<PAGE>
As filed with the Securities and Exchange Commission on March 2, 2000
Registration No. 333-31136
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 1
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TUT SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 3661 94-2958543
(Satetor other jurisdiction of
(Primary Standard Industrial (I.R.S. Employer
incorporation or organization)
Classification Code Number) Identification Number)
2495 Estand Way
Pleasant Hill, CA 94523
(925) 682-6510
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
SALVATORE D'AURIA
President and Chief Executive Officer
2495 Estand Way
Pleasant Hill, CA 94523
(925) 682-6510
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
STEVEN E. BOCHNER, ESQ.
ELIZABETH D. LEAR, ESQ.
JOSEPH A. PIERCE, ESQ.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this registration statement
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered Per Share(1) Price(1) Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 168,679 shares $39.03125 $6,583,753 $1,740
</TABLE>
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
and based on the average of the high and low prices of the Common Stock as
reported on the Nasdaq National Market on February 22, 2000.
(2) Previously paid.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. The selling stockholders may not sell these securities until the +
+registration statement filed with the Securities and Exchange Commission is +
+effective. This prospectus is not an offer to sell these securities and it is +
+not soliciting an offer to buy these securities in any state where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 2, 2000
168,679 Shares
TUT SYSTEMS, INC.
Common Stock
THE SHARES OFFERED IN THIS PROSPECTUS INVOLVED A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS FOR INFORMATION THAT YOU
SHOULD CONSIDER BEFORE PURCHASING THESE SECURITIES.
Our common stock is quoted on the Nasdaq National Market System under the
symbol "TUTS". On March 1, 2000, the last reported sale price of our common
stock on the Nasdaq was $64.00 per share.
The selling stockholders, who acquired these shares when Tut Systems acquired
PublicPort, Inc., may offer and sell these shares from time to time.
Concurrently with this common stock offering and by a separate prospectus, we
are offering up to 2,500,000 shares of common stock in an underwritten public
offering. We have granted the underwriters an option to purchase up to 375,000
additional shares to cover over-allotments. The completion of this common stock
offering and the underwritten offering are not dependent on one another.
------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 2000
<PAGE>
LOGO
FastCopper(TM), HomeRun(R), and LongRun(TM)
Core expertise in sending data faster and farther
HomeRun, the first specification for home networking
LongRun, enhanced home networking for multiple tenant applications
Expresso MDU(TM) and MDU Lite(TM)
HomeRun and LongRun integrated with multi-service systems
for multi-tenant applications
Expresso SMS 2000
An advanced service platform for providing
subscriber management, community webpages, self provisioning, and other
services
for residential and hospitality multi-dwelling unit (MDU) markets
OneGate(R)
An advanced service platform for providing
service management, firewall, email, virtual private networking, and other
services
to the multi-tenant commercial unit (MCU) marketplace
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 26
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Management................................................................. 40
Certain Transactions....................................................... 51
Principal and Selling Stockholders......................................... 53
Description of Capital Stock............................................... 55
Plan of Distribution....................................................... 57
Legal Matters.............................................................. 58
Experts.................................................................... 58
Where You Can Find Additional Information About Tut Systems................ 58
Index to Financial Statements.............................................. F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Business" and elsewhere in this prospectus are
"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 prospectus that are not
historical facts. When used in this prospectus, 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, including our
plans, objectives, expectations and intentions and other factors discussed
under "Risk Factors."
This prospectus contains trademarks of Tut Systems, Inc., including
"Expresso(TM)," "Expresso GS(TM)," "Expresso MDU(TM)," "MDU Lite(TM),"
"HomeRun,(R)" "LongRun(TM)," "FastCopper(TM)," "FreeGate(R)," "OneGate(R),"
"SmartWire,(TM)" "All-Rate DSL,(TM)" "IntelliPOP,(TM)" "PremGate(TM)" and
"RiserSmart.(TM)" All rights reserved. All other trade names and trademarks
appearing in this prospectus are the property of their respective holders.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being registered in this
offering appearing elsewhere in this prospectus and in our Consolidated
Financial Statements and related notes and other documents incorporated herein
by reference.
Our Company
We design, develop and market multi-service broadband access systems that
enable service providers to deliver high-speed data access to multi-tenant
buildings such as apartments, hotels, and office complexes. 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 collection of FastCopper
technologies includes HomeRun, which was selected as the initial specification
for a home networking standard promoted by the Home Phoneline Network Alliance,
or Home PNA, and LongRun, a proprietary extension of HomeRun providing superior
performance at longer distances. These technologies are deployed through our
Expresso high-bandwidth access multiplexers and associated routers. Augmenting
our Expresso access multiplexers are products that provide service providers
with enhanced capabilities such as subscriber management, firewall protection,
virtual private networking, and small business email and web servers.
As the demand for high-speed Internet access has increased significantly over
the last couple of years, we believe that owners and managers of multi-tenant
units, or MTUs, have begun to view high-speed Internet access as a critical
enhanced service for their residents, guests and tenants. We market our
products to a set of specialized service providers that have recently emerged
to fill this growing demand by MTU owners and managers. In addition to Internet
access, we believe that the delivery of multiple enhanced services will be
critical to meeting future customer needs and driving service provider
profitability through bundled service offerings.
Our products and services are designed with the specific requirements of the
MTU market in mind and provide the following benefits to our service provider
customers:
. Reliable, high performance, cost-effective broadband access
technology. Our technology enables cost-effective Ethernet LANs to be
quickly implemented over the telephone wires found in a business or
residence, without interfering with existing telephone service that may
be running over these same wires.
. Easy-to-deploy, scalable systems. Our Expresso access products, which are
integrated with our proprietary technologies, are scalable and compact in
order to meet the installation and operation requirements of MTUs.
. Multiple value-added, revenue-enhancing services. Our Expresso SMS 2000
and Expresso OCS systems provide plug-and-play functionality, subscriber
management, credit card billing and other functions for the multi-
dwelling unit, or MDU market. Our OneGate Internet appliance enables
business-focused service providers to the multi-commercial unit, or MCU,
market to provide key Internet access functions required by small
businesses, such as firewall protection and virtual private networking.
Our objective is to be the dominant provider of advanced multi-service
broadband access systems for the MTU market. The key elements of our strategy
are to:
. Facilitate rapid growth in the MDU market, such as apartments and hotels;
. Accelerate penetration in the MCU market, such as office complexes;
. Enhance the service capabilities provided by our products and systems;
. Continue to leverage our HomeRun technology and partnerships; and
. Expand our international presence.
Our principal executive offices are located at 2495 Estand Way, Pleasant
Hill, California 94523. Our telephone number is (925) 682-6510. We were
incorporated in California in August 1983, began operations in August 1991, and
reincorporated in Delaware in September 1998.
1
<PAGE>
The Offering
Common stock offered by the
selling stockholders........
168,679
Common stock to be
outstanding after this
offering.................... 11,940,610 shares
Use of proceeds............. We will not receive proceeds from the sale of
common stock by the selling stockholders.
Nasdaq National Market TUTS
symbol......................
Concurrent common stock Concurrently with this common stock offering and
offering.................... by a separate prospectus, we are offering up to
2,500,000 shares of common stock in an
underwritten public offering. We have granted to
the underwriters an option to purchase up to
375,000 additional shares of common stock to
cover over-allotments. The completion of this
common stock offering and the underwritten
offering are not dependent on one another.
The number of shares of common stock outstanding after this offering is based
on shares outstanding as of December 31, 1999, and excludes:
. 1,442,141 shares of common stock issuable upon exercise of outstanding
options with a weighted average exercise price of $15.96 per share; and
. 1,267,250 shares reserved for future grant under our option plans; and
. 242,924 shares that have been reserved for future grant under our
employee stock purchase plan.
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
Years Ended December 31, December 31,
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Actual Pro Forma
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1995 1996 1997 1998 1999 1999
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<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenue............. $ 3,445 $ 4,454 $ 6,221 $ 10,555 $ 27,807 $ 29,941
Gross margin............ 1,757 2,256 2,993 4,746 12,348 13,323
Loss from operations.... (3,443) (4,607) (9,351) (13,956) (13,329) (24,738)
Net loss attributable to
common stockholders.... (4,084) (5,564) (10,784) (16,331) (11,969) (23,367)
Net loss per share
attributable to common
stockholders, basic and
diluted................ $(32.56) $(37.51) $ (59.36) $ (60.62) $ (1.12) $ (2.06)
Shares used in computing
net loss per share
attributable to common
stockholders, basic and
diluted................ 125 148 182 269 10,729 11,342
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
As of December
31, 1999
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Pro
Actual Forma
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<S> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalent and short-term investments............... $32,236 $32,366
Working capital................................................ 44,416 41,348
Total assets................................................... 65,356 92,178
Long term debt, net of current portion......................... -- 279
Total stockholders' equity..................................... 51,522 73,896
</TABLE>
The unaudited pro forma information reflects our acquisitions of Vintel on
November 12, 1999 and FreeGate on February 14, 2000. The unaudited pro forma
combined statement of operations data for the year ended December 31, 1999 is
derived from our statement of operations data combined with the statement of
operations data of Vintel and FreeGate, giving effect to the acquisitions as if
they had occurred on January 1, 1999. The unaudited pro forma combined balance
sheet data is derived from our balance sheet data and the balance sheet data of
FreeGate as of December 31, 1999, giving effect to the FreeGate acquisition as
if it had occurred on December 31, 1999. The unaudited pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if the
transactions had been consummated at the dates indicated, nor is it necessarily
indicative of the future operating results or financial position of the
combined companies.
Recent Developments
On February 26, 2000, we entered into a nonbinding letter of intent to
acquire Xstreamis, plc, which is located in Oxford, England. Xstreamis provides
policy-driven traffic management technology for high-performance, multimedia
networking solutions including routing, switching and bridging functions.The
letter of intent contemplates that we and Xstreamis would negotiate a purchase
agreement, under which we would issue to Xstreamis' shareholders shares of our
common stock worth approximately (Pounds)13,000,000, or approximately $20
million at current exchange rates. We expect that this acquisition, if
completed, will be accounted for as a purchase. Completion of the acquisition
is subject to negotiation of the purchase agreement, satisfactory completion of
our due diligence investigation, and a number of other customary conditions. We
cannot assure you that we will complete this acquisition.
On March 1, 2000, we introduced a suite of new products under development,
the IntelliPOP(TM) suite, which includes the IntelliPOP stackable access
multiplexer, the PremGate(TM) service delivery appliance, embedded
RiserSmart(TM) transport modules, and the IntelliPOP Service Management System,
a policy-based system for monitoring and control of the IntelliPOP suite. These
products are intended to expand and enhance the capabilities of the Expresso
and OneGate products and are aimed at the MCU market. We expect to utilize
technology from the planned Xstreamis acquisition and to incorporate components
of our existing products, technologies and designs in the development of this
suite of products.
3
<PAGE>
RISK FACTORS
You should carefully consider the risks described below, together with all of
the other information included in this prospectus, before making an investment
decision. The risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties not presently known to us or that
we currently deem immaterial may also impair our business operations. This
prospectus also contains "forward-looking" statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this prospectus.
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.
4
<PAGE>
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.
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.
5
<PAGE>
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 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
6
<PAGE>
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.
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.
7
<PAGE>
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 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.
8
<PAGE>
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;
. 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
9
<PAGE>
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;
. 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
10
<PAGE>
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 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,
11
<PAGE>
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 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.
We or our suppliers and customers may have been adversely affected by the
transition to the Year 2000 in a manner that is not yet apparent.
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.
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;
12
<PAGE>
. 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.
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.
13
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sales, if any, of the 168,679
shares being offered by the selling stockholders. The purpose of this offering
is to register our common stock for resale by the selling stockholders.
DIVIDEND POLICY
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.
14
<PAGE>
PRICE RANGE OF COMMON STOCK
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 March 1, 2000).......................... $64.00 $39.00
</TABLE>
On March 1, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $64.00 per share. As of December 31, 1999, there
were approximately 314 holders of record of our common stock.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect our acquisition of FreeGate as if it had
occurred on December 31, 1999; and
<TABLE>
<CAPTION>
December 31, 1999
-------------------
Actual Pro Forma
-------- ---------
(in thousands)
(unaudited)
<S> <C> <C>
Long-term debt, net of current portion..................... $ -- $ 279
-------- --------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value:
5,000,000 shares authorized; no shares issued and
outstanding, actual; no shares issued and outstanding,
pro forma............................................. -- --
Common stock, $0.001 par value:
100,000,000 shares authorized; 11,940,610 shares issued
and outstanding, actual; 12,451,641 shares issued and
outstanding, pro forma................................ 12 13
Additional paid-in capital................................. 108,969 132,417
Notes receivable from stockholders......................... -- (275)
Deferred compensation...................................... (972) (972)
Accumulated deficit........................................ (56,487) (57,287)
-------- --------
Total stockholders' equity............................... 51,522 73,896
-------- --------
Total capitalization................................... $ 51,522 $ 74,175
======== ========
</TABLE>
This table excludes:
. 1,442,141 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 1999;
. 1,267,250 shares that have been set aside for future issuance under our
1992, 1998 and 1999 Stock Plans; and
. 242,924 shares that have been set aside for future issuance under our
employee stock purchase plan.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected financial data set forth below as of December 31, 1998 and 1999
and for each of the three years ended December 31, 1999 are derived from our
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this prospectus. Our selected consolidated financial data set forth below as
of December 31, 1995, 1996, and 1997 and for each of the two years ended
December 31, 1995 are derived from our audited consolidated financial
statements not included elsewhere herein. The data set forth below should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements
and related notes included elsewhere in this prospectus.
The unaudited pro forma information reflects our acquisitions of Vintel on
November 12, 1999 and FreeGate on February 14, 2000 and has been derived from
our unaudited pro forma combined financial information included elsewhere in
this prospectus. The unaudited pro forma combined statement of operations data
for the year ended December 31, 1999 is derived from our statement of
operations data combined with the statement of operations data of Vintel and
FreeGate, giving effect to the acquisitions as if they had occurred on January
1, 1999. The unaudited pro forma combined balance sheet data presents our
balance sheet data combined with the balance sheet data of FreeGate as of
December 31, 1999, giving effect to the FreeGate acquisition as if it had
occurred on December 31, 1999. The unaudited pro forma information is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have occurred if the
transactions had been consummated at the dates indicated, nor is it necessarily
indicative of the future operating results or financial position of the
combined companies.
<TABLE>
<CAPTION>
Year Ended
Years Ended December 31, December 31,
-------------------------------------------------- ------------
Actual Pro Forma
-------------------------------------------------- ------------
1995 1996 1997 1998 1999 1999
-------- -------- --------- --------- -------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenues.......... $ 3,445 $ 4,454 $ 6,221 $ 10,555 $ 27,807 $ 29,941
Total cost of goods
sold................... 1,688 2,198 3,228 5,809 15,459 16,618
-------- -------- --------- --------- -------- --------
Gross margin.......... 1,757 2,256 2,993 4,746 12,348 13,323
-------- -------- --------- --------- -------- --------
Operating expenses:
Sales and marketing... 2,645 3,068 5,147 8,462 10,523 14,159
Research and
development.......... 993 2,012 3,562 6,200 7,618 11,559
General and
administrative....... 1,562 1,783 2,375 2,807 4,429 5,970
In-process research
and development...... -- -- -- -- 2,600 --
Amortization of
intangibles.......... -- -- -- -- 52 5,697
Noncash compensation
expense.............. -- -- 1,260 1,233 455 676
-------- -------- --------- --------- -------- --------
Total operating
expenses............. 5,200 6,863 12,344 18,702 25,677 38,061
-------- -------- --------- --------- -------- --------
Loss from operations.. (3,443) (4,607) (9,351) (13,956) (13,329) (24,738)
Other income (expense),
net.................... 54 181 195 210 1,596 1,610
-------- -------- --------- --------- -------- --------
Loss before income
taxes................ (3,389) (4,426) (9,156) (13,746) (11,733) (23,128)
Income tax expense...... 1 1 1 1 1 4
-------- -------- --------- --------- -------- --------
Net loss.............. (3,390) (4,427) (9,157) (13,747) (11,734) (23,132)
Dividend accretion on
preferred stock........ 694 1,137 1,627 2,584 235 235
-------- -------- --------- --------- -------- --------
Net loss attributable to
common stockholders.... $ (4,084) $ (5,564) $ (10,784) $ (16,331) $(11,969) $(23,367)
======== ======== ========= ========= ======== ========
Net loss per share
attributable to common
stockholders, basic and
diluted................ $ (32.56) $ (37.51) $ (59.36) $ (60.62) $ (1.12) $ (2.06)
======== ======== ========= ========= ======== ========
Shares used in computing
net loss per share
attributable to common
stockholders, basic and
diluted................ 125 148 182 269 10,729 11,342
======== ======== ========= ========= ======== ========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31,
------------------------------------------------ ------------
Actual Pro Forma
------------------------------------------------ ------------
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ------------
(in thousands)
<S> <C> <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 $ 32,366
Working capital......... 1,771 8,357 11,066 7,173 44,416 41,348
Total assets............ 3,198 10,689 15,168 15,257 65,356 92,178
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 -- 279
Accumulated deficit..... (11,755) (17,319) (28,103) (44,434) (56,487) (57,287)
Total stockholders'
equity (deficit)....... (10,137) (15,694) (26,444) (41,839) 51,522 73,896
</TABLE>
18
<PAGE>
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 by reference in this prospectus. 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, as well as those discussed under "Risk
Factors." 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.
19
<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
20
<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
21
<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 assembled 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
22
<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.
23
<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 operating assets and liabilities 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, anticipated net proceeds from our concurrent underwritten public
offering and funds available under our credit facility will be sufficient to
satisfy our cash requirements for at least the next 12 months.
24
<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:
In-process research and development......... -- -- 2,600
Amortization of intangibles................. -- -- 52
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.
25
<PAGE>
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 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.
26
<PAGE>
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.
[DIAGRAM APPEARS HERE--NETWORK INFRASTRUCTURE FOR MTUS]
27
<PAGE>
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.
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
28
<PAGE>
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.
. 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.
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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
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.
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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.
[DIAGRAM APPEARS HERE--THE EXPRESSO GS/MDU SYSTEM]
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.
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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.
[DIAGRAM APPEARS HERE--THE NETWORKED MDU]
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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 latter 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.
[DIAGRAM APPEARS HERE--THE GARDEN-STYLE MDU]
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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.
[DIAGRAM APPEARS HERE--THE NETWORKED COMMUNITY]
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.
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
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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.
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.
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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, 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
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<PAGE>
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;
. 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.
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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.
Employees
As of February 14, 2000, we employed 163 persons, including:
. 17 in operations;
. 57 in marketing, sales and customer support;
. 50 in research and development; and
. 19 in finance and administration.
We also employ a number of contract employees, especially for software
engineering and systems verification. None of our employees are represented by
a labor union and we have experienced no work stoppages to date. With the
exception of an agreement with our Chief Operating Officer, we do not have any
employment contracts with our executive officers.
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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.
Legal Proceedings
As of the date of this prospectus, we are not involved in any material legal
proceedings.
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MANAGEMENT
Directors and Executive Officers
Our directors and executive officers as of February 25, 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 H. 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 our
President and Chief Executive Officer. Prior to that time, Mr. Taylor was the
Vice President of Engineering and a co-founder of Alameda Instruments, Inc., a
semiconductor equipment company, from 1987 to 1989. Mr. Taylor holds a B.S. in
Biology and an M.S. in Engineering Science from the University of California at
Berkeley.
Nelson Caldwell has served as 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
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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 Integrated Network Corporation'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.
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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
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 H. 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.
Board of Directors
We have authorized nine directors. In accordance with the terms of our
Certificate of Incorporation, the terms of office of our Board of Directors are
divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 2002, Class II, whose term will expire at
the annual meeting of stockholders to be held in 2000, and Class III, whose
term will expire at the annual meeting of stockholders to be held in 2001. The
Class I directors are Messrs. Higgerson, Spreng and Applegate, the Class II
directors are Messrs. Middlemas, Douglas and Taylor, and the Class III
directors are Messrs. D'Auria, Rosenzweig and
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Moore. At each annual meeting of stockholders, the successors to directors
whose terms will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible,
each class will consist of one-third of the directors. This classification of
our Board of Directors may have the effect of delaying or preventing changes in
control or management of us. Directors may be removed for cause by the
affirmative vote of the holders of a majority of the Common Stock.
Board Committees
Our Board of Directors has two committees, an Audit Committee and a
Compensation Committee. Since April 1998, our Audit Committee has consisted of
Messrs. Rosenzweig and Spreng. Our Audit Committee reviews our annual audit and
meets with our independent auditors to review our internal accounting
procedures and financial management practices. Since April 1998, our
Compensation Committee has consisted of Messrs. Applegate, Moore and Douglas.
Our Compensation Committee makes recommendations concerning salaries, stock
options, incentives and other forms of compensation for our directors, officers
and other employees, subject to ratification by our full Board of Directors.
Our Compensation Committee is also empowered to administer our various stock
plans. Prior to the creation of our Compensation Committee, all decisions
concerning salaries, incentives and other forms of compensation for our
directors, officers and other employees required a vote by our entire Board of
Directors.
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.
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.
Employee Contracts and Change in Control
We currently have employment and non-competition agreements with Sanford
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
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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.
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 $211,721 -- 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(/3/).... 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(/4/)... 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.
(3) Mr. Caldwell has served as our Vice President of Finance and Chief
Financial Officer since June 1997. His 1997 compensation reflects the fact
that he joined us in June 1997.
(4) Mr. Berberi served as one of our officers from September 1995 until
September 1999. In 1997, he was one of the four other most highly
compensated executive officers.
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<PAGE>
Stock Option Information. The following table sets forth 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.
45
<PAGE>
Stock Plans
1992 Stock Plan
Our 1992 Stock Plan, as amended, provides for the grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, to our employees and nonstatutory stock options and stock
purchase rights to our employees, directors and consultants. A total of 710,641
shares of Common Stock have been reserved for issuance under our 1992 Stock
Plan. Under our 1992 Stock Plan, as of December 31, 1999, options to purchase
an aggregate of 710,641 shares were outstanding, 543,882 shares of our common
stock had been purchased pursuant to exercises of stock options and stock
purchase rights and no shares were available for future grant. Our Board of
Directors has determined that no further options will be granted under the 1992
Stock Plan.
Our 1992 Stock Plan is administered by our Board of Directors, or a committee
appointed by our Board of Directors, which determines the terms of options
granted, including the exercise price and the number of shares subject to each
option. Our Board of Directors also determines the schedule upon which options
become exercisable. The exercise price of incentive stock options granted under
our 1992 Stock Plan must be at least equal to the fair market value of our
common stock on the date of grant. However, for any employee holding more than
10% of the voting power of all classes of our stock, the exercise price may be
no less than 110% of the fair market value. The exercise price of a
nonstatutory stock option may not be less than 85% of the fair market value of
our common stock on the date such option is granted; provided, however, the
exercise price of a nonstatutory stock option granted to an employee holding
more than 10% of the voting power of all classes of our common stock may not be
less than 110% of the fair market value of our common stock on the date such
option is granted. The maximum term of options granted under our 1992 Stock
Plan is ten years.
Options and stock purchase rights granted under our 1992 Stock Plan are not
transferable by the optionee, and each option and stock purchase rights is
exercisable during the lifetime of the optionee only by such optionee. Options
granted under our 1992 Stock Plan must generally be exercised within three
months after the end of optionee's status as our employee, director or
consultant, or within twelve months after such optionee's termination by
disability or death, respectively, to the extent optionee is vested on the date
of termination, but in no event later than the expiration of the option's term.
The 1992 Stock Plan provides that in the event we merge with or into another
corporation, or we sell substantially all of our assets, each outstanding
option or stock purchase right shall be assumed or an equivalent option or
stock purchase right substituted by the successor corporation. If the
outstanding options or stock purchase rights are not assumed or substituted,
the options or stock purchase rights will terminate upon the closing of the
merger. Our Board of Directors may amend or modify our 1992 Stock Plan at any
time, except that without the consent of our stockholders, no amendment or
modification shall adversely affect rights and obligations with respect to
outstanding options.
1998 Stock Plan
Our 1998 Stock Plan provides for the discretionary grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code, to our
employees and for the grant of nonstatutory stock options and stock purchase
rights to our employees, directors and consultants. A total of 1,000,000 shares
of our common stock, plus annual increases (beginning in 2000) equal to the
lesser of: (i) 375,000 shares, (ii) 3% of the outstanding shares, or (iii) a
lesser amount determined by our Board of Directors, are currently reserved for
issuance pursuant to our 1998 Stock Plan. Effective January 1, 2000 we
increased the number of shares reserved for issuance under our 1998 Stock Plan
by 358,218 shares. Under our 1998 Stock Plan, as of December 31, 1999, options
to purchase an aggregate of 693,106 shares were outstanding, 500 shares of our
common stock had been purchased pursuant to exercise of stock options and stock
purchase rights and 305,644 shares were available for future grant.
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<PAGE>
Our 1998 Stock Plan may be administered by our Board of Directors or a
committee of our Board, or the Administrator, which committee shall, in the
case of options intended to qualify as "performance-based compensation" within
the meaning of Section 162(m) of the Internal Revenue Code, consist of two or
more "outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code. The Administrator has the power to determine the terms of the
options or stock purchase rights granted, including the exercise price of the
option or stock purchase right, the number of shares subject to each option or
stock purchase rights, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, the Administrator has
the authority to amend, suspend or terminate our 1998 Stock Plan, provided that
no such action may affect any share of our common stock previously issued and
sold or any option previously granted under our 1998 Stock Plan.
The exercise price of all incentive stock options granted under our 1998
Stock Plan must be at least equal to the fair market value of our common stock
on the date of grant. The exercise price of nonstatutory stock options and
stock purchase rights granted under our 1998 Stock Plan is determined by the
Administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code, the exercise price must be at least equal
to the fair market value of our common stock on the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of our outstanding capital stock, the exercise price of any
incentive stock option granted must be at least equal 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of all other options granted under our 1998 Stock
Plan may not exceed ten years.
In the case of stock purchase rights, unless the Administrator determines
otherwise, the restricted stock purchase agreement shall grant us a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment or consulting relationship with us for any reason
(including death or disability). The purchase price for shares repurchased
pursuant to the restricted stock purchase agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of
the purchaser to us. The repurchase option shall lapse at a rate determined by
the Administrator.
Options and stock purchase rights granted under our 1998 Stock Plan are
generally not transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by such optionee.
Options granted under our 1998 Stock Plan must generally be exercised within
three months after the end of optionee's status as our employee, director or
consultant, or within one year after such optionee's termination by disability
or death, respectively, but in no event later than the expiration of the
option's term.
Our 1998 Stock Plan provides that in the event we merge with or into another
corporation, or we sell substantially all of our assets, each outstanding
option and stock purchase right shall be assumed or an equivalent option
substituted for by the successor corporation. If the outstanding options and
stock purchase rights are not assumed or substituted for by the successor
corporation, the Administrator shall provide for the optionee to have the right
to exercise the option or stock purchase right as to all of the optioned stock,
including shares as to which it would not otherwise be exercisable. If the
Administrator makes an option or stock purchase right exercisable in full in
the event of a merger or sale of assets, the Administrator shall notify the
optionee that the option or stock purchase right shall be fully exercisable for
a period of fifteen days from the date of such notice, and the option or stock
purchase right will terminate upon the expiration of such period. Unless
terminated sooner, our 1998 Stock Plan will terminate in 2008.
1998 Employee Stock Purchase Plan
Our 1998 Stock Purchase Plan, which is intended to qualify under Section 423
of the Internal Revenue Code, contains successive six-month offering periods.
The offering periods generally start on the first trading day on or after May 1
and November 1 of each year. A total of 250,000 shares of our common stock has
been reserved for issuance under this plan, plus annual increases (beginning in
2000) equal to the lesser of: (i) 250,000 shares, (ii) 2% of the outstanding
shares, or (iii) a lesser amount determined by our Board. Under our
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<PAGE>
1998 Stock Purchase Plan, as of December 31, 1999, employees had purchased a
total of 8,428 shares of our common stock and there were 241,572 shares
available for purchase under the plan.
Our employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 21 hours per week. However, any
employee who (i) immediately after grant owns stock possessing 5% or more of
the total combined voting power or value of all classes of our capital stock,
or (ii) whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate which exceeds $25,000 worth of stock for each calendar
year may be not be granted an option to purchase stock under this plan. This
plan permits participants to purchase our common stock through payroll
deductions of up to 15% of the participant's "compensation." Compensation is
defined as the participant's base straight time gross earnings and commissions,
but exclusive of overtime, bonuses and any other compensation. The maximum
number of shares a participant may purchase during a single offering period is
1,250 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each offering period. The price of
stock purchased under this plan is generally 85% of the lower of the fair
market value of our common stock at the beginning or end of the offering
period. Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment by us.
Rights granted under this plan are not transferable by a participant other
than by will, the laws of descent and distribution, or as otherwise provided
under this plan. This plan provides that, in the event we merge with or into
another corporation or we sell substantially all of our assets, each
outstanding option may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be shortened
and a new exercise date will be set.
Our Board of Directors has the authority to amend or terminate this plan,
except that no such action may adversely affect any outstanding rights to
purchase stock under this plan, provided that our Board of Directors may
terminate an offering period on any exercise date if they determine that the
termination of this plan is in our best interests and that of our stockholders.
This plan became effective in 1998 and will terminate in 2008, unless sooner
terminated by the Board of Directors.
1999 Nonstatutory Stock Plan
Our 1999 Nonstatutory Stock Plan was adopted by our Board of Directors in
November 1999. A total of 1,000,000 shares of our common stock are currently
reserved for issuance pursuant to our 1999 Nonstatutory Stock Plan. Unless
terminated sooner, our 1999 Nonstatutory Stock Plan will terminate in 2009.
Under our 1999 Nonstatutory Stock Plan, as of December 31, 1999, options to
purchase an aggregate of 38,394 shares were outstanding, no shares of our
common stock had been purchased pursuant to exercises of stock options and
stock purchase rights and 961,606 shares were available for future grant.
Our 1999 Nonstatutory Stock Plan provides for the discretionary grant of
nonstatutory stock options to our employees and consultants. No options may be
granted to our officers and directors pursuant our 1999 Nonstatutory Stock
Plan.
Our 1999 Nonstatutory Stock Plan may be administered by our Board of
Directors or a committee of our Board, or the Administrator, which committee
shall, in the case of options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue
Code, consist of two or more "outside directors" within the meaning of Section
162(m) of the Internal Revenue Code. The Administrator has the power to
determine the terms of the options or stock purchase rights granted, including
the exercise price of the option or stock purchase right, the number of shares
subject to each option or stock purchase right, the exercisability thereof, and
the form of consideration payable upon such exercise. In addition, the
Administrator has the authority to amend, suspend or terminate our 1999
Nonstatutory Stock Plan, provided that no such action may affect any share of
our common stock previously issued and sold or any option previously granted
under our 1999 Nonstatutory Stock Plan.
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<PAGE>
The exercise price of nonstatutory stock options and stock purchase rights
granted under our 1999 Nonstatutory Stock Plan is determined by the
Administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Internal Revenue Code, the exercise price must be at least equal
to the fair market value of our common stock on the date of grant. The term of
all options granted under our 1999 Nonstatutory Stock Plan may not exceed ten
years.
In the case of stock purchase rights, unless the Administrator determines
otherwise, the restricted stock purchase agreement shall grant us a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment or consulting relationship with us for any reason
(including death or disability). The purchase price for shares repurchased
pursuant to the restricted stock purchase agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of
the purchaser to us. The repurchase option shall lapse at a rate determined by
the Administrator.
Options and stock purchase rights granted under our 1999 Nonstatutory Stock
Plan are generally not transferable by the optionee, and each option and stock
purchase right is exercisable during the lifetime of the optionee only by such
optionee. Options granted under our 1999 Nonstatutory Stock Plan must generally
be exercised within three months after the end of optionee's status as our
employee or consultant, or within one year after such optionee's termination by
disability or death, respectively, but in no event later than the expiration of
the option's term.
Our 1999 Nonstatutory Stock Plan provides that in the event we merge with or
into another corporation, or we sell substantially all of our assets, each
outstanding option and stock purchase right shall be assumed or an equivalent
option substituted for by the successor corporation. If the outstanding options
and stock purchase rights are not assumed or substituted for by the successor
corporation, the Administrator shall provide for the optionee to have the right
to exercise the option or stock purchase right as to all of the optioned stock,
including shares as to which it would not otherwise be exercisable. If the
Administrator makes an option or stock purchase right exercisable in full in
the event of a merger or sale of assets, the Administrator shall notify the
optionee that the option or stock purchase right shall be fully exercisable for
a period of fifteen days from the date of such notice, and the option or stock
purchase right will terminate upon the expiration of such period.
401(k) Plan
We maintain a retirement and deferred savings plan for our employees, or
401(k) Plan, that is intended to qualify as a tax-qualified plan under the
Internal Revenue Code. This 401(k) Plan provides that each participant may
contribute up to 15% of his or her pre-tax gross compensation (up to a
statutory limit, which was $10,000 in calendar year 1999). Under this 401(k)
Plan, we may make discretionary matching contributions. We did not make any
contributions to the 401(k) Plan in 1999. A matching contribution made by us
vests at 25% per year commencing on the first anniversary of a participant's
date of employment by us. All amounts contributed by participants and earnings
on such contributions are fully vested at all times.
Limitation of Liability and Indemnification Matters
Our Certificate of Incorporation provides for the indemnification of
directors to the maximum extent permitted by Delaware law. Section 145 of the
Delaware General Corporation Law permits a corporation to include in its
charter documents, and in agreements between the corporation and its directors
and officers, provisions expanding the scope of indemnification beyond that
specifically provided by the current law.
Our Bylaws provide that we shall indemnify our directors, officers, employees
and other agents to the fullest extent permitted by law. We believe that
indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Bylaws also permit us to
secure insurance on behalf of any of our officers, directors, employees or
other agents for any liability arising out of his or her actions in such
capacity, regardless of whether our Bylaws permit such indemnification.
49
<PAGE>
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our Bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in our right arising out of such person's services
as our director, officer, employee, agent or fiduciary, any of our subsidiaries
or any other company or enterprise to which the person provides services at our
request. The agreements do not provide for indemnification in cases where (i)
the claim is brought by the indemnified party; (ii) the indemnified party has
not acted in good faith; (iii) the claim arises under Section 16(b) of the
Exchange Act; or (iv) the indemnified party has engaged in acts, omissions or
transactions for which the indemnified party is prohibited from receiving
indemnification under the agreement or applicable law. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
At present, there is no pending litigation or proceeding involving any of our
directors or officers in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for such indemnification.
50
<PAGE>
CERTAIN TRANSACTIONS
On March 31, 1995 and May 15, 1995 we sold an aggregate of 1,306,282 shares
of our Series E preferred stock, at a per share price of $4.60, in a private
placement equity financing with some of our stockholders and directors,
including: (i) an aggregate of 207,576 shares purchased by an entity affiliated
with Apex Investment Funds, one of our principal stockholders, of which Mr.
Middlemas, one of our directors, is Managing General Partner; (ii) an aggregate
of 490,185 shares purchased by entities affiliated with First Analysis
Corporation (including shares purchased by Apex), one of our principal
stockholders; (iii) an aggregate of 108,696 shares purchased by entities
affiliated with Investment Advisers, Inc., one of our principal stockholders;
(iv) an aggregate of 86,957 shares purchased by Vanguard IV, L.P., one of our
principal stockholders, of which Mr. Higgerson, one of our directors is a
general partner; and (v) an aggregate of 16,305 shares purchased by Spectrum
Equity Investors, L.P., one of our principal stockholders and for which Brion
Applegate, one of our directors, serves as managing general partner. See
"Principal Stockholders."
On April 17, 1995 we loaned to Salvatore D'Auria, our President and Chief
Executive Officer, an aggregate of $125,000 pursuant to a loan agreement and
secured promissory note. The loan did not bear interest. Pursuant to the loan
agreement, we forgave 25% of the principal amount of the loan each year. As of
the date hereof, the loan has been discharged in full.
On August 9, 1996 and October 7, 1996 we sold an aggregate of 2,306,158
shares of our Series F preferred stock, at a per share purchase price of $5.00,
in a private placement equity financing with some of our stockholders and
directors, including: (i) an aggregate of 300,000 shares purchased by entities
affiliated with Apex, one of our principal stockholders, of which
Mr. Middlemas, one of our directors, is Managing General Partner; (ii) an
aggregate of 360,000 shares purchased by entities affiliated with First
Analysis Corporation (including shares purchased by Apex), one of our principal
stockholders; (iii) an aggregate of 260,000 shares purchased by entities
affiliated with IAI, one of our principal stockholders; and (iv) an aggregate
of 150,696 shares purchased by Vanguard IV, L.P., one of our principal
stockholders, of which Mr. Higgerson is a general partner. See "Principal
Stockholders."
On August 27, 1997 we and Microsoft entered into a licensing and cooperative
marketing agreement pursuant to which we and Microsoft agreed to cooperate in
the development and marketing of future implementations of our HomeRun
technology. Each party will own a half interest in the other's technology
embodied in works made jointly by them. In connection with this license
agreement, we issued Microsoft a warrant to purchase up to 666,836 shares of
our Series G preferred stock at an exercise price of $10.00 per share. This
warrant expired on the closing of our initial public offering. Microsoft is one
of our principal stockholders. See "Principal Stockholders."
From December 1997 through May 1998, we sold an aggregate of 1,250,006 shares
of our Series G preferred stock, at a per share purchase price of $12.00, in a
private placement equity financing with certain of our stockholders and
directors, including: (i) an aggregate of 125,000 shares purchased by AT&T
Ventures, one of our major stockholders and of which Neal Douglas, one of our
directors, is a general partner; (ii) an aggregate of 416,667 shares purchased
by Microsoft; (iii) an aggregate of 28,835 shares purchased by entities
affiliated with Apex, one of our principal stockholders of which Mr. Middlemas,
one of our directors, is Managing General Partner; (iv) an aggregate of 47,650
shares purchased by entities affiliated with First Analysis Corporation
(including shares purchased by Apex); (v) an aggregate of 50,000 shares
purchased by IAI, one of our principal stockholders; (vi) an aggregate of 8,334
shares purchased by Vanguard IV, L.P., one of our principal stockholders, of
which Mr. Higgerson is a general partner; and (vii) an aggregate of 41,667
shares purchased by Spectrum Equity Investors, L.P., one of our principal
stockholders and for which Brion Applegate, one of our directors, serves as
managing general partner. See "Principal Stockholders."
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.
51
<PAGE>
In the past, we have granted options to our executive officers and directors.
We intend to grant options to our officers and directors in the future. See
"Management--Option Grants During Year Ended December 31, 1999" and
"Management--Director Compensation."
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. We also intend to execute such agreements
with our future directors and executive officers. See "Management--Limitation
of Liability and Indemnification Matters."
All of our securities referenced above were purchased or sold at prices equal
to the fair market value of such securities, as determined by our Board of
Directors, on the date of issuance.
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of December 31, 1999, and as adjusted to
reflect the sale of the shares of common stock offered hereby, certain
information with respect to the beneficial ownership of the common stock as to:
. 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;
. all of our directors and executive officers as a group; and
. each selling stockholder.
In connection with our acquisition of PublicPort, Inc., we agreed to register
common stock for those stockholders for resale. Our registration of the shares
of common stock does not necessarily mean that the selling stockholders will
sell all or any of the shares.
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.
Unless otherwise indicated below, each person or entity named below has an
address in care of our principal executive offices.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Prior to the Offering After the Offering
------------------------- -----------------------
Beneficial Owner Number Percent Number Percent
---------------- ------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
5% Beneficial Owners
Microsoft Corporation (1).... 1,083,503 9.1% 1,083,503 9.1%
Vanguard IV, L.P. (2)........ 658,591 5.5% 658,591 5.5%
Officers and Directors
Clifford H. Higgerson (3).... 658,591 5.5% 658,591 5.5%
George Middlemas (4)......... 313,826 2.6% 313,826 2.6%
Neal Douglas (5)............. 312,500 2.6% 312,500 2.6%
Salvatore D'Auria (6)........ 207,583 1.7% 207,583 1.7%
Matthew Taylor (7)........... 188,612 1.6% 188,612 1.6%
Saul Rosenzweig (8).......... 79,913 * 79,913 *
Thomas Warner (9)............ 47,416 * 47,416 *
Nelson Caldwell (10)......... 25,683 * 25,683 *
Allen Purdy (11)............. 20,686 * 20,686 *
Roger Moore (12)............. 8,083 * 8,083 *
Brion Applegate.............. 955 * 955 *
David Spreng................. -- -- -- --
All officers and directors as
a group (15 persons) (13)... 1,893,941 15.5% 1,893,941 15.5%
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially
Shares Owned After Offering
Offered ----------------------
Name of Selling Stockholder Hereby Number Percent
--------------------------- ------- ------ ----------
<S> <C> <C> <C>
Dory Leifer................................ 74,556 * *
David Carson............................... 44,734 * *
Allan Rubens............................... 44,734 * *
David Katz................................. 1,671 * *
Wesley Craig............................... 1,492 * *
Lawrence Blunk............................. 1,492 * *
------- --------- ---------
Total.................................... 168,679 * *
======= ========= =========
</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.
(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.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon completion of this offering, the total number of shares of all classes
of stock which we have authority to issue will be 100,000,000 shares of common
stock, $0.001 par value, and 5,000,000 shares of undesignated preferred stock,
$0.001 par value. As of December 31, 1999, there were 11,940,610 shares of our
common stock outstanding, which were held of record by approximately 314
holders of record of our common stock, and no shares of undesignated preferred
stock outstanding.
Common Stock
The holders of our common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders. Holders of our
common stock have no preemptive or subscription rights and there are no
redemption rights with respect to such shares.
Preferred Stock
Our Board of Directors is authorized, without further stockholder action, to
issue preferred stock in one or more series and to fix the voting rights,
liquidation preferences, dividend rights, repurchase rights, conversion rights,
redemption rights and terms, including sinking fund provisions, and certain
other rights and preferences, of the preferred stock.
Although there is no current intention to do so, our Board of Directors may,
without stockholder approval, issue shares of a class or series of preferred
stock with voting and conversion rights which could adversely affect the voting
power or dividend rights of the holders of our common stock and may have the
effect of delaying, deferring or preventing a change in control of us.
Options
As of December 31, 1999, we had outstanding options to purchase a total of
1,442,141 shares of our common stock at a weighted average exercise price of
$15.96 per share. Recommendations for option grants under our 1992 Stock Plan
and our 1998 Stock Plan or otherwise are made by our Compensation Committee,
subject to ratification by our full Board of Directors. Our Compensation
Committee may issue options with varying vesting schedules, but all options
granted pursuant to our stock plans must be exercised within ten years from the
date of grant.
Registration Rights of Certain Holders
The holders of approximately 3,025,000 shares of our common stock or their
transferees are entitled to certain registration rights with respect to the
registration of such shares under the Securities Act of 1933, as amended. These
rights are provided under the terms of the Fourth Amended and Restated
Shareholders' Rights Agreement between us and the holders of these registrable
securities. If we register any of our common stock either for our own account
or for the account of other security holders, the holders of these registrable
securities are entitled to include their shares of our common stock in the
registration. A holder's right to include shares in an underwritten
registration statement is subject to the ability of the underwriters to limit
the number of shares included in the offering. A holder or holders of these
registrable securities may also require us to register all or a portion of
these registrable securities on Form S-3 when use of such form becomes
available to us, provided, among other limitations, that the proposed aggregate
selling price is at least $1,000,000. All registration expenses and all selling
expenses relating to these registrable securities, including the reasonable
fees and disbursements of one counsel for the selling holders (not to exceed
$20,000), must be borne by us, except that we shall only be responsible for the
first two registrations in any twelve-month period at the request of the
holders of these registrable securities. If such holders, by exercising their
registration
55
<PAGE>
rights, cause a large number of securities to be registered and sold in the
public market, such sales could have an adverse effect on the market price for
our common stock. If we were to initiate a registration and include these
registrable securities pursuant to the exercise of piggyback registration
rights, the sale of these registrable securities may have an adverse effect on
our ability to raise capital.
Certain Charter and Bylaws Provisions and Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law which,
subject to certain exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date that such stockholder became an interested
stockholder, unless: (1) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; or (2) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding shares owned (i) by persons who are directors and also officers and
(ii) employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (3) at subsequent to such time the
business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.
Our Certificate of Incorporation requires that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of our stockholders and may not be effected by a
consent in writing. In addition, as provided by our Bylaws, special meetings of
our stockholders may be called only by our Board of Directors. Our Certificate
of Incorporation also provides that our Board of Directors will be divided into
three classes, with each class serving staggered three-year terms. These
provisions may have the effect of deferring hostile takeovers or delaying
changes in our control or management. See "Risk Factors--Our charter and bylaws
and Delaware law contain provisions that could delay or prevent a change in
control."
Transfer Agent and Registrar
The Transfer Agent and Registrar with respect to our Common Stock is American
Stock Transfer & Trust Company located at 40 Wall Street, New York, New York
10005, and its telephone number is (212) 936-5100.
56
<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders may sell the shares separately or together, from
time to time on the Nasdaq National Market at prices and on terms prevailing at
the time of any such sale. Any such sale may be made:
. in broker's transactions through broker-dealers acting as agents;
. in transactions directly with market makers; or
. in privately negotiated transactions where no broker or other third party
(other than the purchaser) is involved.
The selling stockholders will pay:
. selling commissions or brokerage fees, if any;
. all applicable transfer taxes; and
. all fees and costs of their own counsel incurred in connection with the
sale.
During such time as the selling stockholders may be attempting to sell shares
registered hereunder, they will:
(i) furnish copies of this prospectus, as supplemented or amended to each
person to whom shares may be offered; and
(ii) not bid for or purchase any of our securities other than as permitted
under the Exchange Act.
The selling stockholders, and any other persons who participate in the sale
of the shares, may be deemed to be "Underwriters" as defined in the Securities
Act. Any commissions paid or any discounts or concessions allowed to any such
persons, and any profits received on resale of the shares, may be deemed to be
underwriting discounts and commissions under the Securities Act.
With regard to the shares, we have agreed to maintain the effectiveness of
this registration statement until the earlier to occur of June 8, 2000 or the
sale of all securities registered under this registration statement.
We will bear all costs, expenses and fees in connection with the registration
of the shares. The selling stockholders will bear all commissions and
discounts, if any, attributable to the sale of the shares. We agreed to
indemnify the selling stockholders against certain liabilities, including
liabilities under the Securities Act. The selling stockholders have agreed to
indemnify us against certain liabilities, including liabilities under the
Securities Act.
57
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for Tut
Systems by Wilson Sonsini Goodrich & Rosati, P.C. WS Investment Company, an
investment fund for the benefit of certain attorneys of Wilson Sonsini Goodrich
& Rosati, owns an aggregate of 11,840 shares of our common stock. Pillsbury
Madison & Sutro LLP, San Francisco and Palo Alto, California, is acting as
counsel for the underwriters in connection with selected legal matters relating
to the shares of common stock offered by this prospectus.
EXPERTS
The consolidated financial statements of Tut Systems, Inc. as of December 31,
1998 and December 31, 1999 and for each of the three years ended December 31,
1999 included in this Prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of FreeGate Corporation as of December 31, 1999 and
for the year ended December 31, 1999 included in this Prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The balance sheet of FreeGate Corporation as of December 31, 1998 and the
related statements of operations, stockholders' equity and cash flows for the
year then ended, have been included in the registration statement in reliance
upon the report of KPMG LLP, independent auditors, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
The report of KPMG LLP covering the December 31, 1998, financial statements
contains an explanatory paragraph that states that the Company's recurring
losses from operations and negative operating cash flows since inception raise
substantial doubt about the company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of that uncertainty.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT TUT SYSTEMS
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including the exhibits and schedules thereto, under the
Securities Act of 1933, as amended with respect to the shares to be sold in
this offering. This prospectus does not contain all the information set forth
in the registration statement. For further information about us and the shares
to be sold in this offering, please refer to the registration statement.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to, are not necessarily complete, and in
each instance please refer to the copy of the contract, agreement or other
document filed as an exhibit to the registration statement, each statement
being qualified in all respects by this reference.
You may read and copy all or any portion of the registration statement or any
reports, statements or other information we file with the SEC at the SEC's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.C.,
Washington, D.C. 20549 and at the regional offices of the SEC located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents upon payment of a duplicating fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings, including the
registration statement will also be available to you on the SEC's Web site. The
address of this site is http://www.sec.gov.
58
<PAGE>
TUT SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Tut Systems, Inc. ----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
<TABLE>
<CAPTION>
Page
Tut Systems, Inc. ----
<S> <C>
Unaudited Pro Forma Combined Financial Information......................... F-20
Unaudited Pro Forma Combined Balance Sheet................................. F-21
Unaudited Pro Forma Combined Statement of Operations....................... F-22
Notes to Unaudited Pro Forma Combined Financial Information................ F-23
</TABLE>
<TABLE>
<CAPTION>
Page
FreeGate Corporation ----
<S> <C>
Report of Independent Accountants.......................................... F-26
Independent Auditors' Report............................................... F-27
Balance Sheets............................................................. F-28
Statements of Operations................................................... F-29
Statements of Stockholders' Equity (Deficit)............................... F-30
Statements of Cash Flows................................................... F-31
Notes to Financial Statements.............................................. F-32
</TABLE>
<TABLE>
<CAPTION>
Page
Vintel Communications, Inc. ----
<S> <C>
Balance Sheet.............................................................. F-43
Statement of Operations.................................................... F-44
Statement of Shareholders' Equity.......................................... F-45
Statement of Cash Flows.................................................... F-46
Notes to Financial Statements.............................................. F-47
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Tut Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statement of operations, of stockholders' equity (deficit) and of
cash flows 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. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with 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 March 1, 2000
F-2
<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.
F-3
<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.
F-4
<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.
F-5
<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
Noncash 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 and
development................................... -- -- 2,600
Change in operating 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 Communications, 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.
F-6
<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.
F-7
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Property and equipment
Property and equipment are carried at cost. The Company provides for
depreciation by charges to expense which are sufficient to write off the cost
of the assets over their estimated useful lives on the straight-line basis.
Leasehold improvements are amortized over the lesser of the lease term or the
estimated useful life of the improvement. Useful lives by principal
classifications are as follows:
<TABLE>
<S> <C>
Office equipment............................................... 5 years
Computers and software......................................... 3-5 years
Test equipment................................................. 5 years
Leasehold improvements......................................... 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 assembled 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.
F-8
<PAGE>
TUT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Contract fees for the services provided under these licensing agreements are
generally comprised of license fees and nonrefundable, prepaid royalties which
are recognized when the proprietary technology is delivered if there are no
significant vendor obligations. If the licensing agreements contain post-
contract customer support, the Company recognizes the contract fees ratably
over the five year period during which the post-contract customer support is
expected to be provided. This period represents the estimated life of the
technology. The Company begins to recognize revenue under the contract, once it
has delivered the implementation package which contains all information needed
to use the Company's proprietary technology in the licensee's process. The
remaining obligations are primarily to provide the licensee with any changes or
improvements to the technology and technical advice on specifications, testing,
debugging and enhancements.
The Company recognizes royalties upon notification of sale by its licensees.
The terms of the royalty agreements generally require licensees to give
notification to the Company and to pay royalties within 60 days of the end of
the quarter during which the sales take place.
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 1,442
======== ======== ========
</TABLE>
F-9
<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
F-10
<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,
40 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 assembled 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>
F-11
<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>
F-12
<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.
F-13
<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.
F-14
<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
F-15
<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...... 1,188 -- -- -- -- --
Options granted......... (414) -- 414 2.00- 15.00 2,822 6.82
Options exercised....... -- 129 (129) 0.36- 2.40 (63) 0.49
Options terminated...... 5 -- (5) 0.52 (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 -- (144) 0.48- 46.63 (1,957) 13.59
Available options
cancelled from 1992
Plan................... (10) -- -- -- -- --
----- --- ----- -------
Balance, December 31,
1999................... 1,267 605 1,442 $0.28-$46.63 $23,022 $15.96
===== === ===== =======
</TABLE>
F-16
<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-$ 0.52 335 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.
F-17
<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>
F-18
<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) In February 2000, the Company 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.
(c) On February 26, 2000, the Company entered into a nonbinding letter of
intent to acquire the United Kingdom based holding company Xstreamis, plc.
Xstreamis provides policy-driven traffic management for high-performance,
multimedia networking solutions including routing, switching and bridging
functions. The letter of intent contemplates that the Company and
Xstreamis would negotiate a purchase agreement, under which the company
would issue shares of Tut common stock worth approximately (Pounds)13
million, or approximately $20 million at current exchange rates, to the
Xstreamis shareholders. This acquisition is expected to be accounted for
as a purchase.
F-19
<PAGE>
TUT SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(in thousands)
The following unaudited pro forma combined financial information for Tut
Systems, Inc. (the "Company") consist of the Unaudited Pro Forma Combined
Statement of Operations for the year ended December 31, 1999 and the Unaudited
Pro Forma Combined Balance Sheet as of December 31, 1999. This pro forma
financial information gives effect to Tut's acquisitions of Vintel
Communications, Inc. ("Vintel") and FreeGate Corporation ("FreeGate") both to
be accounted for as purchases.
The Vintel acquisition was consummated on November 12, 1999. The stockholders
of Vintel received 116 shares of Tut common stock and $500 in cash.
Additionally, Tut converted stock options to purchase 750 shares of Vintel
common stock into stock options to purchase 40 shares of Tut common stock. The
FreeGate acquisition was consummated on February 14, 2000. The stockholders of
FreeGate received 511 shares of Tut common stock. Additionally, Tut converted
stock options to purchase 1,113 shares of FreeGate common stock into stock
options to purchase 20 shares of Tut common stock.
The unaudited pro forma combined balance sheet gives effect to the FreeGate
acquisition as if it had occurred on December 31, 1999, by consolidating the
balance sheet of FreeGate with the balance sheet of Tut at December 31, 1999.
The unaudited pro forma combined statement of operations for the year ended
December 31, 1999 gives effect to these acquisitions as if they had occurred on
January 1, 1999, by consolidating the results of operations of Vintel and
FreeGate with the results of operations of Tut.
The unaudited pro forma combined statement of operations is not necessarily
indicative of the operating results that would have been achieved had the
transactions been in effect as of the beginning of the periods presented and
should not be construed as being representative of future operating results.
The historical financial statements of the Company, Vintel and FreeGate are
included elsewhere in this Prospectus and the unaudited pro forma combined
financial information presented herein should be read in conjunction with those
financial statements and related notes.
F-20
<PAGE>
TUT SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------
Pro Forma
Tut FreeGate Adjustments Combined
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 13,405 $ 130 $ -- $ 13,535
Short-term investments .......... 18,831 -- -- 18,831
Accounts receivable, net ........ 11,742 403 -- 12,145
Inventories ..................... 8,401 210 -- 8,611
Prepaid expenses and other ...... 3,746 224 -- 3,970
-------- -------- -------- --------
Total current assets .......... 56,125 967 -- 57,092
Property and equipment, net ....... 3,476 394 -- 3,870
Intangible assets, net ............ 1,774 -- 25,409 (D) 27,183
Other assets ...................... 3,981 52 -- 4,033
-------- -------- -------- --------
Total assets .................. $ 65,356 $ 1,413 $ 25,409 $ 92,178
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................ $ 5,859 $ 465 $ -- $ 6,324
Accrued liabilities.............. 3,551 734 1,200 (D) 5,485
Lines of credit ................. 1,529 -- -- 1,529
Notes payable.................... -- 895 -- 895
Capital lease obligations ....... -- 323 -- 323
Deferred revenue ................ 770 418 -- 1,188
-------- -------- -------- --------
Total current liabilities ..... 11,709 2,835 1,200 15,744
Capital lease obligations, net of
current portion .................. -- 279 -- 279
Deferred revenue, net of current
portion .......................... 2,125 134 -- 2,259
-------- -------- -------- --------
Total liabilities ............. 13,834 3,248 1,200 18,282
-------- -------- -------- --------
Stockholders' equity (deficit):
Common stock .................... 12 -- 1 (D) 13
Additional paid-in capital ...... 108,969 26,443 (26,443)(D) 132,417
23,448 (D)
Notes receivable from
stockholders ................... -- (275) -- (275)
Deferred compensation ........... (972) -- -- (972)
Accumulated deficit ............. (56,487) (28,003) 28,003 (D) (57,287)
(800)(D)
-------- -------- -------- --------
Total stockholders' equity
(deficit) .................... 51,522 (1,835) 24,209 73,896
-------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)................... $ 65,356 $ 1,413 $ 25,409 $ 92,178
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial information.
F-21
<PAGE>
TUT SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, 1999
Year Ended (inception) to
December 31, November 12,
1999 1999 Year Ended December 31, 1999
------------ -------------- ---------------------------------
Pro Forma
Tut Vintel FreeGate Adjustments Combined
------------ -------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Product and services.. $ 26,266 $ 200 $ 2,134 $ (200)(A) $ 28,400
License and royalty... 1,541 -- -- -- 1,541
-------- ------- ------- ------- --------
27,807 200 2,134 (200) 29,941
Cost of goods sold...... 15,459 110 1,159 (110)(A) 16,618
-------- ------- ------- ------- --------
Gross margin............ 12,348 90 975 (90) 13,323
-------- ------- ------- ------- --------
Operating expenses:
Sales and marketing... 10,523 -- 3,636 -- 14,159
Research and
development.......... 7,618 132 3,899 (90)(A) 11,559
General and
administrative....... 4,429 135 1,406 -- 5,970
In-process research
and development...... 2,600 -- -- (2,600)(C) --
Amortization of
intangibles.......... 52 -- -- 363 (B) 5,697
5,282 (E)
Noncash compensation
expense.............. 455 -- 221 -- 676
-------- ------- ------- ------- --------
Total operating
expenses........... 25,677 267 9,162 2,955 38,061
-------- ------- ------- ------- --------
Loss from operations.... (13,329) (177) (8,187) (3,045) (24,738)
Interest expense........ (608) -- (62) -- (670)
Interest income......... 2,203 -- 76 -- 2,279
Other income, net....... 1 -- -- -- 1
-------- ------- ------- ------- --------
Loss before income
taxes.................. (11,733) (177) (8,173) (3,045) (23,128)
Income tax expense...... 1 -- 3 -- 4
-------- ------- ------- ------- --------
Net loss................ (11,734) (177) (8,176) (3,045) (23,132)
Dividend accretion on
preferred stock........ 235 -- -- -- 235
-------- ------- ------- ------- --------
Net loss attributable to
common stockholders.... $(11,969) $ (177) $(8,176) $(3,045) $(23,367)
======== ======= ======= ======= ========
Net loss per share
attributable to common
stockholders, basic and
diluted................ $ (1.12) $ (0.11) $ (1.03) $ (2.06)
======== ======= ======= ========
Shares used in computing
net loss per share
attributable to common
stockholders, basic and
diluted................ 10,729 1,595 7,964 613 11,342
======== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial information.
F-22
<PAGE>
TUT SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(in thousands)
NOTE 1--BASIS OF PRESENTATION:
The pro forma combined financial information gives effect to Tut's
acquisitions of Vintel and of FreeGate, consummated on November 12, 1999 and
February 14, 2000, respectively. The acquisitions will be accounted for as
purchases. Vintel stockholders and optionholders received an aggregate total of
156 shares of Tut common stock and shares subject to options. FreeGate
stockholders and optionholders received an aggregate of 531 shares of Tut
common stock and shares subject to options.
The pro forma combined financial information has been prepared on the basis
of assumptions described in the following notes and include assumptions
relating to the allocation of the consideration paid for the assets and
liabilities based on estimates of their fair values.
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1999 gives effect to the acquisitions as if they had taken place
on January 1, 1999. The Unaudited Pro Forma Combined Balance Sheet as of
December 31, 1999 gives effect to the FreeGate acquisition as if it had taken
place on December 31, 1999.
The pro forma combined financial information is not necessarily indicative of
what the actual financial results would have been had the transactions taken
place on January 1, 1999 and do not purport to be indicative of the results of
future operations.
NOTE 2--PURCHASE PRICE ALLOCATION:
The unaudited pro forma combined information reflects a total purchase price
for the Vintel acquisition of $4,780 including the estimated value of the Tut
shares and the estimated value of vested options issued upon consummation of
the Vintel acquisition and estimated transaction costs.
The allocation of the purchase price using balances as of November 12, 1999
is summarized below:
<TABLE>
<S> <C>
Net tangible assets................................................ $ 354
In-process research and development................................ 2,600
Assembled workforce................................................ 380
Goodwill........................................................... 1,446
------
$4,780
======
</TABLE>
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 cost 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.
The amount allocated to in-process research and development was charged to
the statement of operations in the period the acquisition was consummated.
F-23
<PAGE>
TUT SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
(in thousands)
The unaudited pro forma combined information reflects a total purchase price
for the FreeGate acquisition of $24.7 million from 511 shares of common stock,
20 options to acquire common stock and acquisition related expenses, consisting
primarily of investment advisory, legal and other professional fees. The
Company valued the options using the Black-Scholes option pricing model,
applying an average expected life of 4 years, a weighted average risk free rate
of 6%, an expected dividend yield of zero percent, a volatility of 80% and a
deemed fair value of common stock of $41.81.
The Company's allocation of the aggregate purchase price to the tangible and
identifiable assets acquired in connection with the FreeGate acquisition has
been based on a preliminary analysis by the Company:
<TABLE>
<S> <C>
Net liabilities assumed.......................................... $(1,560)
Current technology............................................... 2,900
In-process research and development.............................. 800
Assembled workforce.............................................. 1,500
Patents.......................................................... 500
Goodwill......................................................... 20,509
-------
Total purchase price........................................... $24,649
-------
FreeGate's liabilities assumed are derived as follows:
Total stockholders' deficit...................................... $(1,835)
Notes receivable from stockholders............................... 275
-------
Total.......................................................... $(1,560)
-------
</TABLE>
The amount allocated to in-process research and development represents the
purchased in-process technology for projects that, as of the date of the
acquisition, had not yet reached technological feasibility and had no
alternative future use. Based on preliminary assessments, the value of these
projects was determined by using the income approach, which discounts expected
future cash flows to present value. The discount rate used in the present value
calculations were typically derived from a weighted average cost of capital
analysis adjusted upwards 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 FreeGate 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. 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.
The amounts allocated to in-process research and development will be charged
to the statement of operations in the period the acquisition is consummated.
F-24
<PAGE>
TUT SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
(in thousands)
NOTE 3--UNAUDITED PRO FORMA COMBINED NET LOSS PER SHARE:
The net loss per share and shares used in computing the net loss per share
for the year ended December 31, 1999 are based upon the Tut historical weighted
average common shares outstanding together with the shares issued in the
transactions as if such shares were issued January 1, 1999. Common stock
issuable upon the conversion of convertible preferred stock and exercise of Tut
stock options and warrants has been excluded as the effect would be anti-
dilutive.
NOTE 4--PURCHASE ADJUSTMENTS:
The following adjustments were applied to the pro forma combined financial
information:
(A) To eliminate intercompany transactions between Tut and Vintel.
(B) To reflect amortization of goodwill and assembled workforce related to
the Vintel acquisition over their estimated useful lives of five and
three years, respectively, as if the acquisition occurred on January 1,
1999.
(C) To eliminate the amount allocated to in-process research and
development related to the Vintel acquisition as it is nonrecurring.
(D) To reflect the issuance of shares in the FreeGate acquisition and to
record estimated transaction costs and other assets and liabilities at
their fair values.
(E) To reflect amortization of goodwill and other intangibles related to
the FreeGate acquisition over their estimated useful lives of five
years for goodwill, patents and current technology and three years for
assembled workforce.
The amount allocated to in-process research and development for the FreeGate
acquisition has not been included in the unaudited pro forma combined statement
of operations as it is nonrecurring. This amount will be expensed in the period
the acquisition is consummated.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
FreeGate Corporation
In our opinion, the accompanying balance sheet as of December 31, 1999 and
the related statements of operations, of cash flows, and of stockholders'
equity (deficit) present fairly, in all material respects, the financial
position of FreeGate Corporation at December 31, 1999, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit 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 audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 14, 2000
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
FreeGate Corporation
We have audited the accompanying balance sheet of FreeGate Corporation (the
"Company") as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FreeGate Corporation as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred net losses and negative operating cash
flows since inception that cause substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. Continuation of the Company as a going concern is
dependent upon management's ability to obtain additional financing and the
successful development and marketing of its products. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG LLP
Mountain View, California
April 23, 1999, except
as to Note 7, which is
as of November 1, 1999
F-27
<PAGE>
FREEGATE CORPORATION
BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 6,120 $ 130
Accounts receivable, net of allowance for doubtful
accounts of $201 and $132, respectively ................. 557 403
Inventory ................................................ 497 210
Prepaid expenses and other current assets ................ 80 224
-------- --------
Total current assets ................................... 7,254 967
Property and equipment, net ................................ 661 394
Other assets ............................................... 50 52
-------- --------
Total assets ........................................... $ 7,965 $ 1,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ......................................... $ 306 $ 465
Accrued liabilities ...................................... 690 734
Notes payable ............................................ -- 895
Capital lease obligations ................................ 281 323
Deferred revenue ......................................... 112 418
-------- --------
Total current liabilities .............................. 1,389 2,835
Capital lease obligations, net of current portion .......... 547 279
Deferred revenue, net of current portion.................... 220 134
-------- --------
Total liabilities ...................................... 2,156 3,248
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity (deficit):
Convertible preferred stock, $0.0001 par value:
Series A: 2,500 shares authorized; 2,500 shares issued
and outstanding as of December 31, 1998 and 1999;
liquidation preference of $300 ......................... -- --
Series B: 5,200 shares authorized; 5,067 shares issued
and outstanding as of December 31, 1998 and 1999;
liquidation preference of $3,800 ....................... -- --
Series C: 5,000 shares authorized; 4,706 shares issued
and outstanding as of December 31, 1998 and 1999;
liquidation preference of $8,000........................ -- --
Series D: 5,000 shares authorized; 4,442 shares issued
and outstanding as of December 31, 1998 and 1999,
respectively; liquidation preference of $13,325 ........ -- --
Restricted common stock, $0.0001 par value; 35,000 shares
authorized; 9,272 and 10,048 shares issued and
outstanding as of December 31, 1998 and 1999,
respectively ............................................ -- --
Additional paid-in capital ............................... 25,779 26,443
Notes receivable from stockholders ....................... (143) (275)
Accumulated deficit ...................................... (19,827) (28,003)
-------- --------
Total stockholders' equity (deficit).................... 5,809 (1,835)
-------- --------
Total liabilities and stockholders' equity (deficit).. $ 7,965 $ 1,413
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
FREEGATE CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------
1998 1999
-------- -------
<S> <C> <C>
Revenue ................................................... $ 2,824 $ 2,134
Cost of revenue ........................................... 1,819 1,159
-------- -------
Gross margin .............................................. 1,005 975
-------- -------
Operating expenses:
Sales and marketing ..................................... 5,771 3,636
Research and development ................................ 4,178 3,899
General and administrative .............................. 1,807 1,406
Noncash expense.......................................... 17 221
-------- -------
Total operating expenses .............................. 11,773 9,162
-------- -------
Loss from operations ...................................... (10,768) (8,187)
Interest expense........................................... (100) (62)
Interest income............................................ 207 76
-------- -------
Loss before income taxes .................................. (10,661) (8,173)
Income taxes .............................................. 1 3
-------- -------
Net loss .................................................. $(10,662) $(8,176)
======== =======
Net loss per share, basic and diluted ................... $ (1.73) $ (1.03)
======== =======
Shares used in computing basic and diluted net loss per
share..................................................... 6,149 7,964
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
FREEGATE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(in thousands)
<TABLE>
<CAPTION>
Convertible Preferred Stock
-------------------------------------------------------
Restricted Notes
Series A Series B Series C Series D common stock Additional Receivable
------------- ------------- ------------- ------------- -------------- Paid-In from Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Stockholders Deficit
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1997............ 2,500 $ -- 5,067 $ -- 4,706 $ -- -- $ -- 8,963 $ -- $12,338 $ -- $ (9,165)
Issuance of
Series D
preferred stock,
net of issuance
costs of $90.... -- -- -- -- -- -- 4,442 -- -- -- 13,235 -- --
Repurchase of
common stock.... -- -- -- -- -- -- -- -- (790) -- (72) -- --
Issuance of
common stock--
options
exercised....... -- -- -- -- -- -- -- -- 964 -- 221 -- --
Issuance of
common stock in
exchange for
legal services.. -- -- -- -- -- -- -- -- 135 -- 40 -- --
Warrants issued
in connection
with capital
lease........... -- -- -- -- -- -- -- -- -- -- 17 -- --
Issuance of
notes receivable
from
stockholders.... -- -- -- -- -- -- -- -- -- -- -- (143) --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- -- (10,662)
----- ---- ----- ---- ----- ---- ----- ---- ------ ---- ------- ----- --------
Balances,
December 31,
1998............ 2,500 -- 5,067 -- 4,706 -- 4,442 -- 9,272 -- 25,779 (143) (19,827)
Repurchase of
common stock.... -- -- -- -- -- -- -- -- (400) -- (49) -- --
Issuance of
common stock--
options
exercised....... -- -- -- -- -- -- -- -- 886 -- 354 -- --
Issuance of
common stock in
exchange for
services........ -- -- -- -- -- -- -- -- 290 -- 69 -- --
Warrants issued
under capital
lease........... -- -- -- -- -- -- -- -- -- -- 17 -- --
Warrants issued
under financing
activity........ -- -- -- -- -- -- -- -- -- -- 273 -- --
Issuance of
notes receivable
from
stockholders.... -- -- -- -- -- -- -- -- -- -- -- (132) --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- -- (8,176)
----- ---- ----- ---- ----- ---- ----- ---- ------ ---- ------- ----- --------
Balances,
December 31,
1999............ 2,500 $ -- 5,067 $ -- 4,706 $ -- 4,442 $ -- 10,048 $ -- $26,443 $(275) $(28,003)
===== ==== ===== ==== ===== ==== ===== ==== ====== ==== ======= ===== ========
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balances,
December 31,
1997............ $ 3,173
Issuance of
Series D
preferred stock,
net of issuance
costs of $90.... 13,235
Repurchase of
common stock.... (72)
Issuance of
common stock--
options
exercised....... 221
Issuance of
common stock in
exchange for
legal services.. 40
Warrants issued
in connection
with capital
lease........... 17
Issuance of
notes receivable
from
stockholders.... (143)
Net loss........ (10,662)
-------------
Balances,
December 31,
1998............ 5,809
Repurchase of
common stock.... (49)
Issuance of
common stock--
options
exercised....... 354
Issuance of
common stock in
exchange for
services........ 69
Warrants issued
under capital
lease........... 17
Warrants issued
under financing
activity........ 273
Issuance of
notes receivable
from
stockholders.... (132)
Net loss........ (8,176)
-------------
Balances,
December 31,
1999............ $(1,835)
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
FREEGATE CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------
1998 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................. $(10,662) $(8,176)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................ 352 418
Noncash warrant expense .................................. 17 221
Common stock issued for services ......................... 40 69
Changes in operating assets and liabilities:
Accounts receivable ..................................... (390) 154
Inventory ............................................... (359) 287
Prepaid expenses and other assets ....................... -- (146)
Accounts payable ........................................ 58 159
Accrued liabilities ..................................... 211 44
Deferred revenue ........................................ 314 220
-------- -------
Net cash used in operating activities .................. (10,419) (6,750)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment ........................ (369) (151)
Notes receivable from stockholders ........................ 200 (10)
-------- -------
Net cash used in investing activities .................. (169) (161)
-------- -------
Cash flows from financing activities:
Proceeds from sale of equipment under sale/leaseback
arrangement .............................................. 378 55
Proceeds from sale of preferred stock ..................... 13,235 --
Proceeds from exercise of stock options ................... 78 222
Principal payments of capital leases ...................... (152) (226)
Repurchase of common stock ................................ (72) (49)
Proceeds from notes payable ............................... -- 919
-------- -------
Net cash provided by financing activities 13,467 921
-------- -------
Net increase (decrease) in cash and cash equivalents ....... 2,879 (5,990)
Cash and cash equivalents at beginning of year ............. 3,241 6,120
-------- -------
Cash and cash equivalents at end of year ................... $ 6,120 $ 130
======== =======
Supplemental disclosure of cash flow information:
Cash paid during year for interest ........................ $ 92 $ 79
======== =======
Noncash financing activity:
Warrants issued in connection with notes payable.......... $ -- $ 273
======== =======
Warrants issued in connection with capital lease.......... $ 17 $ 17
======== =======
Common stock issued for services ......................... $ 40 $ 69
======== =======
Stock options issued in exchange for notes receivable .... $ 143 $ 132
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of business
FreeGate Corporation (the "Company") was incorporated in the state of
Delaware on December 26, 1995. FreeGate Corporation provides "all-in-one"
Internet and Intranet connectivity solutions for small to medium sized
businesses and branch offices. These solutions combine E-mail, web access and
publishing, electronic file transfer, remote access, virtual private
networking, firewall security, and LAN/router capabilities in an affordable,
reliable turnkey system for a nontechnical audience.
Beyond this integrated Internet and Intranet functionality, the Company
provides a remote provisioning and management system that opens up business
opportunities for value-added Internet applications and services, with
increased security and reliability.
(b) Basis of presentation
The Company has incurred net losses and negative operating cash flows since
inception that raise substantial doubt about its ability to continue as a going
concern. The accompanying financial statements have been prepared assuming the
Company continues in existence as a going concern. Continuation of the Company
as a going concern is dependent upon the successful conclusion of the merger
agreement signed in November 1999 (see Note 7).
(c) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported results of operations during the reporting period. Actual results
could differ from those estimates.
(d) Revenue recognition
On October 1, 1997, the Company adopted Statement of Position (SOP) 97-2,
Software Revenue Recognition. The adoption of SOP 97-2 did not have a material
effect on the Company's operating results. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements to be allocated to
each element based on the relative fair values of the elements. The fair value
of an element must be based on evidence that is specific to the vendor. If a
vendor does not have evidence of the fair value of all elements in a multiple-
element arrangement, all revenue from the arrangement is deferred until such
evidence exists or until all elements are delivered.
Product revenue is generally recognized upon delivery or if sales are made to
a distributor, with right of return, upon sell through, provided the Company
deems the receivable to be collectible. Revenue allocated to maintenance is
recognized ratably over the maintenance term.
(e) Concentrations of credit risk
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, accounts receivable, and
notes receivable. The Company maintains all of its cash with one financial
institution in the United States. Cash equivalents are comprised of money
market funds. The Company's policy limits the amount of credit exposure in any
one-debt issue. Management believes the financial risks associated with these
financial instruments are minimal. The notes receivable are due from
stockholders of the Company and management believes that the risk of credit
loss is low. With respect to accounts receivable, the Company performs credit
evaluations of its customers and maintains reserves for potential credit
losses.
F-32
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Significant customer information is as follows:
<TABLE>
<CAPTION>
Percentage
of
Total Accounts
Revenues Receivable
------------- -------------
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Customer A................................. 46% 19% -- --
Customer B................................. 10% -- 21% --
Customer C................................. -- 16% -- 41%
</TABLE>
(f) Capitalized software
Costs related to the research and development for new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility of the product has been established, at which time
such costs are capitalized subject to expected recoverability. As of December
31, 1999, the Company had not capitalized any development costs related to
software products.
(g) Inventory
Inventory as of December 31, 1999, consisted of finished goods and raw
materials valued at the lower of cost, using the first in first out method, or
market.
(h) Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the equipment, generally three years. Assets
under capital leases are amortized over the shorter of the lease terms or the
estimated useful lives of the assets.
(i) Income taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A
valuation allowance is recorded to reduce deferred tax assets to an amount that
is more likely than not to be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(j) Stock-based compensation
The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income or loss disclosures for employee
options granted as if the fair value-based method defined in SFAS No. 123 had
been applied. The Company has elected to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
F-33
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(k) Accumulated other comprehensive income
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards of
reporting and display of comprehensive income and its components of net income
and "Other Comprehensive Income" in a full set of general-purpose financial
statements. Other comprehensive income refers to revenues, expenses, gains, and
losses that are not included in net income but rather are recorded directly in
stockholders' equity. SFAS No. 130 was adopted by the Company in 1998 but the
Company has no elements of other comprehensive income.
(l) Impairment of long-lived assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, management evaluates the
Company's long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. As of December 31, 1999, the Company does not consider any assets
to be impaired.
(m) Net loss per share
Basic net loss per share is computed using the weighted-average number of
vested outstanding shares of common stock. Diluted net loss per share is
computed using the weighted-average number of shares of vested common stock
outstanding and when dilutive, unvested common stock outstanding, potential
common shares from options and warrants to purchase common and preferred stock
using the treasury stock method and from convertible securities using the as-
if-converted basis. All potential common shares have been excluded from the
computation of diluted net loss per share for all periods presented because the
effect would be antidilutive.
Diluted net loss per share does not include the effect of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Shares issuable under common stock options.................... 1,563 1,839
Shares of unvested common stock subject to repurchase......... 2,017 2,579
Shares issuable pursuant to warrants to purchase common and
convertible preferred stock.................................. 89 426
Shares of convertible preferred stock on an "as-if-converted"
basis........................................................ 16,715 16,715
</TABLE>
The weighted-average exercise price of stock options outstanding was $0.24
and $0.53 as of December 31, 1998 and 1999, respectively. The weighted-average
purchase price of unvested stock was $0.11 and $0.41 as of December 31, 1998
and 1999, respectively. The weighted-average exercise price of warrants was
$1.14 and $2.61 as of December 31, 1998 and 1999, respectively.
(n) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. FreeGate is required to adopt SFAS No. 133
in fiscal 2001. SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
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
F-34
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
2. BALANCE SHEET COMPONENTS
(a) Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity
of 90 days or less to be cash equivalents. Cash equivalents as of December 31,
1998 and 1999, consisted of money market funds totaling $5,961,043 and nil,
respectively.
(b) Inventory
Inventory consisted of the following as of December 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
December
31,
---------
1998 1999
---- ----
<S> <C> <C>
Finished goods................................................... $400 $164
Raw materials.................................................... 97 46
---- ----
$497 $210
==== ====
</TABLE>
(c) Property and Equipment
Property and equipment consisted of the following as of December 31, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Property and equipment, net:
Computer equipment and purchased software................ $1,007 $1,158
Office equipment......................................... 229 229
------ ------
1,236 1,387
Less: Accumulated depreciation and amortization.......... (575) (993)
------ ------
$ 661 $ 394
====== ======
</TABLE>
Computer equipment and purchased software as of December 31, 1998 and 1999,
included equipment under capital leases of approximately $1,037,000 and
$1,191,000 respectively, and related accumulated amortization of approximately
$283,000 and $847,000, respectively.
(d) Accrued liabilities
Accrued liabilities consisted of the following as of December 31, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
December
31,
---------
1998 1999
---- ----
<S> <C> <C>
Accrued compensation............................................ $146 $119
Accrued warranty................................................ 64 149
Legal and professional fees..................................... 135 199
Other........................................................... 345 267
---- ----
$690 $734
==== ====
</TABLE>
F-35
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. STOCKHOLDERS' EQUITY
(a) Convertible preferred stock
The rights, preferences, and privileges of the holders of Series A, B, C, and
D convertible preferred stock are as follows:
. The holders of Series D convertible preferred stock shall be entitled to
receive dividends, at a rate of $0.18 per share, per annum in preference
to holders of Series A, B, and C convertible preferred stock payable when
and if declared by the Company's Board of Directors. The holders of
Series A, B, and C convertible preferred stock are entitled to receive
dividends at the rate of $0.0075, $0.045, and $0.102, per share,
respectively, per annum, payable when and if declared by the Company's
Board of Directors in preference and priority to any payments of
dividends to holders of the Company's common stock. The dividend rights
are not cumulative.
. The holders of Series D convertible preferred stock have a liquidation
preference of $3.00 per share in preference to the holders of Series A,
B, and C convertible preferred stock. Subject to Series D rights, the
holders of Series A, B, and C convertible preferred stock have a
liquidation preference of $0.12, $0.75, and $1.70 per share,
respectively. After payment of the liquidation preference, all remaining
assets of the Company shall be distributed among holders of convertible
preferred stock and common stock pro rata on an "as-if-converted" basis.
Distributions to holders of convertible preferred stock are limited to an
aggregate of $0.24, $1.50, $3.40, and $6.00 per share to holders of
Series A, B, C, and D convertible preferred stock, respectively. After
payment of the maximum liquidation distribution to holders of convertible
preferred stock, any remaining assets of the Company will be distributed
pro rata to holders of common stock.
. Each share of convertible preferred stock is convertible into one share
of common stock. Conversion will occur automatically upon an initial
public offering with a price of not less than $4.50 per share and
proceeds in excess of $30,000,000.
. Holders of Series A, B, C, and D convertible preferred stock vote equally
with shares of common stock on an "as-if-converted" basis.
. Holders of Series A, B, C, and D convertible preferred stock possess
certain registration rights and the right to participate in future
financings.
No dividends have been declared or paid on convertible preferred stock or
common stock since inception of the Company.
(b) Common stock
During 1996, the Company issued 6,000,000 shares of common stock to the
Company's founders in exchange for certain rights and services. The fair value
assigned to the rights and services was equivalent to the fair value of the
common stock on the issuance date as determined by the Board of Directors. Upon
issuance, the Company had the right to repurchase 50% of these shares at $0.005
per share. Subject to continued employment of the founders, the repurchase
right expired in December 1996 for 25% of the shares and, for the remaining
shares, expired ratably over 36 months through December 1999. Under certain
circumstances, the shares may immediately vest upon a change in control of the
Company.
Stock issued to the founders, as well as stock issued upon exercise of stock
options under the 1996 Stock Option Plan, is subject to vesting. The Company
reserves the right of first refusal to purchase all vested shares of common
stock. All unvested shares of common stock may be repurchased by the Company at
the original issuance price upon an employee's termination of employment. The
repurchase right expires when the Company's stock becomes publicly traded or
upon a change in control of the Company. As of December 31, 1998 and 1999,
2,017,832 and 2,579,419 shares of outstanding common stock, respectively, are
unvested and, therefore, subject to repurchase by the Company.
F-36
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
By decision of the Board of Directors in November 1999, however, these
options will vest immediately on the closing date of the merger of the Company.
(c) 1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "Plan") authorizes the granting of
incentive and nonstatutory common stock options to employees and nonemployees
at exercise prices no less than 85% of the fair market value of the common
stock on the grant date, as determined by the Board of Directors. The options
may be exercised immediately upon issuance and generally have a term of 10
years. The common stock issued upon the exercise of stock options vests 25%
after one year of service and thereafter ratably over 36 months of service.
Upon termination of service, an employee's unvested shares may be repurchased
by the Company at the option exercise price. Approximately 5,000,000 shares of
common stock have been reserved for issuance under the Plan.
(d) Accounting for stock-based compensation
Under APB Opinion No. 25, the Company has recorded no compensation costs
related to its stock option plan for the year ended December 31, 1999, because
the exercise price of each employee option equals or exceeds the market value
of the underlying common stock as of the grant date for each employee stock
option. Had compensation cost for the Company's plans been determined
consistent with the fair value approach enumerated in SFAS No. 123, the
Company's pro forma net loss would have been as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1998 1999
------- ------
<S> <C> <C>
Net loss attributable to common stockholders--as
reported............................................... $10,662 $8,176
Net loss attributable to common stockholders--pro
forma.................................................. 10,677 8,408
Net loss per share attributable to common stockholders--
as reported............................................ (1.73) (1.03)
Net loss per share attributable to common stockholders--
pro forma.............................................. (1.74) (1.06)
</TABLE>
The fair value of employee options granted was estimated on the date of grant
using the minimum-value method. The fair value of nonemployee options granted
was estimated on the date of grant using the Black-Scholes option-pricing
model. There were no nonemployee options granted in 1998. The following
weighted-average assumptions were used in these calculations: risk-free
interest rate of approximately 5.3% and 6.1% for the years ended 1998 and 1999,
respectively; expected life of five years and ten years for the years ended
December 31, 1998 and 1999, respectively; no dividends and expected volatility
of 0% and 65% for employee and nonemployee options, respectively.
The weighted average fair values of options granted in 1998 and 1999 was
$0.07 and $0.24, respectively.
F-37
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of activity under the Company's option plan for the period from
January 1, 1998 to December 31, 1999, is presented below (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Options
Outstanding
----------------
Weighted
Options Average
Available Exercise
for Grant Shares Price
--------- ------ --------
<S> <C> <C> <C>
Balances as of January 1, 1998 ...................... 805 1,232 $0.15
Granted ........................................... (1,286) 1,286 0.30
Exercised ......................................... -- (444) 0.18
Canceled .......................................... 511 (511) 0.23
Unvested stock repurchased ........................ 790 -- 0.09
------ ------
Balances as of December 31, 1998..................... 820 1,563 0.24
Granted ........................................... (2,554) 2,554 0.46
Exercised ......................................... -- (941) 0.19
Canceled .......................................... 1,337 (1,337) 0.29
Unvested stock repurchased ........................ 400 -- 0.13
------ ------
Balances as of December 31, 1999..................... 3 1,839 $0.53
====== ======
</TABLE>
In addition to the 1996 stock option plan, the Company granted options of
475,000 and 235,000 for the years ended December 31, 1998 and 1999,
respectively.
A breakdown of the Company's outstanding options as of December 31, 1999 is
presented below (in thousands, except per share data):
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise of Contractual Exercise of Exercise
Price Shares Life (Years) Price Shares Price
------------- ------ ------------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
$0.075 69 6.68 $0.075 69 $0.075
$0.170 71 7.55 $0.170 71 $0.170
$0.300 586 9.31 $0.300 586 $0.300
$0.700 1,113 9.92 $0.700 1,113 $0.700
----- -----
$0.075-$0.700 1,839 9.51 $0.529 1,839 $0.529
===== =====
</TABLE>
F-38
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(e) Warrants
Warrants outstanding are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Warrants Outstanding
------------------------------
Weighted Average
Shares Exercise Price Amount
------ ---------------- ------
<S> <C> <C> <C>
Balance at December 31, 1997................. 75 $1.03 $ 77
Warrants granted............................. 14 1.70 25
--- ------
Balance at December 31, 1998................. 89 1.14 102
Warrants granted............................. 337 3.00 1,012
--- ------
Balance at December 31, 1999................. 426 $2.61 $1,114
=== ======
</TABLE>
The Company issued warrants in 1996 and 1997 for the purchase of 52,668
shares of Series B convertible preferred stock and 22,058 shares of Series C
convertible preferred stock, respectively. The Series B convertible preferred
stock warrants will expire on the later of June 17, 2003, or three years from
the effective date of an initial public offering. The Series C preferred stock
warrants will expire on the later of September 1, 2004, or three years from the
effective date of an initial public offering. In addition, the warrants expire
immediately upon either of the following:
. An initial public offering whereby the per share sale price to the public
is $3.40 or higher, or if requested by the underwriter.
. A merger or sale of substantially all of the Company's assets.
In connection with a credit facility, the Company issued warrants in 1998 for
the purchase of 14,706 shares of Series C convertible stock at an exercise
price of $1.70 per share. The fair value of the preferred stock warrants at the
date of grant was $1.17 and will expire on the later of February 1, 2005 or
three years from the effective date of an initial offering. In addition, the
warrants expire immediately upon either of the following:
. An initial public offering whereby the per share sale price to the public
is $4.50 or higher, or if requested by the underwriter.
. A merger or sale of substantially all of the Company's assets.
In connection with a capital lease, the Company issued warrants in 1999 for
the purchase of 8,333 shares of Series D convertible preferred stock at an
exercise price of $3.00 per share. The fair value of the Series D convertible
preferred stock warrants at the date of grant was $2.07. The Company determined
the fair value of Series D warrants using the Black-Scholes model with the
following assumptions: risk free interest rate of 6.1%; expected life of seven
years; volatility of 65%; and no dividend yield. The Series D preferred stock
warrants will expire on the later of January 1, 2006 or three years from the
effective date of an initial public offering. In addition, the warrants expire
immediately upon either of the following:
. An initial public offering whereby the per share sale price to the public
is $3.40 or higher, or if requested by the underwriter.
. A merger or sale of substantially all of the Company's assets.
In connection with short term note payable agreements entered into during
1999, the Company issued 329,079 Series D preferred stock warrants at a price
of $3.00 per share. The fair value of preferred stock warrants at the date of
the grant was $0.67. The Company determined the fair value of the Series D
warrants using the Black-Scholes model with the following assumptions: risk
free interest rate of 6.1%; expected life of seven years; volatility of 65% and
no
F-39
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
dividend yield. The warrants are immediately exercisable and expire on the
earliest of (i) September 23, 2000; (ii) the effective date of the Company,
completing an initial public offering; (iii) on a sale or transfer by the
Company of all or substantially all of its assets; or (iv) the acquisition of
the Company by another entity.
4. INCOME TAXES
Income tax expense for the years ended December 31, 1998 and 1999, consisted
of state income tax. The difference between the statutory income tax rate of
34% and the Company's effective tax rate is primarily due to the valuation
allowance provided for deferred tax assets. The Company has provided a
valuation allowance due to the uncertainty of generating future taxable income
that would allow for the realization of such deferred tax assets.
The types of temporary differences that give rise to significant portions of
the deferred tax assets and liabilities as of December 31, 1998 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves................................. $ 356 $ 422
Deferred start-up costs............................... 667 643
Deferred revenue...................................... 141 54
Research credit carryforwards......................... 722 957
Net operating loss carryforwards...................... 7,406 9,549
Fixed assets.......................................... 9 9
------- --------
Total gross deferred tax assets..................... 9,301 11,634
Less: Valuation allowance............................. (9,301) (11,634)
------- --------
Total deferred tax assets $ -- $ --
======= ========
</TABLE>
The change in valuation allowance for the years ended December 31, 1998 and
1999, was $5,038,000 and $2,333,000 respectively.
The Company has net operating loss carryforwards for federal and state tax
purposes of approximately $24,000,000 and $20,500,000, respectively. The
federal carryforwards expire from 2010 to 2018. The state net operating loss
carryforwards expire in 2003. The Company also has tax credit carryforwards of
approximately $591,000 and $366,000 for federal and state tax purposes,
respectively, which expire from 2001 to 2003.
The Internal Revenue Code of 1986, and applicable state tax laws, impose
substantial restrictions on the ability of the Company to utilize net operating
loss and tax credit carryforwards in the event of an ownership change, as
defined. During 1997, the Company underwent an ownership change, and, as a
result, the federal and state tax losses and tax credit carryovers incurred
through that date are subject to an annual limitation.
5. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases certain equipment and its facilities under various
noncancelable operating leases. In addition, the Company has entered into
capital lease arrangements for certain office and computer equipment.
F-40
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under operating and capital leases as of
December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31, Capital Leases Operating Leases
------------------------- -------------- ----------------
<S> <C> <C>
2000....................................... $359 $469
2001....................................... 230 482
2002....................................... 71 352
----- ------
Total minimum lease payments............... 660 $1,303
======
Less: Amount representing interest......... (58)
-----
Present value of minimum lease payments.... 602
Less: Current portion...................... (323)
-----
Long-term lease obligations.............. $ 279
=====
</TABLE>
Rent expense was $452,184 and $467,439 for the years ended December 31, 1998
and 1999, respectively.
Notes payable
The Company entered into short-term note payable agreements with various
lenders on September 23, 1999 for $987,000. The notes bear interest of 10% and
are payable in full on March 23, 2000. The principal amount outstanding on
these notes at December 31, 1999 is $895,000.
6. SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for reporting information about operating segments. The method for
determining what information to report is based on the way that management
organizes the operating segments within the Company for making operating
decisions and assessing financial performance. The Company's chief operating
decision-maker is considered to be the Company's Chief Executive Officer (CEO).
The consolidated financial information reviewed by the CEO is identical to the
information presented in the accompanying statements of operations. Therefore,
the Company operates in a single operating segment.
The CEO does not receive discrete financial information about individual
components of the Company's operations. The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information
about revenue by geographic region for purposes of making operating decisions
and assessing financial performance.
Information regarding product revenue and geographic areas for the years
ended December 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Product and service:
Product.................................................... $2,747 1,880
Maintenance................................................ 77 254
------ ------
$2,824 $2,134
====== ======
Geographic:
United States.............................................. $1,219 $1,605
Japan...................................................... 1,303 425
Canada..................................................... 266 40
Other...................................................... 36 64
------ ------
$2,824 $2,134
====== ======
</TABLE>
F-41
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. SUBSEQUENT EVENTS
On November 1, 1999, the Company entered into a definitive merger agreement
with Tut Systems, Inc. in which the stockholders of the Company received common
stock of the acquiring company in exchange for all of the outstanding shares of
preferred stock, common stock, shares issuable under common stock options, and
shares issuable under warrants for common stock and preferred stock. In
accordance with the definitive agreement, the Company's stockholders are to
receive 510,931 shares of the acquirer's common stock and approximately 19,600
options to acquire Tut Systems, Inc. common stock. The acquirer has also agreed
to pay for all investment banking fees and related closing costs of
approximately $1,200,000. The acquisition closed on February 14, 2000.
F-42
<PAGE>
VINTEL COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
November
12, 1999
-----------
(unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $330
Prepaid expenses and other........................................ 1
----
Total current assets............................................. 331
Property and equipment, net....................................... 48
Other assets...................................................... 4
----
Total assets.................................................... $383
====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 38
----
Shareholders' equity:
Common stock...................................................... 522
Deficit accumulated during development stage...................... (177)
----
Total shareholders' equity....................................... 345
----
Total liabilities and shareholders' equity...................... $383
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
VINTEL COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(in thousands, except per share amount)
<TABLE>
<CAPTION>
March 31,
1999
(Inception)
through
November 12,
1999
------------
(unaudited)
<S> <C>
Product and services revenue....................................... $ 200
Cost of goods sold................................................. 110
------
Gross margin....................................................... 90
------
Operating expenses:
Research and development......................................... 132
General and administrative....................................... 135
------
Total operating expenses....................................... 267
------
Net loss........................................................... $ (177)
======
Net loss per share, basic and diluted.............................. $(0.11)
======
Shares used in computing net loss, basic and diluted............... 1,595
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
VINTEL COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During
------------- Development
Shares Amount Stage Totals
------ ------ ----------- ------
(unaudited)
<S> <C> <C> <C> <C>
Balances as of March 31, 1999 (Inception).... -- $ -- $ -- $ --
Common stock issued to founder............... 2,000 20 -- 20
Common stock issued for consulting services.. 55 1 -- 1
Common stock issued for cash................. 463 501 -- 501
Net loss..................................... -- -- (177) (177)
----- ---- ----- -----
Balances as of November 12, 1999............. 2,518 $522 $(177) $ 345
===== ==== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
VINTEL COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
March 31,
1999
(Inception)
through
November 12,
1999
------------
(unaudited)
<S> <C>
Cash flows from operating activities:
Net loss........................................................ $(177)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation................................................... 8
Noncash compensation expense................................... 21
Change in assets and liabilities:
Prepaid expenses and other assets............................. (5)
Accounts payable.............................................. 38
-----
Net cash used in operating activities........................ (115)
-----
Cash flows from investing activities:
Purchase of property and equipment.............................. (56)
-----
Net cash used in investing activities........................ (56)
-----
Cash flows from financing activities:
Proceeds from issuances of common stock......................... 501
-----
Net cash provided by financing activities.................... 501
-----
Net increase in cash and cash equivalents......................... 330
Cash and cash equivalents, beginning of period.................... --
-----
Cash and cash equivalents, end of period.......................... $ 330
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
VINTEL COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
NOTE 1--THE COMPANY:
Vintel Communications, Inc. (the "Company"), was incorporated in March 1999
in the state of California. The Company specializes in developing high-
performance circuit and packet switching software for use in DSL access
multiplexers.
On October 15, 1999, the Company entered into a definitive agreement to
exchange all outstanding shares for shares of Tut Systems, Inc.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
The Company includes in cash and cash equivalents all highly liquid
investments which mature within three months of their purchase date.
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.
Useful lives by principal classifications are as follows:
<TABLE>
<S> <C>
Furniture and fixtures............................................. 5 years
Computers and software............................................. 3 years
</TABLE>
When assets are sold or otherwise disposed of, the cost and accumulated
depreciation and amortization are removed from the asset and allowance for
depreciation and amortization accounts, and any gain or loss on 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.
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
F-47
<PAGE>
VINTEL COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share amounts)
(continued)
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.
NOTE 3--PROPERTY AND EQUIPMENT:
Property and equipment as of November 12, 1999 consists of the following:
<TABLE>
<S> <C>
Furniture and fixtures................................................. $ 26
Computer and software.................................................. 30
----
56
Less: Accumulated depreciation......................................... (8)
----
$ 48
====
</TABLE>
NOTE 4--STOCK OPTION PLAN:
The Company reserved 750 shares of common stock for issuance under the 1999
Stock Option Plan (the "Plan") to employees, outside directors and consultants.
Under the terms of the Plan options may be granted at prices no less than 85%
of the fair market value at the date of grant, as determined by the Board of
Directors. The options generally vest over four years and expire ten years
after the date of grant. The Plan provides that vesting accelerates on all
outstanding options upon a change of control, as defined.
As of November 12, 1999, 750 options at an exercise price of $0.10 were
outstanding.
NOTE 5--OPERATING LEASE
In May 1999, the Company entered into a two year noncancelable office lease
for approximately $4 per month plus common area charges.
NOTE 6--INCOME TAXES:
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 asset.
F-48
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of our common stock being registered. All amounts are estimates except the
registration fee, the NASD filing fee and the Nasdaq National Market System
listing fee.
<TABLE>
<CAPTION>
Amount
To Be
Paid
--------
<S> <C>
Registration Fee................................................... $ 1,740
NASD Fee........................................................... 700
Nasdaq Listing Fee................................................. 17,500
Legal Fees and Expenses............................................ 75,000
Accounting Fees and Expenses....................................... 10,000
Blue Sky Fees and Expenses......................................... 5,000
Transfer Agent Fees................................................ 2,500
Miscellaneous...................................................... 2,560
--------
Total.......................................................... $115,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Our Certificate of Incorporation provides for the indemnification of
directors to the maximum extent permissible under Delaware law.
Our Bylaws provide that we shall indemnify our directors, officers, employees
and other agents to the fullest extent permitted by law. We believe that
indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether our Bylaws permit such indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our Bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in our right arising out of such person's services
as our director, officer, employee, agent or fiduciary, any of our subsidiaries
or any other company or enterprise to which the person provides services at our
request. The agreements do not provide for indemnification in cases where (i)
the claim is brought by the indemnified party, (ii) the indemnified party has
not acted in good faith; (iii) the claim arises under Section 16(b) of the
Exchange Act; or (iv) the indemnified party has engaged in acts, omissions or
transactions for which the indemnified party is prohibited from receiving
indemnification under the agreement or applicable law. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
Item 15. Recent Sales of Unregistered Securities
(a) In the three years prior to the date of this Registration Statement, we
have issued and sold the following unregistered securities. The transactions
set forth below occurring prior to September 29, 1998 do not reflect a four for
one reverse split of our common stock effected on such date.
II-1
<PAGE>
(1) During the period from June 30, 1995 to January 27, 1999, we issued
options to purchase 3,791,450 shares of our common stock to directors,
employees and consultants pursuant to the Registrant's 1992 Stock Plan.
(2) On January 2, 1997, we sold 7,500 shares of our common stock upon the
exercise of options at a price of $0.13 per share.
(3) On February 4, 1997, we sold 11,667 shares of our common stock upon
the exercise of options at a price of $0.12 per share.
(4) On February 27, 1997, we sold 6,771 shares of our common stock upon
the exercise of options at a price of $0.12 per share.
(5) On June 16, 1997, we sold 1,500 shares of our common stock upon the
exercise of options at a price of $0.09 per share.
(6) On July 11, 1997, we sold 30,000 shares of our common stock upon the
exercise of options at a price of $0.09 per share.
(7) On August 18, 1997, we sold 9,937 shares of our common stock upon the
exercise of options at a price of $0.12 per share.
(8) On August 27, 1997, we issued a warrant to purchase up to 2,667,343
shares of our Series G preferred stock, which automatically converted to
our common stock upon the closing of our initial public offering,
exercisable at a price of $2.50 per share to Microsoft Corporation in
connection with the licensing and marketing arrangement entered into
between the two companies.
(9) On September 2, 1997, we sold 9,302 shares of our common stock upon
the exercise of options at a price of $0.12 per share.
(10) On September 15, 1997, we sold 127,607 shares of our common stock
upon the exercise of options at a price of $0.09 per share.
(11) On October 21, 1997, we sold 15,625 shares of our common stock upon
the exercise of options at a price of $0.12 per share.
(12) On November 17, 1997, we sold 2,500 shares of our common stock upon
the exercise of options at a price of $0.13 per share.
(13) On December 1, 1997, we sold 822 shares of our common stock upon the
exercise of options at a price of $0.12 per share.
(14) On December 16, 1997, we sold 3,752,098 shares of our Series G
preferred stock, which automatically converted to our common stock upon the
closing of our initial public offering, to 20 investors at an as-converted
price of $3.00 per share, payable in cash.
(15) On December 31, 1997, we sold 14,500 shares of our Series G
preferred stock, which automatically converted to our common stock upon the
closing of our initial public offering, to 3 investors at an as-converted
price of $3.00 per share, payable in cash.
(16) On January 23, 1998, we sold 2,708 shares of our common stock upon
the exercise of options at a price of $0.13 per share.
(17) On January 30, 1998, we sold 7,333 shares of our Series G preferred
stock, which automatically converted to our common stock upon the closing
of our initial public offering, to 2 investors at an as-converted price of
$3.00 per share, payable in cash.
(18) On March 10, 1998, we sold 1,600 shares of our common stock upon the
exercise of options at a price of $0.12 per share.
(19) On March 16, 1998, we sold 891,079 shares of our Series G preferred
stock, which automatically converted to our common stock upon the closing
of our initial public offering, to 6 investors at an as-converted price of
$3.00 per share, payable in cash.
(20) On April 10, 1998, we sold 5,417 shares of our common stock upon the
exercise of options at a price of $0.13 per share.
II-2
<PAGE>
(21) On April 16, 1998, we sold 333,333 shares of our Series G preferred
stock, which automatically converted to our common stock upon the closing
of this offering, to one investor at an as-converted price of $3.00 per
share, payable in cash.
(22) On April 19, 1998, we sold 1,042 shares of our common stock upon the
exercise of options at a price of $0.60 per share.
(23) On May 22, 1998, we sold 1,657 shares of our Series G preferred
stock, which automatically converted to our common stock upon the closing
of our initial public offering, to one investor at an as-converted price of
$3.00 per share, payable in cash.
(24) On June 22, 1998, we sold 5,833 shares of our common stock upon the
exercise of options at a price of $0.13 per share.
(25) On June 30, 1998, we sold 1,000 shares of our common stock upon the
exercise of options at a price of $0.09 per share.
(26) On July 8, 1998, we sold 12,500 shares of our common stock upon the
exercise of options at a price of $0.12 per share.
(27) On July 10, 1998, we sold 28,749 shares of our common stock upon the
exercise of options at prices of $0.09, $0.12 and $0.13 per share.
(28) On July 14, 1998, we sold 2,080 shares of our common stock upon the
exercise of options at a price of $0.12 per share.
(29) On July 16, 1998, we sold 194,000 shares of our common stock upon
the exercise of options at prices of $0.09 and $0.12 per share.
(30) On July 29, 1998, we sold 104,896 shares of our common stock upon
the exercise of options at prices of $0.13 and $0.60 per share.
(31) On August 17, 1998, we sold 5,972 shares of our common stock upon
the exercise of options at prices of $0.12 and $0.13 per share.
(32) On August 18, 1998, we sold 15,044 shares of our common stock upon
the exercise of options at prices of $0.09 and $0.13 per share.
(33) On August 19, 1998, we sold 43,752 shares of our common stock upon
the exercise of options at a price of $0.13 per share.
(34) On August 26, 1998, we sold 917 shares of our common stock upon the
exercise of options at a price of $0.09 per share.
(35) On August 28, 1998, we sold 2,531 shares of our common stock upon
the exercise of options at a prices of $0.12 and $0.13 per share.
(36) On September 17, 1998, we sold 3,395 shares of our common stock upon
the exercise of options at a prices of $0.12 and $0.13 per share.
(37) On September 18, 1998, we sold 11,000 shares of our common stock
upon the exercise of options at a price of $0.09 per share.
(38) On September 22, 1998, we sold 7,500 shares of our common stock upon
the exercise of options at a price of $0.09 per share.
(39) On November 24, 1998, we sold 1,250 shares of our common stock upon
the exercise of options at a price of $2.00 per share.
(40) On November 30, 1998, we sold 1,187 shares of our common stock upon
the exercise of options at a price of $0.48 per share.
II-3
<PAGE>
(41) On December 4, 1998, we sold 416 shares of our common stock upon the
exercise of options at a price of $0.52 per share.
(42) On December 18, 1998, we issued a warrant to purchase 55,000 shares
of our common stock exercisable at a price of $14.00 per share to TBCC
Funding Trust II, a Delaware Business Trust, in connection with the loan
and security arrangement entered into between TransAmerica Business Credit
Corporation and the Registrant. The warrant expires on December 18, 2003.
(43) On December 22, 1998, we sold 2,049 shares of our common stock upon
the exercise of options at a price of $0.36 per share.
(44) On December 29, 1998, we sold 1,329 shares of our common stock upon
the exercise of options at prices of $0.48 and $0.52 per share.
(45) On December 30, 1998, we sold 4,250 shares of our common stock upon
the exercise of options at prices of $0.36, $0.48 and $0.52 per share.
(46) On January 4, 1999, we sold 9,750 shares of our common stock upon
the exercise of options at prices of $0.48, $0.52 and $2.00 per share.
(47) On January 5, 1999, we sold 6,901 shares of our common stock upon
the exercise of options at prices of $0.48 and $0.52 per share.
(48) On January 6, 1999, we sold 445 shares of our common stock upon the
exercise of options at prices of $0.48, $0.52 and $2.00 per share.
(49) On January 8, 1999, we sold 125 shares of our common stock upon the
exercise of options at a price of $2.00 per share.
(50) On January 18, 1999, we sold 10,000 shares of our common stock upon
the exercise of options at a price of $0.48 per share.
(51) On January 19, 1999, we sold 1,052 shares of our common stock upon
the exercise of options at prices of $0.48 and $0.52 per share.
(52) On January 20, 1999, we sold 1,939 shares of our common stock upon
the exercise of options at prices of $0.48 and $0.52 per share.
(53) On January 21, 1999, we sold 401 shares of our common stock upon the
exercise of options at a price of $0.52 per share.
(54) On January 22, 1999, we sold 20,468 shares of our common stock upon
the exercise of options at prices of $0.48, $0.52 and $2.40 per share.
(55) On January 23, 1999, we sold 5,077 shares of our common stock upon
the exercise of options at prices of $0.52 and $2.40 per share.
(56) On January 25, 1999, we sold 13,113 shares of our common stock upon
the exercise of options at prices of $0.48, $0.52, $2.00 and $2.40 per
share.
(57) On January 26, 1999, we sold 23,000 shares of our common stock upon
the exercise of options at prices of $0.36, $0.52, $2.00, $3.60 per share.
(58) On January 28, 1999, we sold 6,253 shares of our common stock upon
the exercise of options at prices of $.036, $0.48, $0.52 and $2.40 per
share.
(59) On January 28, 1999, we sold 666,836 shares of our common stock upon
exercise of the warrant issued to Microsoft on August 27, 1997 at a price
of $2.50 per share.
(60) On February 1, 1999, we sold 885 shares of our common stock upon the
exercise of options at a price of $0.52 per share.
(61) On February 8, 1999, we sold 5,452 shares of our common stock upon
the exercise of options at prices of $0.48 and $0.52 per share.
(62) On February 12, 1999, we sold 1,953 shares of our common stock upon
the exercise of options at a price of $0.52 per share.
II-4
<PAGE>
(63) On February 22, 1999, we sold 2,292 shares of our common stock upon
the exercise of options at a price of $0.52 per share.
(64) On March 1, 1999, we sold 125 shares of our common stock upon the
exercise of options at a price of $0.52 per share.
(65) On March 8, 1999, we sold 595 shares of our common stock upon the
exercise of options at a price of $0.52 per share.
(66) On March 10, 1999, we sold 654 shares of our common stock upon the
exercise of options at a price of $0.52 per share.
(67) On March 19, 1999, we sold 1,385 shares of our common stock upon the
exercise of options at a price of $0.52 per share.
(68) On April 20, 1999, we sold 937 shares of our common stock upon the
exercise of options at a price of $0.48 per share.
(69) On May 18, 1999, we sold 1,500 shares of our common stock upon the
exercise of options at a price of $8.00 per share.
(70) On June 8, 1999, we issued 168,679 of our common shares in
connection with the acquisition of PublicPort, Inc.
(71) On June 23, 1999, we sold 301 shares of our common stock upon the
exercise of options at prices of $0.36, $2.00 and $8.00 per share.
(72) On June 30, 1999, we sold 5,000 shares of our common stock upon the
exercise of options at a price of $12.00 per share.
(73) On July 8, 1999, we sold 5,493 shares of our common stock upon the
exercise of options at prices of $0.52, $2.40 and $3.60 per share.
(74) On July 13, 1999, we sold 312 shares of our common stock upon the
exercise of options at a price of $0.52 per share.
(75) On July 21, 1999, we sold 1,666 shares of our common stock upon the
exercise of options at a price of $0.52 per share.
(76) On November 12, 1999, we issued 116,370 of our common shares in
connection with the acquisition of Vintel Communications, Inc.
(77) On December 27, 1999, we sold 36,645 shares of our common stock at a
price per share of $14.00 in a cashless exchange for 18,355 shares of our
common stock pursuant to the exercise of a warrant issued December 18,
1998.
(b) There were no underwriters, brokers or finders employed in connection
with any of the transactions set forth above.
(c) The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D or Regulation S promulgated thereunder (with
respect to items 8, 14, 15, 17, 19, 21, 23, 42, 59, 70, 75, 77), or Rule 701
promulgated under Section 3(b) of the Securities Act (with respect to all other
items listed above) as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
instruments representing such securities issued in such transactions. All
recipients had adequate access, through their relationships with the Company,
to information about the Registrant.
II-5
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
1.2 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. (6)
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. (6)
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)
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
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. (6)
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. (6)
10.12 Non-competition Agreement by and between Tut Systems, Inc. FreeGate
Corporation and Sandy Benett dated as of November 17, 1999. (6)
10.13 Agreement and General Release between Registrant and And Yet, Inc. dated
July 31, 1998. (1)
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S>
10.14 Software License Agreement between RouterWare, Inc. and Registrant dated
December 16, 1997. (1)
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).
21.1 List of Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
23.2 Consent of Independent Auditors.
23.3 Consent of Independent Accountants.
23.4 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (See page II-9).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(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.
(6) Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 1999.
(b) Financial Statement Schedules
<TABLE>
<C> <S> <C>
Schedule II --Valuation and Qualifying Accounts...................... S-2
</TABLE>
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with
II-7
<PAGE>
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The registrant hereby undertakes that:
1. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
2. For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pleasant
Hill, State of California, on the 2nd day of March, 2000.
Tut Systems, Inc.
/s/ Nelson Caldwell
By: _________________________________
Nelson Caldwell
Vice President, Finance, Chief
Financial Officer
and Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Salvatore D'Auria President, Chief Executive March 2, 2000
______________________________________ Officer and Chairman of
Salvatore D'Auria the Board (Chief
Executive Officer)
/s/ Nelson Caldwell Vice President, Finance, March 2, 2000
______________________________________ Chief Financial Officer
Nelson Caldwell and Secretary (Chief
Financial and Accounting
Officer)
* Matthew Taylor Chief Technical Officer March 2, 2000
______________________________________ and Director
Matthew Taylor
* Saul Rosenzweig Director March 2, 2000
______________________________________
Saul Rosenzweig
* Brion Applegate Director March 2, 2000
______________________________________
Brion Applegate
* Neal Douglas Director March 2, 2000
______________________________________
Neal Douglas
/s/ Nelson Caldwell
*By: _________________________________
Nelson Caldwell
(Attorney-in-Fact)
</TABLE>
II-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Tut Systems, Inc.
In connection with our audits of the consolidated financial statements of Tut
Systems, Inc. as of December 31, 1998 and 1999, and for each of the three years
in the period ended December 31, 1999, which consolidated financial statements
are included in the Prospectus, we have also audited the financial statement
schedule listed in Item 16(b) herein. In our opinion, this financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information required
to be included therein.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 20, 2000
S-1
<PAGE>
SCHEDULE II
TUT SYSTEMS, INC.
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>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
1.2 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. (6)
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. (6)
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)
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
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. (6)
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. (6)
10.12 Non-competition Agreement by and between Tut Systems, Inc. FreeGate
Corporation and Sandy Benett dated as of November 17, 1999. (6)
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>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<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).
21.1 List of Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
23.2 Consent of Independent Auditors.
23.3 Consent of Independent Accountants.
23.4 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (See page II-9).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(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.
(6) Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 1999.
<PAGE>
Exhibit 5.1
[ON WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
March 2, 2000
Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
Re: Registration Statement on Form S-1 of
Tut Systems, Inc., a Delaware corporation
(the "Company")
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on February 25, 2000, (the
"Registration Statement"), in connection with the registration for resale
under the Securities Act of 1933, as amended, of 168,679 shares of Common
Stock of the Company (the "Shares").
In connection with this opinion, we have examined and relied upon
the Merger Agreement, the Registration Statement and related Prospectus,
the Company's Amended and Restated Certificate of Incorporation and
Bylaws, as currently in effect, and the originals or copies certified to
our satisfaction of records, documents, certificates, memoranda and other
instruments as judgment are necessary or appropriate to enable us to render
the opinion expressed below.
It is our opinion that the Shares are validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement, and further consent to the use of our name wherever
appearing in the Registration Statement, including the prospectus
constituting a part thereof, and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<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 use in this Registration Statement or Form S-1 of our
reports dated January 20, 2000, except as to Note 14 which is as of March 1,
2000, relating to the consolidated financial statements and financial statement
schedule of Tut Systems, Inc., which appear in such Registration Statement. We
also consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 2, 2000
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors
FreeGate Corporation:
We consent to the use of our report dated April 23, 1999, except as to Note 7,
which is as of November 1, 1999, with respect to the balance sheet of FreeGate
Corporation as of December 31, 1998 and the related statements of operations,
stockholders' equity, and cash flows for the year then ended, included herein,
and to the reference to our firm under the headings "Experts" in the
Prospectus.
Our report dated April 23, 1999, except as to Note 7, which is as of November
1, 1999, contains an explanatory paragraph that states that the Company has
suffered recurring losses from operations and negative operating cash flows
since inception, which raise substantial doubt about its ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
/s/ KPMG LLP
Mountain View, California
March 2, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement or Form S-1 of our
report dated February 14, 2000, relating to the financial statements of
FreeGate Corporation, which appear in such Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 2, 2000
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