<PAGE>
As filed with the Securities and Exchange Commission on March 23, 2000
Registration No. 333-31146
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 2
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)
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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 STANTON D. WONG
ELIZABETH D. LEAR GABRIELLA A. LOMBARDI
JOSEPH A. PIERCE DANIEL T. DASHIELL
Wilson Sonsini Goodrich & Rosati Pillsbury Madison & Sutro LLP
Professional Corporation P.O. Box 7880
650 Page Mill Road San Francisco, CA 94120
Palo Alto, California 94304 (415) 983-1000
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable 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. [_]
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 ealier effective registation 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(2) Price(2) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par 2,875,000
value................. shares(1) $39.03125 $112,214,844 $29,625
</TABLE>
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(1) Includes shares that the Underwriters have the option to purchase solely
to cover over-allotments.
(2) 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.
(3) Fee previously paid.
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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. We 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 23, 2000
PROSPECTUS
2,500,000 Shares
Common Stock
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We are offering 2,500,000 shares of common stock. Our common stock is quoted
on the Nasdaq National Market under the symbol "TUTS." On March 22, 2000, the
last reported sale price of our common stock on the Nasdaq National Market was
$58.8125 per share.
Investing in our shares involves risks. "Risk Factors" begin on page 4.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discount...........................................
Proceeds, before expenses, to Tut Systems.......................
</TABLE>
We and the selling stockholders have granted the underwriters a 30 day option
to purchase up to 375,000 additional shares of common stock to cover over-
allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 2000.
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Lehman Brothers
Dain Rauscher Wessels
Robertson Stephens
, 2000
<PAGE>
[LOGO OF TUT SYSTEMS, INC. APPEARS HERE]
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>
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Page
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<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Price Range of Common Stock.............................................. 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 27
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Management................................................................. 41
Certain Transactions....................................................... 52
Principal Stockholders..................................................... 54
Description of Capital Stock............................................... 56
Shares Eligible for Future Sale............................................ 58
Underwriting............................................................... 59
Legal Matters.............................................................. 61
Experts.................................................................... 61
Where You Can Find Additional Information About Tut Systems................ 62
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 sold in this
offering appearing elsewhere in this prospectus and in our Consolidated
Financial Statements and related notes and other documents incorporated herein
by reference.
Except as otherwise indicated, all information in this prospectus assumes
that the underwriters will not exercise the option granted by us and the
selling stockholders to purchase additional shares in this offering.
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
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The Offering
<TABLE>
<C> <S>
Common stock offered by us.......... 2,500,000 shares
Common stock offered by the selling
stockholders in the over-allotment
option(a).......................... 115,000 shares
Common stock to be outstanding after
this offering...................... 14,440,610 shares
Use of proceeds..................... For general corporate purposes, including
working capital, leasehold improvements and
capital expenditures, enhancing research and
development and attracting key personnel. See
"Use of Proceeds."
Nasdaq National Market symbol....... TUTS
</TABLE>
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(a) We have agreed that if any or all of the selling stockholders decide not to
sell their shares upon the exercise of the over-allotment option, we will
issue any shares necessary to satisfy the option.
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>
<TABLE>
<CAPTION>
As of December 31, 1999
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Pro Pro Forma
Actual Forma As Adjusted
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<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalent and short-term investments... $32,236 $32,366 $171,426
Working capital.................................... 44,416 41,348 180,408
Total assets....................................... 65,356 92,178 231,238
Long term debt, net of current portion............. -- 279 279
Total stockholders' equity......................... 51,522 73,896 212,956
</TABLE>
2
<PAGE>
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.
The unaudited pro forma as adjusted balance sheet data above reflects the
receipt of the net proceeds from the sale of the 2,500,000 shares of common
stock offered by us at an assumed public offering price of $58.8125 per share
after deducting the estimated underwriting discount and estimated offering
expenses.
Concurrent with this offering we have filed a registration statement
registering for sale 168,679 shares of our common stock issued in connection
with our acquisition of PublicPort, Inc.
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 million, 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 suite, which includes the IntelliPOP stackable access
multiplexer, the PremGate service delivery appliance, embedded RiserSmart
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 20 United
States patents and have 13 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
The net proceeds to us from the sale of the 2,500,000 shares of common stock
being offered by us are estimated to be approximately $139,059,688 after
deducting the estimated underwriting discount and estimated offering expenses
payable by us. If the underwriters fully exercise the over-allotment option,
the net proceeds are estimated to be approximately $153,563,188. We expect to
use the net proceeds of this offering for general corporate purposes, including
working capital, leasehold improvements and capital expenditures, enhancing
research and development and attracting key personnel. Pending use of the net
proceeds for the foregoing purposes, we intend to invest the net proceeds in
investment grade interest bearing marketable securities.
We will not receive any proceeds from the sale of common stock 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 22, 2000)......................... $72.38 $39.00
</TABLE>
On March 22, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $58.8125 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
. on a pro forma as adjusted basis to reflect the application of the net
proceeds from the sale of 2,500,000 shares of common stock offered by us
in this offering at an assumed public offering price of $58.8125 per
share, after deducting the estimated underwriting discount and estimated
offering expenses.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
(unaudited)
<S> <C> <C> <C>
Long-term debt, net of current portion......... $ -- $ 279 $ 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; no
shares issued and outstanding, pro forma
as adjusted............................... -- -- --
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; 14,951,641 shares issued and
outstanding, pro forma as adjusted........ 12 13 15
Additional paid-in capital..................... 108,969 132,417 271,475
Notes receivable from stockholders............. -- (275) (275)
Deferred compensation.......................... (972) (972) (972)
Accumulated deficit............................ (56,487) (57,287) (57,287)
-------- -------- --------
Total stockholders' equity................... 51,522 73,896 212,956
-------- -------- --------
Total capitalization....................... $ 51,522 $ 74,175 $213,235
======== ======== ========
</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>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was $46.7
million, or $3.75 per share. Our pro forma net tangible book value per share
represents total tangible assets less total liabilities after giving effect to
the acquisition of FreeGate as if it was completed on December 31, 1999 divided
by 12,451,641 shares, which reflects shares of common stock outstanding as of
December 31, 1999 and the shares issued in connection with the acquisition of
FreeGate. After giving effect to the receipt of the net proceeds from the sale
of 2,500,000 shares of our common stock by us at an assumed public offering
price to the public of $58.8125 per share and after deducting the estimated
underwriting discount and the estimated offering expenses, our pro forma net
tangible book value at December 31, 1999 would have been approximately $185.8
million or approximately $12.42 per share. This represents an immediate
increase in pro forma net tangible book value per share of $8.67 to existing
stockholders and an immediate dilution of $46.39 per share to new investors.
The following table sets forth this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $58.8125
Pro forma net tangible book value per share as of December
31, 1999................................................. $3.75
Increase per share attributable to new investors.......... 8.67
-----
Pro forma net tangible book value per share after the Offer-
ing........................................................ 12.42
--------
Dilution per share to new investors......................... $ 46.39
========
</TABLE>
If the underwriters exercise the over-allotment option in full, the pro forma
net tangible book value per share after this offering would be $13.17 per
share, representing an increase in net tangible book value per share to
existing stockholders of $9.42 and dilution in pro forma net tangible book
value of $45.65 to investors purchasing common stock in this offering.
The above calculations do not give effect to the exercise of outstanding
options to purchase 1,442,141 shares of our common stock at a weighted average
exercise price of $15.96 per share outstanding on December 31, 1999. To the
extent that these options become exercisable or are exercised, there will be
further dilution to new investors. See "Management--Stock Plans" and
"Description of Capital Stock--Options."
17
<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>
18
<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>
19
<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.
20
<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
21
<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
22
<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
23
<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.
24
<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, funds available under our credit facility, and the net proceeds from
this offering will be sufficient to satisfy our cash requirements for at least
the next 12 months.
25
<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.
26
<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.
27
<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]
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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
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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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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 20 United States patents and have 13 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
execption 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 intend to relocate our principal administrative and engineering facilities
from Pleasant Hill to Pleasanton, California during 2000. We have entered into
a lease for facilities in Pleasanton totaling approximately 89,000 square feet.
The lease for the Pleasanton facility expires in April 2007, with an option to
renew for five years. 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 March 22, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Salvatore D'Auria....... 44 President, Chief Executive Officer and Chairman of the Board
Sanford Benett.......... 51 Chief Operating Officer
Matthew Taylor.......... 40 Chief Technical Officer and Director
Nelson Caldwell......... 43 Vice President of Finance, Chief Financial Officer and Secretary
Allen Purdy............. 50 Vice President of Sales
Mark Carpenter.......... 39 Vice President of Marketing
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.
Mark Carpenter has served as our Vice President of Marketing since March
2000. From April 1999 to March 2000, Mr. Carpenter was Senior Director of
Marketing, New Desktop Product Marketing at Compaq Computer Corporation. From
April 1997 to March 1999 Mr. Carpenter was Director of Engineering, Internet
and Home Networking at Compaq. Prior to that time, Mr. Carpenter was Senior
Manager, Emerging Products, in the Consumer Division of IBM Corporation from
January 1996 to March 1997, and Lead Architect, Embedded Network Systems, at
IBM from January 1994 to January 1996. Mr. Carpenter holds a B.S. in Computer
Science form Worcester Polytechnic Institute.
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
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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.
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
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stockholders to be held in 2000, and Class III, whose term will expire at the
annual meeting of stockholders to be held in 2001. The Class I directors are
Messrs. Higgerson, Spreng and Applegate, the Class II directors are Messrs.
Middlemas, Douglas and Taylor, and the Class III directors are Messrs. D'Auria,
Rosenzweig and Moore. At each annual meeting of stockholders, 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 153,891 35,625 -- 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.
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<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, 611,833 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.
49
<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.
50
<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.
51
<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.
52
<PAGE>
We intend to enter into a loan agreement and secured promissory note with
Mr. Carpenter in the amount of $150,000 to be used toward the purchase of Mr.
Carpenter's principal residence. The loan will be forgiven at a rate of 25% per
annum and will not bear interest.
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.
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<PAGE>
PRINCIPAL 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; and
. all of our directors and executive officers as a group.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named below have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 11,940,610 shares of
common stock outstanding as of December 31, 1999 and 14,440,610 shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Shares of common stock subject to options that are
presently exercisable or exercisable within 60 days of December 31, 1999 are
deemed outstanding for the purpose of computing the percentage ownership of the
person or entity holding options or warrants, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person or entity. If any shares are issued upon exercise of options, warrants
or other rights to acquire our capital stock that are presently outstanding or
granted in the future or reserved for future issuance under our stock plans,
there will be further dilution to new public investors.
Unless otherwise indicated below, each person or entity named below has an
address in care of our principal executive offices.
<TABLE>
<CAPTION>
Precentage of
Ownership
Number of -----------------
Shares Beneficially Prior to After
Beneficial Owner Owned Offering Offering
---------------- ------------------- -------- --------
<S> <C> <C> <C>
5% Beneficial Owners
Microsoft Corporation (1)............... 1,083,503 9.1% 7.5%
Vanguard IV, L.P. (2)................... 658,591 5.5% 4.6%
Officers and Directors
Clifford H. Higgerson (3)............... 658,591 5.5% 4.6%
George Middlemas (4).................... 313,826 2.6% 2.2%
Neal Douglas (5)........................ 312,500 2.6% 2.2%
Salvatore D'Auria (6)................... 207,583 1.7% 1.4%
Matthew Taylor (7)...................... 188,612 1.6% 1.3%
Saul Rosenzweig (8)..................... 79,913 * *
Thomas Warner (9)....................... 47,416 * *
Nelson Caldwell (10).................... 25,683 * *
Allen Purdy (11)........................ 20,686 * *
Roger Moore (12)........................ 8,083 * *
Brion Applegate......................... 955 * *
David Spreng............................ -- -- --
All officers and directors as a group
(15 persons) (13)...................... 1,893,941 15.5% 12.9%
</TABLE>
- --------
* Less than 1%.
(1) The address of record for Microsoft Corporation is One Microsoft Way,
Building 8, Redmond, WA 98502-6399.
54
<PAGE>
(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.
The total number of outstanding shares used to calculate the percentages in
the above table does not include the exercise of the over-allotment option. If
the over-allotment option is exercised, the underwriters will have an option to
purchase an additional 375,000 shares. Of the 375,000 share option, the selling
stockholders, including some of our executive officers, may sell up to 115,000
shares of the over-allotment option. Salvatore D'Auria, our President and Chief
Executive Officer, may sell up to 50,000 shares; after the offering, assuming
full exercise of the over-allotment option, he would beneficially own 1.05% of
our common stock. Matthew Taylor, our Chief Technical Officer, may sell up to
50,000 shares; after the offering, assuming full exercise of the over-allotment
option, he would beneficially own less than one percent of our common stock.
Nelson Caldwell, our Chief Financial Officer, may sell up to 15,000 shares;
after the offering, assuming full exercise of the over-allotment option, he
would beneficially own less than one percent of our common stock. We have
agreed that if any or all of the selling stockholders decide not to sell their
shares upon exercise of the over-allotment option, we will issue any shares
necessary to satisfy the option.
55
<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
56
<PAGE>
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 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.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the offering and based on outstanding shares and options
at December 31, 1999, we will have outstanding 14,440,610 shares of our common
stock. Of these shares, the 2,500,000 shares sold by us in the offering will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended, unless purchased by our affiliates as that
term is defined in Rule 144 of the Securities Act. Of the remaining 11,940,610
shares of our common stock, approximately 3,025,000 shares held by existing
stockholders will be "restricted securities" as that term is defined in Rule
144. The number of shares of our common stock available for sale in the public
market is further limited by restrictions under the Securities Act.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned restricted shares for at least one year from the later of the date such
restricted shares are acquired from us and (if applicable) the date they were
acquired from an affiliate, is entitled to sell, within any three month period,
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of our common stock or the average weekly trading volume in
the Nasdaq National Market during the four calendar weeks preceding the filing
of Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner and notice of sales and the availability
of public information concerning us. All shares, including restricted shares,
held by our affiliates eligible for sale in the public market under Rule 144
are subject to the foregoing volume limitations and other restrictions. In
addition, an individual that is not deemed to have been our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned for at
least one year the shares proposed to be sold, would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above.
Any sale of substantial amounts of our common stock in the open market may
adversely affect the market price of our common stock offered hereby.
58
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, and FleetBoston Robertson Stephens Inc. are acting as
representatives, have each agreed to purchase from us the respective number of
shares of common stock shown opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Lehman Brothers Inc.............................................
Dain Rauscher Incorporated......................................
FleetBoston Robertson Stephens Inc..............................
---------
Total......................................................... 2,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement. It also provides that, if any of the
shares of common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock that the underwriters have
agreed to purchase under the underwriting agreement must be purchased. The
conditions contained in the underwriting agreement include the requirement
that:
. the representations and warranties made by us to the underwriters are
true;
. there is no material change in the financial markets; and
. we deliver to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus. The representatives have also
advised us that the underwriters propose to offer the shares of common stock to
dealers, who may include the underwriters, at the public offering price less a
selling concession not in excess of $ per share. The underwriters may allow,
and the dealers may reallow, a concession not in excess of $ per share to
brokers and dealers. After completion of the offering, the underwriters may
change the offering price and other selling terms.
We and the selling stockholders have granted to the underwriters an option to
purchase up to 375,000 additional shares of common stock, exercisable to cover
over-allotments, if any, at the public offering price less the underwriting
discount shown on the cover page of this prospectus. The underwriters may
exercise this option at any time until 30 days after the date of the
underwriting agreement. If this option is exercised, each underwriter will be
committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the table
above and we will be obligated, under the over-allotment option, to sell the
shares of common stock to the underwriters.
The following table shows the per share and total underwriting discount to be
paid to the underwriters by us and the selling stockholders. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Paid by the Selling
Tut Systems, Inc. Stockholders
------------------------- -------------------------
No Exercise Full Exercise No Exercise Full Exercise
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per share................ $ $ $ $
Total.................... $ $ $ $
</TABLE>
59
<PAGE>
We will pay the expenses of the offering on behalf of the selling
stockholders, excluding the underwriting discount. We estimate that the total
expenses of the offering, excluding the underwriting discount, will be
approximately $620,000.
We and the selling stockholders have agreed that, without the prior written
consent of Lehman Brothers Inc., not to directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities that may be
converted into or exchanged for any shares of common stock for a period of 90
days from the date of this prospectus.
Our common stock is quoted on the Nasdaq National Market under the symbol
"TUTS."
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities, including liabilities under the Securities Act and
liabilities arising from breaches of the representations and warranties
contained in the underwriting agreement, and to contribute to payments that the
underwriters may be required to make for these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.
The representatives also may impose a penalty bid on underwriters and selling
group members. This means that, if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or
to stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members that sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the securities by purchasers
in an offering.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
page of this prospectus.
60
<PAGE>
As permitted by Rule 103 of Regulation M promulgated by the Securities and
Exchange Commission under the Exchange Act, the underwriters, if any, that are
market makers, referred to as passive market makers, in the common stock, may
make bids for or purchases of the common stock on the Nasdaq National Market
until the time, if any, when a stabilizing bid for the securities has been
made. Rule 103 generally provides that:
. a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in the securities for the
two full consecutive calendar months (or any 60 consecutive days ending
within the 10 days) immediately preceding the filing date of the
registration statement of which this prospectus forms a part;
. a passive market maker may not effect transactions or display bids for
the common stock at a price that exceeds the highest independent bid for
the common stock by persons who are not passive market makers; and
. bids made by passive market makers must be identified as such.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information through the Internet,
intranet and other proprietary electronic technology.
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.
61
<PAGE>
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.
62
<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 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>
2,500,000 Shares
[LOGO OF TUT SYSTEMS, INC. APPEARS HERE]
Common Stock
------------
PROSPECTUS
, 2000
------------
Lehman Brothers
Dain Rauscher Wessels
Robertson Stephens
<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................................................... $ 29,625
NASD Fee........................................................... 11,800
Nasdaq Listing Fee................................................. 17,500
Legal Fees and Expenses............................................ 200,000
Accounting Fees and Expenses....................................... 150,000
Blue Sky Fees and Expenses......................................... 5,000
Transfer Agent Fees................................................ 2,500
Printing Expenses.................................................. 200,000
Miscellaneous...................................................... 3,575
--------
Total.......................................................... $620,000
========
</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.
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 Second Amended and Restated Certificate of Incorporation of Registrant.
(1)
3.2 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)
Commercial Office Lease between Las Positas LLC and Registrant, dated
10.21 March 8, 2000.
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. (7)
</TABLE>
- --------
(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.
(7) Previously filed.
(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
II-7
<PAGE>
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The 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 23rd 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 23, 2000
______________________________________ Officer and Chairman of
Salvatore D'Auria the Board (Chief
Executive Officer)
/s/ Nelson Caldwell Vice President, Finance, March 23, 2000
______________________________________ Chief Financial Officer
Nelson Caldwell and Secretary (Chief
Financial and Accounting
Officer)
* Matthew Taylor Chief Technical Officer March 23, 2000
______________________________________ and Director
Matthew Taylor
* Saul Rosenzweig Director March 23, 2000
______________________________________
Saul Rosenzweig
* Brion Applegate Director March 23, 2000
______________________________________
Brion Applegate
* Neal Douglas Director March 23, 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.
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 Second Amended and Restated Certificate of Incorporation of
Registrant. (1)
3.2 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)
10.21 Commercial Office Lease between Las Positas LLC and Registrant, dated
March 8, 2000.
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. (7)
</TABLE>
- --------
(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.
(7) Previously filed.
<PAGE>
EXHIBIT 1.1
2,500,000
TUT SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
March____, 2000
Lehman Brothers Inc.
Dain Rauscher INCORPORATED
FleetBoston Robertson Stephens Inc.
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Tut Systems, Inc., a Delaware corporation (the "Company"), proposes to
sell an aggregate of 2,500,000 shares (the "Firm Stock") of the Company's Common
Stock, par value $0.001 per share (the "Common Stock"). In addition, the
Company and certain stockholders of the Company named in Schedule 2 hereto,
individually, (a "Selling Stockholder"), collectively, (the "Selling
Stockholders") propose to grant to the Underwriters named in Schedule 1 hereto
(the "Underwriters") an option to purchase up to an additional 375,000 shares of
the Common Stock on the terms and for the purposes set forth in Section 3 (the
"Option Stock"). Additionally, the Selling Stockholders who are also officers
of the Company may also be referred to as the "Principal Stockholders." The
Firm Stock and the Option Stock, if purchased, are hereinafter collectively
called the "Stock." This is to confirm the agreement concerning the purchase of
the Stock from the Company and the Selling Stockholders by the Underwriters
named in Schedule 1 hereto (the "Underwriters").
1. Representations, Warranties and Agreements of the Company.
The Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, and an
amendment thereto, with respect to the Stock has (i) been prepared by
the Company in conformity with the requirements of the United States
Securities Act of 1933 (the "Securities Act") and the rules and
regulations (the "Rule and Regulations") of the United States
Securities and Exchange Commission (the "Commission") thereunder, (ii)
been filed with the Commission under the Securities Act and (iii)
become effective under the Securities Act. Copies of such registration
statement have been delivered by the Company to you as the
representatives (the "Representatives") of the Underwriters. As used
in this Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent post-effective
amendment thereto, if any, was declared effective by
1
<PAGE>
the Commission; "Effective Date" means the date of the Effective Time;
"Preliminary Prospectus" means each prospectus included in such
registration statement, or amendments thereof, before it became
effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Representatives
pursuant to Rule 424(a) of the Rules and Regulations; "Registration
Statement" means such registration statement, as amended at the
Effective Time, including any documents incorporated by reference
therein at such time and all information contained in the final
prospectus filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations in accordance with Section 6 hereof and deemed
to be a part of the registration statement as of the Effective Time
pursuant to paragraph (b) of Rule 430A of the Rules and Regulations;
and "Prospectus" means such final prospectus, as first filed with the
Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the
Rules and Regulations. The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will, when they become
effective or are filed with the Commission, as the case may be,
conform in all respects to the requirements of the Securities Act and
the Rules and Regulations and do not and will not, as of the
applicable effective date (as to the Registration Statement and any
amendment thereto) and as of the applicable filing date (as to the
Prospectus and any amendment or supplement thereto) contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided that no representation or warranty is made as to
information contained in or omitted from the Registration Statement or
the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or
on behalf of any Underwriter specifically for inclusion therein.
(c) The Company and each of its subsidiaries (as defined
in Section 17) have been duly incorporated and are validly existing as
corporations in good standing under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and
are in good standing as foreign corporations in each jurisdiction in
which their respective ownership or lease of property or the conduct
of their respective businesses requires such qualification, and have
all power and authority necessary to own or hold their respective
properties and to conduct the businesses in which they are engaged;
and none of the subsidiaries of the Company is a "significant
subsidiary," as such term is defined in Rule 405 of the Rules and
Regulations.
(d) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description thereof contained in
the Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly
2
<PAGE>
and validly authorized and issued and are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or indirectly
by the Company, free and clear of all liens, encumbrances, equities or
claims.
(e) The unissued shares of the Stock to be issued and
sold by the Company to the Underwriters hereunder have been duly and
validly authorized and, when issued and delivered against payment therefor
as provided herein will be duly and validly issued, fully paid and non-
assessable and the Stock will conform to the descriptions thereof contained
in the Prospectus.
(f) This Agreement has been duly authorized, executed and
delivered by the Company.
(g) The execution, delivery and performance of this
Agreement will not conflict with or result in a breach or violation of any
of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to which any of
the property or assets of the Company or any of its subsidiaries is
subject, nor will such actions result in any violation of the provisions of
the charter or by-laws of the Company or any of its subsidiaries or any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or assets; and except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated.
(h) There are no contracts, agreements or understandings
between the Company and any person granting such person the right (other
than rights which have been waived or satisfied) to require the Company to
file a registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities registered
pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Securities Act.
(i) Except as described in the Prospectus, the Company
has not sold or issued any shares of Common Stock during the six-month
period preceding the date of the Prospectus, including any sales pursuant
to Rule 144A under, or Regulations D or S of, the Securities Act other than
shares issued pursuant to employee benefit plans, qualified stock options
plans or other employee compensation plans or pursuant to outstanding
options, rights or warrants.
3
<PAGE>
(j) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements
included in the Prospectus, any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, since such date, there has not been any change in the
capital stock or long-term debt of the Company or any of its subsidiaries
or any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth or contemplated
in the Prospectus.
(k) The financial statements (including the related notes
and supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby, at the
dates and for the periods indicated, and have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved.
(l) PricewaterhouseCoopers LLP, who have certified
certain financial statements of the Company, whose report appears in the
Prospectus and who have delivered the initial letter referred to in Section
9(h) hereof, are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(m) The Company and each of its subsidiaries have good
and marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them, in each case free
and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the value
of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company and its subsidiaries;
and all real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases, with such exceptions as are not material and do not interfere with
the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries.
(n) The Company and each of its subsidiaries carry, or
are covered by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the value of
their respective properties and as is customary for companies engaged in
similar businesses in similar industries.
(o) The Company and each of its subsidiaries own or
possess adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations, service
mark registrations, copyrights and licenses (the "Intellectual Property")
necessary for the conduct of their respective
4
<PAGE>
businesses except where the failure to so own or possess such Intellectual
Property would not, singularly or in the aggregate, have a material adverse
effect on the business, financial condition or results of operations of the
Company and each of its subsidiaries, and have no reason to believe that
the conduct of their respective businesses will conflict with the
Intellectual Property rights of others, and have not received any notice of
any claim of conflict with, any such Intellectual Property rights of
others.
(p) There are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of
which any property or assets of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any of its
subsidiaries, might have a material adverse effect on the consolidated
financial position or results of operations of the Company and its
subsidiaries; and to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others.
(q) There are no contracts or other documents which are
required to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed as
exhibits to the Registration Statement or incorporated therein by reference
as permitted by the Rules and Regulations.
(r) No relationship, direct or indirect, exists between
or among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
which is required to be described in the Prospectus which is not so
described.
(s) No labor disturbance by the employees of the Company
exists or, to the knowledge of the Company, is imminent which might be
expected to have a material adverse effect on the business financial
position or results of operations of the Company and its subsidiaries.
(t) The Company is in compliance in all material respects
with all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
5
<PAGE>
(u) The Company has filed all federal, state and local
income and franchise tax returns required to be filed through the date
hereof and has paid all taxes due thereon, and no tax deficiency has been
determined adversely to the Company or any of its subsidiaries which has
had, nor does the Company have any knowledge of any tax deficiency which,
if determined adversely to the Company or any of its subsidiaries, might
have a material adverse effect on the business financial position or
results of operations of the Company and its subsidiaries.
(v) Since the date as of which information is given in
the Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted any
securities, (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred in
the ordinary course of business, (iii) entered into any transaction not in
the ordinary course of business or (iv) declared or paid any dividend on
its capital stock.
(w) The Company (i) makes and keeps accurate books and
records and (ii) maintains internal accounting controls which provide
reasonable assurance that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as necessary to
permit preparation of its financial statements and to maintain
accountability for its assets, (C) access to its assets is permitted only
in accordance with management's authorization and (D) the reported
accountability for its assets is compared with existing assets at
reasonable intervals.
(x) Neither the Company nor any of its subsidiaries (i)
is in violation of its charter or by-laws, (ii) is in default in any
material respect, and no event has occurred which, with notice or lapse of
time or both, would constitute such a default, in the due performance or
observance of any term, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which it is a party or by which it is bound or to which any of its
properties or assets is subject or (iii) is in violation in any material
respect of any law, ordinance, governmental rule, regulation or court
decree to which it or its property or assets may be subject or has failed
to obtain any license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its property or to
the conduct of its business.
(y) Neither the Company nor any of its subsidiaries, nor
any director, officer, agent, employee or other person associated with or
acting on behalf of the Company or any of its subsidiaries, has used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expense relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; violated or is in violation of any provision
of the Foreign Corrupt Practices Act of 1977; or made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment.
6
<PAGE>
(z) To the Company's knowledge, there has been no
storage, disposal, generation, manufacture, refinement, transportation,
handling or treatment of toxic wastes, medical wastes, hazardous wastes or
hazardous substances by the Company or any of its subsidiaries (or, to the
knowledge of the Company, any of their predecessors in interest) at, upon
or from any of the property now or previously owned or leased by the
Company or its subsidiaries in violation of any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit or which would require
remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or remedial
action which would not have, or could not be reasonably likely to have,
singularly or in the aggregate with all such violations and remedial
actions, a material adverse effect on the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries; there has been no material spill, discharge,
leak, emission, injection, escape, dumping or release of any kind onto such
property or into the environment surrounding such property of any toxic
wastes, medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company or any of its subsidiaries or
with respect to which the Company or any of its subsidiaries have
knowledge, except for any such spill, discharge, leak, emission, injection,
escape, dumping or release which would not have or would not be reasonably
likely to have, singularly or in the aggregate with all such spills,
discharges, leaks, emissions, injections, escapes, dumpings and releases, a
material adverse effect on the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and
its subsidiaries; and the terms "hazardous wastes", "toxic wastes",
"hazardous substances" and "medical wastes" shall have the meanings
specified in any applicable local, state, federal and foreign laws or
regulations with respect to environmental protection.
(aa) Neither the Company nor any subsidiary is an
"investment company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the Commission
thereunder.
(bb) The execution and delivery of the Agreement and Plan
of Reorganization dated as of June 7, 1999 (the "PublicPort Agreement")
between the Company and PublicPort, Inc. ("PublicPort"), effecting the
merger of PublicPort with and into a wholly owned subsidiary of the
Company, was duly authorized by all necessary corporate action on the part
of each of the Company and PublicPort. Each of the Company and PublicPort
had all corporate power and authority to execute and deliver the PublicPort
Agreement and the Certificate of Merger between the Company and PublicPort
complying with all applicable laws and referencing the PublicPort Agreement
(the "PublicPort Certificate of Merger"), to file the PublicPort
Certificate of Merger with the Secretary of State of Delaware and to
consummate the merger contemplated by the PublicPort Agreement, and the
PublicPort Agreement at the time of execution and filing constituted a
valid and binding obligation of each of the Company and PublicPort,
enforceable in accordance with its terms. The execution and delivery of the
Agreement and Plan of Reorganization dated as of November 12, 1999 (the
7
<PAGE>
"Vintel Agreement") between the Company and Vintel Communications, Inc.
("Vintel"), effecting the merger of Vintel with and into a wholly owned
subsidiary of the Company, was duly authorized by all necessary corporate
action on the part of each of the Company and Vintel. Each of the Company
and Vintel had all corporate power and authority to execute and deliver the
Vintel Agreement and the Certificate of Merger between the Company and
Vintel complying with all applicable laws and referencing the Vintel
Agreement (the "Vintel Certificate of Merger"), to file the Vintel
Certificate of Merger with the Secretary of State of California and to
consummate the merger contemplated by the Vintel Agreement, and the Vintel
Agreement at the time of execution and filing constituted a valid and
binding obligation of each of the Company and Vintel, enforceable in
accordance with its terms. The execution and delivery of the Agreement and
Plan of Reorganization dated as of November 16, 1999 (the "Freegate
Agreement") between the Company and Freegate Corporation ("Freegate"),
effecting the merger of Freegate with and into a wholly owned subsidiary of
the Company, was duly authorized by all necessary corporate action on the
part of each of the Company and Freegate. Each of the Company and Freegate
had all corporate power and authority to execute and deliver the Freegate
Agreement and the Certificate of Merger between the Company and Freegate
complying with all applicable laws and referencing the Freegate Agreement
(the "Freegate Certificate of Merger"), to file the Freegate Certificate of
Merger with the Secretary of State of Delaware and to consummate the merger
contemplated by the Freegate Agreement, and the Freegate Agreement at the
time of execution and filing constituted a valid and binding obligation of
each of the Company and Freegate, enforceable in accordance with its terms.
The execution and delivery of the Asset Purchase Agreement dated as of
February 3, 2000 (the "Oneworld Agreement") between the Company and
Oneworld Systems, Inc. ("Oneworld"), effecting the purchase of certain of
the assets of Oneworld by the Company, was duly authorized by all necessary
corporate action on the part of each of the Company and Oneworld. Each of
the Company and Oneworld had all corporate power and authority to execute
and deliver the Oneworld Agreement and the Oneworld Agreement complied with
all applicable laws, and the Oneworld Agreement at the time of execution
constituted a valid and binding obligation of each of the Company and
Oneworld, enforceable in accordance with its terms.
(cc) The pro forma consolidated condensed financial
statements of the Company and its subsidiaries and the related notes
thereto included under the captions "Prospectus Summary-Summary
Consolidated Financial Data," "Capitalization," "Selected Consolidated
Financial Data" and "Unaudited Pro Forma Combined Financial Information"
and elsewhere in the Prospectus and the Registration Statement, present
fairly the information contained therein, have been prepared in accordance
with the Commission's rules and guidelines with respect to pro forma
financial statements and have been properly presented on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein
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2. Representations, Warranties and Agreements of the Selling
Stockholders Each Selling Stockholder severally represents, warrants and agrees
that:
(a) The Selling Stockholder has, and immediately prior to
the First Delivery Date (as defined in Section 5 hereof) the Selling
Stockholder will have good and valid title to the shares of Stock to
be sold by the Selling Stockholder hereunder on such date, free and
clear of all liens, encumbrances, equities or claims; and upon
delivery of such shares and payment therefor pursuant hereto, good and
valid title to such shares, free and clear of all liens, encumbrances,
equities or claims, will pass to the several Underwriters.
(b) The Selling Stockholder has placed in custody under a
custody agreement (the "Custody Agreement" and, together with all
other similar agreements executed by the other Selling Stockholders,
the "Custody Agreements") with [insert name of custodian], as
custodian (the "Custodian"), for delivery under this Agreement,
certificates in negotiable form (with signature guaranteed by a
commercial bank or trust company having an office or correspondent in
the United States or a member firm of the New York or American Stock
Exchanges) representing the shares of Stock to be sold by the Selling
Stockholder hereunder.
(c) The Selling Stockholder has duly and irrevocably
executed and delivered a power of attorney (the "Power of Attorney"
and, together with all other similar agreements executed by the other
Selling Stockholders, the "Powers of Attorney") appointing the
Custodian and one or more other persons, as attorneys-in-fact, with
full power of substitution, and with full authority (exercisable by
any one or more of them) to execute and deliver this Agreement and to
take such other action as may be necessary or desirable to carry out
the provisions hereof on behalf of the Selling Stockholder.
(d) The Selling Stockholder has full right, power and
authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement; the execution, delivery and performance of this
Agreement, the Power of Attorney and the Custody Agreement by the
Selling Stockholder and the consummation by the Selling Stockholder of
the transactions contemplated hereby will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Selling
Stockholder is a party or by which the Selling Stockholder is bound or
to which any of the property or assets of the Selling Stockholder is
subject, nor will such actions result in any violation of the
provisions of the charter or by-laws of the Selling Stockholder, the
articles of partnership of the Selling Stockholder or the deed of
trust of the Selling Stockholder, as applicable, or any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Selling Stockholder or the property or
assets of the Selling Stockholder; and, except for the registration of
the Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required
under
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the Exchange Act and applicable state securities laws in connection
with the purchase and distribution of the Stock by the Underwriters,
no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this
Agreement, the Power of Attorney or the Custody Agreement by the
Selling Stockholder and the consummation by the Selling Stockholder of
the transactions contemplated hereby and thereby.
(e) All information furnished by or on behalf of such
Selling Stockholder in writing expressly for use in the Registration
Statement and Prospectus, including, without limitation, information
concerning the shares of Common Stock of the Company held by the
Selling Stockholder, as set forth in the Prospectus under the caption
"Principal and Selling Stockholders," is true and correct in all
material respects and does not contain any untrue statement of
material fact or omit to state any material fact necessary to make
such information not misleading. Such Selling Stockholder (other than
a Management Selling Stockholder (as defined below)) has no reason to
believe that the Registration Statement and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, do not and will not, as of the
applicable effective date (as to the Registration Statement and any
amendment thereto) and as of the applicable filing date (as to the
Prospectus and any amendment or supplement thereto) contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided that no representation or warranty is made as to
information contained in or omitted from the Registration Statement or
the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or
on behalf of any Underwriter specifically for inclusion therein.
(f) The Selling Stockholder, if an officer of the Company
(a "Management Selling Stockholder"), has no reason to believe that
the representations and warranties of the Company contained in Section
1 hereof are not materially true and correct, is familiar with the
Registration Statement and the Prospectus (as amended or supplemented)
and has no knowledge of any material fact, condition or information
not disclosed in the Registration Statement, as of the effective date,
or the Prospectus (or any amendment or supplement thereto), as of the
applicable filing date, which has adversely affected or may adversely
affect the business of the Company. The Selling Stockholder is not
prompted to sell shares of Common Stock by any information concerning
the Company which is not set forth in the Registration Statement and
the Prospectus.
(g) The Selling Stockholder has not taken and will not
take, directly or indirectly, any action which is designed to or which
has constituted or which might reasonably be expected to cause or
result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the shares
of the Stock.
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<PAGE>
3. Purchase of the Stock by the Underwriters. On the basis of
the representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 2,500,000 shares of
the Firm Stock to the several Underwriters and each of the Underwriters,
severally and not jointly, agrees to purchase the number of shares of the Firm
Stock set opposite that Underwriter's name in Schedule 1 hereto. Each
Underwriter shall be obligated to purchase from the Company, that number of
shares of the Firm Stock which represents the same proportion of the number of
shares of the Firm Stock to be sold by the Company, as the number of shares of
the Firm Stock set forth opposite the name of such Underwriter in Schedule 1
represents of the total number of shares of the Firm Stock to be purchased by
all of the Underwriters pursuant to this Agreement. The respective purchase
obligations of the Underwriters with respect to the Firm Stock shall be rounded
among the Underwriters to avoid fractional shares, as the Representatives may
determine.
In addition, the Company and the Selling Stockholders grant to the
Underwriters an option to purchase up to 375,000 shares of Option Stock. Of the
375,000 shares of Option Stock, each Selling Stockholder individually grants an
option to purchase the number of shares of the Option Stock set forth opposite
his name in Schedule 2 hereto. If any of the Selling Stockholders refuses to
sell to the Underwriters the Option Stock, the Company agrees to sell all of the
Option Stock to be sold by such Selling Stockholder to the Underwriters. Such
options are granted for the purpose of covering over-allotments in the sale of
Firm Stock and is exercisable as provided in Section 5 hereof. Shares of Option
Stock shall be purchased severally for the account of the Underwriters in
proportion to the number of shares of Firm Stock set opposite the name of such
Underwriters in Schedule 1 hereto. The respective purchase obligations of each
Underwriter with respect to the Option Stock shall be adjusted by the
Representatives so that no Underwriter shall be obligated to purchase Option
Stock other than in 100 share amounts.
The price of both the Firm Stock and any Option Stock shall be
$[_____] per share.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on any Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein.
4. Offering of Stock by the Underwriters. Upon authorization by
the Representatives of the release of the Firm Stock, the several Underwriters
propose to offer the Firm Stock for sale upon the terms and conditions set forth
in the Prospectus.
5. Delivery of and Payment for the Stock. Delivery of and
payment for the Firm Stock shall be made at the office of Wilson, Sonsini,
Goodrich & Rosati, at 10:00 A.M., New York City time, on the fourth full
business day following the date of this Agreement or at such other date or place
as shall be determined by agreement between the Representatives and the Company.
This date and time are sometimes referred to as the "First Delivery Date." On
the First Delivery Date, the Company and the Selling Stockholders shall deliver
or cause to be delivered certificates representing the Firm Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company and the Selling Stockholders of the purchase price by
wire transfer in immediately available funds. Time shall be of the essence, and
delivery at the time and place specified pursuant to this Agreement is a further
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<PAGE>
condition of the obligation of each Underwriter hereunder. Upon delivery, the
Firm Stock shall be registered in such names and in such denominations as the
Representatives shall request in writing not less than two full business days
prior to the First Delivery Date. For the purpose of expediting the checking and
packaging of the certificates for the Firm Stock, the Company and the Selling
Stockholders shall make the certificates representing the Firm Stock available
for inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the First Delivery Date.
The option granted in Section 3 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Custodian (on behalf of the Selling
Stockholders) and the Company by the Representatives. Such notice shall set
forth the aggregate number of shares of Option Stock as to which the option is
being exercised, the names in which the shares of Option Stock are to be
registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as a "Second Delivery Date" and the First Delivery
Date and any Second Delivery Date are sometimes each referred to as a "Delivery
Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 5
(or at such other place as shall be determined by agreement between the
Representatives and the Custodian (on behalf of the Selling Stockholders) or the
Representatives and the Company, as the case may be) at 10:00 A.M., New York
City time, on such Second Delivery Date. On such Second Delivery Date, each
Selling Stockholder or the Company, as the case may be, shall deliver or cause
to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of such Selling Stockholder or Company, as the case may be, of the
purchase price by wire transfer in immediately available funds. Time shall be
of the essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligation of each Underwriter
hereunder. Upon delivery, the Option Stock shall be registered in such names
and in such denominations as the Representatives shall request in the aforesaid
written notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, each Selling Stockholder or the Company, as
the case may be, shall make the certificates representing the Option Stock
available for inspection by the Representatives in New York, New York, not later
than 2:00 P.M., New York City time, on the business day prior to such Second
Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than Commission's close of business
on the second business day following the execution and delivery of
this Agreement or, if applicable, such earlier time as may be required
by Rule 430A(a)(3) under the
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<PAGE>
Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted
herein; to advise the Representatives, promptly after it receives
notice thereof, of the time when any amendment to the Registration
Statement has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish the
Representatives with copies thereof; to advise the Representatives,
promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or the Prospectus, of the
suspension of the qualification of the Stock for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or the
Prospectus or for additional information; and, in the event of the
issuance of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or the Prospectus or suspending
any such qualification, to use promptly its best efforts to obtain its
withdrawal;
(b) To furnish promptly to each of the Representatives and to
counsel for the Underwriters a signed copy of the Registration
Statement as originally filed with the Commission, and each amendment
thereto filed with the Commission, including all consents and exhibits
filed therewith;
(c) To deliver promptly to the Representatives such number of
the following documents as the Representatives shall reasonably
request: (i) conformed copies of the Registration Statement as
originally filed with the Commission and each amendment thereto (in
each case excluding exhibits other than this Agreement and the
computation of per share earnings) and, (ii) each Preliminary
Prospectus, the Prospectus and any amended or supplemented Prospectus
and, if the delivery of a prospectus is required at any time after the
Effective Time in connection with the offering or sale of the Stock or
any other securities relating thereto and if at such time any events
shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary to amend
or supplement the Prospectus in order to comply with the Securities
Act, to notify the Representatives and, upon their request, to file
such document and to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of an amended
or supplemented Prospectus which will correct such statement or
omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by the
Commission;
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<PAGE>
(e) Prior to filing with the Commission any amendment to
the Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to furnish a
copy thereof to the Representatives and counsel for the Underwriters and
obtain the consent of the Representatives to the filing;
(f) As soon as practicable after the Effective Date to
make generally available to the Company's security holders and to deliver
to the Representatives an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a) of
the Securities Act and the Rules and Regulations (including, at the option
of the Company, Rule 158);
(g) For a period of five years following the Effective
Date, to furnish to the Representatives copies of all materials furnished
by the Company to its shareholders and all public reports and all reports
and financial statements furnished by the Company to the principal national
securities exchange upon which the Common Stock may be listed pursuant to
requirements of or agreements with such exchange or to the Commission
pursuant to the Exchange Act or any rule or regulation of the Commission
thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering
and sale under the securities laws of such jurisdictions as the
Representatives may request and to comply with such laws so as to permit
the continuance of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the Stock;
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction;
(i) For a period of 90 days from the date of the
Prospectus, not to, directly or indirectly, (1) offer for sale, sell,
pledge or otherwise dispose of (or enter into any transaction or device
which is designed to, or could be expected to, result in the disposition by
any person at any time in the future of) any shares of Common Stock or
securities convertible into or exchangeable for Common Stock (other than
the Stock and shares issued pursuant to employee benefit plans, qualified
stock option plans or other employee compensation plans existing on the
date hereof or pursuant to currently outstanding options, warrants or
rights), or sell or grant options, rights or warrants with respect to any
shares of Common Stock or securities convertible into or exchangeable for
Common Stock (other than the grant of options pursuant to option plans
existing on the date hereof), or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in part, any
of the economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in clause (1) or (2) above is
to be settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case without the prior written consent of Lehman
Brothers Inc.
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<PAGE>
(j) Prior to the Effective Date, to apply for the listing
of the Stock on the National Market System and to use its best efforts to
complete that listing, subject only to official notice of issuance, prior
to the First Delivery Date;
(k) To apply the net proceeds from the sale of the Stock
being sold by the Company as set forth in the Prospectus; and
(l) To take such steps as shall be necessary to ensure
that neither the Company nor any subsidiary shall become an "investment
company" within the meaning of such term under the Investment Company Act
of 1940 and the rules and regulations of the Commission thereunder.
7. Further Agreements of the Selling Stockholders. Each
Selling Stockholder agrees:
(a) For a period of 90 days from the date of the
Prospectus, not to, directly or indirectly, (1) offer for sale, sell,
pledge or otherwise dispose of (or enter into any transaction or device
which is designed to, or could be expected to, result in the disposition by
any person at any time in the future of) any shares of Common Stock or
securities convertible into or exchangeable for Common Stock (other than
the Option Stock) or (2) enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any of the
economic benefits or risks of ownership of such shares of Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or other securities, in cash or
otherwise, in each case without the prior written consent of Lehman
Brothers Inc.
(b) That the Option Stock to be sold by the Selling
Stockholder hereunder, which is represented by the certificates held in
custody for the Selling Stockholder, is subject to the interest of the
Underwriters and the other Selling Stockholders thereunder, that the
arrangements made by the Selling Stockholder for such custody are to that
extent irrevocable, and that the obligations of the Selling Stockholder
hereunder shall not be terminated by any act of the Selling Stockholder, by
operation of law, by the death or incapacity of any individual Selling
Stockholder or, in the case of a trust, by the death or incapacity of any
executor or trustee or the termination of such trust, or the occurrence of
any other event.
(c) To deliver to the Representatives prior to the First
Delivery Date a properly completed and executed United States Treasury
Department Form W-8 (if the Selling Stockholder is a non-United States
person) or Form W-9 (if the Selling Stockholder is a United States person.)
8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the
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<PAGE>
Registration Statement as originally filed and each amendment thereto and any
post-effective amendments thereof (including, in each case, exhibits), any
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Prospectus, all as provided in this Agreement; (d) the costs of producing and
distributing this Agreement and any other related documents in connection with
the offering, purchase, sale and delivery of the stock; (e) the costs of
delivering and distributing the Custody Agreements and the Powers of Attorney;
(f) the filing fees incident to, and the reasonable fees and expenses of counsel
for the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of sale of the
Stock; (g) any applicable listing or other fees; (h) the fees and expenses of
qualifying the Stock under the securities laws of the several jurisdictions as
provided in Section 6(h) and of preparing, printing and distributing a Blue Sky
Memorandum (including related fees and expenses of counsel to the Underwriters);
and (i) all other costs and expenses incident to the performance of the
obligations of the Company and the Selling Stockholders under this Agreement;
provided that, except as provided in this Section 8 and in Section 13 the
Underwriters shall pay their own costs and expenses, including the costs and
expenses of their counsel, any transfer taxes on the Stock which they may sell
and the expenses of advertising any offering of the Stock made by the
Underwriters.
9. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
and the Selling Stockholders contained herein, to the performance by the Company
and the Selling Stockholders of their respective obligations hereunder, and to
each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a); no stop order suspending
the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission; and any request of the
Commission for inclusion of additional information in the Registration
Statement or the Prospectus or otherwise shall have been complied
with.
(b) No Underwriter shall have discovered and disclosed to
the Company on or prior to such Delivery Date that the Registration
Statement or the Prospectus or any amendment or supplement thereto
contains an untrue statement of a fact which, in the opinion of
Pillsbury Madison & Sutro LLP, counsel for the Underwriters, is
material or omits to state a fact which, in the opinion of such
counsel, is material and is required to be stated therein or is
necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters
incident to the authorization, form and validity of this Agreement,
the Custody Agreements, the Powers of Attorney, the Stock, the
Registration Statement and the Prospectus, and all other legal matters
relating to this Agreement and the transactions contemplated hereby
shall be reasonably satisfactory in all material respects to counsel
for the Underwriters, and the Company and the Selling Stockholders
shall
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<PAGE>
have furnished to such counsel all documents and information
that they may reasonably request to enable them to pass upon such
matters.
(d) Wilson Sonsini Goodrich & Rosati shall have furnished
to the Representatives its written opinion, as counsel to the Company,
addressed to the Underwriters and dated such Delivery Date, in form
and substance reasonably satisfactory to the Representatives, to the
effect that:
(i) The Company and each of its subsidiaries have
been duly incorporated and are validly existing as corporations in
good standing under the laws of their respective jurisdictions of
incorporation, are duly qualified to do business and are in good
standing as foreign corporations in each jurisdiction in which their
respective ownership or lease of property or the conduct of their
respective businesses requires such qualification and have all power
and authority necessary to own or hold their respective properties and
conduct the businesses in which they are engaged;
(ii) The Company has an authorized capitalization
as set forth in the Prospectus, and all of the issued shares of
capital stock of the Company (including the shares of Stock being
delivered on such Delivery Date) have been duly and validly authorized
and issued, are fully paid and non-assessable and conform to the
description thereof contained in the Prospectus;
(iii) There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the voting or
transfer of, any shares of the Stock pursuant to the Company's
Certificate of Incorporation, by-laws, any agreement material to the
Company's business as described in the Registration Statement and
Prospectus, or, to such counsel's knowledge, any other instrument;
(iv) There are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party of
which any property or assets of the Company or any of its subsidiaries
is a party or of which any property or assets of the Company or any of
its subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, might have a material adverse
effect on the business, financial position, and results of operations
of the Company and its subsidiaries; and, to such counsel's knowledge,
no such proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(v) The Registration Statement was declared
effective under the Securities Act as of the date and time specified
in such opinion, the Prospectus was filed with the Commission pursuant
to the subparagraph of Rule 424(b) of the Rules and Regulations
specified in such opinion on the
17
<PAGE>
date specified therein and no stop order suspending the effectiveness
of the Registration Statement has been issued and, to the knowledge of
such counsel, no proceeding for that purpose is pending or threatened
by the Commission;
(vi) The Registration Statement and the Prospectus
and any further amendments or supplements thereto made by the Company
prior to such Delivery Date (other than the financial statements,
financial data and related schedules therein, as to which such counsel
need express no opinion) comply as to form in all material respects
with the requirements of the Securities Act and the Rules and
Regulations and any further amendment or supplement to any such
incorporated document made by the Company prior to such Delivery Date
(other than the financial statements and related schedules therein, as
to which such counsel need express no opinion), when they became
effective or were filed with the Commission, as the case may be,
complied as to form in all material respects with the with the
requirements of the Securities Act or the Exchange Act, as applicable,
and the rules and regulations of the Commission thereunder;
(vii) The statements in the Registration Statement
and Prospectus under the captions "Certain Transactions," "Description
of Capital Stock" and "Shares Eligible for Future Sale" and in the
Registration Statement in Items 14 and 15, insofar as they are
descriptions of contracts, agreements or other legal documents, or
refer to statements of law or legal conclusion, are accurate and
present fairly the information required to be shown;
(viii) To such counsel's knowledge, after due
inquiry, there are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as exhibits to the
Registration Statement or incorporated therein by reference as
permitted by the Rules and Regulations;
(ix) This Agreement has been duly authorized,
executed and delivered by the Company;
(x) The issue and sale of the shares of Stock
being delivered on such Delivery Date by the Company and the
compliance by the Company with all of the provisions of this Agreement
and the consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement, or other agreement material
to the Company's business as described in the Registration Statement
and Prospectus, or other instrument known to such counsel to which the
Company is a party or by which the Company is
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bound or to which any of the property or assets of the Company is
subject, nor will such actions result in any violation of the
provisions of the charter or by-laws of the Company or any statute or
any order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or
any of its properties or assets; and, except for the registration of
the Stock under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required
under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency or
body is required for the execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby; and
(xi) To such counsel's knowledge, after due
inquiry, there are no contracts, agreements or understandings between
the Company and any person granting such person the right (other than
rights which have been waived or satisfied) to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement. To such counsel's knowledge, after due
inquiry, except as described in the Prospectus there are no contracts,
agreements or understandings between the Company and any person
granting such person the right to require the Company to register or
include such securities pursuant to any other registration statement
filed by the Company under the Securities Act.
In rendering such opinion, such counsel may state that its opinion is limited to
matters governed by the Federal laws of the United States of America, the laws
of the state of California and the General Corporation Law of the State of
Delaware. Such counsel shall also have furnished to the Representatives a
written statement, addressed to the Underwriters and dated such Delivery Date,
in form and substance satisfactory to the Representatives, to the effect that
(i) such counsel has acted as counsel to the Company on a regular basis, has
acted as counsel to the Company in connection with previous financing
transactions and has acted as counsel to the Company in connection with the
preparation of the Registration Statement, and (ii) although such counsel has
not verified the accuracy, completeness or fairness of the statements contained
in the Registration Statement or Prospectus (except for those matters referred
to in subsections (vi), (vii) and (xi) of this Section 9(d)), based on the
foregoing, no facts have come to the attention of such counsel which lead it to
believe that the Registration Statement (other than the financial statements,
financial data and related schedules therein, as to which such counsel need
express no opinion), as of the Effective Date, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that the Prospectus
(other than the financial statements, financial data and related schedules
therein, as to which such counsel need express no opinion), as of the
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Delivery Date, contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(e) Blakely, Sokoloff, Taylor & Zafman LLP shall have
furnished to the Representatives its written opinion as patent counsel
to the Company addressed to the Underwriters and dated such Delivery
Date, in form and substance reasonably satisfactory to the
Representatives, to the effect that:
Such counsel is familiar with the technology used by
the Company in its business and the manner of its use thereof and has
read the Registration Statement and the Prospectus, including
particularly the portions of the Registration Statement and the
Prospectus referring to patents, trade secrets, trademarks, service
marks or other proprietary information or materials and:
(i) The statements in the Registration Statement
and the Prospectus under the captions "Risk Factors -- We may be
subject to intellectual property infringement claims that are costly
to defend and may harm our business and ability to compete; If we fail
to protect our intellectual property, or if others use our proprietary
technology without authorization, our competitive position may suffer"
and "Business -- Proprietary Rights" and under the caption "Business"
generally to the extent such statements relate solely to patent
matters (the "Intellectual Property Portion") to the best of such
counsel's knowledge and belief, are accurate statements or summaries
of the matters therein set forth and nothing has come to such
counsel's attention that causes such counsel to believe that the
Intellectual Property Portion of the Registration Statement, as of the
Effective Date, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading, or
that the Intellectual Property Portion of the Prospectus, as of the
Delivery Date, contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(ii) There are no legal or governmental proceedings
pending relating to patent rights, trade secrets, trademarks, service
marks or other proprietary information or materials of the Company
which, if determined adversely to the Company, might have a material
adverse effect on the business financial position or results of the
operations of the Company and to the best of such counsel's knowledge,
no such proceedings are threatened or contemplated by governmental
authorities or others;
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(iii) To such counsel's knowledge, after due
inquiry, there are no contracts or other documents, relating to the
Company's patents, trade secrets, trademarks, service marks or other
proprietary information or materials of a character required to be
filed as an exhibit to or incorporated by reference in the
Registration Statement or required to be described in the Registration
Statement or the Prospectus that are not filed, incorporated by
reference or described as required;
(iv) To such counsel's knowledge, the Company is
not infringing or otherwise violating any patents, trade secrets,
trademarks, service marks or other proprietary information or
materials, of others; and
(v) To such counsel's knowledge, the Company owns
or possesses sufficient licenses or other rights to use all patents,
trade secrets, trademarks, service marks or other proprietary
information or materials necessary to conduct the business now being
or proposed to be conducted by the Company as described in the
Prospectus.
(f) The counsel for the Selling Stockholders shall have
furnished to the Representatives its written opinion, as counsel to
the Selling Stockholders for whom it is acting as counsel, addressed
to the Underwriters and dated the First Delivery Date, in form and
substance reasonably satisfactory to the Representatives, to the
effect that:
(i) Each Selling Stockholder has full right, power
and authority to enter into this Agreement, the Power of Attorney and
the Custody Agreement; the execution, delivery and performance of this
Agreement, the Power of Attorney and the Custody Agreement by each
Selling Stockholder and the consummation by each Selling Stockholder
of the transactions contemplated hereby and thereby will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute, any
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument known to such counsel to which any Selling Stockholder
is a party or by which any Selling Stockholder is bound or to which
any of the property or assets of any Selling Stockholder is subject,
nor will such actions result in any violation of the provisions of the
charter or by-laws of any Selling Stockholder, the articles of
partnership of any Selling Stockholder or the deed of trust of any
Selling Stockholder, as applicable, or any statute or any order, rule
or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over any Selling Stockholder or the
property or assets of any Selling Stockholder; and, except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws
in connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or
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registration with, any such court or governmental agency or
body is required for the execution, delivery and performance of this
Agreement, the Power of Attorney or the Custody Agreement by any
Selling Stockholder and the consummation by any Selling Stockholder of
the transactions contemplated hereby;
(ii) This Agreement has been duly authorized,
executed and delivered by or on behalf of each Selling Stockholder;
(iii) A Power-of-Attorney and a Custody Agreement
have been duly authorized, executed and delivered by each Selling
Stockholder and constitute valid and binding agreements of each
Selling Stockholder, enforceable in accordance with their respective
terms;
(iv) Immediately prior to the First Delivery Date,
each Selling Stockholder had good and valid title to the shares of
Stock to be sold by such Selling Stockholder under this Agreement,
free and clear of all liens, encumbrances, equities or claims, and
full right, power and authority to sell, assign, transfer and deliver
such shares to be sold by such Selling Stockholder hereunder; and
(v) Good and valid title to the shares of Stock to
be sold by each Selling Stockholder under this Agreement, free and
clear of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters.
In rendering such opinion, such counsel may (i) state that its opinion
is limited to matters governed by the Federal laws of the United States of
America, the laws of the State of California and the General Corporation Law of
the State of Delaware and that such counsel is not admitted in the State of
Delaware and (ii) in rendering the opinion in Section 9(f)(iv) above, rely upon
a certificate of each Selling Stockholder in respect of matters of fact as to
ownership of and liens, encumbrances, equities or claims on the shares of Stock
sold by such Selling Stockholder, provided that such counsel shall furnish
copies thereof to the Representatives and state that it believes that both the
Underwriters and it are justified in relying upon such certificate. Such
counsel shall also have furnished to the Representatives a written statement,
addressed to the Underwriters and dated the First Delivery Date, in form and
substance satisfactory to the Representatives, to the effect that (x) such
counsel has acted as counsel to each Selling Stockholder in connection with the
preparation of the Registration Statement, and (y) based on the foregoing, no
facts have come to the attention of such counsel which lead it to believe that
the Registration Statement, as of the Effective Date, contained any untrue
statement of a material fact relating to any Selling Stockholder or omitted to
state such a material fact required to be stated therein or necessary in order
to make the statements therein not misleading, or that the Prospectus contains
any untrue statement of a material fact relating to any Selling Stockholder or
omits to state such a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. The foregoing opinion and statement may
be qualified by a statement to the effect that such
22
<PAGE>
counsel does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or the
Prospectus.
(g) The Representatives shall have received from
Pillsbury Madison & Sutro LLP, counsel for the Underwriters, such
opinion or opinions, dated such Delivery Date, with respect to the
issuance and sale of the Stock, the Registration Statement, the
Prospectus and other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such
counsel such documents as they reasonably request for the purpose of
enabling them to pass upon such matters.
(h) At the time of execution of this Agreement, the
Representatives shall have received from PricewaterhouseCoopers LLP a
letter, in form and substance satisfactory to the Representatives,
addressed to the Underwriters and dated the date hereof (i) confirming
that they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission, (ii) stating, as of the date hereof
(or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days prior to
the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(i) With respect to the letter of PricewaterhouseCoopers
LLP referred to in the preceding paragraph and delivered to the
Representatives concurrently with the execution of this Agreement (the
"initial letter"), the Company shall have furnished to the
Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such Delivery
Date (i) confirming that they are independent public accountants
within the meaning of the Securities Act and are in compliance with
the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission, (ii)
stating, as of the date of the bring-down letter (or, with respect to
matters involving changes or developments since the respective dates
as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of
the bring-down letter), the conclusions and findings of such firm with
respect to the financial information and other matters covered by the
initial letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
(j) The Company shall have furnished to the
Representatives a certificate, dated such Delivery Date, of its
Chairman of the Board, its President or a Vice President and its chief
financial officer stating that:
(i) The representations, warranties and agreements
of the Company in Section 1 are true and correct as of such
Delivery Date; the
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Company has complied with all its agreements contained
herein; and the conditions set forth in Sections 9(a) and
9(l) have been fulfilled; and
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as of
the Effective Date, the Registration Statement and Prospectus
did not include any untrue statement of a material fact and
did not omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, and (B) since the Effective Date no event has
occurred which should have been set forth in a supplement or
amendment to the Registration Statement or the Prospectus.
(k) Each Selling Stockholder (or the Custodian or one or
more attorneys-in-fact on behalf of the Selling Stockholders) shall
have furnished to the Representatives on the First Delivery Date a
certificate, dated the First Delivery Date, signed by, or on behalf
of, the Selling Stockholder (or the Custodian or one or more
attorneys-in-fact) stating that the representations, warranties and
agreements of the Selling Stockholder contained herein are true and
correct as of the First Delivery Date and that the Selling Stockholder
has complied with all agreements contained herein to be performed by
the Selling Stockholder at or prior to the First Delivery Date.
(l) (i) Neither the Company nor any of its subsidiaries
shall have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference with
its business from fire, explosion, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus or (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set
forth or contemplated in the Prospectus, the effect of which, in any
such case described in clause (i) or (ii), is, in the judgment of the
Representatives, so material and adverse as to make it impracticable
or inadvisable to proceed with the public offering or the delivery of
the Stock being delivered on such Delivery Date on the terms and in
the manner contemplated in the Prospectus.
(m) Subsequent to the execution and delivery of this
Agreement (i) no downgrading shall have occurred in the rating
accorded the Company's debt securities by any "nationally recognized
statistical rating organization" as that term is defined by the
Commission for purposes of Rule 436(g)(2) of the Rules and Regulations
and (ii) no such organization shall have publicly announced that it
has under surveillance or review, with possible negative implications,
its rating of any of the Company's debt securities.
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<PAGE>
(n) Subsequent to the execution and delivery of this
Agreement there shall not have occurred any of the following: (i)
trading in securities generally on the New York Stock Exchange or the
American Stock Exchange or in the over-the-counter market, or trading
in any securities of the Company on any exchange or in the over-the-
counter market, shall have been suspended or minimum prices shall have
been established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body or
governmental authority having jurisdiction, (ii) a banking moratorium
shall have been declared by Federal or state authorities, (iii) the
United States shall have become engaged in hostilities, there shall
have been an escalation in hostilities involving the United States or
there shall have been a declaration of a national emergency or war by
the United States or (iv) there shall have occurred such a material
adverse change in general economic, political or financial conditions
(or the effect of international conditions on the financial markets in
the United States shall be such) as to make it, in the judgment of a
majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the
Stock being delivered on such Delivery Date on the terms and in the
manner contemplated in the Prospectus.
(o) The National Market System shall have approved the
Stock for listing subject only to official notice of issuance.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
10. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each
Underwriter, its officers and employees and each person, if any, who
controls any Underwriter within the meaning of the Securities Act,
from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof (including, but not limited
to, any loss, claim, damage, liability or action relating to purchases
and sales of Stock), to which that Underwriter, officer, employee or
controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in (A) any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto, or (B) in any materials or
information provided to investors by, or with the approval of, the
Company in connection with the marketing of the offering of the Stock
("Marketing Materials"), including any roadshow or investor
presentations made to investors by the Company (whether in person or
electronically), (ii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the Prospectus,
or in any amendment or supplement thereto, or in any Marketing
Materials any material fact required to be stated therein or necessary
to make the statements therein not misleading or (iii) any act or
failure to act or any alleged
25
<PAGE>
act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Stock or the offering contemplated
hereby, and which is included as part of or referred to in any loss,
claim, damage, liability or action arising out of or based upon
matters covered by clause (i) or (ii) above (provided that the Company
shall not be liable under this clause (iii) to the extent that it is
determined in a final judgment by a court of competent jurisdiction
that such loss, claim, damage, liability or action resulted directly
from any such acts or failures to act undertaken or omitted to be
taken by such Underwriter through its gross negligence or willful
misconduct), and shall reimburse each Underwriter and each such
officer, employee or controlling person promptly upon demand for any
legal or other expenses reasonably incurred by that Underwriter,
officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such
loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any such amendment or supplement, in reliance upon
and in conformity with written information concerning such Underwriter
furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein which
information consists solely of the information specified in Section
9(g). The foregoing indemnity agreement is in addition to any
liability which the Company or the Principal Stockholders may
otherwise have to any Underwriter or to any officer, employee or
controlling person of that Underwriter.
(b) The Selling Stockholders, severally in proportion to
the number of shares of stock to be sold by each of them hereunder,
shall indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss,
claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of the Option
Stock), to which that Underwriter, officer, employee or controlling
person may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment or
supplement thereto or (ii) the omission or alleged omission to state
in any Preliminary Prospectus, Registration Statement or the
Prospectus, or in any amendment or supplement thereto, any material
fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse each Underwriter, its
officers and employees and each such controlling person for any legal
or other expenses reasonably incurred by that Underwriter, its
officers and employees or controlling person in connection with
investigating or defending or preparing to defend against any such
loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that such Selling Stockholders
26
<PAGE>
shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of, or is based upon,
any untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any such amendment or supplement in
reliance upon and in conformity with written information concerning
such Underwriter furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion therein
which information consists solely of the information specified in
Section 9(g); and provided, further, that each Selling Stockholder
other than the Management Selling Stockholders shall only be liable
under this Section 9(b) with respect to (A) information pertaining to
such Selling Stockholder furnished by or on behalf of such Selling
Stockholder expressly for use in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or
supplement thereto or (B) facts that would constitute a breach of any
representation or warranty of such Selling Stockholder set forth in
Section 2 hereof. The foregoing indemnity agreement is in addition to
any liability which such Selling Stockholders may otherwise have to
any Underwriter or any officer, employee or controlling person of that
Underwriter.
(c) Each Underwriter, severally and not jointly, shall
indemnify and hold harmless the Company, its officers and employees,
each of its directors, and each person, if any, who controls the
Company within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any action in
respect thereof, to which the Company or any such director, officer or
controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto, or (B) in any Blue Sky Application or
(ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, or in any Blue Sky Application any
material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent
that the untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
written information concerning such Underwriter furnished to the
Company through the Representatives by or on behalf of that
Underwriter specifically for inclusion therein, and shall reimburse
the Company and any such director, officer or controlling person for
any legal or other expenses reasonably incurred by the Company or any
such director, officer or controlling person in connection with
investigating or defending or preparing to defend against any such
loss, claim, damage, liability or action as such expenses are
incurred. The foregoing indemnity agreement is in addition to any
liability which any Underwriter may otherwise have to the Company or
any such director, officer, employee or controlling person.
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(d) Promptly after receipt by an indemnified party under
this Section 10 of notice of any claim or the commencement of any
action, the indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under this Section 10,
notify the indemnifying party in writing of the claim or the
commencement of that action; provided, however, that the failure to
notify the indemnifying party shall not relieve it from any liability
which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure and, provided further, that
the failure to notify the indemnifying party shall not relieve it from
any liability which it may have to an indemnified party otherwise than
under this Section 10. If any such claim or action shall be brought
against an indemnified party, and it shall notify the indemnifying
party thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After
notice from the indemnifying party to the indemnified party of its
election to assume the defense of such claim or action, the
indemnifying party shall not be liable to the indemnified party under
this Section 10 for any legal or other expenses subsequently incurred
by the indemnified party in connection with the defense thereof other
than reasonable costs of investigation; provided, however, that the
Representatives shall have the right to employ counsel to represent
jointly the Representatives and those other Underwriters and their
respective officers, employees and controlling persons who may be
subject to liability arising out of any claim in respect of which
indemnity may be sought by the Underwriters against the Company or any
Selling Stockholder under this Section 10 if, in the reasonable
judgment of the Representatives, it is advisable for the
Representatives and those Underwriters, officers, employees and
controlling persons to be jointly represented by separate counsel, and
in that event the fees and expenses of such separate counsel shall be
paid by the Company or Selling Stockholders. No indemnifying party
shall (i) without the prior written consent of the indemnified parties
(which consent shall not be unreasonably withheld), settle or
compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of
which indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding, or
(ii) be liable for any settlement of any such action effected without
its written consent (which consent shall not be unreasonably
withheld), but if settled with the consent of the indemnifying party
or if there be a final judgment of the plaintiff in any such action,
the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of
such settlement or judgment.
(e) If the indemnification provided for in this Section
10 shall for any reason be unavailable to or insufficient to hold
harmless an indemnified party under Section10(a), 10(b) or 10(c) in
respect of any loss, claim, damage or liability, or any action in
respect thereof, referred to therein, then each
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<PAGE>
indemnifying party shall, in lieu of indemnifying such indemnified
party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action
in respect thereof, (i) in such proportion as shall be appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other from
the offering of the Stock or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company and the
Selling Stockholders on the one hand and the Underwriters on the other
with respect to the statements or omissions which resulted in such
loss, claim, damage or liability, or action in respect thereof, as
well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other with respect to such
offering shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Stock purchased under this Agreement
(before deducting expenses) received by the Company and the Selling
Stockholders, on the one hand, and the total underwriting discounts
and commissions received by the Underwriters with respect to the
shares of the Stock purchased under this Agreement, on the other hand,
bear to the total gross proceeds from the offering of the shares of
the Stock under this Agreement, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be
determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state
a material fact relates to information supplied by the Company, the
Principal Subsidiary, the Selling Stockholders or the Underwriters,
the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contributions
pursuant to this Section 10 were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take
into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the
loss, claim, damage or liability, or action in respect thereof,
referred to above in this Section 10 shall be deemed to include, for
purposes of this Section 10(e), any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
this Section 10(e), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Stock underwritten by it and distributed to the public was offered to
the public exceeds the amount of any damages which such Underwriter
has otherwise paid or become liable to pay by reason of any untrue or
alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section
10(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
The Underwriters' obligations to
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contribute as provided in this Section 10(e) are several in proportion
to their respective underwriting obligations and not joint.
(f) The Underwriters severally confirm and the Company
acknowledges that the statements with respect to the public offering
of the Stock by the Underwriters set forth on the cover page of, the
legend concerning over-allotments on the inside front cover page of
and the concession and reallowance figures appearing under the caption
"Underwriting" in, the Prospectus are correct and constitute the only
information concerning such Underwriters furnished in writing to the
Company by or on behalf of the Underwriters specifically for inclusion
in the Registration Statement and the Prospectus.
(g) The liability of each Selling Stockholder under such
Selling Stockholder's indemnity, contribution and reimbursement
agreements contained in the provisions of this Section 9 shall be
limited to an amount equal to the product of the price of the Stock
sold by such Selling Stockholder to the Underwriters set forth in
Section 3 hereof, multiplied by the number of shares of Stock sold by
such Selling Stockholder hereunder.
30
<PAGE>
11. Defaulting Underwriters. If, on either Delivery Date,
any Underwriter defaults in the performance of its obligations under this
Agreement, the remaining non-defaulting Underwriters shall be obligated to
purchase the Stock which the defaulting Underwriter agreed but failed to
purchase on such Delivery Date in the respective proportions which the number of
shares of the Firm Stock set opposite the name of each remaining non-defaulting
Underwriter in Schedule 1 hereto bears to the total number of shares of the Firm
Stock set opposite the names of all the remaining non-defaulting Underwriters in
Schedule 1 hereto; provided, however, that the remaining non-defaulting
Underwriters shall not be obligated to purchase any of the Stock on such
Delivery Date if the total number of shares of the Stock which the defaulting
Underwriter or Underwriters agreed but failed to purchase on such date exceeds
9.09% of the total number of shares of the Stock to be purchased on such
Delivery Date, and any remaining non-defaulting Underwriter shall not be
obligated to purchase more than 110% of the number of shares of the Stock which
it agreed to purchase on such Delivery Date pursuant to the terms of Section 3.
If the foregoing maximums are exceeded, the remaining non-defaulting
Underwriters, or those other underwriters satisfactory to the Representatives
who so agree, shall have the right, but shall not be obligated, to purchase, in
such proportion as may be agreed upon among them, all the Stock to be purchased
on such Delivery Date. If the remaining Underwriters or other underwriters
satisfactory to the Representatives do not elect to purchase the shares which
the defaulting Underwriter or Underwriters agreed but failed to purchase on such
Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the
obligation of the Underwriters to purchase, and of the Selling Stockholders or
Company, as the case may be, to sell, the Option Stock) shall terminate without
liability on the part of any non-defaulting Underwriter or the Company or the
Selling Stockholders except that the Company will continue to be liable for the
payment of expenses to the extent set forth in Sections 8 and 13. As used in
this Agreement, the term "Underwriter" includes, for all purposes of this
Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 11, purchases Firm Stock which a
defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company and the Selling Stockholders for damages
caused by its default. If other underwriters are obligated or agree to purchase
the Stock of a defaulting or withdrawing Underwriter, either the Representatives
or the Company may postpone the Delivery Date for up to seven full business days
in order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
12. Termination. The obligations of the Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 9(l), 9(m) or 9(n)shall have
occurred or if the Underwriters shall decline to purchase the Stock for any
reason permitted under this Agreement.
13. Reimbursement of Underwriters' Expenses. If (a) the Company
or any Selling Stockholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholders to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company or the Selling Stockholders
31
<PAGE>
Stockholders is not fulfilled, the Company or the Selling Stockholders will
reimburse the Underwriters for all reasonable out-of-pocket expenses (including
fees and disbursements of counsel) incurred by the Underwriters in connection
with this Agreement and the proposed purchase of the Stock, and upon demand the
Company or the Selling Stockholders shall pay the full amount thereof to the
Representative(s). If this Agreement is terminated pursuant to Section 11 by
reason of the default of one or more Underwriters, neither the Company nor any
Selling Stockholder shall be obligated to reimburse any defaulting Underwriter
on account of those expenses.
14. Notices, etc. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc., Three
World Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice
pursuant to Section 11(d), to the Director of Litigation, Office of
the General Counsel, Lehman Brothers Inc., 3 World Financial Center,
10th Floor, New York, NY 10285;
(b) if to the Company shall be delivered or sent by mail,
telex or facsimile transmission to the address of the Company set
forth in the Registration Statement, Attention: Nelson Caldwell (Fax:
(925) 682-4125);
(c) if to any Selling Stockholders, shall be delivered or
sent by mail, telex or facsimile transmission to such Selling
Stockholder at the address set forth on Schedule 2 hereto;
provided, however, that any notice to an Underwriter pursuant to Section 10(d)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and
the Selling Stockholders shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Underwriters by
Lehman Brothers Inc. on behalf of the Representatives and the Company and the
Underwriters shall be entitled to act and rely upon any request, consent, notice
or agreement given or made on behalf of the Selling Stockholders by the
Custodian.
15. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the Underwriters, the Company,
the Selling Stockholders and their respective personal representatives and
successors. This Agreement and the terms and provisions hereof are for the sole
benefit of only those persons, except that (A) the representations, warranties,
indemnities and agreements of the Company and the Selling Stockholders contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act and (B) the indemnity agreement of the Underwriters contained
in Section 10(c) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the
32
<PAGE>
Company within the meaning of Section 13 of the Securities Act. Nothing in this
Agreement is intended or shall be construed to give any person, other than the
persons referred to in this Section 15, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision contained herein.
16. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Selling Stockholders and the
Underwriters contained in this Agreement or made by or on behalf on them,
respectively, pursuant to this Agreement, shall survive the delivery of and
payment for the Stock and shall remain in full force and effect, regardless of
any investigation made by or on behalf of any of them or any person controlling
any of them.
17. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of New York.
Each party irrevocably agrees that any legal suit, action or
proceeding arising out of or based upon this Agreement or the transactions
contemplated hereby ("Related Proceedings") may be instituted in the federal
courts of the United States of America located in the City of New York or the
courts of the State of New York in each case located in the Borough of Manhattan
in the City of New York (collectively, the "Specified Courts"), and irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. The parties further agree that service of
any process, summons, notice or document by mail to such party's address set
forth above shall be effective service of process for any lawsuit, action or
other proceeding brought in any such court. The parties hereby irrevocably and
unconditionally waive any objection to the laying of venue of any lawsuit,
action or other proceeding in the Specified Courts, and hereby further
irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such lawsuit, action or other proceeding brought in any such
court has been brought in an inconvenient forum.
19. Waiver of Immunity. With respect to any Related Proceeding,
each party irrevocably waives, to the fullest extent permitted by applicable
law, all immunity (whether on the basis of sovereignty or otherwise) from
jurisdiction, service of process, attachment (both before and after judgment)
and execution to which it might otherwise be entitled in the Specified Courts,
and with respect to any Related Judgment, each party waives any such immunity in
the Specified Courts or any other court of competent jurisdiction, and will not
raise or claim or cause to be pleaded any such immunity at or in respect of any
such Related Proceeding or Related Judgment, including, without limitation, any
immunity pursuant to the United States Foreign Sovereign Immunities Act of 1976,
as amended.
33
<PAGE>
20. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
21. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
[The remainder of this page intentionally left blank]
34
<PAGE>
If the foregoing correctly sets forth the agreement among the Company,
the Selling Stockholders and the Underwriters, please indicate your acceptance
in the space provided for that purpose below.
Very truly yours,
TUT SYSTEMS, INC.
By
-----------------------------------
Nelson Caldwell
The Selling Stockholders named in Schedule 2 to
this Agreement
By
-----------------------------------
Nelson Caldwell
Attorney-in-Fact
Accepted:
Lehman Brothers Inc.
Dain Rauscher Incorporated
FleetBoston Robertson Stephens Inc.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By LEHMAN BROTHERS INC.
BY
-------------------------
Authorized Representative
35
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Underwriters Number of Shares
- ------------ ----------------
<S> <C>
Lehman Brothers Inc........................... 1,175,000
Dain Rauscher Incorporated 646,250
FleetBoston Robertson Stephens Inc............ 528,750
Fidelity Capital Markets, a division of 50,000
National Services Finance Corporation
Gruntal & Co., LLC 50,000
Kaufman Bros., L.P. 50,000
Total.................................... 2,500,000
=========
</TABLE>
36
<PAGE>
SCHEDULE 2
<TABLE>
<CAPTION>
Name and Address of Selling Stockholders Number of Shares of Option Stock
- ---------------------------------------- --------------------------------
<S> <C>
Salvatore D'Auria............................. 50,000
2495 Estand Way
Pleasant Hill, CA 94523
Tel.: (925) 682-6510
Fax: (925) 682-4125 50,000
Matthew Taylor................................
2495 Estand Way
Pleasant Hill, CA 94523
Tel.: (925) 682-6510
Fax: (925) 682-4125
Nelson Caldwell............................... 15,000
2495 Estand Way
Pleasant Hill, CA 94523
Tel.: (925) 682-6510
Fax: (925) 682-4125
Total.................................... 115,000
=======
</TABLE>
<PAGE>
Exhibit 5.1
[ON WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
March 23, 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, as amended,
(the "Registration Statement"), in connection with the registration under
the Securities Act of 1933, as amended, of 2,500,000 shares of Common Stock
of the Company (the "Shares"). The Shares, which include up to 375,000
shares of Common Stock issuable pursuant to an over-allotment option
granted to the underwriters, are to be sold to the underwriters as
described in such Registration Statement for the sale to the public or
issued to the Representatives of the underwriters. As your counsel in
connection with this transaction, we have examined the proceedings proposed
to be taken in connection with said sale and issuance of the Shares.
It is our opinion that, upon approval by the pricing committee duly
authorized by the Company's Board of Directors, the Shares when issued and
sold in the manner referred to in the Registration Statement will be
legally and validly issued, fully paid and nonassessable.
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 10.21
========================================
Commercial Office Lease
between
Las Positas LLC,
as Landlord,
and
Tut Systems, Inc.
as Tenant,
dated
March __, 2000
========================================
<PAGE>
Table Of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Basic Lease Information............................................. iii
1. Premises...................................................... 1
2. Term; Completion of Improvements.............................. 1
3. Rental........................................................ 2
4. Use........................................................... 7
5. Utilities and Services........................................ 8
6. Taxes Payable by Tenant....................................... 9
7. Alterations, Additions or Improvements........................ 11
8. Liens......................................................... 12
9. Repairs....................................................... 12
10. Destruction or Damage......................................... 14
11. Insurance; Waiver of Subrogation.............................. 15
12. Release; Indemnity............................................ 17
13. Compliance with Legal Requirements............................ 19
14. Assignment and Subletting..................................... 21
15. Rules......................................................... 25
16. Entry by Landlord............................................. 25
17. Events of Default............................................. 26
18. Landlord's Right to Terminate................................. 27
19. Continuation Notwithstanding Default.......................... 28
20. Additional Remedies........................................... 28
21. Landlord's Right to Cure Defaults............................. 28
22. Attorneys' Fees............................................... 29
23. Eminent Domain................................................ 29
24. Subordination................................................. 30
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
25. No Merger..................................................... 32
26. Sale.......................................................... 32
27. Estoppel Certificate.......................................... 32
28. No Light, Air, or View Easement............................... 33
29. Holding Over.................................................. 33
30. Abandonment................................................... 33
31. Surrender..................................................... 34
32. Waiver........................................................ 34
33. Notice........................................................ 34
34. Complete Agreement............................................ 35
35. Authority..................................................... 35
36. Miscellaneous Provisions...................................... 35
37. Exhibits...................................................... 37
38. Letter of Credit.............................................. 38
39. Brokerage..................................................... 40
40. Limitation of Liability....................................... 40
41. Option to Renew............................................... 40
42. Signage....................................................... 43
43. Use of Names.................................................. 43
44. Parking and Transportation.................................... 43
45. Landlord's Default............................................ 44
</TABLE>
ii
<PAGE>
Commercial Office Lease
Basic Lease Information
Lease
Section
Preamble Date: March __, 2000
Preamble Landlord: Las Positas LLC
Preamble Tenant: Tut Systems, Inc.
Preamble Guarantor: None
1 Building Rinconada Center
5956 & 5964 West Las Positas Boulevard,
Pleasanton, California
1 Premises Approximately Eighty-Nine Thousand
Eighty-Six (89,086) rentable square
feet of the Building, as shown on
Exhibit A attached hereto.
2(a); 2(c) Possession Delivery Date One (1) day after (i) mutual execution
and delivery hereof, and (ii)
Landlord's receipt of the Letter of
Credit pursuant to Section 38, subject
to the second sentence of Section 2(a).
iii
<PAGE>
Term Commencement: The later of (i) the date Landlord
substantially completes Landlord's Work
in accordance with Section 2(b), or
(ii) the earlier of (a) the date that
is ninety (90) days following the
Possession Delivery Date (as such date
may be extended as provided below), or
(b) June 1, 2000 (as such date may be
extended as provided below). Each of
the dates described in clauses (ii) (a)
and (ii)(b) of the preceding sentence
shall be extended one (1) day for each
day of any delay in Tenant's completion
of Tenant's Work (as defined in Exhibit
B) that may be caused by a breach by
Landlord of its obligations under
Exhibit B.
3(d) Commencement of Payment of Term Commencement
Base Rent and Additional Rent:
2 Term Expiration: April 30, 2007 subject to Section 2 of
the Lease.
---------------------------------------
3(a) Base Rent: Lease
Year Monthly Base Rent Installment
---------------------------------------
1 One Hundred Twenty Thousand
Two Hundred Sixty-Six and
10/100 Dollars ($120,266.10)
(based on a Monthly Base Rent
of $1.35 per square foot).
---------------------------------------
2 One Hundred Twenty-Four
Thousand Seven Hundred Twenty
and 40/100 Dollars
($124,720.40) (based on a
Monthly Base Rent of $1.40
per square foot).
---------------------------------------
iv
<PAGE>
---------------------------------------
3 One Hundred Twenty-Nine
Thousand One Hundred Seventy-
Four and 70/100 Dollars
($129,174.70) (based on a
Monthly Base Rent of $1.45
per square foot).
---------------------------------------
4 One Hundred Thirty-Three
Thousand Six Hundred Twenty-
Nine and No/100 Dollars
($133,629.00) (based on a
Monthly Base Rent of $1.50
per square foot).
---------------------------------------
5 One Hundred Thirty-Eight
Thousand Eighty-Three and
30/100 Dollars ($138,083.30)
(based on a Monthly Base Rent
of $1.55 per square foot).
---------------------------------------
6 One Hundred Forty-Two
Thousand Five Hundred Thirty-
Seven and 60/100 Dollars
($142,537.60) (based on a
Monthly Base Rent of $1.60
per square foot).
---------------------------------------
7 One Hundred Forty-Six
Thousand Nine Hundred Ninety-
One and 90/100 Dollars
($146,991.90) (based on a
Monthly Base Rent of $1.65
per square foot).
---------------------------------------
33 Tenant's Address for Notices: 2495 Estand Way
Pleasant Hill, CA 94523
Attention: Chief Financial Officer
After Term Commencement, to the
Premises:
5964 West Las Positas Boulevard
Pleasanton, CA 94588
Attention: Chief Financial Officer
v
<PAGE>
33 Guarantor's Address for Not applicable
Notices:
33 Landlord's Address for c/o Landmark Asset Management Group
Notices: 23422 Mill Creek Drive, Suite 125
Laguna Hills, California 92653
and
c/o DRA Advisors, Inc.
220 East 42nd Street
27th Floor
New York, New York 10017
38 Letter of Credit: Letter of Credit in the amount of
$1,850,000.00, to be reduced by
$250,000 upon the expiration of each of
the first six Lease Years
Landlord's Broker Colliers International
Tenant's Broker Cushman & Wakefield of California, Inc.
vi
<PAGE>
The provisions of the Lease identified above in the margin are those provisions
where references to particular Basic Lease Information appear. Each such
reference shall incorporate the applicable Basic Lease Information.
Landlord: Las Positas LLC,
a Delaware limited liability company
By: G&I II Las Positas LLC,
a Delaware limited liability company,
its managing member
By: G&I II Investment Las Positas Corp.,
a Delaware corporation,
its managing member
By:
--------------------
Name:
------------------
Title:
-----------------
Tenant: Tut Systems, Inc.,
a Delaware corporation
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
vii
<PAGE>
Commercial Office Lease
This Commercial Office Lease (this "Lease"), dated effective as of the date
set forth in the Basic Lease Information is made and entered into by and between
each of the persons or entities specified in the Basic Lease Information as
Landlord ("Landlord"), Tenant ("Tenant") and Guarantor, if any ("Guarantor"),
respectively.
1. Premises
Subject to the terms, covenants, agreements and conditions hereinafter set
forth, to which Landlord and Tenant hereby mutually agree, (i) Landlord hereby
leases to Tenant, and Tenant hereby leases from Landlord, for the Term (as
defined below), the Premises, as specified in the Basic Lease Information, which
are located in the Building, as specified in the Basic Lease Information, which
is located on the parcel of land described on Exhibit A attached hereto (the
"Land," and together with the Premises and the Building, collectively, the
"Property"), and (ii) Landlord hereby grants to Tenant, for the Term, the right
to use all areas and facilities within the Property, but outside the Premises,
including, without limitation, the parking areas, access and perimeter roads,
sidewalks, landscaped areas, service areas, trash disposal facilities, and
similar areas and facilities, and the exterior walls and windows of the
Building. In addition, throughout the Term Tenant shall be entitled to use the
generator located immediately outside the Building (the "External Generator").
2. Term; Completion of Improvements
(a) Term. The term of this Lease (the "Term") shall commence (the "Term
Commencement") and, unless sooner terminated as hereinafter provided, shall end
(the "Term Expiration") on the dates specified in the Basic Lease Information.
If Landlord, for any reason whatsoever, cannot deliver possession of the
Premises to Tenant (subject to Section 2(c) below) by the Possession Delivery
Date, as specified in the Basic Lease Information, this Lease shall not be void
or voidable and the Landlord shall not be liable to Tenant for any loss or
damage resulting therefrom; provided, however, that in such event Tenant may
terminate this Lease upon not less than ten (10) days prior written notice to
Landlord, or, at Tenant's option, subject to any contrary provisions in Exhibit
B attached hereto, the Term Commencement and the Term Expiration shall be
deferred for the number of days of such delay.
(b) Completion of Landlord's Work. The Premises are leased to Tenant in
their present "as-is" condition, except that prior to the Term Commencement
Landlord shall substantially complete Landlord's Work (as defined in Exhibit B),
subject only to the completion of punchlist items, and except as otherwise
expressly set forth herein or in Exhibit B. If Landlord has not substantially
1
<PAGE>
completed Landlord's Work by the date that is ninety (90) days following the
Possession Delivery Date, Tenant may terminate this Lease upon not less than ten
(10) days prior written notice to Landlord. Following substantial completion of
Landlord's Work, Landlord's architect and Tenant shall conduct a joint
inspection of the Premises and shall prepare a punchlist of items to be
completed by Landlord in connection with Landlord's Work. Such punchlist items
shall be completed by Landlord within thirty (30) days following preparation of
such punchlist.
(c) Delivery of Possession; Early Access. Landlord shall deliver possession
of the Premises to Tenant on the Possession Delivery Date; provided, however,
that until the Term Commencement Tenant's possession of the Premises shall be
solely for the purpose of constructing the Tenant Improvements (as defined in
Exhibit B) as provided in Exhibit B. Landlord shall permit Tenant nonexclusive
access to the Premises before the Possession Delivery Date solely for the
purpose of preparing space plans and working drawings for the Tenant
Improvements. Any such possession of or access to the Premises before the Term
Commencement shall be on all of the terms of this Lease (subject to the
foregoing limitations on Tenant's use of the Premises, and excluding the
obligation to pay Base Rent and Additional Rent). Notwithstanding the foregoing,
Landlord shall be permitted access to the Premises before the Term Commencement
for the purpose of performing Landlord's Work.
3. Rental
Tenant shall pay to Landlord throughout the Term the following sums as
rental for the Premises:
(a) Base Rent. The monthly Base Rent payable during the Term shall be the
sum specified in the Basic Lease Information as the Base Rent subject to the
further provisions hereof.
(b) Additional Rent on Account of Operating Expenses. In addition to Base
Rent, Tenant, as provided in Section 3(c), shall pay to Landlord, as additional
rent ("Additional Rent") with respect to each calendar year of the Term, all
Operating Expenses paid or incurred by Landlord in such calendar year. For
purposes hereof, "Operating Expenses" shall mean (i) all direct and indirect
costs of management, operation and maintenance of the Building, including,
without limitation, the following: wages, salaries, employee benefits, and
payroll burden of personnel engaged in management, operation and maintenance of
the Building, a property management fee in the amount of three percent (3%) of
Base Rent, Landlord's cost of administering the Property (including, without
limitation, Building management office rent or rental value), maintenance of and
repairs of the Building and all Standard Building Systems (as defined below),
equipment, tools, materials and supplies, Insurance Expenses (as defined below),
license, permit and inspection
2
<PAGE>
fees, maintenance contracts and general services, and depreciation on personal
property, (ii) the cost of any capital improvements made to the Building by
Landlord after the Term Commencement that are required under any governmental
law or regulation, such cost or allocable portion thereof to be amortized over
the useful life of the capital item in question in accordance with generally
accepted accounting principles together with interest on the unamortized balance
at the rate of ten percent (10%) per year, and (iii) any assessments, dues or
other amounts payable pursuant to the Covenants, Conditions and Restrictions
(the "CC&R's") of the Hacienda Business Park, as they may be amended from time
to time, including, without limitation, any periodic or special dues or
assessments of the Hacienda Business Park Association (the "Association") which
are applicable to the Property (provided, however, that Landlord may elect that
Tenant pay directly any such assessments or dues relating to any particular uses
of the Property made by Tenant or arising out of any actions or Tenant or its
agents, employees or invitees). Notwithstanding the foregoing, Operating
Expenses shall not include (a) Property Taxes (as defined below, and which are
payable by Tenant in accordance with the provisions set forth below), (b)
depreciation on the Building other than depreciation on personal property, (c)
costs of Landlord's Work or Landlord's Contribution (as each such term is
defined in Exhibit B attached hereto), (d) interest, (e) capital items other
than those referred to in clause (ii) above, (f) payments on debt (principal or
interest), (g) costs occasioned by the act, omission or violation of any law by
Landlord or its employees, agents or contractors, (h) costs occasioned by
casualties or by the exercise of the power of eminent domain, (i) costs to
correct any construction defect in the Property or to comply with any covenant,
condition, restriction, underwriter's requirement or law applicable to the
Property as of the date hereof, (j) costs incurred in connection with the
presence of any Hazardous Material except to the extent caused by any
Environmental Activity of Tenant or its employees, agents or invitees, (k)
expense reserves, (l) costs of structural repairs to the Building, and (m)
earthquake insurance premiums in excess of two (2) times the amount of such
premiums as of the date of this Lease. The determination of the costs of
management, operation, and maintenance of the Building and the costs of the
capital improvements referred to in clause (ii) above shall be in accordance
with generally accepted accounting principles consistently applied.
(i) Without limiting the foregoing, the costs of maintenance of the
Building, as contemplated by this Section 3(b), shall include the cost of a roof
maintenance contract entered into by Landlord with a roof maintenance contractor
for the performance of routine maintenance and repairs on the roof coverings
required to be performed during the Term.
(ii) Without limiting the foregoing, the costs of maintenance of the
Standard Building Systems, as contemplated by this Section 3(b), shall include
the cost of an HVAC service and maintenance contract entered into by Landlord
with
3
<PAGE>
an HVAC service and maintenance contractor for the performance of routine
maintenance and repairs on the heating, ventilation and air conditioning systems
of the Building required to be performed during the Term.
(iii) As used herein, "Standard Building Systems" shall mean all
Building systems, including, without limitation, electrical, mechanical,
elevator, plumbing, heating, ventilation, air conditioning, life safety, power,
intrabuilding network cable ("INC"), telecommunications and lighting systems;
provided, however, that "Standard Building Systems" shall not include the Tenant
Extra Building Systems (as defined in Section 9(b)) or the existing halon fire
protection system, special air-conditioning units, telephone systems, or any
other existing systems specifically serving the computer room.
(iv) As used herein, "Insurance Expenses" shall mean the total costs
and expenses paid or incurred by Landlord in connection with the obtaining of
insurance on the Premises, the Building and/or the Property or any part thereof
or interest therein, including, without limitation, premiums for "all risk" fire
and extended coverage insurance, commercial general liability insurance, "Loss
of Rents" or abatement insurance, earthquake insurance, flood or surface water
coverage, and other insurance that may be required by Landlord's lender or may
otherwise be deemed necessary by Landlord or any mortgagee of Landlord, in its
reasonable discretion, and any deductibles paid under policies of any such
insurance. The foregoing shall not be deemed an agreement by Landlord to carry
any particular insurance relating to the Premises, Building, or Property.
(c) Procedure. The Additional Rent provided under Section 3(b) above shall
be paid in accordance with the following procedures:
(i) Not less than fifteen (15) days before the Term Commencement, and
at the end of each calendar year occurring during the Term, Landlord shall give
Tenant written notice of its estimate of the amount payable under Section 3(b).
On or before the later of thirty (30) days following such notice or the first
day of the calendar month next following such notice, Tenant shall pay to
Landlord that portion of the estimated amounts that already shall have accrued
and thereafter on or before the first day of each succeeding calendar month
shall pay a ratable portion of the balance remaining over the relevant period
covered. If for any reason such notice is not given as provided above, Tenant
shall continue to pay on the basis of the then applicable rental until the month
after such notice is given. If at any time or times Landlord determines that the
increased amount payable under Section 3(b) above will vary from its estimate by
more than ten percent (10%), Landlord may, by notice to Tenant, revise its
estimate for such year, and subsequent payments by Tenant for such year shall be
based upon such revised estimate.
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(ii) Within ninety (90) days after the close of each respective
calendar year during the Term (or as soon after such ninety (90) day period as
practicable), Landlord shall deliver to Tenant a statement ("Expense Statement")
of the adjustments to be made pursuant to Section 3(b) above for such calendar
year. Such Expense Statement shall be prepared in accordance with generally
accepted accounting principles, and shall be final and binding upon Landlord and
Tenant. If on the basis of such Expense Statement Tenant owes an amount that is
less than the estimated payments for such year previously made by Tenant,
Landlord shall refund such excess to Tenant within thirty (30) days of the
delivery of such Expense Statement. If on the basis of the Expense Statement
Tenant owes an amount that is more than the estimated payments for such year
previously made by Tenant, Tenant shall pay the deficiency to Landlord within
thirty (30) days after delivery of the Expense Statement.
(iii) Notwithstanding anything in Section 3(c)(ii) to the contrary,
provided that Tenant is not in default under the terms of this Lease beyond any
applicable notice and cure periods, Tenant, at its sole cost and expense, shall
have the right within ninety (90) days after the delivery of each Expense
Statement to review and audit Landlord's books and records regarding such
Expense Statement for the sole purpose of determining the accuracy of such
Expense Statement. Such review or audit shall be performed by Tenant's employees
or by a nationally recognized accounting firm that calculates its fees with
respect to hours actually worked (as opposed to a calculation based upon
percentage of recoveries or other incentive arrangement), shall take place
during normal business hours in the office of Landlord or Landlord's property
manager and shall be completed within three (3) business days after the
commencement thereof. If Tenant does not so review or audit Landlord's books and
records, Landlord's Expense Statement shall be final and binding upon Landlord
and Tenant. In the event that Tenant determines on the basis of its review of
Landlord's books and records that the amount payable by Tenant pursuant to this
Lease for the period covered by the Expense Statement is either less than or
greater than the actual amount properly payable by Tenant pursuant to the terms
of this Lease, (i) Tenant shall pay any deficiency to Landlord within thirty
(30) days of Tenant's completion of its review or audit or (ii) Landlord shall
refund any excess to Tenant within thirty (30) days after Tenant delivers
written notice and reasonable supporting documentation showing a refund to be
owing and Landlord shall pay at such time any reasonable audit expenses, if such
refund owing exceeds the aggregate amount properly payable by Tenant pursuant to
the terms of this Lease by ten percent (10%) or more.
(iv) If this Lease shall terminate on a day other than the last day of
a calendar year, the amount of adjustment to be made pursuant to Section 3(b)
above that is applicable to the calendar year in which such termination occurs
shall be prorated on the basis that the number of days from the commencement of
such year
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to and including the Term Expiration bears to 365. The termination of this Lease
shall not affect the obligations of Landlord and Tenant pursuant to subparagraph
(ii) of this Section 3(c) to be performed after such termination.
(d) Rental Commencement; Rent Defined. Base Rent and Additional Rent shall be
paid to Landlord (i) upon the execution of this Lease by Tenant for the first
full month of the Term for which Base Rent and Additional Rent are payable as
set forth in the Basic Lease Information (as the same may be deferred pursuant
to Section 2(a) hereof), and (ii) with respect to the second full month and each
successive calendar month thereafter for which Base Rent and Additional Rent are
payable, on or before the first day of each such month. Base Rent, Additional
Rent and all other sums payable by Tenant pursuant to this Lease shall be deemed
to be "Rent". If this Lease commences on other than the first day of a calendar
month or ends on other than the last day of a calendar month, the second and
last installments of Rent shall be pro-rated for the partial months involved.
(e) No Deduction or Offset; Interest. All Rent due and payable by Tenant to
Landlord under any of the provisions of this Lease shall be paid to Landlord,
without abatement, deduction, offset, prior notice or demand, in lawful money of
the United States at Landlord's address for notices or to such other person or
at such other place as Landlord, from time to time, may designate in writing.
Tenant acknowledges that late payment by Tenant to Landlord of rental or such
sums will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of such costs being extremely difficult and impracticable to fix.
Such costs include, without limitation, processing and accounting charges, and
late charges that may be imposed on Landlord by the terms of any encumbrance and
note secured by any encumbrance upon the Property. Therefore, if any installment
of Rent due and payable by Tenant to Landlord is not paid to and received by
Landlord within five (5) days of the date when due:
(i) Tenant shall pay to Landlord an additional sum of five percent
(5%) of the overdue amount as a late charge. The parties agree that this late
charge represents a fair and reasonable estimate of the costs that Landlord will
incur by reason of late payment by Tenant; and
(ii) the sums due and payable shall bear interest from the date due
until paid at the lesser of prime plus 5% per annum or the highest rate legally
permitted by applicable law.
Acceptance of any late charge or interest shall not constitute a waiver of
Tenant's default on the overdue amount, or prevent Landlord from exercising any
of the other rights and remedies available to Landlord. The parties further
agree that the payment of a late charge and interest provided for above are
distinct and separate from one another in that the payment of interest is to
compensate Landlord
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for the use of Landlord's money by Tenant, while the payment of a late charge is
to compensate Landlord for the additional administrative expenses incurred by
Landlord in handling and processing delinquent payments.
4. Use
The Premises shall be used only for general office purposes, for shipping,
receiving, warehousing, assembly, research and development purposes, and for
other purposes permitted by the CC&R's and applicable laws, regulations and
governmental approval requirements. Tenant shall neither do nor permit its
employees, agents or invitees to do in or about the Premises, nor bring or keep
therein, or permit its employees, agents or invitees to bring or keep therein,
anything which is prohibited by or will in any way conflict with any law,
statute, ordinance or governmental rule or regulation now in force or which may
hereafter be enacted or promulgated, or which now or hereafter is prohibited by
any insurance policy carried by Landlord, or cause a cancellation of any
insurance policy covering the Building or any part thereof or any of its
contents. Tenant, in its own respect and in respect of its agents, employees
and invitees, shall not use or allow its employees, agents or invitees to use
the Premises or the Building or any part thereof to be used by its employees,
agents or invitees for any improper, unlawful or objectionable purpose, nor
shall Tenant cause, maintain or permit its employees, agents or invitees to
cause or maintain any nuisance in, on or about the Property or any portion
thereof, or commit or suffer to be committed by its employees, agents or
invitees any waste or damage in or about the Property or any portion thereof.
Tenant agrees that the Property is subject and this Lease is subordinate to the
CC&R's. Tenant hereby acknowledges that it has received and read a copy of the
current CC&R's and knows the contents thereof. Throughout the Term, Tenant
shall faithfully and timely perform and comply with the CC&R's and any
modification or amendment thereof. Tenant shall comply with all duly adopted
rules, regulations and restrictions that may be adopted from time to time by the
Hacienda Business Park Owners Association (the "Association"). Tenant shall
indemnify, defend and hold Landlord free and harmless from and against any
claim, loss, liability, expense or damage, including attorneys' fees and costs,
arising out of the actual or asserted failure of Tenant to perform or comply
with the CC&R's. Tenant, its agents, employees and invitees shall have the
right, on a 24 hour per day - seven day per week basis during the Term, to the
exclusive use of the Premises. Tenant shall not use any portion of the Building
roof without Landlord's prior written consent, which consent may be withheld in
Landlord's sole and absolute discretion; provided, however that Landlord shall
not unreasonably withhold its consent to Tenant's use of the Building roof to
the extent such use is necessary for the operation of Tenant's business;
provided further, however, that Landlord shall be entitled to review and
reasonably approve Tenant's plans and specifications for any construction or
installation to be performed on the roof and Tenant shall be responsible for any
damage to the roof resulting from
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Tenant's use thereof or Tenant's construction or installation thereon. Tenant
shall not place any equipment in or otherwise utilize the Premises in a manner
that would exceed the floor load limits specified by Landlord. Tenant shall not
dump or store waste materials or refuse or allow such materials or refuse to
remain outside the Building, except in the enclosed trash areas provided. Tenant
shall not store or otherwise place, or permit its employees, agents or invitees
to store or otherwise place, any material of any nature whatsoever outside the
Building. Tenant shall not do nor shall Tenant allow its agents, employees or
invitees to do anything to cause any damage, deterioration or unsightliness to
the Property.
Notwithstanding anything herein to the contrary, Tenant shall not be
required to comply with any rule or regulation of the Association, or with any
amendment to the CC&R's, which, in either case, is adopted, imposed or entered
into after the date hereof (a "New Requirement"), unless (i) Landlord's consent
was not required in order for such New Requirement to become effective, or (ii)
such New Requirement (a) applies non-discriminatorily to all occupants of
Hacienda Business Park, (b) does not unreasonably interfere with Tenant's use of
the Property (including Tenant's rights to use the parking areas on the
Property), and (c) does not materially increase the obligations or decrease the
rights of Tenant under this Lease. If any New Requirement is proposed which
would not become effective without Landlord's consent and which is not covered
by clause (ii) of the preceding sentence, Landlord shall consult with Tenant and
act reasonably in determining whether or not to consent to such New Requirement.
5. Utilities and Services
Tenant shall be solely responsible for obtaining and paying for all
utilities and services (including water, electricity, sewer, janitorial and
security) relating to the Premises. Landlord shall not be liable for, Tenant
shall not be entitled to any abatement or reduction of Rent by reason of, no
eviction of Tenant shall result from, and Tenant shall not be relieved from the
performance of any covenant or agreement in this Lease because of Tenant's
failure to obtain such utilities and/or services. Landlord reserves the right to
temporarily stop the services of the plumbing, electricity, water, ventilation,
air condition or heating systems when necessary by reason of accident,
emergency, or for repairs, maintenance or construction of Landlord's Work. To
the extent possible and practicable, Landlord shall give advance notice to
Tenant of any proposed shutdowns of services.
If the Premises should become not reasonably suitable for Tenant's use as a
consequence of cessation of utilities or other services, interference with
access to the Premises not existing on the date hereof, legal restrictions not
existing on the date hereof or the presence of any Hazardous Material on the
Premises which is not known to Tenant on the date hereof and does not result
from any Environmental Activity of Tenant or Tenant's employees, agents or
invitees, and in any of the
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foregoing cases the interference with Tenant's use of the Premises persists for
seven (7) consecutive days, then Tenant shall be entitled to an equitable
abatement of Rent to the extent of the interference with Tenant's use of the
Premises occasioned thereby. If the interference persists for more than ninety
(90) consecutive days, Tenant shall have the right to terminate this Lease upon
written notice to Landlord. Landlord shall have the right, but not the
obligation, to take such action as may be reasonably necessary to remove the
cause of such any interference with Tenant's use of the Premises.
6. Taxes Payable by Tenant
(a) Property Taxes.
(i) Subject to subparagraphs (ii) and (iii) of this Section 6(a),
Tenant shall pay directly to the public authorities charged with collection
therefor, before delinquency, all Property Taxes that become payable with
respect to the Property for periods covered by the Term. If Tenant fails to pay
such Property Taxes as and when required hereunder, Tenant shall be in breach
hereof, and, without limiting any other remedy for such breach that Landlord may
have, Landlord may pay such Property Taxes, in which event the amount of such
payment shall become payable to Landlord on demand, and Landlord shall have (in
addition to any other right or remedy of Landlord) the same rights and remedies
in the event of the nonpayment thereof by Tenant as in the case of default by
Tenant in the payment of rental. For purposes hereof, "Property Taxes" shall
mean all real property taxes, assessments (general or special), property tax
reassessments caused by a change in ownership of the Property and all other
taxes (including any tax levied wholly or partly in lieu thereof) levied against
the Building (or this Lease, the occupancy of Tenant or the sums payable by
Tenant hereunder), excluding only (a) taxes covered by Section 6(b) hereof, (b)
federal and California income and death taxes imposed with respect to Landlord,
(c) taxes levied on Landlord's rental income, unless such tax is imposed in lieu
of real property taxes, and (d) any tax or assessment expense in excess of the
amount which would be payable if such tax or assessment expense were paid in
installments over the longest permitted term. For purposes hereof, "taxes" is
meant to be interpreted in its most comprehensive sense and to include any
impost, levy or the like levied by any governmental jurisdiction; and without
limiting the generality of the foregoing, "taxes" shall include any tax, fee,
excise, levy, transfer, gift or other impost imposed by the United States, the
State of California or any political subdivision of the State (including any
county, city, city and county, public corporation, district or any other
political entity or public corporation thereof), however described (including
any so-called value-added tax) as a direct substitution in whole or in part for,
or in addition to, real property taxes and assessments. Landlord agrees to give
appropriate written instructions to the public authorities charged with
collecting Property Taxes to cause statements and billings to be mailed directly
by such public authorities to Tenant at the address set
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forth in the Basic Lease Information. Tenant shall deliver to Landlord, on
demand, original receipts or photocopies evidencing payment of Property Taxes.
(ii) All Property Taxes levied on the Premises for the tax period in
which the Term Commencement occurs shall be appropriately prorated between
Landlord and Tenant as of the Term Commencement. With respect to such tax
period, Tenant shall pay Tenant's share of the Property Taxes directly to
Landlord and not to the public authorities charged with the collection. Such
payment shall be made not later than thirty (30) days before the date on which
such Property Taxes would become delinquent. Such payment shall constitute full
performance by Tenant, and Landlord shall pay from those funds and Landlord's
own funds all of the Property Taxes for such tax period. Taxes levied on the
Premises for the tax period in which the Term Expiration occurs shall be
similarly prorated between Landlord and Tenant as of the Term Expiration. Tenant
shall pay Tenant's share of such Property Taxes to Landlord directly rather than
to the public authorities, and such payment shall constitute full performance
under this Lease with respect to such Property Tax liability.
(iii) Tenant shall not be required to pay any Property Tax so long as
Tenant diligently and in good faith contests the validity or the legality of the
Property Tax by appropriate legal proceedings, which should prevent the
collection of Property Tax contested; provided however, that Tenant, before the
date that such Property Tax becomes delinquent, shall either have paid it under
protest or shall have posted a bond with Landlord sufficient to cover the amount
of such Property Tax. Upon final determination of Tenant's contest of the
validity or legality of the Property Tax, Tenant shall immediately pay the
contested Property Tax, together with all interest and penalties, if any, and
remove and discharge any lien or forfeiture arising from the prior nonpayment.
Any proceedings for contesting the validity, legality, or amount of any Property
Tax, or to recover any Property Tax paid by Tenant, may be brought by Tenant in
the name of Landlord or in the name of Tenant, or both, as Tenant deems
advisable. Landlord agrees that Landlord will, upon the reasonable request of
Tenant, execute or join in the execution of any instrument or document necessary
in connection with any proceeding. However, if any proceedings are brought by
Tenant, Tenant agrees to indemnify Landlord for all loss, cost, or expense that
may be imposed on Landlord in connection with the proceeding. Tenant's right to
contest taxes as provided in this Lease shall not extend beyond the point where
Landlord's title to all or any portion of the Property could be lost. In any
event, Tenant shall notify Landlord in advance of any Property Tax contest
proceedings that Tenant intends to initiate, and shall then inform Landlord of
all significant developments in the proceedings as they occur.
(iv) If Tenant fails to pay any Property Taxes, including any penalties
and interest, as and when required under this Section 6, Landlord may, but shall
not be obligated to, pay such Property Taxes, together with any such interest
and
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penalties, and any such amounts, together with interest at the lesser of prime
plus 5% per annum or the highest rate legally permitted by applicable law, shall
be repaid to Landlord by Tenant, upon demand, as Additional Rent.
(b) Other Taxes. In addition to the monthly rental and other charges that
are payable by Tenant hereunder, Tenant shall reimburse Landlord upon demand for
any and all taxes payable by Landlord whether or not now customary or within the
contemplation of the parties hereto which are upon, measured by, or reasonably
attributable to the cost or value of Tenant's equipment, furniture, fixtures,
and other personal property located in the Premises or by the cost or value of
any leasehold improvements made in or to the Premises by or for Tenant, other
than any installed and paid for by Landlord under Exhibit B, regardless of
whether title to such improvements shall be in Tenant or Landlord.
7. Alterations, Additions or Improvements
Except for the Tenant Improvements, the installation and payment of which
shall be governed by the provisions of Exhibit B, Tenant shall not make or
suffer to be made any alterations, additions, or improvements to or of the
Premises or any part thereof or attach any fixtures or equipment thereto
(collectively, "Alterations") without Landlord's prior written consent, which
consent shall not be unreasonably withheld or delayed; provided, however, that
Tenant may, without Landlord's prior written consent, make non-structural
Alterations the aggregate cost of which does not exceed $25,000 in any twelve
(12) month period ("Permitted Alterations"). Except for Alterations which
cannot be removed without structural injury to the Premises (which shall
immediately become Landlord's property and, at the end of the Term, shall remain
on the Premises without compensation to Tenant unless Landlord elects by notice
to Tenant to have Tenant remove the same), all Alterations shall belong to
Tenant and may be removed by Tenant at any time provided that Tenant repairs all
damage caused by such removal. At Landlord's option, which Landlord may
exercise in its sole and absolute discretion, by notice to Tenant (a) within
thirty (30) days after Tenant's written request therefor (which request shall be
accompanied by a copy of any space plans or other written information reasonably
required by Landlord), or (b) if no such request is made then at the end of the
Term, Tenant shall remove all or any Alterations, repair any damage to the
Premises, and restore the Premises to their condition prior to the installation
of the Alterations. Landlord shall have no lien in any item of Tenant's trade
fixtures, furniture, equipment or other personal property.
Tenant at its expense shall obtain any and all permits and consents of
applicable governmental authorities in respect of the Alterations and shall
comply with the requirements of all governmental authorities in connection
therewith, including all building codes; and Tenant shall be liable to Landlord
and shall reimburse Landlord for the costs of any improvements to the Building
(whether or
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not within the Premises) which may be required by governmental authority as a
consequence of the Alterations.
All Alterations made by Tenant with the prior written consent of Landlord
shall be at Tenant's sole cost and expense, and, except for any Permitted
Alterations, shall be effected through the use of contractors approved by
Landlord who, with respect to any project costing in excess of $100,000, shall
furnish to Landlord upon demand such completion bonds and labor and material
bonds as Landlord may require so as to assure completion of the Alterations on a
lien-free basis (and the furnishing of the same shall not relieve Tenant of its
obligation under Section 8 hereof).
Without limiting any other provision hereof, before commencing any
Alteration Tenant shall furnish Landlord at least three (3) but no more than
fifteen (15) days' prior written notice so that Landlord may post any notices of
non-responsibility or other notices reasonably required by Landlord.
8. Liens
Tenant shall keep the Premises and the Building free and clear of and from
any and all mechanics', materialmen's and other liens for work or labor done,
services performed and for materials used or furnished in or about the Premises
by or on behalf of Tenant. Tenant at all times shall pay and discharge,
promptly and fully, any and all claims upon which any such lien may or could be
based, provided that Tenant in good faith may contest any such lien if Tenant
first obtains and records a statutory lien release bond the effect of which is
that the lien is expunged from Landlord's title as a matter of law. Tenant
shall save, defend, indemnify and hold Landlord, the Premises and the Building
free and harmless of and from any and all such liens or claims of liens or suits
or other proceedings pertaining thereto.
9. Repairs
(a) Condition of Premises. Tenant hereby accepts the Premises as being in
the condition in which Landlord is obligated to deliver the Premises, subject
only to completion of Landlord's Work (as defined in Exhibit B). Landlord has no
obligation and has made no promise to alter, remodel, improve, repair, decorate,
or paint the Premises or any part thereof, except as specifically herein set
forth in Exhibit B. Except as specifically set forth herein, Landlord has not
made any representations respecting the condition of the Premises to Tenant.
(b) Maintenance by Tenant. Throughout the Term, Tenant shall, at its sole
expense, subject to Sections 9(c), 10 and 23 hereof, (1) keep and maintain in
good order and condition the Premises and Tenant's personal property located in
or about the Premises, (2) keep and maintain in good order and condition, repair
and
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replace each of the following Building Systems (the "Tenant Extra Building
Systems"): (a) the External Generator, and (b) any systems installed in the
Premises by Tenant, including, without limitation, Tenant's security system.
Notwithstanding the foregoing, Tenant shall have no obligation to perform or
construct any repair, maintenance or improvement which is made necessary by the
acts or omissions of Landlord or its employees, agents or contractors or which
would be treated as a "capital expenditure" under generally accepted accounting
principles (provided that Tenant shall pay its share of the cost of such repair,
maintenance or improvement to the extent that such cost is properly included in
Operating Expenses). In addition, Landlord shall cooperate reasonably with
Tenant, at Tenant's expense, in enforcing for Tenant's benefit any warranties
that apply to Tenant's repair obligations hereunder.
(c) Maintenance by Landlord. Subject to the provisions of Sections 9(b)(2),
10 and 23, and further subject to Tenant's obligation under Section 3 to
reimburse Landlord, in the form of Additional Rent, for the cost and expense of
the following items, Landlord agrees to repair and maintain the following items:
the roof membrane and coverings (which shall be deemed to exclude the plywood
roof panels), the Standard Building Systems, and the parking areas, pavement,
landscaping, sprinkler systems, sidewalks, driveways and curbs. Subject to the
provisions of Sections 9(b)(2), 10 and 23, Landlord, at its own cost and
expense, agrees to repair and maintain the following items: the structural
portions of the roof (specifically excluding the roof membrane and coverings),
the foundation, the footings, the floor slab, and the load bearing walls and
exterior walls of the Building (excluding any glass and any routine maintenance,
but including, without limitation, any painting, sealing, patching and
waterproofing of such walls). Notwithstanding anything in this Section 9 to the
contrary, Landlord shall have the right to either repair or to require Tenant to
repair any damage to any portion of the Premises, the Building and/or the
Property caused by or created due to any act, omission, negligence or willful
misconduct of Tenant or its agents, employees or invitees, and to restore the
Premises, the Building and/or the Property, as applicable, to the condition
existing prior to the occurrence of such damage; provided, however, that in the
event Landlord elects to perform such repair and restoration work, Tenant shall
reimburse Landlord upon demand for all costs and expenses incurred by Landlord
in connection therewith. Landlord's obligation hereunder to repair and maintain
is subject to the condition precedent that Landlord shall have received written
notice of the need for such repairs and maintenance; provided, however, that
such condition precedent shall not apply to (i) routine preventative maintenance
and repairs that would be within the scope of (a) a customary roof maintenance
contract for the performance of routine maintenance and repairs on the roof
coverings, or (b) a customary HVAC service and maintenance contract for the
performance of routine maintenance and repairs on the heating, ventilation and
air conditioning systems of the Building, or any (ii) maintenance or repair
needs of which Landlord otherwise actually becomes
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aware. Landlord shall have a reasonable time to perform all of its repair and
maintenance obligations hereunder. Tenant shall promptly report in writing to
Landlord any defective condition known to Tenant's facilities personnel or
senior management which Landlord is required to repair, and failure to so report
such defects shall make Tenant responsible to Landlord for any liability to
third parties and any other damage or expense incurred by Landlord by reason of
Tenant's failure to report such condition.
(d) Tenant's Waiver of Rights. Tenant hereby expressly waives all rights to
make repairs at the expense of Landlord or to terminate this Lease, as provided
for in California Civil Code Sections 1941 and 1942, and 1932(1), respectively,
and any similar or successor statute or law in effect or any amendment thereof
during the Term.
10. Destruction or Damage
(a) Damage. If the Premises and/or the portion of the Building necessary
for Tenant's occupancy are damaged by fire, earthquake, act of God, the
elements, or other casualty, and if (i) such casualty does not occur during the
last Lease Year of the initial Term or, if such casualty occurs during the last
Lease Year of the initial Term, Tenant has timely exercised the Renewal Option
(as defined in Section 41(a)) pursuant to Section 41(a) and waives in writing
any right it may have to rescind such exercise under Section 41(c), (ii) such
casualty does not occur during the last Lease Year of the Extended Term (as
defined in Section 41(a)), if any, and (iii) such casualty, in Landlord's
opinion, can be repaired within one hundred eighty (180) days following the
issuance of all building permits required by the relevant governmental
authorities (the "Rebuilding Period"), then Landlord shall forthwith repair the
same, subject to the provisions of this Section hereinafter set forth, and this
Lease shall remain in full force and effect except that a proportional abatement
of rental (based upon square footage) shall be allowed Tenant for such part of
the Premises as shall be rendered unusable by Tenant in the conduct of its
business during the time such part is so unusable. Landlord's determination that
such repair may be made within the Rebuilding Period shall not obligate Landlord
to complete the same within such period. For purposes of this Section 10,
"repairs" shall include all repair and restorative work Landlord in Landlord's
good faith discretion deems advisable, including, without limitation, all work
and improvements Landlord deems advisable to improve the condition and quality
of the Building, whether in the form of government mandated building code
upgrades or otherwise.
(b) Repair. If any one or more of the conditions set forth in clauses (i),
(ii) and (iii) of the first sentence of subparagraph (a) above is not satisfied,
then either Landlord or Tenant may elect, by notice to the other party, within
30 days after the date of such fire or other casualty (or if later, in the case
of such termination by
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Tenant on the ground that clause (iii) above has not been satisfied, within
ten (10) days after Tenant's receipt of notice from Landlord of Landlord's
determination that such repairs cannot be made within the Rebuilding Period), to
terminate this Lease, in which event this Lease shall terminate as of the date
of such fire or other casualty. In addition, if neither Landlord nor Tenant
terminates this Lease pursuant to the preceding sentence of this subparagraph
(b), and Landlord fails to repair the Premises within the Rebuilding Period (as
such period may be extended pursuant to Section 36(o)), Tenant may terminate
this Lease by written notice to Landlord. If this Lease is not terminated
pursuant to this subparagraph (b), this Lease shall continue in full force and
effect (except that the rent shall be proportionally abated as hereinabove
provided) and Landlord shall repair such damage with reasonable diligence.
(c) Waiver. Tenant waives California Civil Code Sections 1932(2) and
1933(4) providing for termination of hiring upon destruction of the thing hired
or any other law, statute or ordinance now or hereafter in effect.
(d) Costs of Repair. If the Premises are to be repaired under this
Section, Landlord (subject to the provisions of Section 12(b) hereof) shall
repair at its cost any injury or damage to the Building itself and the Tenant
Improvements. Tenant shall repair and pay the cost of repairing any Alterations,
Tenant's trade fixtures, Tenant's personal property and any other improvements
in the Premises not otherwise covered hereunder.
(e) Landlord's Option to Terminate. Notwithstanding anything in this Lease
to the contrary, in the event of damage to or destruction of all or any portion
of the Property that is not fully covered by insurance proceeds (including
applicable deductibles) received by Landlord or which has not been insured under
the insurance policies required to be carried under the terms of this Lease,
Landlord may terminate this Lease by written notice to Tenant, given within
thirty (30) days after the date of notice to Landlord that said damage or
destruction is not so covered. Notwithstanding the foregoing, Landlord's right
to terminate this Lease under this subparagraph (e) shall not apply if (i) the
damage to the Building (x) results from a risk required to be insured against
under Section 11(b) of this Lease, or (y) can be repaired for a cost of less
than ten percent (10%) of the replacement cost of the Building, or (ii) Tenant
agrees to pay any uninsured portion of the cost of repair.
11. Insurance; Waiver of Subrogation
(a) Tenant's Insurance. Tenant shall, during the entire Term and any other
period of occupancy, at its sole cost and expense, keep in full force and effect
the following insurance:
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(i) Standard form property insurance insuring against the perils of
fire, extended coverage, vandalism, malicious mischief, special extended
coverage ("All-Risk") and sprinkler leakage. This insurance policy shall be upon
all property owned by Tenant, for which Tenant is legally liable and/or that was
installed at Tenant's expense, and which is located in the Building including,
without limitation, Alterations, furniture, fittings, installations, fixtures,
trade fixtures and any other personal property, in an amount not less than the
full replacement cost thereof. This insurance policy shall also insure the
direct or indirect loss of Tenant's earnings attributable to Tenant's inability
to use fully or obtain access to the Property in the amount as will properly
reimburse Tenant.
(ii) Commercial general liability insurance insuring Tenant against any
liability arising out of the lease, use, occupancy, or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be in the
amount of Five Million Dollars ($5,000,000) combined single limit for injury to
or death of one or more persons in an occurrence, and for damage to tangible
property (including loss of use) in an occurrence. The policy shall insure the
hazards of premises and operations, independent contractors, contractual
liability (covering the indemnity contained in Section 12 hereof but in no way
limiting Tenant's indemnity obligation therein) and shall (1) name Landlord,
Landlord's property manager, and any mortgagees of Landlord as additional
insureds, (2) contain a cross-liability provision, and (3) contain a provision
that "the insurance provided the landlord hereunder shall be primary and
noncontributing with any other insurance available to the landlord."
(iii) Workers' compensation and employer's liability insurance (as
required by state law).
(iv) Business interruption insurance covering all amount of Rent due
hereunder for one (1) year.
All such policies shall be written in a form satisfactory to Landlord and
shall be taken out with insurance companies qualified to issue insurance in the
State of California and holding a General Policyholder's Rating of "A" and a
Financial Rating of "XIII" or better, as set forth in the most current issue of
Best's Insurance Guide. On or before the commencement of the Term, Tenant shall
deliver to Landlord copies of policies or certificates evidencing the existence
of the amounts and forms of coverage satisfactory to Landlord. No such policy
shall be cancelable in coverage except after thirty (30) days' prior written
notice to Landlord. Tenant shall, within ten (10) days prior to the expiration
of such policies, furnish Landlord with renewals or "binders" thereof, or
Landlord may order such insurance and charge the cost thereof to Tenant as
additional rent, if Tenant fails to so notify Landlord. If Landlord obtains any
insurance that is the responsibility of Tenant under this Section 11, Landlord
shall deliver to Tenant a written statement setting
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forth the cost of any such insurance and showing in reasonable detail the manner
in which it has been computed.
(b) Landlord's Insurance. Landlord shall purchase and keep in force fire,
extended coverage and "all risk" insurance covering the Building and the
Property in the amount of the full replacement value thereof. Tenant shall, at
its sole cost and expense, comply with any and all reasonable requirements
pertaining to the Premises, the Building and the Property of any insurer
necessary for the maintenance of reasonable fire and commercial general
liability insurance, covering the Building and the Property. Without limiting
any other provision hereof, Landlord may maintain "Loss of Rents" insurance,
insuring that the Rent will be paid in a timely manner to Landlord for a period
of at least twelve (12) months if the Premises, the Building or the Property or
any portion thereof are destroyed or rendered unusable or inaccessible by any
cause insured against under this Lease.
(c) Subrogation. To the extent available, each party shall obtain from its
insurers under all policies of property insurance maintained by such party at
any time during the Term insuring or covering the Property or any portion
thereof or operations therein, a waiver of all rights of subrogation which the
insurer might have against the other party, and each party shall indemnify the
other party against any loss or expense, including reasonable attorneys' fees,
resulting from the failure to obtain such waiver to the extent the same is so
available. Notwithstanding anything herein to the contrary, Landlord and Tenant
each release the other from all liability for any property damage that results
from a risk which is actually insured against or which is required under this
Lease to be insured against by the releasing party, without regard to the
negligence or willful misconduct of the released party.
12. Release; Indemnity
(a) Tenant covenants and agrees that Landlord, its agents or employees and
any mortgagee of Landlord shall not at any time after the date hereof or to any
extent whatsoever be liable, responsible or in anywise accountable for, and
Tenant waives and releases any claim (including any claim for contractual or
implied indemnity) against Landlord, its agents or employees or any mortgagee of
Landlord, for Losses (hereinafter defined) which at any time after the date
hereof may be suffered or sustained by:
(i) Tenant; or
(ii) Any person whosoever may at any time be using or occupying or
visiting the Premises or be in, on or about the same, or in or about the
Building or the Property, and which Losses are caused in whole or in part by any
act or
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omission (whether negligent, non-negligent or otherwise) of Tenant, its agents,
employees and invitees;
and whether in case of either clause (i) and/or (ii) such Losses shall be caused
in part by any act, omission or negligence of Landlord, its agents, employees or
contractors, except to the extent caused by the grossly negligent or willful act
or omission of Landlord, its agents or employees.
In connection with this Section 12, Tenant expressly waives the benefits of
Section 1542 of the California Civil Code which provides as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR EXPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN TO HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE
DEBTOR."
(b) In addition to, and not in limitation of (a) above, Tenant shall
forever indemnify, defend (by counsel reasonably acceptable to Landlord) and
hold Landlord, its agents or employees and any mortgagee of Landlord free and
harmless of, from and against any and all Losses arising from or caused in whole
or in part by any act or omission (whether negligent, non-negligent, or
otherwise) of Tenant, its agents, employees and invitees and suffered or
sustained by:
(i) Landlord, its agents or employees and any mortgagee of Landlord;
and/or
(ii) any third person who asserts a claim against Landlord on account
thereof;
and whether in case of either clause (i) and/or (ii) such Losses shall be caused
in part by any act, omission or negligence of Landlord, its agents or employees,
except to the extent caused by the grossly negligent or willful act or omission
of Landlord, its agents or employees. The foregoing indemnity obligation of
Tenant shall include reasonable attorneys' fees, investigation costs, and all
other reasonable costs and expenses incurred by Landlord, its agents or
employees and any mortgagee of Landlord from the first notice that any claim or
demand is to be made or may be made. Notwithstanding anything herein to the
contrary, Landlord shall not be released or indemnified from, and shall
indemnify, defend, protect and hold Tenant harmless from and against any Loss to
the extent such Loss arises from the gross negligence or willful misconduct of
Landlord or its agents, contractors or licensees, Landlord's violation of any
law, order or regulation (excluding, however, any such violation arising from
any condition or feature of the Building), or a breach of Landlord's obligations
or representations under this Lease.
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(c) For purposes of this Lease "Losses" shall mean any and all losses,
damages, liabilities, claims, costs and expenses, direct and indirect, actual
and consequential, on account of injury to or death of persons, or loss of or
damage to property, interference with, or interruption of business (including
income and profits lost by reason thereof) of any kind or nature, including
without limitation, loss, injury, death, damage, interruption or interference
due to criminal act by third persons.
(d) The provisions of this Section 12 shall survive the termination of this
Lease with respect to any Losses occurring prior to such termination. The
insurance policy or policies required pursuant to the provisions of Section
11(a) by their terms shall cover the indemnity obligations of Tenant under
Section 12(b) but shall in no way limit Tenant's indemnity obligation therein.
13. Compliance with Legal Requirements
(a) Compliance. During the Term, Tenant, at its sole cost and expense,
shall comply promptly with (i) all laws, statutes, regulations, ordinances,
governmental rules, and requirements now in force or which may hereafter be in
force, (ii) the requirements of any board of fire underwriters or other similar
body now or hereafter constituted, (iii) any direction or occupancy certificate
issued pursuant to any law by any public officer or officers, and (iv) the
provisions of all recorded documents affecting the Property insofar as any of
clauses (i) through (iv) relate to or affect the condition, use or occupancy of
the Premises (collectively, the "Requirements"); provided, however, that Tenant
shall not be responsible for any failure to comply with such Requirements to the
extent that such failure (w) exists as of the date hereof and does not result
from the design or construction of the tenant improvements existing in the
Building as of the date hereof, (x) consists of a failure of the elevator system
or the restrooms, to the extent the same are not modified by Tenant as part of
Tenant's construction of the Tenant Improvements or any Alterations, to comply
with the Americans with Disabilities Act of 1990, as amended, (y) both (1)
arises under a Requirement that becomes effective after the date hereof and (2)
does not result from the particular design or construction of the Tenant
Improvements or any Alterations or Tenant's particular use of the Premises, or
(z) results from a breach of Landlord's repair and maintenance obligations under
Section 9(c). As soon as reasonably practicable after receipt of specific
written request therefor from Tenant, Landlord shall cure any failure of the
Property to comply with such Requirements which failure has a material adverse
effect upon Tenant's operation of its business in the Premises and is not
Tenant's responsibility under the preceding sentence.
(b) Environmental Matters.
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(i) As used herein, the following items shall have the following
meanings:
"Environmental Activity" means any actual, proposed or threatened use,
storage, treatment, release, emission, discharge, generation, manufacture,
disposal or transportation of any Hazardous Materials from, into, on, under or
about the Property, or any other activity or occurrence that causes or would
cause any such event to exist but excluding the use and storage of ordinary
office supplies in a quantity commonly used by tenants of commercial office
buildings.
"Environmental Requirements" means all present and future federal, state,
regional or local laws, regulations and requirements relating to the use,
storage, treatment, existence, release, emission, discharge, generation,
manufacture, disposal or transportation of any Hazardous Materials.
"Hazardous Material" means at any time any chemical, substances or
materials which at such time are classified or considered to be hazardous or
toxic under any present of future federal, state, regional or local laws,
regulations or guidelines.
(ii) Tenant shall not engage in nor permit its employees, agents or
invitees to engage in any Environmental Activity. Tenant shall, at its own
expense, procure, maintain in effect and comply with all conditions of any and
all permits, licenses, and other governmental and regulatory approvals required
under any Environmental Requirements for any Environmental Activity by Tenant or
any person or entity using or visiting the Property, including, without
limitation, the discharge of (appropriately treated) materials or wastes into or
through any sanitary sewer serving the Premises, and upon termination of this
Lease shall cause all of its Hazardous Materials to be removed from the Premises
in accordance with and in compliance with all applicable Environmental
Requirements.
(iii) Upon having knowledge thereof, Tenant shall immediately notify
Landlord in writing of:
(A) any regulatory action that has been instituted, or threatened
by any governmental agency or court with respect to Tenant that relates to any
Environmental Activity;
(B) any claim relating to any Environmental Activity by Tenant
in, on or about the Property, or that arises out of or in connection with any
Hazardous Materials in, on, under or about the Property or removed from the
Property; or
(C) any actual or threatened material release on, under or about
the Property or any adjacent property of any Hazardous Material, except any
Hazardous Material whose discharge or emission is expressly authorized by and in
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compliance with a permit issued by a federal, state, regional or local
governmental agency pursuant to Environmental Requirements.
(iv) Tenant shall provide Landlord with copies of any communications
with federal, state, regional or local governments, agencies or courts with
respect to any Environmental Activity or Environmental Requirement relating to
the Premises and any communications with any third party relating to any claim
made or threatened with respect to any Environmental Activity by Tenant in, on
or about the Property.
(v) Tenant shall indemnify, defend (by counsel reasonably acceptable
to Landlord) and hold Landlord, its agents or employees and any mortgagee of
Landlord free and harmless of, from and against any and all Losses to the extent
arising from or caused by (i) an Environmental Activity by Tenant or Tenant's
agents, employees and invitees, or (ii) Tenant's failure to comply with any
Environmental Requirement relating to an Environmental Activity by Tenant.
Tenant's obligations under this Section 13(b) shall include, without limitation,
and whether foreseeable or unforeseeable, all costs of any repair or cleanup,
removal or remediation action, or detoxification or decontamination of the
Premises, or the preparation and implementation of any closure, remedial action
or other plans in connection therewith that are required as a result of any
Environmental Activity by Tenant, and shall survive the expiration or earlier
termination of the Term.
(vi) Landlord represents and warrants to Tenant that (a) to Landlord's
actual knowledge, without any duty of inquiry, and except as otherwise disclosed
in that certain Final Report - Phase I Environmental Site Assessment, dated as
of December 15, 1998, relating to the Premises and designated as Job No. 39737-
013-044, prepared by Dames & Moore, (1) no Hazardous Material is present on the
Property or the soil, surface water or groundwater thereof, (2) no underground
storage tanks are present on the Property, and (b) Landlord has not received
written notice of any pending or threatened action, proceeding or claim
regarding any Hazardous Material on the Property or the soil, surface water or
groundwater thereof.
(vii) The provisions of this Section 13(b) shall survive the termination
of this Lease.
14. Assignment and Subletting
(a) Assignment and Subletting. Except as expressly permitted pursuant to
this Section, Tenant shall not, without the prior written consent of Landlord,
assign this Lease, or any interest herein, or sublet the Premises, or any part
thereof, or permit the use or occupancy of the Premises (or any right or
privilege appurtenant thereto) by any party other than Tenant. For purposes
hereof, "assignment" shall include
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any proposed disposition or transfer, voluntary or involuntary, or
hypothecation; and where Tenant is a (i) partnership or limited liability
company, "assignment" shall include a transfer of twenty-five percent (25%) or
more of the equity interest therein (other than to an existing equity holder) or
(ii) a corporation "assignment" shall include (except with respect to a
corporation whose stock is publicly traded) any (A) merger, consolidation or
other reorganization of Tenant, (B) liquidation, dissolution or disposition of
all or substantially all of the assets of Tenant or (C) change in ownership of
twenty-five percent (25%) or more of the equity interest therein (other than a
transfer to an existing equity holder). Any of the foregoing acts without such
consent of Landlord shall be void. This Lease shall not, nor shall any interest
herein, be transferable or assignable as to the interest of Tenant by operation
of law without the written consent of Landlord.
Landlord's consent to any assignment or subletting of all or any part of the
Premises shall not be unreasonably withheld or delayed. Without limiting the
other instances in which it may be reasonable for Landlord to withhold its
consent to an assignment or subletting, Landlord and Tenant acknowledge that it
shall be reasonable for Landlord to withhold its consent from a proposed
assignment or subletting in the following instances:
(i) If Landlord determines that the use of the Premises by the
proposed assignee or sublessee would be in violation of Section 4 of this Lease;
(ii) If Landlord reasonably determines that the proposed assignee or
sublessee does not have a favorable reputation as a tenant of property;
(iii) If Landlord has experienced previous material defaults by or is in
litigation or threatened litigation with the proposed assignee or subtenant;
(iv) If the use of the Premises by the proposed assignee or subtenant
will violate any applicable law, ordinance or regulation, or any use permit
issued for the use and occupancy of the Premises;
(b) Information. If at any time, or from time to time, during the Term,
Tenant desires to assign, sublet or permit the occupancy or use by another of
all or any part of the Premises, Tenant shall give notice to Landlord setting
forth the following: (i) the name, address, and legal composition of the
proposed sublessee, occupier or user; (ii) the nature of the business proposed
to be carried on in the Premises (including proposed number of employees to be
located in the Premises, the proposed equipment to be used therein; (iii) a copy
of the proposed assignment or sublease agreement; and (iv) any other
documentation or information requested by Landlord, including financial
information covering the proposed assignee, sublessee, occupier or user with
respect to such proposed subletting. All such information may be considered by
Landlord in making Landlord's permitted
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determinations hereunder, including the granting or withholding of consent in
respect of a proposed assignment or subletting.
(c) Assignment or Subletting Conditions. Subject to (i) the other provisions
of this Section 14 and (ii) Landlord's consent, which shall not be unreasonably
withheld, Tenant may assign or sublet such space to any third party on the
following conditions:
(i) In the case of a sublease, the same shall be subject and
subordinate to all of the provisions, terms and conditions of this Lease,
(ii) No assignment or sublease shall be valid and no assignee or
sublessee shall take possession of the Premises assigned or subleased until an
executed counterpart of such assignment or sublease, in form and substance
satisfactory to Landlord, shall have been delivered to Landlord, and Landlord
shall have expressly consented thereto in writing,
(iii) No assignee or sublessee shall have a further right to assign or
sublet without Landlord's prior written consent,
(iv) An amount equal to seventy-five percent (75%) of all sums or other
economic consideration received by Tenant as a result of such assignment or
subletting, however denominated (whether as consideration for the assignment,
rentals under a sublease, or otherwise) which exceed in the aggregate the total
sums which Tenant (or Tenant's assignee in case of an assignment) is obligated
to pay Landlord under this Lease, prorated to reflect obligations allocable to
that portion of the Premises subject to such assignment or sublease, shall be
payable to Landlord as additional rental under this Lease without affecting or
reducing any other obligations of Tenant hereunder, provided that in no event
shall Tenant be obligated to pay Landlord less than the rental specified in this
Lease.
(v) Tenant shall immediately and irrevocably assign to Landlord, as
security for Tenant's obligations under this Lease, all rental from any
subletting of all or a part of the Premises as permitted by this Lease, and
Landlord, as assignee and as attorney-in-fact for Tenant, or a receiver for
Tenant appointed on Landlord's application, may collect such rental and apply it
towards Tenant's obligations under this Lease; except that, except during the
existence of an Event of Default by Tenant as defined in Section 17, Tenant
shall have the right to collect such rental.
(vi) Notwithstanding anything in this Section 14 to the contrary,
before paying any amounts to Landlord pursuant to Section 14(c)(iv), Tenant may
recover out of the economic consideration received by Tenant as a result of such
assignment or subletting, and reimburse itself for, any brokerage commissions
paid by Tenant in connection with the assignment or subletting (such commission
not to exceed commissions typically paid in the market at the time of such
assignment or subletting) and the reasonable costs incurred by Tenant for any
Alterations made to prepare the space for such assignment or subletting. As a
condition to Tenant recovering the above-referenced costs, Tenant shall provide
to Landlord, within sixty (60) days of any such assignment or
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subletting) and the reasonable costs incurred by Tenant for any Alterations made
to prepare the space for such assignment or subletting. As a condition to
Tenant recovering the above-referenced costs, Tenant shall provide Landlord,
within sixty (60) days of any such assignment or subletting, a detailed
accounting of these costs and supporting documentation, such as receipts and
invoices.
(d) Permitted Assignment. Notwithstanding anything in this Section 14 to the
contrary, Tenant shall have the right, without Landlord's prior written consent,
to assign or sublease all or any part of the Premises to a successor of Tenant
by merger, consolidation or other reorganization of Tenant (including by the
sale of substantially all of Tenant's assets) or to an Affiliate of Tenant. For
purposes hereof, "Affiliate" shall mean any person, firm or corporation (i)
which shall be controlled by, under the control of, or under common control with
the original Tenant, or (ii) which results from a merger of, reorganization of,
or consolidation with the original Tenant. For purposes hereof, "control" shall
mean the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, firm or corporation,
whether through the ownership of voting securities, by contract or otherwise. In
the event of an assignment or subletting pursuant to this Section, Tenant shall
promptly thereafter notify Landlord of such assignment or subletting (including
the name of such assignee or sublessee) and Tenant agrees to execute such
documentation as reasonably requested by Landlord to memorialize such assignment
or subletting.
(e) Primary Liability. Regardless of Landlord's consent, no subletting or
assignment shall release the originally named Tenant of the originally named
Tenant's obligation or alter the primary liability of the originally named
Tenant to pay the rental and to perform all other obligations to be performed by
Tenant hereunder. The acceptance of rental by Landlord from any other person
shall not be deemed to be a waiver by Landlord of any provision hereof nor shall
the same be construed to make Landlord a party to any sublease or impose on
Landlord any obligations to any subtenant. Consent to one assignment or
subletting shall not be deemed consent to any subsequent assignment or
subletting. In the event of default by any assignees of Tenant or any successor
of Tenant in the performance of any of the terms hereof, Landlord may proceed
directly against the originally named Tenant without the necessity of exhausting
remedies against such assignee or successor. Landlord may consent to subsequent
assignments or subletting of this Lease or amendments or modifications to this
Lease with assignees of Tenant, without notifying the originally named Tenant,
or any successor of Tenant, and without obtaining its or their consent thereto,
and such action shall not relieve the originally named Tenant of liability under
this Lease, provided that any such amendments or modifications shall not
increase the originally named Tenant's liability hereunder.
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(f) Attorneys' Fees. If Tenant shall assign or sublet the Premises or
request the consent of Landlord to any assignment or subletting, or if Tenant
shall request the consent of Landlord for any act that Tenant proposes to do,
then Tenant shall immediately, upon demand, pay Landlord's reasonable attorneys'
fees incurred in connection therewith, not to exceed $5,000.
(g) Conflicting Provisions. The provisions of this Section shall prevail
and govern over any conflicting provision in any assignment or subletting to
which Landlord gives written consent. Any modification of the terms of this
Lease as between Tenant and any sublessee or assignee shall be void and will not
be binding on the Landlord.
(h) Brokerage. Tenant shall indemnify, defend (by counsel reasonably
acceptable to Landlord) and hold Landlord, its agents or employees and any
mortgagee of Landlord harmless of, from and against any and all Losses for real
estate broker's or finder's fees or commissions of persons claiming by or
through Tenant arising from any assignment or subletting.
15. Rules
Tenant shall faithfully observe and comply with the rules and regulations
annexed to this Lease as Exhibit C and, after notice thereof, all modifications
thereof and additions thereto from time to time promulgated in writing by
Landlord which do not unreasonably interfere with Tenant's use of the Premises
or Tenant's parking rights or unreasonably increase the obligations or decrease
the rights of Tenant under this Lease.
16. Entry by Landlord
Landlord may enter the Premises at reasonable hours to (a) inspect the same,
(b) exhibit the same to prospective purchasers, lenders, or (during the last six
months of the Term only) tenants, (c) determine whether Tenant is complying with
all its obligations hereunder, (d) supply any service to be provided by Landlord
to Tenant hereunder, (e) post notices of non-responsibility and (f) make repairs
in the Premises or repairs to any adjoining space or utility services or make
repairs, alterations or improvements to any other portion of the Building.
Without limiting the foregoing, Landlord may, at any time or from time to time
during the Term, perform repair and maintenance work for which Landlord is
responsible under this Lease in and to the Building or the systems serving the
Building (which work may include, but need not be limited to, the repair or
replacement of the Building's exterior facade, exterior window glass, or
Standard Building Systems), any of which work may require access to the same
from within the Premises. Tenant agrees that (a) Landlord shall have access to
the Premises at all reasonable times, upon reasonable notice, for the purpose of
performing such work, and (b) Landlord
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shall incur no liability to Tenant, nor shall Tenant be entitled to any
abatement of rent on account of any noise, vibration, order, or other
disturbance or annoyance to Tenant's business at the Premises (provided that
Tenant is not denied access to said Premises and Tenant's ability to conduct its
business on the Premises is not substantially impaired thereby) which shall
arise out of said access by Landlord or by the performance by Landlord of the
aforesaid renovations at the Building. Landlord shall use reasonable efforts
(which shall not include any obligation to employ labor at overtime rates) to
avoid disruption of Tenant's business and to comply with Tenant's reasonable
security measures during any such entry upon the Premises by Landlord. Except in
the case of emergency, Landlord and Landlord's agents shall provide Tenant with
one (1) business day's notice before entering the Premises.
Tenant hereby waives any claim for damages for any injury or inconvenience
to or interference with Tenant's business, any loss of occupancy or quiet
enjoyment of the Premises or any other loss occasioned by any such entry or
entries made by Landlord pursuant to any of the foregoing. Landlord shall at all
times have and retain keys with which to unlock all of the doors in, on or about
the Premises (excluding Tenant's vaults, safes and similar secure areas
designated by Tenant); and Landlord shall have the right to use any and all
means which Landlord may deem proper to open such doors in an emergency in order
to obtain entry to the Premises, and any entry to the Premises obtained by
Landlord by any of said means, or otherwise, shall not under any circumstances
be construed or deemed to be a forcible or unlawful entry into or a detainer of
the Premises or an eviction, actual or constructive, of Tenant from the
Premises, or any portion thereof.
17. Events of Default
The occurrence of any one or more of the following events (an "Event of
Default") shall constitute a breach of this Lease by Tenant: (a) if Tenant
shall fail to pay any rental due under Section 3 above within five (5) days of
the date when the same becomes due and payable; or (b) if Tenant shall fail to
pay any other sum when and as the same becomes due and payable and such failure
shall continue for more than five (5) days following written notice from
Landlord; or (c) if Tenant shall default in the performance or observance of any
other term hereof or of the rules and regulations described in Section 15 to be
performed or observed by Tenant, and within thirty (30) days following written
notice from Landlord to Tenant, Tenant shall have failed to completely cure such
default, or if the nature of such default is such that it cannot reasonably be
cured within such thirty (30) day period, Tenant shall not within such thirty
(30) day period have commenced with prompt diligence the curing of such default,
or, having so commenced, shall thereafter have failed to prosecute with prompt
diligence the complete curing of such default; or (d) if Tenant or any Guarantor
shall make a general assignment for the benefit of creditors, or shall admit in
writing its inability to pay its debts as
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they become due, or shall file a petition in bankruptcy, or shall be adjudicated
a bankrupt or as insolvent, or shall file a petition in any proceeding seeking
any reorganization, arrangement, composition, readjustment, liquidation,
dissolution, or similar relief under any present or future statute, law, or
regulation, or shall file an answer admitting, or fail to protest timely the
material allegations of a petition filed against it in any such proceeding, or
shall seek or consent to or acquiesce in the appointment of any trustee,
receiver, or liquidator of Tenant or any material part of its properties; or (e)
if within thirty (30) days after the commencement of any proceeding against
Tenant or any Guarantor seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under any present or
future statute, law, or regulation, such proceeding shall not have been
dismissed, or if, within thirty (30) days after the appointment without the
consent or acquiescence of Tenant or any Guarantor, as applicable, of any
trustee, receiver, or liquidator of Tenant or of any material part of its
properties, such appointment shall not have been vacated; or (f) if this Lease
or any estate of Tenant hereunder shall be levied upon under any attachment or
execution and such attachment or execution is not vacated within thirty (30)
days; or (g) if Tenant shall abandon the Premises, or be dispossessed by process
of law; or (h) upon the election of Landlord, if not later than thirty (30) days
before the then applicable expiration date of the Letter of Credit (as defined
in Section 38), neither (1) the Bank (as defined in Section 38) shall have
notified Tenant that the Letter of Credit will be renewed for at least one (1)
year beyond the then applicable expiration date, nor (2) Tenant shall have
delivered to Landlord a replacement Letter of Credit in the amount required
hereunder and otherwise meeting the requirements set forth in Section 38.
18. Landlord's Right to Terminate
If an Event of Default shall occur, Landlord at any time thereafter may give
a written termination notice to Tenant, and on the date specified in such notice
(which shall be not less than three (3) days after the giving of such notice)
Tenant's right to possession shall terminate, unless on or before such date all
delinquent rent and all other sums payable by Tenant under this Lease and all
costs and expenses incurred by or on behalf of Landlord hereunder shall have
been paid by Tenant and all other breaches of this Lease by Tenant at the time
existing shall have been fully remedied to the satisfaction of Landlord.
Landlord may remove all persons and property located therein and hold,
administer and dispose of any or all of such properties in accordance with
applicable California law, including California Civil Code Section 1980 et seq.
and California Code of Civil Procedure Section 1174. Landlord may do all things
Landlord reasonably deems necessary in order to relet the Premises, including,
without limitation any demolition, alterations, repair and/or restoration of the
Premises. Upon such termination, Landlord may recover from Tenant: (a) the worth
at the time of award of the unpaid rental which had been earned at the time of
termination; (b) the worth at the time of award of the
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amount by which the unpaid rental which would have been earned after termination
until the time of award exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided; (c) the worth at the time of award of
the amount by which the unpaid rental for the balance of the Term after the time
of award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided; and (d) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom including, without limitation, to the extent
allocable to the remainder of the term hereof, tenant improvement costs, leasing
commissions and legal fees. The "worth at the time of award" of the amounts
referred to in clauses (a) and (b) above is computed by allowing interest at the
lesser of prime plus 5% per annum or the highest rate legally permitted under
applicable law. The "worth at the time of award" of the amount referred to in
clause (c) above is computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%). Notwithstanding any other provisions hereof, any efforts by Landlord to
mitigate damages caused by Tenant's breach of this Lease shall not constitute a
waiver of Landlord's right to recover damages hereunder and shall not affect the
right of Landlord to indemnification pursuant to the provisions of Section 12
hereof.
19. Continuation Notwithstanding Default
Even though Tenant has breached this Lease and abandoned the Premises, this
Lease shall continue in effect for so long as Landlord does not elect to
terminate Tenant's right to possession by written notice to Tenant, and Landlord
may enforce all its rights and remedies under this Lease, including the right to
recover the rental as it becomes due under this Lease. Acts of maintenance or
preservation or efforts to relet the Premises or the appointment of a receiver
upon the initiative of Landlord to protect Landlord's interest under this Lease
or any other act by Landlord, other than service of written notice of
termination upon Tenant, shall not constitute a termination of Tenant's right to
possession.
20. Additional Remedies
The remedies provided for in this Lease are in addition to any other
remedies available to Landlord at law or in equity by statute or otherwise.
21. Landlord's Right to Cure Defaults
All agreements and provisions to be performed by Tenant under any of the
terms of this Lease shall be at its sole cost and expense and without any
abatement of rental. If Tenant shall fail to pay any sum of money, other than
rental, required to be paid by it hereunder, or shall fail to perform any other
act on its part to be
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performed hereunder and such failure shall continue for thirty (30) days after
notice thereof by Landlord, Landlord may, but shall not be obligated to do so,
and without waiving or releasing Tenant from any obligations of Tenant, make any
such payment or perform any such other act on Tenant's part to be made or
performed as in this Lease provided. All sums so paid by Landlord and all
necessary incidental costs shall be deemed additional rent hereunder and shall
be payable to Landlord on demand, and Landlord shall have (in addition to any
other right or remedy of Landlord) the same rights and remedies in the event of
the nonpayment thereof by Tenant as in the case of default by Tenant in the
payment of rental.
22. Attorneys' Fees
If as a result of any breach or default in the performance of any of the
provisions of this Lease, Landlord uses the services of an attorney in order to
secure compliance with such provisions or recover damages therefor, or to
terminate this Lease or evict Tenant, Tenant shall reimburse Landlord upon
demand for any and all attorneys' fees and expenses so incurred by Landlord,
provided that if Tenant shall be the prevailing party in any legal action
brought by Landlord against Tenant, Tenant shall be entitled to recover for the
fees of its attorneys in such amount as the court may adjudge reasonable. Any
such attorneys' fees and other expenses incurred by Landlord in enforcing a
judgment in its favor under this Lease shall be recoverable separately from and
in addition to any other amount included in such judgment, and such attorneys'
fees obligation is intended to be severable from the other provisions of this
Lease and to survive and not be merged in any such judgment. Without limiting
the foregoing, if either Landlord or Tenant shall bring any action or legal
proceeding for an alleged breach of any provision of this Lease or otherwise to
enforce, protect or establish any term or covenant of this Lease, the prevailing
party shall be entitled to recover as a part of such action or proceeding, or in
a separate action brought for that purpose, reasonable attorneys' fees, court
costs and expert fees as may be fixed by the court.
23. Eminent Domain
If any part of the Premises shall be taken as a result of the exercise of
the power of eminent domain, this Lease shall terminate as to the part of the
Premises so taken as of the date of taking, and either Landlord or Tenant shall
have the right to terminate this Lease as to the balance of the Premises
remaining after a partial taking by written notice to the other within thirty
(30) days after such date, provided, however, that (i) a condition to the
exercise by Tenant of such right to terminate shall be that such partial taking
shall be to such extent and nature as to substantially and permanently handicap,
impede, or impair the conduct of Tenant's business therein, and (ii) a condition
to the exercise by Landlord of such right to terminate shall be that such
partial taking shall affect twenty-five percent (25%) or more of the rentable
square footage of the Premises. If all of the Premises are
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taken as a result of the exercise of the power of eminent domain, this Lease
shall terminate upon the date of taking.
Landlord shall be entitled to any and all compensation, damages, income,
rent, awards, or any interest therein whatsoever which may be paid or made in
connection with any exercise of the power of eminent domain, and Tenant shall
have no claim against Landlord for the value of any unexpired Term or otherwise,
except that Tenant shall be entitled to any specific award made in favor of
Tenant covering Tenant's trade fixtures, relocation expenses, and the
unamortized value of all improvements made to the Premises at Tenant's expense.
In the event of a partial taking of the Premises which does not result in a
termination of this Lease, the monthly rental thereafter to be paid shall abate
in proportion to that portion of the Premises that is rendered unusable by
Tenant in the conduct of its business.
It is understood and agreed that the foregoing provisions of this Section
are intended to and do fully define and set forth the respective rights and
obligations of the parties in the event of a taking of the Premises or a part
thereof, including without limitation the circumstances under which this Lease
shall or may be terminated, and the disposition of any proceeds of any insurance
or award, and Landlord and Tenant each expressly waives the benefit and effect
of any rights and/or obligations whether purporting to arise by law, by
governmental order, under any insurance contract, or otherwise (including the
provisions of the California Code of Civil Procedure (S)1265.130), which are
inconsistent with the rights and obligations set forth herein.
For purposes hereof the "date of taking" shall be deemed to be the date that
physical possession of the property taken is delivered to the condemning
authority.
24. Subordination
(a) This Lease shall be subject and subordinate at all times to (a) all
ground or underlying leases which may hereafter be executed affecting the
Building and (b) the liens of all mortgages and deeds of trust now or hereafter
placed on or against the Building or on or against Landlord's interest or estate
therein or on or against all such ground or underlying leases, all without the
necessity of having further instruments executed on the part of Tenant to effect
such subordination; provided, however, that such subordination shall be
conditioned upon Tenant's receipt of a written agreement in form reasonably
satisfactory to Tenant from any such lender or ground lessor which provides that
as long as Tenant is not in default in the payment of rental or other sums or be
otherwise in default under the terms of this Lease beyond any notice and cure
period, and Tenant attorns to the landlord of any such ground or underlying
lease or to the purchaser upon foreclosure of the lien of any mortgage or deed
of trust, or, if requested, enters into a new lease for the balance of the
original or extended term hereof then remaining upon the same terms
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and provisions as are in this Lease contained (which attornment or entry into a
new lease Tenant hereby agrees to do), the rights and possession of Tenant under
this Lease shall not be disturbed. Tenant shall execute and deliver to Landlord
within ten (10) days of request from Landlord, such further instruments
evidencing the subordination of this Lease in form reasonably acceptable to
Tenant. If any mortgagee, beneficiary, trustee or ground lessor elects to have
this Lease prior to the lien of such mortgagee's beneficiary's, trustee's or
ground lessor's mortgage or deed of trust or ground lease, and gives notice of
such election to Tenant, this Lease shall be deemed prior to the lien of such
mortgage or deed of trust or ground lease, whether this Lease is dated prior or
subsequent to the date of such mortgage, deed of trust or ground lease or the
date of recording thereof. Tenant shall execute and deliver to Landlord within
ten (10) days of request from Landlord, such further investments evidencing the
subordination of this Lease to such ground or underlying leases, and to the
liens of any such mortgages or deeds of trust, as may be requested by Landlord
and/or in such form as is required by Landlord's lender and reasonably
acceptable to Tenant (including without limitation provisions waiving as against
lender claims of, and giving to lender notice of and the right to cure, Landlord
defaults under this Lease), provided such instruments shall provide that as long
as Tenant is not in default in the payment of rental or other sums or be
otherwise in default under the terms of this Lease beyond any notice and cure
period, and Tenant attorns to the Landlord of any such ground or underlying
lease or to the purchaser upon foreclosure of the lien of any mortgage or deed
of trust, or, if requested, enters into a new lease for the balance of the
original or extended term hereof then remaining upon the same terms and
provisions as are in this Lease contained (which attornment or entry into a new
lease Tenant hereby agrees to do), the rights and possession of Tenant under
this Lease shall not be disturbed. If, in connection with Landlord's obtaining
financing for the Building, the lender shall request reasonable modifications in
this Lease as a condition to such financing, Tenant will not unreasonably
withhold, delay or defer its consent thereto, provided that such modifications
do not increase the obligations or decrease the rights of Tenant hereunder or
materially adversely affect the leasehold interest hereby created or Tenant's
rights hereunder. In the event of any default on the part of Landlord, Tenant
will deliver notice by registered or certified mail to any beneficiary of a deed
of trust or mortgagee under a mortgage covering the Property whose address shall
have been furnished to Tenant, and shall offer such beneficiary or mortgagee a
reasonable opportunity to cure the default, including time to appoint a
receiver, if such should prove necessary to effect a cure.
(b) Landlord shall use commercially reasonable efforts to deliver to
Tenant, within thirty (30) days after the Possession Delivery Date, a
subordination, nondisturbance and attornment agreement ("SNDA") in form
reasonably satisfactory to Tenant, executed by the holder (each, an "Existing
Lender") of any mortgage or deed of trust or any ground or underlying lease
affecting the Premises which exists as of the date hereof. Such SNDA (i) shall
provide that as long as
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Tenant is not in default under the terms of this Lease beyond any applicable
notice or cure period, and Tenant attorns to the landlord of any such ground or
underlying lease or to the purchaser upon foreclosure of the lien of any such
mortgage or deed of trust (a "New Owner"), such New Owner shall not disturb the
rights and possession of Tenant under this Lease and shall recognize this Lease
and all of Tenant's rights thereunder, subject to the provisions of clause (iii)
below; and (iii) shall contain such other terms and conditions as are
customarily required by institutional lenders to be included in such a
subordination, nondisturbance and attornment agreement and are reasonably
approved by Tenant, including, without limitation, provisions requiring Tenant
to give such Existing Lender written notice of any default by Landlord under
this Lease and a reasonable opportunity to cure the same, including time to
appoint a receiver to obtain control of the Property, if such should prove
necessary to effect a cure. If for any reason Landlord fails to deliver to
Tenant such an SNDA executed by each Existing Lender within thirty (30) days
after the Possession Delivery Date, Tenant may terminate this Lease by written
notice to Landlord provided that such termination becomes effective not later
than forty-five (45) days after the Possession Delivery Date.
25. No Merger
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and, at the option of Landlord,
either shall operate (a) to terminate all or any existing subleases or
subtenancies under this Lease or (b) as an assignment to Landlord of any or all
such subleases and subtenancies.
26. Sale
If the original Landlord hereunder, or any successor owner of the Building,
shall sell or convey the Building, all liabilities and obligations on the part
of the original Landlord, or such successor owner, under this Lease accruing
thereafter shall terminate provided that such new owner assumes the same in
writing, and thereupon all such liabilities and obligations shall be binding
upon the new owner. Tenant agrees to attorn to such new owner.
27. Estoppel Certificate
Tenant shall execute, acknowledge and deliver to Landlord, within ten (10)
days following request by Landlord, a certificate certifying (a) that this Lease
is unmodified and in full force and effect (or if there have been modifications,
that this Lease is in full force and effect as modified and stating the date and
nature of each modification), (b) the date, if any, to which rental and other
sums payable hereunder have been paid, (c) that no notice has been received by
Tenant of any default which has not been cured, except as to defaults specified
in said certificate
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(d) that no offsets or defenses available to Tenant, except as specified in said
certificate, (e) that Landlord has performed all of its obligations (including
tenant improvement work), except as specified in said certificate, and that
Tenant has entered into and accepted occupancy of the Premises, and (f) such
other matters as may be requested by Landlord or Landlord's lender. Any such
certificate may be relied upon by any prospective purchaser, mortgagee, or
beneficiary under any deed of trust on the Building or any part thereof.
28. No Light, Air, or View Easement
Any diminution or shutting off of light, air, or view by any structure which
may be erected on lands adjacent to the Building shall in no way affect this
Lease or impose any liability on Landlord.
29. Holding Over
If, without objection by Landlord, Tenant holds possession of the Premises
after expiration of the Term, Tenant shall become a tenant from month to month
upon the same terms, conditions and provisions specified in this Lease but at a
monthly Base Rent equivalent to one hundred fifty (150%) of the then prevailing
fair market rental as determined in good faith by the Landlord but in no event
less than one hundred fifty percent (150%) of Base Rent being paid by Tenant in
the last month of the Term, payable in advance on or before the first (1st) day
of each month. Each party shall give the other notice at least one (1) month
prior to the date of termination of such monthly tenancy of its intention to
terminate such tenancy. In the event Landlord objects to Tenant's holding over,
Tenant shall be unlawfully and illegally in possession of the Premises and
Tenant shall be responsible for holdover rent in the amount set forth above on a
per-diem basis and shall otherwise be liable to Landlord and hereby agrees to
indemnify, defend and hold Landlord harmless from and against all Losses
incurred by Landlord resulting from such holdover.
30. Abandonment
Tenant shall not, by vacating or abandoning any part or all of the Premises,
cause the termination of any utility or other service which is necessary for the
normal operation of the Building. If Tenant shall be dispossessed of the
Premises by process of law or otherwise, any personal property belonging to
Tenant and left on the Premises may be removed by Landlord, and stored or sold,
all at Tenant's cost, in accordance with applicable law.
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31. Surrender
(a) Subject to Section 7 and subparagraph (b) below, Tenant shall at the
end of the Term surrender to Landlord the Premises and all alterations,
additions and improvements thereto in the same condition as when received,
except for ordinary wear and tear, damage by fire, earthquake, act of God or the
elements, the presence of Hazardous Materials (other than those introduced to
the Premises by Tenant or Tenant's employees, agents or invitees), Landlord's
Work, the Tenant Improvements, and any Alterations permitted hereunder. In
addition to the foregoing and at Landlord's request, Tenant shall at Tenant's
cost and expense remove all communications and data wiring and cabling installed
by Tenant and repair and restore the Premises in respect of any damage caused by
such removal.
(b) Notwithstanding anything else herein to the contrary, at Landlord's
option, which Landlord may exercise in its sole and absolute discretion, Tenant
shall remove, at Tenant's sole cost and expense, all Tenant Improvements from
the "engineering area" of the portion of the Premises located at 5964 West Las
Positas Boulevard, as such area is described on Exhibit D attached hereto, and
repair any damage caused by such removal (including, without limitation, any
damage to any Building system, which shall be restored to good working order),
upon the expiration or early termination of this Lease in the event, and to the
extent, that Landlord requests such removal by written notice to Tenant given
(i) upon Tenant's termination of this Lease under any of Section 5, the first
sentence of Section 10(b), or Section 23, or (ii) not later than five (5) months
before the expiration of this Lease.
32. Waiver
The waiver by either party of any term, agreement, condition, or provision
herein contained shall not be deemed to be a waiver of any subsequent breach of
the same or any other term, agreement, condition, or provision herein contained,
nor shall any custom or practice which may grow between the parties in the
administration of the terms hereof be construed to waive or to lessen the right
of such party to insist upon the performance by the other party in strict
accordance with said terms. The subsequent acceptance of rental hereunder by
Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of
any term, agreement, condition, or provision of this Lease, other than the
failure of Tenant to pay particular rental so accepted, regardless of Landlord's
knowledge of such preceding breach at the time of acceptance of such rental.
33. Notice
All notices, demands or other writings provided in this Lease to be given or
made or sent, or which may be given or made or sent by one party to another
party,
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shall be deemed to have been fully given or made or sent when made in writing
and upon personal delivery (whether by such party or its agent, or by courier,
or, with respect to any notices other than notices given under Section 17
hereof, by electronically confirmed telefacsimile) or after three (3) business
days following deposit in the United States mail, registered or certified,
postage prepaid, and addressed to such party at the address specified in the
Basic Lease Information, or to such other place as such party may from time to
time designate in a notice to the other party or parties.
34. Complete Agreement
There are no oral agreements between Landlord and Tenant affecting this
Lease, and this Lease supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements, and understandings, if any, between
Landlord and Tenant or displayed by Landlord to Tenant with respect to the
subject matter of this Lease. There are no representations between Landlord and
Tenant other than those explicitly set forth in this Lease, and all reliance
with respect to any representations is solely upon such representations.
35. Authority
Tenant hereby represents and warrants to Landlord that Tenant is duly
organized, validly existing and in good standing under the laws of the state of
its organization and the persons executing this Lease on behalf of Tenant have
the full right and authority to execute this Lease on behalf of Tenant and to
bind Tenant without the consent or approval of any other person or entity.
Tenant has full, power, capacity, authority and legal right to execute and
deliver this Lease and to perform all of its obligations hereunder. This lease
is a legal, valid and binding obligation of Tenant, enforceable against Tenant
in accordance with its terms.
36. Miscellaneous Provisions
(a) The words "Landlord," "Tenant" and "Guarantor," if any, as used herein
shall include the plural as well as the singular.
(b) If there be more than one entity or person comprising Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several.
(c) Subject to the provisions of subsection 36(o), time is of the essence
of this Lease and each and all of its provisions.
(d) Submission of this instrument for examination or signature by Tenant
does not constitute a reservation of or option for lease, and it is not
effective as a lease or otherwise until execution and delivery by both Landlord
and Tenant.
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(e) The agreements, conditions and provisions herein contained shall,
subject to the provisions as to assignment and subletting, apply to and bind the
heirs, executors, administrators, successors and assigns of the parties hereto.
(f) Except where specifically provided otherwise, Landlord may act in its
sole and absolute discretion when required to act hereunder.
(g) The term "including" shall mean "including without limitation." The
term "gross negligence" shall mean any action or inaction taken with a reckless
disregard for the consequences.
(h) If any provision of this Lease shall be determined to be illegal or
unenforceable, such determination shall not affect any other provision of this
Lease and all such other provisions shall remain in full force and effect.
(i) This Lease shall be construed and enforced in accordance with the laws
of the State of California, without giving effect to any choice of law rule that
would cause the application of the laws of any jurisdiction other than the State
of California.
(j) All remedies hereinbefore and hereafter conferred upon Landlord shall
be deemed cumulative and no one shall be exclusive of the other, or shall in any
way limit the availability to Landlord of any other remedy conferred by law,
whether or not specifically conferred by the provisions of this Lease.
(k) All indemnities of Tenant and Landlord contained in this Lease shall
survive the expiration or other termination hereof with respect to any act,
condition or event which is the subject matter of such indemnity and which
occurs prior to such expiration or other termination.
(l) The parties acknowledge and agree that each party has reviewed and
revised, and has been provided the opportunity for its respective counsel to
review and revise, this Lease, and no rule of construction to the effect that
any ambiguities are to be resolved against the drafting party shall be employed
in the interpretation or construction of this Lease, or any amendments or
exhibits thereto, or any other document executed and delivered by either party
in connection therewith.
(m) Notwithstanding anything herein to the contrary, all provisions of this
Lease which require the payment of money or the delivery of property after the
termination of this Lease shall survive the termination of this Lease.
(n) The parties have agreed that any action or proceedings with respect to
this Lease (including an enforcement action against either or both of Tenant and
Guarantor) may appropriately be conducted in the State of California.
Accordingly, Tenant and Guarantor hereby consent and submit to the jurisdiction
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of the courts of the State of California for purposes of such action or
proceedings and agree that, if suit is brought in such state, service of process
may be made, and personal jurisdiction over Tenant and Guarantor obtained by
serving a copy of the summons and complaint upon Tenant and Guarantor at the
Premises. Each of Tenant and Guarantor waives any objection it may now or
hereafter have to the laying of venue in such state on any claim that any action
or proceedings instituted in such state has been brought in any inconvenient
forum. Nothing contained herein, however, shall prevent Landlord from bringing
any action or exercising any rights against any security or against Tenant or
Guarantor personally, or against any property of Tenant and/or Guarantor, within
any other state or country. Initiating such proceeding or taking such action in
any other state or country shall not, however, constitute a waiver of the
agreement contained herein that the laws of the State of California shall govern
the rights and obligations of the parties hereunder.
(o) Except as may be otherwise specifically provided herein, time periods
for Landlord's or Tenant's performance under any provisions of this Lease not
involving the payment of money shall be extended for periods of time during
which the nonperforming party's performance is prevented due to circumstances
beyond the party's control, including, without limitation, strikes, embargoes,
governmental regulations, inability to obtain permits, acts of God, war or other
strife (a "Force Majeure Event"). Landlord and Tenant agree to use commercially
reasonable efforts to eliminate or mitigate a Force Majeure Event and agree to
perform promptly once the Force Majeure Event is eliminated or has subsided
enough to allow performance. Tenant hereby waives and releases its right to
terminate this Lease under Section 1932(1) of the California Civil Code or under
any similar law, statute or ordinance now or hereafter in effect.
Notwithstanding the foregoing, Tenant's termination and abatement rights under
Sections 2 and 5 shall not be affected by Force Majeure Events.
(p) Any expenditure by a party permitted or required under this Lease, for
which demands reimbursement from the other party, shall be limited to the actual
cost of the goods and services involved, shall be reasonably incurred, and shall
be substantiated by documentary evidence available for inspection and review by
the other party.
37. Exhibits
The exhibit(s), schedule(s) and addendum, if any, specified in any of the
Sections of this Lease are attached to this Lease and by this reference made a
part hereof.
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38. Letter of Credit
(a) Upon execution of this Lease, and in any event before taking possession
of the Premises for any purpose other than to prepare space plans and working
drawings for the Tenant Improvements, Tenant shall deliver to Landlord the
Letter of Credit (as defined below) as security for Tenant's performance of all
of Tenant's covenants and obligations under this Lease; provided, however, that
neither the Letter of Credit nor any Letter of Credit Proceeds (as defined
below) shall be deemed an advance rent deposit or an advance payment of any
other kind, or a measure of Landlord's damages upon Tenant's default. The Letter
of Credit shall be maintained in effect from the date hereof through the date
which is one hundred twenty (120) days after the Term Expiration, as the same
may be extended in accordance with the provisions of this Lease, provided that
upon Tenant's surrender of the Premises at the Term Expiration, Landlord and
Tenant shall endeavor to determine as soon as practicable any amounts owing by
Tenant on account of its obligation to restore the Premises, and within five (5)
business days after payment of such amount (and any other amounts owing to
Landlord) and Tenant's fulfillment of any other obligations to Landlord,
Landlord shall return to Tenant the Letter of Credit and any Letter of Credit
Proceeds then held by Landlord (other than those held for application by
Landlord as provided below). Landlord shall not be required to segregate the
Letter of Credit Proceeds from its other funds, and in no event shall Letter of
Credit Proceeds or any portion thereof be deemed to be held in trust for Tenant.
No interest shall accrue or be payable to Tenant with respect Letter of Credit
Proceeds. Landlord may (but shall not be required to) draw upon the Letter of
Credit and use the proceeds therefrom (the "Letter of Credit Proceeds") or any
portion thereof to the extent required to cure any Event of Default under this
Lease, it being understood that any use of the Letter of Credit Proceeds shall
not constitute a bar or defense to any of Landlord's remedies provided herein.
In such event and upon written notice from Landlord to Tenant specifying the
amount of the Letter of Credit Proceeds so utilized by Landlord and the
particular purpose for which such amount was applied, Tenant shall immediately
deliver to Landlord an amendment Letter of Credit or a replacement Letter of
Credit in an amount equal to one hundred percent (100%) of the amount specified
below. Tenant's failure to deliver such replacement Letter of Credit to Landlord
within five (5) business days of Landlord's notice shall constitute a Event of
Default hereunder. If Tenant is not then in default, within one hundred twenty
(120) days after the termination or expiration of this Lease, or on such earlier
date as provided above, Landlord shall return to Tenant the Letter of Credit or
the balance of the Letter of Credit Proceeds then held by Landlord; provided,
however, that in no event shall any such return be construed as an admission by
Landlord that Tenant has performed all of its obligations hereunder. No
mortgagee of Landlord, nor any purchaser at any judicial or private foreclosure
sale of the Premises or any portion thereof, shall be responsible to Tenant for
such Letter of
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Credit or any Letter of Credit Proceeds unless such holder or purchaser shall
have actually received the same.
(b) As used herein, "Letter of Credit" means an irrevocable letter of
credit issued by a major "money center" bank satisfactory to Landlord in its
sole and absolute discretion (the "Bank"), drawings under which may be made at
an office of the Bank located in either New York, New York, or San Francisco,
California, or Los Angeles, California, naming Landlord as beneficiary, in the
amounts set forth below, and otherwise in form and substance satisfactory to
Landlord. Landlord hereby approves Citibank, N.A. as the Bank. The amount of the
Letter of Credit shall be One Million Eight Hundred Fifty Thousand Dollars
($1,850,000.00) throughout the first Lease Year of the initial Term, and shall
be reduced by Two Hundred Fifty Thousand Dollars ($250,000) upon the expiration
of each of the first six (6) Lease Years of the initial Term. The Letter of
Credit shall be for an initial term of not less than one year and shall provide:
(i) that Landlord may make partial and multiple draws thereunder, up to the face
amount thereof, (ii) that Landlord may draw upon the Letter of Credit up to the
full amount thereof, as determined by Landlord, and the Bank will pay to
Landlord the amount of such draw upon receipt by the Bank of a sight draft
signed by Landlord and accompanied by a written certification from Landlord to
the Bank stating either: (A) that a Event of Default has occurred and is
continuing under this Lease or (B) that Landlord has not received notice from
the Bank that the Letter of Credit will be renewed by the Bank for at least one
(1) year beyond the then applicable expiration date and Tenant has not furnished
Landlord with a replacement Letter of Credit as hereinafter provided; and (iii)
that, in the event of Landlord's assignment or other transfer of its interest in
this Lease, the Letter of Credit shall be freely transferable by Landlord,
without charge and without recourse, to the assignee or transferee of such
interest and the Bank shall confirm the same to Landlord and such assignee or
transferee. The Letter of Credit shall further provide that a draw thereon
pursuant to clause (ii)(B) above may only be made during the thirty (30) day
period preceding the then applicable expiration date of the Letter of Credit. In
the event that no later than thirty (30) days prior to then applicable
expiration date of the Letter of Credit, neither (1) the Bank shall have
notified Landlord that the Letter of Credit will be renewed for at least one (1)
year beyond the then applicable expiration date, nor (2) Tenant shall have
delivered to Landlord a replacement Letter of Credit in the amount required
hereunder and otherwise meeting the requirements set forth above, then Landlord
shall be entitled to draw on the Letter of Credit as provided above, and shall
hold the proceeds of such draw as Letter of Credit Proceeds pursuant to
subparagraph (a) above, provided that such drawing shall not constitute a waiver
of Landlord's right to declare a Event of Default of this Lease pursuant to
Section 17.
(c) At any time during the Term, Tenant may replace any Letter of Credit
provided hereunder with another Letter of Credit meeting the requirements
39
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hereunder, and Landlord shall cooperate in arranging a simultaneous exchange of
such Letters of Credit.
39. Brokerage
Each party warrants and represents to the other that such party has not
retained the services of any real estate broker, finder or any other person
whose services would form the basis for any claim for any commission or fee in
connection with this Lease or the transactions contemplated hereby except for
(a) real estate brokerage services rendered to Landlord by the broker listed in
the Basic Lease Information as Landlord's Broker, pursuant to a separate
agreement between Landlord and Landlord's Broker, the commissions earned with
respect to which Landlord shall pay to such broker pursuant to such separate
agreement, and (b) such real estate brokerage services as may have been rendered
to Tenant by the Broker listed in the Basic Lease Information as the Tenant's
Broker pursuant to a separate agreement between Tenant and Tenant's Broker.
Each party agrees to forever indemnify, defend (by counsel reasonably acceptable
to the indemnified party) and hold the other party free and harmless of, from
and against any and all Losses arising from any breach of its warranty and
representation as set forth in the preceding sentence. Landlord and Tenant each
are informed and acknowledge that Landlord's Broker has agreed, in a separate
agreement, to share with Tenant's Broker the commission paid by Landlord to
Landlord's Broker. Tenant acknowledges and agrees that Landlord has no
obligation to pay any commission directly to Tenant's Broker.
40. Limitation of Liability
With the exception of actions arising from Landlord's fraud, bad faith or
willful misconduct, any liability of Landlord under this Lease shall be limited
to Landlord's interest in the Building and the parcel of real property on which
the Building is located, and any appurtenant rights thereto and insurance,
condemnation and sale proceeds thereof.
41. Option to Renew
(a) Provided that Tenant is not then in default beyond any notice and cure
periods, Tenant shall have one (1) option to renew this Lease (the "Renewal
Option") with respect to all, but not less than all, of the Premises for a five
(5) year extended term (the "Extended Term"), commencing upon the Term
Expiration and otherwise upon the same terms and conditions as this Lease,
except that (i) Base Rent shall be determined as described below, (ii) there
shall be no option to renew, and (iii) at Landlord's option, which Landlord may
exercise in its sole and absolute discretion based on Landlord's financial
evaluation of Tenant at the time of the commencement of the Extended Term,
Tenant shall be required to furnish to
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Landlord a new Letter of Credit in an amount not exceeding $1,850,000 but
otherwise determined by Landlord in its sole and absolute discretion, which
amount shall not be reduced during the Extended Term; provided, however, that
the amount of such required Letter of Credit shall not exceed $350,000 if Tenant
provides to Landlord evidence reasonably satisfactory to Landlord that during
each of the last three (3) Lease Years of the initial Term the amount of
Tenant's shareholder equity was not less than $100,000,000. In order to exercise
the option, Tenant shall give written notice (the "Election Notice") to Landlord
of Tenant's intention to exercise such option not more then eighteen (18) months
nor less than twelve (12) months prior to the Term Expiration, and if such
notice is not so given, the option shall terminate; the Tenant hereby expressly
acknowledges and agrees that time is of the essence for purposes of notice of
exercise of such option and that Tenant's failure to do so within such time
period will relieve Landlord of any obligation under this Section. Subject to
subparagraphs (b) and (c) below, if Tenant timely delivers the Election Notice
to Landlord and is not in default under this Lease at the time the Extended Term
commences, Landlord and Tenant shall be deemed to have entered into an extension
of this Lease with respect to the entirety of the Premises for the Extended Term
on the terms and conditions set forth herein. The parties hereto acknowledge
that Landlord shall be under no obligation to expend or agree to expend funds in
connection with this option to renew, including but not limited to, any funds
for improvement to the Premises.
(b) The monthly Base Rent payable during the Extended Term pursuant to
Section 3(a) shall be an amount equal to the Prevailing Market Rent (as
hereinafter defined), multiplied by the number of square feet constituting the
Premises, as then measured by Landlord in accordance with generally accepted
measurement standards. "Prevailing Market Rent" shall mean the prevailing rental
rate per square foot then being obtained by landlords of commercial office
buildings of similar location, character and stature as the Building, for
comparable improved space of similar size and for comparable duration and
otherwise upon substantially equivalent economic terms as this Lease. During the
option period, the Premises are to be leased "as is" and Landlord shall not be
obligated to provide any tenant improvements or financing for the same.
Notwithstanding the foregoing, the calculation of Prevailing Market Rent shall
be determined by making adjustments for any concessions or inducements,
including without limitation tenant improvement allowances, free rent, lease
take-over obligations, or moving costs, that may be paid to other tenants.
Landlord and Tenant shall meet and attempt in good faith to mutually determine
Prevailing Market Rent for the purposes of the foregoing. If the parties have
not reached agreement on Prevailing Market Rent by the date that is sixty (60)
days after the Election Notice (the "Initial Rent Determination Period"), each
party shall appoint an appraiser and shall give to the other party the identity
of the appraiser no later than the date that is ten (10) days after the Initial
Rent Determination Period. If either party fails to appoint an appraiser by such
date, the sole appraiser appointed, if any, shall determine the
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Prevailing Market Rent. If no appraiser is appointed Landlord's determination of
Prevailing Market Rent shall be final and binding upon the parties. If two
appraisers are appointed, they shall immediately meet and attempt to agree upon
such Prevailing Market Rent. If the appraisers cannot reach agreement on the
Prevailing Market Rent by the date that is fifteen (15) days after appointment
of the appraisers by the parties hereto, each appraiser shall submit a
determination of Prevailing Market Rent to Landlord and Tenant. If the
determinations of Prevailing Market Rent made by these two appraisers vary by
five percent (5%) or less, the Prevailing Market Rent shall be the average of
the two determinations. If the determinations vary by more than five percent
(5%), the two appraisers shall within ten (10) days after submission of their
determinations, appoint a third appraiser. If the two appraisers shall be unable
to agree on the selection of a third appraiser within the 10-day period, then
either Tenant or Landlord may request such appointment by petitioning the
presiding judge of the Superior Court in and for the City of Pleasanton. Such
third appraiser shall, within thirty (30) days after appointment, make a
determination of the Prevailing Market Rent and submit such determination to
Landlord and Tenant. The Prevailing Market Rent shall be the determination of
Prevailing Market Rent submitted by the original two appraisers that is closer
to the Prevailing Market Rent determination of the third appraiser. If the third
appraiser's determination is exactly between the Prevailing Market Rent
determination of the original two appraisers, then Prevailing Market Rent shall
be the average of the original two determinations. For purposes of this Section,
"appraiser" shall mean an MAI designated appraiser with not less than 2 years of
substantial commercial appraisal or brokerage experience in Hacienda Business
Park. Each party shall bear the fees and costs incurred by each party's
appraiser in connection with the determination of Prevailing Market Rent and all
fees and costs incurred by the third appraiser, if any, in connection with the
determination of Prevailing Market Rent shall be shared equally by Landlord and
Tenant. If the determination of Prevailing Market Rent has not been made by the
Term Expiration then Tenant shall (i) continue to pay monthly Base Rent at the
rate of 110% of the monthly Base Rent for the last month of the Term (the
"Arbitration Period Base Rent") as well as any additional rent due under this
Lease and (ii) pay to Landlord, or receive as a refund from Landlord, as
applicable, on the first day of the month after the determination of Prevailing
Market Rent is made, an amount, if any, equal to the difference between the
Arbitration Period Base Rent that was paid to Landlord and the monthly Base Rent
for the Extended Term that should have been paid to Landlord as the monthly Base
Rent for the Extended Term as determined hereunder.
(c) Notwithstanding the foregoing provisions of this Section 41, upon
determination of the Prevailing Market Rent pursuant to subparagraph (b) above,
Tenant shall have the right, in its sole absolute discretion, to rescind its
exercise of the Renewal Option by giving Landlord written notice of such
election within ten (10) days after receipt of written notice of such
determination. If Tenant so
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rescinds its exercise of the Renewal Option, (i) this Lease shall terminate on
the later of (A) the one hundred eightieth (180th) day after such notice of
rescission, or (B) the Term Expiration, and (ii) Tenant shall pay all fees and
costs incurred by each party's appraiser and the third appraiser, if any, in
connection with the determination of Prevailing Market Rent.
42. Signage
Tenant may install one monument building sign on the Land outside the
Building and one sign on the Building; provided, however, that the size, design,
color, location and other physical aspects of each such sign shall be subject to
Landlord's prior reasonable written approval, the CC&R's, including any design
review requirements provided for therein, Landlord's rules and regulations, and
applicable laws, regulations and governmental approval requirements. Until the
expiration or earlier termination of this Lease, all such signage shall be
maintained by Landlord in good condition and repair, and the cost of such
maintenance shall be an Operating Expense to be paid by Tenant in accordance
with Section 3. Upon the expiration or earlier termination of this Lease, all
such signage shall be removed by Tenant, at Tenant's sole cost and expense, and
Tenant shall restore the affected portions of the Building to the same condition
as existed immediately before the installation of such signage. Except as
expressly provided in this Section 43, tenant shall have no right to maintain
Tenant identification signs in any other location in, on or about the Property
and shall not display or erect any other Tenant identification sign, display or
other advertising material that is visible from the exterior of the Building.
43. Use of Names
Tenant shall not use the name of the Building or any of the words
"Rinconada," "Hacienda" or "Business Park" in the name or title of its business
or occupation without Landlord's prior written consent, which consent Landlord
may withhold in its reasonable discretion. Landlord reserves the right to
change the name of the Building without Tenant's consent and without any
liability to Tenant.
44. Parking and Transportation
(a) Tenant shall have the right to park in the Property's parking areas,
subject to reasonable rules and regulations imposed from time to time by
Landlord. Landlord shall not be liable to Tenant, nor shall this Lease by
affected, if any parking is impaired by moratorium, initiative, referendum, law,
ordinance, regulation or order passed, issued or made by any governmental or
quasi-governmental body. Landlord shall not impose any charge for the use of the
parking areas of the Property except for parking charges, fees or assessments,
if any, which may be imposed by any governmental or quasi-governmental
authority.
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Landlord shall have no responsibility for assuring that use of such parking
areas is limited to Tenant's invitees and licensees.
(b) Tenant shall establish and maintain during the Term a program to
encourage maximum use of public transportation by personnel of Tenant employed
on the Premises, including, without limitation, the distribution to such
employees of written materials explaining the convenience and availability of
public transportation facilities adjacent or proximate to the Building,
staggering working hours of employees, and encouraging use of such facilities,
all at Tenant's sole reasonable cost and expense. Tenant agrees to comply with
any lawful regulation or ordinance of the City of Pleasanton or the County of
Alameda respecting transportation management in those jurisdictions, related to
the conduct of Tenant's business within the Premises.
45. Landlord's Default
In the event Landlord fails to perform any of its obligations under this
Lease and (except in the case of emergency posing an immediate threat to persons
or property, in which case no prior notice shall be required) fails to cure such
default within sixty (60) days after written notice from Tenant specifying the
nature of such default where such default could reasonably be cured within such
sixty (60) day period, or fails to commence such cure within such sixty (60) day
period and thereafter continuously with due diligence prosecute such cure to
completion where such default could not reasonably be cured within such sixty
(60) day period, then Tenant shall have the right, but not the obligation,
following fifteen (15) days' prior written notice to Landlord and Landlord's
continued failure to cure such default (or be in the process of diligently
pursuing the same to completion), to incur any reasonable expense necessary to
cure such default and invoice Landlord therefor. If Landlord fails to reimburse
Tenant within fifteen (15) days following receipt of such invoice, then Tenant
may apply the actual and reasonable cost of such cure against the next Rent
obligations due hereunder, at a rate not to exceed one-half (1/2) the monthly
installments of Base Rent until such amount has been paid in full.
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In Witness Whereof, the parties have executed this Lease as of the date set
forth in the Basic Lease Information.
Landlord: Las Positas LLC,
a Delaware limited liability company
By: G&I II Las Positas LLC,
a Delaware limited liability company,
its managing member
By: G&I II Investment Las Positas Corp.,
a Delaware corporation,
its managing member
By:
--------------------------
Name:
------------------------
Title:
-----------------------
Tenant: Tut Systems, Inc.,
a Delaware corporation
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
45
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Exhibit A
Site Plan
Diagram of Building
Diagram of Premises
A-1
<PAGE>
Exhibit B
Tenant Construction Agreement
This Exhibit B is attached to and forms part of that certain Lease, dated as
of March __, 2000, by and between Las Positas LLC, as Landlord, and Tut Systems,
Inc., as Tenant (the "Lease"), relating to the Premises described therein. All
capitalized terms used but not otherwise defined herein shall have the meanings
set forth in the Lease.
Subject to the terms and conditions set forth herein and in the Lease,
Landlord and Tenant shall each construct or install in the Premises the
improvements as set forth below and in accordance with the procedures set forth
below:
1. Definitions
(i) "Base Building" shall mean the structural portions of the Building
(including exterior walls, roof structure, foundation and floor slabs of the
Building) and all Standard Building Systems.
(ii) "Codes" shall mean all applicable statutes, ordinances or regulations
issued or adopted by the governing authorities having jurisdiction over the
Building, including, without limitation, electrical, building, architectural,
barrier, zoning, health, safety, seismic, and fire codes.
(iii) "Final Plans" is defined in Section 3.1 below.
(iv) "Landlord's Architect" shall mean the architect designated from time
to time by Landlord.
(v) "Landlord's Contribution" is defined in Section 4.2.1 below.
(vi) "Landlord's Work" is defined in Section 2 below.
(vii) "Space Plans" is defined in Section 3.1 below.
(viii) "Tenant's Architect" is defined in Section 3.1 below.
(ix) "Tenant's Contractor" shall mean the contractor selected by Tenant
and approved by Landlord in accordance with Section 3.2 below.
(x) "Tenant Improvements" is defined in Section 3.1 below.
(xi) "Tenant Plans" is defined in Section 3.1 below.
(xii) "Tenant's Work" is defined in Section 3.4 below.
B-1
<PAGE>
Capitalized terms not otherwise defined in this Exhibit B shall have the
meanings ascribed to them in the Lease.
2. Landlord's Work
On or before the Term Commencement, Landlord shall substantially complete,
at Landlord's sole cost and expense, the following work ("Landlord's Work"): (i)
installation of a new roof membrane on the Building as more fully described on
Schedule 1 attached hereto; (ii) any repairs to the Standard Building Systems
that may be necessary to bring such systems into good condition and repair;
(iii) repainting of the exterior of the Building in a color mutually and
reasonably approved by Landlord and Tenant; and (iv) enhancement of the
landscaping surrounding the Building. For a period of one (1) year after the
date hereof, Landlord warrants to Tenant that Landlord's Work shall be performed
and constructed in accordance with all applicable Codes, in a good and
workmanlike manner, free of defects and using materials and equipment of good
quality.
3. Tenant's Work
3.1 Tenant Plans
Tenant shall furnish to Landlord for Landlord's review and written approval
(which approval shall not be unreasonably withheld) detailed layout plans and
finish specifications (the "Space Plans") prepared by an architect reasonably
acceptable to Landlord ("Tenant's Architect"). Landlord hereby approves Studio
Architects, Inc. as Tenant's Architect. The Space Plans shall show all of the
improvements which Tenant desires to be constructed in the Premises, and all
such improvements shall comply with all Codes. The Space Plans shall separately
note any proposed structural work or extraordinary or supplemental electrical,
plumbing or HVAC requirements. Landlord shall respond to the Space Plans within
five (5) business days of its receipt thereof. In response to any objections of
Landlord to the Space Plans, Tenant shall resubmit appropriately revised Space
Plans prepared by Tenant's Architect, and such resubmitted Space Plans shall
clearly indicate which portions of the Space Plans are revised and which
portions of the Space Plans remain unchanged from the previously submitted Space
Plans. The Space Plans, as finally approved in writing by Landlord, shall be
referred to herein as the "Final Space Plans." Landlord hereby approves the
Space Plans attached hereto as Schedule 2 and agrees not to withhold consent to
the Working Drawings (as defined below) to the extent they are consistent with
such Space Plans.
Tenant shall furnish to Landlord for Landlord's written approval (which
shall not be unreasonably withheld) working plans and specifications (the
"Working Drawings") prepared by Tenant's Architect for all of the improvements
which Tenant desires to be constructed in the Premises. The Working Drawings
shall show improvements that conform to the Final Space Plans. Landlord shall
respond
B-2
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to the Working Drawings within five (5) business days of its receipt thereof.
In response to any reasonable objections of Landlord to the Working Drawings,
Tenant shall resubmit appropriately revised Working Drawings prepared by
Tenant's Architect, and such resubmitted Working Drawings shall clearly indicate
which portions of the Working Drawings are revised and which portions of the
Working Drawings remain unchanged from the previously submitted Working
Drawings. (The Working Drawings for all of the improvements to be constructed in
the Premises, as approved in writing by Landlord, as revised by Tenant from time
to time with Landlord's written approval in accordance with the following
provisions of this Section 3, are hereinafter called the "Final Plans", and the
improvements to be performed in accordance with the Final Plans are hereinafter
called the "Tenant Improvements"). Upon construction, the Tenant Improvements
shall become part of the Building and the property of Landlord.
In the event that Tenant shall desire any change in or to the Final Plans (a
"Change"), if such Change will affect any portion of the Base Building (other
than the electrical systems forward of the distribution panel in the Premises),
Tenant shall submit to Landlord for Landlord's review and written approval a
copy of the change order prepared by Tenant's Architect or Tenant's Contractor
with respect to such Change (the "Change Order"), together with revised working
drawings prepared by Tenant's Architect incorporating the requested Change and
clearly identifying the same as such on the revised Working Drawings. Landlord
shall not unreasonably withhold or delay its approval of the Change Order or
revised Working Drawings, provided, however, that, in any event, Landlord shall
have five (5) business days after receipt of the Change Order and revised
Working Drawings to review any proposed Change. Upon completion of the Tenant
Improvements, Tenant shall deliver to Landlord "CAD" as-built mylar plans of the
Tenant Improvements, together with the disk for the same (using auto-CAD).
The parties hereto acknowledge that, notwithstanding anything else herein to
the contrary, the components of the Space Plans or the Final Plans
(collectively, the "Tenant Plans") may be submitted to Landlord in stages, with
each such component being subject to the review and approval procedures set
forth above. Notwithstanding anything herein or in the Lease to the contrary,
Tenant may not begin work on any portion of the Tenant Improvements until such
time as Landlord has approved, or is deemed to have approved, the same.
Landlord's approval of the Tenant Plans shall create no responsibility or
liability on the part of the Landlord with respect to the completeness, design
sufficiency or Code compliance of the Tenant Plans.
In the event Landlord fails to respond to any request of Tenant as provided
herein, Landlord shall be deemed to have disapproved Tenant's request.
B-3
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3.2 Tenant's Contractor
Tenant's Contractor shall be subject to Landlord's prior written approval,
which approval shall not be unreasonably withheld or delayed. Landlord hereby
approves Richlen Construction as Tenant's Contractor. Tenant's Contractor shall
(1) have substantial recent experience in the construction of tenant
improvements in similar class office buildings in the Hacienda Business Park,
(2) be licensed by the State of California (as evidenced by Tenant's submission
to Landlord of Tenant's Contractor's state license number), (3) have the
capacity to be bonded by a recognized surety company to assure full performance
of the construction contract for the work shown on the Final Plans (as evidenced
by Tenant's submission to Landlord of a commitment or other writing satisfactory
to Landlord issued by a recognized surety company confirming that Tenant's
Contractor is bondable for construction projects having a contract price not
less than the contract price under the construction contract for the Tenant
Improvements, but Tenant shall not be required to bond the construction of the
Tenant Improvements), and (4) have the capacity to meet all of the requirements
of Section 3.3 below (as evidenced by Tenant's submission to Landlord of
documentation satisfactory to Landlord).
3.3 Subcontractors; Insurance; Compliance with Law
Tenant shall be responsible for Tenant's Contractor, subcontractors,
suppliers and materialmen (A) obtaining Landlord's prior written approval (which
Landlord shall not unreasonably withhold or delay) of all subcontractors to be
utilized in the performance of such construction work, (B) obtaining all
necessary governmental permits and approvals in connection with all construction
work (including demolition, if applicable) shown on the Final Plans, (C)
furnishing to Landlord, before commencing any demolition or construction in the
Premises, certificates evidencing comprehensive public liability insurance with
limits per occurrence of not less than $2,000,000 and property damage insurance
with limits per occurrence of not less than $1,000,000, covering Tenant's
Contractor's and subcontractors' operations in the Premises and the Building
(including any liability arising out of work involving Hazardous Materials) and
builders' risk insurance providing coverage in an amount equal to the full value
of the Tenant Improvements upon completion thereof, and with respect to all such
insurance naming Landlord, its property manager, construction manager, and any
mortgagee of Landlord as additional insureds, and (D) performing the
construction work in accordance with applicable governmental requirements.
Notwithstanding clause (C) above, subcontractors performing minor portions of
the work may carry such lower insurance limits as Landlord shall reasonably
approve in writing, and Tenant, rather than Tenant's Contractor or
subcontractors, may carry the builders' risk insurance specified in such clause
(C). Landlord shall have no responsibility for furnishing any security services
in or about the Building or Premises to safeguard Tenant's construction of the
Tenant Improvements or materials in connection therewith.
B-4
<PAGE>
Without limiting any other provision hereof, throughout the performance of
Tenant's Work, Tenant, at its sole cost and expense, shall carry, or cause to be
carried, workers' compensation insurance as required by law and general
liability insurance, with completed operations endorsements, for any occurrence
in or about the Building, in such coverage limits and with insurers, in each
case, meeting the requirements of the Lease. Landlord, its property manager,
construction manager, and any mortgagee of Landlord shall be designated as
additional insured parties on such insurance policies. Tenant shall furnish
Landlord with evidence satisfactory to Landlord that such insurance is in effect
before the commencement of Tenant's Work and, on request of Landlord during
construction, Tenant shall provide evidence satisfactory to Landlord that such
insurance remains in effect.
Upon receipt of written notice from Tenant, together with reasonable written
evidence of the same, that an existing violation by the Building of any Code
will be required to be corrected in order for Tenant to obtain any of the
permits, licenses, or other applicable approvals necessary for Tenant to
complete construction of the Tenant Improvements in accordance with this Section
3.3, then, at Tenant's election, (i) Tenant may cure such violation at Tenant's
cost, or (ii) Landlord shall cure such violation as soon as reasonably
practicable, at Landlord's cost; provided, however, that if such violation
results from the design or construction of the tenant improvements existing in
the Building as of the date hereof and does not consist of a failure of the
elevator system or the restrooms to comply with the Americans with Disabilities
Act of 1990, as amended, then, notwithstanding that Landlord cures such
violation, such cure shall be at Tenant's expense.
3.4 Construction
Before commencement of any demolition or construction in the Premises,
Tenant shall enter into a contract with Tenant's Contractor for construction of
the Tenant Improvements. Subject to Section 38(a) of the Lease, after Landlord's
delivery to Tenant of the Premises, Tenant may cause Tenant's Contractor to
commence and diligently pursue to completion the demolition, as necessary, of
any existing improvements in the Premises and the construction of the Tenant
Improvements ("Tenant's Work"). The Tenant Improvements shall be constructed by
Tenant's Contractor in conformance with the Final Plans and all Codes.
Tenant shall deliver written notice to Landlord at least three (3) but no
more than fifteen (15) days before the commencement of any of Tenant's Work to
permit Landlord to post on the Premises such notices, including without
limitation, notices of non-responsibility, as Landlord may deem appropriate.
3.5 Coordination
Tenant shall cause Tenant's Contractor and/or Tenant's Architect to
coordinate with Landlord's representative and/or Landlord's Architect to assure
timely and
B-5
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orderly completion of Tenant's Work and Landlord's Work and to otherwise assure
the consistency of the Tenant Plans with the plans and specifications for
Landlord's Work. In furtherance of the foregoing, Tenant's Contractor and a
representative of Landlord shall hold construction meetings with reasonable
frequency. Appropriate procedures shall be adopted and followed by Tenant to
assure satisfaction or waiver of any potential mechanics' lien claims.
3.6 Liens and Violations
Tenant, at its sole cost and expense, shall diligently procure the
cancellation or discharge of all notices of violation arising from or otherwise
connected with Tenant's Work or any other work, labor, service or material done
for or supplied to Tenant, or any person claiming through or under Tenant, which
shall be issued by any governmental authority. Tenant shall not utilize
materials in Tenant's Work that are subject to security interests or other
liens. Tenant shall forever indemnify, defend and hold Landlord, its agents or
employees and any mortgagee of Landlord free and harmless of, from and against
any and all mechanics' liens, stop notices and other liens and encumbrances or
claims of liens or encumbrances filed in connection with Tenant's Work, or any
other work, labor, service or material done for or supplied to Tenant, or any
person claiming through or under Tenant, including, without limitation, security
interests in any materials, fixtures or other articles installed in the
Premises; and against all costs, expenses and liabilities incurred in connection
with any such lien or encumbrance, or claim of lien or encumbrance, its removal
or any related action or proceeding. Tenant, at its sole cost and expense,
shall satisfy or discharge of record each stop notice, lien or encumbrance
within fifteen (15) days after it is filed. If Tenant fails to do so, Landlord
shall have the right to satisfy or discharge the stop notice, lien or
encumbrance by payment to the claimant on whose behalf it was filed, by the
posting of a bond, or by any other action Landlord deems necessary. Tenant
shall reimburse Landlord on demand for the costs and expenses so incurred by
Landlord.
3.7 Indemnity
Tenant shall be directly responsible to Landlord for the performance of
Tenant's Contractor and any subcontractors, and shall forever indemnify, defend
and hold Landlord, its agents or employees and any mortgagee of Landlord free
and harmless of, from and against any and all claims, damages, liability and
losses (including, without limitation, attorney's fees and costs) suffered by
Landlord, its agents, employees or any mortgagee of Landlord arising from or
relating to the performance of Tenant's Work.
B-6
<PAGE>
3.8 Inspection by Landlord
Landlord shall have the right to inspect Tenant's Work at any reasonable
time and upon reasonable prior notice, and may reasonably reject work that does
not conform with the Final Plans or any Codes.
4. Cost of Improvements
4.1 Landlord's Work
Landlord shall pay the entire cost of Landlord's Work.
4.2 Tenant's Work
4.2.1 Landlord's Contribution
In addition to the sum referenced in Section 4.1 above, Landlord shall
contribute toward the cost of the construction and installation of the Tenant
Improvements an amount not to exceed One Million Sixty-Nine Thousand Thirty-Two
Dollars ($1,069,032), based on a maximum Landlord contribution of Twelve Dollars
($12.00) per rentable square foot of the Premises ("Landlord's Contribution").
4.2.2 Excess Cost: Share of Costs.
If the cost of construction of the Tenant Improvements exceeds the funds
available therefor from Landlord's Contribution, then Tenant shall pay all such
excess.
4.2.3 Use of Landlord's Contribution.
Landlord's Contribution shall be used for (i) payment of the costs of
designing, planning and obtaining necessary governmental permits for Tenant's
Work, including, without limitation, payment of architectural and engineering
fees, governmental agency fees, and fees for permits, licenses and inspections;
(ii) payment of the costs of performing Tenant's Work, including, without
limitation, general contractors' overhead and supervision fees and such other
costs as may be reasonably incurred by Tenant in connection with such
construction; and (iii) payment of the costs of installing furniture, security
equipment and voice and data cabling in the Premises. Landlord's Contribution
shall not be used for purchasing any furniture (other than permanently attached
furniture), fixtures or equipment (other than system cabling) or for payment of
any costs associated with obtaining and maintaining insurance, canceling or
discharging any violations or for any indemnities of Landlord by Tenant
hereunder.
B-7
<PAGE>
Tenant acknowledges that Landlord's Contribution is to be applied to the
Tenant Improvements (and the associated costs described above) covering the
entire Premises. If Tenant does not improve the entire Premises, then, without
limitation of any other rights or remedies of Landlord hereunder, Landlord's
Contribution shall be adjusted on a pro rata per rentable square foot basis to
reflect the number of rentable square feet actually being improved.
4.2.4 Disbursement of Landlord's Contribution.
Landlord's Contribution shall be paid in two lump sum payments (i) first,
following completion of one-half (1/2) of Tenant's Work, within thirty (30) days
after receipt of the following: (A) invoices for such half of Tenant's Work
reasonably satisfactory to Landlord demonstrating the cost incurred by Tenant in
connection with such portion of Tenant's Work, (B) a certificate signed by
Tenant and Tenant's Architect certifying that one-half (1/2) of Tenant's Work
has been substantially completed in accordance with Tenant's Plans, and (C) lien
waivers by Tenant's Contractor and subcontractors and materialmen for all of
their work performed at the Building which is part of such initial half of
Tenant's Work; and (ii) second, following completion of the balance of Tenant's
Work, within thirty (30) days following receipt of the following: (A) invoices
for the balance of Tenant's Work reasonably satisfactory to Landlord
demonstrating the cost incurred by Tenant in connection with such remaining half
of Tenant's Work, (B) a certificate signed by Tenant and Tenant's Architect
certifying that all of Tenant's Work has been substantially completed in
accordance with Tenant's Plans, and (C) lien waivers by Tenant's Contractor and
subcontractors and materialmen for all of their work performed at the Building,
and (D) a general release form Tenant's Contractor and subcontractors and
materialmen regarding their work at the Building. Landlord shall have the right
to inspect the Premises to confirm the completion of the Tenant's Work covered
by such invoices. Notwithstanding the foregoing, Landlord shall have no
obligation to disburse Landlord's Contribution to Tenant during the existence of
an Event of Default by Tenant under the Lease. Notwithstanding anything herein
to the contrary, if any Hazardous Materials are required to be remediated or
removed from the Property in order for Tenant to complete Tenant's Work, and if
any specialized procedures or personnel are required for the safe and lawful
remediation or removal of such Hazardous Substances, Landlord shall pay, in
addition to Landlord's Contribution, up to $25,000 of the cost of such
specialized procedures or personnel.
B-8
<PAGE>
Exhibit C
Landlord's Rules
1. Signs. Except as otherwise expressly provided in the Lease, no sign,
placard, picture, advertisement, name or notice shall be inscribed, displayed,
printed or affixed on or to any part of the outside of the Building, or on or to
any part of the inside of the Building so as to be visible from outside the
Building, without the written consent of Landlord first had and obtained, and
Landlord shall have the right to remove any such sign, placard, picture,
advertisement, name or notice, without notice to and at the expense of Tenant.
2. Wiring. When wiring of any kind is introduced, it must be connected as
directed by Landlord, and no boring or cutting for wires will be allowed except
with the consent of Landlord. The location of telephones, electrical outlets,
and other office equipment affixed to the Premises shall be prescribed by
Landlord.
3. Halls and Stairways. The entries, passages, stairways, and elevators
shall not be obstructed by Tenant or used for any purpose other than ingress and
egress of persons to and from the respective offices.
4. Plumbing. The wash-bowls, water closets, and urinals shall not be used
for any purpose other than those for which they were constructed.
5. Closing Precautions. Before leaving the Building, Tenant shall cause (a)
all doors of the Premises to be closed and securely locked, (b) all water
faucets or water apparatus to be shut off, and (c) all unused electrical or gas
appliances to be shut off, all so as to prevent waste or damage.
6. Moving Equipment, Safes, etc. Landlord shall have the right to prescribe
the weight, size, and position of all safes and other heavy property brought
into the Building, and also the times and manner of moving the same in and out
of the Building. Landlord will not be responsible for loss of or damages to any
such safe or property from any cause and all damage done to the Building by
moving or maintaining any such safe or property shall be repaired at the expense
of Tenant.
7. Space Heaters. No space heaters or other similar electrical device shall
be permitted to operate in the Premises.
C-1
<PAGE>
Exhibit D
Description of Engineering Area
<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 22, 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 22, 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 appears 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 22, 2000
