<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-26473
EFFICIENT NETWORKS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2486865
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
4201 Spring Valley Road
Dallas, Texas 75244
(Address of principal executive office and zip code)
(972) 991-3884
(Registrant's telephone number, including area code)
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
filing requirements for the past 90 days.
YES [X] NO [_]
As of October 19, 1999, 37,507,465 shares of the Registrant's common stock
were outstanding.
<PAGE>
Efficient Networks, Inc.
FORM 10-Q
September 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information...................................................................... 3
Item 1. Financial Statements...................................................................... 3
Consolidated Balance Sheets at September 30, 1999 (unaudited) and June 30, 1999........... 3
Consolidated Statements of Operations (unaudited) for the Three Months Ended
September 30, 1999, and 1998....................................................... 4
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended
September 30, 1999 and 1998........................................................ 5
Notes to Consolidated Financial Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 10
Item 3. Qualitative and Quantitative Disclosure about Market Risk................................. 16
Risk Factors.............................................................................. 17
Part II Other Information......................................................................... 29
Item 1. Legal Proceedings......................................................................... 29
Item 2. Changes In Securities and Use of Proceeds................................................. 29
Item 4. Submission of Matters to a Vote of Security Holders....................................... 30
Item 6. Exhibits and Reports on Form 8-K.......................................................... 30
Signatures........................................................................................ 31
</TABLE>
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<PAGE>
PART I Financial Information
Item 1. Financial Statements
EFFICIENT NETWORKS, INC.
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets September 30, 1999 June 30, 1999
------------------ -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 47,456 $ 3,604
Short-term investments 8,663 -
Accounts receivable, net of allowance for doubtful
accounts of $165 and $120 at September 30, 1999 13,852
and June 30, 1999, respectively 10,316
Other receivables 7,110 2,018
Inventories 7,326 5,472
Other assets 1,051 241
-------- --------
Total current assets 85,458 21,651
Furniture and equipment, net 3,187 2,285
Other assets, net 35 29
-------- --------
$ 88,680 $ 23,965
======== ========
Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 11,184 $ 6,122
Accrued liabilities 2,782 2,208
Deferred revenue 2,441 736
-------- --------
Total current liabilities 16,407 9,066
Long-term debt, net of discount - 13,396
Other liabilities 21 22
-------- --------
Total liabilities 16,428 22,484
-------- --------
Redeemable convertible preferred stock - 40,495
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, par value $.001 per share, 100,000,000
shares authorized; 37,482,465 and 4,362,221
shares issued and outstanding at September 30, 1999 and
June 30, 1999, respectively 37 4
Additional paid-in capital 150,320 29,777
Deferred stock option compensation (16,162) (14,606)
Accumulated deficit (61,943) (54,189)
-------- --------
Total stockholders' equity (deficit) 72,252 (39,014)
-------- --------
$ 88,680 $ 23,965
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Net revenues $12,171 $ 1,174
Cost of revenues 11,706 863
------- -------
Gross profit 465 311
------- -------
Operating expenses:
Sales and marketing 2,652 1,168
Research and development 3,053 1,826
General and administrative 1,048 339
Stock option compensation 1,389 433
------- -------
Total operating expenses 8,142 3,766
------- -------
Loss from operations (7,677) (3,455)
Interest income 597 87
Interest expense and other, net (674) (7)
------- -------
Net loss $(7,754) $(3,375)
======= =======
Basic and diluted net loss per share of common stock $ (.25) $ (.93)
======= =======
Weighted-average shares of common stock outstanding 30,496 3,713
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,754) $ (3,375)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 240 179
Amortization of deferred stock option 1,389 433
compensation
Accretion of discount on subordinated promissory 604 -
notes
Changes in operating assets and liabilities:
Accounts receivable (3,536) (191)
Other receivables (5,092) -
Inventories (1,854) (62)
Other assets and liabilities (817) 220
Accounts payable and accrued liabilities 5,658 125
Deferred revenue 1,705 -
--------- ---------
Net cash used in operating activities (9,457) (2,671)
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (1,142) (596)
Purchase of investments (8,663) -
--------- ---------
Net cash used for investing activities (9,805) (596)
--------- ---------
Cash flows from financing activities:
Principal payments on capital lease obligations - (11)
Proceeds from issuance of common stock, net 63,114 14
--------- ---------
Net cash provided by financing activities 63,114 3
--------- ---------
Increase in cash and cash equivalents 43,852 (3,264)
Cash and cash equivalents at beginning of period 3,604 7,607
--------- ---------
Cash and cash equivalents at end of period $ 47,456 $ 4,343
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
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Efficient Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(1) Basis of Presentation
The accompanying unaudited financial data as of and for the quarters
ended September 30, 1999 and 1998 have been prepared by the Company,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. These consolidated financial statements
should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1999.
In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the
financial position, results of operations, and cash flows as of and
for the three months ended September 30, 1999 have been made. The
results of operations for the quarter ended September 30, 1999 are not
necessarily indicative of the operating results for the full year.
(2) Completion of Initial Public Offering
On July 15, 1999, the Company completed its initial public offering.
The Company issued 4.6 million shares of common stock in exchange for
gross proceeds of approximately $69 million, before underwriters'
discount of $4.8 million and other related expenses of $1.2 million.
Upon the completion of the initial public offering, the Company's
subordinated promissory notes converted into 3.1 million shares of
Series H redeemable convertible preferred stock, the convertible
promissory note plus accrued interest converted into .5 million shares
of Series I redeemable convertible preferred stock, and all
outstanding redeemable convertible preferred stock converted into 28.3
million shares of common stock.
(3) Earnings Per Share
Basic and diluted earnings (loss) per share has been computed in
accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share." Basic earnings per share is computed by
dividing income or loss by the weighted average number of shares of
the Company's common stock ("Common Stock") outstanding during the
period. Diluted earnings per share is
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determined in the same manners as basic earnings per share except that
the number of shares is increased assuming exercise of dilutive stock
options and warrants using the treasury stock method and conversion of
the Company's redeemable convertible preferred stock ("Preferred
Stock"). The diluted earnings per share amount is the same as basic
earnings per share because the Company has a net loss in each of the
periods presented and the impact of the assumed exercise of the stock
options and warrants and the assumed Preferred Stock conversion is
antidilutive. Common stock equivalents of 7.0 million and 27.7 million
shares for the three months ended September 30, 1999 and 1998,
respectively, were excluded from the calculation of diluted earnings
per share because of the anti-dilutive effect.
All outstanding Preferred Stock converted into Common Stock upon the
completion of the Company's initial public offering of Common Stock.
The following table presents the calculation of basic and diluted net
loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Net loss $ (7,754) $ (3,375)
Accretion of issuance costs on redeemable convertible - (88)
preferred stock ------- -------
Net loss available to common stockholders $ (7,754) $ (3,463)
======= =======
Weighted average shares outstanding 30,496 3,713
======= =======
Basic and diluted net loss per share $ (.25) $ (.93)
======= =======
</TABLE>
(4) Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
-------------- --------
1999 1999
---- ----
<S> <C> <C>
Raw materials $1,844 $2,265
Finished goods 5,482 3,207
------ ------
Total $7,326 $5,472
====== ======
</TABLE>
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<PAGE>
(5) Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
---------------- -----------
1999 1999
---- ----
<S> <C> <C>
Accrued compensation and benefits $1,041 $1,102
Other 1,741 1,106
------ ------
Total $2,782 $2,208
====== ======
</TABLE>
(6) Deferred revenue
Deferred revenue of $2.4 million at September 30, 1999 primarily relates
to shipments of product to customers where title and risk of ownership has
passed to the customer, but revenue recognition has been deferred for
accounting purposes due to certain stock balancing and right of return
privileges granted to the customer. The corresponding receivable of $2.4
million is included in the accounts receivable balance at September 30,
1999.
(7) Long-term debt
In January 1999, the Company issued subordinated promissory notes with
detachable warrants in exchange for $7.0 million in cash. On April 8, 1999,
the Company issued a subordinated promissory note with a detachable warrant
in exchange for $2.0 million in cash. The notes bore interest at 10% per
annum with interest payable quarterly. The subordinated promissory notes
were issued with detachable warrants to purchase an aggregate of 3.1
million shares of the Company's Series H redeemable convertible preferred
stock at an exercise price of $2.92 per share. The holders of the
subordinated promissory notes had entered into a note repayment and warrant
exercise agreement with the Company which stipulated that immediately prior
to the closing of an initial public offering, the aggregate $9.0 million
principal amount of the notes would be applied toward the aggregate
exercise price of the detachable warrants. Accordingly, immediately prior
to the closing of the Company's initial public offering on July 15, 1999,
the warrants were exercised to purchase the Company's Series H redeemable
convertible preferred stock, which shares of preferred stock automatically
converted into shares of Common Stock upon completion of the initial public
offering.
On June 28, 1999, the Company issued a convertible promissory note in
exchange for $5.0 million in cash. The note bore interest at 8.0% per
annum. In accordance with the conversion feature of the note, immediately
prior to the closing of the Company's initial public offering, the note
automatically converted into .5 million shares of Series I preferred stock
at a conversion price $10.09 per share, and such shares of preferred stock
automatically converted into shares of Common Stock upon completion of the
initial public offering.
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<PAGE>
(8) Statements of Cash Flows
The Company paid cash interest of $.4 million and $0 during the three
months ended September 30, 1999 and 1998, respectively. No income taxes
were paid during the three months ended September 30, 1999 and 1998. Non-
cash financing transactions included the exchange of promissory notes of
$13.4 million and related accrued interest for $14.0 million of redeemable
convertible preferred stock, and the exchange of redeemable convertible
preferred stock of $54.5 million for 28.3 million shares of Common Stock
during the three months ended September 30, 1999. No non-cash financing
transactions occurred during the three months ended September 30, 1998.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations'
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," and words of similar import, may
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers are referred to the Risk
Factors section in this report and to the risk factors set out in the Company's
Annual Report on Form 10-K which describes factors that could cause actual
events to differ from those contained in the forward looking statements.
Overview
We are a worldwide independent developer and supplier of high-speed digital
subscriber line, or DSL, customer premises equipment for the broadband access
market. Our DSL solutions enable telecommunications and other network service
providers to provide high-speed, cost-effective broadband access services over
the existing copper wire telephone infrastructure to both business and
residential markets. We therefore focus on developing and producing single- and
multiple-user DSL customer premises equipment for small- to medium-size
businesses, branch offices of large corporations and consumers. Our DSL products
enable applications such as high-speed Internet access, electronic commerce,
remote access, telecommuting and extensions of corporate networks to branch
offices.
We were incorporated in June 1993. From inception through fiscal 1997, we
primarily focused on developing and selling ATM-based products for local area
network, or LAN, applications. ATM, or asynchronous transfer mode, is a widely-
used transmission technology that breaks data down into individual packets with
unique identification and destination addresses and may be used to transmit
data, voice and video within a network. During fiscal 1997 we began to leverage
our ATM, personal computing environment and networking expertise to develop DSL
modem products for high-speed Internet access. Although we continue to sell ATM
LAN products, we have largely discontinued further development efforts on such
products and are currently focusing on our DSL products. We shipped our first
DSL products in the third quarter of fiscal 1998 ended March 31, 1998. Our DSL
products accounted for 97% of our net revenues in the first quarter of fiscal
2000 ended September 30, 1999, 87% of our net revenues in fiscal 1999, and less
than 3% of net revenues in fiscal 1998. We expect sales of our ATM LAN products
to continue to decrease over the next one to two years, and to decrease
substantially as a percentage of net revenues during that time.
We derive our revenues from sales of our SpeedStream family of DSL products
and, to a lesser extent, our ATM LAN products. We sell our DSL products
primarily to network service providers, network equipment vendors and telephone
company-aligned distributors. A significant portion of our net revenues is
derived from a relatively small number of large customers, and we expect to
continue to be dependent upon them in future periods, although the specific
customers may vary from period to period.
Since inception, a substantial portion of our revenues has been derived
from customers located outside of the United States and we expect this trend to
continue. Revenues derived from customers outside the United States represented
20% of our net revenues for the quarter ended September 30, 1999, 41% for the
fiscal year ended June 30, 1999, and 52% for the fiscal year ended June 30,
1998. We currently maintain a European sales office in Amsterdam and opened an
Asian sales office in Singapore in May 1999. We believe that in order to
continue growing and attain profitability, we must continue to penetrate
international markets.
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<PAGE>
Accordingly, we will need to expand our international operations and to hire
qualified personnel for these operations.
To date, international sales have been denominated solely in U.S.
dollars and, accordingly, we have not been exposed to fluctuations in non-U.S.
currency exchange rates. In the future, a portion of our international sales may
be denominated in currencies other than U.S. dollars, which would then expose us
to gains and losses based upon exchange rate fluctuations.
The gross margins on our DSL products have been below the levels that
our business has historically achieved. The lower gross margins on our DSL
products have been a result of manufacturing start-up costs and volume discounts
given to quickly introduce products into the market. While we believe that our
gross margins will improve in the near term as a result of manufacturing and
component cost reductions, we do not expect to attain gross margins comparable
to those we historically achieved until at least the second half of fiscal 2000.
Other factors that will affect our gross margin include the product mix sold in
any particular period, distribution channels, competitive pressures and levels
of volume discounts.
Our limited operating history in the DSL market makes it difficult to
forecast our future operating results. To date, we have not achieved
profitability in any quarter or annual period, and as of September 30, 1999, we
had an accumulated deficit of $61.9 million. Although our net revenues have
grown in recent quarters, we cannot be certain that our net revenues will
increase at a rate sufficient to achieve and maintain profitability.
For the fiscal years 1997, 1998, 1999, and the first quarter of fiscal
2000 ended September 30, 1999 we accrued an aggregate of $21.7 million in
deferred stock option compensation. These amounts represent the difference
between the exercise price of certain stock options granted during such periods
and the deemed fair market value of our common stock at the time of such option
grants. We are amortizing the deferred stock option compensation over the
vesting periods of the applicable options, which is generally four years. We
amortized deferred stock option compensation in the amounts of $1.4 million for
the first quarter of fiscal 2000 ended September 30, 1999, and $3.1 million,
$1.2 million, and $.7 million in fiscal years 1999, 1998 and 1997, respectively.
We expect to amortize the remaining deferred stock option compensation at the
rate of approximately $1.4 million per quarter until fully amortized.
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<PAGE>
Results of Operations
The following table sets forth, for the periods presented, certain
data from Efficient's consolidated statement of operations expressed as a
percentage of net revenues.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Net revenues 100.0% 100.0%
Cost of revenues 96.2 73.5
------ ------
Gross profit 3.8 26.5
------ ------
Operating expenses:
Sales and marketing 21.8 99.5
Research and development 25.1 155.5
General and administrative 8.6 28.9
Stock option compensation 11.4 36.9
------ ------
Total operating expenses 66.9 320.8
------ ------
Loss from operations (63.1) (294.3)
Interest income 4.9 7.4
Interest expense and other, net (5.5) (0.6)
------ ------
Net loss (63.7)% (287.5)%
====== ======
</TABLE>
Net Revenues
Net revenues consist of product sales, net of allowances for returns. Net
revenues increased 937% to $12.2 million for the quarter ended September 30,
1999 from $1.2 million for the comparable quarter in 1998. DSL product revenues
increased to $11.8 million for the quarter ended September 30, 1999 compared to
$.4 million for the quarter ended September 30, 1998. The increase in DSL
product revenues for the quarter ended September 30, 1999 compared to the same
period in 1998 reflects the continued market adoption of our DSL products, as
well as the addition of new products to the Company's DSL product line. During
fiscal 1997, we made the strategic decision to begin focusing on developing our
DSL products and, as a result, significantly reduced the level of development
and support activities associated with our ATM LAN products. We expect ATM LAN
product revenues to continue to decrease over time. Net revenues exclude $2.4
million of deferred revenues primarily related to shipments of product to
customers where title and risk of ownership has passed to the customer, but
revenue recognition has been deferred for accounting purposes due to certain
stock balancing and return rights granted to the customer.
Cost of Revenues
Cost of revenues consists of amounts paid to third-party contract
manufacturers, manufacturing start-up expenses and the personnel and related
costs of our manufacturing operation. Cost of revenues increased 1,256% to $11.7
million, or 96.2% of net revenues, for the quarter ended September 30, 1999 from
$.9 million, or 73.5% of net revenues, for the quarter ended September 30, 1998.
The increase from the quarter ended September 30, 1998 to the comparable period
in 1999 reflected the increase in DSL product sales.
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<PAGE>
Gross margin represented 3.8% of net revenues for the quarter ended
September 30,1999, compared to 26.5% of net revenues for the same period in
1998. These amounts are not comparable due to the shift from ATM LAN products to
DSL products. Included in cost of revenue for the quarter ended September 30,
1999 are $1.0 million of one time costs associated with the change in the
Company's contract manufacturer. Excluding these one time costs, the gross
margin for the quarter ended September 30, 1999 would have been 12.0%.
Our gross margin improved from the .6% gross margin achieved in the quarter
ended June 30, 1999 due to manufacturing and other cost efficiencies associated
with higher production volumes and the change in contract manufacturer. Although
an improvement has been achieved in the current period, gross margin continued
to be adversely affected by our efforts to bring our DSL products to market
quickly and as we continued to add personnel to our manufacturing operations in
anticipation of higher levels of business going forward. We took a number of
actions that were designed to bring our DSL products to market quickly, but
which also adversely affected our gross margins. These actions included initial
volume price discounts for key customers and incremental costs such as
manufacturing start-up, expedite and other incremental shipping and handling
charges associated with low volume manufacturing. We expect that we will
continue to incur higher than normal costs associated with the actions to bring
our DSL products to market quickly through at least the end of the second
quarter of fiscal 2000 ending December 31, 1999. We do not expect to attain
gross margins comparable to those we historically achieved until at least the
second half of fiscal 2000 as we continue to focus on quickly bringing our DSL
products to market.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries,
commissions and benefits, advertising, promotional materials and trade show
exhibit expenses. Sales and marketing expenses increased 127% to $2.7 million
for the quarter ended September 30, 1999, up from $1.2 million for the same
period in 1998. The increase in sales and marketing expenses resulted from
expanded sales and marketing activities associated with our DSL products. These
costs included significant personnel-related expenses associated with increasing
the size of our sales and marketing organization, and increased trade show
activities and related travel expenses. Sales and marketing expenses represented
21.8% of net revenues for the quarter ended September 30, 1999, and 99.5% of net
revenues for the quarter ended September 30, 1998. The decrease in sales and
marketing expenses as a percentage of net revenues for the quarter ended
September 30, 1999 compared to the same period in 1998 was a result of the
increase in DSL revenues. We expect sales and marketing expenses to increase in
dollar amount in future periods as we continue to expand our domestic and
international sales and marketing organization.
Research and Development Expenses
Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts, including third-
party consulting and prototyping costs. Research and development expenses
increased 67% to $3.1 million for the quarter ended September 30, 1999, up from
$1.8 million for the quarter ended September 30, 1998. The substantial increase
in research and development spending was primarily a result of increased
personnel and related costs associated with an expanded research and development
organization in connection with our DSL products. Research and development
expenses represented 25.1% of net revenues for the quarter ended September 30,
1999 compared to 155.5% of net revenues for the quarter ended September 30,
1998. The decrease in research and development expenses as a percentage of net
revenues for the quarter ended September 30, 1999 compared to the same period in
1998 was a result of the rapid increase in DSL revenues. We expect research and
development expenses to increase in dollar amount in future periods as we
continue to expand our research and development organization to develop new
products and technologies.
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<PAGE>
General and Administrative Expenses
General and administrative expenses consist primarily of employee salaries
and related expenses for executive, administrative and accounting personnel,
facility costs, insurance costs and professional fees. General and
administrative expenses increased 209% to $1.1 million for the quarter ended
September 30, 1999, up from $.3 million for the same period in 1998. The
increases in general and administrative spending were primarily a result of
increases in headcount associated with building our infrastructure. General and
administrative expenses represented 8.6% of net revenues for the quarter ended
September 30, 1999, compared to 28.9% of net revenues for the quarter ended
September 30, 1998. The decrease in general and administrative expenses as a
percentage of net revenues for the quarter ended September 30, 1999 compared to
the same period in 1998 was a result of the increase in DSL revenues. We expect
general and administrative expenses to increase in dollar amount in future
periods as we continue to build our infrastructure and as a result of operating
as a publicly-held company.
Stock Option Compensation
Stock option compensation reflects the difference between the exercise
price of stock options granted and the deemed fair market value of our common
stock on the dates of grant. A charge of $3.1 million of deferred stock option
compensation was recorded in the quarter ended September 30, 1999 in connection
with stock option grants made prior to the completion of the Company's initial
public offering on July 15, 1999. Amortization of deferred stock option
compensation was $1.4 million for the quarter ended September 30, 1999 compared
to $.4 million for the quarter ended September 30, 1998. We expect to amortize
the deferred stock option compensation at the rate of approximately $1.4 million
per quarter until fully amortized. Prior to our initial public offering on July
15, 1999, there was no market for our common stock, and option prices were
determined by the Board of Directors based upon numerous factors. Upon review in
connection with our initial public offering, it was determined that the fair
market value on the date of grant of certain options was higher than originally
determined by the Board of Directors. Beginning with our initial public
offering, we began pricing options based upon the public market price of our
common stock, and do not anticipate accruing additional deferred stock option
compensation in future periods.
Interest Income, and Interest Expense and Other, Net
Interest income consists primarily of interest earned on cash and cash
equivalents. Interest income increased for the quarter ended September 30, 1999
from the quarter ended September 30, 1998 as a result of interest earned on the
net cash proceeds received in connection with the Company's completion of its
initial public offering on July 15, 1999. Interest expense and other, net
primarily represents the current period accretion of the discount on
subordinated promissory notes through the date of their conversion into
preferred stock. In future periods we expect interest income and interest
expense and other, net to vary depending upon changes in the amount and mix of
interest-bearing investments and short and long-term debt outstanding during
each period.
Income Taxes
From inception through September 30, 1999, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. The Company has significant federal net operating loss carryforwards to
offset future taxable income which will begin to expire in varying amounts
beginning in
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2008. Given our limited operating history, losses incurred to date and the
difficulty in accurately forecasting our future results, management does not
believe that the recognition of the related deferred income tax asset meets the
criteria required by generally accepted accounting principles. Accordingly, a
100% valuation allowance has been recorded. Furthermore, as a result of changes
in Efficient's equity ownership resulting from Efficient's redeemable
convertible preferred stock and note financings and Efficient's initial public
offering, utilization of the net operating losses and tax credits may be subject
to substantial annual limitations due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and tax credits before utilization.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the sale
of preferred equity securities and, in the second half of fiscal 1999, through
borrowings from our investors and others. Since inception through June 30, 1999,
we have raised an aggregate of $40.4 million (net of transaction expenses) from
the sale of equity securities and an additional $14.0 million through loan
transactions.
On July 15, 1999, the Company completed an initial public offering. The
Company issued 4.6 million shares of common stock and raised $63.0 million in
net proceeds. Upon the completion of the initial public offering, the Company's
promissory notes converted into redeemable convertible preferred stock, and all
outstanding redeemable convertible preferred stock then converted into 28.3
million shares of common stock.
At September 30, 1999, we had cash and cash equivalents and highly liquid
short-term investments of $56.0 million. At September 30, 1999, we did not have
a line of credit or other borrowing facility available, nor did we have any
material capital commitments.
Cash used in operating activities for the quarter ended September 30, 1999
was $9.5 million. Cash used in operating activities has primarily represented
net investments in working capital and funding of our net losses.
Cash used in investing activities for the quarter ended September 30, 1999
was $9.8 million. Of this amount, $8.7 million of cash was used to purchase
highly liquid short-term investments. In each period, purchases of furniture and
equipment related primarily to the purchase of computers and other equipment
used in our development activities and other equipment and furniture used in our
operations.
Cash provided by financing activities for the quarter ended September 30,
1999 was $63.1 million, consisting primarily of funds raised from the Company's
initial public offering of common stock on July 15, 1999.
Our future capital requirements will depend upon a number of factors,
including the rate of growth of our sales, the timing and level of research and
development activities and sales and marketing campaigns. We believe that our
cash, cash equivalents and short-term investments will provide sufficient
capital to fund our operations at least through the end of fiscal 2000.
Thereafter, we may require additional capital to fund our business. In addition,
from time to time we may evaluate opportunities to acquire complementary
technologies or companies. Should we identify any such opportunities, we may
need to raise additional capital to fund the acquisitions. There can be no
assurance that financing will be available to us when we need it on favorable
terms or at all.
Year 2000 Issues
Many currently installed computer systems, software products and other
control devices are unable to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, many
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companies' computer systems, software products and control devices may need to
be upgraded or replaced in order to operate properly in the year 2000 and
beyond.
We have designed our products to be year 2000 compliant. However, there can
be no assurance that our current products do not contain undetected errors or
defects associated with year 2000 date functions. If such errors or defects do
exist, we may incur material costs to resolve them.
The internal systems used to deliver our services utilize third-party
hardware and software. We have completed an internal systems and processes
review for year 2000 compliance. We have completed our assessment of the year
2000 risks we may encounter, and all identified instances of noncompliance have
been repaired and tested. We have contacted the vendors of these products in
order to gauge their year 2000 compliance. Based on these vendors'
representations, we believe that the third-party hardware and software we use
are year 2000 compliant. There can be no assurance, however, that we will not
experience unanticipated negative consequences, including material costs, caused
by undetected errors or defects in the technology used in our internal systems.
We have no specific contingency plan to address the effect of year 2000
noncompliance. If, in the future, it comes to our attention that certain of our
products need modification, or certain of our third-party hardware and software
are not year 2000 compliant, then we will seek to make modifications. In such
cases, we expect such modifications to be made on a timely basis and we do not
believe that the cost of such modifications will have a material effect on our
operating results. There can be no assurance, however, that we will be able to
modify our products, services and systems in a timely and successful manner to
comply with year 2000 requirements, which could have a material adverse effect
on our business.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the Risk Factors section.
As of September 30, 1999, we had short-term investments of $8.7 million.
All of these short-term investments consisted of highly liquid investments with
remaining maturities of greater than 90 days. These investments are subject to
interest rate risk and will decrease in value if market interest rates increase.
A hypothetical increase or decrease in market interest rates by 10% from the
September 30, 1999 rates would cause the fair value of these short-term
investments to change by an insignificant amount. We have the ability to hold
these investments until maturity, and therefore we do not expect the value of
these investments to be affected to any significant degree by the effect of a
sudden change in market interest rates. Declines in interest rates over time
will, however, reduce our interest income.
At September 30, 1999 we did not own any equity investments. Therefore, we
did not have any direct equity price risk.
Substantially all of our revenues are realized currently in U.S. dollars.
In addition, we do not maintain significant asset or cash account balances in
currencies other than the United States dollar. Therefore, we do not believe
that we currently have any significant direct foreign currency exchange rate
risk.
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Risk Factors
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
report.
Risks Associated With the Digital Subscriber Line Industry
Sales of our products depend on the widespread adoption of broadband access
services and if the demand for broadband access service does not develop, then
our results of operations and financial condition would be adversely affected.
Our business would be harmed, and our results of operations and financial
condition would be adversely affected, if the use of broadband access services
does not increase as anticipated, or if our customers' broadband access services
are not well received in the marketplace. Certain critical factors will likely
continue to affect the development of the broadband access services market.
These factors include:
. inconsistent quality and reliability of service;
. lack of availability of cost-effective, high-speed service;
. inability to integrate business applications on the Internet;
. lack of interoperability among multiple vendors' network equipment;
. congestion in service providers' networks;
. inadequate security; and
. inability to meet growing demands for increasing bandwidth.
Even if these factors are adequately addressed, the market for broadband
access services to the Internet and corporate networks may fail to develop or
may develop more slowly than anticipated. If this market fails to develop or
develops more slowly than anticipated, our business would be harmed, and our
results of operations and financial condition would be adversely affected.
Many competing technologies may serve our target market, and if the DSL
technology upon which our products is based does not succeed as a technological
solution for broadband access, we would not be able to sustain or grow our
business.
The market for high-speed data transmission services has several competing
technologies which offer alternative solutions, and the demand for DSL services
is uncertain in light of this competition. The introduction of new products by
competitors, market acceptance of products based on new or alternative
technologies or the emergence of new industry standards could render our
products less competitive or obsolete. If any of these events occur, we would be
unable to sustain or grow our business. Technologies which compete with DSL are:
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. other access solutions provided by telephone network service providers such
as dial-up analog modems, integrated services digital networks and T1
services;
. broadband wireless technologies; and
. broadband cable technologies.
If these alternatives gain market share at the expense of DSL technologies,
demand for our products would be reduced, and we would be unable to sustain or
grow our business. Additionally, wireless and cable network service providers
are well funded, and cable network service providers have large existing
customer bases. As a result, competition from these companies is intense and
expected to increase.
We depend upon network service providers to deploy DSL technologies and services
in a broad and timely manner, and if they do not, we would be unable to sell our
products.
If network service providers do not increase their deployment of DSL
services rapidly, we would be unable to sell our products as anticipated, if at
all. Factors that impact deployments include:
. the demand from end users;
. a prolonged approval process, including laboratory tests, technical trials,
marketing trials, initial commercial deployment and full commercial
deployment;
. the development of a viable business model for DSL services, including the
capability to market, sell, install and maintain DSL services;
. cost constraints, such as installation costs and space and power requirements
at the network service providers' central offices;
. varying and uncertain conditions of the installed copper wire, including size
and length, electrical interference, and crossover interference with voice
and data telecommunications services;
. problems of interoperability among DSL network equipment vendors' products;
. evolving industry standards for DSL technologies; and
. domestic and foreign government regulation.
Risks We Face Within the DSL Industry
Competition within the DSL market is intense and includes numerous established
competitors, and if we are unable to compete effectively, our business would be
harmed.
Competition in the DSL customer premises equipment market is intense, and
we expect competition to increase. Many of our competitors and potential
competitors have substantially greater name recognition and technical, financial
and marketing resources than we have. If we are unable to compete successfully,
our business will be harmed and our results of operations and financial
condition would be adversely affected. We cannot assure you that we will have
the financial resources, technical expertise or marketing, distribution and
support capabilities to compete successfully.
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Competitive pressures could adversely affect us in the following ways:
. reduce demand for our products;
. cause delays or cancellations of customer orders;
. cause us to reduce prices on our existing products; or
. increase our expenses.
Our failure to enhance our existing products or to develop and introduce new
products that meet changing customer requirements and emerging industry
standards would adversely impact our ability to sell our products.
The market for high-speed broadband access is characterized by rapidly
changing customer demands and short product life cycles. If our product
development and enhancements take longer than planned, the availability of our
products would be delayed. Any such delay would adversely impact our ability to
sell our products and our results of operations and financial condition would be
adversely affected. Our future success will depend in large part upon our
ability to:
. identify and respond to emerging technological trends in the market;
. develop and maintain competitive products that meet changing customer
demands;
. enhance our products by adding innovative features that differentiate our
products from those of our competitors;
. bring products to market on a timely basis;
. introduce products that have competitive prices; and
. respond effectively to new technological changes or new product announcements
by others.
The technical innovations required for us to remain competitive in the DSL
industry are inherently complex, require long development cycles and sometimes
depend on sole-source suppliers. We will be required to continue to invest in
research and development in order to maintain and enhance our existing
technologies and products, but we may not have sufficient funds available to do
so. Even if we have sufficient funds, these investments may not serve the needs
of customers or be interoperable with changing technological requirements or
standards. We will have to incur most research and development expenses before
the technical feasibility or commercial viability of enhanced or new products
can be ascertained. Our revenues from future or enhanced products may not be
sufficient to recover our associated development costs.
Our current products are not interoperable with certain products offered by
suppliers to our customers and are subject to evolving industry standards. If
our products do not interoperate with our target customers' networks or an
industry standard that achieves market acceptance, customers may refuse to
purchase our products.
In some cases, network equipment vendors, such as Cisco Systems, Inc., sell
to our target customers proprietary or non-interoperable systems with which our
products will not function. In these cases, potential
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customers who wish to purchase DSL customer premises equipment and who have
purchased other network equipment which does not function with our DSL customer
premises equipment may not purchase our products.
Also, the emergence of new industry standards, whether through adoption by
official standards committees or widespread use by our target customers, could
require us to redesign our products. If such standards become widespread and our
products do not meet these standards, our customers and potential customers
would not purchase our products. In this case, our business would be harmed, and
our financial condition and results of operations would be adversely affected.
The rapid development of new standards increases the risk that competitors could
develop products that would reduce the competitiveness of our products or could
result in greater competition and additional pricing pressure. If we fail to
develop and introduce new products or enhancements in the face of new industry
standards, our product sales would decrease, and our business would be harmed.
We may not be able to produce sufficient quantities of our DSL products because
we depend on third-party manufacturers. If these manufacturers fail to produce
our products on a timely manner, our ability to fulfill our customer orders
would be adversely impacted.
Any manufacturing disruption could impair our ability to fulfill orders,
and if this occurs, our revenues would be adversely affected. Although we work
with more than one third-party manufacturer, many of our products are presently
manufactured for us by only one party. Since third parties manufacture our
products and we expect this to continue in the future, our success will depend,
in significant part, on our ability to have third parties manufacture our
products cost effectively and in sufficient quantities to meet our customer
demand. There are a number of risks associated with our dependence on
third-party manufacturers, including the following:
. reduced control over delivery schedules;
. quality assurance;
. manufacturing yields and costs;
. the potential lack of adequate capacity during periods of excess demand;
. limited warranties on products supplied to us;
. increases in prices; and
. the potential misappropriation of our intellectual property.
Any of these risks, if not adequately addressed by our third-party
manufacturers, would harm our business.
We have no long-term contracts or arrangements with any of our vendors that
guarantee product availability, the continuation of particular payment terms or
the extension of credit limits. The competitive dynamics of our market require
us to obtain components at favorable prices, but we may not be able to obtain
additional volume purchase or manufacturing arrangements on terms that we
consider acceptable, if at all. If we enter into a high-volume or long-term
supply arrangement and subsequently decide that we cannot use the products or
services provided for in the agreement, our business would also be harmed.
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We may not be able to produce sufficient quantities of our products because we
obtain certain key components from, and depend on, certain sole-source
suppliers. If we are unable to obtain these sole-source components, we would
not be able to ship our products in a timely manner and our strategic
relationships with our customers would be detrimentally affected.
We obtain certain parts, components and equipment used in our products
from sole sources of supply. For example, we obtain certain semiconductor
chipsets from Alcatel Microelectronics, Analog Devices, Inc., Texas Instruments
Incorporated, and Conexant Systems, Inc. If we fail to obtain components in
sufficient quantities when required, and are unable to meet customer demand, our
business could be harmed, as our customers would consider purchasing products
from our competitors. We also rely on Texas Instruments Incorporated, Samsung
Semiconductor Inc., and VLSI Technology, Inc. to manufacture our application
specific integrated circuits. Developing and maintaining these strategic
relationships is critical in order for us to be successful. If our relationships
with our equipment vendor and network service provider customers are harmed as a
result of a failure to obtain sole-source components for our products on a
timely basis, our business would be harmed.
Any of our sole-source suppliers may:
. enter into exclusive arrangements with our competitors;
. stop selling their products or components to us at commercially reasonable
prices; or
. refuse to sell their products or components to us at any price.
If we are unable to obtain sufficient quantities of sole-source
components or to develop alternative sources for components for any reason, our
business would be harmed. Furthermore, additional sole-source components may be
incorporated into our future products, thereby increasing our sole-source
supplier risks. If any of our sole-source manufacturers delay or halt production
of any of their components, our business would be harmed, and our results of
operations and financial condition would be adversely affected.
We may be subject to product returns and product liability claims resulting from
defects in our products. Product returns and product liability claims could
result in the failure to attain market acceptance of our products and harm our
business.
Our products are complex and may contain undetected defects, errors or
failures. The occurrence of any defects, errors or failures could result in
delays in installation, product returns and other losses to us or to our
customers or end users. Any of these occurrences could also result in the loss
of or delay in market acceptance of our products, either of which would harm our
business and adversely affect our operating results and financial condition. We
will likely have limited experience with any problems that may arise with new
products that we introduce.
Although we have not experienced any product liability claims to date,
the sale and support of our products entail the risk of these claims. A
successful product liability claim brought against us could be expensive, divert
the attention of management from ordinary business activities and,
correspondingly, harm our business.
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Risks That May Cause Financial Fluctuations
We have incurred net losses since our inception and expect future losses.
Accordingly, we may not be able to achieve profitability, and even if we do
become profitable, we may not be able to sustain profitability.
We have incurred net losses in every fiscal quarter and annual period
since inception and expect to continue to operate at a loss for the foreseeable
future. In addition, we had negative cash flow from operations of $9.5 million
for the quarter ended September 30, 1999, $23.4 million in fiscal year 1999, and
$6.6 million in fiscal year 1998. As of September 30, 1999, we had an
accumulated deficit of approximately $61.9 million. Due to our limited operating
history and our history of losses, we may never be able to achieve
profitability, and even if we do, we may not be able to remain profitable. To
achieve profitable operations on a continuing basis, we must successfully
design, develop, test, manufacture, introduce, market and distribute our
products on a broad commercial basis.
Our ability to generate future revenues will depend on a number of
factors, many of which are beyond our control. These factors include:
. the rate of market acceptance of DSL broadband access;
. the level of demand for DSL systems that incorporate our products;
. changes in industry standards governing DSL technology solutions;
. the extent and timing of new customer transactions;
. changes in our development schedules and those of system companies that
provide complementary DSL products, or changes in their levels of
expenditure on research and development;
. personnel changes, particularly those involving engineering and technical
personnel;
. the costs associated with protecting our intellectual property;
. regulatory developments; and
. general economic trends.
Due to these factors, we cannot forecast with any degree of accuracy
what our revenues will be in future periods or how quickly network service
providers will select our products for use in their systems. In view of these
factors, we may not be able to achieve or sustain profitability.
We have a short operating history and, as a result, it is difficult to predict
our future results of operations.
We have a short operating history upon which to base your investment
decision. We first commenced product shipments in August 1994 and did not
introduce DSL products until March 1998. Due to our limited operating history,
it is difficult or impossible for us to predict future results of operations and
you should not expect future revenue growth to be comparable to our recent
revenue growth. In addition, we believe that comparing different periods of our
operating results is not meaningful, and you should not rely on the results
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for any period as an indication of our future performance. Investors in our
common stock must consider our business and prospects in light of the risks and
difficulties typically encountered by companies in their early stages of
development, particularly those in rapidly evolving markets such as ours.
If sales forecasted for a particular period are not realized in that period due
to the lengthy sales cycle of our products, our operating results for that
period would be adversely affected.
If we fail to realize forecasted sales for a particular period, our
operating results would be adversely affected and our stock price would likely
decline and could decline significantly. The sales cycle of our products is
typically lengthy and involves:
. a significant technical evaluation;
. delays associated with network service providers' internal procedures to
commit to a particular product line offering and approve large capital
expenditures;
. time required to deploy new technologies within service providers'
networks; and
. testing and acceptance of new technologies.
For these and other reasons, a sale of our products generally requires
six to 12 months to complete. Furthermore, the announcement and projected
implementation of new standards may affect sales cycles, as network service
providers may choose to delay large-scale deployment of DSL services until
compliant products are available.
Our product cycles tend to be short, and we may incur substantial non-
recoverable expenses or devote significant resources to sales that do not occur
when anticipated.
In the rapidly changing technology environment in which we operate,
product cycles tend to be short. Therefore, the resources we devote to product
sales and marketing may not generate material revenues for us, and from time to
time we may need to write off excess and obsolete inventory. If we incur
substantial sales, marketing and inventory expenses in the future that we are
not able to recover, and we are not able to compensate for such expenses, our
operating results would be adversely affected. In addition, if we sell our
products at reduced prices in anticipation of cost reductions and we still have
higher cost products in inventory, our business would be harmed, and our results
of operations and financial condition would be adversely affected.
Our operating results in one or more future periods are likely to fluctuate
significantly and may fail to meet or exceed the expectations of securities
analysts or investors, causing our stock price to decline.
Our operating results are likely to fluctuate significantly in the
future on a quarterly and an annual basis due to a number of factors, many of
which are outside our control. If our operating results do not meet the
expectations of securities analysts or investors, our stock price may decline.
We cannot assure you that this will not occur because of the numerous factors
that could cause our revenues and costs to fluctuate. These factors include the
following:
. the timing and size of sales of our products and services;
. announcements of new products and product enhancements by competitors;
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. the entry of new competitors into our market, including by acquisition;
. unexpected delays in introducing new or enhanced products, including
manufacturing delays;
. our ability to control expenses;
. our ability to ship products on a timely basis and at a reasonable cost;
. the mix of our products sold;
. the volume and average cost of products manufactured;
. the type of distribution channel through which we sell our products;
. the average selling prices of our products; and
. the effectiveness of our product cost reduction efforts.
The amount and timing of our operating expenses generally will vary
from quarter to quarter depending on the level of actual and anticipated
business activities. Research and development expenses will vary as we develop
new products. Due to competitive factors in our market, in the past we have
experienced, and we anticipate that we will continue to experience, decreases in
the average selling prices of our products. Due to these and other factors, our
quarterly revenues, expenses and results of operations could vary significantly
in the future, and you should not rely upon period-to-period comparisons as
indications of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our customer base is concentrated, and the loss of one or more of our customers
could harm our business.
Because DSL service relies upon existing telephone lines to reach end
users, a substantial majority of potential DSL end-user accounts in the U.S. and
in other countries are controlled by a relatively small number of network
service providers. If we are not successful in maintaining relationships with
these few network service providers and the network equipment vendors that
supply them, our business will be harmed.
Although deregulation and increasing competition are expanding our
potential customer base, a small number of customers has accounted for a large
portion of our revenues to date. We sell our DSL products primarily to network
service providers, network equipment vendors and telephone company-aligned
distributors. For the quarter ended September 30, 1999, sales to four
customers, American Communications Supply, Inc., a distributor for Southwestern
Bell, America Online, Inc., Innotrac Corporation, a distributor for BellSouth,
and Lucent Technologies each represented more than 10% of our net revenues.
Sales to none of these customers represented in excess of 10% of our net
revenues in the quarter ended June 30, 1999. Our top ten customers for the
quarter ended September 30, 1999 represented 95% of our net revenues. We expect
to continue to be dependent upon a relatively small number of large customers in
future periods, although the specific customers may vary from period to period.
If we are not successful in maintaining relationships with key customers, and
winning new customers, our business would be harmed.
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We derive a substantial amount of our revenues from international sources, and
difficulties associated with international operations could harm our business.
Since inception, a substantial portion of our revenues has been
derived from customers located outside of the United States, and we expect this
trend to continue. Revenues derived from customers located outside of the United
States represented 20% for the quarter ended September 30, 1999, and 41% and 52%
of our net revenues for fiscal 1999 and 1998, respectively. We believe that our
continued growth and ability to attain profitability will require us to continue
to penetrate international markets. If we are unable to successfully overcome
the difficulties associated with international operations and maintain and
expand our international operations, our business would be harmed. These
difficulties include:
. difficulties staffing and managing foreign operations in our highly
technical industry;
. changes in regulatory requirements which are common in the
telecommunications industry;
. licenses, tariffs and other trade barriers imposed on products such as
ours;
. political and economic instability especially in Asia and the Pacific;
. potentially adverse tax consequences;
. difficulties obtaining approvals for products from foreign governmental
agencies which regulate networks;
. compliance with a wide variety of complex foreign laws and treaties
relating to telecommunications equipment; and
. delays or difficulties collecting accounts receivable from foreign entities
that are not subject to suit in the United States.
To date, our international sales and component purchases have been
denominated solely in U.S. dollars and, accordingly, we have not been exposed to
fluctuations in non-U.S. currency exchange rates. In the future, a portion of
our international sales may be denominated in currencies other than U.S.
dollars, which would expose us to gains and losses based upon exchange rate
fluctuations. Such gains and losses may contribute to fluctuations in our
operating results.
Risks That May Affect Our Ability to Execute Our Business Plans
We rely on indirect distribution channels and strategic relationships to sell
and manufacture our products, and if we are not able to maintain existing and
develop additional strategic relationships and indirect distribution channels,
our business would be harmed.
Our business strategy relies on our strategic relationships with
network equipment vendors, network service providers, and suppliers of DSL
technology. If our existing relationships are not successful or our competitors
are better able to develop these relationships, our business would be harmed.
End users typically purchase DSL customer premises equipment from network
service providers, and network service providers may purchase DSL customer
premises equipment from independent network equipment vendors and distributors.
We typically work closely with our potential customers and suppliers to ensure
interoperability of products with customer networks and of components with our
DSL customer premises equipment. In
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addition, we rely on our strategic relationships with telephone company-aligned
distributors in order to broaden our distribution network. Also, larger vendors
of DSL customer premises equipment may be able to leverage their size and
established distribution channels to gain a significant competitive advantage
over us. We cannot assure you that we will be able to maintain or expand our
existing strategic relationships or that we will be able to establish new
relationships in the future.
We continue to rapidly and significantly expand our operations, and our failure
to manage growth could harm our business and adversely affect our results of
operations and financial condition.
We have rapidly and significantly expanded our operations, including
the number of our employees, the geographic scope of our activities and our
product offerings. We expect that further significant expansion will be required
to address potential growth in our customer base and market opportunities. Any
failure to manage growth effectively could harm our business and adversely
affect our operating results and financial condition. We cannot assure you that
we will be able to do any of the following, which we believe are essential to
successfully manage the anticipated growth of our operations:
. improve our existing and implement new operational, financial and
management information controls, reporting systems and procedures;
. hire, train and manage additional qualified personnel;
. expand and upgrade our core technologies; and
. effectively manage multiple relationships with our customers, suppliers and
other third parties.
In the future, we may also experience difficulties meeting the demand
for our products. The installation and use of our products require training. If
we are unable to provide training and support for our products, more time may be
necessary to complete the implementation process and customer satisfaction may
be adversely affected. In addition, our suppliers may not be able to meet
increased demand for our products. We cannot assure you that our systems,
procedures or controls will be adequate to support the anticipated growth in our
operations.
Competition for qualified personnel in the networking equipment and
telecommunications industries is intense, and if we are not successful in
attracting and retaining these personnel, our business would be harmed.
Our future success will depend on the ability of our management to
operate effectively, both individually and as a group. Therefore, the future
success of our business will also depend on our ability to attract and retain
high-caliber personnel. The loss of the services of any of our key personnel,
the inability to attract or retain qualified personnel in the future or delays
in hiring required personnel, particularly engineers, could harm our business.
Because competition for qualified personnel in the networking
equipment and telecommunications industries is intense, we may not be
successful in attracting and retaining such personnel. During the quarter ended
September 30, 1999, we added 39 employees to our total work force, representing
an increase of 31.5% from June 30, 1999. We expect to hire additional personnel
in the near future, including direct sales and marketing personnel. There may be
only a limited number of people with the requisite skills to serve in those
positions, and it may become increasingly difficult to hire these people. In
addition, we are actively searching
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for research and development engineers, who also are in short supply. Our
business will be harmed if we encounter delays in hiring additional engineers.
Furthermore, competitors and others have in the past and may in the future
attempt to recruit our employees. We do not have employment contracts with any
of our key personnel. Although we currently maintain key person life insurance
on our key personnel, we will not continue to maintain it after the offering.
The loss of the services of one or more of our executive officers or key
employees could harm our business.
Our executive officers and certain key sales, engineering and
management personnel may not remain with us in the future. Our executive
officers and key personnel and in particular Mark A. Floyd, our Chief Executive
Officer, and Patricia W. Hosek, our Vice President of Engineering, are critical
to our business and its future success. If we lost the services of one or more
of our executive officers or key employees, we would need to devote substantial
resources to finding replacements, and until replacements were found, Efficient
would be operating without the skills or leadership of such personnel, either of
which could have a significant adverse effect on our business. None of our
officers or key employees is bound by agreements for any specific employment
term or covenants not to compete.
Our future success will depend in part on our ability to protect our proprietary
rights and the technologies used in our principal products, and if we do not
enforce and protect our intellectual property or if others bring infringement
claims against us, our business would be harmed.
We rely on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality provisions and other contractual provisions to
protect our proprietary rights. However, these measures afford only limited
protection. Our failure to adequately protect our proprietary rights may
adversely affect us. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use trade secrets or other information that we regard as proprietary.
Our means of protecting our proprietary rights in the U.S. or abroad
may not be adequate, and competitors may independently develop similar
technologies. In addition, the laws of some foreign countries do not protect our
proprietary rights as fully as do the laws of the U.S. Issued patents may not
preserve our proprietary position. Even if they do, competitors or others may
develop technologies similar to or superior to our own.
We may become involved in litigation over proprietary rights. In the
event of an adverse result in any future litigation with third parties relating
to proprietary rights, we could be required:
. to pay substantial damages, including treble damages if we are held to have
willfully infringed;
. to halt the manufacture, use and sale of infringing products;
. to expend significant resources to develop non-infringing technology; or
. to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts
intellectual property claims against us, on commercially reasonable terms, or at
all. In addition, litigation frequently involves substantial expenditures
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<PAGE>
and can require significant management attention, even if we ultimately prevail.
However, there can be no assurance that we would be able to successfully resolve
such disputes in the future.
From time to time, third parties, including our competitors, have
asserted patent, copyright and other intellectual property rights to
technologies that are important to us. For example, we have received a letter
from Bell Atlantic indicating that they hold a patent on certain DSL technology,
and urging us to begin negotiating a license to the patent. We are aware that
Bell Atlantic has sued a least one other company alleging that such other
company's DSL services infringe Bell Atlantic's patent. We are evaluating the
Bell Atlantic patent, and have not yet determined whether to seek a license.
Although there are multiple indications from Bell Atlantic that licenses to the
patent are or will be available, there can be no assurances we would find the
license terms acceptable. We expect that we will increasingly be subject to
infringement claims as the number of products and competitors in the high-speed
data access market grows and the functionality of products overlaps.
Our products and those of our customers are subject to government regulations,
and changes in current or future laws or regulations that negatively impact our
products and technologies could harm our business.
The jurisdiction of the Federal Communications Commission, or the FCC,
extends to the entire communications industry including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the broadband access services industry, our customers or our products
may harm our business. For example, FCC regulatory policies that affect the
availability of data and Internet services may impede our customers' penetration
into certain markets or affect the prices that they are able to charge. In
addition, international regulatory bodies are beginning to adopt standards for
the communications industry. Delays caused by our compliance with regulatory
requirements may result in order cancellations or postponements of product
purchases by our customers, which would harm our business and adversely affect
our results of operations and financial condition.
Additional Risks That May Affect Our Stock Price
Our failure or the failure of our key suppliers and customers to be year 2000
compliant would harm our business.
Many currently installed computer systems are not capable of
distinguishing 21st century dates from 20th century dates. As a result,
beginning on January 1, 2000, computer systems and software used by many
companies and organizations in a wide variety of industries, including
technology, transportation, utilities, finance and telecommunications, will
produce erroneous results or fail unless they have been modified or upgraded to
process date information correctly.
Although we cannot predict with any certainty what adverse effects we
may suffer from Year 2000 compliance issues, possible effects include:
. disruptions in basic services such as water, electricity and telephone, any
of which could require us to close or substantially reduce the level of
activity at our facilities until service returns to normal;
. disruptions in the supply of components and manufactured goods from our
component suppliers and contract manufacturers if they experience
disruptions in the delivery of basic services;
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<PAGE>
. disruptions in our ability to ship and receive goods if third-party
transportation and delivery providers experience disruptions in their
operations; and
. delays in receiving accurate management information from our internal
accounting and management systems.
We currently have no contingency plan to address potential
interruptions in the operation of our internal systems or those of third parties
upon whom we depend as a result of Year 2000 noncompliance.
We may face claims based on Year 2000 issues arising from the
integration of multiple products within an overall network. We may also
experience reduced sales of our products as potential customers reduce their
budgets for network equipment and network services due to increased expenditures
on their own Year 2000 compliance efforts. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Issues."
We may need additional capital in the future, and if we are unable to secure
adequate funds on terms acceptable to us, we may be unable to execute our
business plan.
If the proceeds generated from our initial public offering, which was
consummated in July 1999, together with our existing cash balances and cash flow
expected from future operations, are not sufficient to meet our liquidity needs,
we will need to raise additional funds. If adequate funds are not available on
acceptable terms or at all, we may not be able to take advantage of market
opportunities, to develop new products or to otherwise respond to competitive
pressures. This inability would harm our business.
In addition, we expect from time to time to review potential
acquisitions that would complement our existing product offerings or enhance our
technical capabilities. While we have no current agreements or negotiations
underway with respect to any potential acquisition, any future transaction of
this nature could require potentially significant amounts of capital. Funds may
not be available at the time or times needed, or available on terms acceptable
to us. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Part II Other Information
Item 1. Legal Proceedings
The Company is not party to any material legal proceedings.
Item 2. Changes In Securities and Use of Proceeds
The Company registered the initial public offering of its common
stock, par value $0.001 per share, on a Registration Statement on Form S-1 (File
No. 333-77795) which was declared effective on July 14, 1999. The offering
closed on July 20, 1999. The managing underwriters of the offering were Credit
Suisse First Boston, BancBoston Robertson Stephens and Volpe Brown Whelan &
Company. A total of 4,600,000 shares of common stock were sold by the Company in
the offering at a price of $15.00 per share, resulting in gross proceeds of
$69.0 million. The underwriting discount was $4.8 million and the other expenses
related
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<PAGE>
to the offering totaled approximately $1.2 million. From the time of receipt
through September 30, 1999, the Company has applied its net proceeds from the
offering toward working capital and funding operating losses. Net cash used from
the offering for operating expenses totaled $9.5 million, and cash used for
investing activities, principally the purchase of highly liquid short-term
investments, totaled $9.8 million.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter ended
September 30, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed herewith.
27.1 Financial data schedule
(b) Reports on Form 8-K - None
-30-
<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of
1934 as amended, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: October 20, 1999
/s/ Jill S. Manning
-----------------------------------------------------
Jill S. Manning
Vice President, Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
-31-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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