<PAGE>
As filed with the Securities and Exchange Commission on June 9, 1999
Registration No. 333-77795
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1 to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
EFFICIENT NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
Delaware 3661 75-2486865
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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4201 Spring Valley Road, Suite 1200
Dallas, Texas 75244-3666
(972) 991-3884
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
MARK A. FLOYD
Chief Executive Officer
4201 Spring Valley Road, Suite 1200
Dallas, Texas 75244-3666
(972) 991-3884
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
KENNETH M. SIEGEL S. MICHAEL DUNN, P.C.
ADAM R. DOLINKO MICHELLE KWAN MONTOYA
PETER F. STEWART Brobeck, Phleger & Harrison LLP
HELEN E. QUINN 301 Congress Avenue, Suite 1200
Wilson Sonsini Goodrich & Rosati Austin, Texas 78701
Professional Corporation (512) 477-5495
650 Page Mill Road
Palo Alto, California 94304
(650) 493-9300
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall hereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 9, 1999
4,000,000 Shares
[EFFICIENT NETWORKS LOGO]
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $10.00 and $12.00
per share. We have applied to list the shares on The Nasdaq Stock Market's
National Market under the symbol "EFNT."
The underwriters have an option to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 6.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Efficient
-------------- -------------- --------------
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total.............................. $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
BancBoston Robertson Stephens
Volpe Brown Whelan & Company
The date of this prospectus is , 1999.
<PAGE>
[INSIDE FRONT COVER OF PROSPECTUS]
[Graphic of network: Internet and corporate local area networks, over a DSL
provider's network to four types of users; small business Internet users;
consumer Internet users; branch office remote access users; and telecommuters]
<PAGE>
------------
TABLE OF CONTENTS
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Page
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 6
Special Note Regarding Forward-
Looking Statements................. 17
Use Of Proceeds..................... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Consolidated Financial
Data............................... 21
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations...................... 22
</TABLE>
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<CAPTION>
Page
----
<S> <C>
Business.......................... 32
Management........................ 50
Certain Transactions.............. 57
Principal Stockholders............ 59
Description Of Capital Stock...... 62
Shares Eligible For Future Sale... 65
Underwriting...................... 67
Notice To Canadian Residents...... 69
Legal Matters..................... 70
Experts........................... 70
Additional Efficient Information.. 70
Index To Consolidated Financial
Statements....................... F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully.
Efficient Networks, Inc.
------------
Efficient Networks is a leading worldwide independent developer and supplier
of high-speed digital subscriber line customer premises equipment for the high-
speed, high-volume digital communication, or broadband, access market. Digital
subscriber line, or DSL, solutions enable telecommunications and other
communication network service providers to provide high-speed, cost-effective
broadband access services over the existing copper wire telephone
infrastructure. We believe there is significant demand for broadband access,
especially among business users and consumers who have found current solutions
to be inadequate or too expensive. DSL networks generally consist of two core
components, one installed at the network operator's facility--typically
referred to as the "central office"--and one installed at the customer's home
or business. The DSL equipment installed at the customer premises is generally
referred to as "customer premises equipment" or "CPE." We develop and produce
DSL customer premises equipment, and in particular 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, access to
computer networks from remote locations, telecommuting and extensions of
corporate networks to branch offices.
Business-critical Internet-based applications, such as electronic commerce,
supply chain management, Web browsing and remote access for telecommuters,
generate enormous data traffic over the existing communications infrastructure.
The growth in Internet use, increased competition resulting from domestic and
international deregulation, and pressure from alternative means of providing
high-speed, high-volume access services have led both traditional and new
operators of the existing copper telephone wire-based networks to deploy DSL.
DSL technology enables these network service providers to exploit the existing
copper telephone wire infrastructure to cost-effectively provide broadband
access to most businesses and homes currently connected by telephone lines.
In order to offer cost-effective DSL services to end users, network service
providers are actively seeking DSL customer premises equipment solutions that
offer interoperability from the end user's personal computer through the
service provider's networks and which provide for simple and low-cost
installation and maintenance. The products that make up our SpeedStream family
of customer premises equipment satisfy the requirements of network service
providers, as they:
. Enable DSL Deployments. We enable network service providers to rapidly deploy
DSL services, thereby allowing them to quickly capture market share in
today's intensely competitive broadband services market.
. Ensure End-To-End Interoperability. Our technology expertise and
relationships with network equipment vendors, such as ADC Telecommunications,
Advanced Fibre Communications, Alcatel, Diamond Lane Communications, DSC
Communications, Ericsson, Lucent Technologies, Newbridge Networks, Nokia,
Nortel Networks and Siemens, and network service providers enable us to
ensure interoperability between the end user's personal computer and the
service provider's network.
. Provide for Efficient and Cost-Effective Installation. Our ProfileBuilder
software tool allows a network service provider to pre-configure the customer
premises equipment to the parameters of a particular network, reducing the
costs associated with having installers perform these activities during each
end-user installation.
. Provide for Cost-Effective Maintenance. Our Advanced Status software allows a
network service provider to easily monitor, diagnose and often remotely fix
the customer's problems quickly, which can substantially reduce the network
service provider's customer support costs.
3
<PAGE>
Our objective is to be the leading worldwide provider of high-performance
DSL broadband access customer premises equipment for businesses, remote
offices, telecommuters and consumers. To achieve this goal, we intend to
capitalize on our early market acceptance by network service providers and to
leverage our relationships with network equipment vendors. In addition, we will
continue developing enhancements to our current DSL products and expect to
develop products that are capable of processing both voice and data
communications through the same DSL equipment and network. Finally, we plan to
extend our distribution channels to meet the growing demand for broadband
access solutions and increase our brand awareness.
We sell our products to network equipment vendors and DSL network service
providers. As of March 31, 1999, our products have been deployed by Ameritech,
BellSouth, Covad Communications, Hong Kong Telecom, Singapore Telecom and six
other network service providers, and purchased by eight network equipment
vendors. An additional 39 network service providers have begun to test our
customer premises equipment solutions.
We were incorporated in Delaware in 1993. Our principal executive offices
are located at 4201 Spring Valley Road, Suite 1200, Dallas, Texas 75244-3666
and our telephone number is (972) 991-3884. Our Website is located at
http://www.efficient.com. Information contained on our Website does not
constitute part of this prospectus. We have registered the trademarks
"Efficient Networks" and "SpeedStream." "Advanced Status" and "ProfileBuilder"
are also our trademarks. All other trademarks or service marks appearing in
this prospectus are trademarks or service marks of the respective companies
that use them.
The Offering
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<S> <C>
Common stock offered.............. 4,000,000 shares
Common stock to be outstanding
after this offering.............. 36,067,124 shares
Use of proceeds................... For general corporate purposes, principally
working capital, additional sales and
marketing efforts, and potential
acquisitions.
Proposed Nasdaq National Market
symbol........................... EFNT
</TABLE>
- --------
The above table is based on shares outstanding as of May 31, 1999. However,
this table also includes 3,082,191 shares that will be issued prior to the
closing of this offering upon exercise of presently outstanding warrants for
redeemable convertible preferred stock. These warrants will terminate if not
exercised prior to the closing of this offering. See "Capitalization" and
"Certain Transactions." This table excludes:
. 6,240,850 shares subject to options outstanding as of May 31, 1999 under
our stock option plans;
. 3,700,000 shares reserved for future issuance under our stock option and
employee stock purchase plans; and
. 167,746 shares issuable upon exercise of outstanding warrants.
------------
You should be aware that our fiscal year ends on June 30; thus, a reference
to "fiscal 1998," for example, is to the fiscal year ended June 30, 1998. In
addition, except as otherwise indicated, information in this prospectus is
based on the following assumptions:
. that all note holders will convert an aggregate of $9.0 million owed to
them by Efficient into an aggregate of 3,082,191 shares of redeemable
convertible preferred stock through the exercise of outstanding warrants;
. that each outstanding share of redeemable convertible preferred stock
will convert into one share of common stock immediately prior to the
closing of this offering;
. that the underwriters' over-allotment option will not be exercised; and
. that we will file our amended and restated certificate of incorporation.
4
<PAGE>
Summary Consolidated Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Fiscal Year Ended June 30, March 31,
---------------------------- ------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues................ $ 3,687 $ 4,122 $ 3,370 $ 2,703 $ 7,139
Cost of revenues............ 2,209 2,386 2,160 1,553 6,699
-------- -------- -------- -------- --------
Gross profit................ 1,478 1,736 1,210 1,150 440
Loss from operations........ (5,823) (6,174) (8,070) (5,158) (11,016)
Net loss.................... $ (5,646) $ (6,049) $ (7,940) $ (5,077) $(12,996)
======== ======== ======== ======== ========
Net loss per share:
Basic and diluted......... $ (1.99) $ (2.00) $ (2.44) $ (1.59) $ (3.48)
======== ======== ======== ======== ========
Weighted average shares... 2,838 3,027 3,254 3,193 3,807
======== ======== ======== ======== ========
Pro forma net loss per
share:
Basic and diluted......... $ (0.35) $ (0.64)
======== ========
Weighted average shares... 22,886 27,077
======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
---------- ----------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................... $ 4,596 $6,596 $46,516
Working capital............................. 9,473 9,473 49,393
Total assets................................ 17,234 19,234 59,154
Long-term debt, net of discount............. 4,253 -- --
Redeemable convertible preferred stock...... 40,408 -- --
Total stockholders' equity (deficit)........ (33,036) 13,625 53,545
</TABLE>
------------
See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share data.
The pro forma numbers reflect:
. the conversion of $9.0 million in long-term debt into an aggregate of
3,082,191 shares of redeemable convertible preferred stock through the
exercise of certain warrants; and
. the conversion into common stock of all redeemable convertible preferred
stock immediately prior to the closing of this offering.
The pro forma as adjusted numbers give effect to our receipt of the
estimated net proceeds from the sale of the 4,000,000 shares of common stock
offered hereby at an assumed initial public offering price of $11.00 per share,
after deducting underwriting discounts and commissions and estimated offering
expenses payable by us. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in Efficient.
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:
. 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.
6
<PAGE>
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. See "Business--
Industry Background" and "--Competition."
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;
7
<PAGE>
. 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 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. See "Business--Competition."
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 in 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. Solectron Corporation
is currently the sole manufacturer of many of our products. 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;
8
<PAGE>
. 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.
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.
9
<PAGE>
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.
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 $6.4 million
in fiscal 1999 and $14.1 million for the first nine months of fiscal 1999. As
of March 31, 1999, we had an accumulated deficit of approximately $38.6
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 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 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.
10
<PAGE>
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;
. 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;
11
<PAGE>
. 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 nine months ended March 31, 1999, Covad Communications
Group, Inc. represented 19.6% of our net revenues, and Lucent Technologies Inc.
represented 10.2% of our net revenues. For the fiscal year ended June 30, 1998,
Victron, Inc., a manufacturer for Xylan Corporation, represented 19.6% of our
net revenues, and Telecom Equipment, a distributor for Singapore Telecom,
represented 12.6% of our net revenues. Our top ten customers for the nine
months ended March 31, 1999 accounted for 80.5% 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.
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 United States
represented 52% of our revenues in fiscal 1998 and 35% of our revenues for the
first nine months of fiscal 1999. 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;
. changes in regulatory requirements;
. costs and risks of deploying systems in foreign countries;
. licenses, tariffs and other trade barriers;
. political and economic instability;
. potentially adverse tax consequences;
. difficulties obtaining governmental approvals for products;
. compliance with a wide variety of complex foreign laws and treaties; and
. delays or difficulties collecting accounts receivable.
12
<PAGE>
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 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. See "Business--Strategic Relationships."
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
13
<PAGE>
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 1998, we added 36 employees to
our total work force, representing an increase of approximately 61% from
December 31, 1997. We expect to add 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 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 and
14
<PAGE>
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. 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. See
"Business--Intellectual Property."
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;
. 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."
15
<PAGE>
We have broad discretion to use the offering proceeds, and we cannot assure you
that how we invest these proceeds will yield a favorable return.
Substantially all of the net proceeds of this offering are not allocated for
specific uses other than working capital and general corporate purposes. Thus,
our management will have broad discretion over how these proceeds are used and
could spend most of these proceeds in ways with which the stockholders may not
agree. We cannot assure you that the proceeds will be invested to yield a
favorable return. See "Use of Proceeds."
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 of this offering, 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."
Our securities have no prior market, and our stock price may decline after the
offering.
Before this offering, there has not been a public market for our common
stock and an active public market for our common stock may not develop or be
sustained after this offering. If an active public market for our common stock
does not develop, the liquidity of your investment may be limited, and our
stock price may fluctuate or decline below our initial public offering price.
The initial public offering price will be determined by negotiations between us
and the representatives of the underwriters. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
There are substantial shares of common stock eligible for future sale, and such
sales may depress our stock price.
After this offering, we will have outstanding 36,067,124 shares of common
stock. The 4,000,000 shares sold in this offering will be freely tradeable. The
remaining shares of common stock outstanding after this offering will be
available for sale, assuming the effectiveness of certain lock-up arrangements
under which the stockholders have agreed not to sell or otherwise dispose of
their shares of common stock, in the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date of Availability for Sale
--------- -----------------------------
<S> <C>
76,250 , 1999 (date of this prospectus)
, 1999 (90 days after the date of this
140,938 prospectus)
26,559,412 , 1999 (after 180 days following the date of
this prospectus); and the remaining shares at various
times thereafter upon the expiration of one-year holding
periods
</TABLE>
If our stockholders sell substantial amounts of common stock in the public
market, including shares issuable upon the exercise of outstanding options, the
market price of our common stock could fall. See "Shares Eligible for Future
Sale" and "Underwriting."
16
<PAGE>
The net tangible book value of shares purchased in this offering will be
substantially lower than the initial public offering price.
Investors purchasing stock in this offering will incur substantial and
immediate dilution in net tangible book value of $9.50 per share assuming an
initial public offering price of $11.00. To the extent that currently
outstanding options and warrants are exercised, there will be further dilution
in net tangible book value. See "Dilution" for a definition of the term "net
tangible book value" and further explanation of this risk.
Our principal stockholders and management have the ability to control
stockholder votes regarding changes in control and other actions, and such
control could adversely affect our stock price or lessen any premium over
market price that an acquiror might otherwise pay.
Our executive officers and directors and their affiliates will own
approximately 51.9% of the outstanding common stock after this offering, or
51.1% if the underwriters' option is fully exercised. These stockholders may
therefore determine the composition of the board of directors, approve all
matters that require stockholder approval and influence management affairs.
This concentration of ownership may delay or prevent a beneficial merger or
discourage a potential acquiror. This level of control could adversely affect
our stock's market price or lessen any premium over market price that an
acquiror might otherwise pay. See "Management" and "Principal Stockholders."
Certain provisions of our charter documents may make acquiring control of our
company more difficult for a third party, which could adversely affect our
stock's market price or lessen any premium over market price that an acquiror
might otherwise pay.
Our charter documents contain provisions providing for a classified board of
directors, eliminating cumulative voting in the election of directors and
restricting our stockholders from acting without a meeting. These provisions
may make certain corporate actions more difficult and might delay or prevent a
change in control and therefore limit the price that new investors will pay for
our stock. Further, the board of directors may issue up to 10,000,000 new
shares of preferred stock with certain rights, preferences, privileges and
restrictions, including voting rights, without any vote by our stockholders.
Our existing stockholders may be adversely affected by the rights of this
preferred stock. New preferred stock might also be used to make acquiring
control more difficult. We have no current plans to issue shares of preferred
stock. We will also indemnify officers and directors against losses incurred in
legal proceedings to the broadest extent permitted by Delaware law.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance,
and involve known and unknown risks, uncertainties, and other factors that may
cause our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. These
risks and other factors include, among other things, those listed under "Risk
Factors" and elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue," or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
these statements to actual results.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 4,000,000 shares of common stock
offered by us are estimated to be $39,920,000, or approximately $46,058,000 if
the underwriters' over-allotment option is exercised in full, at the assumed
initial public offering price of $11.00 per share, after deducting underwriting
discounts and commissions and the estimated offering expenses.
We intend to use the net proceeds of this offering primarily for general
corporate purposes including working capital and sales and marketing efforts.
We may also use a portion of the net proceeds to acquire complementary
products, technologies or businesses; however, we currently have no commitments
or agreements and are not involved in any negotiations to do so. Pending use of
the net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
18
<PAGE>
CAPITALIZATION
The table below sets forth the following information:
. the actual capitalization of Efficient as of March 31, 1999;
. the pro forma capitalization of Efficient after giving effect to (1) the
conversion of $9.0 million of long-term debt into 3,082,191 shares of
redeemable convertible preferred stock through the exercise of certain
outstanding warrants and (2) the conversion of all outstanding shares of
redeemable convertible preferred stock into presently outstanding shares
of common stock; and
. the pro forma capitalization as adjusted to give effect to the sale of
4,000,000 shares of common stock at the assumed initial public offering
price of $11.00 per share in this offering, less underwriting discounts
and commissions and the estimated offering expenses payable by Efficient.
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------
Pro
Forma As
Actual Pro Forma Adjusted
------------ ----------- --------
(in thousands, except share and
per share data)
<S> <C> <C> <C>
Long-term debt, net of discount............ $ 4,253 $ -- $ --
Redeemable convertible preferred stock;
issuable in series, $0.001 par value,
31,136,913 shares authorized, 24,720,213
shares issued and outstanding, actual;
none issued and outstanding, pro forma and
pro forma as adjusted..................... 40,408 -- --
Stockholders' equity (deficit):
Common stock, $0.001 par value; 100,000,000
shares authorized; 3,918,765 shares issued
and outstanding, actual; 31,721,169 shares
issued and outstanding, pro forma and
shares outstanding, pro forma as
adjusted.................................. 4 32 36
Additional paid-in capital................. 18,041 68,865 108,781
Deferred stock option compensation......... (12,436) (12,436) (12,436)
Accumulated deficit........................ (38,645) (42,836) (42,836)
-------- -------- --------
Total stockholders' equity (deficit)....... (33,036) 13,625 53,545
-------- -------- --------
Total capitalization....................... $ 11,625 $ 13,625 $ 53,545
======== ======== ========
</TABLE>
This table excludes the following shares:
. 6,470,575 shares subject to options outstanding as of March 31, 1999
under our stock option plans;
. 3,700,000 shares reserved for future issuance under our stock option and
employee stock purchase plans; and
. 167,746 shares issuable upon exercise of certain outstanding warrants.
See "Management--Benefit Plans," "Description of Capital Stock" and Notes 8,
9 and 10 of Notes to Consolidated Financial Statements.
19
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock on March 31, 1999
was $13.6 million, or approximately $0.43 per share. Pro forma net tangible
book value per share represents the amount of our total tangible assets less
total liabilities, divided by the number of shares of common stock outstanding
after giving pro forma effect to (1) the conversion of $9.0 million of long-
term debt into an aggregate of 3,082,191 shares of redeemable convertible
preferred stock through the exercise of certain warrants and (2) the conversion
of all outstanding shares of redeemable convertible preferred stock into
24,720,213 shares of common stock, each as if they had occurred at March 31,
1999. Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately afterwards. After giving effect to our
sale of 4,000,000 shares of common stock offered by this prospectus at the
assumed initial public offering price of $11.00 per share and after deducting
underwriting discounts and commissions and the estimated offering expenses
payable by us, our pro forma net tangible book value would have been $53.5
million, or approximately $1.50 per share. This represents an immediate
increase in pro forma net tangible book value of $1.07 per share to existing
stockholders and an immediate dilution in net tangible book value of $9.50 per
share to new investors.
<TABLE>
<S> <C> <C>
Assumed public offering price per share.......................... $11.00
Pro forma net tangible book value per share as of March 31,
1999.......................................................... $0.43
Increase per share attributable to new investors............... 1.07
-----
Pro forma net tangible book value per share after the offering... 1.50
Dilution in pro forma net tangible book value per share to new
investors....................................................... $ 9.50
======
</TABLE>
This table excludes all options and warrants outstanding as of March 31,
1999, other than the warrants to purchase 3,082,191 shares of redeemable
convertible preferred stock that will be exercised immediately prior to the
completion of this offering. See Notes 6 and 7 of Notes to Consolidated
Financial Statements. The exercise of outstanding options and warrants having
an exercise price less than the offering price would increase the dilutive
effect to new investors.
The following table sets forth, as of March 31, 1999, the differences
between the number of shares of common stock purchased from us, the total
consideration and average price per share paid by existing stockholders and by
the new investors, before deducting the underwriting discounts and commissions
and estimated expenses payable by us, assuming an initial public offering price
of $11.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
--------------------- ---------------------- Average Price
Number Percentage Amount Percentage Per Share
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 31,721,169 88.8% $55,785,000 55.9% $1.76
New investors........... 4,000,000 11.2 44,000,000 44.1 11.00
---------- ----- ----------- -----
Total................. 35,721,169 100.0% $99,785,000 100.0%
========== ===== =========== =====
</TABLE>
The existing stockholder information includes warrants to purchase 3,082,191
shares of redeemable convertible preferred stock that will be exercised prior
to the completion of this offering. See "Capitalization" and "Certain
Transactions."
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new public investors will be increased to 4,600,000 or
approximately 12.7% of the total number of shares of our common stock
outstanding after this offering.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and are qualified by reference to the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this prospectus. The
statement of operations data set forth below for the years ended June 30, 1996,
1997 and 1998, and the nine months ended March 31, 1999 and the balance sheet
data at June 30, 1997, 1998 and March 31, 1999, are derived from, and are
qualified by reference to, the audited Consolidated Financial Statements of
Efficient included elsewhere in this prospectus. The statement of operations
data set forth below for the years ended June 30, 1994 and 1995 and the balance
sheet data at June 30, 1995 and 1996 are derived from audited Consolidated
Financial Statements of Efficient not included in this prospectus. The balance
sheet data at June 30, 1994 is derived from unaudited financial statements not
included in this prospectus. The statement of operations data for the nine
months ended March 31, 1998 and balance sheet data at the end of that period
are derived from unaudited interim consolidated financial statements of
Efficient. In the opinion of management, such unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements referred to above and contain all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
Efficient's financial results and position for the indicated periods and dates.
The historical results are not necessarily indicative of results to be expected
for any future period.
<TABLE>
<CAPTION>
Nine Months Ended
Fiscal Year Ended June 30, March 31,
------------------------------------------------ ------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $ 500 $ 2,314 $ 3,687 $ 4,122 $ 3,370 $ 2,703 $ 7,139
Cost of revenues........ -- 1,125 2,209 2,386 2,160 1,553 6,699
-------- -------- -------- -------- -------- -------- --------
Gross profit............ 500 1,189 1,478 1,736 1,210 1,150 440
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing... 238 1,505 2,366 2,409 3,436 2,232 3,856
Research and
development.......... 1,341 3,405 3,853 4,183 4,157 2,845 5,546
General and
administrative....... 692 822 1,082 1,245 1,641 1,197 1,234
Stock option
compensation......... -- -- -- 73 46 34 820
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses............ 2,271 5,732 7,301 7,910 9,280 6,308 11,456
-------- -------- -------- -------- -------- -------- --------
Loss from operations.... (1,771) (4,543) (5,823) (6,174) (8,070) (5,158) (11,016)
Interest and other
income (expense), net.. 67 248 177 125 130 81 (1,980)
-------- -------- -------- -------- -------- -------- --------
Net loss................ $ (1,704) $ (4,295) $ (5,646) $ (6,049) $ (7,940) $ (5,077) $(12,996)
======== ======== ======== ======== ======== ======== ========
Basic and diluted net
loss per share(1)...... $ (0.68) $ (1.56) $ (1.99) $ (2.00) $ (2.44) $ (1.59) $ (3.48)
======== ======== ======== ======== ======== ======== ========
Weighted average
shares(1).............. 2,521 2,750 2,838 3,027 3,254 3,193 3,807
======== ======== ======== ======== ======== ======== ========
Unaudited pro forma
basic and diluted net
loss per share(1)...... $ (0.35) $ (0.64)
======== ========
Weighted average shares
used to compute
unaudited pro forma
basic and diluted net
loss per share(1)...... 22,886 27,077
======== ========
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 1,617 $ 2,711 $ 1,363 $ 3,413 $ 7,607 $ 4,617 $ 4,596
Working capital......... 1,565 3,400 2,619 4,370 7,870 5,457 9,473
Total assets............ 2,710 6,357 5,150 6,454 10,667 7,919 17,234
Redeemable convertible
preferred stock........ 4,125 11,155 16,155 23,635 34,743 25,142 40,408
Total stockholders'
deficit................ (1,716) (6,008) (11,644) (17,610) (25,374) (22,671) (33,036)
</TABLE>
- --------
(1) Note 2 of Notes to Consolidated Financial Statements provides an
explanation of the determination of the weighted average shares used to
compute basic and diluted net loss per share and unaudited pro forma basic
and diluted net loss per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto, as well as the other information
included elsewhere in this prospectus.
Overview
We are a leading worldwide independent developer and supplier of high-speed
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. Our DSL products, which
accounted for less than three percent of net revenues in fiscal 1998,
represented 87.3% of our net revenues in the third quarter of fiscal 1999. We
expect sales of our ATM LAN products to continue to gradually decrease in
absolute amount 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. For the nine months ended March 31, 1999, Covad
Communications represented 19.6% of our net revenues, and Lucent Technologies
represented 10.2% of our net revenues. For the fiscal year ended June 30, 1998,
Victron, a manufacturer for Xylan, represented 19.6% of our net revenues, and
Telecom Equipment, a distributor for Singapore Telecom, represented 12.6% of
our net revenues. Our top ten customers for the nine months ended March 31,
1999 accounted for 80.5% 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.
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
52% of our net revenues in fiscal 1998 and 35% of our net revenues for the nine
months ended March 31, 1999. We currently maintain a European sales office in
Amsterdam and are opening 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. 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
22
<PAGE>
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 March 31, 1999, we had
an accumulated deficit of $38.6 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 and 1998 and for the nine months ended March 31,
1999, we accrued an aggregate of $13.4 million in deferred stock option
compensation. This amount represents 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, generally four years. We amortized deferred stock option
compensation in the amounts of $73,000, $46,000 and $820,000 in fiscal years
1997 and 1998 and the nine months ended March 31, 1999, respectively. We expect
to amortize the deferred stock option compensation at the rate of approximately
$830,000 per quarter until fully amortized.
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>
Nine Months
Fiscal Year Ended Ended March
June 30, 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................. 59.9 57.9 64.1 57.5 93.8
------ ------ ------ ------ ------
Gross profit..................... 40.1 42.1 35.9 42.5 6.2
------ ------ ------ ------ ------
Operating expenses:
Sales and marketing............ 64.2 58.4 102.0 82.6 54.0
Research and development....... 104.5 101.5 123.3 105.2 77.7
General and administrative..... 29.3 30.2 48.7 44.3 17.3
Stock option compensation...... -- 1.8 1.4 1.2 11.5
------ ------ ------ ------ ------
Total operating expenses..... 198.0 191.9 275.4 233.3 160.5
------ ------ ------ ------ ------
Loss from operations............. (157.9) (149.8) (239.5) (190.8) (154.3)
Interest and other income
(expense), net.................. 4.8 3.1 3.9 3.0 (27.7)
------ ------ ------ ------ ------
Net loss......................... (153.1)% (146.7)% (235.6)% (187.8)% (182.0)%
====== ====== ====== ====== ======
</TABLE>
23
<PAGE>
Results of Operations
Nine Months Ended March 31, 1998 and 1999
Net Revenues
Net revenues consist of product sales, net of allowances for returns. Net
revenues increased 164.1%, from $2.7 million for the nine months ended March
31, 1998 to $7.1 million for the nine months ended March 31, 1999. DSL product
revenues increased from $5,000 for the nine months ended March 31, 1998 to $5.6
million for the nine months ended March 31, 1999. The period-over-period
increases in DSL product revenues reflect the beginning market adoption of our
DSL products, which first became available in the quarter ended March 31, 1998.
The increase in DSL product revenues was partially offset by a decrease in
revenues from our ATM LAN products. ATM LAN product revenues decreased 42%,
from $2.7 million for the nine months ended March 31, 1998 to $1.6 million for
the nine months ended March 31, 1999. The period-over-period decreases in ATM
LAN product revenues reflect the limited focus that we are placing on our ATM
LAN products as we continue our shift toward DSL products. We expect ATM LAN
product revenues to continue to decrease over time.
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 331.4% from
$1.6 million for the nine months ended March 31, 1998 to $6.7 million for the
nine months ended March 31, 1999, reflecting the substantial increase in DSL
product sales. Gross margin represented 42.5% of net revenues for the nine
months ended March 31, 1998, compared to 6.2% for the nine months ended
March 31, 1999. Gross margin on our DSL products declined from 20.0% of the
related revenues for the nine months ended March 31, 1998 to a gross loss of
5.9% of the related revenues for the nine months ended March 31, 1999. Our
gross margin was lower in the current period as we focused on bringing our DSL
products to market quickly and as we began 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 initial low volume
manufacturing. We expect that we will continue to incur higher than normal
costs associated with the actions to bring our DSL markets to product quickly
through at least the end of calendar 1999. The higher costs incurred on our DSL
products were partially offset by improved gross margins realized on our ATM
LAN products. Gross margin on our ATM LAN products improved from 42.6% of
related revenues for the nine months ended March 31, 1998, compared to 49.0%
for the 1999 period. The period-to-period increase in gross margins on our ATM
LAN products was a result of manufacturing efficiencies achieved with these
more mature products. As sales of our ATM LAN products continue to decline as a
percentage of our total revenues, any benefit of manufacturing efficiencies,
cost reduction or other gross margin improvements in those products will have a
diminishing beneficial effect on our overall gross margins. We expect our gross
margins to continue to remain below our historical levels through at least the
first 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, and advertising, promotional materials and trade show
exhibit expenses. Sales and marketing expenses increased 72.8% from $2.2
million for the nine months ended March 31, 1998 to $3.9 million for the nine
months ended March 31, 1999. As a percentage of net revenues, sales and
marketing expenses decreased from 82.6% for the nine months ended March 31,
1998 to 54.0% for the nine months ended March 31, 1999. The substantial
increase in sales and marketing expenses in absolute amounts was attributable
to our aggressive efforts to launch our DSL products. The decrease in such
expenses as a percentage of net revenues was a result of the
24
<PAGE>
rapid 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
94.9% from $2.8 million for the nine months ended March 31, 1998 to $5.5
million for the nine months ended March 31, 1999. As a percentage of net
revenues, research and development expenses decreased from 105.2% for the nine
months ended March 31, 1998 to 77.7% for the nine months ended March 31, 1999.
The substantial increase in research and development spending from period to
period was primarily a result of increased personnel and related costs
associated with a larger research and development organization, as well as
design and prototype expenses incurred in connection with the roll-out of our
DSL products. Additionally, research and development spending in fiscal 1998
was partially offset by $1.1 million of nonrecurring engineering expenses
reimbursed by third parties. These amounts are treated as an offset to the
related research and development spending. We received no such reimbursements
in the fiscal 1999 period. The decrease in such expenses as a percentage of net
revenues 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.
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 remained consistent at $1.2 million for the nine months
ended March 31, 1998 and March 31, 1999. As a percentage of net revenues,
general and administrative expenses decreased from 44.3% for the nine months
ended March 31, 1998 to 17.3% for the nine months ended March 31, 1999. The
decrease in such expenses as a percentage of net revenues 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
During the nine months ended March 31, 1998, stock option compensation
totaled $34,000. For the nine months ended March 31, 1999, this expense totaled
$820,000. See Note 8 of Notes to Consolidated Financial Statements for a
discussion of our stock option compensation.
Interest and Other Income (Expense), Net
Interest and other income (expense), net consists primarily of interest
earned on cash and cash equivalents offset by miscellaneous non-operating
expenses. Interest and other income (expense), net went from income of $81,000
for the nine months ended March 31, 1998 to an expense of $2.0 million for the
nine months ended March 31, 1999. In the quarter ended March 31, 1999, we
borrowed $7.0 million from our existing investors. These notes bear interest at
10% per year, and are payable on the earlier of January 2002 or the completion
of an initial public offering. In connection with these notes, we issued the
investors warrants to purchase 2,397,260 shares of Series H preferred stock at
an exercise price of $2.92 per share. The principal amount of the outstanding
debt will be canceled through the exercise of these warrants. The proceeds were
allocated between the notes and the warrants based on their pro rata fair
values resulting in a discount. As the notes will be canceled in connection
with this offering, the discount is being amortized as interest expense over
six months. Accordingly, we expect the interest related to these notes to be an
expense of approximately $4.1 million for the quarter ending June 30, 1999.
Thereafter, we expect interest and other income (expense), net to vary
depending upon changes in the amount and mix of interest-bearing investments
outstanding during each period.
25
<PAGE>
Income Taxes
From inception through March 31, 1999, we incurred net losses for federal
and state tax purposes and have not recognized any tax provision or benefit. As
of March 31, 1999, we had approximately $36.0 million of federal net operating
loss carryforwards to offset future taxable income which will begin to expire
in varying amounts beginning in 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
from Efficient's redeemable convertible preferred stock financings, note
financings and this 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. See Note
11 of Notes to Consolidated Financial Statements.
Fiscal Years Ended June 30, 1996, 1997 and 1998
Net Revenues
Net revenues increased 11.8%, from $3.7 million in fiscal 1996 to $4.1
million in fiscal 1997. Net revenues decreased 18.2% to $3.4 million in fiscal
1998. Our DSL products, first introduced in late fiscal 1998, represented less
than 3% of net revenues in that year. Accordingly, for fiscal 1998 and earlier,
sales of DSL products were not a material portion of our business. ATM LAN
product revenues increased from fiscal 1996 to 1997 primarily as a result of
increased sales of higher-priced ATM LAN products. 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. As a result of this change in focus, ATM
LAN product revenues declined from fiscal 1997 to 1998. This decrease was only
slightly offset by sales of prototype DSL products that began in the second
half of fiscal 1998.
Cost of Revenues
Cost of revenues increased from $2.2 million in fiscal 1996 to $2.4 million
in fiscal 1997, and then decreased to $2.2 million in fiscal 1998, reflecting
the increase in net revenues from fiscal 1996 to 1997 and the subsequent
decrease in net revenues from fiscal 1997 to 1998. Gross margins were 40.1% in
fiscal 1996, 42.1% in fiscal 1997 and 35.9% in fiscal 1998. The improvement in
gross margins from fiscal 1996 to 1997 reflected better pricing that we were
able to obtain from our component suppliers and contract manufacturers, as well
as increased sales of higher margin ATM LAN products. Gross margins decreased
from fiscal 1997 to 1998 as we began to incur manufacturing start-up costs
associated with our DSL products.
Sales and Marketing Expenses
Sales and marketing expenses remained relatively consistent at $2.4 million
in fiscal 1996 and 1997. The expenses increased 42.6% to $3.4 million in fiscal
1998. The increases in sales and marketing expenses in absolute amount from
fiscal 1997 to 1998 resulted primarily from sales and marketing activities
associated with the launch of our DSL products. These launch 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 64.2% of net
revenues in fiscal 1996, 58.4% in fiscal 1997 and 102.0% in fiscal 1998. The
decrease in sales and marketing expenses as a percentage of net revenues from
fiscal 1996 to 1997 reflected the growth in net revenues from period to period.
The increases in sales and marketing expenses as a percentage of net revenues
from fiscal 1997 to 1998 were primarily a result of the up front spending
required to launch our DSL products, which only began to constitute a
significant portion of our revenues in fiscal 1999.
26
<PAGE>
Research and Development Expenses
Research and development expenses increased 8.6%, from $3.9 million in
fiscal 1996 to $4.2 million in fiscal 1997. These expenses remained consistent
in fiscal 1998 at $4.2 million. The increase in research and development
expenses in absolute amount from fiscal 1996 to 1997 reflected the beginning of
our DSL product development efforts. In fiscal 1998, we received $1.1 million
from third parties for nonrecurring engineering expenses related to certain DSL
product development activity, which was used to offset research and development
spending. Accordingly, while the net amount of research and development
spending in fiscal 1998 was consistent with the fiscal 1997 level, our gross
research and development spending increased 25.7% from fiscal 1997 to 1998.
Research and development expenses represented 104.5% of net revenues in fiscal
1996, 101.5% in fiscal 1997 and 123.3% in fiscal 1998. The slight decreases in
research and development expenses as a percentage of net revenues from fiscal
1996 to 1997 primarily reflected the higher rate of revenue growth in fiscal
1997. The substantial increases in research and development expenses as a
percentage of net revenues from fiscal 1997 to 1998 reflected our early
investment in developing our DSL products.
General and Administrative Expenses
General and administrative expenses increased 15.1%, from $1.1 million in
fiscal 1996 to $1.2 million in fiscal 1997, and 31.8% to $1.6 million in fiscal
1998. The increases in absolute amount of general and administrative spending
from period to period were primarily a result of increases in headcount
associated with building our infrastructure. General and administrative
expenses represented 29.3% of net revenues in fiscal 1996, 30.2% in fiscal 1997
and 48.7% in fiscal 1998. The substantial increase in general and
administrative expenses as a percentage of net revenues in fiscal 1998
primarily reflected lower revenues in that year.
Stock Option Compensation
For the year ended June 30, 1997, we recorded aggregate deferred stock
option compensation totaling $256,000 in connection with certain stock option
grants. Amortization of deferred stock option compensation was $73,000 for that
year and $46,000 for fiscal 1998. Efficient did not record deferred stock
option compensation for periods prior to fiscal 1997. See Note 8 of Notes to
Consolidated Financial Statements for a discussion of our deferred stock option
compensation.
Interest and Other Income (Expense), Net
Interest and other income (expense), net decreased from $177,000 in fiscal
1996 to $125,000 in fiscal 1997, and increased to $130,000 in fiscal 1998.
Interest and other income (expense), net fluctuated during these periods
primarily due to changes in the amount and mix of interest-bearing investments
outstanding during each period.
27
<PAGE>
Quarterly Results of Operations
The following table sets forth, for the periods presented, certain data from
Efficient's consolidated statement of operations and such data as a percentage
of net revenues. The consolidated statement of operations data have been
derived from our unaudited consolidated financial statements. In management's
opinion, these statements have been prepared on substantially the same basis as
the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods presented. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus. The
operating results in any quarter are not necessarily indicative of the results
that may be expected for any future period. We have incurred net losses in each
quarter since inception, and we expect to continue to incur losses for the
foreseeable future.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31, March 31,
1997 1997 1998 1998 1998 1998 1999
------------- ------------ --------- -------- ------------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 676 $ 833 $ 1,194 $ 667 $ 1,174 $ 1,850 $ 4,115
Cost of revenues........ 396 413 744 607 863 1,647 4,189
------- ------- ------- ------- ------- ------- -------
Gross profit............ 280 420 450 60 311 203 (74)
Operating expenses:
Sales and marketing.... 643 694 895 1,204 1,168 1,303 1,385
Research and
development........... 1,044 737 1,064 1,312 1,826 1,790 1,930
General and
administrative........ 305 346 546 444 339 411 484
Stock option
compensation.......... 11 11 12 12 24 67 729
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 2,003 1,788 2,517 2,972 3,357 3,571 4,528
------- ------- ------- ------- ------- ------- -------
Loss from operations.... (1,723) (1,368) (2,067) (2,912) (3,046) (3,368) (4,602)
Interest and other
income (expense), net.. 34 12 35 49 80 30 (2,090)
------- ------- ------- ------- ------- ------- -------
Net loss................ $(1,689) $(1,356) $(2,032) $(2,863) $(2,966) $(3,338) $(6,692)
======= ======= ======= ======= ======= ======= =======
As a Percentage of Net
Revenues:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 58.6 49.6 62.3 91.0 73.5 89.0 101.8
------- ------- ------- ------- ------- ------- -------
Gross profit............ 41.4 50.4 37.7 9.0 26.5 11.0 (1.8)
Operating expenses:
Sales and marketing.... 95.1 83.3 75.0 180.5 99.5 70.4 33.6
Research and
development........... 154.5 88.5 89.1 196.7 155.5 96.8 46.9
General and
administrative........ 45.1 41.5 45.7 66.6 28.9 22.2 11.8
Stock option
compensation.......... 1.6 1.3 1.0 1.8 2.0 3.6 17.7
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 296.3 214.6 210.8 445.6 285.9 193.0 110.0
------- ------- ------- ------- ------- ------- -------
Loss from operations.... (254.9) (164.2) (173.1) (436.6) (259.4) (182.0) (111.8)
Interest and other
income (expense), net.. 5.0 1.4 2.9 7.3 6.8 1.6 (50.8)
------- ------- ------- ------- ------- ------- -------
Net loss................ (249.9)% (162.8)% (170.2)% (429.2)% (252.6)% (180.4)% (162.6)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
Our net revenues and results of operations have fluctuated significantly
from quarter to quarter in the past, and we expect these fluctuations to
continue in the future. The following discussion highlights significant events
that have impacted our net revenues and financial results for the seven
quarters in the period ended March 31, 1999.
28
<PAGE>
Net Revenues
Net revenues increased each quarter beginning in the quarter ended June 30,
1998 due to increased sales of our new DSL products, partially offset in two
quarters by decreased revenues from our ATM LAN products. Sales of our DSL
products have increased significantly quarter to quarter since we introduced
them in the third quarter of fiscal 1998. Net revenues increased in the first
three quarters of fiscal 1998 as demand for our ATM LAN products was
increasing. With the decision to focus on DSL products, we greatly reduced our
sales, marketing and development efforts for our ATM LAN products. As a result,
sales of these products began to decline in the fourth quarter of fiscal 1998,
and have fluctuated during the first three quarters of fiscal 1999. We expect
sales of our ATM LAN products to continue to gradually decrease in absolute
amount over the next one to two years, although sales of such products may
fluctuate from quarter to quarter.
Cost of Revenues
Cost of revenues has increased in absolute dollars in most quarterly
periods. Gross margins have fluctuated from a high of 50.4% in the second
quarter of fiscal 1998 to a gross loss of 1.8% for the quarter ended March 31,
1999. Gross margins have been adversely affected by volume price discounts for
customers in order to get our DSL products quickly into the marketplace as well
as manufacturing start-up costs and inefficiencies related to the relatively
low manufacturing levels for some of our DSL products.
Operating Expenses
Operating expenses generally increased in absolute amount from quarter to
quarter during fiscal 1998 and 1999. As a percentage of net revenues, these
expenses fluctuated, in some periods significantly, as a result of the
fluctuations in revenues.
Interest and Other Income (Expense), Net
Interest and other income (expense), net has varied somewhat from quarter to
quarter, based primarily upon changes in the amount and mix of interest-bearing
investments outstanding during each period. In the quarter ended March 31,
1999, interest and other income (expense), net was an expense of $2.1 million.
As indicated above, this was a result of the note and warrant transaction
consummated in that quarter. After the interest expense associated with that
transaction is fully amortized, we expect interest and other income (expense),
net to increase from historical levels as we invest the proceeds of this
offering pending use in our business.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the sale
of preferred equity securities and, in the quarter ended March 31, 1999,
through borrowings from our investors. We have raised an aggregate of $40.2
million (net of transaction expenses) from the sale of equity securities and an
additional $7.0 million through the recent loan transactions. In addition, we
raised an additional $2.0 million through a loan transaction completed in April
1999.
At March 31, 1999, we had cash and cash equivalents of $4.6 million. At
March 31, 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 nine months ended March 31, 1999
was $14.1 million. Cash used in operating activities was $6.4 million in fiscal
1998, $4.6 million in fiscal 1997 and $5.4 million in fiscal 1996. Cash used in
operating activities has primarily represented funding of our net losses,
partially offset by accounts payable and accrued expenses.
Cash used in investing activities for the nine months ended March 31, 1999
was $1.3 million. Cash used for investing activities was $572,000 in fiscal
1998, $525,000 in fiscal 1997 and $800,000 in fiscal 1996. In each period,
these amounts related primarily to the purchase of computers and other
equipment used in our development activities and other equipment and furniture
used in our operations.
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<PAGE>
Cash provided by financing activities for the nine months ended March 31,
1999 was $12.4 million, consisting of funds raised from issuances of redeemable
convertible preferred stock and borrowings from our investors. See "Certain
Transactions" and Notes 6 and 7 of Notes to Consolidated Financial Statements
for a description of the loan and equity transactions. Cash provided by
financing activities was $11.2 million in fiscal 1998, $7.3 million in fiscal
1997 and $4.8 million in fiscal 1996. In each year, financing activities
consisted primarily of the private placement of redeemable convertible
preferred stock.
Our future capital requirements will depend upon a number of factors,
including the timing and level of research and development activities and sales
and marketing campaigns. We believe that our cash and cash equivalent balances
and the proceeds from this offering 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
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 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. Any application or system scheduled for replacement
by September 1999 has not been tested. We anticipate completion of final test
and repair procedures on our internal systems and expect to be substantially
year 2000 compliant by the end of September 1999. 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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131") which establishes
standards for reporting information about operating segments in interim and
annual financial reporting. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 did not have a material effect on our consolidated financial
statements.
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<PAGE>
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." Statement of Position 98-1
is effective for consolidated financial statements for years beginning after
December 15, 1998. Statement of Position 98-1 provides guidance over
accounting for computer software developed or obtained for internal use
including the requirement to capitalize specified costs and amortization of
such costs. We have adopted the provisions of Statement of Position 98-1 for
our year ending June 30, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and
Hedging Activities," ("SFAS No. 133") which establishes accounting and
reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. The
adoption of Statement of Financial Accounting Standards No. 133 is not
expected to have a material effect on our results of operations, financial
position or cash flows as we do not currently hold derivative instruments or
engage in hedging activities.
Disclosures 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 March 31, 1999, we had short-term investments of $4.6 million.
Substantially all of these short-term investments consisted of highly liquid
investments with remaining maturities at the date of purchase of less 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 percent from the March 31, 1999 rates would
cause the fair value of these short-term investments to decline 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.
We do not own any equity investments. Therefore, we do not currently 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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<PAGE>
BUSINESS
Efficient Networks is a leading worldwide independent developer and supplier
of high-speed digital subscriber line customer premises equipment, or CPE, for
the broadband access market. Our DSL solutions enable telecommunications and
other communication network service providers to provide high-speed, cost-
effective broadband access services over the existing copper wire telephone
infrastructure. We believe there is significant demand for high-speed broadband
access, especially among business users and consumers who have found current
solutions to be inadequate or too expensive. 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.
Industry Background
The Growing Need for High-Speed Broadband Communications
The amount of data being carried over the Internet and private
communications networks has grown dramatically and is expected to continue to
grow as the number of users accessing these networks increases. The increase in
the quantity of data being carried over the Internet and private networks also
is being driven by the broadening range of activities for which these networks
are being used. In order to enhance their reach to customers and suppliers,
businesses are increasingly engaging in mission-critical Internet-based
applications, such as electronic commerce, supply chain management, Web
hosting, and global marketing and customer support. Businesses also
increasingly use the Internet to create secure data networks known as virtual
private networks among corporate sites, remote offices and telecommuters.
International Data Corporation estimates that there were approximately ten
million telecommuters in 1998, of which 72 percent used online services at
least once a day. By utilizing the Internet, businesses can streamline internal
operations by facilitating employee communications, e-mail, file sharing, and
research and analysis. Consumers are also increasingly accessing the Internet
to communicate, collect and publish bandwidth intensive information, conduct
retail purchases, and access online entertainment. These growing network-
dependent activities require the transmission of large amounts of data, which
in turn, requires high-speed broadband data access services for end users to
obtain the data reliably and within practical time constraints.
Traditional Access Solutions are Inadequate
To meet the growing demand for high-speed, high-bandwidth data transmission,
network service providers have installed high-bandwidth fiber optic
transmission equipment, high-speed switches and core routers in the Internet
backbone and in interoffice networks. While this network backbone is capable of
delivering data at very high speeds, an access bottleneck exists between the
ends of these fiber optic networks at telephone companies' central offices and
the end users' premises. The copper line connections between the central office
and the end user are commonly known as the "last mile." Last mile connections
are typically made via dial-up analog or integrated services digital network,
commonly known as ISDN, modems over the copper infrastructure that was
originally built to transmit analog voice signals. Data transmission speed,
otherwise known as bandwidth, is typically expressed in bits per second. Along
the fiber optic network backbone, data moves at speeds up to 2.5 billion bits
per second, or 2.5 Gbps, while analog modems transmit data at rates up to 56.6
thousand bits per second, or 56.6 Kbps, and most ISDN modems transmit at rates
up to 128 Kbps. Even at ISDN speeds, several minutes are often required to
access a media rich Website, and several hours may be required to transfer or
download large files. During this time, the telephone line cannot be used for
any other purpose. This bottleneck frustrates end users and limits the
capability of network service providers to deliver applications such as
efficient Internet access, multimedia entertainment, real-time telecommuting
and branch office internetworking.
In an effort to provide greater bandwidth, telecommunications network
service providers have traditionally deployed T1 services. A T1 line is a high-
capacity, dedicated telecommunications line which can support data
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<PAGE>
transmissions rates of up to 1.5 million bits per second, or 1.5 Mbps, which is
roughly 25 times the speed of analog modems. Although T1 services have helped
fill the need for broadband access for large businesses, network service
providers have generally been unable to offer T1 services to small businesses,
remote offices, telecommuters and consumers as a result of the complexity and
high costs of deployment. Because analog and ISDN modem technology fails to
satisfy the bandwidth needs of end users, and T1 access is prohibitively
expensive, network service providers continue to seek alternatives for
providing cost-effective broadband access to both businesses and consumers.
Additionally, the continued growth in both the number of analog modem users and
their time spent connected to the Internet congests many network service
providers' networks while providing them with little or no additional revenue.
Competition is Driving Rapid DSL Deployment
Until recently, the incumbent local exchange carriers, commonly known as
ILECs, such as Ameritech, Bell Atlantic, BellSouth, GTE, Pacific Bell, SBC
Communications and US West, were the exclusive operators of the last mile.
Since analog dialup modems, ISDN and T1 services offered over the ILECs'
networks did not adequately satisfy the demand for cost-effective broadband
access for a majority of users, alternative solutions were developed such as
broadband wireless and cable access. The deployment of these alternative
broadband solutions is now pressuring ILECs to deliver cost-effective broadband
access to their customers.
In addition, the Federal Telecommunications Act of 1996 intensified the
competitive environment because that Act requires ILECs to lease portions of
their networks, including the last mile, to competitive local exchange
carriers, commonly known as CLECs. As a result, many new companies, long
distance telephone companies and Internet service providers have applied for
and been granted regulatory approval for CLEC status. Leading CLECs, including
Covad Communications, MCI WorldCom, NorthPoint Communications, Rhythms
NetConnections and Sprint, are now deploying high-speed services over the
copper infrastructure owned by the ILECs. In response to these competitive
pressures and in an effort to increase revenues and maintain their existing
customer base, ILECs are now beginning to commit the resources necessary to
deploy cost-effective, high-speed data services over their existing copper
infrastructure.
Similar dynamics are occurring internationally. The growth in Internet use,
telecommunications deregulation and competition from alternative broadband
access technologies have caused foreign telephone network service providers, or
PTTs, to commit similar resources to broadband access deployment.
ILEC, CLEC and PTT service providers are deploying DSL technology as the
cost-effective broadband access solution. DSL technology utilizes sophisticated
data modulation techniques to achieve high-speed data transmission 100 times
faster than analog modems over existing copper telephone wires. A typical
implementation of a DSL solution is shown below:
[Graphic showing a DSL network including routers, switches, servers, DSLAMs and
DSL CPE.]
33
<PAGE>
The equipment needed to enable a DSL link generally consists of two pieces,
one in the network operator's central office and one at the premises of the
business or consumer. The central office equipment is often called a DSL access
multiplexer, commonly known as a DSLAM, which aggregates data traffic from
multiple DSL links into a common link to a fiber optic network backbone. The
CPE and the DSLAM must also interoperate with the rest of the equipment in a
given network. DSL can enable cost-effective, high-speed data transmission from
the premises of a business or consumer into a DSL network operator's central
office where existing high-capacity networks can then carry data to a
destination across an Internet or other service provider's network.
The market for DSL services is expanding rapidly. Several ILECs and CLECs
have begun to offer DSL services to their customers directly and through
Internet service providers. In April 1998, GTE Network Services announced plans
to offer DSL service in approximately 300 central offices across 16 states. In
May 1998, Pacific Bell announced plans to deploy DSL service to 87 central
offices which would provide service to approximately 650,000 business customers
and 4.4 million homes across California. In January 1999, Pacific Bell further
announced it would spend more than $100 million in 1999 to upgrade its DSL
technology and equip 255 central offices. Also in January 1999, Southwestern
Bell announced a rollout to 271 central offices allowing DSL service to reach
over 440,000 businesses and 3.2 million homes. Covad Communications, a CLEC,
announced the availability of its DSL services in the San Francisco Bay area in
December 1997. By May 1998, Covad's service was available to over one million
potential customers. By the end of 1998, Covad extended its DSL offerings to
over 6 million businesses and homes in five major metropolitan areas, and by
April 1999, Covad had deployed DSL capability to over 11.2 million homes and
businesses in nine metropolitan areas.
Existing Customer Premises Solutions are Constraining DSL Deployment
As these and other network service providers are deploying DSL services,
they are encountering several challenges. In particular, interoperability still
presents substantial technical challenges despite recent industry efforts to
standardize the various implementations of DSL. Service providers are actively
seeking DSL CPE solutions that offer seamless end-to-end interoperability
within their networks. End-to-end interoperability requires that DSL solutions
be compatible with the customer's computer hardware, operating systems,
networking equipment and software, the CPE and DSLAM, and the switching and
routing equipment in the service providers' network. Network service providers
face additional challenges in deployment and maintenance, because DSL services
are typically targeted at branch offices, small businesses or individuals where
no particular level of networking expertise can be assumed. Therefore, to
implement rapid and widespread DSL deployment, it is of primary importance that
DSL CPE provides for simple and cost-effective installation and maintenance.
The Efficient Solution
Efficient designs and manufactures the SpeedStream family of DSL CPE and
related software as part of an overall solution for high-speed remote access
and data transmission. Our solutions enable DSL deployment, ensure end-to-end
interoperability and provide for efficient and cost-effective installation and
maintenance.
Enable DSL Deployments. Efficient enables network service providers to
rapidly and cost-effectively deploy DSL services, thereby allowing them to
quickly capture market share in today's intensely competitive environment.
Efficient's products are specifically targeted to small- to medium-size
companies and consumers for applications such as high-speed Internet access,
and to large corporations for applications such as remote access, telecommuting
and extensions of corporate networks to branch offices.
Ensure End-To-End Interoperability. Efficient's DSL solutions offer seamless
interoperability from the customer's computer through the service providers'
network. To ensure this interoperability, Efficient leverages our core
technology expertise in combination with our relationships with network service
providers, such as Ameritech, BellSouth and Covad Communications, and network
equipment vendors, such as ADC Telecommunications, Advanced Fibre
Communications, Alcatel, Diamond Lane Communications, DSC
34
<PAGE>
Communications, Ericsson, Lucent Technologies, Newbridge Networks, Nokia,
Nortel Networks and Siemens. Since these industry leaders recognize that end-
to-end interoperability is a necessary requirement for full scale DSL
deployment, network equipment vendors have provided us with early releases of
their systems and technologies so that we can ensure that our products will
seamlessly interoperate with their systems. Our relationships with network
service providers and network equipment vendors enable us to maintain and use
one of the most complete DSL interoperability test labs in the industry. In
addition, Efficient actively participates in developing industry-wide standards
to continue to facilitate end-to-end interoperability.
Provide for Efficient and Cost-Effective Installation. Efficient offers a
full suite of easily installable DSL solutions, including DSL CPE that provides
routing and bridging capabilities which connect seamlessly into multiple user
environments using a standard networking architecture called Ethernet. For
single user environments, Efficient provides internal DSL CPE installed
directly into the end user's computer and external CPE that connect to the end
user's computer by simply plugging into the computer's universal serial bus, or
USB, port. Efficient's internal and USB modems are supported by Efficient's
ProfileBuilder software which allows the network service provider to configure
the CPE for a particular network before the CPE is sent out into the field.
Pre-configuration of the CPE obviates the cost and time associated with having
installers perform these configuration activities with each end-user
installation.
Provide for Cost-Effective Maintenance. Efficient offers network service
providers our Advanced Status software, a troubleshooting and diagnostic tool.
With Advanced Status software, a network service provider's customer support
technician can walk an end user through the diagnostic process over the
telephone. This allows the network service provider to easily monitor, diagnose
and often remotely fix the customer's problems quickly, which can substantially
reduce the network service provider's customer support costs. In the event that
a technician needs to be dispatched, Advanced Status provides easy diagnosis
and facilitates on-site repair.
The Efficient Strategy
Our objective is to be the leading worldwide provider of high-performance
DSL broadband access customer premises equipment for businesses, remote
offices, telecommuters and consumers. Key elements of our strategy include the
following:
Capitalize upon our Early Market Acceptance by Network Service Providers. We
intend to leverage our products' early market acceptance to extend our market
share. We have been focused on the high-speed network connectivity market for
six years and specifically on the DSL market for three years. Our DSL CPE
products have been deployed by Ameritech, BellSouth, Covad Communications, Hong
Kong Telecom, Singapore Telecom, and six other network service providers. An
additional 39 network service providers have begun to test our CPE solutions.
We intend to build upon this early acceptance of our products to become the
primary provider of DSL CPE to these and other network service providers as
they deploy their DSL networks.
Leverage Strategic Relationships with Network Equipment Vendors. We intend
to leverage both current and future relationships to continue to promote
Efficient in the industry, extend our sales capabilities, increase our volume
distribution, and build brand awareness. We believe successful deployment of
DSL necessitates close working relationships with network equipment vendors.
Since most network equipment vendors do not have complete DSL CPE solutions,
they typically bundle and sell their network equipment with third-party CPE
solutions. We have established relationships with ADC Telecommunications,
Alcatel, Diamond Lane Communications, DSC Communications, Ericsson, Nokia,
Nortel Networks and Siemens, among others.
Continued Development of Broadband Access CPE. We intend to continue
developing DSL CPE products that enhance the features of our current line as
well as create new bundled voice and data access products. We are developing
advanced functionality, enhanced routing and bridging capabilities, additional
software, and new products based on different physical interfaces. We are
continually pursuing techniques to reduce product costs. In developing new
technologies and products, we benefit from our relationships with key industry
leaders that offer early visibility into market requirements and deployment
trends.
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<PAGE>
Broaden Distribution Channels. We plan to extend our distribution channels
to meet the growing demand for broadband access solutions. When we first
deployed our current generation DSL products, we initially targeted ILECs and
network equipment providers in order to secure large contracts, establish
credibility in the marketplace and strengthen key network service provider
relationships. We have since built a direct sales force to target CLECs, PTTs
and Internet service providers as well. Moreover, we are developing alternative
distribution channels such as telephone company-aligned distributors,
traditional two-tier distribution partners, third-party integrators, and retail
partners. To this end, we have recently signed agreements with Innotrac, Nortel
Supply and Sprint North Supply, three leading telephone company-aligned
distributors. We are also expanding our global presence by extending our
international direct sales force, securing additional international value-added
resellers and establishing retail sales abroad.
Build the Efficient Brand Name. In addition to increasing brand awareness
with network service providers and network equipment vendors, we believe it is
critical to establish brand awareness and differentiation from our competitors
with end customers through superior performance, ease of use and customer
service. We plan to continue building brand awareness of Efficient and
SpeedStream to identify us as the leading provider of DSL CPE solutions. All of
our DSL products, even when deployed by network service providers, carry the
Efficient and SpeedStream brand names. In some instances, we co-brand our
products with prominent network equipment vendors such as Alcatel in order to
build this name recognition. In addition, we plan to increase our investments
in a broad range of marketing programs, including active trade show
participation, advertising in print publications, direct marketing and Web-
based marketing.
Products
Efficient has developed the SpeedStream family of DSL products that enables
broadband access for businesses and consumers. Our products are designed to
support a number of operating systems, DSL implementations, and network
architectures. Our asymmetric DSL, or ADSL, products provide transmission
speeds of up to 8 Mbps in the downstream direction from the network to the
user, and up to 800 Kpbs in the upstream direction. Our symmetric DSL, or SDSL,
products provide equal upstream and downstream speeds of up to 1.1 Mbps. Our
SpeedStream products are separated into three different product series:
. 3000 Series -- Designed for the single user and installable into a
peripheral component interface, or PCI, bus slot within a personal
computer
. 4000 Series -- Designed for the single user and connected to a personal
computer through a USB port
. 5000 Series -- Designed to provide routing and/or bridging capabilities
and allow multiple users to connect through an Ethernet port
Although SpeedStream products currently account for most of our revenues, we
continue to generate a small portion of our revenues from the sale of our high-
speed ATM local area network products which were originally introduced in 1994.
These ATM products are specifically designed for use in private data
communications networks within office or home environments which are commonly
known as local area networks, or LANs.
Efficient also provides a full suite of pre-configuration and diagnostic
software tools. Our pre-configuration software, ProfileBuilder, enables network
service providers to architect scalable DSL services and ensures rapid and
reliable installation while reducing or eliminating the need for on-site
configuration. Our diagnostic and troubleshooting software, Advanced Status, is
designed to reduce a network service provider's expense associated with ongoing
maintenance and repair. We believe that these software capabilities can reduce
the overall expense for DSL service deployment and maintenance.
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<PAGE>
The SpeedStream 3000 Series
The SpeedStream 3000 Series consists of internal modems which provide high-
speed ADSL connectivity for a personal computer.
. Installs into any PCI bus slot
. Configures using Efficient
ProfileBuilder software for easy
setup
. Includes Efficient Advanced Status
diagnostic software tools for
rapid error diagnosis and
correction
. Supports the four most prevalent
data encapsulation standards to
ensure network interoperability
with Internet Protocol and ATM
networking equipment
. Provides ATM functionality that
enables reliable data transmission
. Offers remote management
capability
. Supports Microsoft Windows 95,
Windows 98 and Windows NT
operating systems
[Picture of SpeedStream 3000 Series]
<TABLE>
<CAPTION>
SpeedStream 3000 Series
--------------------------------------------------------------------------
3010 3020/3021 3041 3060
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Relies on external ADC, AFC, Siemens Alcatel, DSC
DSL modem Diamond Lane, Communications
DSLAM Interoperability Ericsson, Lucent,
Newbridge, Nokia,
Nortel
- -----------------------------------------------------------------------------------------------
Calendar Year of First First half of 1998 First half of 1998/ Expected second Second half
Commercial Availability Expected second half of 1999 of 1998
half of 1999
- -----------------------------------------------------------------------------------------------
Suggested Retail Price $129 $269 $269 $269
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE>
The SpeedStream 4000 Series
The SpeedStream 4000 Series consists of external modems which provide high-
speed ADSL connectivity through a personal computer's USB port.
. Attaches externally via a personal
computer's USB port
. Configures using Efficient
ProfileBuilder software for easy
setup
. Includes Efficient Advanced Status
diagnostic software tools for
rapid error diagnosis and
correction
. Supports the four most prevalent
data encapsulation standards to
ensure network interoperability
with Internet Protocol and ATM
networking equipment
. Provides ATM functionality that
enables reliable data transmission
. Offers remote management
capability
. Supports Microsoft Windows 98
operating system
[Picture of SpeedStream 4000 Series]
----------------------------------------------------------
<TABLE>
<CAPTION>
SpeedStream 4000 Series
----------------------------------------------------------
4020/4021 4041 4060
<S> <C> <C> <C>
ADC, AFC, Siemens Alcatel, DSC
Diamond Lane, Communications
DSLAM Ericsson, Lucent,
Interoperability Newbridge, Nokia,
Nortel
- -------------------------------------------------------------------------------
Calendar Year of First half of 1999/ Expected second First half of 1999
First Commercial Expected second half of 1999
Availability half of 1999
- -------------------------------------------------------------------------------
Suggested Retail Price $299 $299 $299
</TABLE>
38
<PAGE>
The SpeedStream 5000 Series
The SpeedStream 5000 Series provides high-speed remote ADSL or SDSL
connectivity for one or more personal computers, workstations or other network
devices over a standard networking architecture called Ethernet.
. Facilitates DSL connectivity for
multiple users via a standard
Ethernet port
. Provides routing and bridging
capabilities (except 5250,
designed for bridging only)
. Pre-configures for rapid network
deployment
. Supports the four most prevalent
data encapsulation standards to
ensure network interoperability
with Internet Protocol and ATM
networking equipment
. Provides ATM functionality that
enables reliable data transmission
. Offers remote management
capability
[Picture of SpeedStream 5000 Series]
----------------------------------------------------------
-----------------------------------------------------------
<TABLE>
<CAPTION>
SpeedStream 5000 Series
--------------------------------------------------------------------------
5010/5621 5250 5650 5660
<S> <C> <C> <C> <C>
ADC, AFC, Diamond Lane Diamond Lane Alcatel, DSC
DSLAM Diamond Lane, Communications
Interoperability Ericsson, Lucent,
Newbridge, Nokia,
Nortel
- -----------------------------------------------------------------------------------------------
ADSL or SDSL ADSL SDSL SDSL ADSL
- -----------------------------------------------------------------------------------------------
Calendar Year of First half of 1998/ Second half of 1998 Expected second Expected second
First Commercial Expected second half of 1999 half of 1999
Availability half of 1999
- -----------------------------------------------------------------------------------------------
Suggested Retail Price $595 $499 $595 $595
</TABLE>
39
<PAGE>
ProfileBuilder Software
Our ProfileBuilder software tool supports all SpeedStream DSL products for
single personal computer environments. ProfileBuilder allows a network system
provider to select configuration settings for the CPE that match its specific
network. This CPE pre-configuration allows a network operator the flexibility
to choose network settings unique to the network's service offerings, without
requiring an end user or an installation technician to individually configure
each unit. Thus, by setting the attributes for DSL, ATM and data encapsulation
prior to installation of the CPE, the speed of DSL equipment installation is
increased. We believe that this ability to pre-configure DSL CPE provides cost
savings for network service providers and allows them to scale their DSL
service offerings rapidly and reliably.
Advanced Status Software
All SpeedStream DSL products for single-user environments include embedded
diagnostic and troubleshooting software called Advanced Status. During normal
network conditions, the end user is unaware that this software is operating.
However, if network degradation or failure occurs, a customer service
representative can work with the end user to diagnose and isolate problems with
the DSL link, the CPE or the network itself. Advanced Status software provides
information such as status indications and performance statistics for DSL, ATM
and packet communication layers. This information helps identify problems and
determine whether they must be solved at the central office or the customer
premises. Advanced Status software minimizes the need to send a technician to
the customer premises and speeds troubleshooting and repair. We believe that
our Advanced Status software reduces the overall expense of DSL service.
ATM LAN Products
Prior to developing our SpeedStream product families, Efficient developed
and produced products that were used to provide high-speed connections between
various components on asynchronous transfer mode-based local area networks. We
introduced ATM LAN products in 1994 that were capable of data rates of up to
155 Mbps and introduced 25 Mbps products in 1996 for less demanding
applications. These products utilize the same technology relating to
application specific integrated circuits as our SpeedStream product family and
are geared toward business customers. Also, these products support Windows 95,
Windows NT, Sun OS, and Sun Solaris operating systems. Furthermore, development
of our ATM LAN products required expertise in networking, ATM and personal
computer environments. This expertise provided the foundation for development
and commercialization of our DSL products.
Products under Development
Efficient is developing a new family of business class products that will
integrate voice and data traffic through a single platform. This family of
products is intended to enable service providers to offer bundled voice and
data services over a single copper connection. We intend to release the first
of these new products in the first half of calendar 2000. We believe that as
competition among network service providers intensifies, the ability to provide
bundled voice and data services will provide competitive differentiation among
network service providers.
In addition, Efficient is presently working to add new features, enhance
existing features and reduce the cost of our SpeedStream products.
Specifically, we are working to integrate advanced filtering technology,
routing capabilities, advanced management tools and new hardware interfaces
into SpeedStream products.
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Technology
Efficient designs and manufactures DSL CPE as part of an overall solution
for high-speed remote access and data transmission. Efficient's SpeedStream
family of DSL CPE includes products intended for a single user such as a
telecommuter, as well as for multiple users within branch offices or small
businesses. Efficient integrates a diverse set of technologies and expertise,
primarily in the following areas:
. DSL System Architecture
. Asynchronous Transfer Mode and Data Encapsulation Techniques
. Software
. Application Specific Integrated Circuit Design
. Routing and Bridging
DSL System Architecture Expertise
We structure our product architectures to consist of highly modular blocks
of hardware and software. By utilizing our expertise in developing multiple
products with diverse types of DSL technology, we have developed a core set of
hardware and software designs. Consequently, it is a relatively straightforward
activity to restructure the components and develop a new SpeedStream product.
Similarly, as new features are developed, they can be made available across a
number of products all based upon common components. This design modularity
helps Efficient respond quickly to new market requirements.
Our product architectures use Efficient's proprietary application specific
integrated circuits, or ASICs, as well as chipsets from third-party suppliers.
We believe that the use of our ASICs in conjunction with these third-party
chipsets has advantages for CPE performance and cost. Because DSL signals
operate across a broad frequency range, circuits must be carefully designed to
ensure that high performance is achieved without disrupting other equipment in
the end user's home or office (such as televisions). We believe that our
techniques for DSL circuit design, component selection and layout, emissions
shielding and certification testing result in high-performance products that
meet a broad range of emissions and safety certifications mandated by the
Federal Communications Commission, international regulatory bodies, consumer
safety laboratories and network operators.
Asynchronous Transfer Mode and Data Encapsulation Techniques Expertise
All of our SpeedStream CPE products employ our own ATM hardware and software
technology. ATM technology enables multiple communication sessions to occur
simultaneously and bursty packet traffic to co-exist with delay-sensitive
traffic such as voice or video information. In order to allow this data to be
carried across an ATM network, it must be formatted into fixed-size ATM cells,
a technique known as data encapsulation. ATM and data encapsulation permit a
common network infrastructure to offer diverse services. There are numerous
data encapsulation techniques which network service providers, Internet service
providers or other network operators may implement.
We have been able to implement these numerous ATM and data encapsulation
techniques because of our prior experience in designing, manufacturing, and
commercializing ATM LAN equipment. Key pieces of silicon and software
technology were re-used from these products to enable rapid development of our
SpeedStream CPE. We believe that this intellectual property, as well as the ATM
networking expertise associated with it, represents one of our key competitive
advantages.
Software Expertise
Our software engineers have expertise in developing code that addresses the
needs of network service providers. Our modular software architecture enables
re-use of much of our software code across products. This modularity also
enables rapid development of new products. Our knowledge of network operation
and architectures and data encapsulation techniques allows us to write software
that ensures that our products are
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interoperable with other network equipment vendors' products. In addition, our
understanding of various operating systems and personal computer environments
allows us to create software that provides for trouble-free installation and
network maintenance. Our software engineers also design, build and operate
comprehensive testing environments to ensure not only that our products are
interoperable, but also offer high performance.
Efficient has developed a suite of software for our single-user SpeedStream
products that enables communication in a personal computer environment. This
software is commonly called a "driver" and allows application software, such as
e-mail or a Web browser, to send and receive data over the DSL network link,
just as it would over a modem or a LAN connection. By building upon software
source code and skills developed for ATM LAN products, Efficient is able to
support a number of diverse personal computer environments. To date, Efficient
has leveraged our software expertise to develop and release high-performance,
rapidly installing drivers for our SpeedStream 3000 and 4000 Series products.
This software is interoperable with numerous brands and models of personal
computers, operating system environments such as Windows 95, Windows 98 and
Windows NT version 4, and upcoming environments such as Windows 2000.
Efficient has also developed and released our ProfileBuilder and Advanced
Status software tools. In addition, Efficient works closely with network
service providers to create software specific to their networks, which allows
them to rapidly and reliably deploy and maintain DSL service.
Application Specific Integrated Circuit Design Expertise
Efficient has developed custom application specific integrated circuits that
enable high-speed ATM networking using PCI or USB bus attachments. Our ASICs
provide high-speed interfaces to the personal computer and also perform several
ATM functions, including segmentation and reassembly functions whereby variable
length packets are converted into fixed size ATM cells. They also perform
traffic shaping functions that control the flow of data from the end user's
equipment into the service provider's network. The use of custom ASICs allows
us to better control the cost of our products and helps ensure their
performance and interoperability with diverse brands of personal computers and
network equipment.
Routing and Bridging Expertise
Efficient's multi-user products offer a shared Ethernet port for local
attachment to a computer network and an ATM DSL port for transmission and
receipt of data across a DSL interface. A bridging device forwards Ethernet
packets between the product's Ethernet port and its ATM DSL port based on
addresses contained in the Ethernet packets. Efficient's Ethernet bridging
products examine addressing information in each packet to determine whether it
should be forwarded between the local Ethernet port and the ATM DSL port. Our
bridging CPE requires little or no configuration, thereby reducing the network
service provider's installation expense. Because all packet forwarding
decisions are made independently of the network protocol carried by the
Ethernet packets, our bridging CPE can support numerous network types,
including older LAN environments such as Novell's IPX or Apple's AppleTalk, as
well as networks based on the Internet Protocol.
Routers are able to perform much more complex functions than those performed
by bridges including restricting certain types of data from entering the
network and directing data flow based on dynamically assigned IP addresses.
Efficient's routing products forward Internet Protocol, or IP, packets based
upon addressing information contained in the packet header. Support for several
different methods of ATM data encapsulation helps ensure network
interoperability. Efficient's routing products provide features that enhance
security and ease network administration for end users, such as packet
filtering, which prevents unwanted access to local servers or other private
resources, and a technique known as network address translation, which masks
the presence of local computers from other computers on the Internet. Our
routing products also implement an address management technique called the
dynamic host configuration protocol that automates the assignment of IP
addresses to computers attached locally to the router. The network address
translation and dynamic host configuration protocol features of our routing
products can help minimize address interoperability issues, and may be able to
accelerate deployment of DSL services.
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Efficient's routing products include a complete suite of management
capabilities that enable local and remote troubleshooting as well as upgrades
to system configuration or software. This is important as DSL is a complex
technology typically intended for a technologically unsophisticated user base.
We believe that our products' combination of management capabilities which can
be accessed either locally or remotely can help reduce the cost of network
administration for DSL network service providers.
Customers
Historically, sales of our CPE have been to two main classes of customers:
network equipment vendors who supply DSL central office equipment and DSL
network service providers. To date, Efficient has sold products to eight
network equipment vendors and 11 network service providers. An additional 39
network service providers have begun to test our CPE solutions.
Network equipment vendors include our products as an element of a complete
solution offered to their network service provider customers. In many cases,
several different network equipment vendors specify our products as the
preferred or bundled CPE in response to bid requests issued by a network
service provider for complete DSL access solutions. Network service providers
will then provide the CPE to end users for access to their DSL network. In
some cases, we sell CPE to the network equipment vendor for resale as part of
a bundled solution to the network service provider. In other cases, we sell
directly to the network service provider.
The following table sets forth the top 20 customers for our DSL products in
the current fiscal year, categorized by customer type. These customers
accounted for an aggregate of 24.4% of our total revenues in fiscal 1998 and
76.4% of our total revenues for the first nine months of fiscal 1999.
<TABLE>
<CAPTION>
Network Equipment Vendors Network Service Providers Telephone Company-Aligned
and Other Distributors
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ADC Telecommunications Ameritech Global Technology Integrator
Alcatel Covad Communications* Innotrac for BellSouth's network
Diamond Lane Communications Flashcom Semitron
Ericsson Hong Kong Telecom Telecom Equipment for Singapore
Lucent Technologies* Panhandle Telecommunications Telecom's network*
Nokia Services Universe Computers
Nortel Networks SourceNet
Siemens Southwestern Bell
</TABLE>
* The customers indicated accounted for 10% or more of our total revenues in
fiscal 1998 or the first nine months of fiscal 1999.
The following case studies illustrate how certain network service providers
have deployed our products:
BellSouth. BellSouth Telecommunications is the predominant telephone
network service provider in nine southeastern states with 23 million local
phone lines. BellSouth provides wholesale ADSL service to Internet service
providers, including its own Internet service provider, BellSouth.net.
BellSouth's FastAccess ADSL service is currently available in Atlanta,
Birmingham, Charlotte, Fort Lauderdale, Jacksonville, New Orleans and Raleigh.
BellSouth has announced that FastAccess ADSL service will be extended to 23
new cities during 1999 with over five million ADSL capable phone lines
becoming available during this rollout. As a DSL service provider, BellSouth
relies on its partner Internet service providers to generate demand for DSL-
based Internet access and to manage the installation and support of CPE.
BellSouth has chosen to work with Efficient on a promotional program intended
to encourage Internet service providers to generate customer demand for DSL.
We believe that BellSouth chose to work with us because of the breadth of our
product line and our products' ease of use features, as well as our responsive
support of its DSL lab testing.
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Covad Communications. Covad Communications Company is a leading high-speed
Internet and network access provider offering DSL services through Internet
service providers to small- and medium-size businesses and consumers and sold
directly to large enterprise customers. Covad's service is on-line in 11
regions, currently encompassing 26 metropolitan statistical areas. Covad has
announced plans to deploy its networks in a total of 22 regions, encompassing
51 metropolitan statistical areas nationwide. We worked closely with Covad to
develop the feature set of a product intended to enable Covad to deploy DSL
service rapidly and cost effectively. Our SpeedStream 5250 is interoperable
with the primary DSLAM used by Covad and requires no user configuration during
or after its installation. This provides for a rapid installation, with minimal
chance for mis-configuration. We continue to work with Covad on the definition
of future products and feature sets.
Singapore Telecom. Singapore Telecom is the incumbent telecommunications
provider in Singapore with 1.7 million local phone lines. SingTel launched its
ADSL Magix service in November 1997 as the world's first commercial deployment
of DSL service. SingTel's Magix service is offered to all residents of
Singapore through 27 central offices. We have worked closely with SingTel since
1997 to help match our CPE to SingTel's network, and have provided customized
software with our CPE that is unique to SingTel's DSL service. Based on our
ability to provide reliable, easy-to-install CPE, we were chosen by SingTel as
one of two suppliers for SingTel's Magix network. The Magix service comprises
both Internet access and delivery of television shows, music videos and video
conferencing over DSL. SingTel felt that our expertise in ATM products and
networks was crucial in offering these disparate services simultaneously over
SingTel's network. SingTel has recently purchased our SpeedStream 3060 internal
DSL modem, which obviates the need for both an ATM LAN adapter and an external
modem, resulting in cost savings for SingTel.
The foregoing customer case studies, which have been prepared by Efficient,
are descriptions of the relationships between Efficient and selected customers.
These customer case studies are not to be construed as having been prepared or
certified by such persons as "experts" with respect to such matters within the
meaning of the federal securities laws, or any rule or regulation promulgated
thereunder.
Strategic Relationships
We believe that establishing relationships with leaders in DSL technology
and services is critical to our success. Accordingly, we have formed strategic
relationships and, in some cases, entered into joint development agreements
with network service providers, network equipment vendors and developers of DSL
semiconductor technology. We are also pursuing strategic relationships to
ensure that high-volume distribution channels are in place for our products.
Network Service Providers
Ameritech. Efficient has entered into an agreement to provide DSL CPE to
Ameritech. We have worked closely with the technical and product management
staff responsible for DSL service deployment at Ameritech. We have also
provided early software releases of new products to Ameritech, and have
provided Ameritech with training for both customer service and field support.
BellSouth. Efficient has entered into a joint promotion agreement with
BellSouth for DSL CPE. BellSouth provides a financial incentive for Internet
service providers that bring customers into the BellSouth DSL service. For the
term of the program, subscribing Internet service providers are offered
SpeedStream CPE at a reduced cost. Efficient has also entered into a supply
agreement with BellSouth. We believe that the joint promotion agreement in
conjunction with the supply agreement with BellSouth will create significant
demand for our products.
Covad Communications. Efficient has worked closely with Covad to tune the
feature set of our SpeedStream 5250 SDSL bridging modem to their network
requirements. We are working with Covad to develop new products intended
specifically for its network and also are involved in discussions with Covad
about our next-generation products as well.
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Singapore Telecom. Efficient has worked closely with SingTel to provide
customized software with our CPE that is unique to SingTel's advanced Magix DSL
service. We are involved in discussions with SingTel with respect to the
evolution of SingTel's network architecture and service offerings. SingTel has
consistently volunteered to work with us to test our new products.
Network Equipment Vendors
ADC Telecommunications. ADC is an investor in Efficient and was the first
company with whom we developed a partnership for DSL CPE. ADC has actively
promoted our products to network service providers in conjunction with ADC's
Cellworx central office platform. William L. Martin III, Senior Vice President
of ADC and President of the Business Broadband Group of ADC, is a member of our
board of directors.
Alcatel. Efficient and Alcatel have established a joint development and
marketing agreement for CPE that is interoperable with Alcatel's DSLAM. We are
working together to develop two successive generations of DSL CPE based around
our USB, ATM and software technology, and employing Alcatel's DSL chipsets and
software. In certain cases, we co-brand products which are sold by both
Efficient and Alcatel.
DSC Communications. DSC Communications was recently purchased by Alcatel.
Aside from our relationship with Alcatel and prior to its acquisition, we had
entered into a partnership with DSC for CPE. DSC manufactures the Lightspan
digital loop carrier system. Digital loop carriers enable telecommunications
service providers to extend digital services to locations connected to the
network by analog equipment and typically are employed in DSL service offerings
to extend the number of customers to whom DSL service can be offered. We
believe that our continuing relationship with DSC can increase the exposure of
our CPE into network service providers.
Ericsson. Efficient and Ericsson have entered into a long term agreement
whereby we supply our SpeedStream 3000 PCI and 4000 USB products. Under the
provisions of this agreement, we are the exclusive supplier to Ericsson of USB
DSL CPE through the end of 1999. After 1999, we will provide these products on
a non-exclusive basis.
Nokia. Efficient and Nokia have entered into a purchase and distribution
agreement whereby we supply our SpeedStream 3000 PCI and 4000 USB products.
Under the provisions of this agreement, Nokia resells our products along with
its EKSOS family of DSL equipment and the SpeedLink DSLAM of Diamond Lane.
Nokia recently acquired Diamond Lane Communications.
Nortel Networks. Efficient has an agreement to supply Nortel with DSL CPE
that is interoperable with Nortel's Universal Edge 9000 access product. Nortel
offers the Universal Edge 9000 to both new and existing customers as an upgrade
for both Nortel's DMS voice switches and its access node digital loop carriers.
Based on this relationship, we are working with Nortel on next-generation
products.
Siemens. Siemens has been an investor in Efficient since June 1998.
Following its most recent investment in March 1999, Siemens holds an aggregate
of 3,716,800 shares or approximately 11.6% of our outstanding capital stock. We
have worked with Siemens to specifically design and produce certain DSL CPE
that is interoperable with both Siemens' XpressLink D DSLAM and with DSL
interfaces for Siemens' installed base of voice switches. Anthony T. Maher, who
is a member of the board of Siemens AG Information and Communication Networks,
joined our board of directors in April 1999.
Developers of DSL Semiconductor Technology
Analog Devices. Many of our products use ADSL technology from ADI. Efficient
was one of two CPE vendors to engage in an early availability program with ADI
for G.lite, a splitterless DSL technology. G.lite is expected to enable
deployment of DSL service without requiring a network service provider
technician to perform on-site wiring changes or installation of CPE.
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Texas Instruments Incorporated. Texas Instruments is an investor in
Efficient. Some SpeedStream products under development use ADSL technology from
Texas Instruments. We have licensed pieces of our ATM silicon and software to
Texas Instruments, and have assisted in the development of reference designs
for application of Texas Instruments' ADSL components. Texas Instruments has
provided us with access to its ADSL components at most favored prices. Texas
Instruments also fabricates one of our ATM ASICs and has provided introductions
for Efficient to personal computer manufacturers who are searching for sources
of DSL CPE.
Telephone Company-Aligned Distributors
Sprint North Supply. Sprint North Supply is a primary supplier of
telecommunications equipment to Sprint. Many other network service providers
also source networking products from Sprint North Supply. Efficient has entered
into a distribution agreement with Sprint North Supply that enables it to carry
selected members of our SpeedStream product family.
Nortel Supply. Nortel Supply is a distributor of Nortel and other network
equipment vendors' products. Through our agreement with Nortel Supply,
Efficient leverages Nortel Supply's worldwide distribution capabilities.
Innotrac. Innotrac is a distributor of consumer telecommunications equipment
for several ILECs, including BellSouth. Efficient, Innotrac and BellSouth
jointly promote BellSouth's DSL services with Efficient's SpeedStream CPE. We
believe that we can leverage Innotrac's relationship with several ILECs, as
well as Innotrac's experience in distributing products in high volume.
Manufacturing
Efficient outsources the assembly and testing of products and printed
circuit boards to turnkey contract manufacturers. Currently, Solectron Corp.
manufactures the majority of Efficient's products at its facility in Austin,
Texas. Efficient also contracts with Xetel, Inc. for the manufacturing of its
ATM LAN products and a portion of its DSL products in Dallas, Texas. Both of
these manufacturers are certified by the International Standards Organization
for manufacturing and design processes. Efficient plans to engage an additional
contract manufacturer to meet our anticipated manufacturing requirements and to
continue reducing the cost of our products.
Efficient has a limited in-house manufacturing capability. We have complete
capabilities for final test, packaging and shipping of our products. We perform
comprehensive inspection tests and use statistical process controls to assure
the reliability and quality of our products. Our manufacturing engineers design
and build all test procedures and fixtures for our products. We integrate these
manufacturing tests with the contract manufacturers' build processes. Our
manufacturing personnel work with our design engineers to ensure that the test
environment remains current as DSL technology evolves. We also perform warranty
and repair work at our Dallas facility.
Efficient's engineers design custom ASICs that are incorporated into the
majority of our products. Efficient contracts with silicon manufacturers to
fabricate the ASICs for prototype testing. We perform design verification and
simulation testing at our facilities. After successful completion of these
tests, Texas Instruments, Samsung Semiconductor and VLSI Technology manufacture
our ASICs in volume on a turnkey basis. We purchase only packaged and tested
ASICs.
Other than our ASICs, we try to use standard parts and components whenever
possible. We currently purchase certain key parts and components from sole-
source suppliers such as Alcatel Microelectronics, Analog Devices, Conexant
Systems and Texas Instruments.
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Sales and Marketing
Since 1996, Efficient has worked closely with network equipment vendors that
supply DSL-based central office equipment. These vendors offer our SpeedStream
products to network service providers as part of a complete, interoperable DSL
solution. We engage in joint sales activities with our partners and regularly
provide them with collateral materials to enable their sales forces to promote
our products. Our relationships with network equipment vendors result in
introductions to large network service providers. In many cases, with DSL
interoperability assured by Efficient and our partners, network service
providers choose to purchase CPE directly from Efficient.
Efficient also works closely with network service providers to ensure that
our CPE is matched to their DSL service offerings. Initial discussions with
network service providers generally involve our sales, marketing and business
development personnel who work to communicate the strengths of our company and
our products. Detailed responses to request for purchase documents are
submitted to network service providers, often by both Efficient and one or more
network equipment vendors.
Next, at the network service provider's request, we engage in a technical
certification process involving our system engineers who work in a lab
environment, in some cases for days or weeks, with their counterparts from the
network service provider. We frequently provide informal consultation on
network deployment and testing as well as customized training for network
service providers. In some cases, we create special software releases or
product combinations for major network service providers. While the actual sale
and distribution of CPE varies network by network, this initial relationship-
building stage is critical in every case. We believe that it is difficult to
provide CPE into DSL service offerings without these close relationships with
network service providers.
We engage in a variety of marketing activities to build brand awareness. We
issue press releases concerning significant product releases, partnerships and
network design wins. We also conduct briefings for analysts and members of the
press. We participate in a number of industry trade shows and pursue speaking
engagements at related events. Efficient uses direct mail campaigns to increase
awareness of our company and our products among Internet service providers, who
are increasingly active in introducing customers to DSL services. Our broad
goals are to continue to increase the awareness of Efficient as a company, and
of our DSL CPE product line brand, SpeedStream.
As the scope of our marketing efforts expands, our Website continues to be a
strategic resource in disseminating information to interested parties. Our
Website also plays an active role in collecting sales leads, working remotely
with partners and key customers, and performing customer support. In the
future, we believe that our Website may become an important tool for direct
sales of our products.
Research and Development
We believe that our future success depends on our ability to adapt to the
rapidly changing communications environment, maintain our significant expertise
in core technologies, and continue meeting and anticipating our customers'
needs. We continually review and evaluate technological changes affecting the
telecommunications market and invest substantially in applications-based
research and development. We are committed to an ongoing program of new product
development that combines internal development efforts with joint ventures and
licensing or marketing arrangements relating to new products and technologies
from outside sources.
Efficient's core research and development activities are focused on both
hardware and software technologies. In our hardware development activities, we
possess significant expertise in ASIC development, analog and mixed signal
hardware design, ATM architecture and bus architectures, such as PCI and USB.
In software development, Efficient has particular strengths in data networking
protocols and operating systems, device driver development and traffic
management, and techniques for advanced routing and systems management.
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To enable successful deployment of DSL services, our CPE must be
interoperable with the DSLAM, ATM switching equipment and other networking
equipment from multiple vendors. In our development efforts, we leverage our
relationships with prominent DSLAM vendors to ensure DSL interoperability. The
continued development and use of our own industry-tested ASICs and software
ensure ATM switching interoperability. In addition, our support for a number of
protocol stacks provides data encapsulation interoperability with routers at
Internet service providers or within corporate networks. Efficient has a solid
understanding of the end-to-end technologies in use, and we actively work to
ensure interoperability while using technology that we control. Our design
verification procedures include testing in complex network environments created
in our laboratories that simulate end-to-end network architectures used in DSL
service deployments. We believe that our stringent design verification and test
procedures allow us to provide cost-effective, high-performance DSL CPE that
minimizes the technology risk for network operators.
Most of the technology associated with Efficient's SpeedStream products
continues to evolve. ADSL supports high frequency digital data transmission
simultaneously with analog voice signals on a single copper phone line. Digital
data and analog voice have the capability to disrupt one another. One common
method of minimizing this disruption is to electrically separate the voice
signals from the data signals using a circuit known as a filter or a
"splitter." At present, the use of a splitter often requires a network
technician or the end user to install the device using hand tools and to modify
phone wiring inside a home or business. We are currently researching analog
filtering circuit technology and are working with other companies to enable
filter designs that can be installed without tools or changes to interior
wiring.
Another future technology involves ATM switched virtual circuits. Switched
virtual circuits create a dedicated connection between two points of a network.
Current ATM/DSL deployments typically use permanent virtual circuits to create
these dedicated connections. Permanent virtual circuits must be created
manually, while switched virtual circuits employ software to automatically
create a circuit across the ATM network without manual intervention. Some
network operators have expressed a concern that DSL deployments may not scale
rapidly if permanent virtual circuits are employed. Switched virtual circuit
implementations are complex and may represent a technology barrier for
competitors. Efficient has sold ATM LAN products supporting switched virtual
circuits for several years. We believe we are well suited to help enable large-
scale DSL deployments as network operators demand support for switched virtual
circuits.
Competition
The network equipment industry is highly competitive, and we believe that
competition may increase substantially as the introduction of new technologies,
deployment of broadband networks and potential regulatory changes create new
opportunities for established and emerging companies. In addition, a number of
our competitors and potential competitors have significantly greater financial
and other resources than us which may enable them to more aptly meet new
competitive opportunities. We compete directly with other providers of DSL CPE
including 3Com, Alcatel, Cisco Systems, FlowPoint and Netopia, among others.
Other vendors with whom we compete also have proprietary systems with which our
products are not interoperable. Included among these vendors are Cisco Systems,
Orckit Communications, PairGain Technologies and Westell Technology. In
addition, a number of potential competitors, such as Intel Corporation,
Matsushita which markets its products under the Panasonic name, Sony
Corporation, SGS-Thomson and Toshiba America, may enter the DSL CPE market.
Furthermore, DSL as a technology for deploying broadband connections is
competing with alternative technologies including ISDN, T1, broadband wireless
and cable solutions.
The rapid technological developments within the network equipment industry
results in frequent changes to our group of competitors. The principal
competitive factors in our market include:
. Industry relationships with network service providers and network
equipment vendors;
. product reliability, performance and interoperability;
. product features;
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. product availability;
. price;
. ability to distribute products;
. ease of installation and use;
. technical support and customer service; and
. brand recognition.
We believe we are successfully addressing each of these competitive factors.
Nonetheless, we expect to face increasing competitive pressures from both
current and future competitors in the markets we serve.
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
our trade secrets and know-how. To date, we have been granted one U.S. patent
with counterpart patents pending in three international jurisdictions and have
an additional nine U.S. patent applications pending.
Although we employ a variety of intellectual property in the development and
manufacturing of our products, we believe that none of our intellectual
property is individually critical to our current operations. However, taken as
a whole, we believe our intellectual property rights are significant and that
the loss of all or a substantial portion of such rights could have a material
adverse effect on our results of operations. There can be no assurance that our
intellectual property protection measures will be sufficient to prevent
misappropriation of our technology. In addition, the laws of many foreign
countries do not protect our intellectual properties to the same extent as the
laws of the United States. From time to time, we may desire or be required to
renew or to obtain licenses from others in order to further develop and market
commercially viable products effectively. There can be no assurance that any
necessary licenses will be available on reasonable terms.
Employees
As of March 31, 1999, we employed approximately 104 full-time employees,
including 27 in sales and marketing, 12 in manufacturing, 54 in engineering,
nine in finance and administration and two in customer service. Most of our
employees are located in the United States with six sales and sales engineering
employees located in The Netherlands. None of our employees is represented by
collective bargaining agreements, and management considers relations with our
employees to be good.
Properties
We lease an approximately 26,000 square foot facility in Dallas, Texas for
executive offices and for administrative, sales and marketing, and research and
development purposes. The lease for this facility expires in 2001. We also
lease an approximately 11,000 square foot facility in Dallas, Texas for
manufacturing, shipping and receiving of product. This lease also expires in
2001. Additionally, we lease an approximately 2,500 square foot facility in
Amsterdam, The Netherlands for our European operations. This lease expires in
2004.
Legal Proceedings
Efficient is not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to the
executive officers, directors and a director nominee of Efficient as of April
30, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mark A. Floyd............ 43 Chairman of the Board, Chief Executive Officer and
President
Paul E. Couturier........ 37 Vice President of International Operations
Patricia W. Hosek........ 37 Vice President of Engineering
Gregory L. Langdon....... 38 Vice President of Marketing
Jill S. Manning.......... 36 Vice President and Chief Financial Officer
David B. Stefan.......... 36 Vice President of Sales
Bruce W. Brown........... 49 Director
James P. Gauer........... 47 Director
Robert A. Hoff........... 46 Director
Anthony T. Maher......... 53 Director
William L. Martin III.... 51 Director
Thomas H. Peterson....... 42 Director
Robert Hawk.............. 59 Director Nominee
</TABLE>
Mark A. Floyd co-founded Efficient in June 1993 and has served as President,
Chief Executive Officer and a director of Efficient since its inception. Prior
to founding Efficient, from June 1991 to July 1993, Mr. Floyd was Chief
Operating Officer and a director of Networth, Inc., a provider of LAN products
including Ethernet hubs, switches and network interface cards. From May 1984 to
June 1991, Mr. Floyd held the positions of Executive Vice President, Chief
Financial Officer and director of Interphase Corporation, a provider of
enterprise server connectivity solutions for high-speed LAN, high capacity
storage and remote access applications. Mr. Floyd holds a B.B.A. in Finance
from the University of Texas at Austin.
Paul E. Couturier has served as Efficient's Vice President of International
Operations since February 1997. From March 1995 to February 1997, he served as
Efficient's Managing Director, Europe. From June 1993 to January 1995, he was
Pan-European Business Development Manager at SynOptics, a manufacturer of
synthetic crystals and optical products. Prior to that, Mr. Couturier held the
position of Director of Sales and Marketing at Gandalf Benelux, a division of
Mitel Corporation dedicated to the corporate access segment of the remote
access market. Mr. Couturier has a bachelors degree in Marketing and in Foreign
Languages from the University of Amsterdam.
Patricia W. Hosek has served as Vice President of Engineering of Efficient
since February 1997. From October 1995 to February 1997, she served as
Efficient's Director of Software Engineering. From December 1990 to October
1995, she worked as a senior manager and developer at DSC Communications
Corporation, a global provider of telecommunications products. Ms. Hosek holds
a B.S. in Computer Science from Texas A&M University.
Gregory L. Langdon has served as Vice President of Marketing of Efficient
since February 1997. From February 1996 to February 1997, he served as
Efficient's Director of Product Management. From January 1990 to February 1996,
he worked as an engineer at DSC Communications Corporation. Mr. Langdon holds a
B.S. in Electrical Engineering from Vanderbilt University.
Jill S. Manning has served as Vice President and Chief Financial Officer of
Efficient since February 1997. From November 1994 to February 1997, she served
as Efficient's Controller. From July 1984 to November 1994, Ms. Manning was a
senior manager at KPMG LLP, an international accounting firm. Ms. Manning holds
a B.B.A. in Accounting and in Computer Information Systems from Baylor
University.
50
<PAGE>
David B. Stefan has served as Vice President of Sales of Efficient since
October 1997. From March 1997 to October 1997, Mr. Stefan worked as Vice
President of Sales of Dagaz Technologies, a manufacturer of telecommunications
equipment that was acquired by Cisco Systems in September 1997. From May 1996
to March 1997, Mr. Stefan held the position of Director of Sales of Sourcecom
Corporation, a computer networking equipment and software reseller. From
November 1992 to May 1996, he worked as a territory manager and system engineer
for Primary Access, a division of 3Com Corporation, a computer networking
products company. Mr. Stefan holds an M.S.E.E. from George Washington
University and a B.S. in Electrical Engineering from Michigan State University.
Bruce W. Brown has served as a director of Efficient since October 1995.
Since August 1995, he has served as President, Chief Executive Officer and a
director of Vertel Corp., a provider of telecommunications network management
software and services. From July 1993 to August 1995, Mr. Brown held the
positions of President and Chief Executive Officer of ADC Fibermax Corporation,
a supplier of fiber optic networking products. Mr. Brown holds an M.P.A. from
Drake University and a B.S. in Psychology from Iowa State University.
James P. Gauer has served as a director of Efficient since July 1993. Since
April 1999, he has been a General Partner of Palomar Ventures, and from
December 1992 to November 1997, he was a General Partner of Enterprise
Partners, both of which are venture capital firms and investors in Efficient.
Mr. Gauer holds a B.A. in Mathematics from the University of California, Los
Angeles.
Robert A. Hoff has served as a director of Efficient since July 1993. Since
1983, he has been a General Partner of Crosspoint Venture Partners, a venture
capital firm and investor in Efficient. Mr. Hoff also serves as a director of
Com21, Inc., PairGain Technologies, Inc., Onyx Acceptance Corp. and U.S.
Web/CKS Corporation. Mr. Hoff holds an M.B.A. from Harvard University and a
B.S. in Business Administration from Bucknell University.
Anthony T. Maher was appointed to Efficient's board of directors in April
1999. Mr. Maher is a member of the board of Siemens AG Information and
Communication Networks. Siemens, a network equipment vendor, is an investor in
Efficient. Since May 1978, Mr. Maher has held various positions with Siemens,
including the following positions within the Siemens Public Communication
Networks Group: October 1997 to September 1998, member of the board of
directors; October 1995 to September 1997, Executive Director; and January 1993
to September 1995, Executive Director of Worldwide Product Planning. Prior to
his positions within the Public Communication Networks Group, Mr. Maher was
manager and then deputy director of system engineering for EWSD architecture
and processor technology. Mr. Maher holds a M.S. in Electrical Engineering and
Solid State Physics from the University of Illinois.
William L. Martin III has served as a director of Efficient since January
1997. Since September 1994, Mr. Martin has been Senior Vice President of ADC
Telecommunications, Inc. and President of the Business Broadband Group of ADC
Telecommunications, Inc., a provider of communications networks systems and
solutions and an investor in Efficient. Mr. Martin holds an M.B.A. from Harvard
University, an M.S. of Aerospace Engineering and a B.S. in Engineering from the
California Institute of Technology.
Thomas H. Peterson has served as a director of Efficient since July 1993.
Since July 1994, Mr. Peterson has served as director of Rogue Wave Software,
Inc., a provider of software solutions for creating and managing enterprise
systems. Since May 1991, Mr. Peterson has been a General Partner of El Dorado
Ventures, a venture capital firm and investor in Efficient. Mr. Peterson holds
an M.B.A. from the University of California, Los Angeles and a B.S. in
Electrical Engineering from Iowa State University.
Robert Hawk has been nominated to serve as a member of Efficient's Board of
Directors. Mr. Hawk is President of Hawk Communications and recently retired as
President and Chief Executive Officer of U S WEST Multimedia Communications,
Inc., where he headed the cable, data and telephony communications business
from May 1996 to April 1997. He was president of the Carrier Division of U S
West
51
<PAGE>
Communications, a regional telecommunications service provider, from September
1990 to May 1996. Prior to that time, Mr. Hawk was Vice President of Marketing
and Strategic Planning for CXC Corporation. Prior to joining CXC Corporation,
Mr. Hawk was director of Advanced Systems Development for AT&T/American Bell.
He currently serves on the boards of Xylan Corporation, PairGain Technologies,
Inc., Premisys Communications, Concord Communications and Radcom.
Classified Board
Our board of directors is currently composed of seven members. Upon
completion of this offering, our certificate of incorporation will provide for
a classified board of directors consisting of three classes of directors, each
serving staggered three-year terms. As a result, a portion of our board of
directors will be elected each year. To implement the classified structure,
prior to the consummation of the offering, two of our directors will be elected
to one-year terms, two will be elected to two-year terms and three will be
elected to three-year terms. Thereafter, directors will be elected for three-
year terms. Messrs. Maher and Martin have been designated Class I directors
whose term expires at the 1999 annual meeting of stockholders. Messrs. Floyd
and Peterson have been designated Class II directors whose term expires at the
2000 annual meeting of stockholders. Messrs. Brown, Gauer and Hoff have been
designated Class III directors whose term expires at the 2001 annual meeting of
stockholders. See "Description of Capital Stock--Delaware Anti-Takeover Law and
Certain Charter and Bylaw Provisions."
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors, officers or key
employees.
Board Committees
We established an audit committee and a compensation committee in April
1999.
Our audit committee consists of Messrs. Martin and Hoff. The audit committee
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent accountants.
Our compensation committee consists of Messrs. Brown and Gauer. The
compensation committee reviews and recommends to the board of directors the
compensation and benefits of our employees. The compensation committee also
administers our stock-based employee benefit plans.
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of
directors or compensation committee.
Director Compensation
Directors do not currently receive any cash compensation from us for their
service as members of the board of directors. Directors are eligible to receive
option grants under our 1999 Stock Plan. For a description of this plan, see
"--Benefit Plans." In December 1996, the board granted options to Mr. Brown to
purchase 100,000 shares of common stock with an exercise price of $0.25 per
share. During fiscal 1999, the board granted to each of Messrs. Gauer, Hoff,
Martin and Peterson options to purchase 50,000 shares of common stock with an
exercise price of $1.50 per share. During May 1999, the board granted to Mr.
Maher and Robert Hawk, who is expected to join the board after this offering,
options to purchase 15,000 and 150,000 shares of common stock, respectively,
with an exercise price of $10.50 per share.
52
<PAGE>
Executive Compensation
Summary Compensation Table
The table below sets forth the compensation earned for services rendered to
Efficient in all capacities for the fiscal year ended June 30, 1998 by our
Chief Executive Officer and our next four most highly compensated executive
officers who earned more than $100,000 during fiscal 1998. These executives are
referred to as the "named executive officers" elsewhere in this prospectus.
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual Securities
Compensation Underlying
---------------- ------------ All Other
Name and Principal Position Salary Bonus Options (#) Compensation
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Mark A. Floyd....................... $178,127 $20,000 350,000 $16,667(1)
President and Chief Executive
Officer
David B. Stefan..................... 93,391 37,500 125,000 23,140(2)
Vice President of Sales
Patricia W. Hosek................... 107,625 21,313 50,000 --
Vice President of Engineering
Gregory L. Langdon.................. 103,290 21,051 50,000 --
Vice President of Marketing
Paul E. Couturier................... 85,399 48,739 37,500 28,332(3)
Vice President of International
Operations
</TABLE>
- --------
(1) Represents amount paid in lieu of accrued sabbatical benefit.
(2) Represents a moving allowance.
(3) Represents an annual car and vacation allowance.
53
<PAGE>
Option Grants During Last Fiscal Year. The following table sets forth
certain information with respect to stock options granted to each of the named
executive officers in fiscal 1998, including the potential realizable value
over the ten-year term of the options, based on assumed rates of stock
appreciation of 5% and 10%, compounded annually. These assumed rates of
appreciation comply with the rules of the Securities and Exchange Commission
and do not represent our estimate of future stock price. Actual gains, if any,
on stock option exercises will be dependent on the future performance of our
common stock.
In fiscal 1998, we granted options to purchase up to an aggregate of
1,631,000 shares to employees, directors and consultants. All options were
granted at exercise prices equal to the fair market value of our common stock
on the date of grant, as determined in good faith by our board of directors.
All options have a term of ten years. Optionees may pay the exercise price by
cash, check or delivery of already-owned shares of our common stock. All option
shares vest over four years, with 25% of the option shares vesting one year
after the option grant date and the remaining option shares vesting ratably on
a monthly basis over the succeeding 36 months.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term
------------------------------------------ -----------------
Percent of
Total
Number of Options
Securities Granted to
Underlying Employees
Options In Last Exercise Expiration
Name Granted Fiscal Year Price Date 5% 10%
---- ---------- ----------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Floyd........... 350,000 21.46% $0.60 2/16/08 $132,067 $334,685
David B. Stefan......... 75,000 4.60 0.50 11/17/07 23,583 59,765
50,000 3.07 0.60 3/11/08 18,866 47,812
Patricia W. Hosek....... 50,000 3.07 0.60 3/11/08 18,866 47,812
Gregory L. Langdon...... 50,000 3.07 0.60 3/11/08 18,866 47,812
Paul E. Couturier....... 37,500 2.30 0.50 11/17/07 11,791 29,882
</TABLE>
Aggregate Option Exercises During the Last Fiscal Year and Fiscal Year-End
Option Values. The following table sets forth information with respect to the
named executive officers concerning their option exercises in fiscal 1998, and
exercisable and unexercisable options held as of June 30, 1998. The "Value of
Unexercised In-the-Money Options at June 30, 1998" is based on a value of $0.60
per share, the fair market value of our common stock as of June 30, 1998 as
determined by the board of directors, less the per share exercise price,
multiplied by the number of shares issuable upon exercise of the options.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Shares Year-End Fiscal Year-End
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Floyd........... -- -- 93,750 506,250 $32,812 $54,688
David B. Stefan......... -- -- -- 125,000 -- 7,500
Patricia W. Hosek....... 32,292 $14,531 18,750 98,958 6,563 10,938
Gregory L. Langdon...... -- -- 44,791 105,209 18,385 21,615
Paul E. Couturier....... -- -- 54,844 57,656 21,828 13,172
</TABLE>
The value realized by Ms. Hosek upon the exercise of her options represents
the aggregate amount of the difference between the fair market value for a
share of common stock on the date of exercise, which was $0.60 per share, and
the exercise price of such options, $0.15.
54
<PAGE>
Benefit Plans
1999 Stock Plan
Our 1999 stock plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights. The stock plan was
approved by the board of directors in April 1999 and by our stockholders in May
1999. Unless terminated sooner, the stock plan will terminate automatically in
2009. A total of 3,500,000 shares of our common stock is reserved for issuance,
plus annual increases equal to the lesser of:
. 1,000,000 shares;
. 3% of the outstanding shares on such date; or
. a lesser amount determined by the board of directors.
The stock plan may be administered by the board of directors or a committee
of the board. The board or a committee of the board will have the power to
determine the terms of the options granted, including the exercise price, the
number of shares subject to each option, the vesting provisions, the
exercisability thereof and the form of consideration payable upon such
exercise.
The stock plan provides that in the event of a merger of Efficient with or
into another corporation, or the sale of substantially all of our assets, each
outstanding option or stock purchase right will be assumed or substituted for
by the successor corporation. In addition, if the options are not substituted
for in the merger, each outstanding option will vest and become exercisable as
to all unvested shares and each stock purchase right shall lapse as to all the
shares for a period of 15 days after receipt of notice from Efficient.
1999 Employee Stock Purchase Plan
Our 1999 employee stock purchase plan was adopted by our board of directors
in April 1999 and by our stockholders in May 1999. A total of 200,000 shares of
common stock has been reserved for issuance under the purchase plan, plus
annual increases equal to the lesser of:
. 100,000 shares;
. 1% of the outstanding shares on such date; or
. a lesser amount determined by the board on the first day of each fiscal
year.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, contains successive six-month
offering periods. The offering periods generally start on the first trading day
on or after June 1 and December 1 of each year, except for the first such
offering period which commences on the first trading day on or after the
effective date of this offering and ends on the last trading day on or before
November 30.
Our employees are eligible to participate if they are employed by us or any
of our participating subsidiaries for at least 20 hours per week and more than
five months in any calendar year. However, the following employees may not
purchase stock under the purchase plan:
. any employee who immediately after grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of our capital
stock; or
. any employee whose rights to purchase stock under any of our employee
stock purchase plans accrue at a rate that exceeds $25,000 worth of stock
for each calendar year.
Participants may purchase common stock through payroll deductions of up to
10% of the participant's compensation. The maximum number of shares a
participant may purchase during a single offering period is 500 shares.
Amounts deducted and accumulated by the participant will be used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period and at the end of
each offering period.
55
<PAGE>
The purchase plan provides that, in the event of a merger of Efficient with
or into another corporation or a sale of substantially all of our assets,
outstanding options may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be shortened
and a new exercise date will be set, which will occur before the proposed sale
or merger.
The purchase plan will terminate in 2009. The board of directors has the
authority to amend or terminate the purchase plan, except that no such action
may adversely affect any outstanding rights to purchase stock.
401(k) Plan
We maintain a tax-qualified employee savings and retirement plan, a 401(k)
plan, that covers all of our eligible employees. Pursuant to the 401(k) plan,
participants may elect to reduce their current compensation, on a pre-tax
basis, up to 15% or the statutorily prescribed annual limit, whichever is
lower, and have the amount of such reduction contributed to the 401(k) plan.
Participants' salary reduction contributions are fully vested at all times.
Efficient, in its sole discretion, may make additional employer contributions
to the 401(k) plan. Participants' interests in their additional employer
contributions, if any, vest in accordance with a four-year graduated vesting
schedule. To date, Efficient has not made any employer contributions.
Participants generally are eligible for a distribution from the 401(k) plan
upon their reaching age 59 1/2, age 65, death, disability or separation from
service with Efficient. The 401(k) plan is intended to qualify under Section
401(a) of the Internal Revenue Code of 1986, as amended, and its accompanying
trust is intended to be a tax-exempt trust under Section 501(a) of the Internal
Revenue Code of 1986, as amended. Contributions made on behalf of participants,
on a pre-tax basis, to the 401(k) plan, and income earned on such
contributions, are not currently taxable to participants. All such
contributions are tax deductible by Efficient.
Limitations on Directors' Liability and Indemnification
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for any of
the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and executive officers, and that we may indemnify our other
officers and employees and other agents, to the fullest extent permitted by
law. We believe that indemnification under our bylaws covers at least
negligence and gross negligence on the part of indemnified parties. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors
and executive officers for expenses, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding arising out of such
person's services as a director or executive officer of Efficient or at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers. We
also maintain directors and officers liability insurance. At present, we are
not aware of any pending litigation or proceeding involving any director,
officer, employee or agent of Efficient where indemnification will be required
or permitted. Furthermore, we are not aware of any threatened litigation or
proceeding that might result in a claim for indemnity by these individuals.
56
<PAGE>
CERTAIN TRANSACTIONS
The following is a description of transactions during our last three fiscal
years to which we have been a party, in which the amount involved in the
transaction exceeds $60,000 and in which any director, executive officer or
holder of more than 5% of our capital stock had or will have a direct or
indirect material interest other than compensation arrangements that are
otherwise required to be described under "Management."
During the past three fiscal years, we have issued redeemable convertible
preferred stock, subordinated promissory notes and warrants as follows:
. In September 1995, we sold 2,473,644 shares of Series D preferred stock in a
private placement at a purchase price of $2.02 per share;
. In December 1996, we sold 3,091,430 shares of Series E preferred stock in a
private placement at a purchase price of $2.41 per share;
. In February 1998, we sold 2,057,159 shares of Series F preferred stock in a
private placement at a purchase price of $2.92 per share;
. In June 1998, we sold 1,866,800 shares of Series G preferred stock in a
private placement at a purchase price of $2.92 per share;
. In January 1999, we issued an aggregate $7.0 million of 10% subordinated
promissory notes due January 2002, together with warrants to purchase
2,397,260 shares of Series H preferred stock in a private placement at an
exercise price of $2.92 per share;
. In March 1999, we sold 1,850,000 shares of Series G preferred stock in a
private placement at a purchase price of $2.92 per share; and
. In April 1999, we issued an aggregate $2.0 million of 10% subordinated
promissory notes due January 2002, together with warrants to purchase
684,931 shares of Series H preferred stock in a private placement at an
exercise price of $2.92 per share.
Our officers, directors and 5% stockholders participated in the foregoing
transactions as follows:
<TABLE>
<CAPTION>
Principal
Number of Number of Number of Number of Amount Number of
Shares of Shares of Shares of Shares of of 10% Series H
Name Of Purchaser Series D Series E Series F Series G Notes Warrants
----------------- --------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Texas Instruments
Incorporated........... 2,473,644 -- 1,712,329 -- -- --
ADC Telecommunications.. -- 2,066,420 45,881 -- -- --
Enterprise Partners..... -- 265,836 81,773 -- -- --
Crosspoint Venture
Partners............... -- 236,880 72,848 -- $5,000,000 1,712,329
El Dorado Ventures...... -- 236,367 72,689 -- $2,000,000 684,931
Menlo Ventures.......... -- 144,332 44,381 -- -- --
Siemens................. -- -- -- 3,716,800 -- --
Palomar Ventures........ -- -- -- -- $2,000,000 684,931
</TABLE>
Mr. Martin, a member of our board of directors, is affiliated with ADC
Telecommunications. Mr. Hoff, a member of our board of directors, is affiliated
with Crosspoint Venture Partners. Mr. Peterson, a member of our board of
directors, is affiliated with El Dorado Ventures. Mr. Maher, a member of our
board of directors, is affiliated with Siemens. Mr. Gauer, a member of our
board of directors, was formerly affiliated with Enterprise Partners and is
presently affiliated with Palomar Ventures.
57
<PAGE>
Note Repayment and Warrant Exercise Agreement
Each holder of a 10% subordinated promissory note has entered into a note
repayment and warrant exercise agreement with Efficient. Pursuant to the terms
of the agreement, immediately prior to the closing of this offering, the
aggregate $9.0 million principal amount of the notes will be applied toward the
aggregate exercise price of the warrants to purchase 3,082,191 shares of
Series H preferred stock at an exercise price of $2.92 per share.
ADC Telecommunications, Inc., December 1996
In December 1996, Efficient entered into a seven-year strategic alliance
agreement with ADC. The agreement provides for joint development and promotion
of products incorporating ADC's and Efficient's technology.
Texas Instruments Incorporated, November 1997
In November 1997, Efficient and Texas Instruments Incorporated entered into
an agreement to develop a DSL network interface card and associated software.
In February 1998, Efficient and Texas Instruments amended the agreement to
provide that Efficient would focus a percentage of our resources on products,
product developments and marketing programs that support Texas Instruments ADSL
integrated circuits. In March 1999, Efficient and Texas Instruments amended the
agreement to provide Texas Instruments with the right to make and license a
certain Efficient ASIC.
Siemens AG, June 1998
In June 1998, Efficient entered into an original equipment manufacturer
purchase agreement with Siemens. The agreement provides for the purchase by
Siemens of our SpeedStream 3010 and 3040 models, including supporting software
and hardware and software design, customization and support services.
Director Option and Loan
In May 1999, Efficient granted Robert Hawk an option to purchase 150,000
shares of common stock at an exercise price of $10.50 per share. In connection
with this option, Efficient loaned Mr. Hawk $1,575,000 with which to exercise
the option. The loan bears interest at the rate of 6.0% per year, and is due
and payable upon demand but not later than June 30, 1999.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The table on the following page sets forth information regarding the
beneficial ownership of our common stock as of May 31, 1999, by (a) each person
or entity who is known by us to own beneficially more than 5% of our
outstanding stock; (b) each of our directors and a director nominee; (c) each
of the named executive officers; and (d) all directors and executive officers
as a group.
<TABLE>
<CAPTION>
Percentage of Percentage of
Shares Shares
Number of Shares Beneficially Owned Beneficially Owned
Name and Address Beneficially Owned Prior to Offering After the Offering
- ---------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Crosspoint Venture
Partners(1)............ 5,116,619 16.0% 14.2%
18552 MacArthur Blvd.,
Suite 400
Irvine, CA 92612
Texas Instruments
Incorporated........... 4,185,973 13.1 11.6
P.O. Box 660199, M.S.
8650
Dallas, TX 75266-0199
El Dorado Ventures(2)... 4,081,800 12.7 11.3
2400 Sand Hill Road,
Suite 100
Menlo Park, CA 94025
Enterprise Partners(3).. 3,821,374 11.9 10.6
5000 Birch Street, Suite
6200
Newport Beach, CA 92600
Siemens AG.............. 3,716,800 11.6 10.3
Hofmannstrasse 51
81359 Munchen, Germany
ADC Telecommunications,
Inc.................... 2,144,113 6.7 5.9
2240 Campbell Creek Road
Richardson, TX 75082
Menlo Ventures(4)....... 2,043,210 6.4 5.7
3000 Sand Hill Road,
Bldg. 4, Suite 100
Menlo Park, CA 94025
Chase Bailey............ 1,650,000 5.1 4.6
258 Main Street #D
Los Gatos, CA 95030
Mark A. Floyd(5)........ 1,460,417 4.5 4.0
Bruce W. Brown(6)....... 75,000 * *
Robert A. Hoff(7)....... 5,129,119 16.0 14.2
Thomas H. Peterson(8)... 4,094,300 12.8 11.3
James P. Gauer(9)....... 1,971,234 6.1 5.5
Anthony T. Maher(10).... 3,720,550 11.6 10.3
William L. Martin
III(11)................ 2,156,613 6.7 6.0
Robert Hawk(12)......... 150,000 * *
David B. Stefan(13)..... 50,521 * *
Patricia W. Hosek(14)... 97,917 * *
Gregory L. Langdon(15).. 91,667 * *
Paul E. Couturier(16)... 81,823 * *
All directors and
officers as a group (12
persons)(17)........... 19,181,869 58.6% 52.2%
</TABLE>
- --------
59
<PAGE>
Applicable percentage ownership in the above table is based on 31,994,808
shares of common stock outstanding as of April 30, 1999, as adjusted to
reflect:
. the conversion of $9.0 million in debt into an aggregate of 3,082,191
shares of preferred stock through the exercise of certain outstanding
warrants;
. 167,746 shares of redeemable convertible preferred stock issuable upon
the exercise of certain outstanding warrants;
. the issuance of 105,893 shares of common stock pursuant to the exercise
of options between March 31, 1999 and April 30, 1999; and
. the conversion of all outstanding shares of preferred stock into common
stock upon the closing of this offering.
Unless otherwise indicated above, each stockholder named in the table has
sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where
applicable. Unless otherwise indicated, the address for each stockholder listed
in the following table is c/o Efficient Networks, Inc., 4201 Spring Valley
Road, Suite 1200, Dallas, Texas 75244.
* Less than 1% of the outstanding shares of common stock.
(1) Represents 3,301,480 shares held by Crosspoint Venture Partners III,
102,810 shares held by Crosspoint 1993 Entrepreneurs Fund and a warrant
held by Crosspoint Ventures LS 1997 L.P. for the purchase of 1,712,329
shares of Series H preferred stock exercisable prior to the consummation
of this offering.
(2) Represents 3,236,226 shares held by El Dorado Ventures III, 59,936 shares
held by El Dorado C&L Fund, L.P., 100,707 shares held by El Dorado
Technology IV, L.P., a warrant held by El Dorado Ventures IV, L.P. for the
purchase of 632,626 shares of Series H preferred stock and a warrant held
by El Dorado Technology '98, L.P. for the purchase of 52,305 shares of
Series H preferred stock, each exercisable prior to the consummation of
this offering.
(3) Represents 3,502,945 shares held by Enterprise Partners II, L.P., and
318,429 shares held by Enterprise Partners Associates, L.P.
(4) Represents 2,013,011 shares held by Menlo Ventures VI, L.P. and 30,199
shares held by Menlo Entrepreneurs Fund VI, L.P.
(5) Includes 360,417 shares issuable upon exercise of stock options
exercisable within 60 days of June 30, 1999.
(6) Includes 75,000 shares issuable upon exercise of stock options exercisable
within 60 days of June 30, 1999.
(7) Mr. Hoff is a general partner of Crosspoint Venture Partners. The shares
listed represent (a) 5,116,619 shares held by Crosspoint Venture Partners
and (b) 12,500 shares held by Mr. Hoff issuable upon exercise of stock
options within 60 days of June 30, 1999. Mr. Hoff disclaims beneficial
ownership of the shares held by Crosspoint Venture Partners, except to the
extent of his pecuniary interest therein.
(8) Mr. Peterson is a general partner of El Dorado Ventures. The shares listed
represent (a) 4,081,800 shares held by El Dorado Ventures and (b) 12,500
shares held by Mr. Peterson issuable upon exercise of stock options within
60 days of June 30, 1999. Mr. Peterson disclaims beneficial ownership of
the shares held by El Dorado Ventures, except to the extent of his
pecuniary interest therein.
(9) Mr. Gauer is a general partner of Palomar Ventures and Ocean Park
Ventures, L.P. The shares listed represent (a) a warrant held by Palomar
Ventures for the purchase of 684,931 shares of Series H preferred stock
exercisable prior to the consummation of this offering, (b) 1,273,803
shares held by Ocean Park Ventures and (c) 12,500 shares held by Mr. Gauer
issuable upon exercise of stock options within 60 days of June 30, 1999.
Mr. Gauer disclaims beneficial ownership of the shares held by Palomar
Ventures and Ocean Park Ventures, except to the extent of his pecuniary
interest therein.
(10) Includes 3,716,800 shares beneficially owned by Siemens AG. Mr. Maher is a
member of the board of Siemens AG Information and Communication Networks.
Mr. Maher disclaims beneficial ownership of the shares held by Siemens.
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(11) Includes 2,144,113 shares beneficially owned by ADC Telecommunications,
Inc. Mr. Martin is a Senior Vice President of ADC Telecommunications, Inc.
and President of the Business Broadband Group of ADC Telecommunications,
Inc. The shares listed represent 12,500 shares held by Mr. Martin issuable
upon exercise of stock options within 60 days of June 30, 1999. Mr. Martin
disclaims beneficial ownership of the shares held by ADC
Telecommunications, Inc.
(12) Includes 150,000 shares issued upon exercise of a stock option. All of
such shares are currently subject to a right of repurchase by Efficient.
(13) Includes 50,521 shares issuable upon exercise of stock options exercisable
within 60 days of June 30, 1999.
(14) Includes 65,625 shares issuable upon exercise of stock options exercisable
within 60 days of June 30, 1999.
(15) Includes 91,667 shares issuable upon exercise of stock options exercisable
within 60 days of June 30, 1999.
(16) Includes 81,823 shares issuable upon exercise of stock options exercisable
within 60 days of June 30, 1999.
(17) Includes an aggregate of 853,304 shares issuable upon exercise of stock
options exercisable within 60 days of June 30, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon the completion of this offering, we will be authorized to issue
200,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares of
undesignated preferred stock, $0.001 par value. The following description of
our capital stock is subject to and qualified in its entirety by our
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and by the
provisions of applicable Delaware law.
Common Stock
As of May 31, 1999, there were 32,067,124 shares of common stock outstanding
after giving pro forma effect to (1) the conversion of $9.0 million in debt of
Efficient into an aggregate of 3,082,191 shares of redeemable convertible
preferred stock, and (2) the conversion of all outstanding shares of redeemable
convertible preferred stock into common stock upon the closing of this
offering. These shares were held of record by approximately 60 stockholders
including 24,720,213 shares of common stock to be issued upon the closing of
this offering upon conversion of all outstanding shares of redeemable
convertible preferred stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of Efficient, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The holders
of common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel to Efficient, shall opine that the shares of common stock to be issued
upon the closing of this offering, when issued and sold in the manner described
in this prospectus and in accordance with the resolutions adopted by the board
of directors, will be fully paid and nonassessable.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of Efficient without further
action by the stockholders.
Upon the closing of this offering no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
Warrants
At March 31, 1999, there were warrants outstanding to purchase 96,000 shares
of Series A preferred stock, 37,500 shares of Series C preferred stock and
34,246 shares of Series G preferred stock. Upon completion of
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this offering, these warrants will become exercisable to purchase an aggregate
of 167,746 shares of common stock. These numbers exclude warrants to purchase
3,082,191 shares of Series H preferred stock. It is anticipated that the Series
H warrants will be exercised prior to completion of this offering and will
convert into 3,082,191 shares of common stock upon completion of this offering.
Registration Rights
The holders of 24,720,213 shares of redeemable convertible preferred stock,
and the holders of warrants to purchase 3,082,191 shares of redeemable
convertible preferred stock are entitled to certain rights with respect to the
registration of shares of common stock that are issuable upon the conversion of
such preferred stock under the Securities Act. Certain of these rights are
provided under the terms of an agreement between Efficient and the holders of
the registrable securities. Beginning 180 days following the date of this
prospectus, holders of at least 50% of the then outstanding registrable
securities may require on up to two occasions that we register their shares for
public resale. Also, holders of registrable securities may require on one
occasion within any twelve month period that we register their shares for
public resale on Form S-3 or similar short-form registration if the value of
the securities to be registered is at least $1.0 million. We may defer a
registration on Form S-3 for 60 days in view of market conditions. Furthermore,
in the event we elect to register any of our shares of common stock for
purposes of effecting any public offering, the holders of registrable
securities are entitled to include their shares of common stock in the
registration, but we may reduce the number of shares proposed to be registered
in view of market conditions. These registration rights have been waived with
respect to this offering. All expenses incurred in connection with any
registration, other than underwriting discounts and commissions attributable to
registrable securities, will be borne by us. All registration rights will
terminate six years following the consummation of this offering, or, with
respect to each holder of registrable securities, at such time as the holder is
entitled to sell all of its shares in any three-month period under Rule 144(k)
of the Securities Act.
The holder of a warrant to purchase 96,000 shares of preferred stock
convertible into 96,000 shares of common stock is also entitled to certain
rights with respect to registration of such shares under the Securities Act.
Beginning 180 days following the date of this prospectus, the holder may
require us to register the holder's shares for public resale on Form S-3 or
similar short-form registration; however, we may defer such registration for 90
days in view of market conditions. In addition to Form S-3 registration rights,
the holder also has rights to include its shares in any registration of our
shares of common stock for purposes of effecting a public offering, but we may
reduce the number of shares proposed to registered in view of market condition.
These registration rights have been waived with respect to this offering.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following transactions more difficult:
. the acquisition of Efficient by means of a tender offer;
. the acquisition of Efficient by means of a proxy contest or otherwise; or
. the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of Efficient
to first negotiate with our board of directors. We believe that the benefits of
our increased ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Efficient outweigh the
disadvantages of discouraging such proposals as negotiation of such proposals
could result in an improvement of their terms.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
one class being elected each year by our stockholders. See
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"Management--Executive Officers and Directors." This system of electing and
removing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of Efficient because it
generally makes it more difficult for stockholders to replace a majority of
the directors.
Stockholder Meetings. Under our bylaws, only our board of directors,
Chairman of the Board and President may call special meetings of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by our
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.
Elimination of Cumulative Voting. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of
any attempt to change control of Efficient. These and other provisions may
have the effect of deterring hostile takeovers or delaying changes in control
or management of Efficient.
Amendment of Charter Provisions. The amendment of any of the above
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Harris Trust
Company of California.
Nasdaq National Market Listing
We have applied for the listing of our shares on The Nasdaq National Market
under the symbol "EFNT."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that a significant public market for the
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock, including shares issued upon exercise of
outstanding options and warrants, in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair our ability to raise capital through the sale of our equity securities.
Sales of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering and based on shares outstanding at May 31,
1999, we will have outstanding 36,067,124 shares of common stock. Of these
shares, all the shares sold in this offering, plus any shares issued upon
exercise of the underwriters' over-allotment option, will be freely tradable
without restriction under the Securities Act, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act.
The remaining 32,067,124 shares of common stock outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which are summarized below.
Our directors, officers and stockholders have entered into lock-up
agreements with the underwriters of this offering generally providing that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of our shares of common stock or any securities exercisable
for or convertible into our common stock owned by them prior to this offering
for a period of 180 days after the effective date of the registration statement
filed pursuant to this offering without the prior written consent of Credit
Suisse First Boston Corporation. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold
until such agreements expire or are waived by Credit Suisse First Boston
Corporation. Taking into account the lock-up agreements, and assuming Credit
Suisse First Boston Corporation does not release stockholders from these
agreements prior to the expiration of the 180 day lock-up period, the following
shares will be eligible for sale in the public market at the following times:
. beginning on the effective date of the registration statement, the
4,000,000 shares sold in this offering, and 76,250 additional shares,
will be immediately available for sale in the public market;
. beginning 90 days after the effective date, 140,938 additional shares
will be available for sale in the public market;
. after 180 days following the date of this prospectus, 26,559,412
additional shares will become eligible for sale under Rule 144 subject to
volume restrictions as described below; and
. the remainder of the restricted securities will be eligible for sale from
time to time thereafter, subject in some cases to compliance with Rule
144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year, including the holding period of any prior owner
except an affiliate, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 360,000 shares immediately after this offering; or
. the average weekly trading volume of our common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about Efficient. Under Rule 144(k), a person who is not deemed to
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have been an affiliate of Efficient at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years, including the holding period of any prior owner except
an affiliate, is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule
144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors, or consultant who purchased shares under a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this prospectus before selling
such shares. However, 730,931 Rule 701 shares are subject to lock-up agreements
and will only become eligible for sale at the earlier of the expiration of the
180-day lock-up agreements or no sooner than 90 days after the offering upon
obtaining the prior written consent of Credit Suisse First Boston Corporation.
Within 90 days following the effectiveness of this offering, we will file a
registration statement on Form S-8 registering 10,170,575 shares of common
stock subject to outstanding options or reserved for future issuance under our
stock plans. As of March 31, 1999, options to purchase a total of 6,470,575
shares were outstanding and 3,700,000 shares were reserved for future issuance
under our stock plans. Upon the filing of the registration statement on Form S-
8, common stock issued upon exercise of outstanding vested options or issued
under our purchase plan, other than common stock issued to our affiliates, will
be available for immediate resale in the open market.
Also beginning six months after the date of this offering, holders of
27,802,404 restricted shares and certain holders of warrants to purchase 96,000
shares of common stock will be entitled to certain registration rights. See
"Description of Capital Stock--Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of such
registration.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens, Inc. and Volpe Brown Whelan & Company, LLC are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Credit Suisse First Boston Corporation.............................
BancBoston Robertson Stephens, Inc.................................
Volpe Brown Whelan & Company, LLC..................................
----
Total............................................................
====
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering price less
the underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay:
<TABLE>
<CAPTION>
Total
-----------------------------
Per Without With
Share Over-allotment Over-allotment
----- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commissions
paid by us............................... $ $ $
Expenses payable by us.................... $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and other stockholders holding an aggregate
of 31,567,221 shares have agreed that we and they will not offer, sell,
contract to sell, announce our intention to sell, pledge or otherwise dispose
of, directly or indirectly, or file with the Securities and Exchange Commission
a registration statement under the Securities Act relating to, any additional
shares of our common stock or securities convertible into or exchangeable or
exercisable for any of our common stock without the prior written consent of
Credit Suisse First Boston Corporation for a period of 180 days after the date
of this prospectus, except in the case of issuances by Efficient upon the
exercise of employee stock options outstanding on the date hereof.
The underwriters have reserved for sale, at the initial public offering
price, up to 200,000 shares of the common stock for some of our vendors,
customers and other people and entities with whom we maintain business
relationships who have expressed an interest in purchasing common stock in the
offering. The number of shares available for sale to the general public in the
offering will be reduced to the extent these persons purchase the reserved
shares. Any reserved shares not purchased will be offered by the underwriters
to the general public on the same terms as the other shares.
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We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq National
Market under the symbol "EFNT."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price will include: the information set forth
in this prospectus and otherwise available to the representatives; the history
and the prospects for the industry in which we will compete; the ability of our
management; the prospects for our future earnings; the present state of our
development and our current financial condition; the general condition of the
securities markets at the time of this offering; and the recent market prices
of, and the demand for, publicly-traded common stock of generally comparable
companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934, as amended. Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the common stock
in the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representatives to reclaim a
selling concession from a syndicate member when the common stock originally
sold by such syndicate member is purchased in a syndicate covering transaction
to cover syndicate short positions. These stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the common stock
to be higher than it would otherwise be in the absence of these transactions.
These transactions may be effected on The Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
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NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (1) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under these securities laws, (2) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (3) the purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action of Ontario Purchasers
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser pursuant to this offering. This report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
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LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Efficient by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. The due authorization of the shares to be sold by Efficient
and the execution and delivery of the underwriting agreement for this offering
will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP,
Austin, Texas.
EXPERTS
The consolidated financial statements of Efficient Networks, Inc. as of June
30, 1997, June 30, 1998 and March 31, 1999, and for each of the years in the
three-year period ended June 30, 1998 and the nine months ended March 31, 1999,
included in this prospectus and registration statement have been audited by
KPMG LLP, independent auditors, as set forth in their reports, which are
included in this prospectus and registration statement, and are included in
reliance upon their reports given on their authority as experts in accounting
and auditing.
ADDITIONAL EFFICIENT INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to Efficient and the
common stock offered in this offering, we refer you to the registration
statement and to the attached exhibits and schedules. With respect to each such
document filed as an exhibit to the registration statement, we refer you to the
exhibit for a more complete description of the matter involved.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Securities and Exchange Commission
located at Seven World Trade Center, 13th Floor, New York, NY 10048, and the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the Securities and Exchange Commission at 1-800-
SEC-0330 for further information about public reference rooms. You may obtain
copies of all or any part of our registration statement from the Securities and
Exchange Commission upon payment of prescribed fees. You may also inspect
reports, proxy, and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission without charge at a Web site maintained by the Securities and
Exchange Commission at http://www.sec.gov.
Upon completion of this offering, Efficient will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
and, accordingly, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Such periodic reports,
proxy statements and other information will be available for inspection and
copying at the Securities and Exchange Commission's public reference rooms, and
the Web site of the Securities and Exchange Commission referred to above.
70
<PAGE>
EFFICIENT NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Efficient Networks, Inc.:
We have audited the accompanying consolidated balance sheets of Efficient
Networks, Inc. and subsidiary as of June 30, 1997 and 1998 and March 31, 1999,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
June 30, 1998 and for the nine months ended March 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Efficient
Networks, Inc. and subsidiary as of June 30, 1997 and 1998 and March 31, 1999,
and the results of their operations and their cash flows for each of the years
in the three-year period ended June 30, 1998 and for the nine months ended
March 31, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Dallas, Texas
April 26, 1999
F-2
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Balance Sheets
June 30, 1997 and 1998 and March 31, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30 March 31, 1999
----------------- --------------------
Pro forma
1997 1998 Actual (unaudited)
Assets -------- ------- ------- -----------
<S> <C> <C> <C> <C>
Current assets: (note 2(l))
Cash and cash equivalents............... $ 3,413 $ 7,607 $ 4,596 $ 6,596
Accounts receivable, net of allowance
for doubtful accounts of $25 in 1997,
$15 in 1998 and $70 in 1999............ 779 461 6,499 6,499
Inventories............................. 594 898 3,917 3,917
Other assets............................ -- 202 48 48
-------- ------- ------- -----------
Total current assets.................. 4,786 9,168 15,060 17,060
Furniture and equipment, net.............. 1,559 1,404 2,130 2,130
Other assets, net......................... 109 95 44 44
-------- ------- ------- -----------
$ 6,454 $10,667 $17,234 $ 19,234
======== ======= ======= ===========
<CAPTION>
Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable........................ $ 184 $ 547 $ 3,995 $ 3,995
Accrued liabilities..................... 232 751 967 967
Deferred revenue........................ -- -- 625 625
-------- ------- ------- -----------
Total current liabilities............. 416 1,298 5,587 5,587
Long-term debt, net of discount........... -- -- 4,253 --
Other liabilities......................... 13 -- 22 22
-------- ------- ------- -----------
Total liabilities..................... 429 1,298 9,862 5,609
-------- ------- ------- -----------
Redeemable convertible preferred stock
(note 7) 23,635 34,743 40,408 --
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, par value $.001 per share,
100,000,000 shares authorized;
3,054,771, 3,616,964 and 3,918,765
shares issued and outstanding in 1997,
1998 and 1999, respectively; pro
forma--31,721,169 shares issued and
outstanding............................ 3 4 4 32
Additional paid-in capital.............. 279 408 18,041 68,865
Deferred stock option compensation...... (183) (137) (12,436) (12,436)
Accumulated deficit..................... (17,709) (25,649) (38,645) (42,836)
-------- ------- ------- -----------
Total stockholders' equity (deficit).. (17,610) (25,374) (33,036) 13,625
-------- ------- ------- -----------
$ 6,454 $10,667 $17,234 $ 19,234
======== ======= ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Operations
Years ended June 30, 1996, 1997 and 1998, and the nine months ended March 31,
1998 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
---------------------
March 31,
1998 March 31,
1996 1997 1998 (unaudited) 1999
-------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues................. $ 3,687 $ 4,122 $ 3,370 $ 2,703 $ 7,139
Cost of revenues............. 2,209 2,386 2,160 1,553 6,699
-------- ------- ------- ------- --------
Gross profit............. 1,478 1,736 1,210 1,150 440
-------- ------- ------- ------- --------
Operating expenses:
Sales and marketing........ 2,366 2,409 3,436 2,232 3,856
Research and development... 3,853 4,183 4,157 2,845 5,546
General and
administrative............ 1,082 1,245 1,641 1,197 1,234
Stock option compensation.. -- 73 46 34 820
-------- ------- ------- ------- --------
Total operating
expenses................ 7,301 7,910 9,280 6,308 11,456
-------- ------- ------- ------- --------
Loss from operations..... (5,823) (6,174) (8,070) (5,158) (11,016)
Interest expense............. -- -- (10) -- (2,130)
Interest income.............. 177 144 146 87 154
Other, net................... -- (19) (6) (6) (4)
-------- ------- ------- ------- --------
Net loss................. $ (5,646) $(6,049) $(7,940) $(5,077) $(12,996)
======== ======= ======= ======= ========
Basic and diluted net
loss per share of common
stock................... $ (1.99) $ (2.00) $ (2.44) $ (1.59) $ (3.48)
======== ======= ======= ======= ========
Weighted-average shares
of common stock
outstanding............. 2,838 3,027 3,254 3,193 3,807
======== ======= ======= ======= ========
Unaudited pro forma basic
and diluted net loss per
share................... $ (0.35) $ (0.64)
======= ========
Weighted average shares
used to compute
unaudited pro forma
basic and diluted net
loss per share.......... 22,886 27,077
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Stockholders Equity (Deficit)
Years ended June 30, 1996, 1997 and 1998, and the nine months ended March 31,
1999
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
Common Stock Additional Deferred stockholders'
----------------- paid-in stock option Accumulated equity
Shares Amount capital compensation deficit (deficit)
---------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1995................... 2,811,875 $ 3 $ 3 $ -- $ (6,014) $(6,008)
Issuance of common
stock under stock
option plan.......... 180,396 -- 11 -- -- 11
Net loss.............. -- -- -- -- (5,646) (5,646)
---------- --- ------- -------- -------- -------
Balance at June 30,
1996................... 2,992,271 3 14 -- (11,660) (11,643)
Issuance of common
stock under stock
option plan.......... 62,500 -- 9 -- -- 9
Deferred stock option
compensation......... -- -- 256 (256) -- --
Amortization of
deferred stock option
compensation......... -- -- -- 73 -- 73
Net loss.............. -- -- -- -- (6,049) (6,049)
---------- --- ------- -------- -------- -------
Balance at June 30,
1997................... 3,054,771 3 279 (183) (17,709) (17,610)
Issuance of common
stock under stock
option plan.......... 448,125 1 61 -- -- 62
Issuance of common
stock................ 114,068 -- 68 -- -- 68
Amortization of
deferred stock option
compensation......... -- -- -- 46 -- 46
Net loss.............. -- -- -- -- (7,940) (7,940)
---------- --- ------- -------- -------- -------
Balance at June 30,
1998................... 3,616,964 4 408 (137) (25,649) (25,374)
Issuance of common
stock under stock
option plan.......... 301,801 -- 48 -- -- 48
Issuance of warrants.. -- -- 4,729 -- -- 4,729
Deferred stock option
compensation......... -- -- 13,119 (13,119) -- --
Amortization of
deferred stock option
compensation......... -- -- -- 820 -- 820
Accretion of issuance
costs on redeemable
convertible preferred
stock................ -- -- (263) -- -- (263)
Net loss.............. -- -- -- -- (12,996) (12,996)
---------- --- ------- -------- -------- -------
Balance at March 31,
1999................... 3,918,765 4 18,041 (12,436) (38,645) (33,036)
Unaudited pro forma
issuance of common
stock upon conversion
of redeemable
convertible preferred
stock................ 24,720,213 25 40,470 -- -- 40,495
Unaudited pro forma
accretion of issuance
costs on redeemable
convertible preferred
stock................ -- -- (87) -- -- (87)
Unaudited pro forma
net loss related to
accretion of
remaining discount on
long term debt....... -- -- -- -- (4,191) (4,191)
Unaudited pro forma
issuance of common
stock upon exercise
of warrants.......... 3,082,191 3 10,441 -- -- 10,444
---------- --- ------- -------- -------- -------
Unaudited pro forma
balance at March 31,
1999................... 31,721,169 $32 $68,865 $(12,436) $(42,836) $13,625
========== === ======= ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 1996, 1997 and 1998, and the nine months ended March 31,
1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
---------------------
March 31,
1998 March 31,
1996 1997 1998 (unaudited) 1999
------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $(5,646) $(6,049) $(7,940) $(5,077) $(12,996)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 800 861 727 544 588
Amortization of deferred
stock option compensation.. -- 73 46 34 820
Accretion of discount on
subordinated promissory
notes...................... -- -- -- -- 1,982
Changes in operating assets
and liabilities:
Accounts receivable........ (84) (12) 318 (473) (6,038)
Inventories................ (76) 443 (304) (50) (3,019)
Other assets and
liabilities............... 19 59 (201) 74 230
Accounts payable and
accrued liabilities....... (386) (18) 967 539 3,672
Deferred revenue........... -- -- -- -- 625
------- ------- ------- ------- --------
Net cash used in operating
activities............... (5,373) (4,643) (6,387) (4,409) (14,136)
------- ------- ------- ------- --------
Cash flows used in investing
activities--purchase of
furniture and equipment...... (800) (525) (572) (356) (1,314)
------- ------- ------- ------- --------
Cash flows from financing
activities:
Principal payments on capital
lease obligations........... (185) (192) (78) (60) (11)
Proceeds from issuance of
promissory notes and
warrants.................... -- 1,500 1,000 1,000 7,000
Proceeds from issuance of
common stock................ 11 9 130 29 48
Proceeds from issuance of
preferred stock............. 5,000 5,961 10,101 5,000 5,402
------- ------- ------- ------- --------
Net cash provided by
financing activities..... 4,826 7,278 11,153 5,969 12,439
------- ------- ------- ------- --------
Increase (decrease) in cash
and cash equivalents......... (1,347) 2,110 4,194 1,204 (3,011)
Cash and cash equivalents at
beginning of year............ 2,650 1,303 3,413 3,413 7,607
------- ------- ------- ------- --------
Cash and cash equivalents at
end of year.................. $ 1,303 $ 3,413 $ 7,607 $ 4,617 $ 4,596
======= ======= ======= ======= ========
Supplemental disclosure--cash
paid during the year for:
Interest..................... $ 36 $ 6 $ 4 $ 3 $ --
======= ======= ======= ======= ========
Non-cash financing
transaction--
Exchange of promissory notes
and related interest for
redeemable convertible
preferred stock............. $ -- $ 1,519 $ 1,007 $ 1,007 $ --
======= ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 1997 and 1998 and March 31, 1999
(1) Incorporation and Nature of Business
Efficient Networks, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on June 10, 1993. The Company designs, develops,
manufactures and sells Digital Subscriber Line ("DSL") customer premise
equipment ("CPE") for the broadband access market.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned sales subsidiary located in The
Netherlands. All significant intercompany accounts and transactions
have been eliminated in consolidation.
(b) Cash Equivalents
Cash equivalents consist primarily of an investment account comprised
of investments in commercial paper, repurchase agreements and money
market funds. For purposes of the statements of cash flows, the Company
considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
(c) Inventories
Inventories are stated at the lower of average cost or market (net
realizable value).
(d) Furniture and Equipment
Furniture and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.
Depreciation on plant and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Plant and
equipment held under capital leases and leasehold improvements are
amortized on a straight-line basis over the shorter of the lease term
or estimated useful life of the asset. The estimated useful lives are
as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Computers.............................. 5
Software............................... 3
Equipment.............................. 5
Furniture and fixtures................. 5
</TABLE>
(e) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
F-7
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997 and 1998 and March 31, 1999
(f) Revenue Recognition
Revenue from product sales is recognized upon shipment to the customer.
Reserves for estimated sales returns and allowances are recorded in the
same period as the related revenues. Revenue related to sales
transactions that provide a customer with the right to return product
is deferred until the product is deployed by the customer and/or the
return privileges expire.
(g) Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
in accounting for its fixed plan stock options. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(i) Net Loss Per Share of Common Stock
Net loss per share of common stock is presented in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share. Under SFAS No. 128, basic earnings/loss per
share excludes dilution for potentially dilutive securities and is
computed by dividing income or loss available to common stockholders by
the weighted average number of common shares outstanding during the
period. Diluted earnings/loss per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Potentially dilutive
securities are excluded from the computation of diluted earnings/loss
per share when their inclusion would be antidilutive. The computation
of basic and diluted weighted average shares is as follows (in
thousands):
<TABLE>
<CAPTION>
Nine-month
Year ended June 30, period ended
-------------------------- ---------------------
March 31,
1998 March 31,
1996 1997 1998 (unaudited) 1999
------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss.............. $(5,646) $(6,049) $ (7,940) $(5,077) $(12,996)
Accretion of
redeemable
convertible preferred
stock................ -- -- -- -- (263)
------- ------- -------- ------- --------
Numerator for basic
and diluted net loss
per share............ $(5,646) $(6,049) $ (7,940) $(5,077) $(13,259)
======= ======= ======== ======= ========
Denominator for basic
and diluted net loss
per share--weighted
average common shares
outstanding............ 2,838 3,027 3,254 3,193 3,807
======= ======= ======== ======= ========
</TABLE>
Pro forma basic and diluted net loss per share has been calculated
assuming: (a) the conversion of redeemable convertible preferred stock
outstanding at June 30, 1998 and March 31, 1999, as if the
F-8
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997 and 1998 and March 31, 1999
redeemable convertible preferred stock had converted immediately upon
its issuance, resulting in 19,631,974 and 22,870,213 additional shares
of common stock outstanding, respectively; (b) the warrants issued in
January 1999 in connection with the issuance of subordinated promissory
notes were exercised immediately upon their issuance using the
principal amount of the notes to satisfy the exercise price, resulting
in 399,544 additional shares of common stock outstanding and a charge
of $2,747,000 against earnings for the accretion of the discount
recorded on the notes; and (c) the warrants issued in April 1999 in
connection with the issuance of a subordinated promissory note were
exercised at March 31, 1999 using the principal amount of the note to
satisfy the exercise price, resulting in no incremental weighted
average shares outstanding and a charge of $1,443,810 against earnings
for the accretion of the discount recorded on the note.
(j) Fair Value of Financial Instruments
The carrying values of cash equivalents, accounts receivable and
accounts payable approximate fair value due to their short maturities.
The fair values of the Company's subordinated promissory notes and
warrants were determined using a valuation model with the following
assumptions: a volatility factor of 40% obtained from the stock price
volatility experienced by certain of the Company's principal
competitors; a risk-free interest rate of 5.71%; the contractual term
of the respective notes; the estimated fair value of the Company's
common stock ($10.25 at March 31, 1999); and exercise price of the
detachable warrants. The estimated fair values of the January 1999
subordinated promissory notes and warrants as of March 31, 1999 are
approximately $7.0 million and $18.7 million, respectively.
(k) Comprehensive Income
On July 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and
presentation of comprehensive income and its components in the
financial statements. Comprehensive income includes all changes in
equity during a period except those resulting from investments by and
distributions to owners. To date, no elements of comprehensive income
exist other than net loss from operations.
(l) Pro Forma Balance Sheet
The pro forma balance sheet reflects the following transactions as
though they had occurred as of March 31, 1999 (see notes 6 and 7):
. the April 8, 1999 issuance of subordinated promissory notes with
detachable warrants in exchange for $2 million,
. the conversion of $9 million of subordinated promissory notes into
an aggregate of 3,082,191 shares of redeemable convertible preferred
stock through the exercise of the warrants issued therewith, and
. the conversion of each outstanding share of redeemable convertible
preferred stock into one share of common stock.
(m) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial
F-9
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997 and 1998 and March 31, 1999
statements and the reported amounts of revenue and expenses during the
reporting period to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could
differ from those estimates.
(3)Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
------------- March 31,
1997 1998 1999
------ ------ ---------
<S> <C> <C> <C>
Raw materials........................................ $ 171 $ 354 $1,634
Finished goods....................................... 423 544 2,283
------ ------ ------
Total................................................ $ 594 $ 898 $3,917
====== ====== ======
</TABLE>
(4)Furniture and Equipment
Furniture and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------- March 31,
1997 1998 1999
------- ------ ---------
<S> <C> <C> <C>
Computers........................................ $ 1,766 $1,941 $2,606
Purchased software............................... 1,411 611 855
Equipment........................................ 303 241 513
Furniture and fixtures........................... 62 66 120
Leasehold improvements........................... 97 121 191
------- ------ ------
Total furniture and equipment.................... 3,639 2,980 4,285
Less accumulated depreciation and amortization... (2,080) (1,576) (2,155)
------- ------ ------
Furniture and equipment, net..................... $ 1,559 $1,404 $2,130
======= ====== ======
</TABLE>
The Company leases certain equipment under capital lease arrangements. At
June 30, 1997 and 1998, and March 31, 1999, the cost of assets under such
leases aggregated $456,665, $152,183, and $152,183, respectively, and
related accumulated amortization was $354,046, $134,065, and $152,183,
respectively. Amortization of assets leased under capital lease
arrangements is included in amortization expense.
(5)Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------- March 31,
1997 1998 1999
------ ------- ---------
<S> <C> <C> <C>
Accrued compensation and benefits................... $ 37 $ 247 $ 562
Accrued professional fees........................... 53 320 3
Accrued interest.................................... -- -- 145
Deferred rent....................................... 39 39 38
Current portion of capital lease obligation......... 78 11 --
Other............................................... 25 134 219
------ ------- ------
Total............................................... $ 232 $ 751 $ 967
====== ======= ======
</TABLE>
F-10
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997 and 1998 and March 31, 1999
(6)Long-term debt
In January 1999, the Company issued subordinated promissory notes with
detachable warrants in exchange for $7,000,000 in cash. On April 8, 1999,
the Company issued a subordinated promissory note with a detachable warrant
in exchange for $2,000,000 in cash. The notes bear interest of 10% per
annum and interest is payable quarterly. The notes are due at the earlier
of January 2002 or (a) a consummation of a qualifying liquidation event
which includes a firm commitment underwritten offering pursuant to a
registration statement under the Securities Act of 1933, the public
offering price of which is not less than $5.00 per share and $10,000,000 in
the aggregate; (b) any consolidation or merger of the Company with or into
any other corporation or corporations; (c) sale, conveyance or disposition
of all or substantially all of the assets of the Company; or (d) the
effectuation by the Company of a transaction or series of related
transactions in which more than 50% of the voting power of the Company is
disposed.
The notes issued in January and April 1999 were issued with detachable
warrants to purchase 2,397,260 shares and 684,931 shares, respectively, of
the Company's Series H redeemable convertible preferred stock at an
exercise price of $2.92 per share. The warrants expire at the earlier of
January 2002 or the consummation by the Company of the sale of its common
stock in a firm commitment underwritten offering at a price not less than
$5.00 per share and providing not less than $10,000,000 of net proceeds.
The proceeds were allocated between the notes and the warrants based on
their pro-rata fair values, as determined using a valuation model (see note
2(j)). As a result, the warrants issued in January and April were valued at
$4,728,889 and $1,443,810, respectively. This amount was recorded as paid-
in capital. The resulting discount on the notes is being accreted as
interest expense over the expected term of the related promissory notes.
(7)Redeemable Convertible Preferred Stock
Preferred stock has voting rights equal to the number of shares of common
stock into which the preferred stock is convertible. The preferred stock is
convertible at the option of the holder into such number of shares of
common stock as is determined by dividing the original issue price of the
preferred stock plus all declared but unpaid dividends by the applicable
conversion price at the date of conversion. The conversion price per share
is the original issue price adjusted for any dilution that may occur from
future offerings.
Each share of outstanding preferred stock will be required to convert to
common stock upon the earlier of the time of the Company's initial public
offering, if certain offering parameters are met, or the date on which the
Company obtains the consent of the holders of a majority of the then
outstanding shares of preferred stock.
The outstanding preferred stock is redeemable into cash at the request of a
majority of the holders of the then outstanding shares of preferred stock
at an amount equal to the original issue price plus all declared but unpaid
dividends. Amounts due to the preferred shareholders on redemption are
payable in three equal annual installments on the fifth, sixth and seventh
anniversaries of the original purchase dates.
Dividends may be declared at the sole discretion of the Board of Directors
and are noncumulative. To date, no such dividends have been declared. The
holders of the preferred stock are entitled to a liquidation preference
equivalent to the original issue price of the respective series of
preferred stock plus declared but unpaid dividends.
The following indicates the series of redeemable convertible preferred
stock in existence at March 31, 1999. Series for which preferred stock has
been issued and remains outstanding are stated at the redemption
F-11
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997 and 1998 and March 31, 1999
amount; issuance costs are netted against the proceeds and accreted as a
charge against additional paid-in capital over the expected life of the
related series of preferred stock (all in thousands, except share and per
share data):
<TABLE>
<CAPTION>
Dividend June 30,
Rate ---------------- March 31,
Per Share 1997 1998 1999
--------- -------- ------- ---------
<S> <C> <C> <C> <C>
Series A--7,096,000 shares authorized;
7,000,000 shares issued and
outstanding.......................... $0.03 $ 3,500 $ 3,500 $ 3,500
Series B--522,848 shares authorized,
issued and outstanding............... $0.07 625 625 625
Series C--5,895,832 shares authorized;
5,858,332 shares issued and
outstanding.......................... $0.07 7,030 7,030 7,030
Series D--2,473,644 shares authorized,
issued and outstanding............... $0.12 5,000 5,000 5,000
Series E--3,091,430 shares authorized,
issued and outstanding............... $0.15 7,480 7,480 7,480
Series F--2,057,159 shares authorized,
issued and outstanding in 1998 and
1999................................. $0.18 -- 6,007 6,007
Series G--6,000,000 shares authorized;
1,866,800 and 3,716,800 shares issued
and outstanding in 1998 and 1999..... $0.18 -- 5,451 10,853
Issuance costs, net of accretion...... -- (350) (87)
-------- ------- -------
$ 23,635 $34,743 $40,408
======== ======= =======
</TABLE>
Series H--4,000,000 shares authorized,
none issued or outstanding........... $0.18 -- -- --
The Company issued promissory notes in exchange for cash of $1,000,000 and
$500,000 on September 17, 1996 and December 12, 1996, respectively. The
promissory notes bore interest at 6% and were due on demand. On December
31, 1996, the Company issued 3,091,430 shares of Series E redeemable
convertible preferred stock in exchange for the principal and related
accrued interest on the promissory notes amounting to $1,518,657 and
$5,961,498 in cash.
The Company issued promissory notes in exchange for $1,000,000 on January
7, 1998. The promissory notes bore interest at 6% and were due on demand.
On February 17, 1998, the Company issued 2,057,159 shares of Series F
redeemable convertible preferred stock in exchange for the principal and
related accrued interest on the promissory notes amounting to $1,006,904
and $5,000,000 in cash.
In June 1998, the Company issued 1,866,800 shares of Series G redeemable
convertible preferred stock for $5,451,056 in cash. The issuance was
recorded net of issuance costs of $350,000. In March 1999, the Company
issued an additional 1,850,000 shares of Series G redeemable convertible
preferred stock for $5,402,000 in cash.
(8)Stock Option Plan
In 1993, the Company adopted a stock option plan (the "Plan") pursuant to
which the Company's Board of Directors may grant stock options to officers,
directors and key employees. The Plan authorizes grants of options to
purchase up to 10,000,000 shares of unissued common stock. The Board of
Directors determines the terms of each option, including exercise price
(within limits set forth in the plan), number of shares and the rate at
which each option is exercisable. The options generally vest ratably over a
period of four years from the date of grant.
F-12
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997 and 1998 and March 31, 1999
In 1998, the Company adopted the Directors' Stock Option Plan (the
"Directors' Plan") pursuant to which stock options may be granted to non-
employee members of the Company's Board of Directors. The Directors' Plan
authorizes grants of options to purchase up to 275,000 shares of common
stock.
Option grants under the Directors' Plan are nondiscretionary and automatic.
Non-employee directors serving on the Company's board of directors at the
date of the adoption of the Directors' Plan were granted options to
purchase 50,000 shares on the effective date of the plan. Subsequent non-
employee directors are granted an option to purchase 15,000 shares on the
date they become a director. After their initial grant, non-employee
directors are granted an option to purchase 15,000 shares on January 1 of
each year provided they have served on the board for at least six months.
At March 31, 1999, there were options to purchase 75,000 shares available
for grant under the Directors' Plan.
At March 31, 1999, there were options to purchase 2,404,728 shares
available for grant under both plans. The per share weighted-average fair
value of stock options granted during each of the years ended June 30,
1996, 1997 and 1998 and the nine months ended March 31, 1999 was $0.10,
$0.16, $0.19 and $5.37, respectively, on the date of grant as estimated
using the minimum value option-pricing model with the following weighted-
average assumptions in all years: expected dividend yield of 0.0%, an
expected life of four years, and a risk-free interest rate of 6%.
The Company applies APB Opinion No. 25 in accounting for stock options
granted to employees and non-employee directors under its stock option
plans. The Company recorded $256,000 and $13,119,000 of deferred stock
option compensation during the year ended June 30, 1997 and the nine months
ended March 31, 1999, respectively, as a result of granting stock options
with exercise prices below the estimated fair value per share of the
Company's common stock at the date of grant. Deferred stock option
compensation has been recorded as a component of stockholders' equity
(deficit) and is being amortized as a charge to operations over the vesting
period of the applicable options. Amortization of deferred stock option
compensation of $73,000, $46,000 and $820,000 was recognized in the years
ended June 30, 1997 and 1998, and the nine months ended March 31, 1999,
respectively.
F-13
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997 and 1998 and March 31, 1999
Had the Company determined compensation cost based on the estimated fair
value of stock options at the grant date in accordance with SFAS No. 123,
the Company's net loss would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Nine months
Year ended June 30, ended
------------------------- March 31,
1996 1997 1998 1999
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Net loss:
As reported....................... $(5,646) $(6,049) $(7,940) $(12,996)
Pro forma......................... $(5,652) $(6,067) $(7,951) $(13,154)
Basic and diluted net loss per share
of common stock:
As reported....................... $ (1.99) $ (2.00) $ (2.44) $ (3.48)
Pro forma......................... $ (1.99) $ (2.00) $ (2.44) $ (3.52)
</TABLE>
Pro forma net loss reflects only stock options granted after June 30, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options' vesting periods of four years and compensation expense pertaining
to stock options granted in prior periods is not considered.
Stock option activity for both plans during the periods indicated is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
shares Price
--------- --------
<S> <C> <C>
Balance at June 30, 1996.............................. 2,396,500 $0.11
Granted............................................. 1,716,883 0.24
Exercised........................................... (62,500) 0.15
Forfeited........................................... (454,883) 0.15
---------
Balance at June 30, 1997.............................. 3,596,000 $0.19
Granted............................................. 1,631,000 0.58
Exercised........................................... (448,125) 0.12
Forfeited........................................... (344,458) 0.22
---------
Balance at June 30, 1998.............................. 4,434,417 $0.33
Granted............................................. 2,473,500 2.37
Exercised........................................... (301,801) 0.14
Forfeited........................................... (135,541) 0.87
---------
Balance at March 31, 1999............................. 6,470,575 $1.11
=========
</TABLE>
Options granted during the year ended June 30, 1997 and the nine-month
period ended March 31, 1999 had an exercise price less than the estimated
fair value of the Company's common stock on the date of grant; the
weighted-average grant-date fair value of options granted during those
periods was $0.45 and $7.79, respectively. All options granted during the
year ended June 30, 1998 had an exercise price equal to the estimated fair
value of the Company's common stock on the date of grant.
F-14
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997 and 1998 and March 31, 1999
The following presents certain information about outstanding stock options
at March 31, 1999:
<TABLE>
<CAPTION>
Options
Options outstanding exercisable
------------------------------- ------------------
Weighted average Weighted
-------------------- average
Number Exercise Contractual Number of exercise
Range of exercise price of options price life options price
----------------------- ---------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.05-0.25.............. 2,497,075 $0.19 6.9 years 1,728,443 $0.17
$0.50-0.60.............. 1,547,500 $0.58 9.0 years 402,458 $0.57
$1.50-2.50.............. 2,346,000 $2.23 9.5 years -- --
$7.50................... 75,000 $7.50 9.8 years -- --
</TABLE>
At June 30, 1996, 1997 and 1998, and at March 31, 1999, the number of
options exercisable was 672,946, 1,227,480, 1,634,901 and 2,130,901,
respectively, and the weighted-average exercise price of those options was
$0.10, $0.15, $0.30 and $0.25, respectively.
(9)Research and Development Arrangements
On October 31, 1997, the Company entered into a development and license
agreement with a customer who owns preferred stock of the Company. The
agreement obligated the Company to develop a product that meets mutually
agreed upon specifications in exchange for $850,000. The Company has
fulfilled its development obligations and the proceeds under the
arrangement were offset against research and development expense during the
year ended June 30, 1998.
On November 11, 1997, the Company entered into a development and marketing
agreement with a customer. The agreement obligated the Company to develop a
product in accordance with certain specifications and to provide 114,068
shares of the Company's common stock for an aggregate purchase price of
$300,000. The common stock issuance was recorded at estimated fair value.
The Company has fulfilled its development obligations and the remainder of
the purchase price, $231,559, was offset against research and development
expense during the year ended June 30, 1998.
(10)Lease Commitments
The Company has operating lease agreements relating to certain facilities
and equipment which expire at various dates. Rent expense on operating
leases for the years ended June 30, 1996, 1997 and 1998 and for the nine
months ended March 31, 1999 was $270,122, $367,308, $380,794 and $267,388,
respectively. Minimum lease payments for the three months ended June 30,
1999 are $103,652. The Company entered into several agreements for the sale
and leaseback of certain equipment. The leases were classified as capital
leases and expired during the nine months ended March 31, 1999. Future
minimum lease payments under noncancelable operating leases as of March 31,
1999 are:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
Years ended June 30:
2000.......................................................... $417,097
2001.......................................................... 329,765
2002.......................................................... 124,327
2003.......................................................... 35,955
2004.......................................................... 5,993
--------
Total minimum lease payments................................ $913,137
========
</TABLE>
F-15
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997 and 1998 and March 31, 1999
In connection with certain capital lease transactions, the Company issued
warrants to purchase (a) 96,000 shares of Series A preferred stock at $0.50
per share expiring on the earlier of December 16, 2003 or the fifth annual
anniversary of the consummation of the Company's initial public offering of
its common stock, if certain offering parameters are met, and (b) 37,500
shares of its Series C preferred stock at $1.20 per share expiring on the
later of March 13, 2005 or five years from the effective date of the
Company's initial public offering.
(11)Income Taxes
The Company has not recognized any tax benefits for its net operating loss
carryforwards.
Net deferred tax assets as of June 30, 1997 and 1998 and March 31, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Deferred tax assets:
Operating loss carryforwards................... $6,241 $8,943 $13,083
Stock compensation............................. 26 17 295
Receivables and inventory reserves............. 30 59 123
Accrued liabilities............................ -- 87 142
------ ------ -------
Deferred tax assets.......................... 6,297 9,106 13,643
Valuation allowance.......................... (6,027) (8,909) (13,587)
------ ------ -------
270 197 56
Deferred tax liability - furniture
and equipment................................. (270) (197) (56)
Net deferred tax assets...................... $ -- $ -- $ --
====== ====== =======
</TABLE>
The net change in the valuation allowance for the years ended June 30, 1997
and 1998 and for the nine months ended March 31, 1999 was $2,059,164,
$2,882,756 and $4,677,553, respectively.
As of March 31, 1999, the Company has net operating loss carryforwards of
approximately $36 million which begin to expire in 2008 and are available
to reduce future regular federal income taxes, if any.
F-16
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997 and 1998 and March 31, 1999
(12)Segment Information and Concentration of Credit Risk
The Company operates in one reportable segment as it has one family of DSL
products and markets its products to network equipment vendors and DSL
service providers. In fiscal years 1996, 1997 and 1998 the Company also
developed and marketed asynchronous transfer mode ("ATM") network products
which are no longer actively marketed by the Company. The Company does not
disaggregate financial information by product or geographically, other than
export sales by region and sales by product, for management purposes.
Substantially all of the Company's assets are located within the United
States. The Company does not account for, and does not report to
management, its assets or capital expenditures by revenue source. All of
the Company's products are produced in the United States. The Company
grants credit to customers located in several geographical regions in North
America, Europe and the Pacific Rim. The following represents sales to
customers in each of those geographical regions as a percentage of total
revenues and revenues and gross margins by product line:
<TABLE>
<CAPTION>
March 31,
Geographic Region 1996 1997 1998 1999
----------------- ------ ------ ------ ---------
<S> <C> <C> <C> <C>
North America........................... 71% 65% 48% 65%
Europe.................................. 13% 25% 40% 15%
Pacific Rim............................. 16% 10% 12% 20%
<CAPTION>
March 31,
Product line 1996 1997 1998 1999
------------ ------ ------ ------ ---------
<S> <C> <C> <C> <C>
DSL revenues............................ $ -- $ -- $ 84 $5,573
DSL gross margin........................ $ -- $ -- $ (19) $ (327)
ATM revenues............................ $3,687 $4,122 $3,286 $1,566
ATM gross margin........................ $1,478 $1,736 $1,229 $ 767
</TABLE>
For the years ended June 30, 1996 and 1997, revenues from individual
customers amounted to 13% and 38% of total revenue, respectively. For the
year ended June 30, 1998, revenues from individual customers amounted to
20% and 13% of total revenues. As of and for the nine months ended March
31, 1999, revenues from individual customers amounted to 20% and 10% of
total revenues, and accounts receivable related to these customers was
approximately $1,120,000 and $702,000, respectively. The Company performs
ongoing evaluations of its customers' financial conditions and generally
does not require collateral.
F-17
<PAGE>
INSIDE BACK COVER PAGE
[Product pictures: Speedstream 3000, 4000 and 5000 Series with product
packaging].
<PAGE>
OUTSIDE BACK COVER PAGE
[Efficient Networks Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Efficient in connection with
the sale of common stock being registered. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 16,680
NASD filing fee.................................................. 6,500
Nasdaq National Market listing fee............................... 150,000
Printing and engraving costs..................................... 250,000
Legal fees and expenses.......................................... 300,000
Accounting fees and expenses..................................... 175,000
Blue Sky fees and expenses....................................... 10,000
Transfer Agent and Registrar fees................................ 10,000
Miscellaneous expenses........................................... 81,820
----------
Total.......................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article IX of the Registrant's Restated Certificate of Incorporation
provides that directors and officers may be indemnified to the fullest extent
permissible under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers and directors to the fullest extent permissible under Delaware law.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Bylaws, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
The Underwriting Agreement, Exhibit 1.1 hereto, provides for indemnification
by the Underwriters of the registrant and its executive officers and directors,
and by the registrant of the underwriters for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the Underwriters for inclusion in the
Registration Statement.
Item 15. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below. In each case, we
relied on the exemption from registration provided by Section 4(2) of the
Securities Act.
In September 1995, we sold 2,473,644 shares of Series D Preferred Stock to
Texas Instruments Incorporated at a purchase price of $2.02 per share.
In December 1996, we sold 3,091,430 shares of Series E Preferred Stock to
accredited investors, including ADC Telecommunications, Inc., Aperture
Associates and funds affiliated with Crosspoint Venture Partners, El Dorado
Venture Partners, Enterprise Venture Partners, Menlo Ventures and Ocean
Ventures, at a purchase price of $2.41 per share.
II-1
<PAGE>
In November 1997, we sold 114,068 shares of Common Stock to DSC Telecom,
L.P. at a purchase price of $2.63 per share.
In February 1998, we sold 2,057,159 shares of Series F Preferred Stock to
accredited investors, including ADC Telecommunications, Inc., Texas Instruments
and funds affiliated with Crosspoint Venture Partners, El Dorado Venture
Partners, Enterprise Venture Partners, Menlo Ventures and Ocean Park Ventures,
at a purchase price of $2.92 per share.
In June 1998, we sold 1,866,800 shares of Series G Preferred Stock to
Siemens A.G. at a purchase price of $2.92 per share.
In June 1998, we issued a warrant to purchase 34,264 shares of Series G
Preferred Stock at an exercise price of $2.92 per share to Hambrecht & Quist
LLC.
In January 1999, we issued Subordinated Promissory Notes for an aggregate
principal amount of $7.0 million and warrants to purchase an aggregate of
2,397,260 shares of Series H Preferred Stock at an exercise price of $2.92 per
share to El Dorado Ventures IV, LP and Crosspoint Ventures LS 1997 LP.
In March 1999, we sold 1,850,000 shares of Series G Preferred Stock to
Siemens A.G. at a purchase price of $2.92 per share.
In April 1999, we issued a Subordinated Promissory Note for an aggregate
principal amount of $2.0 million and a warrant to purchase 684,931 shares of
Series H Preferred Stock at an exercise price of $2.92 per share to Palomar
Ventures L.P.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Registrant to
be in effect immediately following the closing of the offering made
under this Registration Statement.
3.2* Amended and Restated Bylaws of the Registrant to be in effect
immediately following the closing of the offering made under this
Registration Statement.
4.1 Specimen Common Stock Certificate (standard form, not filed).
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2* 1999 Stock Plan and form of agreements thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of agreements thereunder.
10.4* Investors' Rights Agreement dated July 30, 1993 executed in connection
with the issuance and sale of our Series A Preferred Stock.
10.5* Amendment No. 1 to the Investors' Rights Agreement dated February 9,
1994, executed in connection with the issuance and sale of our Series
B Preferred Stock.
10.6* Amendment No. 2 to the Investors' Rights Agreement dated September 30,
1994, executed in connection with the issuance and sale of our Series
C Preferred Stock.
10.7* Amendment No. 3 to the Investors' Rights Agreement dated September 1,
1995, executed in connection with the issuance and sale of our Series
D Preferred Stock.
10.8* Amendment No. 4 to the Investors' Rights Agreement dated December 31,
1996, executed in connection with the issuance and sale of our Series
E Preferred Stock.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.9* Amendment No. 5 to the Investors' Rights Agreement dated February 17,
1998, executed in connection with the issuance and sale of our Series
F Preferred Stock.
10.10* Amendment No. 6 to the Investors' Rights Agreement dated June 10,
1998, executed in connection with the issuance and sale of our Series
G Preferred Stock.
10.11* Amendment No. 7 to the Investors' Rights Agreement dated January 11,
1999, executed in connection with the issuance and sale of our Series
H Preferred Stock.
10.12 Geico Building Office Lease dated August 19, 1993 by and between
Government Employees Insurance Company and Efficient.
10.13 Modification of Geico Office Lease dated May 8, 1995 by and between
Government Employees Insurance Company and Efficient.
10.14* Graystone Office Park Lease dated September 8, 1998 by and between
Lanny Houillion and Efficient.
10.15 Form of Agreement Regarding Conditional Exercise of Warrant between
the Registrant, Warrant Holder and Wilson Sonsini Goodrich & Rosati,
Professional Corporation
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney (included on page II-4).
27.1* Financial Data Schedules.
99.1 Consent of Robert Hawk
</TABLE>
- --------
* Previously filed.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report on Schedule S-1
Schedule II--Valuation and Qualifying Accounts S-2
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
Consolidated Financial Statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and
II-3
<PAGE>
contained in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 8th day of June, 1999.
EFFICIENT NETWORKS, INC.
*
By:__________________________________
Mark A. Floyd
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
Signature Title Date
* President, Chief Executive June 8, 1999
- ----------------------------------- Officer and Chairman of the
Mark A. Floyd Board (Principal Executive
Officer)
/s/ Jill S. Manning Vice President and Chief June 8, 1999
- ----------------------------------- Financial Officer (Principal
Jill S. Manning Financial and Accounting
Officer)
* Director June 8, 1999
- -----------------------------------
Bruce W. Brown
* Director June 8, 1999
- -----------------------------------
James P. Gauer
* Director June 8, 1999
- -----------------------------------
Robert A. Hoff
* Director June 8, 1999
- -----------------------------------
William L. Martin III
* Director June 8, 1999
- -----------------------------------
Thomas H. Peterson
Director
- -----------------------------------
Anthony T. Maher
*/s/ Jill S. Manning
- -----------------------------------
Attorney-In-Fact
II-5
<PAGE>
Independent Auditors' Report on Schedule
The Board of Directors
Efficient Networks, Inc.:
Under date of April 26, 1999, we reported on the consolidated balance sheets
of Efficient Networks, Inc. and subsidiary as of June 30, 1997 and 1998 and
March 31, 1999, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended June 30, 1998 and for the nine months ended March 31,
1999, which are included in the prospectus. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Dallas, Texas
April 26, 1999
S-1
<PAGE>
EFFICIENT NETWORKS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to
beginning costs and other Balance at
Description of period expenses accounts Deductions end of period
- ----------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS
ENDED
MARCH 31, 1999
Allowances Deducted
from Assets
Accounts receivable... $ 15 55 -- -- $ 70
Inventories........... 150 130 -- -- 280
---- --- --- --- ----
Total Allowances
Deducted from
Assets.............. $165 185 -- -- $350
==== === === === ====
FOR THE YEAR ENDED JUNE
30, 1998
Allowances Deducted
from Assets
Accounts receivable .. $ 25 11 -- 21 $ 15
Inventories........... 57 124 -- 31 150
---- --- --- --- ----
Total Allowances
Deducted from Assets
.................... $ 82 135 -- 52 $165
==== === === === ====
FOR THE YEAR ENDED JUNE
30, 1997
Allowances Deducted
from Assets
Accounts receivable... $ 23 2 -- -- $ 25
Inventories........... -- 57 -- -- 57
---- --- --- --- ----
Total Allowances
Deducted from
Assets.............. $ 23 59 -- -- $ 82
==== === === === ====
FOR THE YEAR ENDED JUNE
30, 1996
Allowances Deducted
from Assets
Accounts receivable... $-- 26 -- 3 $ 23
Inventories........... -- -- -- -- --
---- --- --- --- ----
Total Allowances
Deducted from
Assets.............. $-- 26 -- 3 $ 23
==== === === === ====
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Registrant to
be in effect immediately following the closing of the offering made
under this Registration Statement.
3.2* Amended and Restated Bylaws of the Registrant to be in effect
immediately following the closing of the offering made under this
Registration Statement.
4.1 Specimen Common Stock Certificate (standard form, not filed).
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2* 1999 Stock Plan and form of agreements thereunder.
10.3* 1999 Employee Stock Purchase Plan and form of agreements thereunder.
10.4* Investors' Rights Agreement dated July 30, 1993 executed in connection
with the issuance and sale of our Series A Preferred Stock.
10.5* Amendment No. 1 to the Investors' Rights Agreement dated February 9,
1994, executed in connection with the issuance and sale of our Series
B Preferred Stock.
10.6* Amendment No. 2 to the Investors' Rights Agreement dated September 30,
1994, executed in connection with the issuance and sale of our Series
C Preferred Stock.
10.7* Amendment No. 3 to the Investors' Rights Agreement dated September 1,
1995, executed in connection with the issuance and sale of our Series
D Preferred Stock.
10.8* Amendment No. 4 to the Investors' Rights Agreement dated December 31,
1996, executed in connection with the issuance and sale of our Series
E Preferred Stock.
10.9* Amendment No. 5 to the Investors' Rights Agreement dated February 17,
1998, executed in connection with the issuance and sale of our Series
F Preferred Stock.
10.10* Amendment No. 6 to the Investors' Rights Agreement dated June 10,
1998, executed in connection with the issuance and sale of our Series
G Preferred Stock.
10.11* Amendment No. 7 to the Investors' Rights Agreement dated January 11,
1999, executed in connection with the issuance and sale of our Series
H Preferred Stock.
10.12 Geico Building Office Lease dated August 19, 1993 by and between
Government Employees Insurance Company and Efficient.
10.13 Modification of Geico Office Lease dated May 8, 1995 by and between
Government Employees Insurance Company and Efficient.
10.14* Graystone Office Park Lease dated September 8, 1998 by and between
Lanny Houillion and Efficient.
10.15 Form of Agreement Regarding Conditional Exercise of Warrant between
the Registrant, Warrant Holder and Wilson Sonsini Goodrich & Rosati,
Professional Corporation
23.1 Consent of Independent Auditors.
23.2 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney (included on page II-4).
27.1* Financial Data Schedules.
99.1 Consent of Robert Hawk.
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 1.1
4,000,000 Shares
EFFICIENT NETWORKS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
_______________, 1999
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens
Volpe Brown Whelan & Company,
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Efficient Networks, Inc., a Delaware corporation
("Company"), proposes to issue and sell shares ("Firm Securities") of its
common stock, par value $0.001 per share ("Securities"), and also proposes to
issue and sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than additional shares ("Optional Securities")
of its Securities as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "Offered Securities". The Company
hereby agrees with the several Underwriters named in Schedule A hereto
("Underwriters") as follows:
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333- ) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("Commission") and either (i) has
been declared effective under the Securities Act of 1933 ("Act") and is
not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("initial registration statement") has been declared effective, either
(i) an additional registration statement ("additional registration
statement") relating to the Offered Securities may have been filed with
the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act
and, if so filed, has become effective upon filing pursuant to such Rule
and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (ii) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant
to such Rule and upon such filing the Offered Securities will all have
been duly registered under the Act pursuant to the initial registration
statement and such additional registration statement. If the Company
does not propose to amend the initial registration statement or if an
additional registration statement has been filed and the Company does
not propose to amend it, and if any post-effective amendment to either
such registration statement has been filed with the Commission prior to
the execution and delivery of this Agreement, the most recent amendment
(if any) to each such registration statement has been declared effective
by the Commission or has become effective upon filing pursuant to Rule
462(c) ("Rule 462(c)") under the Act or, in the case of the additional
registration statement, Rule 462(b). For purposes of this Agreement,
"Effective Time" with respect to the initial registration statement or,
if filed prior to the execution and delivery of this Agreement, the
additional registration statement means (i) if the Company has advised
the Representatives that it does not propose to amend such registration
statement, the date and time as of which such registration statement, or
the most recent post-effective amendment thereto (if any) filed prior to
the execution and delivery of this Agreement, was declared effective by
the Commission or has become effective upon filing pursuant to Rule
462(c), or (ii) if the Company has advised the Representatives that it
proposes to file an amendment or
<PAGE>
post-effective amendment to such registration statement, the date and time
as of which such registration statement, as amended by such amendment or
post-effective amendment, as the case may be, is declared effective by the
Commission. If an additional registration statement has not been filed
prior to the execution and delivery of this Agreement but the Company has
advised the Representatives that it proposes to file one, "Effective Time"
with respect to such additional registration statement means the date and
time as of which such registration statement is filed and becomes effective
pursuant to Rule 462(b). "Effective Date" with respect to the initial
registration statement or the additional registration statement (if any)
means the date of the Effective Time thereof. The initial registration
statement, as amended at its Effective Time, including all information
contained in the additional registration statement (if any) and deemed to
be a part of the initial registration statement as of the Effective Time of
the additional registration statement pursuant to the General Instructions
of the Form on which it is filed and including all information (if any)
deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial Registration Statement". The
additional registration statement, as amended at its Effective Time,
including the contents of the initial registration statement incorporated
by reference therein and including all information (if any) deemed to be a
part of the additional registration statement as of its Effective Time
pursuant to Rule 430A(b), is hereinafter referred to as the "Additional
Registration Statement". The Initial Registration Statement and the
Additional Registration Statement are herein referred to collectively as
the "Registration Statements" and individually as a "Registration
Statement". The form of prospectus relating to the Offered Securities, as
first filed with the Commission pursuant to and in accordance with Rule
424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as
included in a Registration Statement, is hereinafter referred to as the
"Prospectus". No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and did
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all respects to the requirements of the Act
and the Rules and Regulations and did not include, or will not include, any
untrue statement of a material fact and did not omit, or will not omit, to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading and (iii) on the date of this
Agreement, the Initial Registration Statement and, if the Effective Time of
the Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects to
the requirements of the Act and the Rules and Regulations, and neither of
such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. If the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement: on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement and the Prospectus will conform in all respects to
the requirements of the Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or will omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and no Additional Registration
Statement has been or will be filed. The two preceding sentences do not
apply to statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein, it
being understood and agreed that the only such information is that
described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification.
2
<PAGE>
(d) Each subsidiary of the Company has been duly incorporated and is an
existing corporation in good standing under the laws of the jurisdiction of
its incorporation, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus; and
each subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires
such qualification; all of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized and validly issued and
is fully paid and nonassessable; and the capital stock of each subsidiary
owned by the Company, directly or through subsidiaries, is owned free from
liens, encumbrances and defects.
(e) The Offered Securities and all other outstanding shares of capital
stock of the Company have been duly authorized; all outstanding shares of
capital stock of the Company are, and, when the Offered Securities have
been delivered and paid for in accordance with this Agreement on each
Closing Date (as defined below), such Offered Securities will have been,
validly issued, fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus; and the stockholders of
the Company have no preemptive rights with respect to the Securities.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
this offering.
(g) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company under the
Act.
(h) The Offered Securities have been approved for listing on The Nasdaq
Stock Market's National Market subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and such
as may be required under state securities laws.
(j) The execution, delivery and performance of this Agreement, and the
issuance and sale of the Offered Securities will not result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over
the Company or any subsidiary of the Company or any of their properties, or
any agreement or instrument to which the Company or any such subsidiary is
a party or by which the Company or any such subsidiary is bound or to which
any of the properties of the Company or any such subsidiary is subject, or
the charter or by-laws of the Company or any such subsidiary, and the
Company has full power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and delivered by
the Company.
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and
except as disclosed in the Prospectus, the Company and its subsidiaries
hold any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the use made
or to be made thereof by them.
3
<PAGE>
(m) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them and have not
received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
condition (financial or other), business, properties or results of
operations of the Company and its subsidiaries taken as a whole ("Material
Adverse Effect").
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(o) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "intellectual property rights")
necessary to conduct the business now operated by them, or presently or
proposed to be employed by them in connection with their business as
described in the Prospectus, and have not received any notice of
infringement of or conflict with asserted rights of others with respect to
any intellectual property rights that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect and, except as disclosed in the Prospectus,
the discoveries, inventions, products or processes of the Company and its
subsidiaries referred to in the Prospectus do not, to the best knowledge of
the Company or any of its subsidiaries, infringe or conflict with any right
or patent of any third party, or any discovery, invention, product or
process which is the subject of a patent application filed by any third
party, known to the Company or any of its subsidiaries, which could have a
material adverse effect on the Company and its subsidiaries, taken as a
whole; and no third party, including any academic or governmental
organization, possesses rights to the Company's patents, copyrights,
trademarks, service marks, trade names, technology or know-how which, if
exercised, could enable such third party to develop products competitive to
those of the Company or could have a material adverse effect on the ability
of the Company to conduct its business in the manner described in the
Prospectus.
(p) Except as disclosed in the Prospectus, neither the Company nor any
of its subsidiaries is in violation of any statute, any rule, regulation,
decision or order of any governmental agency or body or any court, domestic
or foreign, relating to the use, disposal or release of hazardous or toxic
substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively,
"environmental laws"), owns or operates any real property contaminated with
any substance that is subject to any environmental laws, is liable for any
off-site disposal or contamination pursuant to any environmental laws, or
is subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect; and the Company is not aware of
any pending investigation which might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would individually or
in the aggregate have a Material Adverse Effect, or would materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement, or which are otherwise material in the context of the
sale of the Offered Securities; and no such actions, suits or proceedings
are threatened or, to the Company's knowledge, contemplated.
(r) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company and
its consolidated subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis;
the schedules included in each Registration Statement present fairly the
information required to be stated therein [If pro forma financial
statements are included, insert--; and the assumptions used in preparing
the pro forma financial statements included in each Registration Statement
and the Prospectus provide a reasonable basis for presenting the
significant effects directly attributable to the transactions or events
described therein, the related pro forma adjustments give appropriate
effect to those
4
<PAGE>
assumptions, and the pro forma columns therein reflect the proper
application of those adjustments to the corresponding historical financial
statement amounts].
(s) KPMG LLP, who have certified certain financial statements of the
Company and its subsidiaries, are independent public accountants as
required by the Act and the rules and regulations of the Commission
thereunder.
(t) Except as disclosed in the Prospectus, since the date of the latest
audited financial statements included in the Prospectus there has been no
material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole, and, except as disclosed in or contemplated
by the Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(u) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(v) Except for the Offered Securities, the holders of all outstanding
shares of capital stock of the Company, and all securities convertible into
or exercisable or exchangeable for capital stock of the Company, have
delivered agreements (collectively, the "Lock-up Agreements") that restrict
the holders thereof from, among other things, selling, granting any option
for the purchase of, pledging, or otherwise transferring or disposing of,
any of such shares of stock, or any such securities convertible into or
exercisable or exchangeable for capital stock of the Company, for a period
of 180 days after the date of the Prospectus without the prior written
consent of Credit Suisse First Boston Corporation ("CSFBC"); and the
Company has no reason to believe any Lock-up Agreement is not a valid and
binding obligation of each party thereto other than the Underwriters;
(w) The Company has imposed a stop-transfer instruction with the
Company's transfer agent in order to enforce the Lock-up Agreements;
(x) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes and the Company
agrees to comply with such Section if prior to the completion of the
distribution of the Offered Securities it commences doing such business.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $ per share, the respective
numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for the
accounts of the Underwriters, against payment of the purchase price in Federal
(same day) funds by official bank check or checks or wire transfer to an account
at a bank acceptable to CSFBC drawn to the order of
at the office of , at A.M., New York time, on
, or at such other time not later than seven full business days thereafter as
CSFBC and the Company determine, such time being herein referred to as the
"First Closing Date". For purposes of Rule 15c6-1 under the Securities Exchange
Act of 1934, the First Closing Date (if later than the otherwise applicable
settlement date) shall be the settlement date for payment of funds and delivery
of securities for all the Offered Securities sold pursuant to the offering. The
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and registered in such names as CSFBC requests and
will be made available for checking and packaging at the above office at least
24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional
5
<PAGE>
Securities at the purchase price per Security to be paid for the Firm
Securities. The Company agrees to sell to the Underwriters the number of shares
of Optional Securities specified in such notice and the Underwriters agree,
severally and not jointly, to purchase such Optional Securities. Such Optional
Securities shall be purchased for the account of each Underwriter in the same
proportion as the number of shares of Firm Securities set forth opposite such
Underwriter's name bears to the total number of shares of Firm Securities
(subject to adjustment by CSFBC to eliminate fractions) and may be purchased by
the Underwriters only for the purpose of covering over-allotments made in
connection with the sale of the Firm Securities. No Optional Securities shall be
sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of , at the office of . The certificates
for the Optional Securities being purchased on each Optional Closing Date will
be in definitive form, in such denominations and registered in such names as
CSFBC requests upon reasonable notice prior to such Optional Closing Date and
will be made available for checking and packaging at the above office at a
reasonable time in advance of such Optional Closing Date.
[If the Underwriters purchase the securities at the public offering price
and compensation to the Underwriters is payable separately, insert: As
compensation for the Underwriters' commitments, the Company will pay to the
Representatives for the Underwriters' proportionate accounts the sum of $
per share times the total number of Offered Securities purchased by the
Underwriters on each Closing Date. Such payment will be made on each Closing
Date with respect to the Offered Securities purchased on such Closing Date.]
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to Rule
424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as
of such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective amendment
thereto with the Commission pursuant to and in accordance with Rule 462(b)
on or prior to 10:00 P.M., New York time, on the date of this Agreement or,
if earlier, on or prior to the time the Prospectus is printed and
distributed to any Underwriter, or will make such filing at such later date
as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend or
supplement the initial or any additional registration statement as filed or
the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without CSFBC's consent; and the
Company will also advise CSFBC promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration
6
<PAGE>
Statement or the Prospectus and of the institution by the Commission of any
stop order proceedings in respect of a Registration Statement and will use
its best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will promptly
notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
any such amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (four of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC requests. The Prospectus shall be so
furnished on or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other documents
shall be so furnished as soon as available. The Company will pay the
expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with
the Commission under the Securities Exchange Act of 1934 or mailed to
stockholders, and (ii) from time to time, such other information concerning
the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel) incurred in
connection with qualification of the Offered Securities for sale under the
laws of such jurisdictions as CSFBC designates and the printing of
memoranda relating thereto, for the filing fee incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities
Dealers, Inc. of the Offered Securities, for any travel expenses of the
Company's officers and employees and any other expenses of the Company in
connection with attending or hosting meetings with prospective purchasers
of the Offered Securities and for expenses incurred in distributing
preliminary prospectuses and the Prospectus (including any amendments and
supplements thereto) to the Underwriters.
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(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Commission a registration statement under the Act relating
to, any additional shares of its Securities or securities convertible into
or exchangeable or exercisable for any shares of its Securities, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of CSFBC, except
issuances of Securities pursuant to the conversion of convertible
securities or the exercise of warrants or options, in each case outstanding
on the date hereof, or grants of employee stock options pursuant to the
terms of a plan in effect on the date hereof, issuances of Securities
pursuant to the exercise of such options.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement to
be filed shortly prior to such Effective Time), KPMG LLP confirming that
they are independent public accountants within the meaning of the Act and
the applicable published Rules and Regulations thereunder and stating to
the effect that:
(i) in their opinion the financial statements and schedules examined
by them and included in the Registration Statements comply as to form
in all material respects with the applicable accounting requirements
of the Act and the related published Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited financial
statements included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii) above, a
reading of the latest available interim financial statements of the
Company, inquiries of officials of the Company who have responsibility
for financial and accounting matters and other specified procedures,
nothing came to their attention that caused them to believe that:
(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act
and the related published Rules and Regulations or any material
modifications should be made to such unaudited financial
statements for them to be in conformity with generally accepted
accounting principles;
(B) at the date of the latest available balance sheet read
by such accountants, or at a subsequent specified date not more
than three business days prior to the date of such letter, there
was any change in the capital stock or any increase in short-term
indebtedness or long-term debt of the Company and its
consolidated subsidiaries or, at the date of the latest available
balance sheet read by such accountants, there was any decrease in
consolidated net assets, as compared with amounts shown on the
latest balance sheet included in the Prospectus; or
(C) for the period from the closing date of the latest
income statement included in the Prospectus to the closing date
of the latest available income statement read by such accountants
there were any decreases, as compared with the corresponding
period of the
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<PAGE>
previous year, in consolidated net sales, net operating income,
the total or per share amounts of consolidated income before
extraordinary items or net income,
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from inquiries, a
reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time, (ii) if the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"Registration Statements" shall mean the Initial Registration Statement and
the additional registration statement as proposed to be filed or as
proposed to be amended by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "Prospectus" shall mean the
prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or such later date as shall have been consented to by
CSFBC. If the Effective Time of the Additional Registration Statement (if
any) is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or, if earlier, the time the Prospectus
is printed and distributed to any Underwriter, or shall have occurred at
such later date as shall have been consented to by CSFBC. If the Effective
Time of the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with the
Commission in accordance with the Rules and Regulations and Section 5(a) of
this Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the
knowledge of the Company or the Representatives, shall be contemplated by
the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as one enterprise which, in the judgment of a majority
in interest of the Underwriters including the Representatives, is material
and adverse and makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities; (ii) any downgrading in the rating of any debt
securities of the Company by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Act), or
any public announcement that any such organization has under surveillance
or review its rating of any debt securities of the Company (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any material
suspension or material limitation of trading in securities generally on the
New York Stock Exchange, or any setting of minimum prices for trading on
such exchange, or any suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market; (iv) any banking
moratorium declared by U.S. Federal or New York authorities; or (v) any
outbreak or escalation of major hostilities in which the United States is
involved, any declaration of war by Congress or any other substantial
national or international calamity or emergency if, in the
9
<PAGE>
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own its properties and conduct its
business as described in the Prospectus; and the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct of
its business requires such qualification;
(ii) The Offered Securities delivered on such Closing Date and all
other outstanding shares of the Common Stock of the Company have been duly
authorized and validly issued, are fully paid and nonassessable and conform
to the description thereof contained in the Prospectus; and the
stockholders of the Company have no preemptive rights with respect to the
Securities;
(iii) There are no contracts, agreements or understandings known to
such counsel between the Company and any person granting such person the
right to require the Company to file a registration statement under the Act
with respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement
filed by the Company under the Act;
(iv) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment company"
as defined in the Investment Company Act of 1940;
(v) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance or sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and such
as may be required under state securities laws;
(vi) The execution, delivery and performance of this Agreement and
the issuance and sale of the Offered Securities will not result in a breach
or violation of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any governmental
agency or body or any court having jurisdiction over the Company or any
subsidiary of the Company or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a party or by
which the Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the charter
or by-laws of the Company or any such subsidiary, and the Company has full
power and authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement;
(vii) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became effective
under the Act as of the date and time (if determinable) specified in such
opinion, the Prospectus either was filed with the Commission pursuant to
the subparagraph of Rule 424(b) specified in such opinion on the date
specified therein or was included in the Initial Registration Statement or
the Additional Registration Statement (as the case may be), and, to the
best of the knowledge of such counsel, no stop order suspending the
effectiveness of a Registration Statement or any part thereof has been
issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the Act, and each Registration Statement and
the Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all material
respects with the requirements of the
10
<PAGE>
Act and the Rules and Regulations; such counsel have no reason to believe
that any part of a Registration Statement or any amendment thereto, as of
its effective date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement thereto,
as of its issue date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; the descriptions
in the Registration Statements and Prospectus of statutes, legal and
governmental proceedings and contracts and other documents are accurate and
fairly present the information required to be shown; and such counsel do
not know of any legal or governmental proceedings required to be described
in a Registration Statement or the Prospectus which are not described as
required or of any contracts or documents of a character required to be
described in a Registration Statement or the Prospectus or to be filed as
exhibits to a Registration Statement which are not described and filed as
required; it being understood that such counsel need express no opinion as
to the financial statements or other financial data contained in the
Registration Statements or the Prospectus; and
(viii) This Agreement has been duly authorized, executed and delivered
by the Company.
(e) The Representatives shall have received an opinion, dated such Closing
Date, of __________, special counsel for the Company, to the effect that: the
statements set forth under the headings "Risk Factors -- 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, Our Business Will be Harmed" and "Business --
Proprietary Rights" in the Registration Statement and the Prospectus (the
"Statements"), insofar as such Statements constitute a summary of legal matters
in which counsel has represented the Company or a summary of documents reviewed
by counsel in the course of such representation, have been reviewed by such
counsel and fairly summarize such legal matters and documents in all material
respects, and such counsel has no reason to believe that such Statements, (i) as
of the effective date of the Registration Statement, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make such Statements not misleading and (ii) as
of the date of such opinion, included or includes any untrue statement of
material fact or omitted or omits to state a material fact necessary in order to
make such Statements, in light of the circumstances in which they were made, not
misleading.
(f) The Representatives shall have received from Brobeck, Phleger &
Harrison LLP, counsel for the Underwriters, such opinion or opinions, dated such
Closing Date, with respect to the incorporation of the Company, the validity of
the Offered Securities delivered on such Closing Date, the Registration
Statements, the Prospectus and other related matters as the Representatives may
require, and the Company shall have furnished to such counsel such documents as
they request for the purpose of enabling them to pass upon such matters.
(g) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice President and a principal financial
or accounting officer of the Company in which such officers, to the best of
their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of
the applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any Underwriter;
and, subsequent to the date of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of
11
<PAGE>
operations of the Company and its subsidiaries taken as a whole except as set
forth in or contemplated by the Prospectus or as described in such certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, of KPMG LLP which meets the requirements of subsection (a) of
this Section, except that the specified date referred to in such subsection
will be a date not more than three days prior to such Closing Date for the
purposes of this subsection.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Underwriter, its
partners, directors and officers and each person, if any, who controls such
Underwriter within the meaning of Section 15 of the Act, against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending
any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as such
in subsection (b) below.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any
who controls the Company within the meaning of Section 15 of the Act,
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will
reimburse any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred, it being understood and
agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the concession and reallowance figures appearing in the
paragraph under the caption "Underwriting". [If paragraphs regarding sales
to discretionary accounts and/or passive market making are included,
insert-and the information contained in the [and ]
paragraphs[s] under the caption "Underwriting"].
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under subsection (a) or (b) above, notify the indemnifying party of the
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commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under subsection (a) or (b) above. In case any such
action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to
the indemnifying party), and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof,
the indemnifying party will not be liable to such indemnified party under
this Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement
of any pending or threatened action in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party unless such settlement (i) includes an
unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action and (ii) does not include
a statement as to, or an admission of, fault, culpability or a failure to
act by or on behalf of an indemnified party.
(d) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a)
or (b) above, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other
from the offering of the Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company on the one hand
and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other
shall be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the
Underwriters. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates
to information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim
which is the subject of this subsection (d). Notwithstanding the provisions
of this subsection (d), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section shall be in addition to any
liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each director of the
Company, to each officer of the Company who has signed a Registration
Statement and to each person, if any, who controls the Company within the
meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of
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<PAGE>
shares of Offered Securities that such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10% of the total number of shares
of Offered Securities that the Underwriters are obligated to purchase on such
Closing Date, CSFBC may make arrangements satisfactory to the Company for the
purchase of such Offered Securities by other persons, including any of the
Underwriters, but if no such arrangements are made by such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Offered Securities that such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate number of shares of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of shares of Offered Securities that the Underwriters
are obligated to purchase on such Closing Date and arrangements satisfactory to
CSFBC and the Company for the purchase of such Offered Securities by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company, except as provided in Section 9 (provided that if such default occurs
with respect to Optional Securities after the First Closing Date, this Agreement
will not terminate as to the Firm Securities or any Optional Securities
purchased prior to such termination). As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability for
its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated
pursuant to Section 8 or if for any reason the purchase of the Offered
Securities by the Underwriters is not consummated, the Company shall remain
responsible for the expenses to be paid or reimbursed by it pursuant to Section
5 and the respective obligations of the Company and the Underwriters pursuant to
Section 7 shall remain in effect, and if any Offered Securities have been
purchased hereunder the representations and warranties in Section 2 and all
obligations under Section 5 shall also remain in effect. If the purchase of the
Offered Securities by the Underwriters is not consummated for any reason other
than solely because of the termination of this Agreement pursuant to Section 8
or the occurrence of any event specified in clause (iii), (iv) or (v) of Section
6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of counsel) reasonably incurred by them in
connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 4201 Spring Valley Road,
Suite 1200, Dallas, Texas 75244, Attention: [Mark A. Floyd, President and Chief
Executive Officer]; provided, however, that any notice to an Underwriter
pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to
such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for
the several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to
principles of conflicts of laws.
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The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
Efficient Networks, Inc.
By /s/ MARK A. FLOYD
---------------------------------
Mark A. Floyd
President and
Chief Executive Officer
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens
Volpe Brown Whelan & Company
Acting on behalf of themselves and as
the Representative of the several
Underwriters.
Credit Suisse First Boston Corporation
By
------------------------------------------
[Insert title]
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SCHEDULE A
Underwriter Number of
------------ Firm Securities
----------------
Credit Suisse First Boston Corporation................
BancBoston Robertson Stephens.........................
Volpe Brown Whelan & Company..........................
-----------------
Total.............................................. =================
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EXHIBIT 5.1
Efficient Networks, Inc.
4201 Spring Valley Road, Suite 1200
Dallas, TX 75244
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission (the "SEC") on or about May __, 1999 (the
"Registration Statement"), in connection with registration under the Securities
Act of 1933, as amended, of up to 4,000,000 shares of your Common Stock, par
value $_____ and an over-allotment option granted to the underwriters of the
offering to purchase up to 600,000 shares from you (collectively, the "Shares").
We understand that the Shares are to be sold to the underwriters of the offering
for resale to the public as described in the Registration Statement. As your
legal counsel, we have examined the proceedings taken, and are familiar with the
proceedings proposed to be taken, by you in connection with the sale and
issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part therof, and
any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 10.12
OFFICE LEASE AGREEMENT
STATE OF TEXAS
COUNTY OF Dallas
------
THIS LEASE AGREEMENT, made and entered into as of the ____ day of ____,
19____, by and between the Landlord and Tenant hereinafter named.
WITNESSETH:
1. DEFINITIONS AND BASIC PROVISIONS. The following definitions and basic
provisions shall be used in conjunction with and limited by the reference
thereto in the provisions of this Lease:
(a) "Landlord": Government Employees Insurance Company
--------------------------------------
(b) "Tenant": Efficient Network Technology Inc.
---------------------------------
(c) "Building": The GEICO Building
------------------
(d) "Premises": 4201 Spring Valley Road, Suite 1200, Dallas, Texas
--------------------------------------------------
75244
-----
---------------------------------------------------------------------------
as generally outlined in the plan attached hereto as Exhibit "A". On each floor
of the Building on which the entire space rentable to tenants is or will be
leased to one (1) tenant, the term "Rentable Area" for such floor shall be
computed by measuring to the inside face of the glass in the permanent outer
walls of the Building and adding a pro rata portion of the area located within
the lobby on the ground floor of the Building. No deductions shall be made for
elevator lobbies, corridors, restrooms, mechanical rooms, electric rooms,
telephone closets, all vertical penetrations of the floor that are included for
the special use of Tenant, columns, projections and other structural portions of
the Building, and other similar facilities for the use of all tenants
(hereinafter sometimes called "Common Areas"). On each floor of the Building on
which the entire space rentable to tenants is or will be leased to more than one
(1) tenant, the term "rentable area" shall be the sum of (i) the entire area
included within the leased premises, being the area bounded by the interior of
the exterior wall or walls of the Building, the exterior of all walls separating
the leased premises from any public corridors or other public areas, and the
centerline of all walls separating the leased premises from other areas leased
or to be leased to other tenants, (ii) a pro rata portion of the area covered by
the elevator lobbies, corridors, restrooms, mechanical rooms, electric rooms,
columns and telephone closets situated on such floor, and (iii) a pro rata
portion of the area located within the lobby on the ground floor of the
Building. The Rentable Area within the leased premises shall be the number of
square feet set forth below. The Rentable Area in the Premises has been
calculated on the basis of the foregoing definition and is hereby stipulated for
all purposes hereof to be 10,348 square feet, which includes Tenant's occupied
------
space plus Tenant's portion of Common areas. Such stipulation of the rentable
square feet comprising the Premises shall govern the Lease for all purposes,
notwithstanding that the same should be more or less as a result of a minor
variations resulting from actual construction and completion of the Premises for
occupancy so long as such work is done in accordance with the terms and
provisions hereof. Notwithstanding the inclusion of Common Areas in the
calculation of rentable square feet, it is understood that certain areas, such
as mechanical rooms and janitor closets, may be intended solely for use by
Landlord and the building manager in the operation of (See Rider) the Building.
The total rentable area of the Building shall be 244,585 square feet.
-------
(e) "Lease term": A period of 61 months, commencing on Sept 1, 1993,
-- ---- - --
(the "Commencement Date") and ending on Sept 30, 1998. (See Rider)
-------- --
(f) "Basic Annual Rental": $*, subject to escalation as described in
-
Paragraph 3
<PAGE>
hereinbelow.
(g) "Monthly Rental Installment": $**.
--
(h) "Operating Expense Adjustment": $1994 Base, subject to escalation
---------
as described in Paragraph 4 hereinbelow.
(i) "Security Deposit": $10,434.23, deposited with Landlord on the date
---------
hereof.
(j) "Permitted use": The Premises are to be used and occupied by Tenant
solely for Office/Research and for no other purpose or use without the
---------------
prior written consent of Landlord.
2. LEASE GRANT. Landlord, in consideration of the rent to be paid and
the other covenants and agreements to be performed by Tenant and upon the terms
and conditions hereinafter stated, does hereby lease, demise and let unto Tenant
the Premises (as defined in paragraph 1(d) hereof) commencing on the
Commencement Data (as defined in paragraph 1(e) hereof or as adjusted as
hereinafter provided) and ending on the last day of the lease term, unless
sooner terminated as herein provided. In the event the Premises are occupied by
Tenant prior to the stated date, the Commencement Date shall be the date such
occupancy commenced if this Lease is executed before the Premises become vacant,
or otherwise available and ready for occupancy, or if any present tenant or
occupant of the premises holds over, and Landlord cannot acquire possession of
the Premises prior to the Commencement Date of the Lease, Landlord shall not be
deemed to be in default hereunder, the Tenant agrees to accept possession of the
Premises at such time as Landlord is able to tender the same and such date shall
be deemed to be the Commencement Date and this Lease shall continue for the
lease term described in paragraph 1(e) hereof. By occupying the Premises, Tenant
shall be deemed to have accepted the same as suitable for the purpose herein
intended and to have acknowledged that the same comply fully with Landlord's
covenants and obligations.
3. RENT. In consideration of this Lease, Tenant promises and agrees to
pay Landlord, as an independent covenant, the Basic Annual Rental (as defined in
paragraph 1(f) hereof) and which is subject to escalation as hereinafter
described, without
*Basic Annual Rental **Basic Monthly Rental
-------------------- ----------------------
*** Year 1 $119,002.00 $9,916.83
Year 2 $124,176.00 $10,348.00
Year 3 $124,176.00 $10,348.00
Year 4 $129,350.00 $10,779.17
Year 5 $129,350.00 $10,779.17
*** Month two (2) shall be free.
1-R
<PAGE>
deduction or set off, including the Operating Expense Adjustment as described in
Paragraph 1(g) hereinabove. It is agreed that, notwithstanding anything to the
contrary the Premises herein are leased for the Basic Annual Rental for the
lease term hereof, payable at the time of the making of this Lease and that the
provisions herein contained for the payment of such rent in Monthly Rental
Installments (as defined in paragraph 1(g) hereof) are for the convenience of
the Tenant only, and that, upon default in the payment of any such Monthly
Rental Installment as herein allowed, the whole of the rent hereby reserved for
the whole of the lease term herein provided for and then remaining unpaid shall,
at the option of the Landlord, become due and payable without any notice or
demand. One such Monthly Rental Installment, together with the Security Deposit
(as defined in paragraph 1(i) hereof), shall be payable by Tenant to Landlord
contemporaneously with the execution hereof, and a like Monthly Rental
Installment shall be due and payable to Landlord at Landlord's address provided
herein (or such other address as may be designated by Landlord in writing from
time to time) without demand on or before the first day of each succeeding
calendar month during the term hereof. A Monthly Rental Installment for any
fractional month at the beginning or the end of the lease term shall be
promised. Without impairing any of Landlord's rights or remedies herein for the
late payments of rent, if any Monthly Rental Installment is not received by the
Landlord on or before the 5th day of the month for which said Monthly Rental
Installment is due, a service charge of 10% of the Monthly Rental Installment
owed shall become due and payable in addition to the monthly rental installment
owed. Said service charge is for the purpose of reimbursing Landlord for the
extra costs and expenses incurred in connection with the handling and processing
of late Monthly Rental Installment payments.
4. OPERATING EXPENSE ADJUSTMENT.
The Basic Annual Rental payable under paragraph 1(f) hereof is based, in
part, on operating expenses existing during the calendar year in which the lease
commences ("Base Year"). For the purposes of rental escalations under the terms
of this Lease. said operating expenses are defined as and limited to: (i) ad
valorem taxes, for which Landlord is liable, assessed against the land, Building
and Improvements and in and upon which the Premises are located together with
any special assessments and other real estate costs in the nature of taxes or
assessments for which Landlord is responsible; (ii) expenses of operation,
maintenance and repair of the land, Building, sidewalks and curbs adjacent
thereto in a manner deemed reasonable and appropriate and for the best interest
of the occupants; (iii) actual expenses incurred for employees, such as wages,
fringe benefits, taxes, unemployment and disability insurance, workmen's
compensation insurance, social security benefits and any other expenses incurred
in connection with such employees. The term "employees" includes employees such
as superintendents, engineers, electricians, clerks, mechanics, helpers,
security officers, porters, cleaners, and window washers, as well as contract
laborers performing services for the Building and other persons, firms or
corporations providing contract services for the benefit of the Building; (iv)
actual cost of materials and supplies used and consumed for the benefit of the
Building and the occupants; (v) full contract cost of third-party contractors
for all of the foregoing, including rubbish removal, elevator maintenance,
maintenance of air conditioning, heating and ventilation equipment, management
services, uniform supply, past control and security service; (vi) all utility
services; and (vii) actual cost of insurance, including fire and extended
coverage and general liability insurance, but no change for insurance is
included that reflects premiums due to any act or omission of any tenant of the
Building for which Landlord would be entitled to reimbursement from such tenant.
Said operating expenses shall not include administrative salaries and wages
of persons not involved in the day-to-day operations of the Building, state or
federal income taxes or periodic alterations of improvements to the construction
of the Building, and in no case shall Tenant be charged additional rent for any
operating expense such as painting, repainting, redecorating, special cleaning
service of special security service which can be directly related to the sole
advantage of Landlord or any other particular occupant of the Building other
than Tenant. Operating expenses shall not include cost of any repair or
replacement which is or should be capitalized on Landlord's books under
generally accepted accounting principles.
In the event that during the lease term said operating expenses for 1995 or
any succeeding calendar year exceed the 1994 expenses per square foot per year
("base expense rate") for the total Rentable Area of the Building (as defined in
Paragraph 1(d) hereof), Tenant, within thirty (30) days after written
notification of the foregoing by Landlord, shall:
(a) Pay to the Landlord Tenant's proportionate share (4.23 %) of such
increase for the year in question, said proportionate share being
defined to mean a fraction, the numerator of which is the square footage
of the Premises set out in Paragraph 1(d), and the denominator of which
is the total rentable area of the Building set out in Paragraph 1(d).
The product resulting from the
<PAGE>
application of such fraction to the increases shall constitute the
amount of additional rent Tenant shall pay. (See Rider)
(b) Additionally, Tenant shall pay to Landlord with the payment of
Monthly Rental installments for the months following the month during
which a notice of escalated rents is given, a monthly escalation reserve
on the first day of each month for the remainder of the calendar year.
The monthly escalation reserve shall be equal to the total of Tenant's
proportionate share of such operating expense increase for the previous
calendar year divided by the number of months remaining in the then
current calendar year subsequent to the month in which the notice of
escalated rent is given. Landlord shall apply the total of the monthly
escalation reserves paid by the Tenant to any increase over the base
expense rate for the calendar year in which the monthly escalation
reserves are paid. After the end of every calendar year Landlord will
deliver to Tenant a statement which sets forth (i) the previous year's
operating expenses (ii) Tenant's proportionate share of any increases,
(iii) the adjustment, if any, reflecting the monthly escalation reserves
paid, and (iv) the net amount due Landlord or due to be reimbursed to
Tenant, provided, however, in no event shall the basic rent or the
monthly rental installments ever be less than the amounts specified in
Paragraphs 1(f) and 1(g), respectively.
Notwithstanding any expiration or termination of this Lease prior to the
lease expiration date (except in the case of a cancellation by mutual agreement)
Tenant's obligation to pay any and all additional rent under this Lease shall
continue and shall cover all periods up to the lease expiration date. Tenant's
obligation to pay any and all additional rent under this Lease and Landlord's
and Tenant's obligation to make the adjustments referred to in this Lease shall
survive any expiration or termination of this Lease.
If any amounts which become due by reason of escalation of rent are not
paid by the fifth day following the day on which they are due a service charge
of 10% of such rental escalation amount shall become due and payable in addition
to such rental escalation. Said service charge is for the purpose of reimbursing
Landlord for the extra costs and expenses incurred in connection with the
handling and processing of late rental escalation payments.
5. SERVICES:
(a) Landlord agrees to furnish Tenant while occupying the Premises,
at Landlord's sold cost and expense: (i) hot and cold water at those
points of supply provided for general use to tenantry; (ii) electrical
current for Tenant's use and occupancy of the Premises to the extent
reasonably deemed to be standard by the Landlord, provided however,
that all costs for extraordinary or unusual demand for electrical
service shall be borne by Tenant; (iii) heating and air
Note: (ii) Not to exceed 8 watts per sq. ft.
2-R
<PAGE>
conditioning at such times as Landlord normally furnishes such
services to all tenants of the Project and at such temperatures and in
such amounts as are reasonably considered by Landlord to be standard;
(iv) periodic janitor service; and (v) replacement of proper standard
light bulbs and tubes.
(b) Landlord does not warrant that any of said specified services
will be free from interruption or stoppage, but nevertheless Landlord
shall use reasonable diligence to resume any such interrupted or
stopped service. Anything to the contrary notwithstanding, no failure,
to any indent, to furnish such services or any stoppage or
interruption of these defined services shall render Landlord liable in
any respect for damages to either person, property or business, nor
shall any such failure, interruption or stoppage of such services be
deemed or construed as an eviction, actual or constructive, of Tenant
nor work an abatement of rent nor relieve Tenant from the obligation
to fulfill any covenant or agreement contained in this Lease.
6. LEASEHOLD IMPROVEMENTS. Landlord agrees to install at Landlord's cost
and expense, except as otherwise stated herein, the improvements described in
Exhibit "B" attached hereto. Landlord has made no representations as to the
condition of the Premises or the Building or to remodel, repair or decorate,
except as expressly set forth herein.
7. USE. Tenant shall use the Premises only for the permitted use (as
defined in paragraph 10 hereof). Tenant will not occupy or use the Premises, or
permit any portion of the Premises to be occupied or used for any business or
purpose other than the permitted use or for any use or purpose which is unlawful
in part or in whole or deemed to be disreputable in any manner or extrahazardous
on account of fire, nor permit anything to be done which will in any way
increase the rate of fire insurance on the Building or contents; and in the
event that, by reason of acts of Tenant, there shall be any increase in the rate
of fire insurance on the Building or contents; and in the event that, by reason
of acts of Tenant, there shall be any increase in the rate of the insurance on
the Building or contents created by Tenant's acts or conduct of business then
such acts of Tenant shall be deemed to be an event of default hereunder and
Tenant hereby agrees to pay to Landlord the amount of such increases on demand
and acceptance of such payment shall not constitute a waiver of any of
Landlord's other rights provided herein. Tenant will conduct its business and
control its agents, employees and invites in such a manner as not to create any
nuisance, nor interfere with, annoy or disturb other tenants or Landlord in
management of the Building, or carry on or permit any operation which might omit
offensive odors or conditions into other portions of the Building or use any
apparatus which might make undue noise or set up vibrations in the Building.
Tenant will maintain the Premises in a clean, healthful and safe condition and
will comply with all law, ordinances, orders, rules and regulations (state,
federal, municipal and other agencies or bodies having any jurisdiction thereof)
with reference to use, condition or occupancy of premises. Tenant will not,
without the prior written consent of Landlord, paint, install lighting, window
coverings or decoration, or install any signs, window or door lettering or
advertising media of any type on or about the Premises or any part thereof.
Should Landlord agree in writing to any of the foregoing items in the preceding
sentence. Tenant will maintain such permitted items in good condition and repair
at all times.
8. ENVIRONMENTAL OBLIGATIONS.
(A) The Tenant covenants that no hazardous or toxic materials shall be
brought onto, stored, or used at the Premises by the Tenant or any of its
employees, agents, independent contractors, licensees, subtenants or invitees,
except such materials as are typically found at first-class suburban office
complexes similar to the Premises, and that no substances shall be placed into
the plumbing and waste treatment systems of the Premises other than substances
such systems are designed to treat and discharge appropriately under the Laws.
The Tenant shall hold harmless, indemnify and defend the Landlord, to the extent
that the Landlord shall have any liability to any of the following: its
respective directors, officers, shareholders or partners, employees, successors
and assigns, (collectively, the indemnified Persons) from and against any direct
(but not indirect or consequential) Environmental Damages, resulting from events
occurring during the Term, except for Environmental Damages arising from the
acts or omissions of the Indemnified Persons.
(B) "Environmental Damages" shall mean all claims, judgments, damages
(including punitive damages), losses, penalties, fines, liabilities (including
strict liability), encumbrances, liens, costs and expenses of investigation and
defense of any claim, or any directive of any governmental or quasi-governmental
agency, department, commission, board, or bureau, whether or not such is
ultimately defeated, and of any settlement or judgment, for which the Tenant or
an Indemnified Person is liable under Environmental Laws and which are required
to be incurred under the Laws applicable to Hazardous Material, including
reasonable attorney's fees and disbursements and consultants' fees, any of which
are
<PAGE>
incurred as a result of the existence or release of Hazardous Material upon,
about or beneath the Premises or migrating from the Premises, or the existence
of a violation of such Laws pertaining to the Premises.
(C) "Hazardous Material" shall mean any hazardous or toxic substance,
material or waste (including constituents thereof) which is or becomes regulated
by one or more Governmental Authorities (hereinafter defined). The words
"Hazardous Material" include any material or substance which is (a) listed or
defined as a "hazardous waste," "extremely hazardous waste," "restricted
hazardous waste," "hazardous substance" or "toxic substance" under any Laws, (b)
petroleum and its byproducts, (c) asbestos, (d) polychlorinated biphenyl, (e)
designated as a "hazardous substance" pursuant to Section 311 of the Federal
Water Pollution Control Act (33 U.S.C. 1317), (f) defined as a "hazardous waste"
pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act,
(42 U.S.C. 6903), (g) defined as a "hazardous substance" pursuant to Section 101
of the Comprehensive Environmental Response, Compensation and Liability Act, (42
U.S.C. 9601 et seq.), or (h) defined as a toxic substance in the Toxic Substance
Control Act (15 U.S.C. 2601 et seq.).
9. REPAIRS AND MAINTENANCE.
(a) BY LANDLORD: Landlord shall at its expense maintain only the
roof, foundation, heating and air conditioning systems, common areas,
plumbing, elevators, the structural soundness of the exterior walls,
the paving outside the Buildings, and the landscaping in good repair
and condition, except for reasonable wear and tear. Landlord shall be
responsible for pest eradication. Tenant shall give immediate written
notice to Landlord of the need for repairs or corrections and Landlord
shall proceed promptly to make such repairs or corrections. Landlord's
liability hereunder shall be limited to the cost of such repairs or
corrections.
(b) BY TENANT: Tenant shall at its expense and risk maintain the
Premises and related facilities in good repair and condition,
including but not limited to repairs (including all necessary
replacements, to the windows, window glass, plate glass, doors and the
interior of the Premises in general. Tenant will not in any manner
deface or injure the Building, the Premises or related facilities and
will pay the cost of repairing any damage or injury done by Tenant or
Tenant's agents, employees or invitees. Tenant shall throughout the
term of this Lease take good care of the Premises and related
facilities and keep them free from waste and nuisance of any kind. If
Tenant shall fail to make any repair required hereunder (including all
necessary replacements) within fifteen (15) days after written
notification to do so. Landlord may at its option make such repair,
and Tenant shall, upon demand therefor, pay Landlord for the cost
thereof together
3-R
<PAGE>
with Interest on any such cost which remains unpaid following such
demand at the rate of ten percent (10%) per annum until paid.
10. ALTERATIONS AND IMPROVEMENTS. At the end or other termination of this
Lease. Tenant shall deliver up the Premises with all improvements located
thereon (except as otherwise herein provided) in good repair and condition,
reasonable wear and tear excepted, and shall deliver to Landlord all keys to the
Premises. The cost and expense of any repairs necessary to restore the condition
of the Premises to said condition in which they are to be delivered to Landlord
shall be borne by Tenant. Tenant will not make or allow to be made any
alterations or physical additions in or to the Premises without the prior
written consent of the Landlord. All alterations, additions or improvements
(whether temporary or permanent in character) made in or upon the Premises,
either by Landlord or Tenant, shall be Landlord's property on termination of
this Lease and shall remain on the Premises, without compensation to the Tenant.
All furniture, movable trade fixtures and equipment installed by Tenant may be
removed by Tenant at the termination of this Lease if Tenant so elects, and
shall be so removed if required by Landlord, or if not so removed shall, at the
option of the Landlord, become the property of Landlord. All such installations,
removals and restoration shall be accomplished in good workmanlike manner so as
not to damage the Premises or the primary structure or structural qualities of
the Building or the plumbing, electrical lines or other utilities.
11. COMMON AREAS. The use and occupation by Tenant of the Premises shall
include the use in common with others entitled thereto of the Common Areas,
parking areas, service roads, loading facilities, sidewalks, and other
facilities as may be designated from time to time by Landlord, subject, however,
to the terms and conditions of this agreement and to reasonable rules and
regulations for the use thereof as prescribed from time to time by Landlord.
All common areas described above shall at all times be subject to the
exclusive control and management of Landlord, and Landlord shall have the right
from time to time to establish, modify and enforce reasonable rules and
regulations with respect to all facilities and areas mentioned in this Article.
Landlord shall have the right to construct, maintain, and operate lighting
facilities on all said areas and improvements; to police same; from time to time
to change the area, level, location and arrangement of parking areas and other
facilities hereinabove referred to; and to restrict parking by tenants, their
officers, agents and employees to employee parking areas.
All common areas and facilities not within the Premises, which Tenant may
be permitted to use and occupy, are to be used and occupied under a revocable
license, and if the amount of such areas to be diminished, Landlord shall not be
subject to liability nor shall Tenant be entitled to any compensation or
diminution or abatement of rent, nor shall such diminution of such areas be
deemed constructive or actual eviction.
12. ASSIGNMENT AND SUBLETTING.
(A) Except as specified herein, Tenant shall not, without the prior written
consent of Landlord, such consent shall not be unreasonable witheld or delayed
which may be withheld in Landlord's sole and absolute discretion, (a) assign or
in any manner transfer this Lease or any estate or interest therein, (b) permit
any assignment of this Lease or any estate or interest therein by operation of
law, (c) sublease the Premises or any part thereof, (d) grant any license,
concession or other right of occupancy of any portion of the Premises, or (e)
permit the use of the Premises by any parties other than Tenant, its agents and
employees. Any such consent, transfer, sublease, grant or permit made without
Landlord's prior written consent shall be absolutely void. Consent by Landlord
to one or more assignments or subleases shall not operate as a waiver of
Landlord's right to any subsequent assignments and subleases. Notwithstanding
any assignment or subleasing. Tenant and any guarantor of Tenant's obligations
under this Lease shall, at all times, remain fully responsible and liable for
the payment of the rent herein specified and for compliance with all of Tenant's
other obligations under this Lease. Moreover, in the event that the rental due
and payable under any sublease (or a combination of the rental payable under any
sublease plus any bonus or other consideration therefor or incident thereto)
exceeds the rental payable under this Lease, or if with respect to a permitted
assignment, permitted license or other transfer by Tenant permitted by Landlord,
the consideration payable to Tenant exceeds the rental payable under this Lease,
then Tenant shall be bound and obligated to pay Landlord all such excess rental
and other excess consideration within ten (10) days following receipt thereof by
Tenant from such sublessee, assignee, licensee or other transferee, as the case
may be. Subleases to any parent companies, subsidiaries, or affiliates of Tenant
shall not require Landlord's consent. However, any subsidiary or affiliate type
of business must be similar to Tenant's.
(B) If Tenant is a general partnership or joint venture and there shall be
any change in the membership of such partnership or joint venture subsequent to
the execution
<PAGE>
of this Lease, such change in membership shall be deemed an assignment of this
Lease for purposes of Section 11(A) hereof. If Tenant is a limited partnership
and there shall be any change in the general partner subsequent to the execution
of this Lease, such change in the general partner shall be deemed an assignment
of this Lease for purposes of Section 11(A) hereof. If Tenant is a corporation
and there shall be any change in the control of the corporation subsequent to
the execution of this Lease, such change in control shall be deemed an
assignment of this Lease, for purposes of Section 11(A) hereof. This Section
11(B) shall not apply, however, if Tenant is a corporation which has its
outstanding voting trust listed on a recognized security exchange.
13. INDEMNITY. Landlord shall not be liable for and Tenant will indemnify
and save harmless Landlord of and from all fines, suits, claims, demands, losses
and actions (including attorney's fees) for any injury to person or damage to or
loss of property on or about the Premises caused by any actual or alleged act,
omission, negligence or misconduct from any cause, including Landlord's
negligence, or breach of this Lease by Tenant, Its agents, employees,
subtenants, invitees or by any other person entering the Building, the Premises,
or related facilities. Landlord shall not be liable or responsible for any loss
or damage to any property or death or injury to any person occasioned by theft,
fire, act of God, public enemy, criminal conduct of third parties, injunction,
riot, strike, insurrection, war, court order, requisition or order of any
governmental body or authority, by other tenants of the Building or related
facilities or any other matter, or for any injury or damage or inconvenience
which may arise through repair or alteration of any part of the Building, the
Premises or related facilities, or failure to make repairs or from any cause
whatsoever.
14. MORTGAGES. Tenant accepts this Lease subject to any deeds of trust,
security interests or mortgages which might now or hereafter constitute a lien
upon the Building or improvements therein, the Premises, or related facilities,
and to zoning ordinances and other building and fire ordinances and governmental
regulations relating to the use of the property. Tenant shall at any time
hereafter, on demand, execute any instruments or releases or other documents
that may be required by any mortgagee for the purpose of subjecting and
subordinating this Lease of any such deed of trust, security interest of
mortgage. With respect to any deed of trust, security interest or mortgage
hereafter constituting a lien on the Building or improvements therein, the
Premises, or related facilities, Landlord, at its sole options, shall have the
right to waive the applicability of this paragraph 13 so that this Lease will
not be subject and subordinate to any such deed of trust, security interest or
mortgage.
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<PAGE>
15. CASUALTY INSURANCE
(A) Landlord shall, at all times during the term of this Lease maintain a
policy or policies of insurance with the premiums thereon fully paid in advance,
issued by and binding upon some solvent insurance company, insuring the Building
against loss or damage by fire, explosion, or other hazards and contingencies
for the full insurable value thereof; provided that Landlord shall not be
obligated to insure any furniture, equipment, machinery, goods or supplies not
covered by this Lease which Tenant may bring or obtain upon the Premises, or any
additional improvements which Tenant may construct thereon.
(B) Tenant shall maintain, at its sole expense, fire and extended coverage
insurance in an amount nor less than eighty percent (80%) of the full insurable
value of all of its personal property, including removable trade fixtures
located in the Premises and on all additions and improvements thereto made by
Tenant. Tenant shall maintain, at its sole cost and expense, bodily injury
liability insurance in an amount of $500,000.00 bodily injury or death per
person, $1,000,000.00 bodily injury or death in the aggregate and property
damage liability insurance in an amount of $500,000.00. Such insurance shall
specifically make reference to the indemnity provision of Section 12 of this
Lease and shall name Landlord as an additional insured.
(C) All policies of insurance provided for herein to be carried by Tenant
shall be issued by insurance companies reasonably acceptable to Landlord and
certified to do business by the State of Texas and its insurance regulatory
bodies and shall be issued in the names of both Landlord and Tenant as named
insureds (without any liability on the part of Landlord for premiums). Executed
copies of such policies of insurance or certificates thereof shall be delivered
to Landlord within ten (10) days before delivery of possession of the Premises,
and thereafter, within thirty (30) days prior to the expiration of such policy.
As often as any such policy shall expire or terminate, renewal or additional
policies shall be procured and maintained by Tenant in like manner and to like
extent. All policies of insurance delivered to Landlord must contain a provision
that the company writing said policy will give to Landlord twenty (20) days'
notice in writing in advance of any cancellation or lapse or the effective date
of any reduction in the amounts of insurance. All public liability and property
damage policies shall be written as primary policies, not contributing with, and
not in excess of, coverage which Landlord may carry, if any. If Tenant fails to
provide Landlord with such evidence of insurance, Landlord may, at its option,
obtain insurance coverage, as provided above, and charge Tenant for the cost of
the same, plus a 15% administrative fee.
16. INSPECTION. Landlord or representatives shall have the right to enter
into and upon any and all parts of the Premises if accompanied by Tenant at
reasonable hours with prior notice to (i) inspect same or clean or make repairs
or alterations or additions as Landlord may deem necessary (but without any
obligation to do so, except as expressly provided for herein), or (ii) show the
Premises to prospective tenants, purchasers of lenders in the last ninety (90)
days of this Lease, and Tenant shall not be entitled to any abatement or
reduction of rent by reason thereof, nor shall such be deemed to be an actual or
constructive eviction.
17. CONDEMNATION. If, during the term of this Lease, or any extension or
renewal thereof, all of the Premises should be taken for any public or quasi-
public use under any governmental law, ordinance or regulation or by right of
eminent domain or by private purchase in lieu thereof, this Lease shall
terminate and the rent shall be abated during the unexpired portion of this
Lease, effective on the date physical possession is taken by the condemning
authority, and Tenant shall have no claim against Landlord for the value of any
unexpired term of this Lease.
In the event a portion but not all of the Premises shall be taken for any
public or quasi-public use under any governmental law, ordinance or regulation,
or by right of eminent domain or by private sale in lieu thereof and the partial
taking or condemnation shall render the Premises unsuitable for Tenant's
business, then Landlord shall have the option, in its sole discretion, of
terminating this Lease, or, at Landlord's sole risk and expense, restoring and
reconstructing the Premises to the extent necessary to make some reasonably
tenantable. Should Landlord elect to restore, the Lease shall continue in full
force and effect with the rent payable during the unexpired portion of this
Lease adjusted to such an extent as may be fair and reasonable under the
circumstances, and Tenant shall have no claim against Landlord for the value of
any interrupted portion of this Lease.
In the event of any condemnation or taking, total or partial. Tenant shall
not be entitled to any part of the award or price paid in lieu thereof, and
Landlord shall receive the full amount of such award or price, Tenant hereby
expressly waiving any right or claim to any part thereof.
18. FIRE OR OTHER CASUALTY. If the Premises or any part thereof shall be
damaged by
<PAGE>
fire or other casualty, Tenant shall give prompt written notice thereof to
Landlord. In case the Building shall be so damaged by fire or other casualty
that substantial alteration or reconstruction of the Building shall, in
Landlord's sole opinion, be required (whether or not the Premises shall have
been damaged by such fire or other casualty), or in the event any mortgagee
under a first mortgage or first deed of trust covering the Building should
require that the insurance proceeds payable as a result of said fire or other
casualty be used to retire the mortgage debt, Landlord may, at its opinion,
terminate this Lease and the term and estate hereby granted by notifying Tenant
in writing of such termination within sixty (60) days after the date of such
damage or determination by such Landlord does not thus elect to terminate this
Lease, Landlord shall within sixty (60) days after the date of such damage
commence to repair and restore the Building and shall proceed with reasonable
diligence to restore the Building (except that Landlord shall not be responsible
for delays outside its control and the time period within which Landlord is
obligated to commence and/or complete such repairs shall be extended by a period
equal to such delay) to substantially the same condition in which it was
immediately prior to the happening of the fire or other casualty, except that
Landlord shall not be required to rebuild, repair, or replace any part of
Tenant's furniture or furnishings or fixtures and equipment removable by Tenant
under the provisions of this Lease or any additions or improvements to the
Demised Premises made by Tenant at Tenant's expense, but such work shall not
exceed the scope of the work done by Landlord at Landlord's expense in
originally improving the Building nor shall Landlord in any event be required to
spend for such work an amount in excess of the insurance proceeds actually
received by Landlord as a result of the fire or other casualty plus any
deductible amounts thereunder. In addition, in the event of the occurrence of a
casualty which is not insured under the casualty insurance requirements to be
carried by Landlord pursuant to the terms hereof, Landlord shall have the option
to terminate this Lease. Landlord shall not be liable for any inconvenience or
annoyance to Tenant or injury to the business of Tenant resulting in any way
from such damage or the repair thereof, except that, subject to the provisions
of the next sentence, Landlord shall allow Tenant a fair diminution of rent
during the time and to the extent the Premises are unfit for occupancy. If the
Premises or any other portion of the Building be damaged by fire or other
casualty resulting from the fault or negligence of Tenant or any of Tenant's
agents, servants, employees, licensees, or invitees, the rent hereunder shall
not be diminished during the repair of such damage, and Tenant shall be liable
to Landlord for the cost and expense of the repair and restoration of the
Building caused thereby to the extent such cost and expense is not covered by
insurance proceeds. Any insurance which may be carried by Landlord or Tenant
against loss or damage to the Building or the Premises shall be for the sole
benefit of the party carrying such insurance and under its sole control.
19. HOLDING OVER. Should Tenant, or any of its successors in interest,
hold over the Premises, or any pat thereof, after the expiration of the term of
this Lease or of any renewal or extension thereof, unless otherwise agreed in
writing, such holding over may constitute and may be construed, at Landlord's
sole option, as a tenancy from month to month only at a rental equal to the
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<PAGE>
Monthly Rental Installment, and the Operating Expense Adjustment as described in
paragraph hereof, plus fifty percent (50%) of such amount. The inclusion of the
preceding sentence shall not be construed as Landlord's consent for the Tenant
to hold over.
20. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for all taxes
levied or assessed against personal property, furniture or fixtures placed by
Tenant in the Premises. If any such taxes for which Tenant is liable are levied
or assessed against Landlord's property and if Landlord elects to pay the same
or if the assessed value of the Landlord's property is increased by inclusion of
personal property, furniture or fixtures placed by Tenant in the Premises, and
Landlord elects to pay the taxes based on such increases, the Tenant shall pay
to Landlord upon demand that part of such taxes for which Tenant is primarily
liable hereunder.
21. EVENTS OF DEFAULT. The following events shall be deemed to be events
of default by Tenant under this Lease:
(a) Tenant shall fail to pay any Monthly Rental Installment, or any
portion of the Basic Rental hereby reserved, any portion of the
Operating Expense Adjustment, or any other sum owing under the terms
of this Lease when due;
(b) Tenant shall fail to comply with any term, provision or covenant
of this Lease, other than the payment of rent, and shall not cure such
failure within ten (10) days after written notice thereof to Tenant;
(c) Tenant shall make an assignment for the benefit of creditors;
(d) Tenant shall file a petition under any section or chapter of the
National Bankruptcy Act, as amended, or under any similar law or
statute of the United States or any State thereof, or Tenant shall be
adjudged bankruptcy or insolvent in any proceeding filed against
Tenant thereunder and such adjudication shall not be vacated or set
aside within thirty (30) days;
(e) A receiver or Trustee shall be appointed for all or substantially
all of the assets of Tenant and such receivership shall not be
terminated or stayed within thirty (30) days;
(f) Tenant shall desert or vacate any substantial portion of the
Premises for a period of thirty (30) or more days; with non-payment of
rent or
(g) Tenant makes an assignment or enters into a sublease in violation
of Paragraph 11 hereof.
22. REMEDIES. Upon the occurrence of any event of default specified in
paragraph 20 hereof, Landlord shall have the option to pursue any one or more of
the following remedies without any notice or demand whatsoever;
(a) Terminate this Lease in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may have
for possession or arrearages in rent, enter upon and peaceably take
possession and expel or remove Tenant and any other person who may be
occupying said Premises or any part thereof without being liable for
prosecution or any claim of damages thereof. Tenant agrees to pay to
Landlord on demand the amount of all loss and damage which Landlord
may suffer by reason of such termination, whether through inability to
relet the Premises on satisfactory terms or otherwise, including the
loss of the basic rental then remaining unpaid.
(b) Enter upon and peaceably take possession of the Premises and
expel or remove Tenant and any other person who may be occupying the
Premises or any part thereof without being liable for prosecution or
any claim for damages therefor, and if Landlord so elects, relet the
Premises on such terms as Landlord shall deem advisable and receive
the rent thereof. Tenant agrees to pay to Landlord on demand any
deficiency in basic rental that may arise by reason of such relating;
and
(c) Enter upon the Premises, without being liable for prosecution or
any claim for damage therefor, and do whatever Tenant is obligated to
do under the terms of this Lease, and Tenant agrees to reimburse
Landlord on demand for any expenses which Landlord may incur in thus
effecting compliance with Tenant's obligations under this Lease, and
Tenant further agrees that Landlord shall not be liable for any
damages resulting to the Tenant from such action.
<PAGE>
No re-entry or taking possession of the Premises by Landlord shall be
construed as an election on its part to terminate this Lease, unless a written
notice of such intention be given to Tenant. Notwithstanding any such relating
or re-entry or taking possession, Landlord may at any time thereafter elect to
terminate this Lease for a previous default. Pursuit of any of the foregoing
remedies shall not preclude pursuit of any of the other remedies herein provided
or any other remedies provided by law nor shall pursuit of any remedy herein
provided constitute a forfeiture or waiver of any rent due to Landlord hereunder
or of any damages accruing to Landlord by reason of the violation of any of the
terms, provisions and covenants herein contained. Landlord's acceptance of rent
following an event of default hereunder shall not be construed as Landlord's
waiver of such event of default. No waiver by Landlord of any violation or
breach of any of the terms, provisions and covenants herein contained shall be
deemed or construed to constitute a waiver of any other violation or breach of
any of the terms, provisions and covenants herein contained. Forbearance by
Landlord to enforce one or more of the remedies herein provided upon an event of
default shall not be deemed or construed to constitute a waiver of any other
violation or default. The loss or damage that Landlord may suffer by reason of
termination of this Lease or the deficiency from any reletting as provided for
above shall include the expense of repossession and any repairs or remodeling
undertaken by Landlord following possession. Should Landlord at any time
terminate this Lease for any default, in addition to any other remedy Landlord
may have, Landlord may recover from Tenant all damages Landlord may incur by
reason of such default, including the cost of recovering the premises and the
loss of the basic rental then remaining unpaid.
23. SURRENDER OF PREMISES. No act or thing done by the Landlord or its
agents during the term hereby granted shall be deemed an acceptance of a
surrender of the Premises, and no agreement to accept a surrender of the
Premises shall be valid unless the same be made in writing and subscribed by the
Landlord.
24. ATTORNEY'S FEES. In case it should be necessary or proper for Landlord
to bring any action under the Lease or to consult or place said Lease, or any
amount payable by Tenant thereunder, with an attorney concerning or for the
enforcement of any of Landlord's rights hereunder, then Tenant agrees in each
and any such case to pay to Landlord on demand a reasonable attorney's fee.
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<PAGE>
25. LANDLORD'S LIEN. In addition to the statutory Landlord's lien,
Landlord shall have at all times, a valid security interest to secure payment of
all rentals and other sums of money becoming due hereunder from Tenant, and to
secure payment of any damages or loss which Landlord may suffer by reason of the
breach by Tenant of any covenant, agreement or condition contained herein, upon
all goods, wares, equipment, fixtures, furniture, improvements and other
personal property of Tenant presently or which may hereafter be situated on the
Premises and all proceeds therefrom, and such property shall not be removed
therefrom without the consent of Landlord until all arrearages in rent, as well
as any and all other sums of money than due to Landlord hereunder, shall first
have been paid and discharged and all the covenants, agreements and conditions
hereof have been fully complied with and performed by Tenant. Upon the
occurrence of an event of default by Tenant, Landlord may, in addition to any
other remedies provided herein, enter upon the Premises and take possession of
any and all goods, wares, equipment, fixtures, furniture, improvements and other
personal property of Tenant situated on the Premises, without liability for
trespass or conversion, and sell the same at public or private sale, without
having such property at the sale, after giving Tenant reasonable notice of the
time and place of any public sale or of the time after which any private sale is
to be made, at which sales the Landlord or its assigns may purchase unless
otherwise prohibited by law. Unless otherwise provided by law, and without
intending to exclude any other manner of giving Tenant reasonable notice, the
requirement of reasonable notice shall be met if such notice is given in the
manner prescribed in paragraph 27 of this Lease at least five (5) days before
the time of sale. The proceeds from any such disposition, less any and all
expenses connected with the taking of possession, holding and selling of the
property (including reasonable attorney's fees and other expenses), shall be
applied as a credit against the indebtedness secured by the security interest
granted in this paragraph 24. Any surplus shall be paid to Tenant or as
otherwise required by law; and the Tenant shall pay any deficiencies forthwith.
Upon request by Landlord, Tenant agrees to execute and deliver to Landlord a
financing statement in form sufficient to perfect the security interest of
Landlord in the aforementioned property and proceeds thereof under the
provisions of the Uniform Commercial Code in force in the State of Texas. The
statutory lien for rent is not hereby waived, the security interest herein
granted being in addition and supplementary thereto.
26. MECHANIC'S LIEN. Tenant will not permit any mechanic's lien or liens
to be placed upon the Premises or the Building or improvements thereon during
the term hereof caused by resulting from any work performed, materials furnished
or obligation incurred by or at the request of Tenant, and in the case of the
filling of any such lien Tenant will promptly pay same. If default in payment
thereof shall continue for twenty (20) days after written notice thereof from
Landlord to Tenant, the Landlord shall have the right and privilege at
Landlord's option of paying the same or any portion thereof without inquiry as
to the validity thereof, and any amounts so paid, including expenses and
interest, shall be so much additional indebtedness hereunder due from Tenant to
Landlord and shall be repaid to Landlord immediately on rendition of bill
therefor, together with interest at ten percent (10%) per annum until repaid.
27. WAIVER OF SUBROGATION. Anything in this Lease to the contrary
notwithstanding, the parties hereto hereby waive any and all rights of recovery,
claim, action or cause of action against each other, their agents, officers, and
employees, for any loss or damage that may occur to the Premises hereby demised,
or any improvements thereto, or said Building of which the Premises are a part,
any improvements thereto, or related facilities, by reason of fire, the
elements, or any other cause which could be insured against under the terms of
standard fire and extended coverage insurance policies, regardless of cause or
origin, including negligence of the parties hereto, their agents, officers and
employees.
28. NOTICES. Each provision of this Agreement, or of any applicable
governmental laws, ordinances, regulations, and other requirements with
reference to the sending, mailing or delivery of any notice, or with reference
to the making of any payment by Tenant to Landlord, shall be deemed to be
complied with when and if the following steps are taken:
(a) All rent and other payment required to be made by Tenant to
Landlord hereunder shall be payable to Landlord in Dallas County,
Texas, at the address hereinbelow set forth, or at such other address
as Landlord may specify from time to time by written notice delivered
in accordance herewith:
(b) Any notice or document required to be delivered hereunder shall be
deemed to be delivered if actually received and whether or not
received when deposited in the United States mail, postage prepaid,
certified or registered mail (with or without return receipt
requested) addressed to the parties hereto at the respective addresses
set out opposite their names below, or at such other address as they
have heretofore specified by written notice delivered in accordance
herewith;
<PAGE>
LANDLORD:
Government Employees Insurance Co.
---------------------------------
4201 Spring Valley Road, #200
-----------------------------
Dallas, Texas 75244
-------------------
TENANT:
Efficient Network Technology Inc.
---------------------------------
4201 Spring Valley Road, #1200
------------------------------
Dallas, Texas 75244
-------------------
29. FORCE MAJEURE. Whenever a period of time is herein prescribed for
action to be taken by Landlord, the Landlord shall not be liable or responsible
for, and there shall be excluded from the computation of any such period of
time, any delays due to strikes, riots, Acts of God, shortages of labor or
materials, war, governmental laws, regulations or restrictions or any other
causes of any kind whatsoever which are beyond the control of Landlord.
30. SEPARABILITY. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws effective during the term
of this Lease, then and in that event, it is the intention of the parties hereto
that the remainder of this Lease shall not be affected thereby, and it is also
the intention of the parties to this Lease that in lieu of each clause or
provision of this Lease that is illegal, invalid, or unenforceable, there be
added as a part of this Lease a clause or provision as similar in terms to such
illegal, invalid or unenforceable clause or provision as may be possible and be
legal, valid and enforceable.
31. ENTIRE AGREEMENT; AMENDMENTS; BINDING EFFECT. This Lease contains the
entire agreement between parties and may not be altered, changed or amended,
except by instrument in writing signed by both parties hereto. No provision of
this Lease shall be deemed to have been waived by Landlord unless such waiver be
in writing signed by Landlord and addressed to Tenant, nor shall any custom or
practice which may grow up between the parties in the administration of the
terms hereof be construed to waive or lessen the right of Landlord to insist
upon the performance by Tenant in strict accordance with the terms
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<PAGE>
hereof. The terms, provisions, covenants and conditions contained in this Lease
shall apply to, inure to the benefit of, and be binding upon the parties hereto,
and upon their respective successors in interest and legal representatives,
except as otherwise expressly provided.
32. QUIET ENJOYMENT. Provided Tenant has performed all of the terms,
covenants, agreements and conditions of this Lease, including the payment of
rent, to be performed by Tenant, Tenant shall peaceably and quietly hold and
enjoy the Premises for the term hereof, without hindrance from Landlord, subject
to the terms and conditions of this Lease.
33. RULES AND REGULATIONS. Tenant and Tenant's agents, employees, and
invitees will comply fully with all requirements of the rules and regulations of
the Project and related facilities which are attached hereto as Exhibit "C", and
made a part hereof as though fully set out herein. Landlord shall at all times
have the right to change such rules and regulations or to promulgate other rules
and regulations in such reasonable manner as may be deemed advisable for safety,
care, or cleanliness of the Building, the Premises, or related facilities, and
for preservation of good order therein, all of which rules and regulations,
changes and amendments will be forwarded to Tenant in writing and shall be
carried out and observed by Tenant. Tenant shall further be responsible for the
compliance with such rules and regulations by the employees, servants, agents,
visitors and invitees of Tenant.
34. BROKER'S OR AGENT'S COMMISSION. Tenant represents and warrants that
there are no claims for brokerage commissions or finder's fees in connection
with the execution of this Lease, except as listed below, and Tenant agrees to
indemnity and hold harmless Landlord against all liabilities and costs arising
from such claims, including without limitation attorney's fees in connection
therewith.
35. GENDER. Words of any gender used in this Lease shall be held and
construed to include any other gender, and words in the singular number shall be
held to include the plural, unless the context otherwise requires.
36. GUARANTY, JOINT AND SEVERAL LIABILITY. If there be more than one
Tenant, the obligations hereunder Imposed upon Tenant shall be joint and
several. If there be a guarantor of Tenant's obligations hereunder and
obligations hereunder Imposed upon Tenant shall be the joint and several
obligations of Tenant and such guarantor and Landlord need not first proceed
against the Tenant hereunder before proceeding against such guarantor, nor shall
any such guarantor be released from its guaranty for any reasons whatsoever,
including without limitation, in case of any amendments hereto, waivers hereof
or failure to give such guarantor any notices hereunder.
37. TRANSFER OF LANDLORD'S RIGHTS. Landlord shall have the right to
transfer and assign, in whole or in part, all and every feature of its rights
and obligations hereunder, and in the Building and other property referred to
herein. Tenant agrees that, in the event of such assignment, Landlord will be
relieved of all obligations and liability under this Lease as to such
assignment.
38. SECURITY DEPOSIT. Upon the occurrence of any event of default by
Tenant, Landlord may, from time to time without prejudice to any other remedy,
use the security deposit paid to landlord by Tenant as herein provided to the
extent necessary to make good any arrears of rent and any other damages, injury,
expense or liability caused to Landlord by such event of default, any remaining
balance of such security deposit to be returned by Landlord to Tenant upon
termination of the Lease. Such security deposit shall not be considered an
advance payment of rent or a measure of Landlord's damages in case of default by
Tenant. In the event Landlord so uses the security deposit. Tenant shall, upon
demand, restore the same.
39. LANDLORD'S RIGHT OF INSPECTION. Tenant agrees to permit Landlord and
the authorized representative of Landlord to enter the Premises at all
reasonable hours for the purpose of inspecting the same and making any necessary
repairs to the Premises with reasonable notice or to the Building and performing
any work therein that may be necessary to comply with any laws, ordinances,
rules, regulations or requirements of any public authority or of the Board of
Fire Underwriters or any similar body. Nothing herein shall imply any duty upon
the part of Landlord to do any such work which, under any provision of this
Lease Tenant may be required to perform and the performance thereof by landlord
shall not constitute a waiver of Tenant's default in failing to perform the
same. Landlord may, during the progress of any work in the Premises, keep and
store upon the Premises all necessary materials, tools and equipment. Landlord
shall not in any event be liable for inconvenience, annoyance, disturbance, loss
of business or other damage of Tenant by reason of making repairs or the
performance of any work on the Premises, or on account of bringing materials,
supplies and equipment into or through the Premises during the course thereof,
and the obligations of Tenant under this Lease shall not thereby be affected in
any manner
<PAGE>
whatsoever. Tenant agrees to permit Landlord and the authorized representatives
of Landlord to enter the Premises at all times during usual business hours
during the final year of the Term for purposes of showing the Premises to
prospective tenants or purchases.
40. ESTOPPEL CERTIFICATE. Tenant will, at any time and from time to time,
upon request by Landlord, execute, acknowledge, and deliver to Landlord a
statement in writing executed by Tenant certifying that Tenant is in possession
of the Demised Premises under the terms of this Lease, that this Lease is
unmodified and in full effect (or, if there have been modifications, that this
Lease is in full effect as modified, and setting forth such modifications),
stating the dates to which the rent has been paid, and either stating that to
the knowledge of Tenant no default exists hereunder, or specifying each such
default of which Tenant may have knowledge, and such other matters as may be
reasonably requested by Landlord, it being intended that any such statement by
Tenant may be relied upon by prospective purchaser or mortgagee of the Building.
41. CAPTIONS. The captions contained in this Lease are for convenience of
reference only, and in no way limit or enlarge the terms and conditions of this
Lease.
42. PLACE OF PERFORMANCE. Tenant shall perform all covenants, conditions
and agreements contained herein, including but not limited to payment of rent,
in Dallas County, Texas. Any suit arising from or relating to this agreement
shall be brought in Dallas County, Texas.
43. SPECIAL PROVISIONS.
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<PAGE>
EXECUTED as of the date first written above.
LANDLORD:
GOVERNMENT EMPLOYEES INSURANCE COMPANY
By: ____________________________________
Title: _________________________________
TENANT:
EFFICIENT NETWORK TECHNOLOGY INC
--------------------------------
By: /s/ Mark A. Floyd
Title: President & CEO
ATTEST:
- -----------------------------
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<PAGE>
EXHIBIT "A"
Final space plan to be inserted upon completion.
<PAGE>
EXHIBIT "B"
ATTACHED TO AND MADE A PART OF LEASE AGREEMENT BY AND BETWEEN GOVERNMENT
EMPLOYEES INSURANCE COMPANY (LANDLORD) AND EFFICIENT NETWORK TECHNOLOGY INC.
---------------------------------
(TENANT) DATED _________, 19__.
Landlord shall provide an Improvement Allowance equal to $13.50 per rentable
square foot of the premises. This allowance is to be paid to a mutually
acceptable contractor elected through a bidding process (three contractors) to
finish-out the premises per the attached space plan. This allowance shall be
used for all hard and soft cost associated with construction as well as all
kitchen appliances and all co-axial wiring of tenants CRT's. If the allowance is
inadequate to finish-out per the plan attached, Landlord will provide additional
finish dollars to complete the premises. However, Tenant shall be responsible
for repaying Landlord for such additional cost which shall be amortized over the
term of the Lease in addition to base rental plus six percent (6%) interest.
If the entire allowance is not utilized, tenant shall have the option to:
1. Place the funds in reserve with Landlord for future finish-out use. Such
fund must be used within the first twenty-four (24) months of occupancy.
2. Receive a one time rent credit in the form of free rent based on a $.75 on
the dollar ratio.
Example: Finish allowance $13.50
Allowance used $12.50
------
Unused allowance $1.00
Rent credit $.75 x 10,348 sq.ft. = $7,761.00
Space Planning. Landlord will assume all cost associated with space planning
- --------------
including preliminary plan with one revision and construction documents. The
cost for providing MEP's, if required, will be paid for out of the Improvement
Allowance discussed above.
<PAGE>
EXHIBIT "C"
RULES AND REGULATIONS
1. Landlord shall provide all locks for doors in each Tenant's leased
premises, at the cost of such Tenant, and no Tenant shall place any additional
lock or locks on any door in its leased area without Landlord's prior written
consent. A reasonable number of keys to the locks on the doors in each Tenant's
leased premises shall be furnished by Landlord to each Tenant, at the cost of
such Tenant, and the Tenants shall not have any duplicate keys made.
2. Movement in or out of the Building of furniture or office equipment,
or dispatch or receipt by Tenant of any merchandise or materials which requires
use of elevators or stairways, or movement through Building entrances or lobby
shall be restricted to hours designated by Landlord. All such movement shall be
under supervision of Landlord and in the manner agreed between Tenant and
Landlord by prearrangement before performance. Such prearrangements initiated by
Tenant will include determination by Landlord and be subject to its decision and
control of the time, method and routing of movement, and limitations imposed by
safety or other concerns which may prohibit any article, equipment or any other
item from being brought into the Building. Tenant is to assume all risk as to
damage to articles moved and injury to persons or public engaged or not engaged
in such movement, including equipment, property and personnel of Landlord If
damaged or injured as a result of acts in connection with carrying out this
service for Tenant from time of entering the Land on which the Building stands
to completion of work, and Landlord shall not be liable for acts of any person
engaged in, or any damage or loss to any of said property or persons resulting
from any acts in connection with such service performed by Tenant.
3. No signs will be allowed in any form on the exterior of the Building
or on the inside or outside of the windows of the Building and no signs except
in uniform location and uniform styles fixed by Landlord will be permitted in
the public corridors or on corridor doors or entrances to Tenant's space. All
signs will be contracted for by Landlord for Tenant at the rate fixed by
Landlord from time to time, and Tenant will be billed and shall pay for such
service accordingly.
4. No draperies, shutters, or other window coverings shall be installed
on exterior windows or walls or windows and doors facing public corridors
without Landlord's prior written approval.
5. No portion of the Premises or any other part of Building shall at any
time be used or occupied as sleeping or lodging quarters.
6. Tenant shall not place, install or operate on the Premises or in any
part of the Building, any engine, stove, or machinery, or conduct mechanical
operations or cook thereon or therein, or place or use in or about the Premises
any explosives, gasoline, kerosene, oil, acids, caustics, or any other
inflammable explosive, or hazardous materials without written consent of
Landlord.
7. Landlord will not be responsible for lost or stolen personal property,
equipment, money, or jewelry from the Premises or public rooms regardless of
whether such loss occurs when the Building and/or the Premises are locked
against entry or not.
8. No birds or animals shall be brought into or kept in or about the
Building.
9. Employees of Landlord shall not receive or carry messages for or to
Tenant or other persons, nor contract with or tender free or paid services to
Tenant or Tenant's agents, employees, or invitees.
10. Landlord will not permit entrance to the Premises by use of pass keys
controlled by Landlord, to any person at any time without written permission by
Tenant, except employees, contractors, or service personnel directly supervised
by Landlord and employees of the United States Postal Service.
11. None of the entries, passages, doors, elevator doors, hallways, or
stairways shall be blocked or obstructed, or any rubbish, litter, trash, or
material of any nature placed, empties or thrown into these areas, nor shall
such areas be used at any time except for ingress by Tenant, Tenant's agents,
employees, or invitees.
12. Tenant and its employees, agents and invitees, shall observe and
comply with the driving and parking signs and markers on the Premises
surrounding the Building. Landlord shall not be responsible for any damage to
any vehicle towed because of non-compliance with parking regulations.
<PAGE>
13. Landlord shall have the right to prescribe the weight and position of
safes, computers and other heavy equipment which shall, in all cases, in order
to distribute their weight, stand on supporting devices approved by Landlord.
14. To insure orderly operation of the Building no ice, mineral water or
other beverages, food, towels, newspapers, etc., shall be delivered to the
Premises except by persons and at times approved by Landlord in writing.
15. Should a Tenant require telegraphic, telephonic, annunciator or other
communication service, Landlord will direct an electrician where and how wires
are to be introduced and placed and none shall be introduced or placed except as
Landlord shall direct. Electric current shall not be used for power or heating
without Landlord's prior written permission.
16. Without Landlord's prior approval, Tenant shall not install any radio
or television antenna, loudspeaker, music system or other device on the roof or
exterior walls of the Building or on common walls with adjacent tenants.
17. No hand trucks or other vehicles of any kind shall be used in or
brought into the Building or the Premises by Tenant or others unless such
vehicle shall have been inspected and approved in writing by Landlord.
18. Tenant shall store all its trash and garbage within its Premises. No
material shall be placed in the trash boxes or receptacles If such material is
of such nature that it may not be disposed of in the customary manner of
removing and disposing of trash and garbage and without being in violation of
any law or ordinance governing such disposal. All garbage and refuse disposal
shall be made only through entryways and elevators provided for such purposes
and at such times as Landlord shall designate.
<PAGE>
19. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify, alter or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease covering premises in the
Building.
20. Landlord reserves the right o make such other reasonable rules and
regulations as in its judgment may from time to time be needed for the safety,
care and cleanliness of the Building, and for the preservation of good order
therein.
21. Corridor doors, when not in use, shall be kept closed.
22. Tenant shall not employ any person or persons other than the janitor
of Landlord for the purpose of cleaning the premises unless otherwise agreed to
by Landlord. Except with the written consent of Landlord no person or persons
other than those approved by Landlord shall be permitted to enter the Building
for the purpose of clearing the same. Tenant shall not cause any unnecessary
labor by reason of Tenant's carelessness or indifference in the preservation of
good order and cleanliness. Landlord shall not be responsible to any Tenant for
any loss of Property on the premises, however occurring, or for any damage done
to the effects of any Tenant by the janitor or any employee or any other person.
Janitor service shall include ordinary dusting and cleaning by the janitor
assigned to such work and shall not include beating of carpets or rugs or moving
of service will not be furnished to areas which are occupied after 9:30 P.M.
Window cleaning shall be done only by Landlord, and only between 6:00 A.M. and
5:00 P.M.
23. Tenants shall not make or permit any Improper, objectionable or
unpleasant noises or odors in the Building or otherwise interfere in any way
with other Tenants or persons having business with them.
24. No vending machine or machines of any description shall be installed,
maintained or operated upon the Premises without the written consent of the
Landlord.
25. On Saturdays, Sundays and legal holidays, and on other days between
the hours of 6:00 P.M. and 8:00 A.M. the following day, access to the building,
or to the halls, corridors, elevators or stairways in the building, or to the
Premises may be refused unless the person seeking access is known to the person
or employee of the building charge and has a pass or is properly identified. The
Landlord shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the building of any person. Landlord further, in
case of invasion, mob, riot, public excitement, or other commotion, reserves the
right to prevent access to the Building during the continuance of the same by
closing the doors or otherwise, for the safety of the Tenants and protection of
property in the Building and the Building. Landlord further reserves the right
to close and keep locked all entrances and exit doors of the building on
Saturdays, Sundays, and legal holidays and on other days between the hours of
6:00 P.M. and 8:00 A.M. of the following day, and during such further hours as
Landlord may deem advisable for the adequate protection of said Building and the
property of its Tenants.
Landlord agrees to be reasonable when regulating and inforcing all rules
and regulations.
<PAGE>
EXHIBIT "D"
ATTACHED TO AND MADE A PART OF LEASE AGREEMENT BY AND BETWEEN GOVERNMENT
EMPLOYEES INSURANCE COMPANY (LANDLORD) AND EFFICIENT NETWORK TECHNOLOGY Inc.
---------------------------------
(TENANT) DATED __________, 19__.
Parking. Landlord will provide sixteen (16) covered parking spaces in the
- --------
building garage at a ratio of one (1) space per six hundred (600) square feet at
no charge for the term of the Lease. At least three (3) of these spaces shall be
reserved for the Lease term. The remaining spaces required by Tenant shall be
surface parking on a first come, first serve basis.
There are no open; un-numbered parking spaces in the garage.
<PAGE>
RIDER TO OFFICE LEASE AGREEMENT
-------------------------------
THIS RIDER TO OFFICE LEASE AGREEMENT (this "Rider") is incorporated into
and made a part of that certain Office Lease Agreement (the "Lease") by and
between Government Employees Insurance Company as Landlord and Efficient Network
Technology, Inc. as Tenant.
The following additional terms are incorporated into the Lease:
A. Measurement of Months. Whenever the Lease or this Rider refers to a
---------------------
period of months, or an event which is to take place a period of months
following the Commencement Date, a month shall be deemed to begin on the day of
the month that this Lease commenced, and shall be deemed to end on the preceding
day of the following month. For example, if the Commencement Date is September
15, then the first month of the Lease shall be from September 15 through October
14.
B. Supplementary Language. The following language shall be added to
----------------------
supplement language set forth in existing sections of the Lease:
(1) Section 1(d). The following language shall be added to the end of
------------
Section 1(d):
The 10.348 rentable square feet constituting the Premises (i) shall be
architecturally verified by Landlord prior to the Commencement Date,
(ii) shall include elevator frontage exposure, (iii) shall be
designated Suite Number 1200 of the Building, and (iv) shall be based
upon a maximum common area factor of 15% as determined by Landlord,
provided that if such area factor is ever reduced to a lower
percentage, rentable square feet shall be recalculated and the Tenant
shall be entitled to an equitable reduction in the Basic Annual
Rental.
(2) Section 1(e). Notwithstanding the language set forth in the Lease,
------------
the "Lease term" shall be a period of 61 months, commencing on the third
business day or weekend following the third business day following written
notice from Landlord to Tenant that the Premises are ready for occupancy (the
"Commencement Date") and ending at the end of the 61st month following the
Commencement Date.
(3) Section 3. The word "5th" in the fifteenth printed line of Section
---------
3 shall be changed to "10th".
(4) Section 5(b). The words "(except for a failure due to Landlord's
------------
gross negligence or intentional acts)" should be added after the word "failure"
in the third line of Section 5(b).
(5) Section 9(b). The words "ordinary wear and tear excepted" should
------------
be added to the end of the first sentence of Section 9(b).
(6) Section 13. The words "including Landlord's negligence" should be
----------
deleted from the third and fourth lines of Section 13. The following words
should be added to the end of the last sentence of Section 13: "except to the
extent such injury or damage results from Landlord's gross negligence or
intentional misconduct."
(7) Section 21(a). The words "when due" should be deleted from the end
-------------
of Section 21(a) and replaced with "on or before the tenth (10th) day following
the due date."
Rider - Page 1
- -----
<PAGE>
(8) Section 21(b). The following language should be added at the end of
-------------
Section 21(b): "or within thirty (30) days if such default cannot be cured
within ten (10) days and Tenant is actively attempting to cure such default."
(9) Section 22. The words "and continuously uncured" should be added after
----------
the word "previous" in the third line of the last paragraph of Section 22.
(10) Section 24. The following sentence shall be added to the end of
----------
Section 24:
In case it should be necessary or proper for Tenant to bring any action
under the Lease, the losing party in such action shall pay the prevailing
party on demand a reasonable attorney's fee.
(11) Section 29. The following sentence should be added to the end of
----------
Section 29:
Whenever a period of time is hereindescribed for action to be taken by
Tenant, except for the period of time given for payment of any amount of
money hereunder, the Tenant shall not be liable or responsible for, and
there shall be excluded from the computation of any such period of time,
any delays due to strikes, riots, acts of God, shortages of labor or
materials, war, governmental laws, regulations or restrictions or any other
causes of any kind whatsoever which are beyond the control of Tenant.
(12) Section 34. The language in Section 34 shall be deleted and replaced
----------
with the following:
Landlord and Tenant represent and warrant that there are no claims for
brokerage commissions or finders fees in connection with this lease other
than those due to The Staubach Company and to Landlord's representative,
and Landlord and Tenant each agree to indemnify and hold harmless the other
against all liabilities and costs arising from claims against the other for
brokerage commissions or finders' fees, including without limitation
attorneys' fees in connection therewith.
(13) Exhibit "B". The following language should be inserted following the
-----------
second sentence of the first full paragraph of Exhibit "B":
Tenant requires that McCaslin - Hill, Inc. be one of the contractors
allowed to bid. All construction bids and line item detail will be provided
to Tenant (or its representative) prior to the awarding of the Contract,
for Tenant's review and approval. If the second lowest acceptable
construction bid is within $1,000 of the lowest acceptable bid, Tenant
shall have the right to choose either contractor. There should be no
specified subcontractors unless the additional cost of such subcontractor
is borne by Landlord. No construction management fee will be charged to the
allowance by Landlord.
The portion of Exhibit "B" captioned "Space Planning" shall be deleted and
replaced with the following language:
Rider - Page 2
- -----
<PAGE>
Landlord will assume all costs associated with space planning,
including all preliminary plans with revisions (up to August 12, 1993)
and construction documents. The costs for providing the required MEP's
will be paid for by Landlord out of the Improvement Allowance discussed
above, the preparer of MEP's to be approved by Tenant.
C. Termination Option. Notwithstanding the Lease term set forth in
------------------
Paragraph (1)(e), and in the event and only in the event that Tenant has made a
bona fide request to Landlord to expand Tenant's leased Premises by a minimum of
1500 square feet and Landlord is not able to make available sufficient expansion
space on a floor then occupied by Tenant by the end of the 37th month following
the Commencement Date, then Tenant shall have the right and option to terminate
the Lease effective at the end of the 37th month following the Commencement
Date, upon six (6) months' prior written notice to Landlord (given in accordance
with the requirements of Paragraph 28) and upon payment of the Termination Fee
hereinafter described. As used herein, the Termination Fee shall be the sum of
$70,000, plus the total of all unamortized costs incurred by Landlord in
connection with Tenant's occupancy of any expansion space or additional
improvements, including but not limited to (1) that portion of any and all
broker commissions for such expansion space earned but not yet paid and (2) the
unamortized portion of the Tenant Improvement Allowance (as hereinafter
defined). As used herein, the Tenant Improvement Allowance shall include
construction costs, space planning costs, and construction oversight expenses
for any expansion space or additional improvements.
D. Payment of Rent and Letter of Credit. Notwithstanding anything set
------------------------------------
forth in the Lease, on the Commencement Date, Tenant shall pay in advance all
Basic Monthly Rental which will become due and payable from the Commencement
Date through the end of the seventh (7th) month following the Commencement Date.
In addition, as additional security for the performance of its obligations under
this Lease, Tenant, upon execution of this Lease, shall deliver to Landlord a
letter of credit (the "Letter of Credit") in form acceptable to Landlord, (such
form being attached hereto as Exhibit "X" to this Rider) issued by a financial
institution acceptable to Landlord. The Letter of Credit will be in the amount
of Sixty Thousand and No/100 Dollars ($60,000.00) and shall be transferrable.
The Letter of Credit may be drawn on after the end of the seventh (7th) month
following the Commencement Date and shall expire at the end of the 25th month
following the Commencement Date. In the event of an event of default under this
Lease, Landlord may draw on the Letter of Credit and retain the proceeds thereof
as an additional Security Deposit, to be held and/or applied in accordance with
Paragraph 38. If Landlord transfers its interest in the Premises during the term
of this Lease, Landlord may assign its rights under the Letter of Credit to the
transferee.
E. Ongoing Right of First Offer. Provided Tenant is not in default under
----------------------------
the terms and provisions of this Lease, Tenant shall have an ongoing right of
first offer (the "Ongoing Right of First Offer"), to lease space on the 11th and
12th floor of the Building on the same terms and conditions as offered to other
prospective tenants of the space. Landlord shall notify Tenant in writing when
such space is available for lease and the terms under which the space may be
leased, which notice shall provide Tenant (i) three (3) business days in which
to exercise the Ongoing Right of First Offer with respect to space on the 11th
floor, and (ii) ten (10) calendar days in which to exercise the Ongoing Right of
First Offer with respect to space on the 12th floor. In connection therewith, if
Tenant elects to lease such space, then this Lease shall be modified with
respect to the lease of the additional premises. The Ongoing Right of First
Offer to lease additional space is expressly nonassignable and nontransferable
by Tenant.
Rider - Page 3
- -----
<PAGE>
F. Expansion. If Tenant expands into additional adjacent space on the
---------
12th floor, either due to the exercise of the Ongoing Right of First Offer or
otherwise, between the beginning of the eighth (8th) month of this Lease and the
last day of the tenth (10th) month of this Lease, and such expansion is for not
less than 2500 square feet, then the Basic Annual Rental shall be at the same
rate per rentable square foot as the original Premises. With respect to any
expansion space described in this paragraph, Landlord shall also provide Tenant
with a Tenant Improvement Allowance of 22 1/2 cents per rentable square foot of
expansion space for each remaining month of the primary Lease term. Said
allowance shall only be used for the purpose of making improvements to the
expansion space.
G. Renewal Option.
--------------
(1) Grant of Option. Provided that, at the time in question, this
---------------
Lease is then in full force and effect and there is no uncured Event of Default
hereunder, Landlord hereby grants to Tenant two (2) successive options (each a
"Renewal Option") to renew this Lease for an additional three (3) year term
each. The first such Renewal Option shall be for the three (3) year period
beginning on the day following the final day of the initial Lease term and
continuing thereafter until three (3) years after such date; and the second
Renewal Option shall be for a three (3) year period beginning on the day
following the final day of the first renewal term and continuing thereafter
until three (3) years after such date unless this Lease shall sooner terminate
as provided herein. Each Renewal Option is granted to Tenant upon the terms and
conditions hereinafter set forth.
(2) Exercise of Option. Tenant may, by notifying Landlord in writing
------------------
not less than ninety (90) days nor more than one hundred eighty (180) days prior
to the final day of the initial Lease term or the final day of the first renewal
term, as appropriate, renew this Lease for an additional three (3) year term as
stated above. Landlord shall provide to Tenant a written estimate of Fair Market
Rental Value (as defined below) not less than six (6) months or more than twelve
(12) months prior to the final day of the initial Lease term or the final day of
the first renewal term, as appropriate, so that Tenant may meaningfully evaluate
the renewal rental rate.
(3) Terms of Lease. (a) Each renewal of this Lease shall be upon the
--------------
same terms, covenants and conditions applicable to the original Lease term,
except that the Basic Annual Rental payable during such extended term shall be
an amount equal to ninety-five percent (95%) of the Fair Market Rental Value (as
hereinafter defined) of the Premises as of the commencement of the lease term
covered by the applicable Renewal Option. As used herein, "Fair Market Rental
Value" of the Premises shall mean the price that a ready and willing tenant
would pay as of the commencement of the extended lease term as rent to a ready
and willing landlord of property comparable to the Premises if such property
were exposed for lease on the open market for a reasonable period of time and
taking into account all of the purposes for which such property may be used and
not just the use proposed to be made of the premises by Tenant.
(b) (i) If Landlord and Tenant have not been able to agree on the Fair
Market Rental Value by the forty-fifth (45th) day prior to the commencement date
of the renewal term, the Basic Annual Rental for the extended term shall be
determined as follows: For a period of ten (10) days, Landlord and Tenant shall
endeavor in good faith to agree upon a single appraiser and the single appraiser
shall determine the Fair Market Rental Value. If Landlord and Tenant are unable
to agree upon a single appraiser within said ten (10) day period, each shall
then, by written notice to the other, given within five (5) days after said ten
(10) day period, appoint one appraiser. Within five (5) days after the two
appraisers are appointed, they shall appoint a third appraiser. If either
Landlord or Tenant fails to appoint its appraiser within the
Rider - Page 4
- -----
<PAGE>
prescribed time period, the single appraiser appointed shall determine the Fair
Market Rental Value of the Premises. If the two appointed appraisers fail to
agree on the third appraiser, he or she shall be appointed by the then president
of the Greater Dallas Association of Realtors. Each party shall bear the cost of
the appraiser appointed by it and the parties shall share equally the cost of
the third appraiser. Each of the three selected appraisers shall then determine
the Fair Market Rental Value of the Premises for the first year of the extension
term, and the Fair Market Rental Value for purposes of determining the Basic
Annual Rental shall be the average of the three.
(ii) If the procedure set forth herein is implemented and if for any reason
whatsoever (including, without limitation, the institution of any judicial or
other legal proceedings), the Fair Market Rental Value for any extended lease
term has not been finally determined prior to the first day of said extended
term, then Tenant shall initially pay as rental an amount equal to the Basic
Annual Rental for the final year of the prior term; when the Fair Market Rental
Value is finally determined as set forth above, Landlord and Tenant shall by
appropriate payments to the other, correct any overpayment or underpayment which
may have been made prior to such final determination.
F. Non-Disturbance, Subordination and Attornment. In the event Landlord's
---------------------------------------------
lender or its successors or assigns (collectively, "Lender") succeed to the
interest of Landlord in and to the Property, or under this Lease, then Tenant
will, upon request of Lender, automatically become the lessee of Lender or any
one claiming interest through Lender without change in the terms or other
provisions of this Lease; provided, however, that said successor in interest
shall not be bound by (i) any payment of rent or additional rent for more than
one (1) month in advance, except prepayments in the nature or security for the
performance by the Tenant of its obligations under the Lease, or (ii) any
amendment or modification of the Lease made without the consent of Lender or
successor in interest. In the event Lender or any purchaser at foreclosure shall
succeed to Landlord's interest in the Premises, this Lease will remain in full
force and effect and be binding upon Lender or such purchaser and Tenant as
though each were the original parties thereto. Upon the request of Lender or
anyone claiming through Lender, Tenant shall execute and deliver an instrument
or instruments confirming the subordination described in Paragraph 4 and
agreeing to attorn to the rights of Lender or anyone claiming interest through
Lender. Lender has agreed, subject to the conditions specified in this
paragraph, upon Landlord's request, to execute a nondisturbance and attornment
agreement with Tenant, in Lender's then standard form.
G. Commencement Date. The Lease term shall commence on the third business
day or weekend following the third business day following written notice by
Landlord to Tenant that the premises are ready for occupancy. Landlord will
provide approximately 1,500 square feet of temporary space adjacent to the
premises (with customary office amenities, such as phone hookups)at no charge
until the Premises are ready for occupancy. Occupancy of the temporary space
may begin upon full execution of this lease but must be arranged as specified by
Landlord.
Lights should stay on (without timer) until 12:00 am.
H. Building Hours. The Building Hours are:
--------------
7:00 a.m. to 8:00 p.m. M-F
8:00 a.m. to 2:00 p.m. Sat
Landlord will provide HVAC Monday thru Friday from 7:00 until 12:00 a.m.
and Saturday from 8:00 until 6:00 p.m. at no additional charge to Tenant. Any
above standard electrical usage will be separately metered and paid for by
Tenant on a direct bill basis. If such additional meter is required, which shall
be determined by Landlord, the cost of materials and installation shall be borne
by Tenant.
Note: Not to exceed 8 watts per sq. ft.
Rider - Page 5
- -----
<PAGE>
I. Building Signage. Landlord will provide, at Landlord's expense,
----------------
building directory signage and suite signage. Such signage shall be the building
standard.
J. Consent. In all cases in this Lease where the consent of either
-------
Landlord or Tenant shall be required, including sublease and assignment of all
or any portion of the Premises, such consent shall not be unreasonably withheld
or delayed.
K. Confidentiality. Each of Landlord and Tenant agree not to disclose to
---------------
any third party (other than the lender, auditors or attorneys of either and the
issuing bank and any confirming bank with respect to the letters of credit) the
terms of this Lease or the identities of the principals and agents of the other
party, except as otherwise mutually agreed to in writing by Landlord and Tenant;
provided, however, that in the event of a default by Tenant under the terms of
this Lease, Landlord may pursue whatever collection and enforcement efforts as
it deems appropriate and are permissible under Texas law and the terms of this
Lease.
EXECUTED as of the _____ day of _______________, 1993.
Government Employees Insurance
Company
By:______________________
Printed Name:_____________________
Title:____________________________
Efficient Network Technology, Inc.
By: /s/ Mark A. Floyd
--------------------------
Printed Name: MARK A FLOYD
Title: PRESIDENT & CEO
Rider - Page 6
- -----
<PAGE>
EXHIBIT "X"
-----------
IRREVOCABLE LETTER OF CREDIT
----------------------------
Beneficiary:
GOVERNMENT EMPLOYEES INSURANCE COMPANY
4201 SPRING VALLEY ROAD, #200
DALLAS, TEXAS 75244
We hereby authorize you to draw on the (Bank) by order of:
and for the account of:
Efficient Network Technology, Inc.
4201 Spring Valley Road, #1200
Dallas, Texas 75244
up to an aggregate amount of Sixty Thousand and No/100 Dollars ($60,000.00)
available by your drafts at sight accompanied by the original of this Letter of
Credit and statement signed by a representative on behalf of Government
Employees Insurance Company, stating that:
"Efficient Network Technology, Inc. or its successor and
assigns, Tenant, under a lease agreement dated _______________,
1993, by and between Government Employees Insurance Company and
Efficient Network Technology, Inc. for certain premises located
at 4201 Spring Valley Road, Dallas, Texas, is in default of the
Lease."
This Irrevocable Letter of Credit will be duly honored by us at sight upon
delivery of the statement set forth above without inquiry as to the accuracy of
such statement and regardless of whether Efficient Network Technology disputes
the content of such statement.
This Letter of Credit shall expire on [a date which is the end of the 25th
month following the Commencement Date], and is irrevocable and transferrable.
Drafts must be drawn and presented at _______________, not later than [a
date which is the end of the 25th month following the Commencement Date]. Drafts
drawn hereunder must be marked:
"Drafts are drawn under_______________ Letter of Credit No. _____" and
indicate the date hereof.
We hereby agree with the drawers, endorsers and bonafide holders of all
drafts drawn under and in compliance with the terms of the Credit, that such
drafts will be duly honored upon presentation to the Drawee.
In view of the fact that this Letter of Credit is issued in transferrable
form, if it is your intention to transfer your interest hereunder, you must
return this Letter of Credit to us for endorsement reflecting the new
Beneficiary.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1983 Revision) International Chamber of Commerce
Publication No. 400.
Very truly yours,
__________________________________
EXHIBIT "X" TO RIDER - Solo Page
- --------------------
<PAGE>
EXHIBIT 10.13
MODIFICATION AND RATIFICATION
This Modification and Ratification of Lease Agreement is made and entered
between Government Employees Insurance Company (Landlord) and Efficient
Networks, Inc., (Tenant) for and in consideration of One Dollar ($1.00) and
other good and valuable consideration, receipt of which is hereby acknowledged.
WITNESSETH:
1. Landlord and Tenant hereby confirm and ratify, except as modified below,
all of the terms, conditions and covenants in that certain written Lease
Agreement dated August 19, 1993, between Landlord and Tenant ("The Lease"),
for the rental of the following described property: Approximately 10,348
rentable square feet (Primary Space) of office space located at 4201 Spring
Valley Road, Suite 1200, Dallas, Texas, 75244.
2. Effective July 1, 1995, or substantial completion, Landlord and Tenant
hereby agree to expand the premises to include the remainder of the twelfth
(12) floor which includes 8,322 rentable square feet (Expansion space).
Therefore, Tenant's total rentable square footage under Lease shall be
18,670.
3. The term of the Lease shall be extended an additional thirty-seven (37)
months (Lease Extension) to run coterminous with the expansion space.
Therefore, the new expiration date shall be October 31, 2001.
4. The following shall be the new base rental structure:
<TABLE>
<CAPTION>
Months Expansion Space Total Base Rental
------ --------------- ----------------
<S> <C> <C>
Aug 95 - Dec 95 1 - 5 $ 8.00 psf or $5,548.00 per month $15,896.00 per month
Jan 96 - Oct 96 6 - 15 $12.60 psf or $8,738.10 per month $19,086.10 per month
Nov 96 - Oct 97 16 - 27 $13.45 psf or $9,327.58 per month $20,106.75 per month
Nov 97 - Oct 98 28 - 39 $13.60 psf or $9,431.60 per month $20,210.77 per month
*Nov 98 - Oct 99 40 - 51 $13.60 psf $21,159.33 per month
*Nov 99 - Oct 00 52 - 63 $13.80 psf $21,470.50 per month
*Nov 00 - Oct 01 64 - 76 $14.20 psf $22,092.83 per month
</TABLE>
* Extension of current Lease which includes Expansion space.
5. Tenant's Base Year on the Expansion space shall be 1995.
6. Landlord shall provide a Tenant improvement allowance of up to $12.25 per
rentable square foot ($101,944.50) for improvements to the expansion or
primary space. If Tenant improvements exceed such amount, Landlord shall
amortize up to $2.00 per rentable square foot ($16,644.00) at 10% interest
through-out the Lease term, beginning the amortization at month twelve
(12).
7. Landlord shall pay its space planner, or other required design disciplines
up to $1.00 per rentable square foot ($8,322.00) to prepare the appropriate
construction documents and MEP's for the expansion space. Tenant will be
responsible for any cost overages for such services, which must be paid to
Landlord within thirty (30) days of receiving notice of such overage or may
be charged to the Tenant Improvement Allowance unless such allowance is
exhausted.
8. Landlord shall be responsible for ADA compliance in the twelfth (12) floor
restrooms. Such alterations, if required, will be performed in a design and
at a time determined by Landlord the cost of such alterations shall be at
Landlord's expense.
<PAGE>
9. The option to terminate the Lease as shown in Section C of the "Rider to
Office Lease Agreement" (Rider) shall be changed:
Tenant shall have the right to terminate the Lease per the procedure and
terms contained in Section C after it's thirty-sixth (36) month of
occupancy under this Modification and Ratification. This is a one (1)
time option. The termination option date contained in Section C is
eliminated.
10. Tenant shall have the right to have installed, up to 22 letter characters
on the existing building monument sign located on the corner of Spring
Valley and Midway. Landlord shall purchase the selected building standard
lettering and have such signage installed in a location determined by
Landlord. Tenant shall be responsible for the cost of all materials
required for such installation, including, but not limited to, the letters.
Landlord will pay for installation labor only. Tenant must give Landlord
written notice of its desire to have such signage installed. Landlord
reserves the right to approve the name installed, such approval shall not
be unreasonably withheld.
11. Tenant's ongoing right of first offer as shown in Section E of the Rider
shall be expanded to include the ninth (9) floor. However, such right is
subordinate to any and all space that may be required for the Landlord's or
its affiliates use.
12. Tenant shall receive an additional fourteen (14) covered parking spaces at
no charge for the term of this Modification and Ratification.
13. All other terms and conditions shall be per the original Lease document.
Executed this 8th day of May 1995.
--- ---
Agreed and Accepted: Agreed and Accepted:
Tenant: Landlord:
Efficient Networks, Inc. Government Employees
Insurance Company
By: /s/ Mark A. Floyd By: /s/ Signature Illegible
---------------------- ------------------------
It's: President It's: asst. V.P.
2
<PAGE>
EXHIBIT 10.15
AGREEMENT REGARDING CONDITIONAL
EXERCISE OF WARRANT
This Agreement Regarding Conditional Exercise of Warrants (the "Agreement")
is entered into this ____ day of May, 1999 by and among Efficient Networks, Inc.
("Efficient" or the "Company") and___________________ (the "Investor"), and
Wilson Sonsini Goodrich & Rosati, Professional Corporation as escrow agent (the
"Escrow Agent").
Pursuant to a Securities Purchase Agreement dated _________ ___, 1999 (the
"Purchase Agreement"), the Company borrowed $___________ from the Investor and,
in connection with such loan, issued to the Investor (1) a 10% Subordinated Note
due January ___, 2002 (the "Note") and (2) a warrant to purchase ____________
shares of the Company's Series H Preferred Stock at an exercise price of $2.92
per share (the "Warrant").
Payment of the principal amount and all accrued interest on the Note is
due, and the Warrant expires, upon completion by the Company of a public
offering of shares of the Company's Common Stock pursuant to a registration
statement declared effective under the Securities Act of 1933, as amended in
which the price per share is at least $5.00 and the aggregate offering proceeds
are at least $10 million. A public offering meeting those requirements is
referred to as a "Qualified Public Offering."
The Company has filed a registration statement with the Securities and
Exchange Commission for a Qualified Public Offering. In connection with the
public offering, the Company and the Investor wish to ensure that the Notes are
repaid and that the Warrant is exercised.
The Investor understands that, upon completion of a Qualified Public
Offering, the Series H Preferred Stock that would be issuable upon exercise of
the Warrant will automatically convert to Common Stock.
Based upon and in consideration of the foregoing, the parties hereby agree
as follows:
1. Conditional Exercise of Warrant. The Investor hereby elects to
exercise the Warrant in full, conditioned upon completion of a Qualified Public
Offering. The Investor hereby tenders the Warrant along with this Agreement.
This election to exercise shall become automatically effective immediately prior
to the closing of the Qualified Public Offering.
2. Tender of Exercise Price. In payment of the aggregate exercise price
under the Warrant, the Investor hereby tenders the Note for cancellation. The
Note shall be cancelled concurrently with the automatic exercise of the Warrant
as provided in Section 1.
3. Issuance of Common Stock. Promptly following completion of the
Qualified Public Offering, the Company will cause a certificate representing
that number of shares of Common Stock
<PAGE>
as would have been issued had the Warrant been exercised to purchase an
aggregate of __________ shares of Series H Preferred Stock. The certificate
representing the Common Stock will bear the legends referred to in the Purchase
Agreement.
4. Payment of Interest. Promptly following cancellation of the Note, the
Company will pay to the Investor any interest accrued on the Note up to the date
of cancellation.
5. Escrow of Note and Warrant. In order to ensure faithful exercise of
the Warrant and cancellation of the Note as provided herein, the Investor agrees
to tender the Note and Warrant to the Escrow Agent. Immediately prior to
completion of a Qualified Public Offering and without further instruction or
authorization from any party, the Escrow Agent shall (1) take appropriate
actions to record the full exercise of the Warrant and (2) mark the Note
cancelled. Notwithstanding that the Escrow Agent is holding the Note, any
interest payments, notices or the like relating thereto shall continue to be
sent directly to the Investor as provided in the Purchase Agreement.
6. Right to Exercise Not Limited. Nothing in this Agreement is intended
to limit the Investor's right to exercise the Warrant. In the event that
Investor wishes to exercise the Warrant outside of this Agreement, Investor
should so notify the Company and Wilson Sonsini Goodrich & Rosati, P.C., and
arrangements will be made to effect such exercise.
7. Expiration of Agreement. This Agreement will become void if a
Qualified Public Offering has not been consummated on or before December 31,
1999. In the event that this Agreement expires, Wilson Sonsini Goodrich &
Rosati, P.C. will promptly return the original Note and Warrant to the Investor.
8. Notices. Notices shall be sent to a party at the address set forth
below their signature below, or at such other address as a party may indicate to
the other parties in writing.
The parties have executed this Agreement as of the date set forth above.
Company Investor
Efficient Networks, Inc.
---------------------------------------
By: By:
--------------------------------- -----------------------------------
4201 Spring Valley Road, Ste. 1200 Address:
Dallas, Texas 75244 ------------------------------
------------------------------
Attn: President Attn:
------------------------------
Escrow Agent
Wilson Sonsini Goodrich & Rosati, P.C.
By:
---------------------------------
650 Page Mill Road
Palo Alto, CA 94304
Attn: Kenneth M. Siegel
-2-
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Efficient Networks, Inc.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG LLP
Dallas, Texas
June 8, 1999
<PAGE>
Exhibit 99.1
CONSENT
I hereby consent to the use of my name and the description of my intention
to join the Board of Directors of Efficient Networks, Inc. ("Efficient") in
Amendment No. 1 to Efficient's Registration Statement on Form S-1 (Registration
No. 333-77795) to be filed with the Securities and Exchange Commission on or
about June 8, 1999 and any further amendments thereto (including any filing
under Rule 462 promulgated under the Securities Act of 1933, as amended).
/s/ ROBERT HAWK
- ------------------------------
Robert Hawk
June 8, 1999
