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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 000-25291
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TUT SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2958543
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
2495 Estand Way
Pleasant Hill, California 94523 94523
(address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (925) 682-6510
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
(Title of Class)
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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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $552,185,000 as of December 31, 1999 based on the
closing price of the Common Stock as reported on The Nasdaq Stock Market for
that date. There were 11,940,610 shares of the Registrant's Common Stock issued
and outstanding on December 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has not incorporated any documents by reference in this Form
10-K.
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PART I
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements." These
forward-looking statements include, but are not limited to, statements about
our plans, objectives, expectations and intentions and other statements
contained in this Annual Report on Form 10-K that are not historical facts.
When used in this Annual Report on Form 10-K, the words "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "seeks," "should" or "will" or the negative of these terms or similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements. Such risks and
uncertainties include those set forth in Part II, Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations. We
disclaim any obligation to update information contained in any forward-looking
statement.
ITEM 1. BUSINESS
Overview
We design, develop and market multi-service broadband access systems that
enable service providers to deliver high-speed data access to multi-tenant
buildings. We use our proprietary FastCopper technology to deliver a cost-
effective, scalable and easy to deploy solution to exploit the underutilized
bandwidth of copper telephone wires within these buildings. Our products also
provide service providers with enhanced capabilities such as subscriber
management, firewall protection, virtual private networking, and small business
email and web servers. Our systems and related services are designed with the
specific requirements of the multi-tenant unit, or MTU, market in mind and
enable service providers in this market to increase their revenue by providing
additional services and increase customer retention through bundled service
offerings.
Industry Background
Increasing Demand for High-Speed Internet Access
In recent years, there has been a dramatic increase in demand by businesses
and consumers for high-speed data access to the Internet and to private
corporate networks. This demand is being driven by the growth in users who are
accessing networks for a variety of applications, including communications via
the Internet and corporate intranets, electronic commerce, and telecommuting.
This growth is projected to continue to rapidly increase over the next several
years. The Yankee Group projects that the U.S. market for residential high-
speed Internet services will grow from 1.4 million subscribers in 1999 to
approximately 16 million subscribers by 2004. In addition, Forrester Research
projects that the U.S. market for commercial broadband Internet access will
grow from $2.4 billion in 1998 to $28.7 billion in 2003.
To meet this increasing need for high-speed access, telecommunications
service providers have significantly upgraded both backbone and local networks
with broadband fiber optic facilities and high-speed switches, routers, and
multiplexers. In some cases, these service providers are bringing fiber optic
links all the way to residential neighborhoods or to the basements of
commercial office buildings. In addition, other service providers are building
wireless broadband access networks using recently available radio spectrum, or
are using hybrid fiber coaxial cable networks that are traditionally used to
provide cable TV service. Service providers may also use the copper-based
infrastructure of an incumbent local exchange carrier, or ILEC, to offer DSL-
based services. All of these new networks offer speeds more than 20 times as
fast as today's 56 kbps dial-up modems.
Although service providers are bringing broadband facilities closer to
residential and commercial end users, they remain challenged by the cost and
logistics associated with extending this bandwidth all the way to
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Internet devices in a consumer's home or to the local area network, or LAN, of
a small business office. These challenges are particularly acute in MTU
complexes where the end-user typically does not directly own the network
infrastructure in place, and where the majority of the existing infrastructure
tends to be the copper wires being used to provide existing telephone service.
The MTU market can be segmented into two markets: residential and commercial.
The residential MTU market, also known as the multi-dwelling unit, or MDU,
market, consists primarily of apartments, hotels, and university dormitories.
Data from the U.S. Census Bureau indicates that the domestic apartment market
totals over 21 million individual tenant units, with 9 million units being
located in buildings or complexes of 50 or more units. Data from the U.S.
Department of Commerce indicates that the domestic hotel market consists of 1.7
million rooms, with 1.4 million rooms in buildings of more than 100 rooms. We
believe that these larger buildings and complexes are the initial target for
high-speed Internet access.
The commercial MTU market, also known as the multi-tenant commercial unit, or
MCU, market, represents office complexes and other business-related facilities.
According to data from Torto Wheaton Research, there are more than 2.5 billion
square feet of rentable commercial office space in the 54 largest metropolitan
markets across the United States.
MTU Market Characteristics
As the demand for high-speed Internet access has increased significantly over
the last couple of years, we believe that owners and managers of apartments,
hotels and commercial properties have begun to view high-speed Internet access
as a critical enhanced service for their residents, guests and tenants. There
is demand from owners of MTU complexes and buildings to offer Internet access
and other broadband services as an amenity that effectively attracts and
retains occupants, thereby increasing revenue and profitability.
Given the complexity and cost of deploying broadband services, many property
owners prefer to outsource ownership, installation, operation and management of
high-speed Internet solutions to an MTU focused service provider. In exchange
for granting a service provider the ability to market and provide
telecommunications services to their properties, these MTU owners now have an
opportunity to share the service revenue generated from their buildings, and to
offer new Internet-enabled services. These services enable on-line reservation
of building amenities, community message boards, e-commerce and payment of
rent.
A set of specialized service providers has recently emerged to fill the
growing demand for high-speed Internet service to the MTU market. While high-
speed Internet access is the primary service delivered by these service
providers today, we believe that the delivery of multiple services, such as
high speed corporate networking, packet voice and IP video, will be key to
meeting future customer needs and driving service provider profitability
through bundled service offerings. The MTU market is attractive to these
emerging service providers because of the efficiency of delivering multiple
services, often on an exclusive basis, to a geographically concentrated and
demographically similar customer base.
Infrastructure Requirements for MTU Service Providers
Service providers marketing to MTU owners and tenants typically concentrate
their networks and marketing and sales efforts within major metropolitan areas.
In each local service area, a service provider will then locate a metropolitan
point-of-presence, or metro POP, that will concentrate high-speed, last mile
access links from multiple MTUs, provide value-added services such as web
hosting and email, manage subscriber access, centralize billing, and provide an
efficient link to backbone Internet or intranet networks.
The high-speed links from a service provider's metro POP to individual MTU
buildings or complexes may consist of local T1 facilities sourced from an ILEC,
xDSL facilities sourced from a competitive local exchange carrier, or CLEC, or
self-provisioned fiber, coaxial cable, or radio facilities.
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Once broadband access is brought to the MTU, another broadband distribution
network needs to be created within the building to bring the offered services
to tenants. Alternatives for creating this network include rewiring the
building with Category 5 copper wire for Ethernet, laying a new fiber-based
infrastructure, or reusing the copper infrastructure that is already in place
to provide telephone service. Rewiring with Category 5 wire or laying new fiber
links can be prohibitively expensive on a per-subscriber basis because in most
cases a service provider will only have demand from a limited number of tenants
in the building, yet the entire building will need to be rewired to accommodate
future and changing requirements. Similarly, carrier class DSL access
multiplexers, known as DSLAMs, which are designed to serve hundreds of
subscribers over the existing telephone wires, are prohibitively expensive when
only serving a limited number of tenants.
We believe that service providers for the MTU market require systems that:
. deliver reliable high-quality broadband access services in a cost
effective manner;
. are easy to deploy and provision, and are economically scalable from as
few as four subscribers in small buildings to hundreds of subscribers in
large complexes;
. support multiple services such as voice, video, firewall security and
virtual private networking so as to maximize both the network
infrastructure and the sales, marketing and operations infrastructure of
the service provider; and
. are remotely controlled, maintained and upgraded as required.
We believe that systems with these characteristics enable service providers
to increase their revenue by providing additional services and increase
customer retention through bundled service offerings.
The Tut Systems Solution
We design, develop and market multi-service broadband access systems that
enable service providers to deliver high-speed data access over the existing
copper telephone infrastructure found in MTU complexes, such as apartment
buildings, hotels, business parks, and commercial office buildings. Our systems
also provide service providers with enhanced capabilities such as subscriber
management, firewall protection, virtual private networking, and small business
email and web servers. Our systems are designed with the specific requirements
of the MTU market in mind and provide the following benefits to our customers:
. Reliable, high performance, cost-effective broadband access. Our access
products use our proprietary FastCopper technology to exploit the
underutilized bandwidth of existing MTU infrastructures by reducing the
noise, radio frequency interference and signal cross talk inherent in
high-speed data transmission over copper telephone wires. Our technology
enables cost-effective Ethernet LANs to be quickly implemented over
these telephone wires, without interfering with existing telephone
service that may be running over these same wires. Our proprietary
HomeRun technology has been adopted as the first generation standard for
home networking over copper telephone wires by the Home Phone Network
Alliance, or HPNA, and is licensed to leading semiconductor, computer
hardware and consumer electronics manufacturers. Our proprietary LongRun
technology is similar in operation to our HomeRun technology, but
provides higher performance in the presence of noise and cross-talk, and
transmits over longer distances than HomeRun.
. Easy-to-deploy, scalable systems. Our Expresso GS, MDU and MDU Lite
systems, which are integrated with our proprietary FastCopper
technologies, provide low cost, high-speed bandwidth to multiple tenants
within an MTU complex or building while meeting our service provider
customers' ease-of-use and scalability requirements. The Expresso MDU
unit is intended for deployment in the basements of apartment buildings,
in wiring rooms of hotels and in other residential locations where
access lines are centrally concentrated. Our compact MDU Lite product
extends the delivery of high-speed services to tenants living in the
smaller buildings typically found in garden style apartment complexes.
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. Multiple value-added, revenue-enhancing services. Our Expresso SMS 2000
and Expresso OCS systems provide plug-and-play functionality, subscriber
management, community web pages, credit card billing, and other
functions for the MDU market. When used to provide high-speed Internet
access to hotel guests, the Expresso SMS 2000 system interfaces with our
Expresso MDU system to provide a simple plug-and-play experience for the
guest without disturbing normal phone service or requiring computer
reconfiguring by the guest. We recently acquired our OneGate Internet
appliance to enable MCU and other business-focused service providers to
provide the key Internet access functions required by small businesses,
including routing between LAN and WAN domains, firewall protection,
virtual private networking, email server, and web servers. These
products use industry-standard protocols for interoperability with
third-party systems and are based on industrial-grade computing
platforms for continuous industry-driven improvements in price and
performance.
Strategy
Our objective is to be the dominant provider of advanced multi-service
broadband access systems that exploit the large existing infrastructure of
copper telephone wires within multi-tenant complexes, such as apartment
buildings, hotels, office buildings, business parks, university dormitories and
other buildings. Key elements of our business strategy are as follows:
Facilitate Rapid Growth in MDU Markets. We market our Expresso MDU and
related products to service providers that are focused on the residential MDU
market and can benefit from highly scalable Internet access solutions with low
initial deployment costs. We actively work with our customers both to deploy
systems in additional properties as well as to facilitate the adoption of
broadband access services by tenants in buildings in which our systems are
already deployed. We intend to continue to focus our direct sales and marketing
efforts on establishing additional customer relationships with large MDU
service providers. In addition, we intend to reach smaller service providers
through our network of value added resellers, or VARs, and systems integrators.
Accelerate Penetration in MCU Markets. We plan to accelerate our penetration
of the commercial MCU market with our enhanced service capabilities for this
market. The acquisition of FreeGate, whose OneGate Internet appliance is
specifically designed to serve the growing data communications needs of small
to medium businesses, was our initial step in addressing the value-added needs
of this market. OneGate enables service providers to address the growing needs
of small businesses for Internet access and security, intranet corporate
networking and electronic commerce solutions. We believe that the capabilities
of OneGate products in combination with our broadband access systems provide us
with a significant competitive advantage. We intend to use our direct sales
force to target large service providers in the MCU market and develop
relationships with key VARs and systems integrators in this market.
Enhance the Service Capabilities Provided by our Products and Systems. By
adding higher-level features and functions above the basic data transport
layer, such as subscriber management, network address translation, web, and
email servers, firewall protection, and virtual private networking support to
our product line, we enable our service provider customers to expand the range
of services that they can market and deploy to their customers. Service
providers, in turn, can leverage their sales and marketing efforts, reduce
customer churn, and have a higher revenue-to-cost portfolio of services. We
intend to use our product development capabilities and our FastCopper
technology to enable higher data speeds over longer distances. We plan to
enhance our Expresso SMS 2000 and OneGate platforms by adding new software
features to support voice, video, and enhanced data capabilities. We intend to
lower the total cost of system ownership for our customers by reducing
manufacturing costs, expanding the self-provisioning features of our systems,
and enhancing network management capabilities.
Continue to Leverage HomeRun Technology and Partnerships. In June 1998, our
HomeRun technology was selected as the initial specification for a home
networking standard to be promoted by the Home PNA. We have licensed HomeRun to
leading semiconductor, computer hardware, and consumer electronics
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manufacturers, including 3Com, AMD, AT&T Wireless, Broadcom, Compaq, Conexant
Systems, Davicom, Intel, Lucent, Motorola, National Semiconductor,
STMicroelectronics and TDK. These licensees embed HomeRun technology into
integrated circuits and consumer products, including PCs, network interface
cards, network adaptors, and modems. We believe that the availability of these
devices will reduce the total cost of deploying services based on HomeRun
enabled versions of Expresso MDU. We plan to continue to leverage our
relationships with these licensees to give us better access to technologies
that are supportive of our proprietary LongRun technology and related systems.
Expand International Presence. We believe that our Expresso product lines,
which have been developed in conformance with international standards, can
serve a substantial market for high-speed data access products outside of the
United States. In addition, we believe that our Expresso SMS 2000 and OneGate
product lines can meet the needs of established as well as emerging service
providers in international markets such as Europe, the Middle East, and Asia.
We have added personnel in several key international markets and are actively
seeking to add new international distributors who focus on the MTU market.
Core Technologies and Products
We have developed a broad base of proprietary FastCopper technology to
address noise and distortion problems so that high-speed data access can be
achieved over a single pair of ordinary copper telephone wires used in
corporate and educational campuses, apartment buildings, hotels and single
family homes. Our FastCopper technology encompasses three main areas of
expertise to maximize transmission rates at minimum costs over existing copper
telephone wires: noise reduction, analog and digital signal processing to
reduce distortion, and digital modulation techniques. Our FastCopper expertise
is deployed in our HomeRun, LongRun and other transmission technologies.
HomeRun creates a cost-effective Ethernet LAN over the random topology of
home telephone wires, without disturbing existing telephone service and/or
G.lite ADSL service running simultaneously over these same wires. With HomeRun,
multiple devices can share peripherals and/or a single high-speed Internet
access connection on a 1 Mbps Ethernet LAN. HomeRun supports Internet
connections through ISDN or xDSL wireline technologies, a wireless modem or a
cable modem. LongRun shares similar modulation techniques with HomeRun, but
operates at lower baseband frequencies to provide improved performance in the
presence of intra-system crosstalk and coverage of longer distances that may be
found in many apartment, hotel, and university dormitory complexes. HomeRun is
specified to operate over distances as long as 500 feet, while LongRun is
intended to operate at distances up to 2500 feet.
The following products are based in part on this FastCopper technology
foundation and are augmented by additional technologies that allow for enhanced
capabilities:
Expresso System Platforms
Our Expresso MDU products are designed to be used by ILECs, CLECs, and other
service providers to provide high-speed advanced data services to large numbers
of end users over private copper network infrastructures. Expresso MDU is AC-
powered and, when integrated with our HomeRun or LongRun technology, provides
owners of private copper networks with an easy to deploy and scalable means to
distribute high-speed data access to tenants over the copper telephone wires
found in MTUs. In addition, we offer our Expresso GS system, which is DC-
powered and intended for use by service providers to serve last mile
applications using xDSL technologies.
An Expresso MDU or Expresso GS system consists of a compact, modular central-
site shelf with an SNMP management card, optional switching, multiplexing and
WAN interface cards, and up to 17 xDSL, HomeRun or LongRun line cards. The 10
1/2 inch-high system is available with two mounting options, either 19 inches
wide for data center and international installations or 23 inches wide for
telephone company installations.
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Each Expresso MDU and Expresso GS shelf can support up to 136 line side
subscriber connections, making the Expresso MDU and Expresso GS platforms among
the highest density xDSL platforms in the industry. Multiple Expresso MDU and
Expresso GS shelves can be interconnected via 10 or 100Base-T Ethernet
connections, allowing systems to accommodate hundreds of subscribers onto a
common WAN interface.
Expresso MDU
Expresso MDU integrates our HomeRun and LongRun technologies with our
flexible Expresso platform to provide owners of MDUs with easy to deploy,
scalable and cost-effective solutions to distribute high-speed data access to
multiple tenants over the private copper networks within MDUs. The Expresso MDU
platform has been designed for deployment in residential locations, such as in
the basement wiring room of an apartment building. Expresso MDU can be equipped
with HomeRun and/or LongRun line cards to provide a secure Ethernet LAN for
each living unit within an MDU. We have developed HomeRun and LongRun adapters
that convert HomeRun/LongRun signals to a standard 10Base-T Ethernet interface.
Consumer products, such as PCs, peripherals, Internet telephones and
television-based web browsers, that are compatible with either version 1.0 or
version 2.0 of HomePNA can directly connect to the Expresso MDU without the
need for any additional adapter or network interface card.
Expresso MDU Lite
To provide service to small apartment buildings spread across a garden-style
complex in which there is no central wiring point, we developed the Expresso
MDU Lite and the Expresso LongRun MDU Lite. The former is intended for domestic
and international markets, while the later is primarily intended for
international markets. MDU Lites contain either eight ports of HomeRun or eight
ports of LongRun. Multiple units may be connected together to support more than
eight subscribers and they may be connected back to a central point via LongRun
copper-based products, coax-based cable modems, or radio-based modems.
Expresso GS
For local loop applications, we offer the Expresso GS system, which consists
of xDSL line cards connected to remote M-1100 or MXL-2300 series routers. The
M-1100 series routers connect users' PCs or LANs to the Expresso GS system over
a local loop that may extend up to 24,700 feet using our current 1.1 Mbps SDSL
line technology. The MXL-2300 series routers, when used with a new line card
being developed, will provide access at 2.3 Mbps. Our dynamic SmartWire SDSL
rate adaptation enables all subscribers to be served at the highest attainable
speeds over each loop. Through Expresso's All-Rate DSL feature a service
provider can offer tiered access services in increments of 64 Kbps to meet the
varying bandwidth and price requirements of each subscriber. All-Rate DSL
allows service providers to offer a low cost, low bandwidth, entry level
service that can expand to higher bandwidth capabilities as a subscriber's need
for bandwidth expands. Our M-1100 and MXL-2300 routers provide a standard
10Base-T interface for connection to users' PCs or LANs.
Expresso SMS 2000
Our Expresso SMS 2000 and companion Expresso OCS system provide plug-and-play
functionality, subscriber management, network address translation, credit card
billing, and other functions for the MDU market. The compact 1-3/4" high
Expresso SMS 2000 system runs on a Red Hat Linux operating system, is typically
located on the premises of an MDU complex and supports up to 800 simultaneous
user sessions per unit. The companion Expresso OCS operations center software
is intended to be located at a metro POP or central network operations center.
Expresso OCS is a software package that runs on a standard PC computing
platform. Each Expresso OCS can manage up to 300 remote Expresso SMS systems,
providing central credit card billing interfaces, accounting records, and
access to the accounting and policy data bases most often used by CLECs and
ISPs.
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OneGate 1000
Our OneGate 1000 Internet server appliances combine the functions of IP
routing, firewall security, network address translation, secure remote access
via virtual private networking, email, and web servers on one compact PC-based
platform. Redundant mirrored hard drives provide fault tolerance for critical
functions as well as storage for email and web pages. Built-in WAN interfaces
support T1, DSL, and ISDN links.
The OneGate 1000 is designed for larger offices and supports workgroups of 25
to 250 users. For business enterprises with more than a single office location,
multiple OneGate units interoperate with each other to provide a secure virtual
private network using the worldwide reach of the public Internet. For service
providers, the OneGate service platform provides an all-in-one single box
solution to locate on a customer's premises. Although located on a customer's
premises, the OneGate systems facilitate outsourced management and control by
the service provider. Software upgrades and any maintenance fixes can be
enabled from the service provider's central network operations center without
having to involve the end customer.
XL Products
We use our FastCopper technology, along with commercially available
components, to build high-speed data access products. In the XL1500 product
series, we applied our noise reduction and signal processing expertise to build
a 10Mbps, 1,500 foot Ethernet LAN extension product to operate over a single
pair of copper telephone wires. For other XL products, we pioneered the use of
rate adaptive synchronous digital subscriber line, or SDSL, technology products
that extend to distances up to 24,700 feet without the use of repeaters. For
HomeRun, we developed a proprietary modulation technique to transmit high-speed
data signals over random tree and branch networks typically found in single
family homes.
Customers and Markets
We target our development, marketing and sales efforts to service providers
in both the MDU market and MCU market.
MDU Market
Service providers, including ILECs, CLECs, ISPs and multiple system operators
for the cable industry, can recognize substantial economies of scale by
providing high-speed services to MDU tenants from a single point of service.
MDUs include apartment complexes, hotels, university dormitories and military
housing complexes. We believe that the potential international MDU market
represents a strategic opportunity for us.
Our potential customers in the MDU market include both service providers who
seek to sell services to MDU tenants and owners of MDU complexes who seek to
offer advanced amenities to their tenants, increase property value, and/or gain
additional revenue from the property. Among our Expresso MDU customers are BRE
Properties, Darwin Networks and Reflex Communications. Our Expresso SMS 2000
system has been designed with features to specifically address the needs of
this market.
MCU Market
For some time there have been service providers focused on delivering voice
services to tenants in multi-tenant commercial buildings, but recently a new
class of service providers and CLECs have emerged that plan to use a broadband
IP-based infrastructure to provide a wide array of services, including high-
speed Internet access, email, web hosting, firewall protection, local and long
distance voice, and business TV to tenants in multi-tenant commercial
buildings. These MCU service providers are demanding a low-cost, multi-service,
broadband platform on which to deliver this array of services to the small and
medium size businesses that tend to locate in MCUs.
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Our Expresso-based transport systems, when coupled with our OneGate products,
enable service providers to offer services on an "as-needed" basis, all
remotely controlled and managed. Access bandwidth, firewall, email, web server,
and virtual private networking services are managed by the service provider
obviating the need for a small business to hire on-site IT staff. Among our MCU
customers are Darwin Networks, Rycom Inc. and 2nd Century Communications.
For simple point to point applications, we market our XL products to domestic
and international end users for LAN extensions over existing copper telephone
wires. We have more than 500 domestic and international customers for our XL
product line.
Home Networking
The growth in the demand for high-speed data access, the decreasing cost of
personal computers and the proliferation of Internet access devices in homes
are creating an emerging demand for home networking and access solutions. Home
networks must be designed to allow the sharing of files, the sharing of
peripherals, such as printers, the simultaneous, uninterrupted use of voice
service and, perhaps most importantly, the sharing of Internet and remote
corporate network access. Home network consumers desire a low cost, easy to
implement network solution that does not require new wires to be installed
throughout the home.
We are licensing our HomeRun technology to members of the Home PNA and
others. In 1998, the Home PNA selected HomeRun as the initial specification for
a home networking standard. The founding members of the Home PNA were 3Com,
AMD, AT&T Wireless, Compaq, Epigram, Hewlett-Packard, IBM, Intel, Lucent,
Rockwell and Tut Systems. The Home PNA currently includes over 120 members.
Marketing, Sales and Customer Support
Marketing
We seek to increase demand for our products, expand company and product
visibility in the market and establish cooperative marketing programs. In
addition to customer-specific sales efforts, our marketing activities include
attendance at major industry trade shows and conferences, such as Interop,
Hitech, National Multihousing Conference, and SuperComm, the distribution of
sales and product literature, operation of a web site, advertising in trade
journals and catalogs, direct marketing and ongoing communications with our
customers, the press and industry analysts. As appropriate, we enter into
cooperative marketing and/or development agreements with strategic partners
that may include key customers, semiconductor manufacturers, radio or cable
equipment manufacturers, set-top box manufacturers, and others.
Sales
We sell our products through multiple sales channels in the United States,
including a select group of regional VARs, systems integrators and
distributors, data networking catalogs and directly to service providers.
Internationally, we sell and market our products through sales agents, systems
integrators and distributors. In 1998 and 1999, we established new sales
channels in Canada, Europe, South America, Australia and Asia. In 1999, we
opened a sales office in the United Kingdom. In 1999, we derived approximately
32% of our revenue from customers in international markets. We believe that our
products can serve a substantial market for high-speed data access products
outside of the United States.
Customer Support
We believe that consistent high-quality service and support is a key factor
in attracting and retaining customers. Service and technical support of our
products is coordinated by the customer support organization located in
Pleasant Hill, California. Telecommunications and Networking Systems Engineers
provide critical technical support to our customers. Our Systems Application
Engineers, located in each of our sales regions,
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support pre- and post-sales activities. We also employ a nationwide third party
support organization to handle inquiries from a large number of customers and
provide first level telephone technical support and on-site installation and
support services. Customers can also access technical information and receive
technical support through the Internet.
Research and Development
Our research and development efforts are focused on enhancing our existing
products and developing new products. Our research and development organization
emphasizes early stage system engineering. The product development process
begins with a comprehensive functional product specification based on input
from the sales and marketing organizations. We incorporate feedback from end
users and distribution channels, and through participation in industry events,
industry organizations and standards development bodies such as the Home PNA.
Key elements of our research and development strategy include:
. Core Designs. We seek to develop platform architectures and core designs
that allow for cost-effective deployment and flexible upgrades that meet
the needs of multiple markets and applications. These designs emphasize
quick time to market and future cost reduction potential. The Expresso
GS/MDU platform is a direct result of this strategy.
. Product Line Extensions. We seek to extend our existing product lines
through product modifications and enhancements in order to meet the
needs of particular customers and markets. Products resulting from our
product line extension efforts include the Expresso MDU Lite.
. Use of Industry Standard Components. Our design philosophy emphasizes
the use of industry standard hardware and software components whenever
possible to reduce time to market, decrease the cost of goods and lessen
the risks inherent in new design. We maximize the use of third party
software for operating systems and routing software, allowing our
software engineers to concentrate on hardware-specific drivers, user
interface software and advanced features.
. New Technologies. We seek to enhance our Expresso platform by
incorporating additional xDSL technologies, such as VDSL, higher speed
WAN interfaces and new network management software features. We also
seek to develop new product capabilities through software upgrades to
our Expresso SMS 2000 and OneGate platforms.
Manufacturing
We do not manufacture any of our own products, but instead rely on contract
manufacturers to assemble, test and package our products. We require ISO 9002
registration for these contract manufacturers as a condition of qualification.
We audit the contractor's manufacturing process performance through audits,
testing and inspections and monitor contractor quality through incoming testing
and inspection of packaged products. In addition, we monitor the reliability of
our products through in house repair, reliability audit testing and field data
analysis.
We currently purchase all of our raw materials and components used in our
products through our contract manufacturers. We and our contract manufacturers
have experienced difficulty in obtaining some components used in our products.
For example, we are experiencing, and may continue experiencing in the future,
difficulty obtaining flash memory. We forecast our product requirements to
maintain sufficient product inventory to allow us to meet the short delivery
times demanded by our large and diverse customer base, typically one to four
days between receipt of order and shipment to the customer. Our future success
will depend in significant part on our ability to obtain manufacturing on time,
at low costs and in sufficient quantities to meet demand.
Competition
The markets for our products are intensely competitive, continually evolving
and subject to rapid technological change. We believe that we and our products
face the following competitive factors:
. conformance to industry standards;
9
<PAGE>
. breadth of product lines;
. implementation of additional product features and enhancements, including
improvements in product performance, reliability, size, and scalability;
. low cost and ease of deployment and use;
. sales and distribution capability;
. technical support; and
. service and general industry and economic conditions.
Although we believe that we currently compete favorably with respect to all
of these factors, there can be no assurance that we will have the financial
resources, technical expertise or marketing, manufacturing, distribution and
support capabilities to compete successfully in the future. We expect that
competition in each of our markets will increase in the future. Our principal
competitors include or are expected to include Cisco, Copper Mountain, Nortel
and Paradyne, and a number of other public and private companies. Many of our
competitors and potential competitors have substantially greater name
recognition and technical, financial and marketing resources than us. These
competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing new products than us. There can be no assurance that we will be able
to compete successfully against current or future competitors or that
competitive pressures faced will not harm our business, financial condition and
results of operations. In addition, some of our licensees may sell aspects of
our technology to our competitors or potential competitors. These competitors
may cause an erosion in the potential market for our products. This competition
could result in price reductions, reduced profit margins and loss of market
share, which would harm 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 homeowners and
businesses install other transmission media within buildings, we expect that
demand for our copper telephone wire-based products will decline. These
competitive pressures from alternative transmission technologies may further
necessitate price reductions of our existing and future products.
Proprietary Rights
Our success and ability to compete is dependent in part upon our proprietary
technology. We rely on a combination of patent, copyright and trade secret laws
and non-disclosure agreements to protect our proprietary technology. We
currently hold 17 United States patents and have 18 United States patent
applications pending. There can be no assurance that patents will be issued
with respect to pending or future patent applications or that our patents will
be upheld as valid or will prevent the development of competitive products. We
seek to protect our intellectual property rights by limiting access to the
distribution of our software, documentation and other proprietary information.
In addition, we enter into confidentiality agreements with our employees and
certain customers, vendors and strategic partners. The steps taken by us in
this regard may be inadequate to prevent misappropriation of our technology and
our competitors may independently develop technologies that are substantially
equivalent or superior to our technologies. We are also subject to the risk of
adverse claims and litigation alleging infringement of the intellectual
property rights of others. In this regard, there can be no assurance that third
parties will not assert infringement claims in the future with respect to our
current or future products or that any of these claims will not require us to
enter into license arrangements or result in protracted and costly litigation,
regardless of the merits of those claims. No assurance can be given that any
necessary licenses will be available or that, if available, these licenses can
be obtained on commercially reasonable terms.
10
<PAGE>
Employees
As of February 14, 2000, we employed 163 persons, including:
. 17 in operations;
. 57 in marketing, sales and customer support;
ITEM 2. FACILITIES
Our principal administrative and engineering facilities are located in one
leased building totaling approximately 23,000 square feet located in Pleasant
Hill, California. In addition, we lease sales and administrative facilities
totaling approximately 2,600 square feet in Beaverton, Oregon, engineering and
administrative facilities totaling approximately 20,200 square feet in
Sunnyvale, California. We also lease engineering facilities in Oakland,
California, and Ann Arbor, Michigan. The current lease for the Pleasant Hill
facility expires in May 2001, with an option to renew for two years, the lease
for the Oregon facility expires in March 2002, the lease for the Sunnyvale
facility expires in August 2002, the lease for the Oakland facility expires in
April 2000, and the lease for the Ann Arbor facility expires in December 2001.
We also have sales offices in the vicinity of New York, Washington D.C.,
Chicago, Dallas and Denver.
We intend to relocate our principal administrative and engineering facilities
from Pleasant Hill to Pleasanton, California during 2000 and intend to lease
facilities totaling approximately 90,000 square feet in Pleasanton. We believe
that with this additional space, our facilities will be adequate to meet our
requirements for the foreseeable future and that suitable additional or
substitute space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material litigation and we are not aware of any
pending or threatened litigation that could have a material adverse effect upon
our business, operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "TUTS" since our initial public offering in January 1999. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of the common stock, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1999:
First Quarter (from January 29, 1999).......................... $76.13 $39.75
Second Quarter................................................. 70.19 38.00
Third Quarter.................................................. 47.25 22.44
Fourth Quarter................................................. 56.50 24.94
2000:
First Quarter (through February 18, 2000)...................... $53.50 $39.38
</TABLE>
On February 18, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $39.88 per share. As of December 31, 1999, there
were approximately 314 holders of record of our common stock.
We have not paid dividends in the past and we intend to retain earnings, if
any, and will not pay cash dividends in the foreseeable future. Our loan and
security agreement with a commercial bank prohibits the payment of dividends.
Any future determination to pay cash dividends will be at the discretion of the
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, general business conditions and such other
factors as the board of directors may deem relevant.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
Actual
--------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- --------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenues............. $ 3,445 $ 4,454 $ 6,221 $ 10,555 $ 27,807
Total cost of goods sold... 1,688 2,198 3,228 5,809 15,459
-------- -------- --------- --------- --------
Gross margin............. 1,757 2,256 2,993 4,746 12,348
-------- -------- --------- --------- --------
Operating expenses:
Sales and marketing...... 2,645 3,068 5,147 8,462 10,523
Research and
development............. 993 2,012 3,562 6,200 7,618
General and
administrative.......... 1,562 1,783 2,375 2,807 4,429
In-process research and
development............. -- -- -- -- 2,600
Amortization of
intangibles............. -- -- -- -- 52
Noncash compensation
expense................. -- -- 1,260 1,233 455
-------- -------- --------- --------- --------
Total operating
expenses................ 5,200 6,863 12,344 18,702 25,677
-------- -------- --------- --------- --------
Loss from operations..... (3,443) (4,607) (9,351) (13,956) (13,329)
Other income (expense),
net....................... 54 181 195 210 1,596
-------- -------- --------- --------- --------
Loss before income
taxes................... (3,389) (4,426) (9,156) (13,746) (11,733)
Income tax expense......... 1 1 1 1 1
-------- -------- --------- --------- --------
Net loss................. (3,390) (4,427) (9,157) (13,747) (11,734)
Dividend accretion on
preferred stock........... 694 1,137 1,627 2,584 235
-------- -------- --------- --------- --------
Net loss attributable to
common stockholders....... $ (4,084) $ (5,564) $ (10,784) $ (16,331) $(11,969)
======== ======== ========= ========= ========
Net loss per share
attributable to common
stockholders, basic and
diluted................... $ (32.56) $ (37.51) $ (59.36) $ (60.62) $ (1.12)
======== ======== ========= ========= ========
Shares used in computing
net loss per share
attributable to common
stockholders, basic and
diluted................... 125 148 182 269 10,729
======== ======== ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
Actual
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term investments..... $ 1,531 $ 8,950 $ 10,285 $ 4,452 $ 32,236
Working capital............. 1,771 8,357 11,066 7,173 44,416
Total assets................ 3,198 10,689 15,168 15,257 65,356
Redeemable convertible
preferred stock and
warrant.................... 12,381 24,684 38,871 45,995 --
Long-term debt, net of
current portion............ 55 190 140 4,262 --
Accumulated deficit......... (11,755) (17,319) (28,103) (44,434) (56,487)
Total stockholders' equity
(deficit).................. (10,137) (15,694) (26,444) (41,839) 51,522
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
the related notes included in this Annual Report on Form 10-K. This discussion
contains, in addition to historical information, forward-looking statements
that involve risks and uncertainties. Our 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. We disclaim any obligation to update
information contained in any forward-looking statement.
Overview
We design, develop and market multi-service broadband access systems that
enable service providers to deliver high-speed data access over the existing
copper telephone infrastructure found in multi-tenant unit, or MTU, complexes,
such as apartment buildings, hotels, business parks and commercial office
buildings. Our systems enable service providers to deliver high speed Internet
access, as well as enhanced capabilities, such as subscriber management,
community based web pages, firewall protection, virtual private networking, as
well as small business email and web servers.
We commenced operations in August 1991. Through the third quarter of 1998,
substantially all of our revenue was derived from the sale of our XL Ethernet
LAN extension products to the corporate and university segments of the multi-
commercial unit, or MCU, market. In early 1997, we introduced the first
products in our Expresso product line aimed at service provider markets. During
the first quarter of 1998, we began licensing our HomeRun technology to certain
leading semiconductor, computer hardware and consumer electronics manufacturers
for incorporation into integrated circuits and consumer products including PCs,
peripherals, modems and other Internet appliances. In the third and fourth
quarters of 1998, we commenced selling our Expresso GS products, which are
configured for local loop applications, and Expresso MDU products, which
incorporate our HomeRun technology to a broader range of service providers,
primarily those serving apartment complexes, hotels, university dormitories and
military complexes in the multi-dwelling unit, or MDU, market. In the first
quarter of 1999, we commenced selling Expresso MDU products incorporating our
LongRun technology and Expresso MDU Lite to additional segments of the MDU
market. During the fourth quarter of 1999, we commenced selling our Expresso
SMS 2000 and companion Expresso OCS system providing subscriber management,
bandwidth management, credit card billing and other functions to the MDU
market.
We generate revenue primarily from the sale of products and, to a lesser
extent, through the licensing of our HomeRun technology. We recognize revenue
from product sales upon shipment. Estimated sales returns and warranty costs,
based on historical experience by product, are recorded at the time revenue is
recognized. License and royalty revenue consists of non-refundable up-front
license fees, some of which may offset initial royalty payments, and royalties.
Currently, the majority of our license and royalty revenue is comprised of non-
refundable license fees paid in advance. Such revenue is 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 revenue is expected to consist primarily of royalties based
on products sold by our licensees. We do not expect that such license and
royalty revenue will constitute a substantial portion of our revenue in future
periods.
Sales price reductions on some of our products may be necessary to remain
competitive. Although we have been historically able to offset most price
declines with reductions in our manufacturing costs, there can be no assurance
that we will be able to offset further price declines with cost reductions. In
addition, some of our licensees may sell products based on our technology to
our competitors or potential competitors. There can be no assurance that our
HomeRun technology will be successfully deployed on a widespread basis or that
such licensing will not result in an erosion of the potential market for our
products.
14
<PAGE>
Sales to customers outside of the United States accounted for approximately
15.8%, 18.5% and 32.3% of revenue in 1997, 1998 and 1999, respectively. We
expect international sales to increase in absolute dollars in the future but to
represent approximately one third or less of our revenue, but they may decrease
as a percentage of total sales in the future. To date, substantially all
international sales have been denominated in U.S. dollars.
We expect 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 our products. Accordingly, we
will continue to make significant expenditures on sales and marketing and
research and development activities.
In June 1999, we acquired PublicPort, Inc. in exchange for 168,679 shares of
common stock. This transaction was treated as a pooling of interests for
accounting purposes. PublicPort was located in Ann Arbor, Michigan. PublicPort
designed and developed subscriber management systems that enabled businesses in
the MDU market to provide mobile computer users access to the public Internet
or private corporate networks without having to reconfigure their computer's
network access software.
In November 1999, we acquired Vintel Communications, Inc. for $4.8 million,
consisting of $500,000 cash, 116,370 shares of common stock and approximately
40,000 options to acquire common stock. This transaction was treated as a
purchase for accounting purposes. Vintel was located in Oakland, California.
Vintel designed and developed high-performance integrated service routers that
allowed service providers to offer bundles of services, including voice-over-IP
and high speed Internet services over a common IP infrastructure to customers
in the MTU market.
In February 2000, we acquired FreeGate Corporation for approximately $24.7
million, consisting of 510,931 shares of common stock, approximately 19,600
options to acquire common stock and acquisition related expenses, consisting
primarily of investment advisory, legal and other professional fees. This
transaction was treated as a purchase for accounting purposes. FreeGate was
located in Sunnyvale, California. FreeGate designed, developed and marketed
Internet server appliances combining the functions of IP routing, firewall
security, network address translation, secure remote access via virtual private
networking, and email and web servers on a compact, PC-based platform.
In February 2000, we signed a definitive agreement to acquire certain assets
of OneWorld Systems, Inc. for approximately $2.3 million in cash. This
transaction will be treated as a purchase for accounting purposes. OneWorld was
located in Sunnyvale, California. OneWorld designed and developed network
communication appliances and network modems.
While we expect to derive benefit from sales of product lines acquired
through some of these acquisitions and designed, developed and marketed as a
result of these acquisitions, there can be no assurance that we will be able to
sustain or expand sales of those products or complete the development and
commercial deployment of products expected as a result of these acquisitions.
Through these completed and anticipated transactions, we have added
approximately 55 people to our workforce. The costs associated with personnel
including rent for additional facilities and related general and administrative
costs as well as costs associated with research and development, and sales and
marketing activities will substantially increase our operating costs when
compared to related costs expended in 1999.
We have incurred net operating losses to date and, as of December 31, 1999,
had an accumulated deficit of $56.5 million. Our ability to generate income
from operations will be primarily dependent on increases in sales volume,
reductions in manufacturing costs and the growth of high-speed data access
solutions in the service provider and MTU markets. In view of our limited
history of product revenue from new markets, reliance on growth in deployment
of high-speed data access solutions and the unpredictability of orders and
subsequent revenue, we believe that period to period comparisons of our
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. Failure to generate significant revenue
15
<PAGE>
from new products, whether due to lack of market acceptance, competition,
technological change or otherwise, or the inability to reduce manufacturing
costs, will harm our business, financial condition and results of operations.
Results of Operations
The following table sets forth items from our statements of operations as a
percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
Years ended
December 31,
-----------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Total revenue............... 100.0% 100.0% 100.0%
Total cost of goods sold.... 51.9 55.0 55.6
------ ------ -----
Gross margin.............. 48.1 45.0 44.4
Operating expenses:
Sales and marketing....... 82.7 80.2 37.8
Research and development.. 57.3 58.7 27.4
General administrative.... 38.2 26.6 15.9
In-process research and
development.............. -- -- 9.4
Amortization of
intangibles.............. -- -- --
Noncash compensation
expenses................. 20.3 11.7 1.6
------ ------ -----
Total operating
expenses............... 198.4 177.2 92.3
------ ------ -----
Loss from operations...... (150.3) (132.2) (47.9)
Other income (expense),
net........................ 3.1 2.0 5.7
------ ------ -----
Loss before income taxes.. (147.2) (130.2) (42.0)
Income tax expense.......... -- -- --
------ ------ -----
Net loss.................. (147.2)% (130.2)% (42.0)%
====== ====== =====
</TABLE>
Years Ended December 31, 1997, 1998 and 1999
Revenue. We generate revenue primarily from the sale of products and, to a
lesser extent, through the licensing of our HomeRun technology. Our total
revenue increased to $27.8 million for the year ended December 31, 1999, from
$10.6 million for the year ended December 31, 1998, and from $6.2 million for
the year ended December 31, 1997. The increase in 1999 was primarily due to an
increase in sales of Expresso products. The increase in 1998 was primarily due
to an increase in sales of XL products and initial sales of Expresso GS and
Expresso MDU products. License and royalty revenue increased to $1.5 million
for the year ended December 31, 1999; from $0.8 million for the year ended
December 31, 1998. The increase in 1999 was primarily due to increases in up-
front license fees recognized during the year and receipt of related royalty
payments. There was no license and royalty revenue in periods prior to 1998.
Cost of Goods Sold/Gross Margin. Cost of goods sold consists of raw
materials, contract manufacturing, personnel costs, test and quality assurance
for products, and cost of licensed technology included in the products. Our
cost of goods sold increased to $15.5 million for the year ended December 31,
1999, from $5.8 million for the year ended December 31, 1998, and from $3.2
million for the year ended December 31, 1997. The increase in 1999 was
primarily due to increased production of our Expresso products. The increase in
1998 was primarily due to increased production of our XL and Expresso products
and initial production of our Expresso GS and Expresso MDU products. Our gross
margin on an absolute basis increased to $12.3 million for the year ended
December 31, 1999, from $4.7 million for the year ended December 31, 1998, and
from $3.0 million for the year ended December 31, 1997. Gross margin as a
percentage of revenue decreased to 44.4% of revenue for the year ended December
31, 1999, from 45.0% of revenue for the year
16
<PAGE>
ended December 31, 1998, and from 48.1% of revenue for the year ended December
31, 1997. The decrease in gross margin as a percent of revenue in 1999 was
primarily due to the change in product mix, as we sold a larger percentage of
Expresso products that had lower average gross margins than the XL products.
Volume price discounts to certain customers with substantial volume commitments
and increased costs of raw materials and contract manufacturing associated with
initial introductions of new products in the Expresso MDU product lines also
contributed to this decrease in gross margin. The decrease in gross margin as a
percentage of revenue in 1998 was primarily due to the change in product mix to
include Expresso products which have lower average gross margins than the XL
products, combined with the increased costs of raw materials and contract
manufacturing associated with initial Expresso GS and Expresso MDU product
introductions.
Sales and Marketing. Sales and marketing expense primarily consists of
personnel costs, including commissions and costs related to customer support,
travel, trade-shows, promotions, and outside services. Our sales and marketing
expenses increased to $10.5 million for the year ended December 31, 1999, from
$8.5 million for the year ended December 31, 1998, and from $5.1 million for
the year ended December 31, 1997. The increases in both 1999 and 1998 were
primarily due to increased hiring of sales and marketing personnel, travel,
attendance at trade shows, as well as increases in personnel related to
customer support activities and expanded efforts in international markets.
Research and Development. Research and development expense primarily consists
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. Our research and development
expenses increased to $7.6 million for the year ended December 31, 1999, from
$6.2 million for the year ended December 31, 1998, and from $3.6 million for
the year ended December 31, 1997. The increase in 1999 was primarily due to
further development of the Expresso GS and Expresso MDU products, development
of HomeRun-related products, enhancement of certain XL products, and continued
development of the subscriber management system portion of the Expresso MDU
product line. The research and development expenses of PublicPort and Vintel
were consolidated with our expenses for the periods subsequent to the
respective June and November acquisitions. The increase in 1998 was primarily
due to further development of the Expresso GS and Expresso MDU products,
development of HomeRun-related products, preparation of HomeRun technology for
licensing and potential standardization and enhancement of certain XL products.
We intend to increase investment in research and development programs in future
periods for the purpose of enhancing current products to provide advanced
Internet service applications for both domestic and international markets,
reducing the cost of current products, and developing and acquiring new
products.
General and Administrative. General and administrative expense primarily
consists of personnel costs for administrative officers and support personnel,
and legal, accounting and consulting fees. Our general and administrative
expenses increased to $4.4 million for the year ended December 31, 1999, from
$2.8 million for the year ended December 31, 1998, and from $2.4 million for
the year ended December 31, 1997. The increases in both 1999 and 1998 were
primarily due to additions of administrative personnel and increases in other
costs related to our growth. We intend to increase general and administrative
expenditures and infrastructure costs as we expand our business.
Amortization of Intangibles. Amortization of intangibles consists of the
periodic amortization of intangible assets related to purchase acquisitions.
These assets consist primarily of acquired workforce and goodwill and are
amortized over their estimated useful lives of 3 and 5 years, respectively.
Amortization of intangibles in 1999 of $0.1 million relates to intangible
assets acquired from Vintel. There were no such costs prior to 1999.
In-process research and development. Amounts expensed as in-process research
and development were $2.6 million in 1999 and were related to in-process
research and development purchased from Vintel. There were no such costs prior
to 1999. The fair value of such technology currently under development was
determined by using the income approach, which discounts expected future cash
flows to present value. The
17
<PAGE>
discount rates used in the present value calculations were typically derived
from a weighted average cost of capital analysis, adjusted upward to reflect
additional risks inherent in the development life cycle. These risk factors are
reflected in the discount rate used of 30%. We expect that the pricing model
for products and intellectual property licenses related to our acquisition of
Vintel will be considered standard within the high-technology communications
industry. We do not expect, however, to achieve expense reductions as a result
of integrating the acquired in-process technology. Therefore, the valuation
assumptions do not include any anticipated cost savings. Our estimated cost to
complete the technology at the time of acquisition was approximately $2.0
million. To date, those costs are approximately $0.1 million. We expect that
products incorporating the acquired technology from this acquisition will be
completed and begin to generate cash flows over a six to nine month period
after integration. Development of these technologies, however, remains a
significant risk due to the remaining effort to achieve technical viability,
rapidly changing customer markets, uncertain standards for new products and
significant competitive threats from numerous companies. Efforts to develop the
acquired technology into commercially viable products consists principally of
planning, designing and testing activities necessary to determine that the
product can meet market expectations, including functionality and technical
requirements. Failure to bring these products to market in a timely manner
could result in a loss of market share, or a lost opportunity to capitalize on
emerging markets, and could harm our business and operating results.
Regarding our purchase of Vintel, actual results to date have been
consistent, in all material respects, with our assumptions at the time of the
acquisition as they relate to the value of purchased in-process research and
development. The assumptions primarily consist of an expected completion date
for the in-process projects, estimated costs to complete the projects and
revenue and expense projections once the products have entered the market.
There have been no product shipments to date from acquired technologies,
therefore, it is difficult to determine the accuracy of overall revenue
projections early in the technology or product lifecycle. Failure to achieve
the expected levels of revenue and net income from these products may
negatively impact the return on investment expected at the time that the
acquisition was completed.
Noncash Compensation Expense. Noncash compensation expense in 1999 consisted
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. Noncash compensation expense in
1998 and 1997 primarily consisted of expenses related to the grant of a warrant
to purchase up to 666,836 shares of common stock in consideration for
technology endorsement, marketing and certain development support by Microsoft
with respect to our HomeRun technology and related products. Noncash
compensation expense in both years also consisted of the recognition of expense
related to certain employee stock option grants. Our noncash compensation
expense was $0.5 million, $1.2 million, and $1.3 million for the years ended
December 31, 1999, 1998 and 1997, respectively. We intend to recognize $1.0
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 balances, offset by interest expense associated with credit
facilities. Our other income (expense), net was $1.6 million, $0.2 million, and
$0.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
sale of preferred equity securities for an aggregate of $46.2 million net of
offering costs. In January 1999, we completed our initial public offering and
issued 2,875,000 shares of our common stock at a price of $18.00. We received
approximately $46.9 million in cash, net of underwriting discounts, commissions
and other offering costs. We 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.
As of December 31, 1999, we had cash, cash equivalents and short-term
investments of $32.2 million.
18
<PAGE>
Net increase in cash and cash equivalents in 1999 of $9.0 million resulted
primarily from net proceeds from our initial public offering and exercise of a
warrant for convertible preferred stock, and net proceeds of maturities of
short term investments, offset by a net loss of $11.7 million, a net decrease
in working capital of $12.2 million due to the increase in our sales activity
for the year, purchases of short term investments, purchases of property and
equipment and repayment of credit facilities.
Net decrease in cash and cash equivalents in 1998 of $0.9 million resulted
primarily from a net loss of $13.7 million, net changes in working capital, and
purchase of property and equipment offset by net proceeds from maturities of
short term investments, net proceeds from the sale of preferred securities and
net borrowings from credit facilities.
Net increase in cash and cash equivalents in 1997 of $4.0 million resulted
primarily from net proceeds from the sale of preferred securities, and net
proceeds from maturities of short term investments, offset by a net loss of
$9.2 million, net changes in working capital, and the purchase of property and
equipment.
We have 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; and a non-formula revolver of up to $4.5 million bearing
interest at prime plus 3.5% per annum. The credit facility requires a minimum
monthly interest payment of $10,000. The term of the credit facility is 18
months 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. We
have approximately $1.5 million borrowed against the credit facility as of
December 31, 1999.
For future periods, we generally anticipate 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. We will also continue to
expend significant amounts on property and equipment related to the expansion
of systems infrastructure and office equipment and our anticipated move to
expanded headquarter facilities to support our growth. We also expect to
continue to expend significant amounts on lab and test equipment to support on-
going research and development efforts.
We believe that our cash, cash equivalents and short-term investment balances
and funds available under our credit facility will be sufficient to satisfy our
cash requirements for at least the next 12 months.
19
<PAGE>
During the years ended December 31, 1999, 1998 and 1997, we incurred non-cash
expenses related to purchase acquisition and dividend accretion. The table
below sets forth supplemental information concerning the impact of certain non-
cash items on losses from operations. 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. The Statements of
Operations data has been derived from our audited financial statements.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Computation of pro forma net loss per share:
Net loss attributable to common stockholders.. $(10,784) $(16,331) $(11,969)
Adjustments for certain noncash expenses
related to purchase acquisition and dividend
accretion:
Amortization of intangibles................. -- -- 52
In-process research and development......... -- -- 2,600
Dividend accretion on preferred stock....... 1,627 2,584 235
-------- -------- --------
Pro forma net loss.............................. $ (9,157) $(13,747) $ (9,082)
======== ======== ========
Pro forma net loss per share.................... $ (1.21) $ (1.64) $ (0.80)
======== ======== ========
Shares used in computing pro forma net loss per
share, basic and diluted (1)................... 7,568 8,389 11,321
======== ======== ========
- --------
(1) Calculation of pro forma shares, basic and diluted:
Shares used in computing net loss attributable
to common stockholders, basic and diluted...... 182 269 10,729
Adjustment to reflect the assumed conversion of
preferred stock................................ 7,386 8,120 592
-------- -------- --------
Shares used in computing pro forma net loss per
share, basic and diluted....................... 7,568 8,389 11,321
======== ======== ========
</TABLE>
Year 2000 Compliance
We have addressed computer networks year 2000 compliance in our systems,
accounting software, computer hardware and existing products, and have
communicated with our significant third party vendors with respect to their
respective states of readiness. In order to assess year 2000 compliance of our
products and systems, we identified those systems critical to our operations
and the operations of our technologies and, based upon tests to such products
and systems, believed that all of our systems and technologies, to the extent
developed, were materially compliant. We expended approximately $70,000 to
assess and address the year 2000 problem. Although it is now past January 1,
2000, and we have not experienced any adverse impact from the transition to the
Year 2000, we cannot assure you that we or our suppliers and customers have not
been affected in a manner that is not yet apparent. In addition, some computer
programs that were date sensitive to the Year 2000 may not have been programmed
to process the Year 2000 as a leap year, and any negative consequential effects
remain unknown. As a result, we will continue to monitor our Year 2000
compliance and the Year 2000 compliance of our suppliers and customers.
20
<PAGE>
Additional Risk Factors That Could Affect Our Operating Results and the Market
Price Of Our Stock.
We have a history of losses and expect future losses.
We have incurred substantial net losses and experienced negative cash flow
each quarter since our inception. We incurred net losses attributable to common
stockholders of $12.0 million for 1999 and $16.3 million for 1998. As of
December 31, 1999, we had an accumulated deficit of $56.5 million. We expect
that we will continue to incur losses in 2000. We may incur losses in future
periods as well.
To achieve or sustain profitability, we must increase sales of our Expresso
products, reduce manufacturing costs and successfully introduce enhanced
versions of our existing and new products.
We may never achieve or sustain profitability. We have spent substantial
amounts of money on the development of our Expresso products, HomeRun
technology and software products. We intend to continue increasing certain of
our operating expenditures, including our sales and marketing, research and
development and general and administrative expenditures. We cannot assure you
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. Our ability
to increase revenue or achieve profitability in the future will primarily
depend on our ability to increase sales of our Expresso products, reduce
manufacturing costs, and successfully introduce and sell enhanced versions of
our existing products and new products.
A number of factors could cause our quarterly and annual financial results to
be worse than expected, which could result in a decline in our stock price.
Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of numerous factors, some
of which are outside of our control. These factors include:
. market acceptance of our products;
. competitive pressures, including pricing pressures from our partners and
competitors;
. 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;
. changes in the pricing policies of our suppliers;
. the availability and cost of key components; and
. the timing of personnel hiring.
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 for high-speed data access products and services due to
a number of factors, including competition and rapid technological change. We
anticipate that average selling prices for our products will decrease over time
due to competitive pressures and volume pricing agreements. Decreasing average
selling prices could cause us to experience decreased revenue despite an
increase in the number of units sold. We cannot assure you that we will be able
to sustain our gross margins in the future, improve our gross margins by
offering new products or increased product functionality, or offset future
price declines with cost reductions.
21
<PAGE>
As a result of these and other factors, it is possible that in some future
period our operating results will be below the expectations of securities
analysts and investors. In that event, the trading price of our common stock
would likely decline.
Difficulties in forecasting product sales could negatively impact our business.
We base our expense levels in part upon our expectations concerning future
revenue and these expense levels are relatively fixed in the short-term. Orders
for our products, however, 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 that typically last 60 to 90 days. If orders
forecasted for a specific customer for a particular quarter do not occur in
that quarter, our revenue 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 this shortfall and reduced revenue would have
a direct impact on our results of operations for that quarter. Further, we
purchase components and contract manufacture our products based on forecasts of
sales. If orders for products exceed our forecasts, we may have difficulty
meeting customers orders in a timely manner, which could damage our reputation
or result in lost sales.
Our market is subject to rapid technological change, and if we do not address
these changes, our products will become obsolete, harming our business and
ability to compete.
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. Issues concerning
the use of the Internet, including security, lost or delayed packets, and
quality of service, may negatively affect the development of the market for our
products. We cannot assure you that we will be able to respond quickly and
effectively to technological change. If we do not address these technological
changes and challenges by regularly introducing new products, our product line
will become obsolete, which would harm our business, financial condition and
results of operations.
Our success depends on our ability to continually introduce new products that
achieve broad market acceptance.
We must also continually improve the performance, features and reliability of
our products, particularly in response to competitive product offerings. To
remain competitive we need to introduce products in a timely manner that
incorporate or are compatible with these new technologies as they emerge. We
may have only a limited amount of time to penetrate certain markets, and we
cannot assure you that we will be successful in achieving widespread acceptance
of our products before competitors offer products and services similar or
superior to our products. 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 harm
our operating results by unexpectedly decreasing sales, increasing our
inventory levels of older products and exposing us to greater risk of product
obsolescence.
Our success depends on continued market acceptance of our Expresso products.
We must devote a substantial amount of human and capital resources in order
to maintain commercial acceptance of our Expresso products and to expand
offerings of the Expresso product line in the MDU and MCU markets and to
further penetrate these markets. Historically, the majority of our Expresso
products have been sold into the MDU market. Our future success depends on the
ability to continue to penetrate this market and to expand our penetration into
the MCU market. Our success also depends on our ability to educate existing and
potential customers and end users about the benefits of our Fast Copper
technology, including
22
<PAGE>
HomeRun and LongRun, and the development of new products to meet changing and
expanding demands of service providers, MTU owners and corporate customers. The
continued success of our Expresso products will also depend on the ability of
our service provider customers to market and sell high-speed data services to
end users. We cannot assure you that our Expresso products will achieve or
maintain broad commercial acceptance within the MDU market, MCU market, or in
any other market we enter.
The market in which we operate is highly competitive, and we may not be able to
compete effectively.
The market for multi-service broadband access systems is intensely
competitive, and we expect that this market will become increasingly
competitive in the future. Our most immediate competitors include Cisco, Copper
Mountain, Nortel and Paradyne, 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 and related software products. In addition, the market in which we
compete is characterized by increasing consolidation, and we cannot predict
with certainty how industry consolidation will affect us or our competitors.
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. These competitors 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, our HomeRun licensees may sell products based on our HomeRun
technology to our competitors or potential competitors. This licensing may
cause an erosion in the potential market for our products. We cannot assure you
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 harm our business, financial condition and
results of operations.
Our copper-wire based solutions face severe competition from other technologies
and the commercial acceptance of any competing solutions could harm our
business and ability to compete.
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. These competing solutions
provide fast access, high reliability and are cost-effective for some users.
Because many of our products are based on the use of copper telephone wire, and
because 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. 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 that are based
on copper telephone wires will decline. 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
average selling prices and gross margins associated with our products. The
occurrence of any one or more of these events could harm our business,
financial condition and results of operations.
Manufacturing or design defects in our products could harm our reputation and
business.
Any defect or deficiency in our products could reduce the functionality,
effectiveness or marketability of our products. These defects or deficiencies
could cause orders for our products to be canceled or delayed, reduce revenue,
or render our product designs obsolete. In that event, we would be required to
devote substantial financial and other resources for a significant period of
time in order to develop new product designs. We cannot assure you that we
would be successful in addressing any manufacturing or design defects in our
products or in developing new product designs in a timely manner, if at all.
Any of these events, individually or in the aggregate, could harm our business,
financial condition and results of operations.
23
<PAGE>
We must maintain and develop strategic partnerships with third parties to
increase market penetration of our HomeRun technology.
We have established relationships with several strategic partners, including
our collaborative arrangement through the Home Phoneline Network Alliance, or
the Home PNA, with leading semiconductor, computer hardware and consumer
electronics manufacturers. We have also licensed our HomeRun technology to
members of the Home PNA and others. In this regard, the widespread market
acceptance of our HomeRun technology for home networking applications is
dependent on the development and marketing of HomeRun-enabled integrated
circuits and consumer products by our licensees and their customers. We cannot
assure you that our HomeRun technology will continue to be deployed on a
widespread basis and future sales of products containing our HomeRun technology
cannot be predicted. The amount and timing of resources that our licensees
devote to developing and marketing HomeRun-enabled products is not within our
control. We cannot assure you that these licensees will continue to develop and
market products as expected or that significant license and royalty revenue
will be forthcoming in the future. If any of our licensees fails to
commercialize or market products incorporating HomeRun technology, our revenue
may not grow as expected and we may be required to undertake unforeseen
additional responsibilities or to devote additional resources to development,
commercialization or marketing of HomeRun, all of which could harm our
business, financial condition and results of operations.
Changing industry standards may reduce the demand for our products, which will
harm our business.
We will not be competitive unless we continually introduce new products and
product enhancements that address changing 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 these standards become widespread
and our products are not in compliance, our customers and potential customers
may not purchase our products, which would harm 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 harm our business,
financial condition and results of operations. In addition, selection of
competing technologies as standards by standards setting bodies such as the
Home PNA could negatively affect our reputation in the market regardless of
whether our products are standard compliant or demand for our products does not
decline. This selection could be interpreted by the press and others as having
a negative impact on our business which could negatively impact the market
price of our stock.
A majority of our sales comes from a small number of customers; if we lose any
of these customers, our sales could decline significantly.
The majority of our annual sales comes from a small number of our customers.
Our 10 largest customers accounted for 62% of net sales in 1999. Because we are
dependent upon continued revenue from our 10 largest customers, any material
delay, cancellation or reduction of orders from these or other major customers
could cause our sales to decline significantly. Some of these customers
individually accounted for more than 10% of our annual net sales in 1999. CAIS,
Inc. and Rycom CCI, Inc. accounted for 12% and 10%, respectively, of our annual
net sales in 1999. There is no guarantee that we will be able to retain any of
our 10 largest customers or any other accounts. In addition, our customers may
materially reduce the levels of services ordered from us at any time. This
could cause a significant decline in our net sales and we may not be able to
reduce the accompanying expenses at the same time.
We depend on contract manufacturers to manufacture all of our products, and
rely upon them to deliver high-quality products in a timely manner.
We do not manufacture any of our products, but instead rely on contract
manufacturers to assemble, test and package our products. We cannot assure you
that these contract manufacturers and suppliers will be able to
24
<PAGE>
meet our future requirements for manufactured products, components and
subassemblies. Any interruption in the operations of one or more of these
contract manufacturers would harm 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 harm 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. These constraints could result
in delays in the delivery of our products or the loss of existing or potential
customers, either of which could harm our business, operating results or
financial condition.
We currently purchase all of our raw materials and components used in our
products through our contract manufacturers. Components are purchased pursuant
to purchase orders based on forecasts, but we or our contract manufacturers
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
contract manufacturers and their suppliers with accurate forecasts of our
future needs. If we or our manufacturers were unable to obtain a sufficient
supply of components from current sources, we could experience difficulties in
obtaining alternative sources or in altering product designs to use alternative
components. For example, we are experiencing, and may continue experiencing in
the future, difficulty obtaining flash memory. Resulting delays, reductions in
product shipments could damage customer relationships and could harm our
business, financial condition or results of operations. In addition, any
increases in component costs that are passed on to our customers could reduce
demand for our products.
We rely on third parties to test all of our products and a failure to
adequately control quality could harm our business.
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 quality assurance problems could increase the
costs of manufacturing, assembling or testing of our products and could harm
our business, financial condition and results of operation. Moreover, defects
in products that are not discovered in the quality assurance process could
damage customer relationships and result in product returns or liability
claims, each of which could harm our business, financial condition and results
of operations.
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, 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. Our products are also dependent on
various sole source offerings from Dallas Semiconductor, Intel, Metalink US,
Motorola, Oki Semiconductor, Osicom Technologies, SaRonix, Siemens and Wind
River Systems. If there is any interruption in the supply of any of the key
components currently obtained from a single or limited source, obtaining these
components from other sources could take a substantial period of time, could
cause us to redesign our products and could disrupt our operations and harm our
business in any given period.
We may not be able to effectively integrate our recent acquisitions into our
existing business.
In June 1999, we acquired PublicPort, Inc., in November 1999, we acquired
Vintel Communications, Inc., and in February 2000, we acquired FreeGate
Corporation. In addition, in February 2000, we signed a definitive agreement to
acquire certain assets of OneWorld Systems, Inc. We will need to overcome
significant issues in order to realize any benefits from these transactions.
These issues include:
. integrating the operations of the geographically dispersed businesses
acquired into our own operations;
25
<PAGE>
. incorporating acquired technology, rights and products into our products
and services;
. developing new products and services that utilize the assets of all
entities;
. the potential disruption of our ongoing business and the distraction of
our management; and
. the potential impairment of relationships with employees, suppliers and
customers.
We may engage in future acquisitions of companies, technologies or products and
the failure to integrate any future acquisitions could harm our business.
As a part of our business strategy, we expect to make additional acquisitions
of, or significant investments in, complementary companies, products or
technologies. Any 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 personnel.
We cannot assure you that we will be able to successfully integrate any
business, products, technologies or personnel that we may acquire in the
future, and our failure to do so could harm our business, operating results and
financial condition.
If we fail to manage our growth effectively, our business could be harmed.
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. We cannot assure you 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. If we are unable to manage our growth effectively, our
business, financial condition and results of operations could be harmed.
We depend on international sales for a significant portion of our revenue,
which could subject our business to a number of risks.
Sales to customers outside of the United States accounted for approximately
32.3% and 18.5% of revenue for the years ended December 31, 1999 and 1998,
respectively. 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;
26
<PAGE>
. 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.
We expect sales to customers outside of the United States to continue to
account for a significant portion of our revenue. We can give you no assurance
that foreign markets for our products will not develop more slowly than
currently anticipated. Any failure to increase sales to customers outside of
the United States could harm our business, financial condition and results of
operations.
We also expend product development and other resources in order to meet
regulatory and technical requirements of foreign countries. We are depending on
sales of our products in these foreign markets in order to recoup the costs
associated with developing products for these markets.
Fluctuations in currency exchange rates may harm our business.
All of our foreign sales are invoiced in U.S. dollars. As a result,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive for international customers and reduce demand for our
products. We anticipate that foreign sales will generally continue to be
invoiced in U.S. dollars. Accordingly, we do not currently engage in foreign
currency hedging transactions. As we expand our current international
operations, however, we may allow payment in foreign currencies and exposure to
losses in foreign currency transactions may increase. To reduce this exposure
we may purchase forward foreign exchange contracts or use other hedging
strategies. However, we cannot assure you that any currency hedging strategy
would be successful in avoiding exchange related losses.
If we fail to protect our intellectual property, or if others use our
proprietary technology without authorization, our competitive position may
suffer.
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 17 United States patents
and have 18 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 of our 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 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 may be subject to intellectual property infringement claims that are costly
to defend and could harm our business and ability to compete.
We are also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. We cannot assure
you 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
27
<PAGE>
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. This litigation or potential litigation could result
in product delays, increased costs or both. In addition, the cost of any
litigation and the resulting distraction of our management resources could harm
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, these licenses can be obtained on commercially
reasonable terms. Our failure to obtain these licenses could harm our business,
results of operations and financial condition.
If our products do not comply with complex government regulations, our products
may not be sold, preventing us from increasing our revenue or achieving
profitability.
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 certified before they may be
deployed by certain of our customers. Any delay in or failure to obtain these
approvals could harm 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 revenue 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 harm the sale of
products by us to these customers.
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. As our systems and products become more complex, we
believe our ability to provide adequate customer support will be increasingly
important to our success. We have limited experience with widespread deployment
of our products to a diverse customer base, and we cannot assure you 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 harm our business, financial condition or results of
operations.
If we lose key personnel or are unable to hire additional qualified personnel
as necessary, we may not be able to successfully manage our business.
We depend on the performance of Matthew Taylor, our Chief Technical Officer,
and Salvatore D'Auria, our President, Chief Executive Officer and Chairman of
the Board, and on other senior management and
28
<PAGE>
technical personnel with experience in the data communications,
telecommunications and high-speed data access industries. The loss of any one
of them could harm 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. We cannot assure you that we will be able to do so.
Our stock price has fluctuated and is likely to continue to fluctuate, and you
may not be able to resell your shares at or above the offering price.
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
factors such 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 these 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 securities of 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 technology companies. These market and industry factors
may harm 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 ratios may not be sustained.
Our charter and bylaws and Delaware law contain provisions that could delay or
prevent a change in control.
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. These provisions could limit the
price that certain investors may 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 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 stockholders. 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.
29
<PAGE>
Future sales of our common stock could depress our stock price.
Sales of a substantial number of shares of our common stock in the public
market, or the appearance that these shares are available for sale, could harm
the market price of our common stock. These sales also may 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 December 31, 1999,
we had 11,940,610 shares outstanding. Of these shares, 11,655,561 shares of
common stock are currently available for sale in the public market, some of
which are subject to volume and other limitations under securities laws.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We place our investments with high credit issuers
in short-term securities with maturities of three to twelve months. Our
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. We have no investments denominated in
foreign country currencies and therefore are not subject to foreign exchange
risk.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TUT SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ 32
Consolidated Balance Sheets as of December 31, 1998 and 1999............. 33
Consolidated Statements of Operations for the years ended December 31,
1997, 1998, and 1999.................................................... 34
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998, and 1999....................................... 35
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998, and 1999.................................................... 36
Notes to Consolidated Financial Statements............................... 37
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Tut Systems, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 59 present fairly, in all material
respects, the financial position of Tut Systems, Inc. at December 31, 1998 and
December 31, 1999 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under item 14(a)(2) on page 59 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 20, 2000 except as to Note 14 which is as of February 14, 2000
32
<PAGE>
TUT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 4,452 $ 13,405
Short-term investments................................... -- 18,831
Accounts receivable, net of allowance for doubtful
accounts of $115 and $335 in 1998 and 1999,
respectively............................................ 2,738 11,742
Inventories.............................................. 3,787 8,401
Prepaid expenses and other current assets................ 955 3,746
-------- --------
Total current assets................................... 11,932 56,125
Property and equipment, net................................ 1,790 3,476
Deferred offering costs.................................... 955 --
Other assets............................................... 580 5,755
-------- --------
Total assets........................................... $ 15,257 $ 65,356
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
WARRANT AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 2,421 $ 5,859
Accrued liabilities...................................... 1,758 3,551
Lines of credit.......................................... -- 1,529
Deferred revenue......................................... 580 770
-------- --------
Total current liabilities.............................. 4,759 11,709
Lines of credit, net of current portion.................... 4,262 --
Deferred revenue, net of current portion................... 2,080 2,125
-------- --------
Total liabilities...................................... 11,101 13,834
-------- --------
Redeemable convertible preferred stock; $0.001 par value;
7,531 shares authorized; 6,355 shares issued and
outstanding in 1998 and none in 1999 (liquidation value:
$43,895 at December 31, 1998)............................. 43,895 --
Redeemable convertible preferred stock warrant............. 2,100 --
-------- --------
45,995 --
-------- --------
Commitments and Contingencies (Note 9)
Stockholders' equity (deficit):
Convertible preferred stock; $0.001 par value; 1,339
shares authorized; 1,098 shares issued and outstanding
in 1998 and none in 1999 (liquidation value: $1,567 at
December 31, 1998)...................................... 1,567 --
Common stock; $0.001 par value; 100,000 shares
authorized; 347 and 11,941 shares issued and outstanding
in 1998 and 1999, respectively.......................... -- 12
Additional paid-in capital................................. 2,455 108,969
Deferred compensation...................................... (1,427) (972)
Accumulated deficit........................................ (44,434) (56,487)
-------- --------
Total stockholders' equity (deficit)................... (41,839) 51,522
-------- --------
Total liabilities, redeemable convertible preferred
stock and warrant and stockholders' equity
(deficit)........................................... $ 15,257 $ 65,356
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
TUT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product....................................... $ 6,221 $ 9,790 $ 26,266
License and royalty........................... -- 765 1,541
-------- -------- --------
Total revenues.............................. 6,221 10,555 27,807
-------- -------- --------
Costs of goods sold:
Product....................................... 3,228 5,733 15,454
License and royalty........................... -- 76 5
-------- -------- --------
Total cost of goods sold.................... 3,228 5,809 15,459
-------- -------- --------
Gross margin.................................... 2,993 4,746 12,348
-------- -------- --------
Operating expenses:
Sales and marketing........................... 5,147 8,462 10,523
Research and development...................... 3,562 6,200 7,618
General and administrative.................... 2,375 2,807 4,429
In-process research and development........... -- -- 2,600
Amortization of intangibles................... -- -- 52
Noncash compensation expense.................. 1,260 1,233 455
-------- -------- --------
Total operating expenses.................... 12,344 18,702 25,677
-------- -------- --------
Loss from operations............................ (9,351) (13,956) (13,329)
Interest expense................................ (61) (117) (608)
Interest income................................. 256 327 2,203
Other income, net............................... -- -- 1
-------- -------- --------
Loss before income taxes........................ (9,156) (13,746) (11,733)
Income tax expense.............................. 1 1 1
-------- -------- --------
Net loss........................................ (9,157) (13,747) (11,734)
Dividend accretion on preferred stock........... 1,627 2,584 235
-------- -------- --------
Net loss attributable to common stockholders.... $(10,784) $(16,331) $(11,969)
======== ======== ========
Net loss per share attributable to common
stockholders, basic and diluted................ $ (59.36) $ (60.62) $ (1.12)
======== ======== ========
Shares used in computing net loss attributable
to common stockholders, basic and diluted...... 182 269 10,729
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
TUT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock
Series A-G Common Stock Additional
-------------- ------------- Paid-in Deferred Accumulated
Shares Amount Shares Amount Capital Compensation Deficit Total
------ ------ ------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 1,098 $1,567 156 $ -- $ 58 $ -- $(17,319) $(15,694)
Common stock issued for
cash upon exercise of
options................ -- -- 62 -- 34 -- -- 34
Dividend accretion...... -- -- -- -- -- -- (1,627) (1,627)
Net loss................ -- -- -- -- -- -- (9,157) (9,157)
------ ------ ------ ----- -------- ------- -------- --------
Balance, December 31,
1997................... 1,098 1,567 218 -- 92 -- (28,103) (26,444)
Common stock issued for
cash upon exercise of
options................ -- -- 129 -- 63 -- -- 63
Unearned compensation
related to stock
options................ -- -- -- -- 1,820 (1,820) -- --
Amortization related to
unearned compensation.. -- -- -- -- -- 393 -- 393
Common stock warrant
issued................. -- -- -- -- 480 -- -- 480
Dividend accretion...... -- -- -- -- -- -- (2,584) (2,584)
Net loss................ -- -- -- -- -- -- (13,747) (13,747)
------ ------ ------ ----- -------- ------- -------- --------
Balance, December 31,
1998................... 1,098 1,567 347 -- 2,455 (1,427) (44,434) (41,839)
Common stock issued in
initial public
offering, net.......... -- -- 2,875 3 46,864 -- -- 46,867
Conversion of Series A-C
convertible preferred
stock and Series D-G
redeemable convertible
preferred stock to
common stock in
conjunction with
initial public
offering............... (1,098) (1,567) 8,120 8 54,464 -- -- 52,905
Common stock issued for
cash upon exercise of
options................ -- -- 268 1 507 -- -- 508
Common stock issued in
conjunction with Public
Port pooling of
interest acquisition... -- -- 169 -- 160 -- (84) 76
Common stock issued in
conjunction with Vintel
Corporation purchase
acquisition............ -- -- 116 -- 4,254 -- -- 4,254
Common stock issued
under employee stock
purchase plan.......... -- -- 8 -- 239 -- -- 239
Exercise of common stock
warrant................ -- -- 37 -- -- -- -- --
Common stock issued for
consulting services.... -- -- 1 -- 26 -- -- 26
Amortization related to
unearned compensation.. -- -- -- -- -- 455 -- 455
Dividend accretion...... -- -- -- -- -- -- (235) (235)
Net loss................ -- -- -- -- -- -- (11,734) (11,734)
------ ------ ------ ----- -------- ------- -------- --------
Balance, December 31,
1999................... -- $ -- 11,941 $ 12 $108,969 $ (972) $(56,487) $ 51,522
====== ====== ====== ===== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
TUT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(9,157) $(13,747) $(11,734)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................... 398 606 894
Non cash interest income........................ -- -- (162)
Common stock issued for services................ -- -- 26
Provision for doubtful accounts................. 14 104 235
Provision for excess and obsolete inventory..... 72 203 340
Amortization of discounts on investments........ (152) (204) (322)
Noncash compensation expense.................... 1,260 1,233 455
Amortization of goodwill and intangible assets.. -- -- 52
Write-off of in-process research & development.. -- -- 2,600
Change in assets and liabilities:
Accounts receivable............................ (1,036) (1,672) (9,239)
Inventories.................................... (1,241) (2,566) (4,954)
Prepaid expenses and other assets.............. (382) (1,066) (3,373)
Accounts payable............................... 753 781 3,400
Deferred revenue............................... -- 2,660 235
Accrued liabilities............................ 331 1,011 1,768
------- -------- --------
Net cash used in operating activities......... (9,140) (12,657) (19,779)
------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment............... (969) (1,051) (2,524)
Purchase of short-term investments............... (6,543) (3,906) (32,663)
Purchase of long-term investments................ -- -- (2,192)
Proceeds from maturities of short-term
investments..................................... 9,346 9,000 14,154
Cash acquired in business combination............ -- -- 406
------- -------- --------
Net cash provided by (used in) investing
activities................................... 1,834 4,043 (22,819)
------- -------- --------
Cash flows from financing activities:
Payment on lines of credit....................... (1,130) (1,754) (2,733)
Proceeds from lines of credit.................... 1,088 5,662 --
Proceeds from issuance of common and preferred
stock, net...................................... 11,334 3,763 54,284
------- -------- --------
Net cash provided by financing activities..... 11,292 7,671 51,551
------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 3,986 (943) 8,953
Cash and cash equivalents, beginning of period.... 1,409 5,395 4,452
------- -------- --------
Cash and cash equivalents, end of period.......... $ 5,395 $ 4,452 $ 13,405
======= ======== ========
Supplemental disclosure of cash flow information:
Interest paid during the period.................. $ 61 $ 68 $ --
======= ======== ========
Income taxes paid during the period.............. $ 1 $ 1 $ 1
======= ======== ========
Noncash financing activities:
Common stock warrants issued..................... $ -- $ 480 $ --
======= ======== ========
Common stock issued in connection with Public
Port............................................ $ -- $ -- $ 160
======= ======== ========
Common stock issued for services................. $ -- $ -- $ 26
======= ======== ========
Accretion of preferred stock..................... $ 1,627 $ 2,584 $ 235
======= ======== ========
Conversion of preferred stock to common stock.... $ -- $ -- $ 47,802
======= ======== ========
Unearned compensation related to stock option
grants.......................................... $ 1,260 $ 1,233 $ 455
======= ======== ========
Interest income from warrant..................... $ -- $ -- $ 162
======= ======== ========
Liabilities assumed in connection with acquisition
of Vintel Inc.:
Fair value of tangible assets acquired........... $ 61
In-process research and development.............. 2,600
Goodwill and intangible assets................... 1,826
Common stock issued.............................. (4,254)
Net cash paid.................................... (170)
--------
Liabilities assumed.............................. $ 63
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
NOTE 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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
These consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
The fair value of the Company's cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and lines of credit
approximate their carrying value due to the short maturity or market rate
structure of those instruments.
Cash, cash equivalents and short-term investments
Cash, cash equivalents, and short-term investments are stated at cost or
amortized cost, which approximates fair value, and consist primarily of money
market funds, certificates of deposits, corporate securities and debt
securities. The Company includes in cash and cash equivalents all highly liquid
investments which mature within three months of their purchase date.
Investments maturing between three and twelve months from the date of purchase
are classified as short-term investments.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates that designation as of each balance sheet
date. As of December 31, 1999, debt securities were classified as held-to-
maturity as the Company intended to, and had the ability to hold these
securities to maturity. Held-to-maturity securities are stated at amortized
cost, which approximates fair market value. The estimated fair values of cash
equivalents and short-term investments are based on quoted market prices.
Inventories
Inventories are stated at the lower of cost, using the average cost method,
or market.
Property and equipment
Property and equipment are carried at cost. The Company provides for
depreciation by charges to expense which are sufficient to write off the cost
of the assets over their estimated useful lives on the straight-line basis.
37
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Leasehold improvements are amortized over the lesser of the lease term or the
estimated useful life of the improvement. Useful lives by principal
classifications are as follows:
<TABLE>
<S> <C>
Office equipment............................................... 5 years
Computers and software......................................... 3-5 years
Test equipment................................................. 5 years
Leasehold improvements......................................... 1-5 years
</TABLE>
When assets are sold or otherwise disposed of, the cost and accumulated
depreciation and amortization are removed from the asset and allowance for
depreciation and amortization accounts respectively, and any gain or loss on
that sale or disposal is credited or charged to income.
Maintenance, repairs, and minor renewals are charged to expense as incurred.
Expenditures which substantially increase an asset's useful life are
capitalized.
Intangible assets
Intangible assets consist of goodwill and acquired workforce and are
amortized on a straight line basis over five and three years, respectively. See
Note 4, Business Combinations.
Accounting for long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets.
Revenue recognition
Product revenues
The Company recognizes revenue from product sales upon shipment if collection
of the resulting receivable is probable and product returns are reasonably
estimated. Revenue on products shipped on a trial basis is recognized upon
customer acceptance. Service revenue relating to customer maintenance fees for
ongoing customer support is recognized ratably over the period of the contract.
The Company's products generally carry a one year to two year warranty from the
date of purchase. Estimated sales returns and warranty costs, based on
historical experience by product, are recorded at the time the product revenue
is recognized.
License and royalty revenues
The Company has entered into nonexclusive technology agreements with various
licensees. These agreements provide the licensees the right to use the
Company's proprietary technology to manufacture or have products manufactured
using the proprietary technology and to receive customer support for specified
periods and any changes or improvement to the technology over the term of the
agreement.
Contract fees for the services provided under these licensing agreements are
generally comprised of license fees and nonrefundable, prepaid royalties which
are recognized when the proprietary technology is
38
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
delivered if there are no significant vendor obligations. If the licensing
agreements contain post-contract customer support, the Company recognizes the
contract fees ratably over the five year period during which the post-contract
customer support is expected to be provided. This period represents the
estimated life of the technology. The Company begins to recognize revenue under
the contract, once it has delivered the implementation package which contains
all information needed to use the Company's proprietary technology in the
licensee's process. The remaining obligations are primarily to provide the
licensee with any changes or improvements to the technology and technical
advice on specifications, testing, debugging and enhancements.
The Company recognizes royalties upon notification of sale by its licensees.
The terms of the royalty agreements generally require licensees to give
notification to the Company and to pay royalties within 60 days of the end of
the quarter during which the sales take place.
Advertising expenses
The Company accounts for advertising costs as expense in the period in which
they are incurred. Advertising expense for the years ended December 31, 1997,
1998 and 1999 was $94, $127 and $86, respectively.
Research and development
Research and development expenditures are charged to expense as incurred.
Income taxes
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. Deferred tax assets and liabilities are determined
based on the difference between the financial statement bases and the tax bases
of assets and liabilities using enacted tax rates. A valuation allowance is
established to reduce a deferred tax asset to the amount that is expected more
likely than not to be realized.
Net loss per share
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding. Options, warrants and preferred stock were
not included in the computation of diluted net loss per share because the
effect would be antidilutive.
The calculation of net loss per share attributable to common stockholders
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss per share attributable to common
stockholders, basic and diluted:
Net loss attributable to common stockholders... $(10,784) $(16,331) $(11,969)
======== ======== ========
Shares used in computing net loss attributable
to common stockholders, basic and diluted..... 182 269 10,729
======== ======== ========
Net loss per share attributable to common
stockholders, basic and diluted............... $ (59.36) $ (60.62) $ (1.12)
======== ======== ========
Antidilutive securities including options,
warrants, and preferred stock not included in
net loss per share attributable to common
stockholders calculation...................... 8,537 9,180 1,446
======== ======== ========
</TABLE>
39
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Comprehensive income (loss)
The Company has adopted the provisions of SFAS No. 130, or SFAS 130,
"Reporting Comprehensive Income." SFAS 130 establishes standards for reporting
comprehensive income (loss) and its components in financial statements.
Comprehensive income (loss), as defined, includes all changes in equity during
a period from non-owner sources. There has been no difference between the
Company's net loss and its total comprehensive loss through December 31, 1999.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The Company, to date, has not engaged in derivative and hedging
activities, and accordingly does not believe that the adoption of SFAS No. 133
will have a material impact on the financial reporting and related disclosures
of the Company. The Company will adopt SFAS No. 133 as required by SFAS No.
137, "Deferral of the Effective Date of the FASB Statement No. 133," beginning
with the third quarter of fiscal 2000.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of the operations of the Company.
NOTE 3--CONCENTRATIONS OF CREDIT RISK:
The Company operates in one business segment, designing, developing and
marketing advanced communications products which enable high-speed data access
in homes, businesses and other buildings. The markets for high-speed data
access products are characterized by rapid technological developments, frequent
new product introductions, changes in end user requirements and evolving
industry standards. The Company's future success will depend on its ability to
develop, introduce and market enhancements to its existing products, to
introduce new products in a timely manner which meet customer requirements and
to respond to competitive pressures and technological advances. Further, the
emergence of new industry standards, whether through adoption by official
standards committees or widespread use by telephone companies or other service
providers, could require the Company to redesign its products.
The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company had no customers with accounts
receivable balances greater than 10% at December 31, 1998. The Company had
significant accounts receivable balances due from two customers, individually
representing 28% and 18% of total accounts receivable, at December 31, 1999.
Currently, the Company relies on contract manufacturers and some single
source suppliers of materials for certain product components. As a result,
should the Company's current manufacturers or suppliers not produce and deliver
inventory for the Company to sell on a timely basis, operating results could be
adversely impacted.
The Company from time to time maintains a substantial portion of its cash and
cash equivalents in money market accounts with one financial institution. The
Company invests its excess cash in debt instruments of the
40
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
U.S. Treasury, governmental agencies and corporations with strong credit
ratings. The Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity. The Company has not
experienced any significant losses on its cash equivalents or short-term
investments.
NOTE 4--BUSINESS COMBINATIONS:
Pooling of interests combination
In June 1999, the Company acquired Public Port, Inc. ("Public Port"), a
company that designs and develops subscriber management systems. Under the
terms of the agreement, the Company issued 169 shares of its common stock for
all of the outstanding stock of Public Port. The transaction was accounted for
as a pooling of interests. The historical results of operations and financial
position of Public Port have not been significant in relation to the Company.
As such, historical results of the Company have not been restated for this
acquisition.
Purchase combination
In November 1999, the Company acquired all of the outstanding options to
purchase common stock and common stock of Vintel Communications, Inc.
("Vintel") for a total purchase price of $4,780, which consisted of $500 cash,
41 options to purchase shares of the Company's common stock and 116 shares of
the Company's common stock and related expenses. Vintel was incorporated in
March 1999 and is a networking company that specialized in developing high-
performance integrated service routers. The acquisition was accounted for as a
purchase and the results of operations of Vintel have been included in the
consolidated financial statements from the date of acquisition.
The allocation of the purchase price was based on the estimated fair value of
the assets less liabilities at the date of the acquisition of $354, goodwill
and acquired workforce of $1,446 and $380, respectively, and in-process
research and development of $2,600. The amount allocated to the purchased in-
process technology was determined based on an appraisal completed by an
independent third party using established valuation techniques and was expensed
upon acquisition, because technological feasibility had not been established
and no future alternative uses existed. The product percentage of completion
was estimated to be 75%. The value of this in-process technology was determined
by estimating the costs to develop the purchased in-process technology into a
commercially viable product, estimating the resulting net cash flows from the
sale of the product resulting from the completion of the in-process technology
and discounting the net cash flows back to their present value. Research and
development costs to bring in-process product from Vintel to technological
feasibility are not expected to have a material impact on the Company's future
results of operations or cash flows.
The following unaudited pro forma financial information reflects the results
of operations for the year ended December 31, 1999, as if the acquisition of
Vintel had occurred on January 1, 1999. The pro forma results exclude the
$2,600 nonrecurring write-off of in-process research and development.
<TABLE>
<S> <C>
Revenue....................................................... $ 27,807
Net loss attributable to common stockholders.................. $ (9,546)
Net loss per share attributable to common stockholders, basic
and diluted.................................................. $ (0.88)
</TABLE>
41
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
NOTE 5--INVESTMENTS:
The Company had no investments at December 31, 1998. The cost of short-term
investments approximated the fair value and the amount of unrealized gains or
losses was not significant at December 31, 1999. Short-term investments consist
of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Certificate of deposits................................ $ -- $ 3,095
Corporate bonds........................................ -- 15,736
------- -------
$ -- $18,831
======= =======
NOTE 6--BALANCE SHEET COMPONENTS:
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Inventories
Finished goods....................................... $ 1,856 $ 6,731
Work in process...................................... 1,616 --
Raw material......................................... 315 1,670
------- -------
$ 3,787 $ 8,401
======= =======
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Property and equipment
Office equipment..................................... $ 519 $ 631
Computers and software............................... 1,143 2,661
Test equipment....................................... 860 1,795
Leasehold improvements............................... 454 469
------- -------
2,976 5,556
Less: accumulated depreciation and amortization...... (1,186) (2,080)
------- -------
$ 1,790 $ 3,476
======= =======
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Accrued liabilities
Compensation......................................... $ 936 $ 1,488
Accrued offering costs............................... 340 --
Customer deposit..................................... -- 1,000
Other................................................ 482 1,063
------- -------
$ 1,758 $ 3,551
======= =======
</TABLE>
42
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
NOTE 7--LINES OF CREDIT:
The Company entered into a credit facility for up to $7,500 with a lending
institution in December 1998. The credit facility is composed of two revolvers:
a formula revolver of up to the lesser of $3,000 or 85% of qualifying accounts
receivable and a non-formula revolver up to $4,500. The credit facility
requires a minimum monthly interest payment of $10. The term of the credit
facility is eighteen months and is renewable for additional terms of one year
unless 60 days' written notice is given by either party. The loans under this
credit facility are collateralized by substantially all assets of the Company.
This agreement prohibits the payment of dividends. The Company granted the
lending institution a warrant to purchase 55 shares of the Company's common
stock at an exercise price of $14.00 per share on December 21, 1998. The
warrant is exercisable for 5 years from the date of issuance and has been
valued using the Black-Scholes method.
On December 18, 1999, the lending institution completed a cashless exercise
of its warrant to purchase the Company's common stock, resulting in the
issuance of 37 shares of common stock.
Amounts outstanding under lines of credit are as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------- ------
<S> <C> <C>
Lending institution credit facility; non-formula
revolver of $4,500, interest at prime plus 3.5% (12% at
December 31, 1999)..................................... $ 4,262 $1,529
Lending institution credit facility; the lower of $3,000
or 85% of qualifying accounts receivable; interest at
prime plus 2%.......................................... -- --
------- ------
$ 4,262 $1,529
======= ======
</TABLE>
NOTE 8--INCOME TAXES:
The income tax provision for each of 1997, 1998 and 1999 of $1 relates to the
state franchise tax fee. The components of the net deferred tax assets as of
December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 11,171 $ 14,937
Research and development credit..................... 977 1,599
Deferred research and development costs............. 402 635
Deferred revenue.................................... 1,035 1,152
Accruals and reserves............................... -- 1,195
Other............................................... 686 378
-------- --------
14,271 19,896
Less: valuation allowance........................... (14,271) (19,896)
-------- --------
Net deferred tax assets............................... $ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the realization of the tax attributes in
tax returns, the Company has placed a full valuation allowance against its
otherwise recognizable net deferred tax assets.
43
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
At December 31, 1999, the Company has approximately $39,530 in federal and
$8,900 in state net operating losses, or NOL carryforwards to reduce future
taxable income. At December 31, 1999, the Company also has research and
experimentation tax credit carryforwards of approximately $923 and $676 for
federal and state income tax purposes, respectively. The NOL and credit
carryforwards expire in 2000 to 2019.
NOL carryforwards of $7,000 and $2,000 for federal and state income tax
purposes, respectively, are subject to annual limitations due to a change in
ownership as defined under the Tax Reform Act of 1986.
NOTE 9--COMMITMENTS AND CONTINGENCIES:
Lease obligations
The Company leases office, manufacturing and warehouse space under
noncancelable operating leases that expire through 2002. On March 3, 1998, the
Company extended its existing lease for its headquarters location for three
years beginning June 1, 1998 to May 31, 2001. During December 1998, the Company
leased additional space under the same terms. The additional lease contains an
option to extend for an additional two years at a rate to be determined. In
connection with the business combinations in 1999, the Company assumed
operating leases which expire in April and December 2001.
Minimum future lease payments under operating leases at December 31, 1999 are
as follows:
<TABLE>
<S> <C>
2000................................................................. $399
2001................................................................. 219
2002................................................................. 14
----
$632
====
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was $267,
$314 and $369, respectively.
Royalty obligation
The Company has acquired the rights, title, and interests in two patents from
a founder and stockholder of the Company. These two patents give the Company
exclusive control of the Balun technology required in the Company's products.
Under the 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 is
included in other assets at December 31, 1999. The Company is amortizing the
amount ratably over five years. This period represents the estimated useful
life of the patented technology. Amortization expense for the year ended
December 31, 1999 was $458.
For 1998, the royalty fees based on 1% of net sales were approximately $100.
Contingencies
The Company is subject to legal proceedings, claims and litigation arising in
the ordinary course of business. The Company's management does not expect that
the ultimate costs to resolve these matters will have a material adverse effect
on the Company's financial position, results of operations, or cash flows.
44
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
NOTE 10--PREFERRED STOCK:
Convertible preferred stock and redeemable convertible preferred stock at
December 31, 1998 was composed of the following, (in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation Redemption
Authorized Outstanding Amount Amount
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Convertible preferred stock
Series A...................... 500 500 $ 2 $ 2
Series B...................... 89 89 199 199
Series C...................... 750 509 1,366 1,366
Redeemable convertible preferred
stock
Series D...................... 1,718 1,493 7,160 7,160
Series E...................... 1,313 1,306 7,591 7,591
Series F...................... 2,500 2,306 13,121 13,121
Series G...................... 2,000 1,250 16,023 16,023
Undesignated.................. 380 -- -- --
----- ----- ------- -------
9,250 7,453 $45,462 $45,462
===== ===== ======= =======
</TABLE>
On January 29, 1999, the Company completed its initial public offering of
common stock. Simultaneously with the closing of the initial public offering,
all issued and outstanding shares of the Company's convertible preferred stock
and redeemable convertible preferred shares were automatically converted into
shares of common stock.
Warrants for Series G Mandatorily Redeemable Convertible Preferred Stock
In connection with the issuance of Series G, in 1998 the Company issued
warrants to purchase 667 shares of Series G with an exercise price of $10.00
per share. In January 1999, prior to the public offering, these warrants were
exercised, resulting in the issuance of 667 shares of Series G in exchange for
cash proceeds totaling $6.7 million.
NOTE 11--STOCKHOLDERS' EQUITY
Stock split
In September 1998, in connection with the Company's reincorporation from
California to Delaware, the Company effected a four for one reverse split of
its common and preferred stock. All share data and stock option plan
information have been restated to reflect the reverse split and the
reincorporation.
Stock option plans
In November 1993, the Company adopted the 1992 Stock Plan (the "1992 Plan"),
under which the Company may grant both incentive stock options and nonstatutory
stock options to employees, consultants and directors. Options issued under the
1992 Plan can have an exercise price of no less than 85% of the fair market
value, as defined under the 1992 Plan, of the stock at the date of grant. The
1992 Plan allows for the issuance of a maximum of 750 shares of the Company's
common stock. In January 1997, the 1992 Plan was amended to increase the
maximum number of shares that may be issued to 1,250. In March 1998, the 1992
Plan was amended to increase the maximum number of shares that may be issued to
1,438. This number of shares of
45
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
common stock has been reserved for issuance under the 1992 Plan. Generally,
stock options are granted with vesting periods of four years and have an
expiration date of ten years from the date of grant.
The Company's 1998 Stock Plan (the "1998 Plan") was adopted by the Board of
Directors in July 1998 and was approved by the stockholders in September 1998
and has rights and privileges similar to the 1992 Plan. The 1998 Plan allows
for issuance of 1,000 shares of common stock with annual increases starting in
2000, subject to certain limitations.
The Company's 1999 Nonstatutory Stock Option Plan (the "1999 Plan") was
adopted by the Board of Directors in December 1999. The 1999 Plan allows for
the issuance of 1,000 shares of common stock. The 1999 Plan has rights and
privileges similar to the 1998 Plan.
Activity under the 1992, 1998 and 1999 Plans are summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------------------
Weighted
Shares Average
Available Options Number of Price Aggregate Exercise
For Grant Exercised Shares Per Share Price Price
--------- --------- --------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 147 152 451 $0.28-$ 0.52 $ 179 $ 0.40
Options authorized...... 500 -- -- -- -- --
Options granted......... (389) -- 389 0.52- 2.00 254 0.65
Options exercised....... -- 56 (56) 0.36- 0.48 (21) 0.38
Options terminated...... 59 -- (59) 0.36- 0.52 (27) 0.46
----- --- ----- -------
Balance, December 31,
1997................... 317 208 725 0.28- 2.00 385 0.53
Options authorized...... 188 -- -- -- -- --
Options authorized...... 1,000 -- -- -- -- --
Options granted......... (414) -- 414 2.00- 15.00 2,822 6.82
Options exercised....... -- 129 (129) 0.36- 2.40 (63) 0.49
Options terminated...... 5 -- (5) 0.52 (3) 0.52
----- --- ----- -------
Balance, December 31,
1998................... 1,096 337 1,005 0.28- 15.00 3,141 3.13
Options authorized...... 1,000 -- -- -- -- --
Options granted......... (849) -- 849 1.85- 53.63 22,346 26.35
Options exercised....... -- 268 (268) 0.36- 15.00 (508) 1.89
Options terminated...... 30 -- (139) 0.48- 46.63 (1,957) 14.09
Available options
cancelled from 1992
Plan................... (10) -- -- -- -- --
----- --- ----- -------
Balance, December 31,
1999................... 1,267 605 1,447 $0.28-$46.63 $23,022 $15.92
===== === ===== =======
</TABLE>
46
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (years) Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.36-$ 0.52 340 6.00 $ 0.45 230 $ 0.41
$ 1.85-$ 2.40 214 8.50 $ 2.24 108 $ 2.18
$ 3.60-$ 3.60 18 8.10 $ 3.60 7 $ 3.60
$ 8.00-$12.00 76 8.40 $10.44 24 $10.15
$15.00-$15.00 106 9.00 $15.00 10 $15.00
$22.94-$27.06 507 9.60 $23.59 -- $ --
$38.88-$45.00 170 9.50 $43.77 -- $ --
$46.63-$51.38 15 9.50 $48.75 -- $ --
</TABLE>
In addition to the 1992, 1998 and 1999 Plans, the Company granted an option
to purchase 6 shares at $2.24. These options were exercised in 1997.
In connection with the grant of options for the purchase of 356 shares of
common stock to employees during the period from December 1997 through June
1998, the Company recorded aggregate deferred compensation of $1,820
representing the difference between the deemed fair value of the common stock
and the option exercise price at date of grant. This deferred compensation will
be amortized over the vesting period relating to these options. Accordingly,
the Company amortized $393 and $455 for the years ended December 31, 1998 and
1999, respectively.
The Company uses the Black-Scholes method to value options granted to
consultants. The total estimated fair value of these grants during the periods
presented was not significant and was expensed over the applicable vesting
periods.
At December 31, 1997, 1998 and 1999, vested options to purchase 288, 385 and
379 shares of common stock, respectively were unexercised. The weighted average
exercise price of these options was $0.36, $0.65 and $1.96 per share for 1997,
1998 and 1999, respectively.
Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
was adopted by the Board of Directors in July 1998 and was approved by the
stockholders in September 1998. Under the 1998 Purchase Plan, an eligible
employee may purchase shares of common stock from the Company through payroll
deductions of up to 15% of his or her compensation, at a price per share equal
to 85% of the lesser of the fair market value of the Company's common stock as
of the first or last trading day on or after May 1 and November 1 and end on
the last trading day of the period six (6) months later. At December 31, 1998,
the Company has reserved 250 shares of common stock for issuance under the 1998
Purchase Plan. The 1998 Purchase Plan is subject to annual increases, subject
to certain limitations.
47
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Pro forma stock-based compensation
The following information concerning the Company's stock option plan is
provided in accordance with SFAS 123. The Company accounts for the Plan in
accordance with APB No. 25 and related Interpretations. Had compensation
expense for the stock option plans and the employee stock purchase plan been
determined based on the fair value at the grant date for awards granted in
1997, 1998 and 1999, consistent with the provisions of SFAS 123, the pro forma
net loss would have been reported as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders--as
reported....................................... $(10,784) $(16,331) $(11,969)
Net loss attributable to common stockholders--
pro forma...................................... (10,798) (16,496) (13,602)
Net loss per share attributable to common
stockholders--as reported...................... (59.36) (60.62) (1.12)
Net loss per share attributable to common
stockholders--pro forma........................ (59.44) (61.24) (1.27)
</TABLE>
Prior to the Company's initial public offering, the fair value for each
option grant was determined using the minimum value method. Subsequent to the
offering, the fair value was determined using the Black-Scholes method.
Weighted average assumptions used in determining the fair value for grants in
1997, 1998 and 1999 include risk-free interest rates of 6.7%, 5.4% and 5.6%,
respectively, and an expected life of 4 years each. Volatility and dividend
yields are not factors in the Company's minimum value calculation. Using the
Black-Scholes method, volatility was 90% and no dividend yield was assumed as
the Company has not paid dividends and has no intention to do so.
The weighted average fair value of options granted in 1997, 1998 and 1999 was
$0.12, $2.13 and $17.74 per share, respectively.
The Company has also estimated the fair value for the purchase rights issued
in 1999 under the 1998 Purchase Plan, using the Black-Scholes method with the
following weighted average assumptions: risk free interest rate of 4.7%, an
expected life of 0.5 years, volatility of 90% and no dividend yield.
NOTE 12--401(k) PLAN:
In April 1995, the Company adopted the Tut Systems' Inc. 401(k) Plan (the
"401(k) Plan") covering all eligible employees. Contributions are limited to
15% of each employee's annual compensation. Contributions to the 401(k) Plan by
the Company are discretionary. The Company did not make any contributions for
the years ended December 31, 1997, 1998 and 1999.
NOTE 13--SEGMENT INFORMATION:
The Company currently targets its sales efforts to both public and private
network providers and users across four related market segments. The Company
currently operates in a single business segment as there is only one
measurement of profitability for its operations. Revenues are attributed to the
following countries based on the location of customers:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
United States........................................... $ 5,236 $ 8,601 $18,825
Canada.................................................. -- -- 2,779
All other countries..................................... 985 1,954 6,203
------- ------- -------
$ 6,221 $10,555 $27,807
======= ======= =======
</TABLE>
48
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
The Company was able to determine revenue by country in 1999. In prior
years, the Company was only able to determine revenue breakdown between the
United States and all other countries.
It is impracticable for the Company to compute product revenues by product
type for the years ended December 31, 1997, 1998 and 1999.
Two customers accounted for 14% and 12%, respectively, of the Company's
revenue for the year ended December 31, 1997. One customer accounted for 10%
of the Company's revenue for the year ended December 31, 1998. Two customers
accounted for 12% and 10%, respectively, of the Company's revenue for the year
ended December 31, 1999.
NOTE 14--SUBSEQUENT EVENTS:
(a) In November 1999, the Company entered into a definitive merger agreement
with FreeGate Corporation, in which the stockholders of FreeGate
Corporation receive common stock of the Company in exchange for all
outstanding shares of preferred stock, common stock, shares issuable under
common stock options, and shares issuable under warrants for common stock
and preferred stock. The acquisition was consummated on February 14, 2000
and will be accounted for as a purchase business combination. The total
purchase price of $24.7 million consisted of 511 shares of common stock,
approximately 20 options to acquire common stock and acquisition related
expenses, consisting primarily of investment advisory, legal and other
professional fees.
(b) One World.
In February 2000, the Company signed a definitive agreement to acquire
certain assets of OneWorld for approximately $2.3 million in cash. This
transaction will be treated as a purchase for accounting purposes.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers as of February 22, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Salvatore D'Auria....... 44 President, Chief Executive Officer and Chairman of the Board
Sanford Benett.......... 51 Chief Operating Officer
Matthew Taylor.......... 40 Chief Technical Officer and Director
Nelson Caldwell......... 43 Vice President of Finance, Chief Financial Officer and Secretary
Allen Purdy............. 50 Vice President of Sales
Thomas Warner........... 43 Vice President of Engineering
Craig Bender............ 57 Vice President of Market Development
Avi Caspi............... 48 Vice President of Operations
Clifford H. Higgerson... 60 Director
Saul Rosenzweig(1)...... 74 Director
David Spreng(1)......... 38 Director
George M. Middlemas..... 53 Director
Brion Applegate(2)...... 46 Director
Roger Moore(2).......... 58 Director
Neal Douglas(2)......... 41 Director
</TABLE>
- --------
(1) Member of the audit committee.
(2)Member of the compensation committee.
Salvatore D'Auria has served as President, Chief Executive Officer and a
director since August 1994. Since January 2000, Mr. D'Auria has served as
Chairman of the Board of Directors. He served as our Chief Operating Officer
from May 1994 to August 1994. From August 1993 to May 1994, Mr. D'Auria
performed various consulting services for networking software companies.
Mr. D'Auria joined Central Point Software in October 1989 as Director of
Product Marketing and was appointed as Vice President of Marketing in April
1990, and held various Vice President positions until August 1993. From 1980 to
1989, Mr. D'Auria served in various marketing and management positions at
Hewlett- Packard. Mr. D'Auria holds a B.S. in Physics from Clarkson University.
Sanford Benett has served as our Chief Operating Officer since February 2000.
Mr. Benett served as President and Chief Operating Officer of FreeGate
Corporation from June 1999 until February 2000. He also served as Vice
President of Engineering of FreeGate from December 1998 until June 1999. From
December 1997 to December 1998, Mr. Benett worked as an independent consultant.
Mr. Benett also served as Vice President and General Manager of the Newton
Business Division of Apple Computer from June 1995 until December 1997. He also
served as Director of Software Engineering in the Newton Business Division from
January 1994 until June 1995. Prior to that time he held various positions at
GO Corporation, Datacopy/Xerox, TransImage Corporation, Tandem Computers and
the Mitre Corporation. Mr. Benett holds a B.S. in Mathematics and an M.S. in
Computer Science from the University of Maryland.
Matthew Taylor is a co-founder of Tut Systems and has served as our Chief
Technical Officer since August 1994 and as one of our directors since July
1993. From August 1994 to January 2000, Mr. Taylor was Chairman of the Board of
Directors and Secretary. From April 1989 to August 1994, Mr. Taylor was
President and Chief Executive Officer of Tut Systems. Prior to that time, Mr.
Taylor was the Vice President of Engineering and a co-founder of Alameda
Instruments, Inc., a semiconductor equipment company, from 1987 to 1989. Mr.
Taylor holds a B.S. in Biology and an M.S. in Engineering Science from the
University of California at Berkeley.
51
<PAGE>
Nelson Caldwell has served as our Vice President of Finance and Chief
Financial Officer since June 1997. Since January 2000, Mr. Caldwell has served
as Secretary. From May 1995 to May 1997, Mr. Caldwell served as Chief Financial
Officer and Secretary of Telechips Corporation, a computer telephony device
company. Mr. Caldwell also served as the interim President and Chief Executive
Officer and a director of Telechips from February 1997 to May 1997. Telechips
filed for bankruptcy under Chapter 7 of the Federal Bankruptcy Code on June 30,
1997. Prior to that time, Mr. Caldwell held various positions at Coopers &
Lybrand L.L.P. from June 1989 through April 1995, most recently as Manager in
the Business Assurance practice. Mr. Caldwell holds a B.S. in Business
Administration from California State University, Chico, and is a Certified
Public Accountant.
Allen Purdy has served as our Vice President of Sales since January 1997.
From November 1992 to January 1997, Mr. Purdy was Regional Sales Manager and,
most recently, Director of Sales of Applied Digital Access, Inc., a provider of
network management and testing equipment for the telecommunications industry,
and was a Regional Sales Manager with TeleSciences, Inc. from June 1989 to
November 1992. Mr. Purdy holds a B.S. in Industrial Engineering from Rutgers
University and an M.B.A. from Rider College.
Thomas Warner has served as our Vice President of Engineering since February
1997. Prior to that time, Mr. Warner served in various positions at Ericsson
Fiber Access, a division of Ericsson Inc. from March 1990 through February
1997, most recently as Vice President of Systems Management. Mr. Warner holds a
B.S.E.E. from the University of Illinois at Champaign-Urbana.
Craig Bender has served as our Vice President of Market Development since
June 1997. Prior to that time, Mr. Bender was with Integrated Network
Corporation where he served as Vice President of Marketing from 1988 to 1992,
as Vice President of International Business Development from 1992 to 1996 and
as Vice President of INC's DAGAZ division until 1997. Mr. Bender holds a
B.S.E.E. from Syracuse University, an M.S.E.E. from the University of
California at Los Angeles and an AT&T-sponsored Executive M.B.A. from Pace
University.
Avi Caspi has served as our Vice President of Operations since November 1999.
From June 1999 until November 1999, Mr. Caspi worked as an independent
consultant, and from February 1998 to June 1999, he was Vice President of
Operations for Netro Corporation, a wireless equipment company. From November
1997 to February 1998, he worked as an independent consultant. Mr. Caspi was
Vice President of Quality and Director of Manufacturing Operations for Packard
Bell NEC from November 1991 to November 1997. Prior to that time, he held
various positions with Alps Electrics, Allegretti & Company and Rain Bird
Corporation. Mr. Caspi holds an M.B.A. from Pepperdine University, an M.S. in
Industrial and Systems Engineering from the University of Southern California,
a B.S. in Industrial Engineering from California State Polytechnic University
and a B.S. in Practical Mechanical Engineering from ORT Tel-Aviv Technical
Institute in Israel.
Clifford H. Higgerson has served as one of our directors since July 1993.
Since 1991, Mr. Higgerson has been a general partner of Vanguard Venture
Partners, a venture capital firm specializing in high technology start-ups.
Since 1987, Mr. Higgerson has also been a partner of Communications Ventures,
Inc. Mr. Higgerson also is a director of Advanced Fibre Communications, Ciena
Corporation, a manufacturer of multiplexing systems, and Digital Microwave
Corporation. Mr. Higgerson earned his B.S. in Electrical Engineering from the
University of Illinois and an M.B.A. in Finance from the University of
California at Berkeley.
Saul Rosenzweig has served as one of our directors since July 1993. Mr.
Rosenzweig has been a general partner of Rosetree Partners, a venture investing
group, since 1982. He has also served as President and Chief Executive Officer
of Snap Software from 1994 to 1996, and as President of RZGroup, Inc., a
communications management firm, since 1981. Mr. Rosenzweig holds B.S. degrees
in Naval Science and in Industrial Management from Georgia Institute of
Technology.
David Spreng has served as one of our directors since February 1994. Mr.
Spreng has served as the Managing General Partner of Crescendo Venture
Management, LLC since September 1998. Mr. Spreng served as President of IAI
Ventures, Inc. from March 1996 to September 1998 and served in various
capacities at Investment Advisers, Inc. since 1989. Mr. Spreng is also a
director of GalaGen, Inc., a pharmaceutical company, and PACE Health
Management. Mr. Spreng holds a B.S. in Finance and Accounting from the
University of Minnesota.
52
<PAGE>
George M. Middlemas has served as one of our directors since April 1995. Mr.
Middlemas has been Managing General Partner of Apex Partners, a venture capital
firm, since 1991. Prior to that time, Mr. Middlemas served as Vice President
and principal with Inco Venture Capital Management, and a vice president and
member of the investment committee of Citicorp Venture Capital. Mr. Middlemas
also serves on the Boards of Directors of Pure Cycle Corporation, a water and
water recycling technology company, Online Resources & Communications
Corporation, a provider of electronic commerce solutions, Data Critical
Corporation, a provider of wireless communication and information systems which
allow access to critical health information, and Qorus.com, Inc., a provider of
value-added Internet protocol-based communications solutions. Mr. Middlemas
holds an M.B.A from Harvard University, an M.A. in Political Science from the
University of Pittsburgh and a B.A. in History and Political Science from The
Pennsylvania State University.
Brion Applegate has served as one of our directors since August 1996. Mr.
Applegate was a co-founder of Spectrum Equity Investors and has served as a
Managing General Partner since February 1993. Prior to that time, he was a
General Partner of funds managed by Burr, Egan, Deleage & Co., a venture
capital firm, from 1982 to 1993. Since August 1998, Mr. Applegate has been a
director of Network Access Solutions, a provider of digital subscriber line-
enabled networking solutions for businesses. Mr. Applegate holds a B.A. in
Liberal Arts from Colgate University and an M.B.A. from Harvard University.
Roger Moore has served as one of our directors since March 1997. Mr. Moore
has served as President and Chief Executive Officer of Illuminet, Inc., a
provider of network, database and billing services to the communications
industry, since October 1998, and as a director of Illuminet since July 1998.
Mr. Moore also served as President and Chief Executive Officer of Illuminet
from January 1996 to August 1998. From September 1998 to October 1998, Mr.
Moore served as President, Chief Executive Officer and a director of VINA
Technologies, Inc., a telecommunications equipment company. From November 1985
to December 1995, Mr. Moore served in various executive capacities at Northern
Telecom Ltd., including Vice President, Major Accounts and President, Northern
Telecom Japan. Mr. Moore holds a B.S. in General Science from Virginia
Polytechnic Institute and State University.
Neal Douglas has served as one of our directors since December 1997. Since
December 1999, he has been a Managing General Partner of Spectrum Equity
Investors, and since January 1993, he has been a General Partner of AT&T
Ventures, a venture capital firm. From May 1989 to January 1993, Mr. Douglas
was a partner of New Enterprise Associates, a venture capital firm.
Additionally, he was a Member of the Technical Staff at Bell Laboratories. He
also serves as a director of Cellnet Data Systems, Inc., a provider of fixed
network wireless information services, FVC.COM, Inc., an Internet video
applications company, Netro Corporation, a provider of wireless networking
equipment, Software.com, a provider of Internet messaging services, and several
privately held companies. Mr. Douglas holds a B.S. in Electrical Engineering
from Cornell University, an M.S. in Electrical Engineering from Stanford
University, and an M.B.A from the University of California at Los Angeles.
Our executive officers are appointed by the board of directors and serve
until their successors are elected or appointed.
There are no family relationships among any of our directors or executive
officers.
53
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the compensation
earned by our Chief Executive Officer and our four other most highly
compensated executive officers for services to us in all capacities during each
of the years ended December 31, 1999, 1998, and 1997:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Annual Compensation Securities
---------------------------- Underlying All other
Year Salary Bonus Other(/1/) Options Compensation
---- -------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Salvatore D'Auria....... 1999 $224,230 $286,721 -- $125,000 --
1998 187,500 110,000 -- 75,000 $18,230(/2/)
1997 138,803 12,500 -- -- 31,250(/2/)
Matthew Taylor.......... 1999 151,891 37,625 -- 5,000 --
1998 149,808 35,100 -- 12,500 --
1997 145,986 16,875 -- -- --
Allen Purdy............. 1999 142,308 96,668 -- 15,000 --
1998 138,962 71,875 -- 12,500 --
1997 113,096 70,837 -- 56,250 --
Nelson Caldwell......... 1999 142,846 46,188 -- 30,000 --
1998 118,442 31,625 -- 12,500 --
1997 52,489 14,771 -- 37,500 --
Thomas Warner........... 1999 140,000 35,438 -- 2,000 --
1998 140,000 25,875 -- 13,750 --
1997 111,211 22,563 -- 70,000 --
Nicholas Berberi........ 1999 141,037 19,750 -- -- --
1998 129,600 16,900 -- 5,000 --
1997 115,943 16,715 -- 6,250 --
</TABLE>
- --------
(1) Other annual compensation in the form of perquisite and other personal
benefits, securities or property has been omitted in those cases where the
aggregate amount of such compensation is the lesser of either $50,000 or
10% of the total of annual salary and bonus for the executive officer.
(2) Represents the principal portion of certain indebtedness between the
Company and Mr. D'Auria which was forgiven during each of 1998 and 1997
pursuant to a loan agreement and secured promissory note for an aggregate
of $125,000. The loan did not bear interest. Pursuant to the loan
agreement, we forgave 25% of the principal amount of the loan each year.The
loan has been discharged in full.
54
<PAGE>
Stock Option Information. The following table sets forth certain information
for the year ended December 31, 1999 with respect to each grant of stock
options to our Chief Executive Officer and our four other most highly
compensated executive officers:
Option Grants During Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise for Option Term(4)
Options Employees Price per Expiration ---------------------
Granted(1) in 1999(2) Share(3) Date 5% 10%
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Salvatore D'Auria....... 125,000 14.7% $22.94 8/10/09 $1,803,355 $4,570,057
Matthew Taylor.......... 5,000 0.6% 15.00 1/26/09 47,167 119,531
Allen Purdy............. 5,000 0.6% 15.00 1/26/09 47,167 119,531
10,000 1.2% 22.94 8/10/09 144,268 365,605
Nelson Caldwell......... 5,000 0.6% 15.00 1/26/09 47,167 119,531
25,000 2.9% 22.94 8/10/09 360,671 914,011
Thomas Warner........... 2,000 0.2% 15.00 1/26/09 18,867 47,812
</TABLE>
- --------
(1) The options granted to Messrs. D'Auria, Taylor, Warner, Purdy and Caldwell
vest as to one-fourth of the shares after one year and thereafter as to
1/48th of the shares for each month which expires from the date of grant.
(2) In 1999 the Company granted employees, consultants and directors options to
purchase an aggregate of 848,900 shares of our common stock.
(3) The exercise price per share of each option was equal to the fair value of
our common stock based on the closing price per share of our common stock
as quoted on the Nasdaq National Market on the trading day prior to the
date of grant.
(4) In accordance with the rules of the Securities and Exchange Commission,
shown are the gains or "options spreads" that would exist for the
respective options granted. These gains are based on the assumed rates of
annual compound stock price appreciation of 5% and 10% from the date the
option was granted over the full option term. These assumed annual compound
rates of stock price appreciation are mandated by the rules of the SEC and
do not represent our estimate or projection of future prices of our common
stock.
Aggregate Option Exercises and Option Values. The following table sets forth
information with respect to our Chief Executive Officer and our four other most
highly compensated executive officers concerning option exercises for the
fiscal year ended December 31, 1999 and exercisable and unexercisable options
held as of December 31, 1999:
Aggregate Option Exercises in 1999 and Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Number of Unexercised Options at In-the-Money Options at
Shares December 31, 1999 December 31, 1999
Acquired Value ------------------------- -------------------------
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Salvatore D'Auria....... 33,750 $776,189 $178,576 $165,625 $9,576,138 $8,881,641
Matthew Taylor.......... -- -- 5,729 11,771 307,218 631,220
Allen Purdy............. 31,300 998,648 15,444 37,006 828,185 1,984,447
Nelson Caldwell......... 6,477 119,586 10,969 51,356 588,213 2,753,966
Thomas Warner........... 22,968 597,624 6,693 29,865 358,912 1,601,511
</TABLE>
- --------
(1) The fair market value of our common stock based on the closing price of our
common stock as quoted on the Nasdaq National Market on December 31, 1999
was $53.63 per share.
55
<PAGE>
Employee Contracts and Change in Control
We currently have employment and non-competition agreements with Sandy
Benett, our Chief Operating Officer, which became effective February 14, 2000.
Pursuant to this employment agreement, and actions of the Compensation
Committee of the Board of Directors, Mr. Benett is employed by us as our Chief
Operating Officer, upon the closing of our acquisition of FreeGate Corporation
on February 14, 2000, at an annual salary of $175,000 per year and in addition,
is entitled to bonus compensation in the amount of up to $87,500 per year and
other bonus or incentive compensation payments as our Board of Directors may
determine from time to time, as well as employee benefits we generally provide
to our employees. Mr. Benett was also granted options to purchase 200,000
shares of our common stock. Pursuant to the non-competition agreement, Mr.
Benett shall not compete with us or solicit away any of our employees from the
effective date of the agreement until 18 months following the closing of the
FreeGate acquisition on February 14, 2000.
We currently have no "change-of-control" agreements with any of our officers.
Director Compensation
Our directors currently receive no cash fees for services provided in that
capacity but are reimbursed for out-of-pocket expenses they incur in connection
with their attendance at meetings of our Board of Directors. In addition, in
the past, we have granted certain of our directors stock options for their
service on our Board. We do not intend to pay cash fees for the services of our
Board members in the immediate future, nor to provide for the automatic grant
of stock options to our directors. However, our directors are eligible to
receive discretionary option grants pursuant to our 1998 Stock Plan and our
employee directors are also eligible to participate in our 1998 Employee Stock
Purchase Plan.
Compensation Committee Interlocks and Insider Participation
The members of our Compensation Committee of our Board of Directors are
Messrs. Applegate, Douglas and Moore. None of the members of our Compensation
Committee is currently or has been, at any time since our formation as a
company, one of our officers or employees. During 1999, none of our executive
officers (i) served as a member of the compensation committee (or other board
committee performing similar functions or, in the absence of any such
committee, the board of directors) of another entity, one of whose executive
officers served on our Compensation Committee, (ii) served as a director of
another entity, one of whose executive officers served on our Compensation
Committee, or (iii) served as a member of the compensation committee (or other
board committee performing similar functions or, in the absence of any such
committee, the board of directors) of another entity, one of whose executive
officers served as one of our directors.
56
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1999 certain information
with respect to the beneficial ownership of our common stock as to:
. each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
. our President and each of our four other most highly compensated
executive officers;
. each of our directors; and
. all of our directors and executive officers as a group.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named below have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 11,940,610 shares of
common stock outstanding as of December 31, 1999. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission. Shares of common stock subject to options that are presently
exercisable or exercisable within 60 days of December 31, 1999 are deemed
outstanding for the purpose of computing the percentage ownership of the person
or entity holding options or warrants, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person or
entity. If any shares are issued upon exercise of options, warrants or other
rights to acquire our capital stock that are presently outstanding or granted
in the future or reserved for future issuance under our stock plans, there will
be further dilution to new public investors.
Unless otherwise indicated below, each person or entity named below has an
address in care of our principal executive offices.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
Prior to the Offering
---------------------
Beneficial Owner Number Percent
- ---------------- ------ -------
<S> <C> <C>
5% Beneficial Owners
Microsoft Corporation (1)............................ 1,083,503 9.1%
Vanguard IV, L.P. (2)................................ 658,591 5.5%
Officers and Directors
Clifford H. Higgerson (3)............................ 658,591 5.5%
George Middlemas (4)................................. 313,826 2.6%
Neal Douglas (5)..................................... 312,500 2.6%
Salvatore D'Auria (6)................................ 207,583 1.7%
Matthew Taylor (7)................................... 188,612 1.6%
Saul Rosenzweig (8).................................. 79,913 *
Thomas Warner (9).................................... 47,416 *
Nelson Caldwell (10)................................. 25,683 *
Allen Purdy (11)..................................... 20,686 *
Roger Moore (12)..................................... 8,083 *
Brion Applegate...................................... 955 *
David Spreng......................................... -- --
All officers and directors as a group (15 persons)
(13)................................................ 1,893,941 15.5%
</TABLE>
- --------
* Less than 1%.
(1) The address of record for Microsoft Corporation is One Microsoft Way,
Building 8, Redmond, WA 98502-6399.
(2) The address of record for Vanguard IV, L.P. is 555 University Avenue, Palo
Alto, CA 94301.
57
<PAGE>
(3) Consists of 658,591 shares held by Vanguard IV, L.P. Mr. Higgerson is a
general partner of Vanguard IV, L.P. Mr. Higgerson disclaims beneficial
ownership of these shares except to the extent of his proportional
partnership interest therein.
(4) Includes of 301,731 shares held by Apex Investment Funds. Mr. Middlemas is
the Managing General Partner of Apex Investment Funds. Mr. Middlemas
disclaims beneficial ownership of these shares except to the extent of his
proportional partnership interest therein.
(5) Consists of 312,500 shares held by AT&T Ventures. Mr. Douglas is a general
partner of AT&T Ventures. Mr. Douglas disclaims beneficial ownership of
these shares except to the extent of his proportional partnership interest
therein.
(6) Includes 181,701 shares issuable pursuant to options or rights exercisable
within 60 days of December 31, 1999.
(7) Includes 7,604 shares issuable pursuant to options exercisable within 60
days of December 31, 1999.
(8) Consists of 79,913 shares held by Rosetree Partners General Partnership.
Mr. Rosenzweig is a general partner of Rosetree Partners General
Partnership. Mr. Rosenzweig disclaims beneficial ownership of these shares
except to the extent of his proportional partnership interest therein.
(9) Includes 10,724 shares issuable pursuant to options exercisable within 60
days of December 31, 1999.
(10) Includes 14,408 shares issuable pursuant to options exercisable within 60
days of December 31, 1999.
(11) Includes 19,662 shares issuable pursuant to options exercisable within 60
days of December 31, 1999.
(12) Includes 7,083 shares issuable pursuant to options exercisable within 60
days of December 31, 1999.
(13) Includes an aggregate of 250,485 shares issuable pursuant to options
exercisable within 60 days of December 31, 1999. Also includes an
aggregate of 301,731 shares held by Apex Investment Funds, of which George
Middlemas, our director, is Managing General Partner, 658,591 shares held
by Vanguard IV, L.P. and 312,500 shares held by AT&T Ventures, of which
Neal Douglas, our director, is a general partner.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As part of our acquisition of FreeGate Corporation, completed on February 14,
2000, we assumed a note receivable from Sanford Benett, our Chief Operating
Officer, in the amount of $143,453, bearing interest at 7% per annum and due
upon the earlier of the sale of our common stock received by Mr. Benett as part
of the acquisition or December 2003.
During 1999, we granted options to certain of our executive officers. We
intend to grant options to our executive officers and directors in the future.
We have entered into indemnification agreements with our executive officers,
directors and certain significant employees containing provisions that are in
some respects broader than the specific indemnification provisions contained in
the General Corporation Law of Delaware. These agreements provide, among other
things, for indemnification of the executive officers, directors and certain
significant employees in proceedings brought by third parties and in
stockholder derivative suits. Each agreement also provides for advancement of
expenses to the indemnified party.
58
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)
1. Financial Statements
The following documents are filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ 32
Consolidated Balance Sheets as of December 31, 1998 and 1999............. 33
Consolidated Statements of Operations for the years ended December 31,
1997, 1998, and 1999.................................................... 34
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998, and 1999....................................... 35
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999..................................................... 36
Notes to Consolidated Financial Statements............................... 37
</TABLE>
2. Financial Statements Schedules
The following financial statement schedule is filed as part of this Annual
Report on Form 10-K:
Schedule II--Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted as they are not required, not
applicable, or the required information is otherwise included.
3. Exhibits
The exhibits listed on the accompanying index to exhibits immediately
following the financial statement schedule are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K.
(b) Reports on Form 8-K
We did not file any Reports of Form 8-K during the fourth quarter ended
December 31, 1999.
(c) Exhibits
See item 14(a)(3) above.
(d) Financial Statement Schedules
See Item 14(a)(2) above.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of Pleasant Hill, State
of California, on the 22nd day of February, 2000.
TUT SYSTEMS, INC.
/s/ Nelson Caldwell
By: _________________________________
Nelson Caldwell Vice President,
Finance, Chief Financial Officer
and Secratary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Salvatore D'Auria and Nelson Caldwell, and each
of them, jointly and severally, his true and lawful attorneys-in-fact, each
with full power of substitution and resubstitution, for him in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-K,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he or she might or could do if
personally present, hereby ratifying and confirming all that each said
attorney-in-fact and agent, or his or her substitute or substitutes or any of
them, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS ANNUAL
REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Salvatore D'Auria Chairman of the Board, February 22, 2000
____________________________________ President, and Chief
Salvatore D'Auria Executive Officer
(Principal Executive
Officer)
/s/ Nelson Caldwell Vice President, Finance, February 22, 2000
____________________________________ Chief Financial Officer and
Nelson Caldwell Secretary (Principal
Financial and Accounting
Officer)
/s/ Matthew Taylor Chief Technical Officer and February 22, 2000
____________________________________ Director
Matthew Taylor
/s/ Saul Rosenzweig Director February 22, 2000
____________________________________
Saul Rosenzweig
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ George Middlemas Director February 22, 2000
____________________________________
George Middlemas
/s/ Roger Moore Director February 22, 2000
____________________________________
Roger Moore
</TABLE>
61
<PAGE>
TUT SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Addition
Balance at (reductions) Balance at
Beginning to Costs and End of
of Period Expenses Write-offs Period
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1997.. $ 20 $ 14 $ (5) $ 29
Year ended December 31, 1998.. 29 104 (18) 115
Year ended December 31, 1999.. 115 235 (15) 335
Valuation allowance for deferred
tax assets:
Year ended December 31, 1997.. 5,642 3,339 -- 8,981
Year ended December 31, 1998.. 8,981 5,290 -- 14,271
Year ended December 31, 1999.. 14,271 5,625 -- 19,896
Allowance for excess and
obsolete inventory
Year ended December 31, 1997.. -- 72 (65) 7
Year ended December 31, 1998.. 7 203 (95) 115
Year ended December 31, 1999.. 115 340 (37) 418
</TABLE>
62
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement. (1)
2.1 Agreement and Plan of Reorganization dated as of October 15, 1999, by
and among Tut Systems, Inc., Vintel Acquisition Corp., and Vintel
Communications, Inc. (4)
2.2 Agreement and Plan of Reorganization dated as of June 8, 1999, by and
among Tut Systems, Inc., Public Port Acquisition Corporation, and
Public Port, Inc. (3)
2.3 Agreement and Plan of Reorganization dated as of November 16, 1999, by
and among Tut Systems, Inc., Fortress Acquisition Corporation and
FreeGate Corporation. (5)
2.4 Asset Purchase Agreement by and between Tut Systems, Inc. and OneWorld
Systems, Inc. dated as of February 3, 2000.
2.5 Amendment No. 1 to Asset Purchase Agreement by and between Tut
Systems, Inc. and OneWorld Systems, Inc. dated as of February 17,
2000.
3.1 Restated Certificate of Incorporation of Registrant, as currently in
effect. (1)
3.2 Second Amended and Restated Certificate of Incorporation of
Registrant. (1)
3.3 Bylaws of Registrant, as currently in effect. (1)
4.1 Specimen Common Stock Certificate. (1)
10.1 1992 Stock Plan, as amended, and form of Stock Option Agreement
thereunder. (1)
10.2 1998 Stock Plan and forms of Stock Option Agreement and Stock Purchase
Agreement thereunder. (1)
10.3 1998 Employee Stock Purchase Plan, as amended. (2)
10.4 1998 Stock Plan Inland Revenue Approved Rules for UK Employees.
10.5 American Capital Marketing, Inc. 401(k) Plan. (1)
10.6 Fourth Amended and Restated Shareholders' Rights Agreement, dated
December 16, 1997, between Registrant and certain stockholders. (1)
10.7 Lease by and between Pleasant Hill Industrial Park Associates, a
California Limited Partnership, and Registrant dated April 4, 1995, as
amended. (1)
10.8 Office Building Lease between Petula Associates, Ltd., an Iowa
corporation, and Principal Mutual Life Insurance Co., an Iowa
corporation, doing business as RC Creekside Phase VI and Registrant
dated April 25, 1997. (1)
10.9 Licensing and Cooperative Marketing Agreement between Microsoft
Corporation and Registrant dated August 27, 1997, as modified and
restated on July 30, 1998. (1)
10.10 Form of Indemnification Agreement entered into between Registrant and
each director and officer. (1)
10.11 Employment Agreement by and between Tut Systems, Inc., FreeGate
Corporation and Sandy Benett dated as of November 17, 1999.
10.12 Non-competition Agreement by and between Tut Systems, Inc. FreeGate
Corporation and Sandy Benett dated as of November 17, 1999.
10.13 Agreement and General Release between Registrant and And Yet, Inc.
dated July 31, 1998. (1)
10.14 Software License Agreement between RouterWare, Inc. and Registrant
dated December 16, 1997. (1)
</TABLE>
63
<PAGE>
<TABLE>
<C> <S>
10.15 Home Phoneline Promoters Agreement by and between IBM Corporation,
Hewlett-Packard Company, Compaq Computer Corporation, Advanced Micro
Devices, Inc., Intel Corporation, Epigram, Inc., AT&T Wireless Services
Inc., 3Com Corporation, Rockwell Semiconductor Systems, Inc. and Lucent
Technologies Inc. dated June 1, 1998. (1)
10.16 Master Agreement between Registrant and Compaq Computer Corporation
dated April 21, 1998 including supplements thereto. (1)
10.17 Loan Agreement, General Security Agreement, and Collateral Assignment
and Patent Mortgage and Security Agreement with Imperial Bank, each
dated August 16, 1997. (1)
10.18 Loan and Security Agreement, Streamlined Facility Agreement, Revolving
Credit Note, Patent and Trademark Security Agreement, Security Agreement
in Copyrighted Works and Stock Subscription Warrant between Registrant
and TransAmerica Business Credit Corporation, each dated December 18,
1998. (1)
10.19 Extension Agreement among Registrant, And Yet, Inc. and Marty Graham
dated December 21, 1998. (1)
10.20 Registration Rights Agreement dated as of June 8, 1999, by and between
Registrant and Public Port stockholders listed therein. (3)
11.1 Calculation of earnings per share (contained in Note 2 of Notes to
Financial Statements). (1)
21.1 List of Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1 Power of Attorney (See page 60).
27 Financial Data Schedule.
</TABLE>
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(1) Incorporated by reference to our Registration Statement on Form S-1 (File
No. 333-60419) as declared effective by the Securities and Exchange
Commission on January 28, 1999.
(2) Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
(3) Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
(4) Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
(5) Incorporated by reference to our Current Report on Form 8-K dated February
14, 2000.
64
<PAGE>
Exhibit 2.4
ASSET PURCHASE AGREEMENT
FOR THE ASSETS OF ONEWORLD SYSTEMS, INC.
BY TUT SYSTEMS, INC.
February 3, 2000
<PAGE>
ASSET PURCHASE AGREEMENT
Asset Purchase Agreement (the "Agreement") dated as of February 3,
2000, by and between TUT SYSTEMS, INC., a Delaware corporation ("Buyer"), and
ONEWORLD SYSTEMS, INC., a Delaware corporation (the "Company").
This Agreement sets forth the terms and conditions upon which the
Buyer will purchase from the Company, and the Company will sell to the Buyer,
all of those assets (other than the Retained Assets, as hereinafter defined),
subject to those liabilities of the Company which are specifically hereinafter
described, for the consideration provided herein.
In consideration of the foregoing, the mutual representations,
warranties and covenants set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties to this Agreement hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. For the purposes of this Agreement, all capitalized
-----------
words or expressions used in this Agreement (including the Schedules and
Exhibits annexed hereto) shall have the meanings specified in this Article (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Affiliate" means when used with respect to any Person, (a) if such
---------
Person is a corporation, any officer or director thereof and any Person which
is, directly or indirectly, the beneficial owner (by itself or as part of any
group) of more than five percent (5%) of any class of any Equity Security
thereof, and, if such beneficial owner is a partnership, any general or limited
partner thereof, or if such beneficial owner is a corporation, any Person
controlling, controlled by or under common control with such beneficial owner,
or any officer or director of such beneficial owner or of any corporation
occupying any such control relationship, (b) if such Person is a partnership,
any general or limited partner thereof and (c) any other Person which, directly
or indirectly, controls or is controlled by or is under common control with such
Person. For purposes of this definition, (i) "control" (including the
correlative terms "controlling", "controlled by" and "under common control
with"), with respect to any Person, shall mean possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise; and (ii) all employees, stockholders, consultants and
agents of Buyer and any direct or indirect stockholder of Buyer shall be
considered an Affiliate of Buyer.
"Agreement" means this Asset Purchase Agreement (together with all
---------
Exhibits and Schedules hereto) as from time to time assigned, supplemented,
modified, amended, or restated or as the terms hereof may be waived.
2
<PAGE>
"Business Day" means any day, excluding Saturday, Sunday and any other
day on which commercial banks in San Francisco, California are authorized or
required by law to close.
"Buyer" means TUT SYSTEMS, INC., a Delaware corporation, and its
successors and assigns.
"Charter" means the Certificate of Incorporation, Articles of
Incorporation or Organization or other organizational document of a corporation,
as amended and restated through the date hereof.
"Claim" means an action, suit, proceeding, hearing, investigation,
litigation, charge, complaint, claim or demand.
"Code" means the Internal Revenue Code of 1986, and the regulations
thereunder, published Internal Revenue Service rulings, and court decisions in
respect thereof, all as the same shall be in effect at the time.
"Commission" means the Securities and Exchange Commission and any
other similar or successor agency of the federal government administering the
Securities Act or the Exchange Act.
"Company" means ONEWORLD SYSTEMS, INC., a Delaware corporation, and
its successors and assigns.
"Equity Security" shall have the meaning given to such term in Section
3(a)(ii) of the Exchange Act.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
any similar or successor federal statute, and the rules, regulations and
interpretations thereunder, all as the same shall be in effect at the time.
"ERISA Affiliate" means, for purposes of Title IV of ERISA, any trade
or business, whether or not incorporated, that together with the Company or any
Subsidiary of the Company, would be deemed to be a "single employer" within the
meaning of Section 4001 of ERISA, and, for purposes of the Code, any member of
any group that, together with the Company or any Subsidiary of the Company, is
treated as a "single employer" for purposes of Section 414 of the Code.
"Exchange Act" means the Securities Exchange Act of 1934, and any
similar or successor federal statute, and the rules and regulations and
interpretations of the Commission thereunder, all as the same shall be in effect
at the time.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
3
<PAGE>
"Indebtedness" means all obligations, contingent or otherwise, whether
current or long-term, which in accordance with GAAP would be classified upon the
obligor's balance sheet as liabilities (other than deferred taxes) and shall
also include capitalized leases, guaranties, endorsements (other than for
collection in the ordinary course of business) or other arrangements whereby
responsibility is assumed for the obligations of others, including any agreement
to purchase or otherwise acquire the obligations of others or any agreement,
contingent or otherwise, to furnish funds for the purchase of goods, supplies or
services for the purpose of payment of the obligations of others.
"IRS" means the Internal Revenue Service and any similar or successor
agency of the federal government administering the Code.
"Knowledge of the Company" or "Known to the Company" means the
knowledge of each director, officer or any member of the Company's management,
in each case after due inquiry.
"Lien" means, with respect to any asset, any mortgage, deed of trust,
pledge, hypothecation, assignment, security interest, lien, charge, restriction,
adverse claim by a third party, title defect or encumbrance of any kind
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any assignment or other conveyance of any right to receive
income and any assignment of receivables with recourse against assignor), any
filing of any financing statement as debtor under the Uniform Commercial Code or
comparable law of any jurisdiction and any agreement to give or make any of the
foregoing.
"Material Adverse Effect" shall be defined as an event, occurrence or
act which shall result in a material adverse impact or effect on (a) the
business, operations, assets, liabilities, prospects or condition (financial or
otherwise) of a party, (b) the ability of such party to perform its respective
obligations under any of the Purchase Documents, (c) the validity or
enforceability of any of the Purchase Documents or (d) the rights and remedies
of a party under any of the Purchase Documents.
"Person" means any individual, firm, partnership, association, trust,
corporation, limited liability company, governmental body or other entity.
"Purchase Documents" means this Agreement, the Noncompetition
Agreements and any other certificate, document, instrument, stock power, or
agreement executed in connection therewith.
"Securities Act" means the Securities Act of 1933, and any similar or
successor federal statute, and the rules, regulations and interpretations of the
Commission thereunder, all as the same shall be in effect at the time.
"Tax" means any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental, customs duties, capital stock,
franchise, profits, withholding, social security, unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated, or other tax of any kind whatsoever,
including any interest, penalty, or addition thereto, whether disputed or not.
4
<PAGE>
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Transferred Employee" shall have the meaning defined in Section 3.13.
ARTICLE II
PURCHASE AND SALE OF ASSETS
2.1 Purchase of Assets. Upon the terms and subject to the conditions
------------------
contained in this Agreement, at the Closing (as defined in Section 2.7 below),
the Company shall sell, assign, transfer and convey to Buyer, and Buyer shall
purchase, acquire and accept from the Company, all of the Company's assets of
every kind and description (other than those assets included in the Retained
Assets as defined in Section 2.2 below) (the "Transferred Assets"), and subject
only to the liabilities and obligations of the Company which are defined in
Section 2.3 (the "Assumed Liabilities"). The Transferred Assets include,
without limitation, the following assets and properties (other than those assets
included in the Retained Assets as defined in Section 2.2):
(a) all machinery, equipment, fixtures and furniture, a complete
listing of which is included herein on Schedule 2.1;
(b) all rights and interests of the Company, to the extent they are
transferable, in and to any contracts, including contracts for the purchase of
materials, supplies and services and the sale of products and services,
equipment leases, and any other contract of the Company, including, without
limitation, those listed on Schedule 3.10 attached hereto, however specifically
excluding those identified on Schedule 3.10 not to be transferred;
(c) originals of license agreements, trademark applications and
software code and copies of all of the Company's other books, records and data
relating to the Transferred Assets (the "Company Books and Records");
(d) all of the Company's goodwill, dealer and customer lists and all
other sales and marketing information, and all know-how, technology, drawings,
engineering specifications, bills of materials, software and other intangible
assets of the Company;
(e) all of the Company's interest in patents, patent applications,
proprietary designs, copyrights, and all patents, proprietary designs,
copyrights, trademarks, tradenames (including, without limitations, the name
"ONEWORLD SYSTEMS" and all variations thereof), and together with the goodwill
appurtenant thereto, all federal, state, local and foreign registrations
thereof, if applicable, all common law rights thereto, and all claims or causes
of action for infringement thereof;
(f) all permits, licenses, orders, ratings and approvals of all
federal, state, local or foreign governmental or regulatory authorities or
industrial bodies that are held by the Company to the extent the same are
transferable;
5
<PAGE>
(g) all present and future insurance proceeds which may be payable
under the Company's insurance policies to the extent that such proceeds relate
to the future loss of asset value of the Purchased Assets;
(h) except for Retained Assets described in Section 2.2 below, all
other items of property, real or personal, tangible or intangible, including,
without limitation, all restrictive and negative covenant agreements with
employees and others, including, without limitation, nondisclosure agreements,
computer programs, tapes, discs and timesharing files, owned, used by or
accruing to the benefit of the Company;
(i) the "oneworldsystems.com" domain name used in the operation of
the Company's business; and
(j) the capital stock of OneWorld Services, Inc.
2.2 Retained Assets. The Company will retain ownership of the assets of
---------------
the Company listed on Schedule 2.2 attached hereto (collectively, the "Retained
Assets").
2.3 Assumed Liabilities. The Buyer shall assume and agree to pay, perform
-------------------
and discharge only the Assumed Liabilities, and will pay, perform and discharge
the Assumed Liabilities as they become due. The Assumed Liabilities shall
consist of only those liabilities of the Company listed on Schedule 2.3 attached
hereto or otherwise specifically provided for in this Agreement.
2.4 Retained Liabilities. The liabilities and obligations which shall be
--------------------
retained by the Company (the "Retained Liabilities") shall consist of all
liabilities of the Company other than Assumed Liabilities, including, without
limitation, the following:
(a) all liabilities of the Company relating to indebtedness for
borrowed money;
(b) all liabilities of the Company for federal, state, local or
foreign Taxes, including Taxes incurred in respect of or measured by the income
of the Company earned on or realized prior to the Closing Date, including any
gain and income from the sale of the Assets and other transactions contemplated
herein, excluding those incurred by Buyer in connection with this transaction;
(c) all liabilities for all environmental, ecological, health or
safety claims to the extent arising out of the operation of the Company on or
before the Closing Date;
(d) any liability of the Company based on its tortious or illegal
conduct;
(e) all warranty liabilities for products of the Company sold prior
to the Closing;
(f) any liability or obligation incurred by the Company in
connection with the negotiation, execution or performance of this Agreement,
including, without limitation, all legal,
6
<PAGE>
accounting, brokers', finders' and other professional fees and expenses other
than through Buyer's breach of this Agreement;
(g) all liabilities incurred by the Company after the Closing Date
other than through Buyer's breach of this Agreement (except to the extent such
liability is specifically assumed by Buyer); and
(h) all liabilities or obligations associated with the employees of
the Company, including but not limited to any liability or obligation under or
with respect to any collective bargaining agreement, accrued paid time off
(PTO), 401K plan, employment agreement, any plan, unemployment or workers'
compensation laws, sales commissions (other than on orders shipped and billed
after the Closing Date) unless specifically provided for elsewhere in this
Agreement.
2.5 Purchase Price. Upon the terms and subject to the conditions
--------------
contained in this Agreement, in reliance upon the representations, warranties
and agreements of the Company contained herein, and in consideration of the
sale, assignment, transfer and delivery of the Transferred Assets, Buyer will
assume the Assumed Liabilities and will pay an aggregate purchase price of $2.33
million (the "Purchase Price"), payable in the following manner:
(a) At the Closing, Buyer shall pay the Company up to $580,000
(which shall be indicated in a written notice to Buyer at least two days prior
to the Closing) in cash by wire transfer of immediately available funds to an
account designated by the Company; and
(b) shares of Buyer's common stock comprising the balance of such
$2.33 million amount, with such shares having an assigned value of $44.4125 per
share.
2.6 Allocation of Purchase Price. The Purchase Price shall be allocated
----------------------------
among the Transferred Assets received from the Company in a manner that is
mutually agreed upon by the parties prior to the Closing. The Company and Buyer
shall be bound by such allocation for all purposes and to account for and report
the purchase and sale contemplated hereby for all financial, accounting and Tax
purposes in accordance with such allocation.
2.7 Time and Place of Closing. The closing of the transactions described
-------------------------
above (the "Closing") shall take place at the offices of Wilson Sonsini Goodrich
& Rosati, 650 Page Mill Road, Palo Alto, California, at 10:00 a.m. (local time)
on the third business day following the satisfaction of the conditions to
closing as provided in this Agreement, but in no event later than May 30, 2000,
or at such other place or time as the parties hereto may agree. The date and
time at which the Closing actually occurs is hereinafter referred to as the
"Closing Date."
2.8 Execution and Delivery of Documents of Title by the Company; Further
--------------------------------------------------------------------
Assurances. At the Closing, the Company shall execute and deliver to Buyer the
- ----------
Bill of Sale attached hereto as Exhibit A and such deeds, conveyances, bills of
sale, certificates of title, assignments, assurances and other instruments and
documents as Buyer may reasonably request to effect the sale, conveyance, and
transfer of the Purchased Assets from the Company to the Buyer. Such
instruments and documents shall be sufficient to convey to Buyer good and
merchantable title in all of the Transferred Assets. The Company will, from
time to time after the Closing Date, take such additional actions and execute
and deliver such further documents as
7
<PAGE>
Buyer may reasonably request in order more effectively to sell, transfer and
convey the Transferred Assets to Buyer and to place Buyer in position to operate
and control all of the Transferred Assets, provided however that it shall be
Buyer's responsibility to secure the assignment of all Transferred Assets for
which a consent of transfer is required.
2.9 Execution and Delivery of Documents by Buyer; Further Assurances. At
----------------------------------------------------------------
the Closing, Buyer shall execute and deliver to the Company an Instrument of
Assumption in the form attached hereto as Exhibit B and such other documents as
the Company may reasonably request in order to evidence Buyer's assumption of
the Assumed Liabilities. Buyer will, from time to time after the Closing Date,
take such additional action and deliver such further documents as the Company
may reasonably request to assume the Assumed Liabilities.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company hereby represents and warrants to Buyer as follows:
3.1 Organization and Qualification. The Company is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has full power and authority to own, use and lease its
properties and to conduct its business as such properties are owned, used or
leased and as such business is currently conducted. The copies of the Company's
Charter and ByLaws, as amended to date, which have been delivered to Buyer's
counsel prior to the Closing, are true, complete and correct. Except as set
forth on Schedule 3.1 attached hereto, the Company is qualified to do business
as a foreign corporation and is in good standing in each jurisdiction in which
it owns or leases property or maintains inventories or where the conduct of its
business would require such qualification, except where such qualification to do
business or be in good standing would not have a Material Adverse Effect on the
Company.
3.2 Authority; No Violation. The Company has all requisite corporate
-----------------------
power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the Company have been duly and validly authorized and approved
by all necessary corporate action. This Agreement constitutes the legal and
binding obligation of the Company, enforceable against it in accordance with its
terms. Except as set forth on Schedule 3.2, the entering into of this Agreement
by the Company does not, and the consummation by the Company of the transactions
contemplated hereby, including specifically the transfer of the Transferred
Assets to Buyer by the Company, will not violate the provisions of (a) any
applicable federal, state, local or foreign laws, (b) the Company's respective
Charter or ByLaws, or (c) any provision of, or result in a default or
acceleration of any obligation under, or result in any change in the rights or
obligations of the Company under any Lien, contract, agreement, license, lease,
instrument, indenture, order,
8
<PAGE>
arbitration award, judgment, or decree to which the Company is a party or by
which any of them is bound, or to which any property of the Company is subject.
3.3 SEC Reports and Financial Statements. Since March 31, 1999, the
------------------------------------
Company has filed all forms, reports and documents with the Commission required
to be filed by it pursuant to the Securities Act and the Exchange Act (the "SEC
Reports"), and all of such filings complied in all material respects with all
applicable requirements of the Securities Act and the Exchange Act. None of the
Company's SEC Reports contained any untrue statements of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a document
subsequently filed with the SEC. Attached hereto as Schedule 3.3 are the
following financial statements (collectively the "Financial Statements"): (i)
audited consolidated and unaudited consolidating balance sheets and statements
of operations, changes in owners' equity and consolidated statements of cash
flow as of and for the fiscal year ended March 31, 1999; and (ii) unaudited
consolidated and consolidating balance sheets and statements of income, changes
in stockholders' equity, and cash flow (the "Most Recent Financial Statements")
as of and for the nine (9) months ended December 31, 1999, for the Company. The
Financial Statements are (i) true, correct and complete, (ii) are prepared in
accordance with GAAP, and (iii) fairly present the financial condition and
results of operations of the Company as of the respective dates thereof and for
the periods covered thereby.
3.4 Absence of Undisclosed Liabilities. Except as set forth in Schedule
----------------------------------
3.4 attached hereto, there are no material liabilities of the Company, whether
accrued, absolute, contingent or otherwise (including, without limitation,
liabilities as guarantor or otherwise with respect to obligations of any other
Person, or liabilities for Taxes due or then accrued or to become due), except
for liabilities which have arisen in the ordinary course of business of the
Company since the date of the Most Recent Financial Statements.
3.5 Title to the Transferred Assets. Schedule 3.5 lists all Liens, if
-------------------------------
any, on the Purchased Assets. The Company has good and marketable title to, or a
valid leasehold interest in, all of the Transferred Assets, free and clear of
all Liens, and free of any infractions or noncompliance with zoning and building
laws (collectively, "Defects") and the sale and delivery of the Transferred
Assets to Buyer pursuant hereto shall vest in Buyer good and marketable title
thereto, free and clear of any and all Liens or Defects, other than as disclosed
in Schedule 3.5 hereto or as may be created by Buyer. The Company shall prior to
the Closing use their commercially reasonable efforts to cure at their expense
any Defect identified by Buyer.
3.6 Sufficiency and Condition of Assets.
-----------------------------------
(a) All tangible properties and assets that have an assigned value
owned or leased by the Company and contained in the Transferred Assets are in
good operating condition and repair, ordinary wear and tear excepted, have been
well maintained, and to the Knowledge of the Company, conform with all
applicable laws, statutes, ordinances, rules and regulations, other than as
disclosed on Schedule 3.6. Since December 21, 1999, the Company has not sold,
leased or otherwise disposed of or agreed (other than pursuant to this
Agreement) to sell, lease or otherwise dispose of any of the Transferred Assets.
9
<PAGE>
(b) The Company shall have on the date of any liquidation or
dissolution of the Company sufficient assets to pay its obligations and to cease
operations and liquidate or dissolve in an orderly manner.
3.7 Accounts Receivable. Except as set forth in Schedule 3.7 attached
-------------------
hereto, the Company does not have any accounts receivable or loans or notes
receivable to be assigned to the Buyer pursuant to this Agreement.
3.8 Inventories. The Company is not transferring any Inventory to Buyer.
-----------
3.9 Intellectual Property. All patents, patent applications, proprietary
---------------------
designs, copy-righted works, trademarks and tradenames which are owned by or
licensed to the Company are listed in Schedule 3.9 attached hereto (the "Company
Intellectual Property"), which indicates with respect to each the nature of the
Company's interest. Except as set forth on Schedule 3.9, all of the Company's
patents filed in or issued by the United States Patent Office or the
corresponding offices of other countries identified in Schedule 3.9, and have
been properly maintained and renewed in accordance with all applicable laws and
regulations in the United States and each such country. Except as set forth on
Schedule 3.9, those copyrighted works for which copyright registration has been
secured with the U.S. Register of Copyright or corresponding offices in other
countries are set forth in Schedule 3.9, which indicates the registration number
and date of registration of each such registered work. Except as set forth in
Schedule 3.9, each such registration has been secured and maintained in
accordance with all applicable laws and regulations in the United States and
each such country. Except as set forth in Schedule 3.9, the Company's use of
the Company Intellectual Property does not require the consent of any other
Person and the same are freely transferable (except as otherwise provided by
law) and are owned exclusively by the Company, free and clear of any Liens.
Except as set forth in Schedule 3.9, (a) no other Person has an interest in or
right or license to use, or the right to license any other Person to use, any of
the Company Intellectual Property, (b) except as set forth on Schedule 3.9,
there are no claims or demands of any other Person pertaining thereto and no
proceedings have been instituted, or are pending or, to the Knowledge of the
Company, threatened, which challenge the Company's rights in respect thereof,
(c) to the Knowledge of the Company, none of the Company Intellectual Property
is being infringed by another Person or is subject to any outstanding order,
decree, ruling, charge, injunction, judgment or stipulation, (d) no Claim has
been made or to the Knowledge of the Company is threatened charging the Company
with infringement of any adversely held patent, copyright, tradename or
trademark and (e) to the Knowledge of the Company, there does not exist (i) any
unexpired patent with claims which are or would be infringed by products of the
Company or any Subsidiary of the Company or by apparatus, methods or designs
employed by it in manufacturing such products or (ii) any patent or application
therefor or invention which would materially adversely affect the Company's or
any Subsidiary's ability to manufacture, use or sell any such product,
apparatus, method or design.
3.10 Contracts. Except for contracts, commitments, leases, licenses,
---------
plans and agreements described in Schedule 3.10 attached hereto (the "Company
Contracts"), pursuant to the terms of this Agreement, Buyer will not assume or
otherwise become subject to any such contract or agreement, including without
limitation:
10
<PAGE>
(a) any plan or contract regarding or providing for bonuses,
pensions, options, stock purchases, deferred compensation, severance benefits
retirement payments, profit sharing, stock appreciation, collective bargaining
or the like relating to the Transferred Employees, or any contract or agreement
with any labor union;
(b) any employment or consulting contract or contract for personal
services relating to Transferred Employees not terminable at will by the Company
without penalty to the Company;
(c) any contract or agreement for the purchase of any commodity,
product, material, supplies, equipment or other personal property, or for the
receipt of any service;
(d) any contract or agreement for the purchase or lease of any fixed
asset, whether or not such purchase or lease is in the ordinary course of
business;
(e) any contract or agreement for the sale of any commodity, product,
material, equipment, or other personal property, or the furnishing by the Buyer
of any service;
(f) any supplier contract or agreement;
(g) any contract or agreement with any sales agent, distributor or
OEM of products of the Company;
(h) any contract or agreement concerning a partnership or joint
venture with one or more Persons;
(i) any confidentiality agreement or any non-competition agreement or
other contract or agreement containing covenants limiting the Buyer's freedom to
compete in any line of business or in any location or with any Person;
(j) any license agreement (as licensor or licensee);
(k) any contract or agreement with any present or former officer,
director, consultant, agent or stockholder of the Company or with any Affiliate
of any of them;
(l) any loan agreement, indenture, note, bond, debenture or any other
document or agreement evidencing a capitalized lease obligation or Indebtedness
to any Person; or
(m) any agreement of guaranty, indemnification, or other similar
commitment with respect to the obligations or liabilities of any other Person;
or
(n) any contract pursuant to which Buyer would become obligated to
provide warranty services to customers of the company.
11
<PAGE>
(o) Copies of all Company Contracts have been provided or made
available to Buyer or its counsel prior to the execution of this Agreement, and
all such copies are true, correct and complete and have been subject to no
amendment, extension or other modification as of the date hereof, except such as
are described in Schedule 3.10 or as indicated in the provided copies. Except as
listed and described in Schedule 3.10, each of the Company Contracts is in full
force and effect, constitutes a legal, valid and binding agreement, enforceable
in accordance with its terms, of each party thereto. The Company is not, and to
the Knowledge of the Company, no other Person, is in material default under any
such Company Contract (a "default" being defined for purposes hereof as an
actual default or event of default or the existence of any fact or circumstance
which would, upon receipt of notice or passage of time, constitute a default).
3.11 Compliance with Laws.
--------------------
(a) Except as disclosed in Schedule 3.11, the Company has all
licenses, permits, franchises, orders, approvals, accreditations, written
waivers and other authorizations as are necessary in order to enable it to own
and conduct its business and to occupy and use its real and personal properties
without incurring any material liability ("Necessary Permits"). No registration,
filing, application, notice, transfer, consent, approval, order, qualification,
waiver or other action of any kind is required by virtue of the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby to effect the transfer to Buyer of such Necessary Permits. The Company is
in full compliance with the terms and conditions of all Necessary Permits except
where the failure to be in compliance would not have a Material Adverse Effect.
(b) Except as disclosed in Schedule 3.11, the Company has conducted
and is conducting its business in material compliance with applicable federal,
state, local or foreign laws, statutes, ordinances, regulations, rules or orders
or other requirements of any governmental, regulatory or administrative agency
or authority or court or other tribunal relating to it (including, but not
limited to, any law, statute, ordinance, regulation, rule, order or requirement
relating to securities, properties, business, products, advertising, sales or
employment practices, immigration, terms and conditions of employment, wages and
hours, safety, occupational safety, health or welfare conditions relating to
premises occupied, product safety and liability or civil rights). The Company is
not now charged with, and to the Knowledge of the Company, is not now under
investigation with respect to, any possible violation of any applicable law,
statute, ordinance, regulation, rule, order or requirement relating to any of
the foregoing in connection with the Transferred Assets and the Company has
filed all material reports required to be filed with any governmental,
regulatory or administrative agency or authority. The Company shall promptly
inform Buyer of any notice relating to the foregoing received after the date
hereof and on or prior to the Closing Date.
3.12 Taxes. Except as disclosed in Schedule 3.12,
-----
(a) to the extent a failure to do so would adversely impact Buyer,
the Transferred Assets or Buyer's use of such Transferred Assets, (i) the
Company has timely filed within the time period for filing or any extension
granted with respect thereto, all federal, state, local and foreign tax returns,
reports and estimates ("Returns") which it is required to file relating or
pertaining to any and all taxes attributable to or levied upon the Transferred
Assets and (ii)
12
<PAGE>
paid any and all taxes it is required to pay in connection with the taxable
periods to which such Returns relate. There are (and immediately following the
Closing there will be) no liens or similar encumbrances on the Transferred
Assets relating or pertaining to taxes, except with respect to taxes not yet due
and payable. To the Knowledge of the Company, there is no basis for the
assertion of any claims which, if adversely determined, would result in a Lien
on the Transferred Assets or otherwise adversely effect Buyer or the Transferred
Assets; and
(b) to the extent relevant to the Transferred Assets, the Company
shall (i) provide Buyer with such assistance as may reasonably be required in
connection with the preparation of any tax Return and the conduct of any audit
or other examination by any taxing authority or in connection with judicial or
administrative proceedings relating to any liability for taxes and (ii) retain
and provide Buyer with copies of or access to all records or other information
that may be relevant to the preparation of any tax Returns, or the conduct of
any audit or examination, or other tax proceeding. The Company shall retain all
relevant documents, including prior year's tax Returns, supporting work
schedules and other records or information that may be relevant to such returns
and shall not destroy or otherwise dispose of any such records without the prior
written consent of Buyer.
3.13 Employees. Prior to the date hereof, the Company has set forth
---------
a true and complete list of (a) all officers (with office held) of the Company
who are contemplated to be transferred, (b) all consultants and independent
contractors retained by the Company currently or during the last fiscal year who
are contemplated to be transferred and (c) all employees of the Company and
OneWorld Sub with who are contemplated to be transferred, including each such
employee's job title, remuneration and duration of employment period, who are
currently employed by the Company's OneWorld Services, Inc. subsidiary, each, a
"Transferred Employee". The Company and OneWorld Sub have complied with all
applicable laws relating to the employment of labor, including provisions
thereof relating to wages, hours, equal opportunity, collective bargaining,
discrimination against race, color, national origin, religious creed, physical
or mental disability, sex, age, ancestry, medical condition, marital status or
sexual orientation, and the witholding and payment of social security and other
taxes. Except as disclosed in Schedule 3.13, neither the Company nor OneWorld
Sub is a party to any written or oral employment, consulting, service, severance
or pension agreement to which the Buyer will become subject. Neither the Company
nor OneWorld Sub is a party to, and none of their respective employees are
subject to, any collective bargaining agreement or other union contract. The
Company and OneWorld Sub enjoy good relations with its employees and there is no
pending or, to the Knowledge of the Company, threatened labor trouble with or
effort to organize any of its employees, and there has been no such labor
trouble or, to the Knowledge of the Company, effort to organize during the past
five (5) years.
3.14 Litigation. Except as disclosed on Schedule 3.14 attached hereto,
----------
(a) there is no Claim pending or, to the Knowledge of the Company, threatened
(or, to the knowledge of the Company, any facts which could lead to such a
claim) by, against, affecting or regarding the Company or the Transferred Assets
at law or in equity, before any federal, state, local or foreign court or any
other governmental or administrative agency or tribunal or any arbitrator or
arbitration panel, and (b) there are no judgments, orders, rulings, charges,
decrees, injunctions, notices of violation or other mandates against or
affecting the Company or the Transferred Assets.
13
<PAGE>
3.15 Company Products. Each product manufactured, sold, leased,
----------------
distributed or delivered by the Company ("Company Products") has been in
conformity with all applicable contractual commitments and all applicable
express and implied service and product warranties. There are no existing or, to
the Knowledge of the Company, threatened Claims that would be assumed by the
Buyer for services or merchandise which are defective or fail to meet any
express or implied service or product warranties, or any facts which, if
discovered by a third party, would support such a Claim; and there is no Claim
that would be assumed by the Buyer has been asserted against the Company for
renegotiation or price redetermination with respect to any transaction, and
there are no facts upon which any such Claim could be based other than through
the ordinary course of business. Except as set forth on Schedule 3.15, there are
no statements, citations or decisions by any governmental or regulatory body or
agency that any Company Product is defective or fails to meet any standards
promulgated by any such governmental or regulatory body or agency. There have
been no recalls ordered by any such governmental or regulatory body or agency
with respect to any Company Product.
3.16 Brokers. None of the Company, its Subsidiaries, or anyone acting on
-------
their behalf, has engaged, retained, or incurred any liability to any broker,
investment banker, finder or agent or has agreed to pay any brokerage fees,
commissions, finder's fees or other fees with respect to the sale of the
Transferred Assets or the transactions contemplated by this Agreement.
3.17 Copies of Documents. The Company Books and Records are true, correct
-------------------
and complete. The Company has made available for inspection and copying by Buyer
and its counsel true, correct and complete copies of all documents referred to
in this Article III or in the Schedules delivered to Buyer pursuant to this
Agreement.
3.18 Disclosure of Material Information. Neither this Agreement
----------------------------------
(including the Schedules and Exhibits hereto) nor any document, certificate or
instrument furnished in connection therewith contains, when all such documents
are read together, with respect to the Company, any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
therein not misleading. The representations and warranties contained in this
Article are the only representations and warranties made by the Company in
connection with the transactions contemplated by this Agreement and supersede
any and all previous written or oral statements made by the Company to the
Buyer.
3.19 Board Recommendation. The Board of Directors of the Company, at a
--------------------
meeting duly called and held, has (a) determined that this Agreement and the
transactions contemplated hereby, taken together, are advisable and in the best
interests of the Company and its stockholders, and (b) subject to the other
provisions hereof, resolved to recommend that the holders of the shares of the
Company's Common Stock approve this Agreement and the transactions contemplated
hereby.
3.20 Required Company Vote. The affirmative vote of a majority of the
---------------------
shares of the Company's Common Stock and Preferred Stock, voting together as a
single class, is the only vote of the holders of any class or series of the
Company's securities necessary to approve this Agreement and the transactions
contemplated hereby.
3.21 OneWorld Sub.
------------
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(a) OneWorld Sub is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware. OneWorld Sub is
duly authorized to conduct business and is in good standing in the state of
Delaware. OneWorld Sub has full power and authority, and holds all permits and
authorizations necessary to carry on its business and to own and use its assets
and properties owned and used by OneWorld Sub. OneWorld Sub has delivered to
Buyer correct and complete copies of its charter documents and organizational
documents, each as amended to date.
(b) The authorized capital stock of OneWorld Sub consists of one
hundred (100) shares of common stock, par value $0.01 per share (the "OneWorld
Sub Stock"), of which one hundred (100) shares are issued and outstanding as of
the date hereof, no shares in treasury, and no shares of Preferred Stock. No
shares of the Company's capital stock have been issued since December 20, 1999.
The OneWorld Sub Stock is duly authorized, validly issued, fully paid and
nonassessable. Except for this Agreement, there are no outstanding
subscriptions, options, warrants, calls, commitments or other rights of any kind
for the purchase or acquisition of, nor any securities convertible or
exchangeable for, any capital stock of the OneWorld Sub.
(c) The Company owns beneficially and of record all of the issued and
outstanding shares of the OneWorld Sub Stock, free and clear of all Liens, and
has good and valid title to such shares. The delivery of the stock certificate
representing the OneWorld Sub Stock owned by the Company will transfer to Buyer
good and valid title thereto free and clear of all Liens.
(d) OneWorld Sub has no liabilities, whether accrued, absolute,
contingent or otherwise, other than with respect to the employment of the
Transferred Employees or pursuant to the Services Agreement dated December 21,
1999 between OneWorld Sub and Buyer.
3.22 Benefit Plans. The Company does not (i) maintain or administer any
-------------
benefit plans or (ii) have any severance or similar arrangements in respect of
any present or former personnel that would result in any obligations (absolute
or contingent) of Buyer to make any payment or be subject to any other
obligations to the Company, any present or former personnel of the Company or
any other third party upon the consummation of the transactions contemplated in
this Agreement, following the termination of such personnel's employment by the
Company or the employment of any such personnel by Buyer after the Closing.
3.23 Proprietary Information of Third Parties. To the Knowledge of the
----------------------------------------
Company, no third party has claimed that any person employed by or affiliated
with the Company in connection with and during the Company's ownership and
operation of its business has (i) violated or may be violating any of the terms
or conditions of such person's employment, non-competition or non-disclosure
agreement with such third party, (ii) disclosed or may be disclosing or utilized
or may be utilizing any trade secret or proprietary information or documentation
of such third party, or (iii) interfered or may be interfering in the employment
relationship between such third party and any of its present or former
employees. No third party has requested information from the Company which
suggests that such a claim might be contemplated. To the Knowledge of the
Company, no person employed by or affiliated with the Company in connection with
and during the Company's ownership and operation of its business has employed or
proposes to employ any trade secret or any information or documentation
15
<PAGE>
proprietary to any former employer and no person employed or affiliated with the
Company has violated any confidential relationship which such person may have
had with any third party, in connection with the development, manufacture or
sale of any product or proposed product or the development or sale of any
service or proposed service of the Company.
3.24 Third Party Consent. No consent, approval or authorization of any
-------------------
third party on the part of the Company is required in connection with the
consummation of the transactions contemplated hereunder except as otherwise
provided in Schedule 3.24.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to the Company as follows:
4.1 Organization and Qualification. Buyer is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware and has full power and authority to own, use and lease their properties
and to conduct its business as such properties are owned, used or leased and as
such business is currently conducted and as it is proposed to be conducted. The
copies of the Buyer's Charter and ByLaw, as amended to date, which have been
delivered to the Company's counsel prior to the Closing, are true, complete and
correct. Except as set forth on Schedule 4.1 attached hereto, the Buyer is
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which it owns or leases property or maintains inventories
or where the conduct of its business would require such qualification, except
where such qualification to do business or be in good standing would not have a
Material Adverse Effect on Buyer.
4.2 Authority; No Violation. Buyer has all requisite corporate power and
-----------------------
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by the Buyer have been duly and validly authorized and approved by all necessary
corporate action. This Agreement constitutes the legal and binding obligation
of the Buyer, enforceable against it in accordance with its terms. To the best
knowledge of the Buyer, the entering into of this Agreement by the Buyer does
not, and the consummation by the Buyer of the transactions contemplated hereby,
including specifically the transfer of the Transferred Assets to Buyer by the
Company, will not violate the provisions of (a) any applicable federal, state,
local or foreign laws, (b) the Buyer's Charter or ByLaws, or (c) any provision
of, or result in a default or acceleration of any obligation under, or result in
any change in the rights or obligations of the Buyer, any subsidiary of the
Buyer under, any Lien, contract, agreement, license, lease, instrument,
indenture, order, arbitration award, judgment, or decree to which the Buyer is a
party or by which it is bound, or to which any property of the Buyer is subject.
16
<PAGE>
4.3 SEC Reports and Financial Statements. Since its initial public
------------------------------------
offering, Buyer has filed all material forms, reports and documents with the
Commission required to be filed by it pursuant to the Securities Act and the
Exchange Act (the "SEC Reports"), and all of such filings complied in all
material respects with all applicable requirements of the Securities Act and the
Exchange Act.
4.4 Board Authorization. The Board of Directors of the Buyer, at meetings
-------------------
duly called and held, has approved this agreement and the transactions
contemplated hereby and has authorized the execution, delivery and performance
of this Agreement in accordance with its terms. The Shares, when issued in
accordance with this Agreement shall be fully paid, nonassessable and free of
any Liens.
4.5 Sole Representations and Warranties. The representations and
-----------------------------------
warranties contained in this Article IV are the only representations and
warranties made by Buyer and Buyer in connection with the transactions
contemplated by this Agreement and supersede any and all previous written or
oral statements made by Buyer and Buyer to the Company.
ARTICLE V
COVENANTS
5.1 Covenants of the Company. The Company shall keep, perform and fully
------------------------
discharge the following covenants and agreements:
(a) Interim Conduct of Business. Except as contemplated by the terms
--- ---------------------------
of this Agreement, from the date hereof until the Closing, the Company shall
not:
(i) except as contemplated hereby, enter into or amend any
employment, bonus, severance, or retirement contract or arrangement (including
any Plan as described in Section 3.19), or increase any salary or other form of
compensation payable or to become payable to any Transferred Employee;
(ii) purchase, lease or otherwise acquire any real estate or any
interest therein that would be assumed by the Buyer;
(iii) sell, lease or otherwise dispose of or agree to sell, lease
or otherwise dispose of any of the Transferred Assets;
(iv) incur any liability, guaranty or obligation (fixed or
contingent) that would be assumed by the Buyer;
(v) place or permit to be placed any Lien on any of the
Transferred Assets, other than statutory Liens arising in the ordinary course of
business;
(vi) make or authorize any amendments or changes to its Charter
or ByLaws preventing the consummation or the transactions contemplated by this
Agreement;
17
<PAGE>
(vii) make any investment in property, plant and equipment and
other items of capital expenditure that would be transferred to the Buyer;
(viii) fail to protect the character, quality and
transferability of the Transferred Assets, including without limitation, the
Intellectual Property, at the same level of care that the Company takes with its
intellectual property.
(b) Access. The Company shall, upon reasonable notice, give Buyer
------
and its representatives full and free access to all properties, assets, books,
contracts, commitments and records of the Company during reasonable business
hours and shall promptly furnish Buyer with all financial and operating data and
other information as to the history, ownership, Affiliates, business,
operations, properties, assets, liabilities, or condition (financial or
otherwise) of the Company as Buyer may from time to time reasonably request. It
being understood and agreed by Buyer that any such request for information
relates solely to the Transferred Assets or the Assumed Liabilities, and the
Company's ability to transfer the same.
(c) Transfer of Necessary Permits. From and after the date hereof
-----------------------------
through to the Closing Date and following the Closing, the Company assist with
the transfer to Buyer of all of the Necessary Permits and all other permits,
licenses, and leases which are associated with the Company's business as
presently conducted, to the extent the same are by their terms transferable.
(d) Satisfaction of Conditions. The Company shall use its
--------------------------
commercially reasonable efforts to accomplish the satisfaction of the conditions
precedent to Closing contained in Section 6.1 herein on or prior to the Closing
Date.
5.2 Covenants of the Company and Buyer. The Company shall keep, perform
----------------------------------
and fully discharge the following covenants and agreements:
(a) Confidentiality. The Buyer, and the Company (individually, a
"Party", and collectively, the "Parties") have and will request certain written
and verbal information that is material and confidential in nature (the
"Information") relating to a possible purchase of the Transferred Assets (such
purchase to be referred to herein as the "Transaction"). For purposes of this
Asset Purchase Agreement, the term Information shall include all information
relating to the Transaction that has been received as of the date of this Asset
Purchase Agreement and any additional information that may be received in the
future from or between the Parties in conjunction with their evaluation of the
Transaction. In consideration of the Parties being furnished with the
Information:
(i) The Parties agree that the Information will be kept
confidential and will not, without the other's prior written consent, be
disclosed by the Parties or the Parties' representatives (which term shall mean,
for all purposes herein, Parties' directors, officers, employees, agents or
representatives, including, without limitation, attorneys, accountants,
consultants, lenders and financial advisors), in any manner whatsoever, in whole
or in part, and will not be used by the Parties or the Parties' representatives
directly or indirectly for any purpose other than for the sole purpose of
evaluating the Transaction. The Parties agree to transmit the Information only
to those representatives who need to know the Information for the
18
<PAGE>
purpose of evaluating the Transaction, who are informed by the Parties of the
confidential nature of the Information and who agree to be bound by the terms of
this Agreement. The Parties will be responsible for any breach of this Agreement
by the Parties representatives.
(ii) Without the other Party's prior written consent, the
Parties and their representatives will not disclose to any other person the fact
that the Information has been made available, or any of the terms, conditions or
other facts with respect to the Transaction, including the status thereof,
except as permitted by Subparagraph "v" hereof.
(iii) The Information and all copies thereof will be returned
promptly to the other Party's attention in the event that the such other Party
makes such a request or if the contemplated Transaction shall not be
consummated, and neither Party nor any representative will make or retain any
copies, extracts or other reproductions, in whole or in part, of the
Information.
(iv) This Section shall be inoperative as to such portions of
the Information which (i) are or become generally available to the public other
than as a result of a disclosure by a Party or its representatives; (ii) become
available to a Party on a non-confidential basis from a source other than the
other Party; or (iii) was known to a Party on a non-confidential basis prior to
its disclosure to such Party by the other Party.
(v) In the event that a Party or anyone to whom a Party
transmits the Information pursuant to this Agreement is requested or becomes
legally compelled (by oral questions, interrogatories, request for information
or documents, subpoena, civil investigative demand or similar process, including
regulatory inquiries) to disclose any of the Information, such Party will
provide the other Party with prompt prior written notice so that such other
Party may seek a protective order or other appropriate remedy and/or waive
compliance with the provisions of this Agreement. In the event that such
protective order or other remedy is not obtained, or such other Party waives
compliance with Paragraph 5.2(e)(ii) of this Agreement, the Party will furnish
only that portion of the Information that is legally required (which
determination may be based upon advice of outside legal counsel) and will
exercise all reasonable means to obtain reliable assurance that confidential
treatment will be accorded the Information.
(vi) It is agreed and understood that in the event of any breach
or threatened breach thereof by a Party, such other Party shall, in addition to
any other remedies which may be available, be entitled to injunctive and other
equitable relief in any court of competent jurisdiction.
(vii) It is understood and agreed that no failure or delay by the
a Party in exercising any right, power or privilege under this Agreement shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other further exercise of any right, power or privilege hereunder.
(viii) If any provision of this Section shall be determined to be
void or unenforceable, the remaining provisions of this Section shall
nonetheless constitute valid and enforceable obligations of the parties hereto.
19
<PAGE>
(ix) Any consent or waiver of compliance with any provision
hereof shall be effective only if in writing, and no such consent or waiver
shall be deemed to extend beyond the particular subject thereof.
(b) Exclusive Dealings. Subject to the provisions of Section 7.1,
------------------
the Company, on its own behalf and on behalf of its shareholders, agrees that,
in consideration of Buyer undertaking to prepare the necessary legal
documentation to evidence the contemplated transaction, the Company will not
engage in discussions or negotiations of any level with any other person or
entity regarding the sale of the Transferred Assets prior to the termination of
this Agreement. Notwithstanding the foregoing, the Company shall be entitled to
entertain, discuss and negotiate with any third party that provides an
unsolicited offer for the sale of the Company, Transferred Assets that is
potentially superior to the terms of this Agreement in satisfaction of its
fiduciary obligations to the Company's Stockholders, as advised by its
independent legal counsel.
5.3 Preparation of Proxy Statement; Stockholder Meeting.
---------------------------------------------------
(a) Promptly following the date of this Agreement (and in no event
later than ten business days following execution and delivery of this
Agreement), the Company (i) shall prepare a proxy statement (the "Proxy
Statement") and other materials relating to the solicitation of the vote of a
majority of the issued and outstanding shares of the Company's common stock,
("Common Stock"), in favor of this Agreement and the consummation of the
transactions contemplated hereby and (ii) shall file preliminary proxy materials
with the Securities and Exchange Commission ("SEC"). The Company shall use its
commercially reasonable efforts as promptly as practicable to respond to and
resolve any comments raised by the SEC with respect to such materials. The
Company will use its commercially reasonable efforts to cause the Proxy
Statement and other materials to be mailed to the Company's stockholders as
promptly as practicable and in any event no later than the eleventh (11th)
calendar day following clearance by the SEC for distribution.
(b) The Company will immediately notify the Buyer of (i) the receipt
of any comments from the SEC regarding the Proxy Statement and (ii) any request
by the SEC for any amendment to the Proxy Statement or for additional
information. Buyer shall be given a reasonable opportunity to review and comment
on (1) all filings with the SEC, including the Proxy Statement and any
amendments thereto, (2) all correspondence from the SEC to the Company in
respect of the Proxy Statement, this Agreement and the transactions contemplated
hereby, and (3) all mailings to the Company's stockholders in connection with
the transactions contemplated hereby, including the Proxy Statement, prior to
the filing or mailing thereof. The Company shall use its commercially reasonable
efforts to reflect all reasonable comments raised by Buyer in respect of any of
the foregoing.
(c) The Company will, as promptly as practicable following the date
of this Agreement and in consultation with Buyer, duly call, give notice of,
convene and hold a meeting of its stockholders (the "Stockholders' Meeting") for
the purpose of approving this Agreement and the transactions contemplated by
this Agreement. The Company will, through its Board of Directors, recommend to
its stockholders approval of the foregoing matters. Subject to obtaining the
approval by the SEC of the Proxy Statement and other proxy materials, the
Company will use
20
<PAGE>
its commercially reasonable efforts to hold the Stockholders' Meeting as soon as
practicable after the date hereof.
5.4 Covenants of Buyer. Buyer shall use its commercially reasonable
------------------
efforts to accomplish the satisfaction of the conditions precedent to Closing
contained in Section 6.2 herein on or prior to the Closing Date.
5.5 Covenants of Buyer and the Company. The parties hereto hereby agree
----------------------------------
to keep, perform and fully discharge the following covenants and agreements:
(a) Waiver of Compliance with the Bulk Sales Act. In connection with
the transactions contemplated hereby, the parties shall waive compliance with
the provisions of Article 6 of the Uniform Commercial Code Bulk Transfers and
the Bulk Sales Act and any other applicable United States, state or provincial
bulk sales act or statute ("Bulk Sales Acts"); provided, however, the Company
shall be indemnify Buyer for any and all Losses incurred by Buyer arising from
the Company's failure to comply with the Bulk Sales Act.
(b) Employees.
---------
(i) Provided that each of the Transferred Employees has entered
into an employment relationship with Buyer prior to signing of this Agreement,
the form of which having been previously provided to the Company, Buyer agrees
to assume the employment of, and preserve the tenure and continuity of
employment of, the Transferred Employees; provided, however, that nothing
contained herein shall be construed to create any third party beneficiaries and
in any event such employee relationship shall be governed by the terms of any
offer letters or employment agreements between Buyer and the Transferred
Employees. The employment relationship between the Buyer and the non-engineer
Transferred Employees will be on an at-will basis pursuant to an offer letter
mutually agreeable to the parties thereto and the Buyer does not warrant any
term of longevity of such employment nor the terms and conditions of such
employment. The employment relationship between Buyer and the engineer
Transferred Employees so hired will be pursuant to employment agreements in the
form mutually agreeable to the parties thereto. The Company shall be solely
responsible for any employment benefits, including pension or profit sharing,
medical insurance and accrued vacation due by the Company to such employees.
Subject to the terms of any such offer letter or employment agreement, the
Transferred Employees shall be entitled to participate in Buyer's employment
benefit plans, including its stock option or stock purchase plans, as such plans
are determined and directed by the Buyer's Board of Directors and shall be
required to execute Buyer's standard form of confidentiality and nondisclosure
agreement. Selected Transferred Employees of the Company retained by Buyer will
be provided with retention incentives as determined by the Buyer.
(ii) As to any such Transferred Employee who is employed by
Buyer pursuant to this Section 5.5(b), the Company agrees to cause the release
of such employee from any contractual provision with the Company, or any
affiliate of the Company which would impair the utility of such employee's
services to Buyer, or that would impose upon such employee any monetary or other
obligation to the Company that otherwise would be occasioned by the termination
of such employee's employment or any agreement of non-competition or
confidentiality. Notwithstanding the foregoing, nothing contained herein shall
prevent the
21
<PAGE>
Company from seeking redress from such employees for violations of such
employees' duties as an employee of the Company.
(c) COBRA. The Company shall be responsible for any group health
plan continuation or conversion coverage required under section 4980B of the
Code, Part 6 of Title I or ERISA, or applicable State or local laws ("Required
COBRA Coverage") with respect to the Transferred Employees due to a qualifying
event occurring on or before the Closing Date. The Buyer shall be responsible
for any Required COBRA Coverage with respect to the Transferred Employees due to
a qualifying event occurring after the Closing Date.
(d) Distributions from Plans. Except where prohibited by applicable
law (including but not limited to section 401(k)(2)(B)(i) of the Code), the
Company shall distribute to the Transferred Employees their accrued benefits
under the Plans (subject, however, to any vesting schedule not otherwise
accelerated by applicable law or any term of the Plan), including but not
limited to accrued vacation, bonus, and sick pay (but determined without regard
to any last day of the plan year employment requirement or any other similar
condition). Such distributions shall be made in the manner and at the time as
prescribed by the terms of the Plan and applicable law.
ARTICLE VI
CLOSING CONDITIONS
6.1 Conditions to Obligations of Buyer. The obligations of Buyer to
----------------------------------
consummate this Agreement and the transactions contemplated hereby are subject
to the fulfillment, prior to or at the Closing, of the following conditions
precedent:
(a) Representations, Warranties and Covenants. Each of the
-----------------------------------------
representations and warranties of the Company contained in this Agreement shall
be true and correct in all material respects at the Closing Date. The Company
shall have performed, on or before the Closing Date, all of its respective
obligations under this Agreement and the other Purchase Documents which by the
terms thereof are to be performed on or before the Closing Date; and the Company
shall have delivered to Buyer an Officer's Certificate dated the Closing Date of
the Company to such effect.
(b) No Pending Action. No legislation, order, rule, ruling or
-----------------
regulation shall have been proposed, enacted or made by or on behalf of any
governmental body, department or agency, and no legislation shall have been
introduced in either House of Congress or in the legislature of any state, and
no investigation by any governmental authority shall have been commenced or
threatened, and no action, suit, investigation or proceeding shall have been
commenced before, and no decision shall have been rendered by, any court or
other governmental authority or arbitrator, which, in any such case, in the
reasonable judgment of Buyer could materially prevent or rescind the
transactions contemplated by this Agreement (including, without limitation, the
purchase and sale of the Transferred Assets) or result in a Material Adverse
Effect
22
<PAGE>
(c) Purchase Permitted by Applicable Laws; Legal Investment. Buyer's
-------------------------------------------------------
purchase of and payment for the Transferred Assets (a) shall not be prohibited
by any applicable law or governmental order, rule, ruling, regulation, release
or interpretation, (b) shall not constitute a fraudulent or voidable conveyance
under any applicable law and (c) shall be permitted by all applicable laws,
statutes, ordinances, regulations and rules of the jurisdictions to which Buyer
is subject.
(d) Proceedings Satisfactory. All proceedings taken in connection
------------------------
with the purchase and sale of the Transferred Assets, the transactions
contemplated by Section 6.1(o) hereof, all of the other Purchase Documents and
all documents and papers relating thereto, shall be in form and substance
reasonably satisfactory to Buyer. Buyer and its counsel shall have received
copies of such documents and papers as Buyer or its counsel may reasonably
request in connection therewith, all in form and substance reasonably
satisfactory to Buyer. Any Purchase Document, any Schedule or Exhibit to this
Agreement and any other document, agreement or certificate contemplated by this
Agreement, not approved by Buyer in writing as to form and substance on the date
this Agreement is executed, shall be reasonably satisfactory in form and
substance to Buyer.
(e) Consents Permits. The Company shall have received (and there
----------------
shall be in full force and effect) all material consents, approvals, licenses,
permits, orders and other authorizations of, and shall have made (and there
shall be in full force and effect) all such filings, registrations,
qualifications and declarations with, any Person pursuant to any applicable law,
statute, ordinance regulation or rule or pursuant to any agreement, order or
decree to which the Company is a party or to which it is subject, in connection
with the transactions contemplated by this Agreement and the sale of the
Transferred Assets.
(f) Corporate Documents. The Company shall have delivered to Buyer
-------------------
an Officer's Certificate of the Secretary of the Company certifying (A) the
incumbency and genuineness of signatures of all officers of the Company
executing this Agreement, any document delivered by the Company at the Closing
and any other document, instrument or agreement executed in connection herewith,
(B) the truth and correctness of resolutions of the Company authorizing the
entry by the Company into this Agreement and the transactions contemplated
hereby.
(g) Transfer of Necessary Permits. All of the Necessary Permits
-----------------------------
shall have been transferred, to the extent transferable, to Buyer on or before
the Closing Date.
(h) Transfer of Transferred Assets. All of the Transferred Assets
------------------------------
shall have been effectively sold, transferred, conveyed and assigned to Buyer,
free and clear of all Liens, and all of the deeds, conveyances, bills of sale,
certificates of title, assignments, assurances and other instruments and
documents referenced in Section 3.2 shall have been executed, delivered and, if
appropriate, filed or recorded
6.2 Conditions to Obligations of the Company. The obligations of the
----------------------------------------
Company to consummate this Agreement and the transactions contemplated hereby
are subject to the fulfillment, prior to or at the Closing, of the following
conditions precedent:
23
<PAGE>
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties of Buyer and Buyer in this Agreement shall remain true and correct in
all material respects at the Closing Date, and Buyer shall, on or before the
Closing Date, have performed all of its obligations under this Agreement and the
Other Purchase Documents which by the terms thereof are to be performed by it on
or before the Closing Date; and Buyer shall have delivered an Officer's
Certificate to the Company dated the Closing Date to such effect.
(b) No Pending Action. No legislation, order, rule, ruling or
-----------------
regulation shall have been proposed, enacted or made by or on behalf of any
governmental body, department or agency, and no legislation shall have been
introduced in either House of Congress or in the legislature of any state, and
no investigation by any governmental authority shall have been commenced or
threatened, and no action, suit, investigation or proceeding shall have been
commenced before, and no decision shall have been rendered by, any court or
other governmental authority or arbitrator, which, in any such case, was not
known by the Company on the date hereof or which could adversely affect,
restrain, prevent or rescind the transactions contemplated by this Agreement
(including, without limitation, the purchase and sale of the Transferred Assets)
or result in a Material Adverse Effect.
(c) Corporate Documents. Buyer shall have delivered respectively to
-------------------
the Company:
(i) an Officer's Certificate of the Secretary of such party
certifying (A) the incumbency and genuineness of signatures of all officers of
Buyer executing this Agreement, any document delivered by Buyer at the Closing
and any other document, instrument or agreement executed in connection herewith,
(B) the truth and correctness of resolutions of Buyer authorizing the entry by
Buyer into this Agreement and the transactions contemplated hereby and (C) the
truth, correctness and completeness of the ByLaws of Buyer; and
(ii) the Charter of Buyer certified as of a recent date by the
Secretary of State of the State of Delaware.
(d) Purchase Permitted by Applicable Laws; Legal Investment. The
Buyer's purchase of and payment for the Transferred Assets (a) shall not be
prohibited by any applicable law or governmental order, rule, ruling,
regulation, release or interpretation, (b) shall not constitute a fraudulent or
voidable conveyance under any applicable law and (c) shall be permitted by all
applicable laws, statutes, ordinances, regulations and rules of the
jurisdictions to which the Buyer is subject.
(e) License Agreement. The Company and Buyer shall have entered into
a license agreement in substantially the form of Exhibit __ attached hereto.
(f) Proceedings Satisfactory. All proceedings taken in connection
with the purchase and sale of the Transferred Assets, the transactions
contemplated by Section 6.1(o) hereof, all of the other Purchase Documents and
all documents and papers relating thereto, shall be in form and substance
reasonably satisfactory to the Company. The Company and its counsel shall have
received copies of such documents and papers as the Company or its counsel may
reasonably request in connection therewith, all in form and substance reasonably
satisfactory to
24
<PAGE>
the Company. Any Purchase Document, any Schedule or Exhibit to this Agreement
and any other document, agreement or certificate contemplated by this Agreement,
not approved by the Company in writing as to form and substance on the date this
Agreement is executed, shall be reasonably satisfactory in form and substance to
the Company.
ARTICLE VII
TERMINATION
7.1 Termination of Agreement. This Agreement and the transactions
------------------------
contemplated hereby may (at the option of the party having the right to do so)
be terminated at any time on or prior to the Closing Date:
(a) Mutual Consent. By mutual written consent of Buyer and the
--------------
Company;
(b) Court Order. By Buyer, or the Company if any court of competent
-----------
jurisdiction shall have issued an order pursuant to the request of a third party
restraining, enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement;
(c) Failure to Close By May 30, 2000. By Buyer or the Company if the
--------------------------------
transactions contemplated hereby shall not have been consummated on or before
May 30, 2000 provided, however, that such right to terminate this Agreement
shall not be available to any party whose failure to fulfill any obligation of
this Agreement has been the cause of, or resulted in, the failure of the
transactions contemplated hereby to be consummated on or before such date;
(d) Termination by Company. By the Company upon notice to Buyer at
----------------------
any time prior to May 30, 2000 if (i) a condition to the performance of the
Company set forth in Section 6.2 hereof shall not be fulfilled at the time
specified for the fulfillment thereof, (ii) a material default under or a
material breach of this Agreement shall be made by Buyer and such default or
breach shall not be curable prior to May 30, 2000; or
(e) Termination by Buyer. By Buyer by notice to the Company at any
--------------------
time prior to May 30, 2000, if (i) a condition to the performance of Buyer set
forth in Section 6.1 hereof shall not be fulfilled at the time specified for the
fulfillment thereof; (ii) a material default under or a material breach of this
Agreement shall be made by the Company, and such default or breach shall not be
curable prior to May 30, 2000;
(f) Termination by Buyer and/or the Company. By Buyer or the Company
---------------------------------------
by notice to the other party if the Company enters into any agreement with a
third party that would have a Material Adverse Effect on the Company's ability
to perform its obligations hereunder with respect to any of the following
involving the Company and/or its subsidiaries: (i) any merger, consolidation,
share exchange, recapitalization, business combination, or other similar
transaction involving the sale of the Company, the Business or Transferred
Assets ; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of the Company, the Business or the Transferred Assets in a single
transaction or series of transactions; (iii) any tender offer or exchange offer
for 25% or more of the outstanding shares of capital stock of the Company or the
25
<PAGE>
filing of a registration statement under the Securities Act of 1933 in
connection therewith; or (iv) any public announcement by the Company of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
7.2 Effect of Termination and Right to Proceed. If this Agreement is
------------------------------------------
terminated pursuant to this Article VII, then except as provided below, all
further obligations of Buyer and the Company under this Agreement shall
terminate without further liability of Buyer or any Affiliate thereof to the
Company or to Buyer or any Affiliate thereof, except with respect to the
obligations set forth in Sections 5.2 and 7.1, and except, in the case of
termination pursuant to Section 7.1(d) or Section 7.1(e) as to liability for
misrepresentation, breach or default in connection with any warranty,
representation, covenant or obligation given, occurring or arising to the date
of termination. In addition, anything in this Agreement to the contrary
notwithstanding, if any of conditions to obligations specified in Sections 6.1
or 6.2 hereof have not been satisfied, Buyer, in addition to any other rights
which it may have, shall have the right to waive its rights to have such
conditions satisfied and elect to proceed with the transactions contemplated
hereby and, if any of the conditions to the obligations of the Company specified
in Section 6.2 hereof have not been satisfied, the Company in addition to any
other rights which may be available to them, shall have the right to waive their
rights to have such conditions satisfied and elect to proceed with the
transactions contemplated hereby.
7.3 Penalties Upon Termination. In the event the Company consummates a
--------------------------
merger or consolidation with any third party, the Company agrees that it shall,
as promptly as possible and in any event no later than five (5) days following
the closing of such merger or consolidation, pay to Buyer an amount equal to all
amounts paid by Buyer to Company pursuant to Section 4 of that certain Services
Agreement dated December 20, 1999 (the "Services Agreement"). In the event that
Buyer voluntarily terminates this Agreement other than pursuant to Sections
7.1(e) or (f) above, it shall pay to the Company the lesser of (1) $100,000, or
(2) the actual expenses incurred by the Company for items identified on Schedule
2 of the Services Agreement from the date hereof through the date of such
termination.
ARTICLE VIII
INDEMNIFICATION
8.1 Survival of Representations and Warranties. The parties hereby
------------------------------------------
shorten the applicable period of limitation of claims made under representations
and warranties, and for that purpose each and every such representation and
warranty set forth in this Agreement (including the Officer's Certificates
required by Sections 6.1 and 6.2 above), shall survive until the first
anniversary of the Closing Date; provided, however, that nothing contained
herein shall cause the delay in dissolution of the Company's business and such
survival shall terminate upon the filing of a certificate of dissolution by the
Company. From and after the applicable period of survival with respect to such
respective representations and warranties of the Company and Buyer, none of the
Company, or Buyer or any Affiliate of the Company or Buyer shall have any
liability whatsoever with respect to any such representation or warranty, except
for breaches as to which any party shall have notified the other party prior to
such date. This Section 8.1 shall have no effect upon any other obligation of
the parties hereto, whether to be performed before or after the Closing Date.
26
<PAGE>
8.2 Indemnification by the Company. The Company shall indemnify, defend
------------------------------
and hold the Buyer, its officers, directors, employees, consultants, owners,
agents and Affiliates, harmless from and in respect of any and all Losses which
are actually sustained or suffered by any of them arising out of or resulting
from any breach or inaccuracy of any representation or warranty or the breach of
or failure to perform any warranty, covenant, undertaking or other agreement of
the Company contained in this Agreement or any other Purchase Document and
arising out of any and all actions, suits, claims and administrative or other
proceedings of every kind and nature instituted or pending against the Company
or Buyer or any of their Affiliates at any time before or after the Closing Date
to the extent that such Losses (a) relate to or arise out of or in connection
with the assets, businesses, operations, conduct, products and/or employees
(including former employees) of the Company, whether relating to or arising out
of or in connection with occurrences before or after the Closing Date, (b) do
not arise out of a breach or inaccuracy of the Buyer's representations and
warranties in, or a breach or default by Buyer in the performance of any
warranty, covenant under, undertaking or other agreement contained in this
Agreement or any other Purchase Document, and (c) arise out of or in connection
with matters disclosed in Schedule 3.9(1) attached hereto (the "Losses").
8.3 Indemnification by Buyer. Buyer shall indemnify, defend and hold the
------------------------
Company, its respective officers, directors, employees, consultants, owners,
agents and Affiliates, harmless from and in respect of any and all Losses which
are actually sustained or suffered by any of them arising out of or resulting
from any breach or inaccuracy of any representation or warranty or the breach of
or failure to perform any warranty, covenant, undertaking or other agreement of
Buyer contained in this Agreement or any other Purchase Document to the extent
that such Losses do not arise out of a breach or inaccuracy of the Company's
representations and warranties in, or a breach or default in the performance of
any warranty, covenant under, undertaking or other agreement contained in this
Agreement or any other Purchase.
8.4 Minimum Indemnification; Materiality. Notwithstanding anything to the
------------------------------------
contrary contained herein, no party hereto shall be entitled to recover from any
other party unless and until the total of all claims for indemnity or damages
with respect to any inaccuracy or breach of any such representations or
warranties or breach of or default in the performance of any covenants,
undertakings or other agreements, whether such claims are brought under this
Article VIII or otherwise, exceeds $50,000. Under no circumstances shall the
Company be obligated to indemnify Buyer for Losses in excess of the Purchase
Price received by the Company. Notwithstanding the foregoing, under no
circumstances shall Buyer collectively be obligated to indemnify the Company for
Losses in excess of the Purchase Price.
8.5 Notice and Opportunity to Defend. If there occurs an event that a
--------------------------------
party asserts is an indemnifiable event pursuant to Section 8.2 or 8.3, the
parties seeking indemnification shall promptly notify the other parties
obligated to provide indemnification (collectively, the "Indemnifying Party").
If such event involves (a) any Claim or (b) the commencement of any action, suit
or proceeding by a third person, the party seeking indemnification will give
such Indemnifying Party prompt written notice of such Claim or the commencement
of such action, suit or proceeding, provided, however, that the failure to
provide prompt notice as provided herein will relieve the Indemnifying Party of
its obligations hereunder only to the extent that such failure prejudices the
Indemnifying Party hereunder. In case any such action, suit or proceeding shall
be brought against any party seeking indemnification and it shall notify the
27
<PAGE>
Indemnifying Party of the commencement thereof, the Indemnifying Party shall be
entitled to participate therein and, to the extent that it desires to do so, to
assume the defense thereof, with counsel reasonably satisfactory to such party
seeking indemnification and, after notice from the Indemnifying Party to such
party seeking indemnification of such election so to assume the defense thereof,
the Indemnifying Party shall not be liable to the party seeking indemnification
hereunder for any attorneys' fees or any other expenses, in each case
subsequently incurred by such party, in connection with the defense of such
action, suit or proceeding. The party seeking indemnification agrees to
cooperate fully with the Indemnifying Party and its counsel in the defense
against any such action, suit or proceeding. In any event, the party seeking
indemnification shall have the right to participate at its own expense in the
defense of such action, suit or proceeding. In no event shall an Indemnifying
Party be liable for any settlement or compromise effected without its prior
consent.
8.6 Full Access . The Company shall also give the Buyer full access to:
-----------
(i) the premises occupied by the Company;
(ii) the Company's books and records;
(iii) the Company's Seller's information systems; and
(iv) the Transferred Employees.
ARTICLE IX ARTICLE IX
MISCELLANEOUS
9.1 Fees and Expenses. Each of the parties hereto will pay and discharge
-----------------
its own expenses and fees in connection of with the negotiation of and entry
into this Agreement and the consummation of the transactions contemplated
hereby.
9.2 Publicity and Disclosures. Prior to the Closing, no press release or
-------------------------
any public disclosure, either written or oral, of the transactions contemplated
by this Agreement shall be made by any party without the prior knowledge and
written consent of the Company and Buyer other than compliance with the
Securities Act disclosures and other regulatory bodies.
9.3 Notices. All notices, requests, demands, consents and communications
-------
necessary or required under this Agreement or any other Purchase Document shall
be made in the manner specified, or, if not specified, shall be delivered by
hand or sent by registered or certified mail, return receipt requested, or by
telecopy (receipt confirmed) to:
if to Buyer:
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, Ca
28
<PAGE>
Attention: Nelson Caldwell
Facsimile: (925) 682-4125
with a copy to:
Brobeck, Phleger & Harrison LLP
550 West C Street, Suite 1200
San Diego, CA 92101
Attention: Eddie Rodriguez, Esq.
Facsimile: (619) 699-0252
if to the Company:
One World Systems, Inc.
1144 East Arques Avenue
Sunnyvale, CA 94086
Attention: Neil Selvin
Facsimile Transmission Number: (408) 523-2019
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: Alan K. Austin
Facsimile Transmission Number: (650) 493-6811
All such notices, requests, demands, consents and communications shall
be deemed to have been duly given only when such notice, request, demand,
consent or communication is delivered or, if sent by telecopier, when received.
9.4 Successors and Assigns. All covenants and agreements set forth in
----------------------
this Agreement and made by or on behalf of any of the parties hereto shall bind
and inure to the benefit of the successors and assigns of such party, whether or
not so expressed.
9.5 Descriptive Headings. The headings of the sections and paragraphs of
--------------------
this Agreement have been inserted for convenience of reference only and shall
not be deemed to be part of this Agreement.
9.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
together shall constitute one and the same instrument, and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart.
9.7 Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason in any
jurisdiction, the validity, legality and enforceability of any such
29
<PAGE>
provision in every other respect and of the remaining provisions hereof shall
not be in any way impaired or affected, it being intended that each of parties'
rights and privileges shall be enforceable to the fullest extent permitted by
law, and any such invalidity, illegality and unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the fullest extent permitted by law, the parties hereby
waive any provision of any law, statute, ordinance, rule or regulation which
might render any provision hereof invalid, illegal or unenforceable.
9.8 Attorneys' Fees. In any action or proceeding brought to enforce any
---------------
provision of this Agreement or the other Purchase Documents, or where any
provision hereof or thereof is validly asserted as a defense, the successful
party shall be entitled to recover reasonable attorneys' fees in addition to any
other available remedy.
9.9 Course of Dealing. No course of dealing and no delay on the part of
-----------------
any party hereto in exercising any right, power, or remedy conferred by this
Agreement shall operate as a waiver thereof or otherwise prejudice such party's
rights, powers and remedies. The failure of any of the parties to this Agreement
to require the performance of a term or obligation under this Agreement or the
waiver by any of the parties to this Agreement of any breach hereunder shall not
prevent subsequent enforcement of such term or obligation or be deemed a waiver
of any subsequent breach hereunder. No single or partial exercise of any rights,
powers or remedies conferred by this Agreement shall preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
9.10 Third Parties. Except as specifically set forth or referred to
-------------
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any Person, other than the parties hereto and their
permitted successors or assigns, any rights or remedies under or by reason of
this Agreement or any other Purchase Document.
9.11 Tax Matters.
-----------
(a) The Buyer shall pay all use and transfer taxes associated with
the transfer of the Transferred Assets.
(b) The Company shall be responsible for and shall timely pay or
cause to be paid any and all Taxes (other than Buyer's Taxes, as defined below)
with respect to or relating to the Transferred Assets, whensoever arising, that
are attributable to any taxable period ending on or prior to the Closing Date
and, in the case of a taxable period that includes, but does not end on the
Closing Date, the portion of such taxable period that ends on the Closing Date
("the Company's Taxes"). Notwithstanding anything in this Agreement to the
contrary, the Company's Taxes shall constitute a Retained Liability.
(c) Buyer shall be responsible for and shall timely pay or cause to
be paid any and all Taxes (other than the Company's Taxes) with respect to the
Transferred Assets, whensoever arising, that are attributable to any taxable
period commencing after the Closing Date and, in the case of a taxable period
that includes, but does not end on, the Closing Date, the portion of such
taxable period that begins on the day after the Closing Date ("Buyer's Taxes").
30
<PAGE>
Notwithstanding anything in this Agreement to the contrary, Buyer's Taxes shall
constitute an Assumed Liability.
(d) The obligations of the Company set forth in the Agreement
relating to Taxes shall, except as otherwise agreed in writing, be unconditional
and absolute and shall remain in effect without limitation as to time or amount
of recovery by Buyer until thirty (30) days after the expiration of the
applicable statute of limitations governing the Taxes to which such obligations
relate (after giving effect to any agreement extending or tolling such statute
of limitations).
9.12 Variations in Pronouns. All pronouns and any variations thereof
----------------------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the Person or Persons may require.
9.13 WAIVER OF JURY TRIAL. EACH OF BUYER AND THE COMPANY HEREBY EXPRESSLY
--------------------
WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OTHER PURCHASE DOCUMENT OR THE
TRANSFERRED ASSETS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER
OF THIS AGREEMENT. THE COMPANY AND BUYER ALSO WAIVE ANY BOND OR SURETY OR
SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF ANY
PARTY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND
ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT
MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.
THE COMPANY AND BUYER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAVIER IS IRREVOCABLE
AND MAY ONLY BE MODIFIED EITHER ORALLY OR IN AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS AGREEMENT, ANY OTHER PURCHASE DOCUMENT OR THE SHARES.
IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO
A TRIAL (WITHOUT A JURY) BY THE COURT.
9.14 GOVERNING LAW. THIS AGREEMENT, INCLUDING THE VALIDITY HEREOF AND THE
-------------
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER, SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE
TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY IN SUCH STATE (WITHOUT GIVING
EFFECT TO THE CONFLICTS OF LAWS PROVISIONS THEREOF). EACH OF THE PARTIES HERETO
FURTHER AGREES THAT PROCESS MAY BE SERVED UPON IT BY CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, ADDRESSED AS MORE GENERALLY PROVIDED IN SECTION 9.3 HEREOF,
AND CONSENTS TO THE EXERCISE OF JURISDICTION OVER IT AND ITS PROPERTIES WITH
RESPECT TO ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH
THIS AGREEMENT OR THE
31
<PAGE>
TRANSACTIONS CONTEMPLATED HEREBY OR THE ENFORCEMENT OF ANY RIGHTS UNDER THIS
AGREEMENT.
9.15 Entire Agreement. This Agreement, including the Schedules and
----------------
Exhibits referred to herein, is complete, and all promises, representations,
understandings, warranties and agreements with reference to the subject matter
hereof, and all inducements to the making of this Agreement relied upon by all
the parties hereto, have been expressed herein or in said Schedules or Exhibits.
This Agreement may not be amended except by an instrument in writing signed on
behalf of the Company and Buyer.
32
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Agreement under seal as
of the date first set forth above.
ONE WORLD SYSTEMS, INC.
/s/ Neil Selvin
-------------------------------
President
TUT SYSTEMS, INC.
/s/ Nelson Caldwell
-------------------------------
Chief Financial Officer
33
<PAGE>
TABLE OF SCHEDULES
- ------------------
TITLE
-----------------------------------
Schedule 2.1 Fixed Assets
Schedule 2.2 Retained Assets
Schedule 2.3 Assumed Liabilities
Schedule 3.1 Qualification
Schedule 3.2 No Violations
Schedule 3.3 OneWorld Financial Statements
Schedule 3.4 Liabilities
Schedule 3.5 Material Liens or Defects
Schedule 3.6 Assets; Condition
Schedule 3.7 Accounts Receivable
Schedule 3.8 Inventories
Schedule 3.9 Intellectual Property
Schedule 3.10 Contracts
Schedule 3.11 Necessary Permits
Schedule 3.12 Taxes
Schedule 3.13 Employee Agreements
Schedule 3.14 Litigation
Schedule 3.15 Warranty and other Claims
Schedule 4.1 Organization and Qualification
<PAGE>
EXHIBIT A
---------
Bill of Sale
<PAGE>
EXHIBIT B
---------
Form of Assigment and Assumption Agreement
<PAGE>
EXHIBIT C
---------
Form of License Agreement
<PAGE>
EXHIBIT 2.5
AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT
The Amendment No. 1 to Asset Purchase Agreement (the "Amendment")
dated as of February 17, 2000 by and between TUT SYSTEMS, INC., a Delaware
corporation ("Buyer"), and ONEWORLD SYSTEMS, INC., a Delaware corporation (the
"Company"), amends certain provisions of the Asset Purchase Agreement (the
"Agreement") dated as of February 3, 2000, by and between Buyer and the Company.
ARTICLE I AMENDMENT.
1.1 Section 2.5 of the Agreement shall be amended and restated in its
entirety as follows:
"2.5 Purchase Price. Upon the terms and subject to the conditions
--------------
contained in this Agreement, in reliance upon the representations,
warranties and agreements of the Company contained herein, and in
consideration of the sale, assignment, transfer and delivery of the
Transferred Assets, Buyer will assume the Assumed Liabilities and will pay
an aggregate purchase price of $2,330,000 (the "Purchase Price"), payable
at the Closing in cash by wire transfer of immediately available funds to
an account designated by the Company."
1.2 The last sentence of Section 4.4 shall be deleted in its entirety.
ARTICLE II MISCELLANEOUS
2.1 Counterparts. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
together shall constitute one and the same instrument, and it shall not be
necessary in making proof of this Amendment to produce or account for more than
one such counterpart.
2.2 GOVERNING LAW. THIS AMENDMENT, INCLUDING THE VALIDITY HEREOF AND THE
-------------
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER, SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE
TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY IN SUCH STATE (WITHOUT GIVING
EFFECT TO THE CONFLICTS OF LAWS PROVISIONS THEREOF). EACH OF THE PARTIES HERETO
FURTHER AGREES THAT PROCESS MAY BE SERVED UPON IT BY CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, ADDRESSED AS MORE GENERALLY PROVIDED IN SECTION 9.3 OF THE
AGREEMENT, AND CONSENTS TO THE EXERCISE OF JURISDICTION OVER IT AND ITS
PROPERTIES WITH RESPECT TO ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR IN
CONNECTION WITH THIS AMENDMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR BY THE
AGREEMENT OR THE ENFORCEMENT OF ANY RIGHTS UNDER THIS AMENDMENT.
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Amendment as of the
date first set forth above.
ONE WORLD SYSTEMS, INC.
/s/ Neil Selvin
-------------------------------
President
TUT SYSTEMS, INC.
/s/ Nelson Caldwell
-------------------------------
Chief Financial Officer
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Exihibit 10.4
TUT SYSTEMS INC.
1998 STOCK PLAN
INLAND REVENUE APPROVED RULES FOR UK EMPLOYEES
("THE SUB-PLAN")
Adopted by the Company on: January 28, 2000
Approved by the Inland Revenue on:
Inland Revenue reference no:
PricewaterhouseCoopers
9 Greyfriars Road
Reading
Berkshire RG1 1JG
Tel: 0118 959 7111
Fax: 0118 960 7700
Ref: RFM/NJD/4751
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SCHEDULE
TUT SYSTEMS INC. 1998 STOCK PLAN
INLAND REVENUE APPROVED RULES FOR UK EMPLOYEES
("THE SUB-PLAN")
1. General
This schedule to the Tut Systems Inc. 1998 Stock Plan ("the Plan") sets out
the Inland Revenue Approved Rules for UK Employees ("the Sub-Plan").
2. Establishment of Sub-Plan
Tut Systems Inc. ("the Company") has established the Sub-Plan under section
4(b)(ix) of the Plan, which authorises the Company to establish sub-plans
to the Plan(1).
3. Purpose of Sub-Plan
The purpose of the Sub-Plan is to enable the grant to, and subsequent
exercise by, employees and directors in the United Kingdom, on a tax
favoured basis, of options to acquire shares in the Company under the
Plan.
4. Inland Revenue approval of Sub-Plan
The Sub-Plan is intended to be approved by the Inland Revenue under
Schedule 9 to ICTA 1988.
5. Rules of Sub-Plan
The rules of the Plan, in their present form and as amended from time to
time, shall, with the modifications set out in this schedule, form the
rules of the Sub-Plan. In the event of any conflict between the rules of
the Plan and this schedule, the schedule shall prevail.
6 Relationship of Sub-Plan to Plan
The Sub-Plan shall form part of the Plan and not a separate and independent
plan.
7. Interpretation
In the Sub-Plan, unless the context otherwise requires, the following words
and expressions have the following meanings:
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Acquiring Company a company which obtains Control of the Company in the
circumstances referred to in rule 26;
Approval Date the date on which the Sub-Plan is approved by the
Inland Revenue under Schedule 9 to ICTA 1988;
Associated Company The meaning given to that expression by section 187(2)
of ICTA 1988;(2)
Close Company The meaning given to that expression by section 414(1)
of, and paragraph 8 of Schedule 9 to, ICTA 1988;(3)
Consortium the meaning given to that word by section 187(7) of
ICTA 1988;(4)
Control the meaning given to that word by section 840 of ICTA
1988 and "Controlled" shall be construed
accordingly;(5)
Date of Grant the date on which an Option is granted to an Eligible
Employee determined in accordance with section 14 of
the Plan;
Eligible Employee An Employee who is:
(a) An employee (other than a director) of the Company
or a company participating in the Sub-Plan; or
(b) a director (other than a non-executive director)
of the Company or a company participating in the
Sub-Plan who is contracted to work at least 25
hours per week for the Company and its
subsidiaries or any of them (exclusive of meal
breaks)
and who, in either case, does not have at the Date of
Grant of an Option, and has not had during the
preceding twelve months, a Material Interest in a Close
Company which is the Company or a company which has
Control of the Company or a member of a Consortium
which owns the Company;
ICTA 1988 the Income and Corporation Taxes Act 1988;
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Market Value Notwithstanding section 2(m) of the Plan,
(a) in the case of an Option granted under the Sub
Plan:
(i) if at the relevant time the Shares are
listed on the London or New York Stock
Exchange, the market value as defined in
section 2(m)(i) of the Plan;
(ii) if paragraph (i) does not apply, the market
value of a Share as determined in accordance
with Part VIII of the Taxation of Chargeable
Gains Act 1992 and agreed in advance with
the Inland Revenue Shares Valuation Division
on the Date of Grant of the Option or such
earlier date or dates as may be agreed with
the Board of Inland Revenue;
(b) in the case of an option granted under any other
share option scheme, the market value of an
ordinary share in the capital of the Company
determined under the rules of such scheme for the
purpose of the grant of the option;
Material Interest The meaning given to that expression by section 187(3)
of ICTA 1988;(6)
New Option an option granted by way of exchange under rule 26.1;
New Shares the shares subject to a New Option referred to in rule
26.1;
Option a subsisting right to acquire Shares granted under the
Sub-Plan;
Optionee an individual who holds an Option or, where the context
permits, his legal personal representatives;
Ordinary Share Capital the meaning given to that expression by section 832(1)
of ICTA 1988; and
In this schedule, unless the context otherwise requires:
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words and expressions not defined above have the same meanings as are
given to them in the Plan;
the rule headings are inserted for ease of reference only and do not
affect their interpretation;
a reference to a rule is a reference to a rule in this schedule;
the singular includes the plural and vice-versa and the masculine
includes the feminine; and
a reference to a statutory provision is a reference to a United
Kingdom statutory provision and includes any statutory modification,
amendment or re-enactment thereof.
8. Companies participating in Sub-Plan
The companies participating in the Sub-Plan shall be the Company and any
company Controlled by the Company which has been nominated by the Company
to participate in the Sub-Plan.
9. Shares used in Sub-Plan
The Shares shall form part of the Ordinary Share Capital of the Company
and shall at all times comply with the requirements of paragraphs 10 to 14
of Schedule 9 to ICTA 1988.(7)
10. Grant of Options
An option granted under the Sub-Plan shall be granted under and subject to
the rules of the Plan as modified by this schedule.
11. Identification of Options
An Option Agreement issued in respect of an Option shall expressly state
that it is issued in respect of an Option. An option which is not so
identified shall not constitute an Option.
12. Contents of Option Agreement
An Option Agreement issued in respect of an Option shall state:
that it is issued in respect of an Option;
the date of grant of the Option;
the number of Shares subject to the Option;
the exercise price under the Option;
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any performance target or other condition imposed on the exercise of
the Option;
the date(s) on which the Option will ordinarily become exercisable;
and
the period during which an Option may be exercised by an Optionee who
ceases to be an Eligible Employee..
13. Earliest date for grant of Options
An Option may not be granted earlier than the Approval Date.
14. Persons to whom Options may be granted
An Option may not be granted to an individual who is not an Eligible
Employee at the Date of Grant.
For the avoidance of doubt, Options may not be granted under the Sub-Plan
to Consultants.
15. Options non transferable
An Option shall be personal to the Eligible Employee to whom it is
granted and, subject to rule 25, shall not be capable of being transferred,
charged or otherwise alienated and shall lapse immediately if the Optionee
purports to transfer, charge or otherwise alienate the Option.
Section 12 of the Plan shall be construed accordingly.
16. Limit on number of Shares placed under Option under Sub-Plan
For the avoidance of doubt, Shares placed under Option under the Sub-Plan
shall be taken into account for the purpose of section 3 of the Plan.
17. Inland Revenue limit ((Pounds)30,000)
Notwithstanding section 6(c) of the Plan, an Option may not be granted to
an Eligible Employee if the result of granting the Option would be that the
aggregate Market Value of the shares subject to all outstanding options
granted to him under the Sub-Plan or any other share option scheme
established by the Company or an Associated Company and approved by the
Board of Inland Revenue under Schedule 9 to ICTA 1988 (other than a savings
related share option scheme) would exceed sterling (Pounds)30,000 or such
other limit as may from time to time be specified in paragraph 28 of
Schedule 9 to ICTA 1988(8). For this purpose, the United Kingdom sterling
equivalent of the market value of a share on any day shall be determined by
taking the spot sterling/dollar exchange rate for that as shown in the
Financial Times.
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18. Exercise price under Options
Notwithstanding section 9(a)(ii) and (iii) of the Plan, the amount payable
per Share on the exercise of an Option shall not be less than the Market
Value of a Share on the Date of Grant and shall be stated on the Date of
Grant.
19. Performance target or other condition imposed on exercise of
Option
Any performance target or other condition imposed on the exercise of an
Option under sections 4(b)(v) and 9(b) of the Plan shall be:
19.1 objective;
19.2 such that, once satisfied, the exercise of the Option is not subject
to the discretion of any person; and
19.3 stated on the Date of Grant.
If an event occurs as a result of which the Plan Administrator considers
that a performance target or other condition imposed on the exercise of an
Option is no longer appropriate and substitutes, varies or waives under
section 4(b)(x) of the Plan the performance target or condition, such
substitution, variation or waiver shall:
19.4 be reasonable in the circumstances; and
19.5 produce a fairer measure of performance and be neither materially
more nor less difficult to satisfy.
20. Exercise of Options by leavers
If an Optionee ceases to be an Eligible Employee, the Option may be
exercised within the post termination period specified in the Option
Agreement or, in the absence of a specified period, the period specified in
the Plan. Reference in the Plan (section 4(b)(x)) to a discretionary
authority to extend the post-termination exercisability period, shall for
the purposes of the Sub-Plan be disregarded.
21. Latest date for exercise of Options
The period during which an Option shall be capable of being exercised shall
be stated in the Option Agreement and any Option not so exercised by that
time shall lapse immediately.
22. Material Interest
An Option may not be exercised if the Optionee then has, or has had within
the preceding twelve months, a Material Interest in a Close Company which
is the Company or which is a company which has Control of the Company or
which is a member of a Consortium which owns the Company.
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23. Manner of payment for Shares on exercise of Options
The amount due on the exercise of an Option shall be paid in cash or by
cheque or banker's draft and may be paid out of funds provided to the
Optionee on loan by a bank, broker or other person. Notwithstanding section
9(c)(iv) of the Plan, the amount may not be paid by the transfer to the
Company of Shares or any other shares or securities. The date of exercise
of an Option shall be the date on which the Company receives the amount due
on the exercise of the Option.
24. Issue or transfer of Shares on exercise of Options
The Company shall, as soon as reasonably practicable and in any event not
later than thirty days after the date of exercise of an Option, issue or
transfer to the Optionee, or procure the issue or transfer to the Optionee
of, the number of Shares specified in the notice of exercise and shall
deliver to the Optionee, or procure the delivery to the Optionee of, a
Stock Certificate in respect of such Shares together with, in the case of
the partial exercise of an Option, an Option Agreement in respect of, or
the original Option Agreement endorsed to show, the unexercised part of the
Option, subject only to compliance by the Optionee with the rules of the
Sub-Plan and to any delay necessary to complete or obtain:
24.1 the listing of the Shares on any stock exchange on which Shares are
then listed;
24.2 such registration or other qualification of the Shares under any
applicable law, rule or regulation as the Company determines is
necessary or desirable; or
24.3 the making of provision for the payment or withholding of any taxes
required to be withheld in accordance with any applicable law in
respect of the exercise of the Option or the receipt of the Shares.
Sections 10(a) and 16 of the Plan shall be read accordingly.
25. Death of Optionee
If an Optionee dies before the tenth anniversary of the Date of Grant, his
personal representatives shall be entitled to exercise his Options in
accordance with the Plan. If not so exercised, the Options shall lapse
immediately. Reference in section 10(d) of the plan, to exercise by a
person who acquired the right be bequest or inheritance or under the
Optionee's will or the laws of descent and distribution shall be
disregarded for the purposes of the Sub-Plan.
26. Change in Control of Tut Systems Inc.
26.1 Exchange of Options
If a company ("Acquiring Company") obtains Control of the Company as a
result of making:
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26.1.1 a general offer to acquire the whole of the issued ordinary share
capital of the Company which is made on a condition such that if it
is satisfied the person making the offer will have Control of the
Company; or
26.1.2 a general offer to acquire all the shares in the Company of the
same class as the Shares
an Optionee may, at any time during the period set out in rule 26.2, by
agreement with the Acquiring Company, release his Option in whole or in
part in consideration of the grant to him of a new option ("New Option")
which is equivalent to the Option but which relates to shares ("New
Shares") in:
26.1.3 the Acquiring Company;
26.1.4 a company which has Control of the Acquiring Company; or
26.1.5 a company which either is, or has Control of, a company which is a
member of a Consortium which owns either the Acquiring Company or a
company having Control of the Acquiring Company.
References in Section 13(c) of the Plan to a successor corporation assuming
or substituting the Option shall be disapplied for the purposes of the Sub-
Plan.
26.2 Period allowed for exchange of Options
The period referred to in rule 26.1 is the period of six months beginning
with the time when the person making the offer has obtained Control of the
Company and any condition subject to which the offer is made has been
satisfied.
26.3 Meaning of "equivalent"
The New Option shall not be regarded for the purpose of this rule 26 as
equivalent to the Option unless:
26.3.1 the New Shares satisfy the conditions in paragraphs 10 to 14 of
Schedule 9 to ICTA 1988; and
26.3.2 save for any performance target or other condition imposed on the
exercise of the Option, the New Option will be exercisable in the
same manner as the Option and subject to the provisions of the Sub-
Plan as it had effect immediately before the release of the Option;
and
26.3.3 the total market value, immediately before the release of the
Option, of the Shares which were subject to the Option is equal to
the total market value, immediately after the grant of the New
Option, of the New Shares (market value being determined for this
purpose in accordance with Part VIII of the Taxation of Chargeable
Gains Act 1992); and
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26.3.4 the total amount payable by the Optionee for the acquisition of the
New Shares under the New Option is equal to the total amount that
would have been payable by the Optionee for the acquisition of the
Shares under the Option.
26.4 Date of grant of New Option
The date of grant of the New Option shall be deemed to be the same as the
Date of Grant of the Option.
26.5 Application of Sub-Plan to New Option
In the application of the Sub-Plan to the New Option, where appropriate,
references to "Company" and "Shares" shall be read as if they were
references to the company to whose shares the New Option relates and the
New Shares, respectively, save that in the definition of "Board" the
reference to "Company" shall be read as if it were a reference to Tut
Systems Inc.
26.6 Disapplication of Merger/Asset Sale Provisions
The provisions of the Plan in Section 13(c) relating to merger or asset
sale shall be disapplied for the purposes of the Sub-Plan, however should
the Acquiring Company not agree to grant a New Option in accordance with
rule 26.1 above, the Option shall fully vest and become exercisable in
accordance with the terms of Section 13(c).
27. Rights attaching to Shares issued on exercise of Options
All Shares issued on the exercise of an Option shall, as to any voting,
dividend, transfer and other rights, including those arising on a
liquidation of the Company, rank equally in all respects and as one class
with the Shares in issue at the date of such exercise save as regards any
rights attaching to such Shares by reference to a record date prior to the
date of such exercise.
Reference in section 4(b)(v) of the Plan to restrictions/limitations
imposed on Option Shares shall be disapplied for the purposes of the Sub-
Plan, to the extent that they do not apply to all shares of the same class.
28. Amendment of Sub-Plan
Notwithstanding section 15 of the Plan, no amendment of the Sub-Plan shall
take effect until it has been approved by the Inland Revenue.
29. Adjustment of Options
Notwithstanding sections 4(b)(vi) and (x) of the Plan, no adjustment to an
Option shall take effect until it has been approved by the Inland Revenue.
Reference in Section 13(a) of the Plan to `stock dividend, combination or
reclassification' shall be disapplied for the purposes of the Sub-Plan.
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30. Exercise of discretion by Plan Administrator
In exercising any discretion which it may have under the Sub-Plan, the Plan
Administrator shall act fairly and reasonably.
31. Disapplication of certain provisions of Plan
The provisions of the Plan dealing with:
Incentive Stock Options;
Stock purchase rights;
Option Exchange Program;
Restricted Stock; and
Buyout Provisions
shall not form part of, and shall therefore be disregarded for the purposes
of the Sub-Plan.
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Notes
(1) The Company is the "grantor" as defined in paragraph 1 of Schedule 9 to
ICTA 1988 because it has established the Sub-Plan. In most cases, it will also
be the Company which grants options under the Sub-Plan, although this is not a
requirement of UK tax legislation.
(2) A company is treated as another's "associated company" at a given time if,
at that time or at any other time within one year previously, one of the two has
control of the other, or both are under the control of the same person or
persons. A person is taken to have control of a company if he exercises, or is
able to exercise or is entitled to acquire, direct or indirect control over the
company's affairs and, in particular, if he possesses or is entitled to acquire
the greater part of the company's issued share capital or the voting power in
the company. UK tax legislation contains two definitions of control: the
definition of control here is different from that in paragraph 4 below.
(3) A close company is a company which is under the control (as defined in
paragraph 1 above) of five or fewer participators (eg shareholders) or of any
number of participators who are directors. There are attributed to a
participator all the rights and powers (eg shares, voting power) of, inter alia,
a company which he controls or of an "associate" (eg relative) of his.
Ordinarily, a company is excluded from being a close company if it is non UK
resident or 35% of the voting power in the company is held by the public and its
shares have been listed, and the subject of dealings, on a recognised stock
exchange within the preceding 12 months. However, for the purpose of the
material interest test (see paragraph 5 below), this exclusion does not apply
with the result that the normal definition of a "close company" is extended.
(4) A company is a member of a consortium owning another company if it is one
of a number of companies which between them beneficially own not less than
three-quarters of the other company's ordinary share capital and each of which
beneficially owns not less than one-twentieth of that capital.
(5) Control means the power of a person to secure:
(a) by means of the holding of shares or the possession of voting power in or
in relation to that or any other body corporate; or
(b) by virtue of any powers conferred by the articles of association or other
document regulating that or any other body corporate
that the affairs of the first-mentioned body corporate are conducted in
accordance with the wishes of that person.
(6) A person has a material interest in a company if he, either on his own or
with one or more associates, or if any associate of his with or without such
other associates:
(a) is the beneficial owner of, or able, directly or through the medium of
other companies, or by any other indirect means to control, more than 10
per cent of the ordinary share capital of the company; or
(b) where the company is a close company, possesses, or is entitled to acquire,
such rights as would, in the event of the winding-up of the company or in
any other circumstances, give an entitlement to receive more than 10 per
cent of the assets which would then be available for distribution among the
participators.
(7) The shares used in the scheme must be:
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(a) ordinary shares;
(b) fully paid up;
(c) not redeemable; and
(d) save for certain limited exceptions, not subject to any restrictions which
do not apply to all shares of the same class.
The shares used in the scheme must be:
(a) of a class listed on a recognised stock exchange; or
(b) shares in a company which is not under the control of another company;
or
(c) shares in a company which is under the control of another company
(other than a company which is, or would if resident in the UK be, a close
company) whose shares are listed on a recognised stock exchange.
The shares used in the scheme form part of the ordinary share capital of:
(a) the grantor (ie the company which has established the scheme); or
(b) a company which has control of the grantor; or
(c) a company which either is, or has control of, a company which is a
member of a consortium owning either the grantor or a company having
control of the grantor.
Where the company whose shares are to be used in a scheme has more than one
class of ordinary share, the majority of the issued shares of the same
class as those which are to be used must be either employee control shares
(see below) or:
(a) must not be held by persons (including trustees holding shares on
behalf of such persons) who acquired their shares in pursuance of a right
conferred on them or opportunity offered to them as directors or employees
of any company, and not in pursuance of an offer to the public; and
(b) if the shares are not listed on a recognised stock exchange and the
company is under the control of another company whose shares are so listed,
must not be held by companies which have control of the company whose
shares are in question or of which that company is an associated company.
Shares are employee control shares if:
(a) the persons holding them are, by virtue of their holding of shares of
that class, together able to control the company; and
(b) those persons are, or have been, employees or directors of the company
or of another company which is under the control of the company.
(8) UK tax legislation imposes a limit (currently (Pounds)30,000) on the
"value" of the outstanding options which may be held by an individual
participant in an Inland Revenue approved executive share option scheme.
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EXHIBIT 10.11
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into by and between Tut Systems, Inc.,
a Delaware corporation ("Tut Systems"), FreeGate Corporation, a Delaware
corporation ("FreeGate"), and Sandy Benett ("Employee") as of November 17, 1999.
Recitals
A. Pursuant to that certain Agreement and Plan of Reorganization (the
"Merger Agreement") dated as of November 15, 1999 by and among Tut Systems,
FreeGate Acquisition Corporation ("Sub") and FreeGate, Sub will merge with and
into FreeGate (the "Merger") and any shares of FreeGate capital stock and vested
options to acquire such shares of capital stock owned by Employee will be
exchanged for Tut Systems Common Stock;
B. Employee has served as President and Chief Operating Officer at
FreeGate and has gained substantial knowledge and expertise in connection with
FreeGate's products, organization and customers;
C. Tut Systems desires to provide for the continued services of Employee
following the Merger;
D. As inducement to Tut Systems to consummate the Merger, and in
consideration of the amounts paid to stockholders of FreeGate under the Merger
Agreement, Employee desires to agree with Tut Systems as further provided
herein;
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
agree as follows:
Agreement
1. Employment
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1.1 Period of Employment. Contingent upon the Closing of the Merger, Tut
--------------------
Systems hereby agrees to employ Employee to render services to Tut Systems in
the position and with the duties and responsibilities described in Section 1.2
for the period (the "Period of Employment") commencing on the Closing (as
--------------------
defined in the Merger Agreement) and ending upon the earlier of (i) eighteen
(18) months from such date (the "Term Date"), and (ii) the date the Period of
---------
Employment is terminated in accordance with Section 1.4.
1.2 Position, Duties, Responsibilities.
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(a) Position. Contingent upon the closing of the Merger (the
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"Closing"), Employee hereby accepts employment with Tut Systems as Executive
Vice President - Products and
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Support. Subject to a review of performance by the President and Board of
Directors of Tut Systems, with such review to occur prior to June 1, 2000, the
employment position will be changed to that of Chief Operating Officer, which
shall include a reconsideration of commesurate salary and granting of options to
purchase 75,000 shares of Tut Systems common stock (subject to approval by the
Board of Directors). Employee agrees to devote his or her entire time,
attention, energies and skills during usual business hours (and outside those
hours when reasonably necessary to the performance of his or her duties
hereunder) to the business and interests of Tut Systems during the Period of
Employment. However, Employee may (i) devote a reasonable amount of his or her
time to civic, community, or charitable activities, and, with the prior approval
of the Tut Systems the Board of Directors, to serve as a director of other
corporations and to other types of business or public activities not expressly
mentioned in this paragraph, (ii) take usual, ordinary and customary periods of
vacation, (iii) except as otherwise provided for total disability (as
hereinafter defined), be absent due to illness or other allowed absences in
accordance with Tut Systems policies, and (iv) devote a reasonable amount of
time to academic activities (including, but not limited to, teaching and
lecturing) for which Employee does not receive significant compensation.
(b) Other Services. Employee may be required in pursuance of his or
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her duties hereunder to perform services for any affiliated company but shall
not be entitled to any additional compensation for such services. Employee
shall obey all reasonable policies of Tut Systems and reasonable applicable
policies of its affiliated companies.
1.3 Compensation, Benefits, Expenses.
--------------------------------
(a) Base Salary. In consideration of the services to be rendered
-----------
hereunder, including, without limitation, services to any affiliated company,
Employee shall be paid an annual salary of $150,000(the "Base Salary"), payable
at the time and pursuant to the procedures regularly established, and as such
time and procedures may be amended, by Tut Systems during the Period of
Employment. Tut Systems shall review the Base Salary and in light of such
review may, in its discretion, increase the Base Salary, taking into account
Employee's responsibilities.
(b) Incentive Compensation; Bonuses. In addition to Base Salary,
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the Employee shall be entitled to (i) participate in the cash incentive bonus
program, initially set at $50,000 per year (paid quarterly based on achievement
of mutually agreed to objectives), (ii) participate in any other incentive plans
in effect from time to time, and (iii) receive such other bonuses or
discretionary compensation payments as the Board of Directors may determine from
time to time. Any bonus and incentive plans covered by this subparagraph 1.3(b)
shall be referred to herein in the aggregate as the "Incentive Plans."
(c) Benefits Plans. Employee shall be entitled to such employee
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benefit plans and other terms and conditions of employment as Tut Systems
generally provides to its employees. These include, but are not limited to,
employee health plans, cafeteria plans, Employee Stock Purchase Plans and Stock
Option Plans. An option to purchase 125,000 shares of Tut Systems common stock
under Tut Systems 1998 Stock Plan , subject to approval by the Board of
Directors, at fair market value at the close of business the day prior to the
beginning of the Period of
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Employment, will be granted to the Employee.
(d) Expenses. During the Period of Employment, the Employee shall
--------
be entitled to receive prompt reimbursement in accordance with the policies and
procedures of Tut Systems for all reasonable expenses incurred by the Employee
in the normal course of Tut Systems business.
1.4 Termination of Employment.
-------------------------
(a) By Death. The Period of Employment shall terminate automatically
--------
upon the death of Employee. Tut Systems shall pay to Employee's beneficiaries
or estate, as appropriate, the Compensation and Benefits to which he or she is
entitled through the end of the month in which death occurs. Thereafter, Tut
Systems's obligations hereunder shall terminate. Nothing in this Subsection (a)
shall affect any entitlement of Employee's heirs to the benefits of any life
insurance plan.
(b) By Disability. If, during the term of this Agreement, Employee
-------------
should become Totally Disabled (as hereinafter defined), Tut Systems shall have
the right, to the extent permitted by law, in its sole discretion, to terminate
this Agreement and Employee's employment with Tut Systems, in which case
Employee's Compensation and Benefits shall be paid up through the last day of
the month in which it has been determined that Employee has become Totally
Disabled. Nothing in this Subsection (b) shall affect Employee's rights under
any disability plan in which he or she is a participant. For purposes hereof,
Employee shall be considered "Totally Disabled" if (i) Employee is entitled to
----------------
benefits under any long-term disability income plan applicable to Employee or
(ii) Employee's physical and/or mental condition is such that Employee is unable
to perform those duties Employee would otherwise be expected to continue to
perform as an employee of Tut Systems, and Employee's non-performance of such
duties can reasonably be expected to continue or does continue for not less than
six (6) months. The determination that Employee is Totally Disabled shall be
made by a qualified medical examiner reasonably acceptable to Tut Systems.
(c) By Tut Systems for Cause. Tut Systems may terminate, without
------------------------
liability, the Period of Employment for Cause (as defined below) at any time and
upon written notice to Employee. Tut Systems shall pay Employee his or her
Compensation and Benefits through the date of such notice and thereafter Tut
Systems's obligations hereunder shall terminate. Termination shall be for
"Cause" if (i) Employee commits a material breach of Tut Systems policies and
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procedures to the detriment of Tut Systems or any affiliated company; (ii)
Employee is convicted of a felony or other criminal act involving moral
turpitude; (iii) Employee willfully fails to perform his or her reasonable
employment duties (other than any such failure resulting from Employee's
incapacity due to physical or mental illness) after a written demand for
substantial performance is delivered to Employee by Tut Systems, which demand
specifically identifies the manner in which Tut Systems believes that Employee
has not substantially performed his or her duties; or (iv) Employee breaches any
material term of this Agreement or the Employee Confidentiality Agreement (as
defined in Section 2.4 below), which breach causes or is reasonably expected to
cause material harm to Tut Systems, and, as to any such breach which is subject
to cure, such failure or breach continues for a period of ten (10) days after
Employee receives written notice of such breach from Tut Systems.
-3-
<PAGE>
(d) Termination By Tut Systems Without Cause. Tut systems may
----------------------------------------
terminate this Agreement without cause on sixty (60) days notice. If Tut
Systems terminates this Agreement without cause, then Tut Systems shall pay, on
the date of termination, the total amount that would be due under this Agreement
had Employee continued as an employee until the end of the Agreement's term.
For purposes of this Agreement a termination "without cause" shall mean a
termination by Tut Systems for a reason other than that described in Sections
1.4(a), (b) or (c), above.
(e) By Employee. Employee will be entitled to terminate his or her
-----------
Employment for Good Reason (as defined below) at any time within 180 days after
the facts or circumstances constituting such Good Reason first exist and are
known to Employee. For purposes of this Agreement, "Good Reason" shall be
defined as (i) any violation by Tut Systems of any material provision of this
Agreement or (ii) any action by Tut Systems which results in the constructive
termination of Employee. If Employee terminates this Agreement for Good Reason,
then Tut Systems shall pay, on the date of termination, the total amount that
would be due under this Agreement had Employee continued as an employee until
the end of the Agreement's term.
1.5 Relocation. Tut Systems agrees that, without the Employee's express
----------
consent, Employee will not be required to make special commute arrangements
should Tut Systems consolidate the Sunnyvale, CA office with a headquarters
office or relocate the Sunnyvale office, in either case, to a location outside
of a 30-mile radius from the current Sunnyvale office, and as such, may
terminate this employment agreement.
2 . Miscellaneous
-------------
2.1 Successors, Assigns, Merger. This Agreement shall be binding upon and
---------------------------
shall inure to the benefit of Tut Systems and its successors and assigns.
Notwithstanding any assignment by Tut Systems, Tut Systems shall remain liable
for the payment of all Compensation and Benefits payable to Employee under this
Employment Agreement. This Agreement shall be binding upon Employee and shall
inure to his or her benefit and to the benefit of his or her heirs, executors,
administrators and legal representatives, but shall not be assignable by
Employee.
2.2 Entire Agreement. This Agreement constitutes the entire agreement
----------------
between Tut Systems and Employee relating to his or her employment and the
additional matters herein provided for. This Agreement supersedes and replaces
any prior verbal or written agreements between the parties. This Agreement may
be amended or altered only in a writing signed by the President of Tut Systems
and Employee.
2.3 Applicable Law; Severability. This Agreement shall be construed and
----------------------------
interpreted in accordance with the laws of the State of California without
regard to conflicts of laws and principles. Each provision of this Agreement is
severable from the others, and if any provision hereof shall be to any extent
unenforceable it and the other provisions hereof shall continue to be
enforceable to the full extent allow Tut Systems, as if such offending provision
had not been a part of this Agreement.
-4-
<PAGE>
2.4 Proprietary Information Agreement. Employee shall execute Tut
---------------------------------
Systems's Confidentiality and Disclosure Agreement in the form attached hereto
as Exhibit A concurrent with his or her execution of this Agreement.
---------
2.5 Effectiveness. This Agreement shall become effective upon the Closing,
-------------
and, if the Closing does not occur prior to February 29, 2000, this Agreement
shall immediately terminate and be of no further force or effect.
2.6 Arbitration. The Employee and Tut Systems agree that any and all past
-----------
or present dispute or controversy arising out of or relating to this Agreement,
other than matters related to the Confidentiality and Disclosure Agreement,
shall be subject to binding arbitration held in San Mateo County, California,
under the Arbitration Rules set forth in California Code of Civil Procedure
Section 1280 through 1294.2, including Section 1283.05 (the "Rules") and
pursuant to California law. Each party shall be allowed to take three (3)
depositions and to make a reasonable request for documents. The arbitrator shall
be knowledgeable in the industry and shall be mutually agreed upon by the
Employee and Tut Systems. If an arbitrator cannot be mutually agreed upon, each
party shall select an arbitrator and the two arbitrators shall select a third to
constitute an arbitration panel. Any arbitration shall take place within sixty
(60) days of the initial demand or, if the parties are unable to agree on a
mutual arbitrator, then within sixty (60) days of the date the three person
panel is chosen, except if the arbitrator(s) are unable to hold the arbitration
within such time period then the arbitration shall be held based upon the
availability and schedule of such arbitrator(s).
(a) Equitable Remedies. Employee agrees that if he or she breaches
------------------
any Section of this Agreement, Tut Systems will have available, in addition to
any rights under this Arbitration Provision, the right to obtain an injunction
from a Court of competent jurisdiction restraining such breach or threatened
breach and to specific performance. Employee further agrees that no bond or
other security shall be required in obtaining such equitable relief and hereby
consents to the issuance of such injunction and to the ordering of specific
performance.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first written above.
FREEGATE COMMUNICATIONS, INC. TUT SYSTEMS, INC.
By:/s/ Jean-Marc Frailong By: /s/ Nelson B. Caldwell
---------------------- ----------------------
Its: Founder and Chief Technology Officer By: Nelson B. Caldwell
------------------------------------ ----------------------
EMPLOYEE
/s/ Sandy Benett
--------------------------
Name: Sandy Benett
[Signature Page to Employment Agreement]
-6-
<PAGE>
Exhibit A
---------
Form of Confidentiality and Discolsure Agreement.
<PAGE>
EXHIBIT 10.12
TUT SYSTEMS, INC.
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT (the "Agreement") dated as of November 17,
1999 (the "Effective Date") (as defined below) by and between Tut Systems, Inc.,
a Delaware corporation ("TUT"), Freegate Corporation, a Delaware corporation and
wholly owned subsidiary of TUT (the "Company"), and Sandy Benett
("Stockholder"). Capitalized terms used but not otherwise defined herein shall
have the meanings ascribed to them in the Agreement and Plan of Reorganization
(as defined below).
Background
A. TUT, the Company, Freegate Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of TUT ("Sub"), and, with respect to
Article VII thereto, James Mongiello, as Stockholder Representative, and U.S.
Bank Trust, as Escrow Agent, have entered into an Agreement and Plan of
Reorganization dated as of November 16, 1999 (the "Reorganization Agreement"),
which provides for the merger (the "Merger") of Sub with and into the Company.
The effective date of the consummation of the Merger shall be the Effective Date
of this Agreement.
B. Stockholder has entered into an Employment Agreement with TUT and the
Company dated November 17, 1999.
C. Stockholder is receiving significant consideration pursuant to the
terms of the Reorganization Agreement.
D. As a condition to the Merger and to preserve the value of the business
being acquired by TUT, the Reorganization Agreement contemplates, among other
things, that Stockholder enter into this Agreement and that this Agreement
become effective upon the closing of the Merger.
E. The Company and TUT are each currently engaged or planning to engage in
its business in each of the fifty (50) states of the United States and certain
other countries throughout the world. TUT and the Company, following the
Merger, will continue conducting such business in all parts of the United States
and certain other countries throughout the world.
NOW THEREFORE, in consideration of the mutual promises made herein, TUT,
Sub and Stockholder (collectively referred to as the "Parties") hereby agree as
follows:
<PAGE>
1. Covenant Not to Compete or Solicit.
(a) Beginning on the Effective Date and ending eighteen (18) months
following the Closing Date (the "Non-Compete Period"), Stockholder shall not,
other than on behalf of the Company or TUT, directly or indirectly, without the
prior written consent of TUT, engage anywhere in the Geographic Area in (whether
as an employee, agent, consultant, advisor, independent contractor, proprietor,
partner, officer, director or otherwise), or have any ownership interest in
(except for passive ownership of five percent (5%) or less of any entity whose
securities have been registered under the Securities Act of 1933 or Section 12
of the Securities Exchange Act of 1934), or participate in the financing,
operation, management or control of, any firm, partnership, corporation, entity
or business that engages or participates in a "competing business purpose." The
term "competing business purpose" shall mean the design, development, marketing
and sale of any product competing with a product that was planned, designed,
marketed or sold by Tut or the Company while Stockholder was employed by Tut or
the Company. Notwithstanding the foregoing, in the event Stockholder's
employment with the Company is terminated by the Company without Cause (as
defined in the Stockholder's Employment Agreement with the Company) or by
Employee for Good Reason (as defined in the Stockholder's Employment Agreement
with the Company), then the Non-Compete Period shall terminate upon the earlier
to occur of (i) one (1) year following the date of such termination of
employment or (ii) eighteen (18) months following the Closing Date.
(b) During the Non-Compete Period, Stockholder shall not, directly or
indirectly, without the prior written consent of TUT or the Company, solicit,
encourage, hire or take any other action which is intended to induce or
encourage, or has the effect of inducing or encouraging, any employee of TUT,
any subsidiary of TUT or the Company to terminate his or her employment with
TUT, any subsidiary of TUT or the Company.
(c) The Geographic Area shall mean (i) the United States or (ii)
anywhere in the world outside the United States where Parent or any subsidiary
of Parent conducts business that falls within the definition of a "competing
business purpose" in Section 1(a) above.
(d) The covenants contained in the preceding paragraphs shall be
construed as a series of separate covenants, one for each county, city, state,
or any similar subdivision in any Geographic Area. Except for geographic
coverage, each such separate covenant shall be deemed identical in terms to the
covenant contained in the preceding paragraphs. If, in any judicial proceeding,
a court refuses to enforce any of such separate covenants (or any part thereof),
then such unenforceable covenant (or such part) shall be eliminated from this
Agreement to the extent necessary to permit the remaining separate covenants (or
portions thereof) to be enforced. In the event that the provisions of this
Section 1 are deemed to exceed the time, geographic or scope limitations
permitted by applicable law, then such provisions shall be reformed to the
maximum time, geographic or scope limitations, as the case may be, permitted by
applicable laws.
(e) Stockholder acknowledges that (i) the goodwill associated with
the Company prior to the Merger is an integral component of the value of the
Company to TUT and is reflected in the consideration to be received by
Stockholder in the Merger, and (ii) Stockholder's Agreement as set forth herein
is necessary to preserve the value of the Company for TUT following the Merger.
-2-
<PAGE>
(f) Stockholder also acknowledges and agrees that the limitations of
time, geography, and scope of activity set forth in this Agreement are
reasonable because, among other things, (i) the Company and Parent are engaged
in a highly competitive industry, (ii) the Stockholder has unique access to, and
will continue to have access to, the trade secrets and know how of the Company,
including without limitation the plans and strategy (and in particular the
competitive strategy) of the Company, (iii) the Stockholder is receiving
significant compensation in connection with the Merger, and (iv) in the event
the Stockholder's employment with the Company ended, the Stockholder would be
able to obtain suitable and satisfactory employment without violation of this
Agreement.
(g) Equitable Remedy. Stockholder agrees that it would be
impossible or inadequate to measure TUT's or the Company's damages from any
breach of the covenants set forth in this Section 1. Accordingly, Stockholder
agrees that if he breaches any provision of this Section 1, TUT or the Company
will have available, in addition to any other right or remedy otherwise
available, the right to obtain an injunction from a court of competent
jurisdiction restraining such breach or threatened breach and to specific
performance of any such provision of this Agreement. Stockholder further agrees
that no bond or other security shall be required in obtaining such equitable
relief, nor will proof of actual damages be required for such equitable relief.
Stockholder hereby expressly consents to the issuance of such injunction and to
the ordering of such specific performance.
(h) Stockholder's obligations under this Agreement shall remain in
effect if Stockholder's employment with TUT or the Company is terminated.
2. Arbitration; Consent to Personal Jurisdiction.
(a) Stockholder agrees that, except as provided in Section 1(g)
above, any dispute or controversy arising out of, relating to, or in connection
with this Agreement, or the interpretation, validity, construction, performance,
breach, or termination thereof, shall be settled by binding arbitration to be
held in California, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, supplemented by the Large Complex Case
Procedures of the American Arbitration Association (the "Rules"). The arbitrator
may grant injunctions or other relief in such dispute or controversy. The
decision of the arbitrator shall be final, conclusive and binding on the parties
to the arbitration. Judgment may be entered on the arbitrator's decision in any
court having jurisdiction.
(b) At the request of either party, the arbitration proceedings
pursuant hereto will be conducted confidentially. In such case all documents,
testimony and records shall be received, heard and maintained by the
arbitrator(s) in confidence under seal, available for inspection only by the
arbitrator(s), the parties and their respective attorneys and their respective
experts, who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in confidence.
(c) The arbitrator(s) shall apply California law to the merits of
any dispute or claim, without reference to rules of conflicts of law. The
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law.
-3-
<PAGE>
(d) The arbitrator shall determine how all expenses related to the
arbitration shall be paid, including without limitation, the respective expenses
(including reasonable attorneys' fees) of each party, the fees of the arbitrator
and the administrative fee of the American Arbitration Association.
(e) STOCKHOLDER HAS READ AND UNDERSTANDS THIS SECTION 2, WHICH
DISCUSSES ARBITRATION. STOCKHOLDER UNDERSTANDS THAT BY SIGNING THIS AGREEMENT,
STOCKHOLDER AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN
CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION,
PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, AND THAT THIS
ARBITRATION CLAUSE CONSTITUTES A WAIVER OF STOCKHOLDER'S RIGHT TO A JURY TRIAL
AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO THIS AGREEMENT.
3. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by the laws of
the State of California without reference to rules of conflicts of law.
(b) Severability. If any portion of this Agreement is held by an
arbitrator or a court of competent jurisdiction to conflict with any federal,
state or local law, or to be otherwise invalid or unenforceable, such portion of
this Agreement shall be of no force or effect and this Agreement shall otherwise
remain in full force and effect and be construed as if such portion had not been
included in this Agreement.
(c) No Assignment. Stockholder shall not assign this Agreement or
any rights or obligations under this Agreement without the prior written consent
of TUT and the Company. This Agreement is specific to TUT and its affiliated
entities and may not be assigned by TUT and/or its affiliates to any
unaffiliated entity.
(d) Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to TUT or the Company, to:
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94304
Attention: Salvatore D'Auria
Telephone No.: (925) 682-6510
Facsimile No.: (925) 682-1841
(b) if to the Stockholder, to:
-4-
<PAGE>
Name: ____________________
Telephone No.:
Facsimile No.:
(e) Entire Agreement. This Agreement contains the entire agreement
and understanding of the parties and supersedes all prior discussions,
agreements and understandings relating to the subject matter hereof. This
Agreement may not be changed or modified, except by an agreement in writing
executed by TUT, the Company and Stockholder.
(f) Waiver of Breach. The waiver of a breach of any term or
provision of this Agreement, which must be in writing, shall not operate as or
be construed to be a waiver of any other previous or subsequent breach of this
Agreement.
(g) Headings. All captions and section headings used in this
Agreement are for convenience only and do not form a part of this Agreement.
(h) Counterparts. This Agreement may be executed in counterparts,
and each counterpart shall have the same force and effect as an original and
shall constitute an effective, binding agreement on the part of each of the
undersigned.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
TUT SYSTEMS, INC. STOCKHOLDER
/s/ Nelson B. Caldwell /s/ Sandy Benett
- --------------------------------- -------------------------------
Signature of Authorized Signatory Signature
Nelson B. Caldwell, CFO Sandy Benett
- --------------------------------- ------------------------------
Print Name and Title Print Name
FREEGATE CORPORATION
/s/ Jean-Marc Frailong
- ---------------------------------
Signature of Authorized Signatory
Jean-Marc Frailong
- ---------------------------------
Print Name and Title
[Signature Page to Non-Competition Agreement]
-6-
<PAGE>
EXHIBIT 21.1
TUT SYSTEMS, INC.
SUBSIDIARIES
FreeGate Corporation
PublicPort, Inc.
Vintel Communications, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-83495 and 333-92759) of Tut Systems, Inc. of
our report dated January 20, 2000, except as to Note 14 which is as of February
14, 2000, relating to the financial statements and financial statement
schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 22, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM *AUDITED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
*Identify the financial statement(s) to be referenced in the legend:
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,405
<SECURITIES> 18,831
<RECEIVABLES> 12,077
<ALLOWANCES> 335
<INVENTORY> 8,401
<CURRENT-ASSETS> 56,125
<PP&E> 5,556
<DEPRECIATION> 2,080
<TOTAL-ASSETS> 65,356
<CURRENT-LIABILITIES> 11,709
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 51,510
<TOTAL-LIABILITY-AND-EQUITY> 65,356
<SALES> 26,266
<TOTAL-REVENUES> 27,807
<CGS> 15,459
<TOTAL-COSTS> 25,677
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 608
<INCOME-PRETAX> (11,733)
<INCOME-TAX> 1
<INCOME-CONTINUING> (11,734)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,969)
<EPS-BASIC> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
