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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission File Number: 000-25291
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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)
5964 W. Las Positas Blvd., Pleasanton, California 94588
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (925) 490-3900
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of March 31, 2001, 16,274,864 shares of the Registrant's Common Stock, par
value $0.001 per share, were issued and outstanding.
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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, 2001 and
December 31, 2000.............................................. 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2001 and March 31, 2000................. 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and March 31, 2000................. 5
Notes to Unaudited Condensed Consolidated Financial
Statements..................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 30
Item 2. Changes in Securities and Use of Proceeds...................... 30
Item 3. Defaults Upon Senior Securities................................ 30
Item 4. Submission of Matters to a Vote of Security Holders............ 30
Item 5. Other Information.............................................. 30
Item 6. Exhibits and Reports on Form 8-K............................... 30
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, December 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................. $ 55,322 $ 47,307
Short-term investments................................ 21,297 55,307
Accounts receivable, net of allowance for doubtful
accounts of $20,115 and $21,167 in 2001 and 2000,
respectively......................................... 4,743 6,124
Inventories, net...................................... 24,710 36,285
Prepaid expenses and other............................ 3,155 3,526
--------- ---------
Total current assets................................ 109,227 148,549
Property and equipment, net............................ 10,456 10,578
Intangibles and other assets (including restricted cash
of $3.2 million in both 2001 and 2000)................ 44,002 46,461
--------- ---------
Total assets........................................ $ 163,685 $ 205,588
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 3,486 $ 9,446
Accrued liabilities................................... 22,068 27,129
Deferred revenue...................................... 980 1,054
--------- ---------
Total current liabilities........................... 26,534 37,629
Deferred revenue, net of current portion............... 1,240 1,454
Other liabilities...................................... 344 332
--------- ---------
Total liabilities................................... 28,118 39,415
--------- ---------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $0.001 par value, 100,000 shares
authorized, 16,275 and 15,911 shares issued and
outstanding in 2001 and 2000, respectively........... 16 16
Additional paid-in capital............................ 301,171 298,332
Deferred compensation................................. (636) (1,041)
Notes receivable from stockholders.................... (371) (555)
Accumulated other comprehensive income (loss)......... (59) 6
Accumulated deficit................................... (164,554) (130,585)
--------- ---------
Total stockholders' equity 135,567 166,173
--------- ---------
Total liabilities and stockholders' equity.......... $ 163,685 $ 205,588
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
TUT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months
Ended March 31,
-----------------
2001 2000
-------- -------
Revenues:
Product.................................................... $ 4,650 $16,164
License and royalty........................................ 237 310
-------- -------
Total revenues........................................... 4,887 16,474
-------- -------
Cost of goods sold:
Product.................................................... 21,747 9,137
License and royalty........................................ -- --
-------- -------
Total cost of goods sold................................. 21,747 9,137
-------- -------
Gross (loss) margin......................................... (16,860) 7,337
-------- -------
Operating expenses:
Sales and marketing........................................ 3,825 4,819
Research and development................................... 4,682 3,183
General and administrative................................. 3,236 2,175
In-process research and development........................ 1,160 800
Amortization of intangibles and abandonment of completed
technology and patents.................................... 5,344 746
Noncash compensation expense............................... 61 114
-------- -------
Total operating expenses................................. 18,308 11,837
-------- -------
Loss from operations........................................ (35,168) (4,500)
Interest expense............................................ (9) (310)
Interest income............................................. 1,199 575
Other income, net........................................... 9 --
-------- -------
Loss before income taxes.................................... (33,969) (4,235)
Income tax expense.......................................... -- 1
-------- -------
Net loss.................................................... $(33,969) $(4,236)
======== =======
Net loss per share, basic and diluted (Note 3).............. $ (2.10) $ (0.34)
======== =======
Shares used in computing net loss per share, basic and
diluted (Note 3)........................................... 16,213 12,435
======== =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
TUT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months
Ended March 31,
------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss.................................................. $(33,969) $ (4,236)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................. 877 307
Noncash interest income and amortization of discounts on
investments............................................. (112) 85
Provision for allowance for doubtful accounts............ 70 --
Provision for excess and obsolete inventory.............. 18,633 732
Amortization of intangible assets, abandonment of
completed technology and patents and noncash
compensation expense.................................... 5,795 1,120
Write-off of in-process research and development......... 1,160 800
Gain on sale of other assets............................. (9) (103)
Change in operating assets and liabilities:
Accounts receivable..................................... 1,311 679
Inventories............................................. (7,058) (3,822)
Prepaid expenses and other assets....................... 1,168 (1,649)
Accounts payable and accrued liabilities................ (12,886) 246
Deferred revenue........................................ (288) (181)
-------- --------
Net cash used in operating activities.................. (25,308) (6,022)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (681) (698)
Purchases short-term investments.......................... (3,991) --
Proceeds from maturities of short-term investments........ 38,116 9,500
Proceeds from sale of other assets........................ -- 128
Acquisition of businesses, net of cash acquired and
purchased research and development....................... (169) (1,292)
-------- --------
Net cash provided by investing activities.............. 33,275 7,638
-------- --------
Cash flows from financing activities:
Proceeds from lines of credit............................. -- 42
Proceeds from issuances of common stock, net.............. 48 142,185
-------- --------
Net cash provided by financing activities.............. 48 142,227
-------- --------
Net increase in cash and cash equivalents.................. 8,015 143,843
Cash and cash equivalents, beginning of period............. 47,307 13,405
-------- --------
Cash and cash equivalents, end of period................... $ 55,322 $157,248
======== ========
Noncash financing activities:
Common stock issued in connection with ActiveTelco
acquisition in 2001 and FreeGate acquisition in 2000,
respectively............................................. $ 2,944 $ 21,887
======== ========
Unearned compensation related to stock and stock option
grants................................................... $ 153 $ 1,999
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
NOTE 1 -- DESCRIPTION OF BUSINESS:
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
residential and commercial multi-tenant buildings. The Company's products
incorporate high-bandwidth access multiplexers, associated modems and routers,
ethernet extension products and integrated network management software.
NOTE 2 -- BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements as of March 31,
2001 and December 31, 2000 and for the three months ended March 31, 2001 and
2000 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 as of March 31, 2001 and December 31, 2000, and
the Company's results of operations and cash flows for the three months ended
March 31, 2001 and 2000. 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 Annual Report
on Form 10-K, filed with the Securities and Exchange Commission on April 2,
2001. The balance sheet as of December 31, 2000 was derived from audited
financial statements, but does not include all required disclosures required by
generally accepted accounting principles. The results for the three months
ended March 31, 2001 are not necessarily indicative of the expected results for
any other interim period or the year ending December 31, 2001.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Net loss per share
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding. Options were not included in the
computation of diluted net loss per share because the effect would be
antidilutive.
The calculation of net loss per share follows:
Three Months
Ended March 31,
-----------------
2001 2000
-------- -------
Net loss per share, basic and diluted:
Net loss.............................................. $(33,969) $(4,236)
======== =======
Net loss per share, basic and diluted................. $ (2.10) $ (0.34)
======== =======
Shares used in computing net loss per share, basic and
diluted.............................................. 16,213 12,435
======== =======
Antidilutive securities including options not included
in net loss per share calculations................... 3,121 2,137
======== =======
6
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
Concentrations
The Company operates in one business segment, designing, developing and
marketing advanced communications products which enable high-speed data access
in residential and commercial multi-tenant buildings. The markets for high-
speed data access products are characterized by rapid technological
developments, frequent new product introductions, changes in end user
requirements and evolving industry standards. The Company's future success will
depend on its ability to develop, introduce and market enhancements to its
existing products, to introduce new products in a timely manner which meet
customer requirements and to respond to competitive pressures and technological
advances. Further, the emergence of new industry standards, whether through
adoption by official standards committees or widespread use by telephone
companies or other service providers, could require the Company to redesign its
products.
Currently, the Company relies on contract manufacturers and some single
source suppliers of materials for certain product components. As a result,
should the Company's current manufacturers or suppliers not produce and deliver
inventory for the Company to sell on a timely basis, operating results could be
adversely impacted.
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company invests its excess cash in debt instruments of the U.S. Treasury,
governmental agencies and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. To date, the Company has not
experienced any significant losses on its cash equivalents or short-term
investments. However, at March 31, 2001, the Company held an investment in
commercial paper issued by Southern California Edison Company. This investment
is included in short-term investments at a carrying value of approximately $9.2
million which matured in January 2001 and is currently in default. The Company
believes that the fair value of this investment has declined since the balance
sheet date, however, the ultimate amount of the decline and the net realizable
value of this investment is not currently practicably determinable.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The Company adopted SFAS No. 133 (as amended by SFAS No. 138) as
required by SFAS No. 137, "Deferral of the Effective Date of the FASB Statement
No. 133," effective January 1, 2001. The Company, to date, has not engaged in
derivative and hedging activities, and accordingly the adoption of SFAS No. 133
did not have a material impact on the financial statements.
Reclassifications
Certain reclassifications have been made to prior period balances in order
to conform to the current period presentation.
7
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
NOTE 4 -- COMPREHENSIVE LOSS:
Accumulated other comprehensive loss includes unrealized gains and losses on
other assets and foreign currency translation adjustment that have been
previously excluded from net loss and reflected instead in stockholders'
equity. The following table sets forth the calculation of comprehensive loss:
Three Months
Ended March 31,
-----------------
2001 2000
-------- -------
Net loss............................................... $(33,969) $(4,236)
-------- -------
Unrealized gains on other assets....................... (41) 515
Foreign currency translation adjustment................ (24) --
-------- -------
Net change in other comprehensive loss................. (65) 515
-------- -------
Total comprehensive loss............................... $(34,034) $(3,721)
======== =======
NOTE 5 -- BUSINESS COMBINATIONS:
ActiveTelco
On January 11, 2001, the Company acquired ActiveTelco, Inc. ("ActiveTelco")
for approximately $4,850, consisting of an aggregate of 321 shares of the
Company's common stock and 19 options to purchase shares of the Company's
common stock, acquisition related expenses consisting primarily of legal, other
professional fees, assumed ActiveTelco convertible notes in the amount of $650
plus accrued interest and other assumed liabilities of approximately $1,100.
This transaction was treated as a purchase for accounting purposes. ActiveTelco
provided an Internet telephony platform that enabled Internet and
telecommunications service providers to integrate and deliver Web-based
telephony applications such as unified messaging, long-distance service,
voicemail and fax delivery, call forwarding, call conferencing and callback
services.
The allocation of the purchase price was based on the estimated fair value
of goodwill of $3,248, assembled workforce of $442, and in-process research and
development of $1,160. The amount allocated to intangibles was determined based
on a preliminary appraisal using established valuation techniques. The
purchased in-process technology was expensed upon acquisition, because
technological feasibility had not been established and no future alternative
uses existed. The in-process technology percentage of completion was estimated
to be 75%. The value of this in-process technology was determined by estimating
the costs to develop the purchased in-process technology into a commercially
viable product, estimating the resulting net cash flows from the sale of the
product resulting from the completion of the in-process technology and
discounting the net cash flows back to their present value. Research and
development costs to bring in-process technology from ActiveTelco to
technological feasibility are not expected to have a material impact on the
Company's future results of operations or cash flows.
8
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
NOTE 6 -- BALANCE SHEET COMPONENTS:
March 31, December 31,
2001 2000
--------- ------------
Short-term investments:
Commercial paper.................................. $ 10,106 $ 37,564
Corporate bonds................................... 6,156 12,637
US government agency notes........................ 5,035 5,106
-------- --------
$ 21,297 $ 55,307
======== ========
Inventories, net:
Finished goods.................................... $ 49,028 $ 43,151
Raw materials..................................... 7,354 6,889
-------- --------
56,382 50,040
Less: reserves.................................... (31,672) (13,755)
-------- --------
$ 24,710 $ 36,285
======== ========
Intangibles and other assets:
Goodwill.......................................... $ 37,578 $ 34,298
Completed technology and patents*................. 7,180 10,580
Assembled workforce............................... 3,742 3,300
-------- --------
48,500 48,178
Less: accumulated amortization*................... (9,580) (7,648)
-------- --------
Net intangibles................................... 38,920 40,530
Other**........................................... 5,082 5,931
-------- --------
$ 44,002 $ 46,461
======== ========
Accrued liabilities:
Provision for loss on purchase commitments........ $ 14,771 $ 19,042
Compensation...................................... 2,108 2,571
Other............................................. 5,189 5,516
-------- --------
$ 22,068 $ 27,129
======== ========
- --------
* The Company wrote off $2.7 million, net in completed technology and patents
in the first quarter of 2001.
** Included in other assets is restricted cash of $3.2 million. See Note 7.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES:
Lease obligations
The Company leases office, manufacturing and warehouse space under
noncancelable operating leases that expire through 2007. On March 3, 1998, the
Company extended its existing lease for its former headquarters location for
three years beginning June 1, 1998 to May 31, 2001. In July 2000, the Company
subleased this former headquarters location when the Company moved to its new
headquarters in Pleasanton, California. In connection with the business
combinations in 1999, the Company assumed operating leases which expire in
April and December 2001.
9
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
In July 2000, the Company relocated its principal administrative and
engineering facilities from Pleasant Hill, California to Pleasanton,
California. 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 $1,800. The
letter of credit is collateralized by restricted funds in the amount of $3,248,
which are included in intangibles and other assets. The letter of credit is
reduced annually by $250 provided the Company is not in default under the terms
of the lease agreement.
Purchase commitments
At March 31, 2001, the Company had noncancellable commitments to purchase
finished goods inventory totaling $5,930 in aggregate.
Contingencies
The Company is subject to legal proceedings, claims and litigation arising
in the ordinary course of business. The Company's management does not expect
that the ultimate costs to resolve these matters will have a material adverse
effect on the Company's consolidated financial position, results of operations,
or cash flows.
NOTE 8 -- SEGMENT INFORMATION:
The Company currently targets its sales and marketing efforts to both public
and private service providers and users across two related markets. The Company
currently operates in a single business segment as there is only one
measurement of profitability for its operations. Revenues are attributed to the
following countries based on the location of customers:
Three Months
Ended
March 31,
--------------
2001 2000
------ -------
United States............................................... $1,736 $ 6,703
International:
Denmark.................................................... 524 *
Hong Kong.................................................. -- 3,177
Japan...................................................... 1,981 *
Korea...................................................... -- 5,962
All other countries........................................ 646 632
------ -------
$4,887 $16,474
====== =======
- --------
* Revenue attributable to this country was less than 10% of total revenue and
any revenue attributable to this country is included in the "All other
countries" line.
It is impracticable for the Company to compute product revenues by product
type for the three months ended March 31, 2001 and 2000.
Three customers accounted for 22%, 13% and 11%, respectively, of the
Company's revenue for the three months ended March 31, 2001. Two customers
accounted for 36% and 17%, respectively, of the Company's revenue for the three
months ended March 31, 2000.
10
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
NOTE 9 -- SUBSEQUENT EVENTS:
On April 23, 2001, the Company announced a restructuring plan that is
expected to reduce the Company's operational cost structure beginning in the
third quarter of 2001. Restructuring charges related to terminating employees,
vacating certain facilities and retiring certain property and equipment are
estimated to be approximately $1.8 million.
As a result of the restructuring plan, the Company has reduced its workforce
by approximately 28%. The Company also announced the cancellation of its Option
Exchange Program whereby the Company offered to exchange existing options held
by certain employees for new options to be issued at a future date. The Company
currently expects to re-offer a similar program to the remaining employees.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the Condensed Consolidated
Financial Statements and the related Notes included elsewhere in this Quarterly
Report on Form 10-Q. This discussion contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties
including but not limited to statements regarding customer and geographic mix,
gross margins and operating costs and expenses. 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 10-K, as filed with the SEC on April 12, 2001,
those discussed in our other reports and filings with the SEC and those
discussed under "Risk Factors" elsewhere in this Quarterly Report on Form 10-Q.
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 to multi-tenant
buildings. We use our proprietary FastCopper technology to deliver cost-
effective, scalable and easy to deploy solutions that exploit the underutilized
bandwidth of copper telephone wires within these buildings. Our collection of
FastCopper technologies include HomeRun, which was selected as the initial
specification for a home networking standard promoted by the HomePNA, and
LongRun, a proprietary extension of HomeRun providing superior performance at
longer distances. These technologies are deployed through our Expresso high-
bandwidth access multiplexers and associated routers. In addition to our
Expresso access multiplexers are our products that provide service providers
with enhanced capabilities such as subscriber management, bandwidth management,
IP address management, and network address translation. Recently, we introduced
our IntelliPOP product line with our proprietary Signature Switch technology.
Our proprietary Signature Switch technology is designed to allow service
providers to manage and guarantee bandwidth and service performance across
applications such as IP telephony, VPN networking, videoconferencing, video-on-
demand, file transfer and Internet access, and to efficiently configure
IntelliPOP for the delivery of these services according to the unique market
requirements of multi-tenant building owners and end-user subscribers on an
individual or collective basis.
We commenced operations in August 1991. Through the third quarter of 1998,
substantially all of our revenue was derived from the sale of our XL Ethernet
LAN extension products to the corporate and university segments of the 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 MDU market. In the first quarter of 1999, we commenced selling Expresso MDU
products incorporating our LongRun technology and Expresso MDU Lite into
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. During the last quarter of 2000 and the
first quarter of 2001, our new IntelliPOP product was under evaluation by
several potential customers.
We generate revenue primarily from the sale of hardware products and, to a
lesser extent, through the licensing of our HomeRun technology and the sale of
our software products. We generally recognize product revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectibility is probable. Revenue from service obligations
included in product revenues is
12
deferred and generally recognized ratably over the period of the obligation. We
also maintain accruals and allowances for all cooperative marketing and other
programs. Estimated sales returns, and warranty costs based on historical
experience by product, are recorded at the time revenue is recognized. Our
products generally carry a one year warranty from the date of purchase.
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 nonrefundable up-front license fees,
some of which may offset initial royalty payments, and royalties. Currently,
the majority of our license and royalty revenue is comprised of non-refundable
license fees paid in advance. Such revenue is recognized ratably over the
period during which post-contract customer support is expected to be provided
or upon delivery and transfer of agreed upon technical specifications in
contracts where essentially no further support obligations exist. Future
license and royalty revenue is expected to consist primarily of royalties based
on products sold by our licensees. We do not expect that such license and
royalty revenue will constitute a substantial portion of our revenue in future
periods. With the introduction of our IntelliPOP product line, we expect that
revenue from the sale of software products and maintenance fees will constitute
a substantial portion of revenue in future periods.
We may incur sales price reductions on some of our products to remain
competitive and to reduce relatively high levels of inventory. Although we have
historically been 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. Also, recent market developments,
including the writedown of significant amounts of inventory by competitors and
products resold as a result of bankruptcies within the industry, may put
increased pressure on the sales price of our existing inventories. 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
64% and 59% of revenue for the three months ended March 31, 2001 and 2000,
respectively. On average, we expect international sales to represent
approximately 50% or more of our revenue in future periods. However, actual
results, both geographically and in absolute dollars, may vary from quarter to
quarter depending on the timing of orders placed by customers. To date, 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 research, development and engineering activities and
focus on cost-effective design of our products. Accordingly, we will continue
to make significant expenditures on research and development activities as a
percentage of overall operating expenses.
In February 2000, we acquired FreeGate Corporation ("FreeGate") for
approximately $25.5 million, consisting of 510,931 shares of our common stock,
19,707 options to acquire shares of our common stock, and acquisition related
expenses consisting primarily of investment advisory, legal, other professional
fees and other assumed liabilities. 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 VPN networking, and email and web servers on a
compact, PC-based platform.
In April 2000, we acquired certain assets of OneWorld Systems, Inc.
("OneWorld") for approximately $2.4 million in cash. This transaction was
treated as a purchase of assets for accounting purposes.
In May 2000, we acquired Xstreamis Limited ("Xstreamis"), formerly
Xstreamis, plc, for $19.6 million, consisting of 439,137 shares of our common
stock, 10,863 options to acquire shares of our common stock, $0.1 million in
cash and $0.6 million in acquisition related expenses consisting primarily of
legal and other professional fees. This transaction was treated as a purchase
for accounting purposes. Xstreamis was located in the United Kingdom. Xstreamis
provided policy-driven traffic management for high-performance, multimedia
networking solutions including routing, switching and bridging functions.
13
In January 2001, we acquired ActiveTelco, Inc. ("ActiveTelco") for
approximately $4.9 million, consisting of an aggregate of 321,343 shares of our
common stock and 18,657 options to purchase shares of our common stock and
acquisition related expenses consisting primarily of legal, other professional
fees, assumed ActiveTelco convertible notes in the amount of $0.7 million plus
accrued interest and other assumed liabilities of approximately $1.1 million.
This transaction is being treated as a purchase for accounting purposes.
ActiveTelco was located in Fremont, California. ActiveTelco provided an
Internet telephony platform that enabled Internet and telecommunications
service providers to integrate and deliver Web-based telephony applications
such as unified messaging, long-distance service, voicemail and fax delivery,
call forwarding, call conferencing and callback services.
While we expect to derive benefits from sales of product lines that are
designed, developed and marketed as a result of these acquisitions, there can
be no assurance that we will be able to complete the development and commercial
deployment of certain of these products. In January 2001, we decided to abandon
future sales of the existing OneGate product that we acquired in the FreeGate
acquisition. In April 2001, as part of our cost reduction efforts, we decided
not to pursue further incorporation of the related OneGate and other
intellectual property acquired from FreeGate into the design of future
products. As a result, we have taken a writedown for abandonment of the related
completed technology and patents of $2.7 million.
These completed transactions added significant 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 which substantially increased our operating
costs in fiscal year 2000 when compared to related costs expended in fiscal
year 1999.
In January 2001 and April 2001, we reduced our total workforce by 10% and
28%, respectively, in an effort to control overall operating expenses in
response to recent declines in and expected slowing of our sales growth. In
April 2001, we also implemented plans to close several of our satellite
offices. We expect to incur restructuring charges of $1.8 million related to
the April 2001 restructuring plan.
We have incurred net operating losses to date and, as of March 31, 2001, had
an accumulated deficit of $164.6 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.
14
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,
---------------------
2001 2000
--------- ---------
Total revenues.................................... 100.0 % 100.0 %
Total cost of goods sold.......................... 445.0 55.5
--------- --------
Gross (loss) margin.............................. (345.0) 44.5
--------- --------
Operating expenses:
Sales and marketing.............................. 78.3 29.3
Research and development......................... 95.8 19.3
General administrative........................... 66.2 13.2
In-process research and development.............. 23.7 4.9
Amortization of intangibles and abandonment of
completed technology and patents................ 109.4 4.5
Noncash compensation expense..................... 1.2 0.7
--------- --------
Total operating expenses....................... 374.6 71.9
--------- --------
Loss from operations.............................. (719.6) (27.4)
Interest expense.................................. (0.2) (1.9)
Interest income................................... 24.5 3.5
Other income, net................................. 0.2 --
--------- --------
Loss before income taxes.......................... (695.1) (25.8)
Income tax expense................................ -- --
--------- --------
Net loss.......................................... (695.1)% (25.8)%
========= ========
Three Months Ended March 31, 2001 and 2000
Revenue. We generate revenue primarily from the sale of hardware products
and, to a lesser extent, through the licensing of our HomeRun technology and
from the sale of software products. Our total revenue decreased to $4.9 million
for the three months ended March 31, 2001, from $16.5 million for the three
months ended March 31, 2000. The decrease in the first quarter of 2001, when
compared to the first quarter of 2000, was primarily due to decreased sales of
our Expresso MDU products. The market for our products was markedly different
in the first quarter of 2001 as compared to the first quarter of 2000. During
the fourth quarter of 2000, our revenue growth slowed substantially due to
several key customers who, in the latter part of the fourth quarter experienced
a rapid deterioration in their ability to obtain additional capital and, as a
result, severely curtailed or halted their purchases of our product, and also
due to a fall-off in sales to the Korean market. These developments were not
unique to our company and continued on as a general downturn in the
telecommunications market throughout the first quarter of 2001 which again
affected our ability to generate comparatively similar levels of sales and has
made collection of receivables more uncertain in some cases. License and
royalty revenue decreased to $0.2 million for the three months ended March 31,
2001, from $0.3 million for the three months ended March 31, 2000. The decrease
in 2001 was primarily due to decreases in royalty payments.
Cost of Goods Sold/Gross (Loss) 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, excluding an additional reserve for excess and obsolete
inventory of $18.5 million taken in the first quarter of 2001, decreased to
$3.2 million for the three months ended March 31, 2001, from $9.1 million for
the three months ended March 31, 2000. The decrease in the first quarter of
2001, when compared to the first quarter of 2000, was primarily due to
decreased sales of our
15
Expresso MDU products. Gross margin before such additional reserve as a
percentage of revenue decreased to 33.6% of revenue for the three months ended
March 31, 2001, from 44.5% of revenue for three months ended March 31, 2000.
The decrease in gross margin before such reserve as a percentage of revenue in
the first quarter of 2001 was due primarily to sales price reductions on some
of our Expresso MDU products in response to competitive price pressures and to
a lesser extent to fixed manufacturing costs which could not be reduced in
correlation with the decreased revenue in the first quarter of 2001. During the
first quarter of 2001, we recorded an additional reserve for excess and
obsolete inventory of $18.5 million. This reserve is primarily related to the
costs of raw materials and finished goods in excess of what we reasonably
expect to sell in the foreseeable future. Recent market developments, including
the writedown of significant amounts of inventory by competitors and products
resold as a result of bankruptcies within the industry have contributed to
substantial uncertainties related to the value of these inventories. This
charge was included in cost of goods sold resulting in an overall negative
gross margin as a percentage of (345)% for the three months ended March 31,
2001.
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 decreased to $3.8 million for the three months ended March 31, 2001,
from $4.8 million for the three months ended March 31, 2000. The decrease in
the first quarter of 2001, when compared to the first quarter of 2000, was
primarily due to our scaling back of our marketing programs as a cost saving
measure in light of the current market conditions and to a lesser degree, to
reduced commission expense on lower revenue in the first quarter of 2001. We
expect sales and marketing expenses to decrease in absolute dollars in the
second quarter of 2001, as compared to the first quarter of 2001, and remain
lower throughout the remainder of fiscal 2001 as a result of our workforce
reduction in April 2001 and our continued focus on cost saving measures,
including decreased spending on marketing programs throughout the remainder of
fiscal 2001.
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 $4.7 million for the three months ended March
31, 2001, from $3.2 million the three months ended March 31, 2000. The increase
in the first quarter of 2001, when compared to the first quarter of 2000, was
primarily due to the higher headcount in the first quarter of 2001 due to the
fiscal 2000 acquisitions of FreeGate, OneWorld and Xstreamis and the first
quarter of 2001 acquisition of ActiveTelco, all of which were not a part of Tut
in the entire first quarter of 2000. Additionally, in the first quarter of
2001, we amortized $0.4 million of deferred compensation and notes receivable
to research and development related to restricted stock granted to certain
FreeGate, OneWorld and ActiveTelco employees. Approximately $0.8 million of the
remaining deferred compensation and notes receivable have 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 five, seven and sixteen months for each of FreeGate, OneWorld and
ActiveTelco, respectively. We expect research and development expenses to
decrease in absolute dollars in the second quarter of 2001, as compared to the
first quarter of 2001, and remain lower throughout the remainder of fiscal 2001
as a result of our workforce reduction in April 2001 and our continued focus on
cost saving measures, including the scale-back, postponement or abandonment of
research and development efforts on certain of our product lines. We expect
research and development activities to represent a significant percentage of
our overall fixed operating expenses throughout fiscal 2001.
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 $3.2 million for the three months ended March 31, 2001,
from $2.2 million for the three months ended March 31, 2000. The increase in
the first quarter of 2001, when compared to the first quarter of 2000, was
primarily due to additions of administrative personnel and increases in other
costs related to our growth throughout fiscal 2000. We expect general and
administrative expenses to
16
decrease in absolute dollars in the second quarter of 2001 and remain lower
throughout the remainder of fiscal 2001, as compared to the first quarter of
2001, as a result of our workforce reduction in April 2001 and our continued
focus on cost saving measures.
In-Process Research and Development. Amounts expensed as in-process research
and development for three months ended March 31, 2001 and 2000 were $1.2
million and $0.8 million, respectively, and were related to in-process research
and development purchased from ActiveTelco and FreeGate, respectively.
In-Process Research and Development, ActiveTelco. Amounts expensed as
in-process research and development were $1.2 million for the three months
ended March 31, 2001 and were related to in-process research and
development purchased from ActiveTelco. The purchased in-process technology
was expensed upon acquisition, because technological feasibility had not
been established and no future alternative uses existed. The in-process
technology percentage of completion was estimated to be 75%. The value of
this in-process technology was determined by estimating the costs to
develop the purchased in-process technology into a commercially viable
product, estimating the resulting net cash flows from the sale of the
product resulting from the completion of the in-process technology and
discounting the net cash flows back to their present value using a risk-
weighted discount rate of 30%. Research and development costs to bring in-
process technology from ActiveTelco to technological feasibility are not
expected to have a material impact on our future results of operations or
cash flows.
In-Process Research and Development, FreeGate. Amounts expensed as in-
process research and development were $0.8 million for the three months
ended December 31, 2000 and were related to in-process research and
development purchased from FreeGate. The purchased in-process technology
was expensed upon acquisition, because technological feasibility had not
been established and no future alternative uses existed. The in-process
technology percentage of completion was estimated to be 75%. The value of
this in-process technology was determined by estimating the costs to
develop the purchased in-process technology into a commercially viable
product, estimating the resulting net cash flows from the sale of the
product resulting from the completion of the in-process technology and
discounting the net cash flows back to their present value using a risk-
weighted discount rate of 30%. In April 2001, as part of our cost reduction
efforts, we decided to not pursue further incorporation of the related
OneGate and other intellectual property acquired from FreeGate into the
design of future products.
Amortization of Intangibles and Abandonment of Completed Technology and
Patents. Amortization of intangibles and abandonment of completed technology
and patents includes the periodic amortization of intangible assets related to
the purchase acquisitions of Vintel, FreeGate, OneWorld, Xstreamis and
ActiveTelco. These assets consist primarily of assembled workforce, completed
technology and patents, and goodwill, and each are amortized over their
estimated useful lives of three, five and five years, respectively.
Amortization of intangibles and abandonment of completed technology and patents
also includes the writedown of completed technology and patents related to the
FreeGate acquisition in the first quarter of 2001. Amortization of intangibles
and abandonment of completed technology and patents increased to $5.3 million
for the three months ended March 31, 2001, from $0.7 million for the three
months ended March 31, 2000. The increase in the first quarter of 2001, when
compared to the first quarter of 2000, relates to the amortization of
intangibles related to the Vintel, FreeGate, OneWorld, Xstreamis and
ActiveTelco acquisitions in the first quarter of 2001 and a $2.7 million charge
for abandoned FreeGate completed technology and patents, while the first
quarter of 2000 only includes amortization of intangibles related to the
November 1999 acquisition of Vintel and the February 2000 acquisition of
FreeGate.
Noncash Compensation Expense. Noncash compensation expense for the three
months ended March 31, 2001 and 2000 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 $0.06 million and $0.1
million for the three months ended March 31, 2001 and 2000, respectively. We
intend to recognize $0.2 million in additional expenses related to employee
stock options ratably over the remaining vesting period of the related options.
Such deferred expense has been recorded as a reduction of equity in the balance
sheet.
17
Interest Expense. Interest expense consisted of interest expense associated
with our leases in the first quarter of 2001 and our credit facilities in the
first quarter of 2000. Our interest expense decreased to $0.009 million for the
three months ended March 31, 2001, from $0.3 million for the three months ended
March 31, 2000. The decrease in the first quarter of 2001, when compared to the
first quarter of 2000, was primarily due to our paying off the principal owed
on our credit facilities in June 2000.
Interest Income. Interest income consisted of interest income on our cash,
investments and notes receivable balances, offset by the amortization of
premiums paid on investments. Our interest income increased to $1.2 million for
the three months ended March 31, 2001, from $0.6 million for three months ended
March 31, 2000. The increase in the first quarter of 2001, when compared to the
first quarter of 2000, was primarily due to interest income on higher average
cash and investment balances.
Liquidity and Capital Resources
In March 2000, we completed our secondary offering and issued 2,500,000
shares of our common stock at a price of $60.00 and we received approximately
$141.7 million in cash, net of underwriting discounts, commissions and other
offering costs.
As of March 31, 2001, we had cash, cash equivalents, and short-term
investments of $76.6 million compared to $102.6 million as of December 31,
2000.
The net increase in cash and cash equivalents of $8.0 million during the
three months ended March 31, 2001 resulted primarily from the maturity of
short-term investments of $38.1 million and $0.05 million in proceeds from the
issuance of common stock related to stock options. The increases in cash and
cash equivalents from these sources were offset by uses in operating activities
of $25.3 million, purchases of short-term investments of $4.0 million, $0.7
million for the purchase of property and equipment and $0.2 million in
acquisition costs for ActiveTelco.
The net increase in cash and cash equivalents of $143.8 million during the
three months ended March 31, 2000 resulted primarily from net proceeds of our
secondary offering of $141.7 million, $9.5 million in net proceeds from
maturities of short-term investments, $0.5 million in proceeds from the
issuance of common stock related to stock options and $0.1 million in proceeds
from the sale of other assets. The increases in cash and cash equivalents from
these sources were offset by uses in operating activities of $6.0 million, $0.7
million for the purchase of property and equipment and $1.3 million in
acquisition costs for FreeGate.
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. The letter of credit is
collateralized by restricted funds in the amount of $3.2 million, which are
included in intangibles and other assets as of March 31, 2001. The letter of
credit is reduced annually by $0.25 million provided we are not in default
under the terms of the lease agreement.
For future periods, we generally anticipate a decrease in working capital
expenditures on a period to period basis primarily as a result of completing
payments for purchase commitments for inventory and general decreases in our
operational costs due to our recent workforce reductions.
We believe that our cash, cash equivalents and short-term investment
balances will be sufficient to satisfy our cash requirements for at least the
next 12 months.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. We adopted SFAS No. 133 (as
18
amended by SFAS No. 138) as required by SFAS No. 137, "Deferral of the
Effective Date of the FASB Statement No. 133," effective January 1, 2001. To
date, we have not engaged in derivative and hedging activities, and accordingly
the adoption of SFAS No. 133 did not have a material impact on our financial
statements.
Risk Factors
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL
OF THE OTHER INFORMATION INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q, BEFORE
MAKING AN INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE
NOT THE ONLY ONES FACING US. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS. THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS "FORWARD-LOOKING"
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS
A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN
THIS QUARTERLY REPORT ON FORM 10-Q.
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 of $34.0 million for
the quarter ended March 31, 2001 and $4.2 million for the quarter ended March
31, 2000. As of March 31, 2001, we had an accumulated deficit of $164.6
million. We expect that we will continue to incur losses in 2001 and we may
incur losses in future periods as well.
We may never achieve or sustain profitability. We have spent substantial
amounts of money on the development of our Expresso products, HomeRun
technology, IntelliPOP product 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 including selling excess Expresso inventories, successfully
launch our IntelliPOP product, reduce manufacturing costs, sell excess
component parts obtained as a result of canceled purchase commitments 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:
. availability of capital in the network infrastructure industry;
. market acceptance of our products;
. competitive pressures, including pricing pressures from our partners and
competitors particularly in light of recent announcements from
competitors that they plan on taking significant writedowns in inventory
which could lead to a general excess of competitive products in the
marketplace;
. 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;
19
. variations in our sales or distribution channels;
. variations in the mix of products offered by us;
. changes in the pricing policies of our suppliers;
. the availability and cost of key components; and
. the timing of personnel hiring.
We anticipate that average selling prices for our products will decrease in
the near future due to volume pricing agreements and the need to reduce
relatively high levels of inventory. In addition, 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. Decreasing the average
selling prices of our products 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 even at the anticipated reduced
levels, 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.
Purchases by past customers have decreased dramatically and we must establish a
new base of customers.
Many of our past customers have been unable to continue to access capital
and are experiencing significant financial difficulties, including bankruptcy.
Our largest customers accounted for 46% of net revenues for the quarter ended
March 31, 2001 and 53% of net revenues for the quarter ended March 31, 2000.
Three customers, Kanematsu Computer System Ltd., RIKEI Corporation and NetPoint
A/S, accounted for 22%, 13% and 11%, respectively, of our net revenues for the
quarter ended March 31, 2001. Two customers, TriGem InfoComm Corporation and I-
Quest, accounted for 36% and 17%, respectively, of our net revenues in the
quarter ended March 31, 2000. In order to meet our revenue targets, we must
continue to establish a new customer base and increase sales to existing
customers. Our strategy of targeting larger, more established customers may
result in longer sales cycles and delayed revenue. Sales into larger accounts
could also result in increased competition from larger and better established
competitors.
We must reduce our inventory and future purchase commitments.
Changes in our business have resulted in the accumulation of a substantial
inventory of finished goods and components. In addition, recent announcements
of large-scale inventory writedowns by competitors indicate that the risk of
inexpensive competitive products coming into the marketplace in the near future
has increased significantly. We have provided for losses related to the
cancellation of purchase commitments and allowances for excess and obsolete
finished goods inventories and related raw materials. However, we must sell
existing finished goods inventory and delay or sell finished goods inventory
from future purchase commitments as well as sell component inventory resulting
from deliveries on already canceled purchase commitments. Failure to decrease
our current and future inventory and/or to sell component parts may require
that we take additional charges related to slow moving or obsolete inventory
and components. If we are unable to sell a substantial amount of both the
finished goods and the component inventories, our expected cash position
throughout the year 2001 will be negatively impacted.
We face substantial risk in launching our new IntelliPOP product.
We are in the process of launching our new IntelliPOP product. Risks
associated with the launch include delays in shipping including software bugs,
delays in product hardware and software testing, and delays in
20
production build of the product. The complexity of the product will require
additional customer support resources. Since the product will include major
software components, we plan to sell software maintenance agreements.
Accordingly, revenue associated with such maintenance agreements will be
deferred and recognized over the life of the underlying support. The launch of
our IntelliPOP product may also cause customers to delay purchases of our
existing products. In addition, the introduction of a new, more complex
product, coupled with a search for larger, more established customers may
result in longer sales cycles and delayed revenue.
Our ability to attract and retain our personnel may be negatively impacted by
the drop in our stock price.
The drop in our stock price has resulted in most of our outstanding employee
stock options being "underwater" or priced substantially above current market
price. In order to properly effect a recent Company layoff, we rescinded an
outstanding offer to employees to cancel their existing options and have such
options reissued at a date at least six months and two days later than the date
of cancellation. While we currently intend on reoffering a similar program to
our remaining employees, the effectiveness of such a plan cannot be predicted.
In addition, such a program would require the filing of a tender offer
statement. Employees receiving such an offer would be requested to read this
Form 10-Q, a related offering memorandum and other pertinent information,
before making any decision with respect to the offer. Accounting and other
regulatory concerns will prevent or limit our ability to issue additional stock
options to these employees during the period between cancellation and
reissuance. If certain market conditions persist, the attractiveness of our
stock option offerings and the success of our employee stock plans may be
negatively impacted and as a result diminish our ability to attract and retain
qualified personnel.
Changes in capital markets may negatively impact our business.
Due to recent changes in the capital markets including increased volatility
in equity markets and tightening of lending in the credit markets, we believe
that we are exposed to a greater risk that customers will alter their payment
practices to conserve capital. These changes may lead to increases in
outstanding accounts receivable, longer payback periods and increased risk of
default. For example, we increased our provisions recorded on past due accounts
receivable from several key customers who, during the latter part of the fourth
quarter of 2000, experienced a rapid deterioration in their ability to obtain
additional capital to fund their business models, declared their inability to
make timely payments on their accounts, and, as of the date of this report,
have not been able to demonstrate wherewithal to pay their existing account
balances. Two of these customers have commenced bankruptcy proceedings. These
increased risks will be considered when assessing our customers' wherewithal to
pay and will likely result in longer revenue deferrals than previously
experienced. We also believe that certain of our customers will alter their
deployment plans to meet the constraints imposed by changes in the capital
markets. If we are not able to increase sales to other customer segments or
sales are otherwise delayed, we may experience volatility in expected sales
growth patterns which would increase the risk of declining sales growth in any
particular quarter.
Difficulties in forecasting product sales could negatively impact our business.
We base our expense levels in part upon our expectations concerning future
revenue. 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. In the case of
IntelliPOP, those evaluations may increase to six months. 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 the 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. Conversely, if orders are less than our forecasts, we may
have difficulty in canceling future purchase commitments in a timely manner
which may result in greater than expected inventory levels and exposure to
losses related to slow moving and obsolete inventory.
21
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 our products. We rely on contract manufacturers to
assemble, test and package our products. We cannot assure you that these
contract manufacturers and suppliers will be able to meet our future
requirements for manufactured products, components and subassemblies. Any
interruption in the operations of one or more of these contract manufacturers
would harm our ability to meet our scheduled product deliveries to customers.
In addition, we believe that current market conditions have placed additional
financial strain on our contract manufacturers. 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, we
have canceled certain finished goods and component orders which may have a
negative impact on our ability to diversify our product manufacturing across a
larger base of contract manufactures. 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 neither we nor our contract
manufacturers have any guaranteed supply arrangements with these suppliers. The
availability of many of these components is dependent in part on our ability to
provide our contract manufacturers and their suppliers with accurate forecasts
of our future needs. If we or our manufacturers were unable to obtain a
sufficient supply of components from current sources, we could experience
difficulties in obtaining alternative sources or in altering product designs to
use alternative components. Resulting delays and reductions in product
shipments could damage customer relationships and could harm our business,
financial condition or results of operations. In addition, any increases in
component costs that are passed on to our customers could reduce demand for our
products.
We rely on third parties to test substantially 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 our products and could harm our
business, financial condition and results of operation. Moreover, defects in
products that are not discovered in the quality assurance process could damage
customer relationships and result in product returns or liability claims, each
of which could harm our business, financial condition and results of
operations.
We purchase several key components from single or limited sources and could
lose sales if these sources fail to fill our needs.
We currently purchase all of the 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 supplies 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
from Dallas Semiconductor, Metalink US, Motorola, Flextronics Semiconductor,
SaRonix, Siemens and Wind River Systems. If there is any interruption in the
supply of any of the key components currently obtained from a single or limited
source,
22
obtaining these components from other sources could take a substantial period
of time which could cause us to redesign our products or could disrupt our
operations and harm our business, financial condition and results of operation
in any given period.
Our market is subject to rapid technological changes and if we do not address
these changes, our products will become obsolete, harming our business and
ability to compete.
The markets for high-speed data access products are characterized by rapid
technological developments, frequent enhancements to existing products and new
product introductions, changes in end user requirements and evolving industry
standards. In addition, the market for high-speed data access products is
dependent in large part on the increased use of the Internet. Issues concerning
the use of the Internet, including security, lost or delayed packets, and
quality of service, may negatively affect the development of the market for our
products. We cannot assure you that we will be able to respond quickly and
effectively to technological change. If we do not address these technological
changes and challenges by regularly introducing new products, our product line
will become obsolete, which would harm our business, financial condition and
results of operations.
Our success depends on our ability to continually introduce new products that
achieve broad market acceptance.
We must also continually improve the performance, features and reliability
of our products, particularly in response to competitive product offerings. To
remain competitive we need to introduce products in a timely manner that
incorporate or are compatible with these new technologies as they emerge. We
may have only a limited amount of time to penetrate certain markets and we
cannot assure you that we will be successful in achieving widespread acceptance
of our products before competitors offer products and services similar or
superior to our products. Any delay in product introduction could adversely
affect our ability to compete and cause our operating results to be below our
expectations or the expectations of public market analysts or investors. In
addition, when we announce new products or product enhancements that have the
potential to replace or shorten the life cycle of our existing products,
customers may defer purchasing our existing products.
These actions could harm our operating results by unexpectedly decreasing
sales, increasing our inventory levels of older products and exposing us to
greater risk of product obsolescence.
Our success depends on continued market acceptance of our Expresso products and
the successful launch of our IntelliPOP product.
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 and the launch of our IntelliPOP product
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 our IntelliPOP product and about the development of new products
to meet changing and expanding demands of service providers, MTU owners and
corporate customers. The success of our Expresso and IntelliPOP products will
also depend on the ability of our service provider customers to market and sell
high-speed data services to end users. We cannot assure you that our IntelliPOP
or 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,
23
Copper Mountain, Elastic Networks, 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. Also, many of these
competitors have recently announced significant changes in their business plans
and operations some of which, such as major writedowns of inventory, could have
a negative impact on our ability to sustain our current pricing or to sell
current levels of inventory. 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 cost-effective solutions for some
users. Because many of our products are based on the use of copper telephone
wire, and because there are physical limits to the speed and distance over
which data can be transmitted over this wire, our products may not be a viable
solution for customers requiring service at performance levels beyond the
current limits of copper telephone wire. To the extent that telecommunications
service providers choose to install fiber optic cable or other transmission
media in the last mile, or to the extent that homes and businesses install
other transmission media within buildings, we expect that demand for our
products that are based on copper telephone wires will decline. Commercial
acceptance of any one of these competing solutions or any technological
advancement or product introduction that provides faster access, greater
reliability, increased cost-effectiveness or other advantages over technologies
that utilize existing telephone copper wires could decrease the demand for our
products and reduce average selling prices and gross margins associated with
our products. The occurrence of any one or more of these events could harm our
business, financial condition and results of operations.
Manufacturing or design defects in our products could harm our reputation and
business.
Any defect or deficiency in our products could reduce the functionality,
effectiveness or marketability of our products. These defects or deficiencies
could cause orders for our products to be canceled or delayed, reduce revenue,
or render our product designs obsolete. In that event, we would be required to
devote substantial financial and other resources for a significant period of
time in order to develop new product designs. We cannot assure you that we
would be successful in addressing any manufacturing or design defects in our
products or in developing new product designs in a timely manner, if at all.
Any of these events, individually or in the aggregate, could harm our business,
financial condition and results of operations.
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,
24
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 HomePNA 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.
We may not be able to effectively integrate our recent acquisitions into our
existing business.
In February 2000, we acquired FreeGate, in May 2000, we acquired Xstreamis
and in January 2001, we acquired ActiveTelco. We will need to overcome
significant issues in order to realize any benefits from these transactions.
These issues include:
. integrating the operations of the geographically dispersed businesses
acquired into our own operations;
. incorporating acquired technology, rights and products into our products
and services;
. developing new products and services that utilize the assets of all
entities;
. the potential disruption of our ongoing business and the distraction of
our management; and
. the potential impairment of relationships with employees, suppliers and
customers.
We may engage in future acquisitions of companies, technologies or products and
the failure to integrate any future acquisitions could harm our business.
As a part of our business strategy, we expect to make additional
acquisitions of, or significant investments in, complementary companies,
products or technologies. Any future acquisitions would be accompanied by the
risks commonly encountered in acquisitions of companies. These risks include:
. difficulties in assimilating the operations and personnel of the acquired
companies;
. diversion of management's attention from ongoing business concerns;
. the 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.
Failure to effectively manage operations in light of our changing revenue base
will adversely affect our business.
In the past, we have rapidly and significantly expanded our operations and
anticipate that, in the future, expansion in certain areas of our business may
be required to address potential growth in our customer base and market
opportunities. In particular, we expect to face numerous challenges in the
implementation of our business strategy to focus on the larger, more
established customers such as ILECs and PTTs in both domestic
25
and international markets. In addition, the volatility in our business has
placed a significant strain on our managerial and operational resources. For
example, in January 2001 we cut our workforce by 10% and again in April 2001 by
an additional 28% in an effort to control overall operating expenses in
response to recent declines in and expected slowing of our sales growth.
To exploit the market for our products, we must develop new and enhanced
products while implementing and managing effective planning and operating
processes. To manage our operations, 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 operations effectively, our business, financial condition and
results of operations could be harmed.
We depend on international sales for a significant portion of our revenue,
which could subject our business to a number of risks.
Sales to customers outside of the United States accounted for approximately
64% and 59% of revenue for the quarters ended March 31, 2001 and 2000,
respectively. There are a number of risks arising from our international
business, including:
. longer receivables collection periods;
. increased exposure to bad debt write-offs;
. risk of political and economic instability;
. difficulties in enforcing agreements through foreign legal systems;
. unexpected changes in regulatory requirements;
. import or export licensing requirements;
. reduced protection for intellectual property rights in some countries;
and
. currency fluctuations.
We expect sales to customers outside of the United States to continue to
account for a significant portion of our revenue. However, 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. However, as we expand our current international
operations, we may allow payment in foreign currencies and, as a result,
exposure to foreign currency transaction losses 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.
26
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 24 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 our proprietary information. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain or use our products or technology. We also cannot assure you that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States.
We may be subject to intellectual property infringement claims that are costly
to defend and could harm our business and ability to compete.
We are also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. We cannot assure
you that third parties will not assert infringement claims in the future with
respect to our current or future products. Any such assertion, regardless of
its merit, could require us to pay damages or settlement amounts and could
require us to develop non-infringing technology or acquire licenses to the
technology that is the subject of the asserted infringement. This litigation or
potential litigation could result in product delays, increased costs or both.
In addition, the cost of any litigation and the resulting distraction of our
management resources could harm our business, results of operations or
financial condition. We also cannot assure you that any licenses of technology
necessary for our business will be available or that, if available, these
licenses can be obtained on commercially reasonable terms. Our failure to
obtain these licenses could harm our business, results of operations and
financial condition.
If our products do not comply with complex government regulations, our products
may not be sold, preventing us from increasing our revenue or achieving
profitability.
We and our customers are subject to varying degrees of federal, state and
local regulation. Our products must comply with various regulations and
standards defined by the Federal Communications Commission. The FCC has issued
regulations that set installation and equipment standards for communications
systems. Our products are also required to meet certain safety requirements.
For example, certain of our products must be certified by Underwriters
Laboratories in order to meet federal safety requirements relating to
electrical appliances to be used inside the home. In addition, certain products
must be Network Equipment Building Standard certified before they may be
deployed by certain of our customers. Any delay in or failure to obtain these
approvals could harm our business, financial condition or results of
operations. Outside of the United States, our products are subject to the
regulatory requirements of each country in which our products are manufactured
or sold. These requirements are likely to vary widely. If we do not obtain
timely domestic or foreign regulatory approvals or certificates we would not be
able to sell our products where these regulations apply, which may prevent us
from sustaining our revenue or achieving profitability.
In addition, regulation of our customers may adversely impact our business,
operating results and financial condition. For example, FCC regulatory policies
affecting the availability of data and Internet services and other terms on
which telecommunications companies conduct their business may impede our
penetration of certain markets. In addition, the increasing demand for
communications systems has exerted pressure on regulatory bodies worldwide to
adopt new standards, generally following extensive investigation of competing
27
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 and, we believe that the introduction of IntelliPOP will add
a significant layer of complexity to the demands on our customer support
organizations. Our failure to provide sufficient support to our customers could
delay or prevent the successful deployment of our products. Failure to provide
adequate support could also have an adverse impact on our reputation and
relationship with our customers, could prevent us from gaining new customers
and could harm our business, financial condition or results of operations.
If we lose key personnel or are unable to hire additional qualified personnel,
as necessary, we may not be able to successfully manage our business.
We depend on the performance of 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. We
believe that our future success will depend in large part upon our continued
ability to identify, hire, retain and motivate highly skilled employees, who
are in great demand. We cannot assure you that we will be able to do so.
Our stock price has fluctuated and is likely to continue to fluctuate, and you
may not be able to resell your shares at or above their purchase 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.
28
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 with severe
drops in recent months. 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.
Our charter, bylaws, retention and change 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. The 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. The 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.
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 March 31, 2001, we
had 16,274,864 shares outstanding. Of these shares, 15,798,394 shares of common
stock are currently available for sale in the public market, some of which are
subject to volume and other limitations under securities laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates primarily from our investments
in certain held-to-maturity securities. Under our current policies, we do not
use interest rate derivative instruments to manage exposure to interest rate
changes. A hypothetical 100 basis point adverse move in interest rates along
the entire interest rate yield curve would not materially affect the fair value
of interest sensitive financial instruments at March 31, 2001.
At March 31, 2001, we held an investment in commercial paper issued by
Southern California Edison Company. This investment is included in short-term
investments at a carrying value of approximately $9.2 million which matured in
January 2001 and is currently in default. We believe that the fair value of
this investment has declined since the balance sheet date, however, the
ultimate amount of the decline and the net realizable value of this investment
is not currently practicably determinable.
We have no investments, nor are any significant sales, expenses, or other
financial items denominated in foreign country currencies. All of our
international sales are denominated in U.S. dollars. An increase in the value
of the U.S. dollar relative to foreign currencies could make our products more
expensive and, therefore, reduce the demand for our products.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 11, 2001, we issued 321,343 shares of our common stock and
options to purchase 18,657 shares of our common stock to finance in part our
acquisition of ActiveTelco, Inc. The issuance of the securities in this
transaction was exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act or Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Reorganization dated as of October 15, 1999,
by and among the Company, Vintel Acquisition Corp., and Vintel
Communications, Inc.(3)
2.2 Agreement and Plan of Reorganization dated as of June 8, 1999, by
and among the Company, Public Port Acquisition Corporation, and
Public Port, Inc.(2)
2.3 Agreement and Plan of Reorganization dated as of November 16, 1999,
as amended, by and among the Company, Fortress Acquisition
Corporation and FreeGate Corporation.(4)
2.4 Asset Purchase Agreement by and between the Company and OneWorld
Systems, Inc. dated as of February 3, 2000.(5)
2.5 Amendment No. 1 to Asset Purchase Agreement by and between the
Company and OneWorld Systems, Inc. dated as of February 17, 2000.(5)
2.6 Agreement for the sale and purchase of the entire share capital of
Xstreamis plc, by and among the Company, the shareholders of
Xstreamis plc and Philip Corbishley.(6)
2.7 Agreement and Plan of Reorganization dated as of December 21, 2000,
by and among the Company, ActiveTelco Incorporated, ActiveTelco
Acquisition Corporation, and, with respect to Article VII only,
Azeem Butt, as shareholder representative, and U.S. Bank Trust, as
escrow agent.(7)
3.1 Second Amended and Restated Certificate of Incorporation of the
Company.(1)
3.2 Bylaws of the Company, as currently in effect.(1)
4.1 Specimen Common Stock Certificate.(1)
11.1 Calculation of net loss per share (contained in Note 3 of Notes to
Condensed Consolidated Financial Statements).
30
- --------
(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 10-K for the year
ended December 31, 1999.
(6) Incorporated by reference to our Current Report on Form 8-K dated May 26,
2000 as filed June 9, 2000.
(7) Incorporated by reference to our Current Report on Form 8-K dated January
18, 2001.
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Forms 8-K during the
quarter ended March 31, 2001:
On January 18, 2001, the Company filed a Report on Form 8-K which
included the Agreement and Plan of Reorganization, dated December 21, 2000,
by and among Tut Systems, Inc., ActiveTelco Incorporated, ActiveTelco
Acquisition Corporation, and, with respect to Article VII only, Azeem Butt,
as shareholder representative, and U.S. Bank Trust, as escrow agent.
On March 16, 2001, the Company filed a Report on Form 8-K regarding the
Company's issuance of a press release stating that it planned to conduct an
option exchange program for its employees.
31
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 11, 2001 TUT SYSTEMS, INC.
/s/ NELSON CALDWELL
-------------------------------------
Nelson Caldwell
Vice President, Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer
and Duly Authorized Officer)
32
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Reorganization dated as of October 15, 1999, by
and among the Company, Vintel Acquisition Corp., and Vintel
Communications, Inc.(3)
2.2 Agreement and Plan of Reorganization dated as of June 8, 1999, by and
among the Company, Public Port Acquisition Corporation, and Public
Port, Inc.(2)
2.3 Agreement and Plan of Reorganization dated as of November 16, 1999, as
amended, by and among the Company, Fortress Acquisition Corporation
and FreeGate Corporation.(4)
2.4 Asset Purchase Agreement by and between the Company and OneWorld
Systems, Inc. dated as of February 3, 2000.(5)
2.5 Amendment No. 1 to Asset Purchase Agreement by and between the Company
and OneWorld Systems, Inc. dated as of February 17, 2000.(5)
2.6 Agreement for the sale and purchase of the entire share capital of
Xstreamis plc, by and among the Company, the shareholders of Xstreamis
plc and Philip Corbishley.(6)
2.7 Agreement and Plan of Reorganization dated as of December 21, 2000, by
and among the Company, ActiveTelco Incorporated, ActiveTelco
Acquisition Corporation, and, with respect to Article VII only, Azeem
Butt, as shareholder representative, and U.S. Bank Trust, as escrow
agent.(7)
3.1 Second Amended and Restated Certificate of Incorporation of the
Company.(1)
3.2 Bylaws of the Company, as currently in effect.(1)
4.1 Specimen Common Stock Certificate.(1)
11.1 Calculation of net loss per share (contained in Note 3 of Notes to
Condensed Consolidated Financial Statements).
- --------
(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 10-K for the year
ended December 31, 1999.
(6) Incorporated by reference to our Current Report on Form 8-K dated May 26,
2000 as filed June 9, 2000.
(7) Incorporated by reference to our Current Report on Form 8-K dated January
18, 2001.
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