UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ ][X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2000
Commission File Number: 000 - 25291
TUT SYSTEMS, INC.
-----------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2958543
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2495 Estand Way, Pleasant Hill,5969 W. Las Positas, Pleasanton, California 94523
------------------------------------------------94588
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (925) 682-6510
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ]No [ ][X] No [_]
As of April 30,July 15, 2000, 15,126,48015,622,252 shares of the Registrant's Common Stock, $0.001
par value per share, were issued and outstanding.
TUT SYSTEMS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of March 31,June 30, 2000 and December 31, 1999.... 31999 1
Condensed Consolidated Statements of Operations for the three months and
six months ended March 31,June 30, 2000 and March 31, 1999................................... 4June 30, 1999............................... 2
Condensed Consolidated Statements of Cash Flows for the threesix months
ended March 31,June 30, 2000 and March 31, 1999................................... 5June 30, 1999.......................................... 3
Notes to Unaudited Condensed Consolidated Financial Statements............ 6Statements................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................... 11Operations..................................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 27Risk..................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 27Proceedings.............................................................. 24
Item 2. Changes in Securities and Use of Proceeds................................. 27Proceeds...................................... 24
Item 3. Defaults Upon Senior Securities........................................... 27Securities................................................ 24
Item 4. Submission of Matters to a Vote of Security Holders....................... 27Holders............................ 24
Item 5. Other Information......................................................... 27Information.............................................................. 25
Item 6. Exhibits and Reports on Form 8-K.......................................... 278-K............................................... 25
2
Part I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TUT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
March 31,
June 30, December 31,
2000 1999
--------- -------------------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 157,24826,934 $ 13,405
Short-term investments ...................................... 9,246107,717 18,831
Accounts receivable, net of allowance for doubtful accounts
of $537 and $335 in 2000 and 1999, ................................. 10,378respectively 15,387 11,742
Inventories ................................................. 11,69215,353 8,401
Prepaid expenses and other .................................. 3,0075,248 3,746
--------- ----------------------- ---------------
Total current assets ...................................... 191,571170,639 56,125
Property and equipment, net ................................. 4,1887,604 3,476
Investments 16,255
Other assets ................................................ 32,70651,365 5,755
--------- ----------------------- ---------------
Total assets .............................................. $ 228,465245,863 $ 65,356
========= ======================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 6,2866,146 $ 5,859
Accrued liabilities ....................................... 6,2976,921 3,551
Line of credit ............................................ 1,571- 1,529
Deferred revenue .......................................... 815906 770
--------- ----------------------- ---------------
Total current liabilities ............................... 14,96913,973 11,709
Deferred revenue, net of current portion .................... 2,3382,103 2,125
Other liabilities ........................................... 376 --
--------- ---------329 -
-------------- ---------------
Total liabilities ....................................... 17,68316,405 13,834
--------- ----------------------- ---------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $0.001 par value, 100,000 shares authorized, 15,08815,617 and
11,941 shares issued and outstanding in
2000 and 1999, respectively ............................. 15 12
Additional paid in capital .................................. 275,037295,057 108,969
Deferred compensation ....................................... (2,690)(2,621) (972)
Accumulated comprehensive income ............................ 515 --366 -
Notes receivable from stockholders .......................... (1,372) --(1,456) -
Accumulated deficit ......................................... (60,723)(61,903) (56,487)
--------- ----------------------- ---------------
Total stockholders' equity .............................. 210,782229,458 51,522
--------- ----------------------- ---------------
Total liabilities and stockholders' equity .............. $ 228,465245,863 $ 65,356
========= ======================= ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
31
TUT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended March 31,
------------------------Six months ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 -------- --------2000 1999
------------ ------------- ------------ -------------
Revenues:
Product ............................................ $ 16,16420,345 $ 3,5734,735 $ 36,509 $ 8,308
License and royalty ................................ 310 318
-------- --------669 275 979 593
------------ ------------- ------------ -------------
Total revenues ................................... 16,474 3,891
-------- --------21,014 5,010 37,488 8,901
------------ ------------- ------------ -------------
Cost of goods sold:
Product ............................................ 9,137 2,23911,234 2,921 20,371 5,160
License and royalty ................................ --- - - 3
-------- -------------------- ------------- ------------ -------------
Total cost of goods sold ......................... 9,137 2,242
-------- --------11,234 2,921 20,371 5,163
------------ ------------- ------------ -------------
Gross margin ........................................... 7,337 1,649
-------- --------9,780 2,089 17,117 3,738
------------ ------------- ------------ -------------
Operating expenses:
Sales and marketing ................................ 4,819 2,4014,785 2,456 9,604 4,857
Research and development ........................... 3,183 1,6714,048 1,687 7,231 3,358
General and administrative ......................... 2,175 9872,541 1,015 4,716 2,002
In-process research and development ................- - 800 ---
Amortization of intangibles ........................ 746 --1,814 - 2,560 -
Noncash compensation expense ....................... 114 114 -------- --------228 228
------------ ------------- ------------ -------------
Total operating expenses ......................... 11,837 5,173
-------- --------13,302 5,272 25,139 10,445
------------ ------------- ------------ -------------
Loss from operations ................................... (4,500) (3,524)(3,522) (3,183) (8,022) (6,707)
Interest expense ....................................... (310) (176)(139) (139) (449) (315)
Interest income and other .............................. 575 389
-------- --------2,481 627 3,056 1,016
------------ ------------- ------------ -------------
Loss before income taxes ............................... (4,235) (3,311)(1,180) (2,695) (5,415) (6,006)
Income tax expense .....................................- - 1 1
-------- -------------------- ------------- ------------ -------------
Net loss ............................................... (4,236) (3,312)(1,180) (2,695) (5,416) (6,007)
Dividend accretion on preferred stock .................. --- - - 235
-------- -------------------- ------------- ------------ -------------
Net loss attributable to common stockholders ........... $ (4,236)(1,180) $ (3,547)
======== ========(2,695) $ (5,416) $ (6,242)
============ ============= ============ =============
Net loss per share attributable to common stockholders,
basic and diluted (Note 3) ......................... $ (0.34)(0.08) $ (0.45)
======== ========(0.23) $ (0.39) $ (0.64)
============ ============= ============ =============
Shares used in computing net loss per share attributable to
common stockholders, basic and diluted (Note 3) ........... 12,435 7,872
======== ========15,302 11,498 13,869 9,695
============ ============= ============ =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
42
TUT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three
Six months ended
March 31,June 30,
--------------------------
2000 1999
--------- --------------------- -----------
Cash flows from operating activities:
Net loss ................................................................... $ (4,236)(5,416) $ (3,312)(6,007)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................ 307 176791 366
Provision for allowance for doubtful accounts ............................ -- 50202 115
Provision for excess and obsolete inventory .............................. 732 107
Amortization of premiums (discounts) on investments ...................... 85 (14)
Amortization of deferred1,090 353
Noncash interest income (1,572) (99)
Noncash compensation included in research and development 260 --expense 228 228
Amortization of intangible assets and noncash compensation ............... 860 1143,198 -
Write-off of in-process research and development ........................ 800 ---
Gain on sale of other assets ............................................. (103) ---
Change in assets and liabilities:
Accounts receivable .................................................... 679 (950)(4,532) (1,339)
Inventories ............................................................ (3,822) 201(7,841) (32)
Prepaid expenses and other assets ...................................... (1,649) (1,364)(733) (2,232)
Accounts payable and accrued liabilities ............................... 246 (75)601 (1,604)
Deferred revenue ....................................................... (181) 436
--------- ---------(325) 266
------------ -----------
Net cash used in operating activities ............................... (6,022) (4,631)
--------- ---------(13,612) (9,985)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment ......................................... (698) (187)(4,170) (483)
Purchase of short-term and long-term investments ......................................... -- (3,096)(122,400) (21,763)
Purchase of other assets (4,501) -
Proceeds from maturities and sale of short-term investments ................ 9,500 --18,831 -
Proceeds from sale of other assets ......................................... 128 ---
Acquisition of business, net of cash acquired and purchased -
research and development ................................................. (1,292) --
--------- ---------(1,788) 76
------------ -----------
Net cash provided by (used in)used in investing activities ................ 7,638 (3,283)
--------- ---------(113,900) (22,170)
------------ -----------
Cash flows from financing activities:
Payment on lines of credit ................................................. --(1,529) (2,882)
Proceeds from lines of credit .............................................. 42 --- 34
Proceeds from issuances of common and preferred stock, net ................. 142,185 53,607
--------- ---------142,544 53,682
Other 26 -
------------ -----------
Net cash provided by financing activities ........................... 142,227 50,725
--------- ---------141,041 50,834
------------ -----------
Net increase in cash and cash equivalents ........................... 143,843 42,81113,529 18,679
Cash and cash equivalents, beginning of period ................................. 13,405 4,452
--------- --------------------- -----------
Cash and cash equivalents, end of period ....................................... $ 157,24826,934 $ 47,263
========= =========23,131
------------ -----------
Supplemental disclosure of cash flow information:
Noncash financing activities:
Common stock issued in connection with Freegate ............................FreeGate and Xstreamis acquisitions $ 21,88741,118 $ --
========= =========-
------------ -----------
Accretion of preferred stock ............................................... $ --- $ 235
========= =========
========= =========------------ -----------
Conversion of preferred stock to common stock .............................. $ --- $ 47,802
========= =========------------ -----------
Unearned compensation related to stock option grants ....................... $ 1,9992,427 $ --
========= =========-
============ ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
53
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. The Company:
Tut Systems, Inc. (the "Company") was founded in 1983 and began operations
in August 1991. The Company designs, develops and markets advanced
communications products which enable high-speed data access over the copper
infrastructure of telephone companies, as well as the copper telephone wires in
homes, businesses and other buildings. The Company's products incorporate high-bandwidthhigh-
bandwidth access multiplexers, associated modems and routers, Ethernet extension
products and integrated network management software.
2. Basis of Presentation:
The accompanying condensed consolidated financial statements as of June 30,
2000 and December 31, 1999 and for the three and six months ended March 31,June 30, 2000
and 1999 are unaudited. The unaudited interim condensed consolidated financial
statements have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
Company's financial position, results of operations and cash flows as of and for
the three and six months ended March 31,June 30, 2000 and 1999. These condensed
consolidated financial statements and notes thereto are unaudited and should be
read in conjunction with the Company's audited financial statements included in
the Company's Prospectus, filed with the Securities and Exchange Commission on
March 23, 2000. The balance sheet as of December 31, 1999 was derived from
audited financial statements, but does not include all required disclosures
required by generally accepted accounting principles. The results for the three
and six months ended March 31,June 30, 2000 are not necessarily indicative of the
expected results for any other interim period or the year ending December 31,
2000.
3. Summary of Significant Accounting Policies:
Net Loss Per Share:
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provision of SFAS No. 128, basic and diluted
net loss per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Options, warrants and preferred stock were not
included in the computation of diluted net loss per share because the effect
would be antidilutive.
Three months ended March 31,
----------------------------Six months ended
June 30, June 30,
------------------- -------------------
2000 1999 --------- ---------2000 1999
-------- -------- -------- --------
Net loss per share attributable to common stockholders,
basic and diluted:
Net loss attributable to common stockholders $ (4,236)(1,180) $ (3,547)
=========(2,695) $ (5,416) $ (6,242)
======== ======== ======== ========
Net loss per share attributable to common stockholders,
basic and diluted $ (0.34)(0.08) $ (0.45)
=========(0.23) $ (0.39) $ (0.64)
======== ======== ======== ========
Shares used in computing net loss per share attributable
to common stockholders, basic and diluted 12,435 7,872
=========15,302 11,498 13,869 9,695
======== ======== ======== ========
Antidilutive securities including options, warrants and
preferred stock not included in net loss per share
attributable to common stockholders' calculations 2,137 1,017
=========2,853 1,094 2,853 1,094
======== ======== ======== ========
64
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-STATEMENTS--(Continued)
(in thousands, except per share amounts)
3. Summary of Significant Accounting Policies, continued:
Comprehensive Loss
Comprehensive loss includes unrealized gains and losses on equity
securities that have been previously excluded from net loss and reflected
instead in stockholders' equity. The following table sets forth the calculation
of comprehensive loss on an interim basis:
Three months ended
March 31,
----------------------
2000 1999
------- -------
Net loss ................................ $(4,236) $(3,547)
Unrealized gains on long-term investments $ 515 $ --
------- -------
Total comprehensive loss ................ $(3,721) $(3,547)Six months ended
June 30,
---------------------
2000 1999
------- -------
Net loss $(5,416) $(6,242)
Unrealized gains on long-term investments $ 366 $ -
------- -------
Total comprehensive loss $(5,050) $(6,242)
======= =======
7
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(in thousands, except per share amounts)
3. Summary of Significant Accounting Policies, continued:
Impact of Recently Issued Accounting Standards:
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 offor fiscal 2000.2001.
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.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation-an
interpretationCompensation, an Interpretation of APB Opinion No. 25" ("FIN 44"). This Interpretation_FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Accounting Practice Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"),(b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequenceconsequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. This InterpretationFIN 44 is effective July 1, 2000, but certain conclusions in this Interpretation
cover specific events that occur after either December 15, 1998, or January 12,
2000. Management believes thatThe adoption of certain of the provisions of FIN 44 prior to March 31,
2000 did not have a material impact on the financial statements. Management does
not expect that the adoption of the remaining provisions will not have a material
effect on the financial position or results of operations of the Company.statements.
5
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
4. Follow on Offering, Initial Public Offering and Conversion of Redeemable
Convertible Preferred Stock and Warrant:
In January 1999, the Company completed its initial public offering and
issued 2,875 shares of its common stock at a price of $18.00 per share. The
Company received approximately $47.0$46.9 million in cash, net of underwriting
discounts, commissions and other offering costs. Additionally, prior to the
initial public offering, a warrant to purchase 667 shares of Series G
convertible preferred stock at an exercise price of $10.00 per share was
exercised for approximately $6.7 million. Simultaneously with the closing of
the initial public offering, all of the Company's convertible preferred stock
and redeemable convertible preferred stock was automatically converted into an
aggregate of 8,120 shares of common stock.
In March 2000, the Company completed a follow-on offering and issued
2,500 shares of its common stock at a price of $60.00 per share. The Company
received approximately $141.8 million in cash net of underwriters discounts,
commissions and other offering costs.
5. Royalty Obligation
The Company has acquired the rights, title and interests in two
patents from a founder and stockholder of the Company. Under a previous
agreement, the Company was required to pay on-going royalties based on the net
sales price of products sold utilizing the patented technology. In February
1999, the Company paid the founder $2.5 million as a lump sum payment for all
its future royalty obligations. This payment, net of the current portion, is
included in other assets at March 31,June 30, 2000. The Company amortizes the amount
ratably over five years. This period represents the estimated life of the
patented technology.
8
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(in thousands, except per share amounts)
6. Inventories:
Inventories consist of the following: March 31,June 30, December 31,
2000 1999
------- ------------------- ------------
Finished goods ...................... $ 9,430 $ 6,731$12,653 $6,731
Raw material ........................ 2,2622,700 1,670
------- -------
$11,692 $ 8,401------
$15,353 $8,401
======= =============
7. Commitments and Contingencies:
We intend to relocate ourThe Company relocated its principal administrative and engineering
facilities from Pleasant Hill to Pleasanton, California duringin July 2000. We have entered into a
lease for facilities in Pleasanton totaling approximately eighty-nine thousand
square feet. The lease
for the Pleasanton facility expires April 2007, with an option to renew for five
years. Under the terms of the lease agreement, the Company was required to issue
a letter of credit in the amount of $1.8 million. The letter of credit is
collateralized by restricted cash and short-term investments in the amount of
$3.0 million. This collateral is included in other
assetslong term investments at March 31,June 30,
2000. The letter of credit is reduced annually by $250 provided the Company is
not in default under the terms of the lease agreement.
Minimum base rents of $120 per month, currently estimated to begin June 2000,
will increase annually by approximately $5 per month throughout the life of
the lease. Certain other additional monthly cost allocations related to taxes,
insurance and other common operating expenses will apply.
In the first quarter of 2000, the Company entered into a commitment to
procure a key component for our products from a sole source supplier. This
commitment requires usthe Company to purchase approximately $5.6$5.1 million of the
key component over the remainder of 2000.
The Company decided to entered into the commitment to reduce
any risk of obtaining the component which could result in us having to redesign
our products and could result in a disruption to our operations.6
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
8. Segment Information:
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 location of customers:
Three months ended March 31,
---------------------Six months ended
June 30, June 30,
------- ------ ------- ------
2000 1999 2000 1999
------- ------ ------- ------
United States ......... $ 6,703 $ 3,031$10,624 $4,209 $17,327 $7,252
International:
Korea 6,331 - 12,293 -
Hong Kong ......... 3,177 23
Korea ............. 5,962 --1,309 - 4,486 -
All other countries 632 8372,750 801 3,382 1,649
------- ------ ------- $16,474 $ 3,891------
$21,014 $5,010 $37,488 $8,901
======= ====== ======= ======
Two customers accounted for 36%30% and 17%18%, respectively, of the
Company's revenue for the three months ended March 31,June 30, 2000 and for 33% and 14%,
respectively, of the Company's revenue for the six months ended June 30, 2000.
For the three months ended June 30, 1999, there were no customers which
accounted for more than 10% of the Company's revenue. Two customers accounted
for 13% and 10%, respectively, of the Company's revenue for the threesix months ended
March 31,June 30, 1999.
9
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(in thousands, except per share amounts)
9. Business Combinations:
On February 14, 2000, the Company acquired Freegate,FreeGate, Inc. ("Freegate"FreeGate")
for a total of $24.7$25.5 million. The purchase price consisted of 511 shares of
common stock and approximately 20 options to acquire common stock and
acquisition related expenses, consisting primarily of investment advisory, legal
and other professional fees. This acquisition was accounted for as a purchase
business combination.
The allocation of the purchase price was based on the estimated fair value
of the liabilities assumed at the date of the acquisition of $2.3 million,
goodwill and intangibles of $24.7$22.4 million and in-process research and
development of $0.8 million. 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 calculation 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 expectThe Company expects that the pricing model for products and
intellectual property licenses related to our acquisition of FreegateFreeGate will be
considered standard within the high-technology communications industry. We doThe
Company does 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 expectThe Company expects
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 losslost opportunity to capitalize on
emerging markets, and could harm our business and operating results.
7
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
On May 26, 2000, the Company acquired United Kingdom based holding company,
Xstreamis, plc, ("Xstreamis") for a total of $ 19.8 million. The purchase price
consisted of 439 shares of common stock and 11 options to acquire common stock,
$0.1 million in cash and $0.6 million in acquisition related expenses,
consisting primarily of legal and other professional fees. This acquisition was
accounted for as a purchase business combination. The name of the acquired
company was changed to Xstreamis Limited.
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 $0.2 million,
goodwill and assembled workforce of $12.4 million and purchased technology of
$7.2 million. The amounts allocated to the assembled workforce and to the
purchased technology were determined based on an appraisal completed by an
independent third party using established valuation techniques.
The following unaudited pro forma consolidated information gives effect to
the acquisitionacquisitions of FreegateFreeGate and Xstreamis as if itthey had occurred on January 1,
2000 and January 1, 1999 by consolidating the results of operations of FreegateFreeGate
and Xstreamis with the results of operations of the Company for the three and
six months ended March 31,June 30, 2000 and 1999, respectively. The pro forma results
exclude the $0.8 million nonrecurring write-off of in-process research and
development.development related to the FreeGate acquisition.
Three months ended March 31,
-------------------------Six months
June 30, June 30,
------- ------- ------- --------
2000 1999 --------- ---------2000 1999
------- ------- ------- --------
Revenue .......................................................$21,014 $ 16,5655,470 $37,579 $ 4,59410,064
Net loss attributable to common stockholders .................. $ (5,135) $ (7,483)$(2,464) $(5,945) $(8,413) $(12,684)
Net loss per share attributable to common stockholders,
basic and diluted $ (0.40)(0.16) $ (0.89)(0.48) $ (0.57) $ (1.19)
The above unaudited pro forma consolidated information is not necessarily
indicative of the actual results of operations that would have been reported
if the acquisition had actually occurred as of the beginning of the periods
described above, nor does such information purport to indicate the results of
the Company's future operations. In the opinion of management, all adjustments
necessary to present fairly such pro forma information have been made.
In February,On April 28, 2000, the Company signed a definitive agreement to acquireacquired certain assets of OneWorld Systems,
Inc. for approximately $2.3$2.4 million in cash. This
transaction will be treated as aThe allocation of the purchase for accounting purposes. This
transactionprice was completedbased on
April 28, 2000.
On February 26, 2000, the Company entered into a nonbinding letterfair market value 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, switchingthe assets at the date of acquisition of $0.3 million
of property and bridging functions. The letterequipment and $2.1 million of intent contemplates that the Companygoodwill and Xstreamis would negotiate a purchase
agreement, under which the Company would issue shares of Tut common stock worth
approximately (pound)13.0 million or approximately $20.0 million at current
exchange rates, to the Xstreamis shareholders. This acquisition is expected to
be accounted for as a purchase.
10assembled work force.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
should be read in conjunction with the Condensed Consolidated Financial
Statements and the related Notes thereto included elsewhere in this Form 10-Q.
This discussion contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. 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 in our
Registration Statements on Form S-1 as well as those discussed in our other
reports and filings with the SEC. 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 11
university segments of the multi-commercialmulti-
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.
InThrough the first quarterhalf of 2000, we continued selling all of these products to
customers in the United States and foreign markets.
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.shipment if collection of the resulting receivable is
probable and product returns are reasonably estimable. 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-refundablenon-
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-
refundablenon-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.
Sales to customers outside of the United States accounted for approximately
59.4%53.8% and 22.1%18.5% of revenue in the first quartershalf of 2000 and 1999, respectively. We
expect international sales to increase in absolute dollars in the future and to
represent approximately one half of our revenue during the remainder of this
year. 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.
9
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
12
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 FebruaryApril 2000, we signed a definitive agreement to acquireacquired certain assets of OneWorld Systems, Inc. for
approximately $2.3$2.4 million in cash. This transaction will bewas treated as a purchase
of assets for accounting purposes.
OneWorld was located in
Sunnyvale, California. OneWorld designed and developed network communication
appliances and network modems. This transaction was completed on April 28, 2000.
On February 26,In May 2000, the Company entered intowe acquired 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 letterpurchase price for this acquisition was $19.8 million, consisting
of intent contemplates that the Company and Xstreamis would negotiate a purchase
agreement, under which the Company would issue439,137 shares of Tut common stock, worth
approximately (pound)13.0 million or approximately $20.0 million at current
exchange rates,10,863 options to the Xstreamis shareholders. Thisacquire common stock,
$100,000 in cash, and acquisition is expected to
be accounted for as a purchase.related expenses, consisting primarily of
legal and other professional fees.
While we expect to derive benefitbenefits 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 65 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 March 31,June 30, 2000, had
an accumulated deficit of $60.7$61.9 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 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.
1310
Results of Operations
The following table sets forth items from our statements of operations as a
percentage of total revenue for the periods indicated:
Three months ended March 31,
------------------------Six months ended
June 30, June 30,
---------------------- -----------------------
2000 1999 --------- --------2000 1999
---------------------- -----------------------
Total revenues ........................100.0 % 100.0 % 100.0 % 100.0 %
Total cost of goods sold .............. 55.5 57.6
--------- --------53.5 58.3 54.3 58.0
----- ----- ----- -----
Gross margin ...................... 44.5 42.446.5 41.7 45.7 42.0
Operating expenses:
Sales and marketing ............... 29.3 61.722.8 49.0 25.6 54.6
Research and development .......... 19.3 43.033.7 19.3 37.7
General administrative ............ 13.2 25.412.1 20.3 12.6 22.5
In-process research and development 4.9 --- - 2.1
Amortization of intangibles ....... 4.5 --8.6 - 6.8 -
Noncash compensation expenses ..... 0.7 2.9
--------- --------0.5 2.3 0.6 2.6
----- ----- ----- -----
Total operating expenses ........ 71.9 133.0
--------- --------63.3 105.3 67.0 117.4
----- ----- ----- -----
Loss from operations .................. (27.4) (90.6)(16.8) (63.6) (21.3) (75.4)
Other income (expense), net ........... 1.6 5.5
--------- --------11.1 9.8 6.9 7.9
----- ----- ----- -----
Loss before income taxes .............. (25.8) (85.1)(5.7) (53.8) (14.4) (67.5)
Income tax expense .................... -- --
--------- --------- - - -
----- ----- ----- -----
Net loss .............................. (25.8)(5.7)% (85.1)(53.8)% ========= ========(14.4) (67.5)%
===== ===== ===== =====
Three and Six Months Ended March 31,June 30, 2000 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 $16.5$21.0 million and $37.5 million for the three and six
months ended March 31,June 30, 2000, respectively, from $3.9$5.0 million and $8.9 million for
the three and six months ended March 31, 1999.June 30, 1999, respectively. The increase in 2000
was primarily due to an increase in sales of Expresso MDU products. License and
royalty revenue was $0.7 million and $1.0 million for the three and six months
ended June 30, 2000, respectively and $0.3 million and $0.6 million for eachthe
three and six months ended June 30, 1999, respectively. There was one new
license and royalty agreement signed in the second quarter of the first quarters of 2000 and
1999.2000. There were
no new license and royaltysimilar agreements signed in the first quarter of 2000.
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 $9.1$11.2 million and $20.4 million for the three and six
months ended March 31,June 30, 2000, respectively, from $2.2$2.9 million and $5.2 million for
the three and six months ended March 31, 1999.June 30, 1999, respectively. The increase in 2000
was primarily due to increased production of our Expresso MDU products. Our
gross margin on an absolute basis increased to $7.3$9.8 million and $17.1 million
for the three and six months ended March 31,June 30, 2000, respectively, from $1.6$2.1
million and $3.7 million for the three and six months ended March 31,
1999.June 30, 1999,
respectively. Gross margin as a percentage of revenue increased to 44.5%46.5% and
45.7% of revenue for the three and six months ended June 30, 2000, respectively,
from 41.7% and 42.0% of revenue for the three months ended March 31, 2000, from 42.4% of revenue for the threeand six months ended March 31, 1999.June
30, 1999, respectively. The increase in gross margin as a percent of revenue in
2000 was primarily due to cost reductions related to our more mature Expresso
MDU products.
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 $4.8 million for the three months ended March 31, 2000, from $2.4and $9.6 million for the three and six months
ended March 31, 1999.June 30, 2000, respectively, from $2.5 million and $4.9 million for the
three and six months ended June 30, 1999, respectively. The increase in 2000 was
primarily due to increased hiring of sales and marketing personnel,personnel. Additional
increases were related to travel, attendance at trade shows, as well as
increases in personnel related to customer support activities and expanded
efforts in international markets.
11
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 $3.2$4.0 million and $7.2 million for the three
and six months ended March 31,June 30, 2000, respectively, from $1.7 million and $3.4
million for the three and six months ended March 31,
14
1999.June 30, 1999, respectively. The
increase in 2000 was primarily due to further development of the Expresso MDU
products, development of HomeRun-related products, and continued development of the
subscriber management system portion of the Expresso MDU product line.line and intial
development of the Company's IntelliPop platform. The research and development
expenses of PublicPort, Vintel, FreeGate, and FreegateXstreamis were consolidated with
our expenses for the periods subsequent to the respective June, 1999, November,
1999February and February 2000,May acquisitions. Additionally, in the first quarter of 2000 we
amortized $0.3 million of deferred compensation to research and development
related to restricted stock granted to certain FreegateFreeGate employees, and in the
second quarter of 2000 we amortized $0.5 million of such compensation expense
related to grants to certain FreeGate and OneWorld employees. Approximately $1.7
million of the remaining deferred compensation has been recorded as a reduction
of equity in the balance sheet. We intend to recognize the expense ratably over
the remaining period in which the restrictions lapse, currently estimated at
sixteen months.thirteen and seventeen months for each of FreeGate and OneWorld, respectively.
We intend to increase our 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 $2.2$2.5 million and $4.7 million for the three and six months
ended March 31,June 30, 2000, respectively, from $1.0 million and $2.0 million for the
three and six months ended March 31, 1999.June 30, 1999, respectively. The increase in 2000 was
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.
In-process research and development. Amounts expensed as in-process
research and development were $0.8 million in the first quarter of 2000 and were
related to in-process research and development purchased from Freegate.FreeGate. There
were no such costs in the first quarter of 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
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
FreegateFreeGate 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.
Amortization of Intangibles. Amortization of intangibles consists of the
periodic amortization of intangible assets related to purchase acquisitions.
These assets consist primarily of acquired workforce, purchased technology, and
goodwill and are amortized over their estimated useful lives of 3, 5, and 5
years, respectively. Amortization of intangibles in the first quarterhalf of 2000 of
$0.7$2.6 million relates to intangible assets acquired from Vintel, FreeGate,
OneWorld and Freegate.Xstreamis. There were no such costs in the first quarterhalf of 1999.
Noncash Compensation Expense. Noncash compensation expense in the three and
six months ended March 31,June 30, 2000 and 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. Our noncash compensation expense was $0.1 million and $0.2 million for
the three and six months ended March 31,June 30, 2000 and 1999. We intend to recognize
the remaining $1.0$0.9 million in noncash compensation expense 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.
12
Other Income (Expense), Net. Other income (expense), net consists of
interest income on cash balances, offset by interest expense associated with
credit facilities and gains (losses) on investing activities. Our other income
(expense), net was $0.3$2.5 million and $0.2$3.1 million for the three and six months
ended March 31,June 30, 2000, respectively and 15
$0.6 million and $1.0 million for the
three and six months ended June 30, 1999, respectively. For the three months ended March 31,The increase in 2000 we recognized a
gainwas
primarily due to interest income on investments of $0.1 million.higher average cash balances.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
sale of equity securities. From inception through May 1998, we sold 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. In March 2000, we completed our follow-on
offering and issued 2,500,000 shares of our common stock at a price of $60.00.
We received approximately $141.8 million in cash, net of underwriting discounts,
commissions and other offering costs.
As of March 31,June 30, 2000, we had cash, cash equivalents, short-term and short-termlong-
term investments of $166.5$150.9 million compared to $32.2 million as of December 31,
1999.
The net increase in cash and cash equivalents, short-term and non-current
investments of $118.7 million in the first quarterhalf of 2000 of
$143.8 million resulted primarily from
net proceeds of our follow-on offering of $141.8 million and $0.8 million of
cash proceeds from net proceedsthe issuance of maturities of short-term investments,common stock related to stock options, offset
by a net
lossuse of $4.2 million, a net decreasecash in operating assets and liabilitiesactivities of $1.8$13.6 million, and the use of working capital of $1.8 million for the purchase of
property and equipment andof $4.2 million, the purchase of other assets of $4.5
million which includes the acquisition of Freegate.
We haveOneWorld assets for $2.4 million, and
the payoff of borrowings under a credit facility to borrow up to $7.5of $1.6 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 $1.6 million borrowed against the credit facility as of March 31,
2000. We have provided the lender with written notice to terminate the credit
facility on June 30, 2000.
In the first quarter of 2000, we entered into a lease for administrative
and engineering facilities. Under the terms of the lease, we were required to
issue a letter of credit in the amount of $1.8 million .million. The letter of credit is
collateralized by restricted cash and short-term investments of $3.0 million.
This collateral is included in other assets as of March 31,June 30, 2000. The letter of
credit is reduced annually by $250,000 provided we are not in default under the
terms of the lease agreement.
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-goingon-
going research and development efforts.
We believe that our cash, cash equivalents and short-term investment
balances and funds available under our credit facility will be sufficient to
satisfy our cash requirements for at least the next 12 months.
16
During the three and six months ended March 31,June 30, 2000 and 1999, 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.
13
Three months ended March 31,
------------------------Six months ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Computation of pro forma net lossincome (loss) per share:
Net loss attributable to common stockholders ..................... $ (4,236)(1,180) $ (3,547)(2,695) $ (5,416) $ (6,242)
Adjustments for certain noncash expenses related to
purchase and acquisition and dividend accretion:
Amortization of intangibles .................................... 746 --1,814 - 2,560 -
In-process research and development ............................- - 800 ---
Dividend accretion of preferred stock .......................... --- - - 235
-------- -------- -------- --------
Pro forma net loss ...............................................income (loss) $ (2,690)634 $ (3,312)(2,695) $ (2,056) $ (6,007)
======== ======== ======== ========
Pro forma net lossincome (loss) per share ..................................... $ (0.22)0.04 $ (0.32)(0.23) $ (0.15) $ (0.55)
======== ======== ======== ========
Shares used in computing pro forma net loss,income (loss) per share,
basic and diluted ... 12,435 10,273(1) 16,547 11,498 13,869 10,889
======== ======== ======== ========
(1) Calculation of pro forma shares, basic and diluted:
Shares used in computing net loss per share attributable to
common stockholders,shareholders, basic and diluted ................................................ 12,435 7,87215,302 11,498 13,869 9,695
Adjustment to reflect the assumed conversion of preferred stock ...... -- 2,401- - - 1,194
-------- -------- -------- --------
Shares used in computing pro forma net-loss per share, basic and
diluted 15,302 11,498 13,869 10,889
======== ======== ========
Adjustment to reflect dilutive shares for pro forma net income 1,245 n/a n/a n/a
--------
Shares used in computing pro forma net lossincome per share, basic and diluted ................................................ 12,435 10,27316,547
========
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.
1714
Forward Looking Statements
This Report on Form 10-Q contains "forward-looking statements." These forward-lookingforward-
looking statements include, but are not limited to, statements about our plans,
objectives, expectations and intentions and other statements contained in this
Report on Form 10-Q that are not historical facts. When used in this Report on
Form 10-Q, the words "anticipates," "believes," "continue," "could,"
"estimates," "expects," "intends," "may," "plans," "seeks," "should" or "will"
or the negative of these terms or similar expressions are generally intended to
identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements. Such risks and uncertainties include those discussed
below, as well as those discussed in our Registration Statements on Form S-1 as
well as those discussed in our other reports and filings with the SEC. We
disclaim any obligation to update information contained in any forward-looking
statement.
Risk Factors
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 $4.2$ 5.4 million for the threesix months ended March 31,June 30, 2000 and $3.5$6.2
million for the threesix months ended March 31,June 30, 1999. As of March 31,June 30, 2000, we had an
accumulated deficit of $60.7$61.9 million. We expect that we will incur additional
losses in 2000.
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;
18
*. 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.
15
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. 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.
1916
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-speedhigh-
speed data services to end users. We cannot assure you that our Expresso
products will achieve or maintain broad commercial acceptance within the MDU
market, MCU market, or in any other market we enter.
The market in which we operate is highly competitive, and we may not be able to
compete effectively.
The market for multi-service broadband access systems is intensely
competitive, and we expect that this market will become increasingly competitive
in the future. Our most immediate competitors include Cisco, Copper Mountain,
Nortel and Paradyne, and a number of other public and private companies. Many of
these competitors are offering, or may offer, technologies and services that
directly compete with some or all of our high-speed access products and related
software products. In addition, the market in which we compete is characterized
by increasing consolidation, and we cannot predict with certainty how industry
consolidation will affect us or our competitors.
Many of our competitors and potential competitors have substantially
greater name recognition and technical, financial and marketing resources than
we do, and we can give you no assurance that we will be able to compete
effectively in our target markets. These competitors may be able to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
devote substantially more resources to developing new products than we can. In
addition, our HomeRun licensees may sell products based on our HomeRun
technology to our competitors or potential competitors. This licensing may cause
an erosion in the potential market for our products. We cannot assure you that
we will have the financial resources, technical expertise or marketing,
manufacturing, distribution and support capabilities to compete successfully.
This competition could result in price reductions, reduced profit margins and
loss of market share, which could harm our business, financial condition and
results of operations.
Our copper-wire based solutions face severe competition from other technologies
and the commercial acceptance of any competing solutions could harm our business
and ability to compete.
The market for high-speed data access products and services is
characterized by several competing technologies, including fiber optic cables,
coaxial cables, satellites and other wireless facilities. These competing
solutions provide fast access, high reliability and are cost-effective for some
users. Because many of our products are based on the use of copper telephone
wire, and because there are physical limits to the speed and distance over which
data can be transmitted over this wire, our products may not be a viable
solution for customers requiring service at performance levels beyond the
current limits of copper telephone wire. To the extent that telecommunications
service providers choose to install fiber optic cable or other transmission
media in the last mile, or to the extent that homes and businesses install other
transmission media within buildings, we expect that demand for our products that
are based on copper telephone wires will decline. Commercial acceptance of any
one of these competing solutions or any technological advancement or product
introduction that provides faster access, greater reliability, increased cost-effectivenesscost-
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. While we consistently attempt to
improve our design development, and manufacturing processes to eliminate or
reduce the possibility of potential defects, from time to time, we discover
product defects from either a design or manufacturing quality perspective. To
date, we have not experienced any significant loss from such defects nor do we
believe that defects discovered during this or previous quarters 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.
2017
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.
A majority of our sales comes from a small number of customers; if we lose any
of these customers, our sales could decline significantly.
For the three and six months ended March 31,June 30, 2000, 53% and 92%,
respectively, of net sales came from 10 customers. Although the customer mix
varies from quarter to quarter, we are dependent upon continued revenue from our
major customers. As a result, any material delay, cancellation or reduction of
orders from these major customers could cause our sales to decline
significantly. Some of these customers individually accounted for more than 10%
of our net sales in the first quarterhalf of 2000. TriGem InfoComm, Corp., Darwin
Networks and I-Quest Corporation accounted for 36%33%, 14%, and 17%10%, respectively,
of our net sales in the first quarterhalf of 2000. There is no guarantee that we will
be able to retain any of our major 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.
18
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
21
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. theThe 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 and switching integrated circuits.
Resulting delays, reductions in product shipments could damage customer
relationships and could harm our business, financial condition or results of
operations. In addition, any increaseincreases in component costs that are passed on to
our customers could reduce demand for our products.
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 and the switching integrated circuit
supplies used in the majority of our products are purchased from Texas
Instruments. Our products are also dependent on various sole source offerings
formfrom Dallas Semiconductor, Intel, Metalink US, Motorola, Oki Semiconductor,
Osicom Technologies, SaRonix, Siemens and Wind River Systems. As announced by
other companies in our industry, there are severe component shortages for
certain key parts. These shortages have led to both longer lead times for such
components and to increased risk of component quality problems. While we have
taken preemptive steps to ensure that an adequate supply of quality components
is in place, there can be no assurance that there would not be an interruption
in the supply of any of the key components currently obtained from a single or
limited source that could substantially increase the period of time it takes to
obtain these components, that could result in component quality problems, or
that could cause us to redesign our products, each or any of which event, could
disrupt our operations and harm our business in any given period.
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.
19
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,Corporation,
in FebruaryApril 2000, we signed a definitive agreement to acquireacquired certain assets of OneWorld Systems, Inc., which transaction was completed
April 28,and in May
2000, and to acquirewe acquired a United Kingdom based holding company Xstreamis, plc. 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;
22
*. incorporating acquired technology, rights and products into our products
and services;
*. developing new products and services that utilize the assets of all
entities;
*. the potential disruption of our ongoing business and the distraction of
our management; and
*. the potential impairment of relationships with employees, suppliers and
customers.
We may engage in future acquisitions of companies, technologies or products and
the failure to integrate any future acquisitions could harm our business.
As a part of our business strategy, we expect to make additional
acquisitions of, or significant investments in, complementary companies,
products or technologies. Any future acquisitions would be accompanied by the
risks commonly encountered in acquisitions of companies. These risks include:
*. difficulties in assimilating the operations and personnel of the
acquired companies;
*. diversion of management's attention from ongoing business concerns;
*. our potential inability to maximize our financial and strategic position
through the successful incorporation of acquired technology and rights
into our products and services;
*. additional expense associated with amortization of acquired intangible
assets;
*. maintenance of uniform standards, controls, procedures and policies; and
*. impairment of existing relationships with employees, suppliers and
customers as a result of the integration of new personnel.
We cannot assure you that we will be able to successfully integrate any
business, products, technologies or personnel that we may acquire in the future,
and our failure to do so could harm our business, operating results and
financial condition.
If we fail to manage our growth effectively, our business could be harmed.
Our growth has placed, and in the future may continue to place, a
significant strain on our engineering, managerial, administrative, operational,
financial and marketing resources, and increased demands on our systems and
controls. To exploit the market for our products, we must develop new and
enhanced products while managing anticipated growth in sales by implementing
effective planning and operating processes. To manage our anticipated growth, we
must, among other things, continue to implement and improve our operational,
financial and management information systems, hire and train additional
qualified personnel, continue to expand and upgrade core technologies and
effectively manage multiple relationships with various customers, suppliers and
other third parties. We cannot assure you that our systems, procedures or
controls will be adequate to support our operations or that our management will
be able to achieve the rapid execution necessary to exploit fully the market for
our products or systems. If we are unable to manage our growth effectively, our
business, financial condition and results of operations could be harmed.
20
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
59.4%53.8% and 22.1%18.5% of revenue for the threesix months ended March 31,June 30, 2000 and 1999,
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;
23
*. import or export licensing requirements;
*. reduced protection for intellectual property rights in some countries;
and
*. currency fluctuations.
We expect sales to customers outside of the United States to continue to
account for a significant portion of our revenue. We can give you no assurance
that foreign markets for our products will not develop more slowly than
currently anticipated. Any failure to increase sales to customers outside of the
United States could harm our business, financial condition and results of
operations.
We also expend product development and other resources in order to meet
regulatory and technical requirements of foreign countries. We are depending on
sales of our products in these foreign markets in order to recoup the costs
associated with developing products for these markets.
Fluctuations in currency exchange rates may harm our business.
All of our foreign sales are invoiced in U.S. dollars. As a result,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive for international customers and reduce demand for our
products. We anticipate that foreign sales will generally continue to be
invoiced in U.S. dollars. Accordingly, we do not currently engage in foreign
currency hedging transactions. As we expand our current international
operations, however, we may allow payment in foreign currencies and exposure to
losses in foreign currency transactions may increase. To reduce this exposure we
may purchase forward foreign exchange contracts or use other hedging strategies.
However, we cannot assure you that any currency hedging strategy would be
successful in avoiding exchange related losses.
If we fail to protect our intellectual property, or if others use our
proprietary technology without authorization, our competitive position may
suffer.
Our future success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of copyright, patent, trademark
and trade secrets laws and nondisclosure agreements to establish and protect our
proprietary technology. We currently hold 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.
21
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
24
available or that, if available, these licenses can be obtained
on commercially reasonable terms. Our failure to obtain these licenses could
harm our business, results of operations and financial condition.
If our products do not comply with complex government regulations, our products
may not be sold, preventing us from increasing our revenue or achieving
profitability.
We and our customers are subject to varying degrees of federal, state and
local regulation. Our products must comply with various regulations and
standards defined by the Federal Communications Commission. The FCC has issued
regulations that set installation and equipment standards for communications
systems. Our products are also required to meet certain safety requirements. For
example, certain of our products must be certified by Underwriters Laboratories
in order to meet federal safety requirements relating to electrical appliances
to be used inside the home. In addition, certain products must be Network
Equipment Building Standard certified before they may be deployed by certain of
our customers. Any delay in or failure to obtain these approvals could harm our
business, financial condition or results of operations. Outside of the United
States, our products are subject to the regulatory requirements of each country
in which our products are manufactured or sold. These requirements are likely to
vary widely. If we do not obtain timely domestic or foreign regulatory approvals
or certificates we would not be able to sell our products where these
regulations apply, which may prevent us from sustaining our revenue or achieving
profitability.
In addition, regulation of our customers may adversely impact our business,
operating results and financial condition. For example, FCC regulatory policies
affecting the availability of data and Internet services and other terms on
which telecommunications companies conduct their business may impede our
penetration of certain markets. In addition, the increasing demand for
communications systems has exerted pressure on regulatory bodies worldwide to
adopt new standards, generally following extensive investigation of competing
technologies. The delays inherent in this governmental approval process may
cause the cancellation, postponement or rescheduling of the installation of
communications systems by our customers, which in turn may harm the sale of
products by us to these customers.
Our success is dependent on our ability to provide adequate customer support.
Our ability to achieve our planned sales growth and retain current and
future customers will depend in part upon the quality of our customer support
operations. Our customers generally require significant support and training
with respect to our products, particularly in the initial deployment and
implementation stage. As our systems and products become more complex, we
believe our ability to provide adequate customer support will be increasingly
important to our success. We have limited experience with widespread deployment
of our products to a diverse customer base, and we cannot assure you that we
will have adequate personnel to provide the levels of support that our customers
may require during initial product deployment or on an ongoing basis. In
addition, we rely on a third party for a substantial portion of our customer
support functions. Our failure to provide sufficient support to our customers
could delay or prevent the successful deployment of our products. Failure to
provide adequate support could also have an adverse impact on our reputation and
relationship with our customers, could prevent us from gaining new customers and
could harm our business, financial condition or results of operations.
22
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.
25
Our stock price has fluctuated and is likely to continue to fluctuate, and you
may not be able to resell your shares at or above the offering price.
The trading price of our common stock has been and is likely to continue to
be highly volatile. Our stock price could fluctuate widely in response to
factors such as the following:
*. actual or anticipated variations in operating results;
*. announcements of technological innovations, new products or new services
by us or by our partners, competitors or customers;
*. changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;
*. conditions or trends in the telecommunications industry, including
regulatory developments;
*. growth of the Internet;
*. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
*. additions or departures of key personnel;
*. future equity or debt offerings or our announcements of these offerings;
and
*. general market and general economic conditions.
In addition, in recent years, the stock market in general, and the Nasdaq
National Market and the securities of Internet and technology companies in
particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these technology companies. These market and industry factors may
harm our stock price, regardless of our operating results. In addition, trading
prices of the stocks of many technology companies are at or near historic highs
and reflect price-earnings ratios substantially above historic levels. These
trading prices and price-earnings ratios may not be sustained.
Our charter, bylaws, retention and bylawschange of control plans and Delaware law
contain provisions that could delay or prevent a change in control.
Certain provisions of our charter and bylaws and our retention and change
of control plans ("the Plans") 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. TheseThe provisions of the charter and bylaws and the
Plans 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. TheseThe Plans provide for severance
payments and accelerated option vesting in the event of termination of
employment following a change of control. The provisions of the charter and
bylaws, and the Plans, 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.
23
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 April 30,July 15, 2000, we had
14,973,26815,622,252 shares outstanding. Of these shares, 15,126,48015,183,115 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.
26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We place our investments with high credit issuers
in short-term securities with maturities of three to twelve months. Our
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. We have no investments denominated in
foreign country currencies and therefore are not subject to foreign exchange
risk.
Part II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NoneThe Company's Annual Meeting of Stockholders was held on May 17, 2000 (the
"Annual Meeting"). At the Annual Meeting, stockholders voted on two matters:
(i) the election of three Class II directors for terms of three years expiring
in 2003, and (ii) the ratification of the appointment of PricewaterhouseCoopers
LLP as the Company's independent auditors. The stockholders elected
management's nominees as the Class II directors in an uncontested election and
ratified the appointment of the independent auditors by the following votes,
respectively:
(i) Election of Class II directors for terms expiring in 2003:
Votes For Votes Withheld
---------- --------------
Neal Douglas................................ 9,757,269 12,343
George Middlemas............................ 9,757,269 12,343
Matthew Taylor.............................. 9,757,269 12,343
The Company's Board of Directors is currently comprised of nine members who
are divided into three classes with overlapping three-year terms.
(ii) Ratification of appointment of PricewaterhouseCoopers LLP as
independent auditors:
Votes For Votes Against Abstentions
- ------------------- ------------------------- ---------------------
9,757,626 6,781 5,105
24
Item 5. INFORMATION OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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. (3)
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. (2)
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. (4)
2.4 Asset Purchase Agreement by and between Tut Systems, Inc. and OneWorld
Systems, Inc. dated as of February 3, 2000. (5)
2.5 Amendment No. 1 to Asset Purchase Agreement by and between Tut
Systems, Inc. and One World Systems, Inc. dated as of February 17,
2000. (5)
2.6 Agreement for the sale and purchase of the entire issued share capital
of Xstreamis Plc, by and among Tut Systems, Inc. the shareholders of
Xstreamis Plc, and Philip Corbishley. (6)
3.1 Restated Certificate of Incorporation of Registrant, as currently in
effect. (1)
3.2 Second Amended and Restated Certificate of Incorporation of
Registrant. (1)
3.3 Bylaws of Registrant. (1)
4.1 Specimen Common Stock Certificate. (1)
10.1 Executive Retention and Change of Control Plan.
10.2 Non-Executive Retention and Change of Control Plan.
10.3 Non-Qualified Stock Option Agreement issued to Mark Carpenter on March
3, 2000.
27.1 Financial Data ScheduleSchedule.
______
(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 June 30, 1999.
(3) Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
(4) Incorporated by reference to our Current Report on Form 8-K dated
February 14, 2000.
(5) Incorporated by reference to our Annual Report on Form 10K dated
February 23, 2000.
(6) Incorporated by reference to our Current Report on Form 8-K dated June
9, 2000.
(b) Reports on Form 8-K
The RegistrantCompany filed the following Current Reports on FormForms 8-K during the quarter
ended March 31,June 30, 2000:
Current Report on 8-K dated February 7,June 9, 2000, included information relatingrelated
to Tut's acquisition of Vintel
Communications CorporationXstreamis plc on November 12, 1999.
Current Report on 8-K dated February 14, 2000 included
information relating to Tut's acquisition of FreeGate
Corporation on February 14,May 26, 2000.
Current Report on 8-K dated March 2, 2000 included information
relating to Tut's signing of a non-binding letter of intent to
acquire Xsteamis, PLC, a United Kingdom company.
2725
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2000
TUT SYSTEMS, INC.
Date: July 27, 2000
/s/ Nelson Caldwell
-------------------------------------_____________________________________________
Nelson Caldwell
Vice President, Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer and Duly
Authorized Officer)
2826
EXHIBIT INDEX
-------------
Exhibit
Number
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. (3)
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. (2)
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. (4)
2.4 Asset Purchase Agreement by and between Tut Systems, Inc. and OneWorld
Systems, Inc. dated as of February 3, 2000. (5)
2.5 Amendment No. 1 to Asset Purchase Agreement by and between Tut Systems,
Inc. and One World Systems, Inc. dated as of February 17, 2000. (5)
2.6 Agreement for the sale and purchase of the entire issued share capital of
Xstreamis Plc, by and among Tut Systems, Inc. the shareholders of Xstreamis
Plc, and Philip Corbishley. (6)
3.1 Restated Certificate of Incorporation of Registrant, as currently in
effect. (1)
3.2 Second Amended and Restated Certificate of Incorporation of Registrant. (1)
3.3 Bylaws of Registrant. (1)
4.1 Specimen Common Stock Certificate. (1)
10.1 Executive Retention and Change of Control Plan.
10.2 Non-Executive Retention and Change of Control Plan.
10.3 Non-Qualified Stock Option Agreement issued to Mark Carpenter on March 3,
2000.
27.1 Financial Data ScheduleSchedule.
______
(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 June 30, 1999.
(3) Incorporated by reference to our Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999.
(4) Incorporated by reference to our Current Report on Form 8-K dated February
14, 2000.
(5) Incorporated by reference to our Annual Report on Form 10K dated February
23, 2000.
(6) Incorporated by reference to our Current Report on Form 8-K dated June 9,
2000.
27