.4
Research and development.......................................................... 43.0 77.6
General and administrative........................................................ 25.4 34.5
Noncash compensation expense...................................................... 2.9 3.6
------ -------
Total operating expenses....................................................... 133.0 214.1
------ -------
Loss from operations.............................................................. (90.6) (168.5)
Other income (expense), net......................................................... 5.5 6.1
------ -------
Loss before income taxes.......................................................... (85.1) (162.4)
Income tax expense.................................................................. 0.0 0.0
------ -------
Net loss.......................................................................... (85.1)% (162.4)%
====== =======
</TABLE>
Three Months Ended March 31, 1999 and 1998
Revenues. The Company generates revenues primarily from the sale of
products and, to a lesser extent, through the licensing of its HomeRun
technology. The Company's total revenues increased to $3.9 million for the three
months ended March 31, 1999 from $1.9 million for the three months ended March
31, 1998. The increase in 1999 was primarily due to an increase in sales of XL
and Expresso products and continued sales of Expresso GS and Expresso MDU
products which were introduced in the second quarter and third quarter of 1998,
respectively. License and royalty revenues were $0.3 million for the three
months ended March 31, 1999 compared to $0.2 million for the same quarter of
1998. License and royalty revenues to date consist primarily of the currently
recognized portion of fees from total license contracts of $4.2 million.
Approximately $3.1 million and $0.3 million of such fees were deferred at March
31, 1999 and 1998, respectively.
Cost of Goods Sold/Gross Margin. Cost of goods sold consists of raw
materials, contract manufacturing, personnel costs, test and quality assurance
for products, and cost of licensed technology included in the products. The
Company's cost of goods sold increased to $2.2 million for the three months
ended March 31, 1999 from $1.0 million for the three months ended March 31, 1998
primarily due to increased sales and production of the Company's XL, Expresso
GS and Expresso MDU products. The Company's gross margin on an absolute basis
increased to $1.6 million for the three months ended March 31, 1999 from $0.8
million for the three months ended March 31, 1998. Gross margin as a percentage
of revenues decreased to 42.4% of revenues for the three months ended March 31,
1999 from 45.6% of revenues for the three months March 31, 1998. The decrease in
gross margin as a percent of revenues in 1999 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
introduction of additional
8
<PAGE>
Expresso GS, Expresso MDU or any other new products may result in similar
overall gross margins over the next quarter.
Sales and Marketing. Sales and marketing expenses primarily consist of
personnel costs including commissions and costs related to customer support,
travel, trade-shows, promotions and outside services. The Company's sales and
marketing expenses increased to $2.4 million for the three months ended March
31, 1999 from $1.8 million for the three months ended March 31, 1998. The
increase in 1999 was primarily due to increased sales and marketing personnel,
expansion of travel and attendance at trade shows, increased 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 $1.7 million for the three months ended
March 31, 1999 from $1.4 million for the three months ended March 31, 1998. The
increase in 1999 was primarily due to increased expenditures from development of
additional Expresso GS and Expresso MDU products and enhancement of certain XL
products. The Company intends to increase investment in research and
development programs in future periods for the purpose of enhancing current
products for domestic and international markets, reducing the cost of current
products and developing new products.
General and Administrative. General and administrative expenses primarily
consist of personnel costs for administrative officers and support personnel,
and legal, accounting and consulting fees. The Company's general and
administrative expenses increased to $1.0 million for the three months ended
March 31, 1999 from $0.6 million for the three months ended March 31, 1998. The
increase in 1999 was primarily due to additional 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 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 $0.1 million for the three months ended March 31, 1999
and 1998. The Company intends to recognize $1.3 million in additional expenses
related to employee stock options ratably over the remaining vesting period of
the related options. Such deferred expense has been recorded as a reduction of
equity in the balance sheet.
Other Income (Expense), Net. Other income (expense), net consists of
interest income on cash, cash equivalents and short-term investment balances,
offset by interest expense associated with credit facilities. The Company's
other income (expense), net was $0.2 million for the three months ended March
31, 1999 and $0.1 million for the three months ended March 31, 1998. The
increase in 1999 was primarily due to increased balances in cash, cash
equivalents and short-term investments following the Company's initial public
offering.
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 $46.0
million net of offering costs. In January, 1999 the Company completed its
initial public offering and issued 2,875,000 shares of its Common Stock at a
price of $18.00. The Company received approximately $47.0 million in cash, net
of underwriting discounts, commissions and other offering costs. The Company
also received approximately $6.7 million as a result of the exercise of a
warrant to purchase 666,836 shares of Series G convertible preferred stock at a
price of $10.00 per share.
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
9
<PAGE>
annum. The credit facility requires a minimum monthly interest payment of
$10,000. The term of the credit facility is 18 months ending on June 30, 2000
and is automatically renewed for additional terms of one year unless 60 days'
written notice is given by either party. The Company has approximately $1.4
million borrowed against the credit facility as of March 31, 1999.
At March 31, 1999, the Company had cash, cash equivalents and short-term
investments of $50.4 million.
Net cash used by operating activities was $4.6 million for the three months
ended March 31, 1999, compared to $2.8 million for the same period of 1998. The
increase in 1999 was primarily due to the $2.5 million payment to purchase
certain intellectual property previously subject to ongoing royalties.
Net cash used in investing activities was $3.3 million for the three months
ended March 31, 1999, compared to $2.3 million for the same period of 1998. The
increase in 1999 was primarily due to the purchase of short-term investments.
Net cash provided by financing activities was $50.7 million for the three
months ended March 31, 1999, compared to $2.8 million for the same period of
1998. The increase in 1999 was primarily due to the Company's initial public
offering of 2,875,000 shares of its Common Stock for which the Company received
approximately $47.0 million in cash. Additionally, the Company received
approximately $6.7 million as a result of the exercise of a warrant to purchase
666,836 shares of Series G convertible preferred stock at an exercise price of
$10.00 per share. The Company used $2.9 million of cash to pay down its
borrowings under a credit facility entered into in 1998.
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.
During the three months ended March 31, 1999 and 1998, the Company incurred
non-cash expenses related to the amortization of stock compensation and other
non-cash items. The table below sets forth supplemental information concerning
the impact of certain non-cash items on losses from operations. The Statements
of Operations data has been derived from the Company's unaudited condensed
interim financial statements, which, in Management's opinion, have been prepared
on substantially the same basis as the audited annual financial statements
necessary for a fair presentation of the periods presented. The operating
results in any quarter are not necessarily indicative of the results that may be
expected for any future period.
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1999 1998
----------- ------------
<S> <C> <C>
Total revenues...................................................................... $ 3,891 $ 1,860
------- -------
Gross margin........................................................................ 1,649 848
Operating expenses.................................................................. 5,173 3,982
------- -------
Loss from operations................................................................ $(3,524) $(3,134)
======= =======
Supplemental loss information (1):
Historical loss from operations..................................................... $(3,524) $(3,134)
Add back certain non-cash charges:
Amortization of non-cash compensation (2)......................................... 114 66
Depreciation...................................................................... 176 122
------- -------
Supplemental loss from operations excluding certain non-cash charges................ $(3,234) $(2,946)
======= =======
</TABLE>
10
<PAGE>
(1) The accompanying supplemental financial information is presented for
informational purposes only and should not be considered as a substitute
for the historical financial information presented in accordance with
generally accepted accounting principles.
(2) Expense associated with the amortization of non-cash compensation consists
primarily of the recognition of expense related to certain employee stock
option grants, based on the difference between fair value of common stock
and the option exercise price at the date of grant.
The Company believes that its cash, cash equivalents and short-term
investment balances and funds available under its credit facility will be
sufficient to satisfy its cash requirements for at least the next 12 months.
Risk Factors
We Have a History of Losses and Cannot Predict Our Future Profitability
We have incurred substantial and increasing net losses and experienced
negative cash flow each fiscal quarter since our inception. We incurred net
losses attributable to common stockholders of $3.5 million and $3.6 million for
the three months ended 1999 and 1998, respectively. As of March 31, 1999, we had
an accumulated deficit of $48.0 million. We have spent substantial amounts of
money on the development of our Expresso products and our HomeRun technology. We
intend to continue increasing certain of our operating expenditures, including
our sales and marketing, research and development and general and administrative
expenditures. There can be no assurance that we will generate a sufficient
level of revenue to offset these expenditures, or that we will be able to adjust
spending in a timely manner to respond to any unanticipated decline in revenue
due to the fact that our expenditures for sales and marketing, research and
development, and general administrative functions are, in the short term,
relatively fixed. Currently, we derive revenue primarily from an approximate
even mix of sales of our XL and Expresso products. Our ability to increase
revenues or achieve profitability in the future will primarily depend on our
ability to increase sales of our Expresso GS and Expresso MDU products, reduce
manufacturing costs, and successfully introduce and sell enhanced versions of
our existing products and new products. In particular, the success of our
Expresso MDU products will depend, in part, on the timely and widespread
adoption of our HomeRun technology as an embedded technology in integrated
circuits and consumer products. We shipped our 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. We expect that we will
continue to incur losses through 1999, and we may never achieve or sustain
profitability.
Our Operating Results are Likely to Fluctuate in Future Periods and May Fail to
Meet the Expectations of Securities Analysts or Investors
Our annual and quarterly operating results have fluctuated in the past and
are likely to fluctuate significantly in the future as a result of numerous
factors, some of which are outside of our control. These factors include:
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. market acceptance of our products;
. the timing or cancellation of orders from, or shipments to, existing
and new customers;
. the timing of new product and service introductions by us, our
customers, our partners or our competitors;
. variations in our sales or distribution channels;
. variations in the mix of products offered by us;
. competitive pressures, including pricing pressures from our partners and
competitors;
. changes in the pricing policies of our suppliers;
. the availability and cost of key components; and
. the timing of personnel hiring.
As a result of all of the foregoing factors, it is likely that in some
future quarter our operating results will be below the expectations of
securities analysts and investors. In such event, the trading price of our
common stock would likely decline.
In addition, we base our expense levels in part upon our expectations
concerning future revenue and these expense levels are relatively fixed in the
short-term. However, orders for our products may vary from quarter to quarter.
In some circumstances, customers may delay purchasing our current products in
favor of next-generation products. In addition, our new products are generally
subject to technical evaluations which typically last 60 to 90 days. If orders
forecasted for a specific customer for a particular quarter do not occur in that
quarter, our revenues for that quarter would be reduced. If we have lower
revenue in a quarter than expected, we may not be able to reduce our spending in
the short-term in response to such shortfall and reduced revenues would have a
direct impact on our results of operations for that quarter.
We may also experience substantial period to period fluctuations in future
operating results and declines in gross margin as a result of the erosion of
average selling prices ("ASPs") for high-speed data access products and services
due to a number of factors, including competition and rapid technological
change. We anticipate that ASPs for our products will decrease over time due to
competitive pressures and volume pricing agreements. Decreasing ASPs could
cause us to experience decreased revenues despite an increase in the number of
units sold. There can be no assurance that we will be able to sustain or improve
our gross margins in the future, or that we will be able to offset future price
declines with cost reductions.
We Cannot Predict Our Success Because Market Acceptance of Our Products is
Unproven
To be successful, we must devote a substantial amount of human and capital
resources in order to achieve commercial acceptance of our Expresso GS and
Expresso MDU products in the service provider and MDU markets. Our success
depends on successful completion of product trials, our ability to educate
existing and potential customers and end users about the benefits of our
FastCopper technology, including HomeRun, and the development of new products to
meet changing demands of service providers, MDUs and corporate customers. The
success of our Expresso products will also depend on the ability of our
customers to market and sell high-speed data services to end users. We cannot
yet predict whether our Expresso products will achieve broad commercial
acceptance by service providers, MDUs and corporate customers or in any other
market we enter.
In addition, we recently have licensed our 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.
There can be no assurance that our HomeRun technology will continue to be
successfully deployed on a widespread basis and future sales of products
containing our HomeRun technology cannot be predicted. Therefore, there can be
no assurance that significant license and royalty revenues will be forthcoming
in the future. As a result, we believe that period to period comparisons of
license and royalty revenues are not necessarily meaningful and should not be
relied upon as indications of future performance.
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Copper-Wire Based Solutions Face Competition from Other Technologies
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 our 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, our 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 our products and reduce
ASPs and gross margins associated with our products. The occurrence of any one
or more of these events could materially adversely affect our business,
financial condition and results of operations.
We Utilize FastCopper Technology in all of Our Products
Our FastCopper technology is used in our XL, Expresso, Expresso GS,
Expresso MDU, HomeRun and LongRun products. Any defect or deficiency in our
FastCopper or other transmission technologies used by the Company could manifest
itself in one or more of our products and could reduce the functionality,
effectiveness or marketability of our products. Such defects or deficiencies
could cause orders for our products to be canceled or delayed, reduce revenues,
or render our products obsolete. In such event, we 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 our products. There
can be no assurance that we 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 our products. Any of these events,
individually or in the aggregate, could have a material adverse effect on our
business, financial condition and results of operations.
Our Market is Subject to Rapid Technological Change and to Compete, We Must
Continually Introduce New Products that Achieve Broad Market Acceptance
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. In addition, the market for high-speed data access products is
dependent in large part on the increased use of the Internet. Certain issues
concerning the use of the Internet, including security, lost or delayed packets,
and quality of service, remain unresolved and may negatively affect the
development of the market for our products. If we do not address these
technological changes and challenges by regularly introducing new products, our
product line will become obsolete. We must also continually improve the
performance, features and reliability of our products, particularly in response
to competitive product offerings. We cannot assure you that we will be able to
respond quickly and effectively to technological change. In addition, we may
have only a limited amount of time to penetrate certain markets, and there can
be no assurance that we will be successful in achieving widespread acceptance of
our products before competitors offer products and services similar or superior
to our products. To remain competitive we need to introduce products in a timely
manner that incorporate or are compatible with these new technologies as they
emerge. Any delay in product introduction could adversely affect our ability to
compete and cause our operating results to be below our expectations or the
expectations of public market analysts or investors. In addition, when we
announce new products or product enhancements that have the potential to replace
or shorten the life cycle of our existing products, customers may defer
purchasing our existing products. These actions could materially adversely
affect our operating results by unexpectedly decreasing sales, increasing our
inventory levels of older products and exposing us to greater risk of product
obsolescence.
The Market in which We Operate is Highly Competitive, and We May Not Be Able to
Compete Effectively
The markets for high-speed Internet and network access products are
intensely competitive, and expect that such markets will become increasingly
competitive in the future. Our most immediate competitors are: PairGain
Technologies, Inc., Paradyne Corporation, Cisco Systems, Inc., Ascend
Communications, Inc., Copper Mountain
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Networks, Inc., and a number of other public and private companies. Many of
these competitors are offering, or may offer, technologies and services that
directly compete with some or all of our high-speed access products. The
principal bases of competition in our markets include:
. 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 customer service.
Many of our competitors and potential competitors have substantially
greater name recognition and technical, financial and marketing resources than
we do, and we can give you no assurance that we will be able to compete
effectively in our target markets. As a result, they may be able to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
devote substantially more resources to developing new products than we can. In
addition, certain of our licensees may sell products based on our technology to
our competitors or potential competitors. Such licensing may cause an erosion
in the potential market for our products. There can be no assurance that we will
have the financial resources, technical expertise or marketing, manufacturing,
distribution and support capabilities to compete successfully. This competition
could result in price reductions, reduced profit margins and loss of market
share, which could materially and adversely affect our business, financial
condition and results of operations.
We also compete 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, we expect that
demand for our products which are based on copper telephone wires will decline.
These competitive pressures from alternative transmission technologies may
further necessitate price reductions of our existing and future products.
We Depend on Relationships with Certain Strategic Partners for Increased Market
Penetration of Our Products
We have established relationships with several strategic partners,
including our collaborative arrangement through the Home Phoneline Network
Alliance with leading semiconductor, computer hardware and consumer electronics
manufacturers and agreements with certain licensees of our HomeRun technology.
These relationships are crucial to our success. In particular the success of our
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 our strategic partners. The members of the
Home PNA are not obligated to license, sell or otherwise promote our products or
technologies. Accordingly, we believe that these relationships are important
for the marketing and development of our products.
The amount and timing of resources which these strategic partners devote to
these activities will not be within our control. 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 our strategic
partners breaches or terminates their agreement or otherwise fails to conduct
its collaborative activities in a timely manner, the development,
commercialization or marketing of certain of our products may be delayed and we
may be required to undertake unforeseen additional responsibilities or to devote
additional resources to development, commercialization or marketing of our
products.
There can be no assurance that we will be able to negotiate acceptable
strategic agreements in the future, that the resulting relationships will be
successful, or that we will continue to maintain or develop strategic
relationships or to replace strategic partners in the event any such
relationships are terminated. Our failure to maintain any strategic relationship
could materially and adversely affect our business, financial condition and
results of operations.
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If a Key Distributor Discontinues Purchasing Our Product, Our Revenues May
Decline and the Price of Our Stock May Fall
In the first three months of 1999, we derived approximately 15.3% of our
revenues from combined sales to Tech Data Corporation and Ingram Micro, Inc. two
independent distributors of our products. These independent distributors are not
contractually bound to purchase our products and therefore could discontinue
carrying our products at any time in favor of competitive products or for any
other reason. In addition, we remain subject to the risk of product returns from
these distributors and other customers. We expect that the sale of our products
to a limited number of distributors and value-added resellers, including Tech
Data and Ingram, 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 Ingram could have a material adverse effect on our revenues and on
our business, financial condition and results of operations.
We Depend on Contract Manufacturers for Substantially All of Our Manufacturing
Needs
We do not manufacture any of our products, but instead rely on contract
manufacturers to assemble, test and package our products. There can be no
assurance that these contract manufacturers and suppliers will be able to meet
the Company's future requirements for manufactured products, components and
subassemblies. Any interruption in the operations of one or more of these
contract manufacturers would adversely affect our ability to meet our scheduled
product deliveries to customers. We also intend to regularly introduce new
products and product enhancements, which will require that we rapidly achieve
volume production by coordinating our efforts with those of our suppliers and
contract manufacturers. The inability of our contract manufacturers to provide
us with adequate supplies of high-quality products or the loss of a current
contract manufacturer would cause a delay in our ability to fulfill customer
orders while we obtain a replacement manufacturer and would have a material
adverse effect on our business, operating results and financial condition. In
addition, our inability to accurately forecast the actual demand for our
products could result in supply, manufacturing or testing capacity constraints.
Such constraints could result in delays in the delivery of our products or the
loss of existing or potential customers, either of which could have a material
adverse effect on our business, operating results or financial condition.
Substantially all of our products are assembled and tested by our contract
manufacturers. Although we perform random spot testing on manufactured products,
we rely on our contract manufacturers for assembly and primary testing of our
products. Any product shortages or quality assurance problems could increase the
costs of manufacture, assembly or testing of our products and could have a
material adverse effect on our business, financial condition or results of
operation.
We Purchase Several Key Components from Single or Limited Sources and Could Lose
Sales if These Sources Fail to Fill Our Needs
We currently purchase all of our raw materials and components used in our
products through our contract manufacturers. In procuring components, we and our
contract manufacturers rely on some suppliers that are the sole source of those
components, and we are dependent upon supply from these sources to meet our
needs. For example, all of the field programmable gate array supplies used in
our products are purchased from Xilinx, Inc. Our 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. In addition, certain of our XL products are dependent on
offerings from Globespan Semiconductor, Inc. and Level One Communications, Inc.
Any interruption in the supply of any of the key components currently obtained
from a single or limited source could disrupt our operations and have a material
adverse effect on our business in any given period.
We generally purchase components pursuant to purchase orders based on
forecasts, but we have no guaranteed supply arrangements with these suppliers.
The availability of many of these components is dependent in part on our ability
to provide our suppliers with accurate forecasts of our future needs. If we or
our manufacturers were unable to obtain a sufficient supply of components from
their current sources, we 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 our business, financial condition or
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results of operations. In addition, any increases in component costs could
increase the costs of our products and reduce demand for our products.
We May Not Be Able to Manage Our Growth Effectively
Our growth has placed, and in the future may continue to place, a
significant strain on our engineering, managerial, administrative, operational,
financial and marketing resources, and increased demands on our systems and
controls. To exploit the market for our products, we must develop new and
enhanced products while managing anticipated growth in sales by implementing
effective planning and operating processes. To manage our anticipated growth, we
must, among other things, continue to implement and improve our 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 our systems, procedures or
controls will be adequate to support our operations or that our management will
be able to achieve the rapid execution necessary to exploit fully the market for
our products or systems. Any failure of the Company to manage our growth
effectively could have a material adverse effect on our business, financial
condition and results of operations.
We Depend on International Sales for a Significant Portion of Our Revenues
Sales to customers outside of the United States accounted for approximately
18.5% and 21.4% of revenues in 1998 and the first quarter of 1999, respectively.
We expect sales to customers outside of the United States to increase in the
future. There are a number of risks arising from our international business,
including:
. longer receivables collection periods;
. increased exposure to bad debt write-offs;
. risk of political and economic instability;
. difficulties in enforcing agreements through foreign legal systems;
. unexpected changes in regulatory requirements;
. import or export licensing requirements;
. reduced protection for intellectual property rights in some countries;
and
. currency fluctuations.
There also can be no assurance that foreign markets for our products will
not develop more slowly than currently anticipated.
We also anticipate that our foreign sales will generally be invoiced in
U.S. dollars and, accordingly, we do not plan to engage in foreign currency
hedging transactions. However, as we expand our current international
operations, we may allow payment in foreign currencies and exposure to losses in
foreign currency transactions may increase. We may choose to limit our 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.
Our Limited Ability to Protect Our Intellectual Property May Adversely Affect
Our Ability to Compete
Our future success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of copyright, patent, trademark
and trade secrets laws and nondisclosure agreements to establish and protect our
proprietary technology. We currently hold 12 United States patents and have 14
United States patent applications pending. However, we cannot assure you that
patents will be issued with respect to pending or future patent applications or
that our patents will be upheld as valid or will prevent the development of
competitive products or that any actions we have taken will adequately protect
our intellectual property rights.
We generally enter into confidentiality agreements with our employees,
consultants, resellers, customers and potential customers, strictly limit access
to and distribution of our software, and further limit the disclosure and use of
other proprietary information. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain or use our
products or technology. We also cannot assure you that our competitors will not
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independently develop technologies that are substantially equivalent or superior
to our technology. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States.
We are also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. There can be no
assurance that third parties will not assert infringement claims in the future
with respect to our current or future products. Any such assertion, regardless
of its merit, could require us to pay damages or settlement amounts and could
require us to develop non-infringing technology or acquire licenses to the
technology that is the subject of asserted infringement. Such litigation or
potential litigation could result in product delays, increased costs or both. In
addition, the cost of any such litigation and the resulting distraction of our
management resources could have a material adverse effect on our business,
results of operations or financial condition. We also cannot assure you that any
licenses of technology necessary for our business will be available or that, if
available, such licenses can be obtained on commercially reasonable terms. Our
failure to obtain such licenses could have a material adverse effect on our
business, results of operations and financial condition.
Our Products Must Comply with Complex Government Regulations and Evolving
Industry Standards or Our Products May Not be Widely Accepted or Sold
We and our customers are subject to varying degrees of federal, state and
local regulation. Our products must comply with various regulations and
standards defined by the Federal Communications Commission.. The FCC has issued
regulations that set installation and equipment standards for communications
systems. Our products are also required to meet certain safety requirements. For
example, certain of our products must be certified by Underwriters Laboratories
in order to meet federal safety requirements relating to electrical appliances
to be used inside the home. In addition, certain products must be Network
Equipment Building Standard ("NEBS") certified before they may be deployed by
certain of our customers. Any delay in or failure to obtain such approvals could
have a material adverse effect on our business, financial condition or results
of operations. Outside of the United States, our products are subject to the
regulatory requirements of each country in which our products are manufactured
or sold. These requirements are likely to vary widely. If we do not obtain
timely domestic or foreign regulatory approvals or certificates we would not be
able to sell our products where these regulations apply, which may prevent us
from sustaining our revenues or achieving profitability.
In addition, regulation of our customers may adversely impact our 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 our
penetration of certain markets. In addition, the increasing demand for
communications systems has exerted pressure on regulatory bodies worldwide to
adopt new standards, generally following extensive investigation of competing
technologies. The delays inherent in this governmental approval process may
cause the cancellation, postponement or rescheduling of the installation of
communications systems by our customers, which in turn may have a material
adverse effect on the sale of products by the Company to such customers.
We will not be competitive unless we continually introduce new products and
product enhancements that meet emerging industry standards. 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
redesign of our products. If such standards become widespread and our products
are not in compliance, our customers and potential customers may not purchase
our products, which would materially adversely affect our business, financial
condition and results of operations. The rapid development of new standards
increases the risk that competitors could develop products that make our
products obsolete. Any failure by us to develop and introduce new products or
enhancements directed at new industry standards could have a material adverse
effect on our business, financial condition and results of operations.
Our Success is Dependent on Our Ability to Provide Adequate Customer Support
Our ability to achieve our planned sales growth and retain current and
future customers will depend in part upon the quality of our customer support
operations. Our customers generally require significant support and training
with respect to our products, particularly in the initial deployment and
implementation stage. We have limited
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experience with widespread deployment of our products to a diverse customer
base, and there can be no assurance that we will have adequate personnel to
provide the levels of support that our customers may require during initial
product deployment or on an ongoing basis. In addition, we rely on a third party
for a substantial portion of our customer support functions. Our failure to
provide sufficient support to our customers could delay or prevent the
successful deployment of our products. Failure to provide adequate support could
also have an adverse impact on our reputation and relationship with our
customers, could prevent us from gaining new customers and could have a material
adverse effect on our business, financial condition or results of operations.
Our Success Depends on Our Retention of Certain Key Personnel and Our Ability to
Hire Additional Key Personnel
We depend on the performance of Matthew Taylor, our Chairman of the Board
and Chief Technical Officer, and Salvatore D'Auria, our President and Chief
Executive Officer, and on other senior management and technical personnel with
experience in the data communications, telecommunications and high-speed data
access industries, and the loss of any one of them could have a material adverse
effect on our ability to execute our business strategy. Additionally, we do
not have employment contracts with any of our executive officers and we only
maintain a "key person" life insurance policy on Matthew Taylor. We believe
that our future success will depend in large part upon our continued ability to
identify, hire, retain and motivate highly skilled employees, who are in great
demand. There can be no assurance that we will be able to do so.
Our Failure or the Failure of Our Key Suppliers and Customers to Be Year 2000
Compliant Could Negatively Impact Our Business
Software that records only the last two digits of the calendar year may not
be able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results, which could adversely
impact our operations. The following are risks of the Year 2000 issue:
. potential warranty or other claims from our customers or payment of
compensatory or other damages;
. loss or delay in market acceptance of our products or services;
. disruptions in systems we use to run our business;
. disruptions in systems used by our suppliers; and
. potential reduced spending by other companies on networking solutions as
a result of significant information systems spending on year 2000
remediation
We generally warrant and represent to our customers that our products are
free from Year 2000 defects. Since all customer situations cannot be
anticipated, we may see an increase in warranty and other claims as a result of
the year 2000 transition. In addition, litigation regarding year 2000 compliance
issues is expected to escalate. For these reasons, the impact of customer claims
could have a material adverse impact on our operating results or financial
condition.
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.
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We May Engage in Future Acquisitions that Dilute the Ownership Interests of Our
Stockholders, Cause Us to Incur Debt and Assume Contingent Liabilities
As a part of its business strategy, we expect to make acquisitions of, or
significant investments in, complementary companies, products or technologies,
although no such acquisitions or investments are currently pending. Any such
future acquisitions would be accompanied by the risks commonly encountered in
acquisitions of companies. These risks include:
. difficulties in assimilating the operations and personnel of the
acquired companies;
. diversion of management's attention from ongoing business concerns;
. our potential inability to maximize our financial and strategic position
through the successful incorporation of acquired technology and rights
into our products and services;
. additional expense associated with amortization of acquired intangible
assets;
. maintenance of uniform standards, controls, procedures and policies; and
. impairment of existing relationships with employees, suppliers and
customers as a result of the integration of new management personnel.
We cannot assure you that we will be able to successfully integrate any
business, products, technologies or personnel that we might acquire in the
future, and our failure to do so could materially adversely affect our business,
operating results and financial condition.
Our Stock Price Has Been and is Likely to Continue To Be Volatile
The trading price of our common stock has been and is likely to continue to
be highly volatile. Our stock price could fluctuate widely in response to such
factors as the following:
. actual or anticipated variations in operating results;
. announcements of technological innovations, new products or new services
by us or by our partners, competitors or customers;
. changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;
. conditions or trends in the telecommunications industry, including
regulatory developments;
. growth of the Internet;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. future equity or debt offerings or our announcements of such offerings;
and
. general market and general economic conditions.
In addition, in recent years, the stock market in general, and the Nasdaq
National Market and the market for Internet and technology companies in
particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may materially
and adversely affect our stock price, regardless of our operating results. In
addition, trading prices of the stocks of many technology companies are at or
near historic highs and reflect price-earnings ratios substantially above
historic levels. These trading prices and price-earnings rations may not be
sustained.
Our Charter and Bylaws and Delaware Law Contain Provisions with Certain Anti-
Takeover Effects
Certain provisions of our charter 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 us. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
our common stock. Our charter and bylaws provide for a classified board of
directors, eliminate cumulative voting in the election of directors, restrict
our stockholders from acting by written consent and calling special meetings,
and provide for procedures for advance notification of stockholder nominations
and proposals. In addition, our board of directors has the authority to issue
up to
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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 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 our
outstanding voting stock. These provisions, as well as Section 203 of the
Delaware General Corporation Law to which we are subject, could discourage
potential acquisition proposals, delay or prevent a change of control and
prevent changes in our management.
Future Sales of Our Common Stock May Depress Our Stock Price
Sales of a substantial number of shares of our common stock in the public
market, or the appearance that such shares are available for sale, could
materially and adversely affect the market price of our common stock. Such sales
also might make it more difficult for us to sell equity securities or equity-
related securities in the future at a time and price that we deem appropriate.
As of March 31, 1999, we had 11,453,632 shares outstanding. Of these shares,
the 2,875,000 shares sold in our initial public offering plus an additional
25,000 sold by a former shareholder are freely tradeable in the public market
without restriction unless held by our affiliates. The remaining 8,553,632
shares of common stock available for sale in the public market are limited by
restrictions under the securities laws and lock-up agreements applicable to such
shares and will be generally available for sale in the public market as follows:
Date of Availability For Sale Number
----------------------------- ------
July 27, 1999 (180th day after the date of the
prospectus for our initial public offering) 8,553,632 shares
In addition, we have 55,000 shares underlying an outstanding warrant that,
beginning on July 27, 1999, will be eligible for resale in the public market
upon expiration of the warrant holder's' one-year holding period under Rule 144,
which will begin upon the date of exercise. However, to the extent that the
warrant holder effects a "cashless" exercise of our warrant, the underlying
shares will be eligible for sale in the public market beginning on December 21,
1999.
In addition, we have 991,000 shares of our common stock available for
future grants pursuant to our 1998 Stock Plan , and we have 961,643 shares of
our common stock which are subject to outstanding options at March 31, 1999.
All of such outstanding options are also subject to the 180-day lockup. We
intend to register, prior to July 27, 1999, the shares of common stock reserved
for issuance under our 1992 Stock Plan and 1998 Stock Plan and the 250,000
shares of common stock reserved or issuance under our 1998 Employee Stock
Purchase Plan. Accordingly, shares underlying vested options will be eligible
for resale in the public market beginning on July 27, 1999.
Lehman Brothers Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit issuers in short-term securities with maturities of
three to twelve months. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. The Company
has no investments denominated in foreign country currencies and therefore is
not subject to foreign exchange risk.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Since January 1, 1999, the Company has issued and sold unregistered
securities as follows:
Between January 1, 1999 and March 31, 1999, an aggregate of 111,865
shares of Common Stock were issued to employees upon exercise of options. The
aggregate consideration received for such shares was $65,404.
The Company's registration statement (Registration No. 333-60419) under
the Securities Act of 1933, as amended, for its initial public offering became
effective on January 28, 1999. Offering proceeds, net of aggregate expenses to
the Company, were approximately $47.0 million. The Company expects to use the
net offering proceeds for general corporate purposes, including working capital
and capital expenditures, enhancing research and development and attracting key
personnel.
Item 3. Defaults Upon Senior Securities
--------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits:
10.1 1998 Employee Stock Purchase Plan, as amended.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter ended
March 31, 1999.
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUT SYSTEMS, INC.
/s/ Nelson Caldwell
Date: May 14, 1999 --------------------------------------
Nelson Caldwell
Vice President, Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer and Duly
Authorized Officer)
22
<PAGE>
Exhibit Index
-------------
10.1 1998 Employee Stock Purchase Plan, as amended.
27.1 Financial Data Schedule
23
<PAGE>
Exhibit 10.1
TUT SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED ON OCTOBER 21, 1998;
AS FURTHER AMENDED ON FEBRUARY 24, 1999)
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Tut Systems, Inc., a Delaware corporation,
-------
and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
------------
and commissions, exclusive of payments for overtime, shift premium, incentive
compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is a regular, full-time
--------
non-temporary employee of the Company whose customary employment with the
Company is at least twenty-one (21) hours per week. For purposes of the Plan,
the employment relationship shall be treated as continuing intact while the
individual is on sick leave or other leave of absence approved by the Company.
Where the period of leave exceeds 90 days and the individual's right to
reemployment is not guaranteed either by statute or by contract, the employment
relationship shall be deemed to have terminated on the 91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
(i) "Exercise Date" shall mean the last day of each Offering Period.
-------------
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
<PAGE>
(1) If the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last market
trading day on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(2) If the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean of the closing bid and asked prices for the Common Stock on the date of
such determination, as reported in The Wall Street Journal or such other source
as the Board deems reliable, or;
(3) In the absence of an established market for the Common Stock, the
Fair Market Value thereof shall be determined in good faith by the Board.
(k) "Offering Period" shall mean a period of approximately six (6)
---------------
months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after November 1 and terminating on
the last Trading Day in the period ending the following April 30, or commencing
on the first Trading Day on or after May 1 and terminating on the last Trading
Day in the period ending the following October 31; provided, however, that the
first Offering Period under the Plan shall commence on May 1, 1999 and end on
the last Trading Day on or before October 31, 1999. The duration of Offering
Periods may be changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower; provided, however, that the Purchase Price
may be adjusted by the Board pursuant to Section 20.
(n) "Reserves" shall mean the number of shares of Common Stock covered
--------
by each option under the Plan which have not yet been exercised and the number
of shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
(o) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(p) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
-2-
<PAGE>
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive
----------------
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after November 1 and May 1 each year, or on such other date as the Board
shall determine, and continuing thereafter until terminated in accordance with
Section 20 hereof; provided, however, that the first Offering Period under the
Plan shall commence on May 1, 1999 and end on the last Trading Day on or before
October 31, 1999. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without stockholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription agreement,
he or she shall elect to have payroll deductions made on each pay day during the
Offering Period in an amount not exceeding fifteen percent (15%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
-3-
<PAGE>
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during an
Offering Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Offering
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period,
---------------
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period more than 1,250
shares (subject to any adjustment pursuant to Section 19), and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8
hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The
Option shall expire on the last day of the Offering Period.
-4-
<PAGE>
8. Exercise of Option. Unless a participant withdraws from the Plan
------------------
as provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 hereof. Any other monies left over in a participant's account after
the Exercise Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, the shares purchased upon exercise of his or
her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an
-------------------------
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the person
or persons entitled thereto under Section 15 hereof, and such participant's
option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment shall be treated as continuing to be an Employee for
the participant's customary number of hours per week of employment during the
period in which the participant is subject to such payment in lieu of notice.
-5-
<PAGE>
12. Interest. No interest shall accrue on the payroll deductions of
--------
a participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 250,000 shares, plus an annual increase to be added on the first day of
the Company's fiscal year beginning in 2000 equal to the lesser of (i) 250,000
shares, (ii) 2% of the outstanding shares on such date or (iii) a lesser amount
determined by the Board. If, on a given Exercise Date, the number of shares
with respect to which options are to be exercised exceeds the number of shares
then available under the Plan, the Company shall make a pro rata allocation of
the shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall
-6-
<PAGE>
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the
------------
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
-------
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
---------------------------------------------------------
Liquidation, Merger or Asset Sale.
---------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase per Offering Period (pursuant to Section 7), as well as
the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board.
-7-
<PAGE>
The New Exercise Date shall be before the date of the Company's proposed
dissolution or liquidation. The Board shall notify each participant in writing,
at least ten (10) business days prior to the New Exercise Date, that the
Exercise Date for the participant's option has been changed to the New Exercise
Date and that the participant's option shall be exercised automatically on the
New Exercise Date, unless prior to such date the participant has withdrawn from
the Offering Period as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, the Offering Period
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date"). The New Exercise Date shall be before the date of the
Company's proposed sale or merger. The Board shall notify each participant in
writing, at least ten (10) business days prior to the New Exercise Date, that
the Exercise Date for the participant's option has been changed to the New
Exercise Date and that the participant's option shall be exercised automatically
on the New Exercise Date, unless prior to such date the participant has
withdrawn from the Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its stockholders. Except as
provided in Section 19 and Section 20 hereof, no amendment may make any change
in any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any other applicable law, regulation or stock exchange rule), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
-8-
<PAGE>
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(1) altering the Purchase Price for any Offering Period including
an Offering Period underway at the time of the change in Purchase Price;
(2) shortening any Offering Period so that Offering Period ends
on a new Exercise Date, including an Offering Period underway at the time of the
Board action; and
(3) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to
-------
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the later to
-------------
occur of its adoption by the Board of Directors or the effective date of the
Company's initial public offering. It shall continue in effect for a term of
ten (10) years unless sooner terminated under Section 20 hereof.
-9-
<PAGE>
EXHIBIT A
---------
TUT SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: __________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ________________________________ hereby elects to participate in the Tut
Systems, Inc. 1998 Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") and subscribes to purchase shares of the Company's Common
Stock in accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 1 to 15%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):__________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be treated
for federal income tax purposes as having received ordinary income at the
time of such disposition in an amount equal to the excess of the fair
market value of the shares at the time such shares were purchased by me
over the price which I paid for the shares. I hereby agree to notify the
----------------------------
Company in writing within 30 days after the date of any disposition of
----------------------------------------------------------------------
shares and I will make adequate provision for Federal, state or other tax
-------------------------------------------------------------------------
withholding obligations, if any, which arise upon the disposition of the
------------------------------------------------------------------------
Common Stock. The
------------
<PAGE>
Company may, but will not be obligated to, withhold from my compensation
the amount necessary to meet any applicable withholding obligation
including any withholding necessary to make available to the Company any
tax deductions or benefits attributable to sale or early disposition of
Common Stock by me. If I dispose of such shares at any time after the
expiration of the 2-year holding period, I understand that I will be
treated for federal income tax purposes as having received income only at
the time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser of (1)
the excess of the fair market value of the shares at the time of such
disposition over the purchase price which I paid for the shares, or (2) 15%
of the fair market value of the shares on the first day of the Offering
Period. The remainder of the gain, if any, recognized on such disposition
will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print) __________________________________________________
(First) (Middle) (Last)
__________________________ __________________________________________________
Relationship
__________________________________________________
(Address)
Employee's Social
Security Number: __________________________________________________
Employee's Address: __________________________________________________
__________________________________________________
__________________________________________________
-2-
<PAGE>
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:______________ _______________________________________________________
Signature of Employee
_______________________________________________________
Spouse's Signature (If beneficiary other than spouse)
-3-
<PAGE>
EXHIBIT B
---------
TUT SYSTEMS, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Tut Systems, Inc.
1998 Employee Stock Purchase Plan which began on ___________ 19____ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
__________________________________________________
__________________________________________________
__________________________________________________
Signature:
__________________________________________________
Date:_____________________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INCORMATION EXTRACTED FROM TUT SYSTEMS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-31-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 47,263 3,188
<SECURITIES> 3,110 6,916
<RECEIVABLES> 4,259 1,820
<ALLOWANCES> (165) (13)
<INVENTORY> 3,479 1,805
<CURRENT-ASSETS> 58,844 14,048
<PP&E> 3,163 2,482
<DEPRECIATION> (1,362) (926)
<TOTAL-ASSETS> 63,145 15,613
<CURRENT-LIABILITIES> 4,597 3,442
<BONDS> 0 0
0 42,170
0 1,567
<COMMON> 11 0
<OTHER-SE> 54,554 (31,566)
<TOTAL-LIABILITY-AND-EQUITY> 63,145 15,613
<SALES> 3,573 1,696
<TOTAL-REVENUES> 3,891 1,860
<CGS> 2,242 1,012
<TOTAL-COSTS> 2,242 1,012
<OTHER-EXPENSES> 5,173 3,982
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 176 10
<INCOME-PRETAX> (3,311) (3,020)
<INCOME-TAX> 1 0
<INCOME-CONTINUING> (3,312) (3,020)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,312) (3,020)
<EPS-PRIMARY> (0.45) (16.53)
<EPS-DILUTED> (0.45) (16.53)
</TABLE>
