<PAGE>
As filed with the Securities and Exchange Commission on January 18, 2000
Registration No. 333-94289
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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)
<TABLE>
<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
HELEN E. QUINN Brobeck, Phleger & Harrison LLP
Wilson Sonsini Goodrich & Rosati 301 Congress Avenue, Suite 1200
Professional Corporation Austin, Texas 78701
650 Page Mill Road (512) 477-5495
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. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of each Class of Amount Maximum Aggregate Amount of
Securities to be to be Offering Price Offering Registration
Registered Registered(1) Per Share(2) Price(2) Fee
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 5,750,000 65.875 $378,781,250 $99,998.25
</TABLE>
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(1) Includes 750,000 shares that the Underwriters have the option to purchase
from the Company to cover over-allotments, if any.
(2) The price is estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(c) promulgated under the Securities
Act of 1933, as amended.
----------------
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This 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 JANUARY 18, 2000.
5,000,000 Shares
[LOGO OF EFFICIENT NETWORKS, INC. APPEARS HERE]
Common Stock
---------
We are selling 2,000,000 shares of common stock and the selling stockholders
are selling 3,000,000 shares of common stock. We will not receive any of the
proceeds from the sale of the shares being sold by the selling stockholders.
The underwriters have an option to purchase a maximum of 750,000 additional
shares from us to cover over-allotments of shares.
Our common stock is quoted on The Nasdaq Stock Market's National Market under
the symbol "EFNT". The last reported sale price of the common stock on January
14, 2000 was $68.375 per share.
Investing in our common stock involves risks. See "Risk Factors" on page 7.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price Discounts and Proceeds to Selling
to Public Commissions Efficient Stockholders
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
Total....................... $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
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
Robertson Stephens
Dain Rauscher Wessels
WR Hambrecht + Co
The date of this prospectus is , 2000.
<PAGE>
------------
TABLE OF CONTENTS
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Page
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 7
Special Note Regarding Forward-
Looking Statements................. 19
Use Of Proceeds..................... 20
Price Range of Common Stock......... 20
Dividend Policy..................... 20
Capitalization...................... 21
Selected Consolidated Financial
Data............................... 22
Management's Discussion and Analysis
Of Financial Condition and Results
Of Operations...................... 23
</TABLE>
<TABLE>
<CAPTION>
Page
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Business............................ 35
Management.......................... 52
Certain Transactions................ 61
Principal and Selling Stockholders.. 63
Description Of Capital Stock........ 66
Shares Eligible For Future Sale..... 71
Underwriting........................ 73
Notice To Canadian Residents........ 75
Legal Matters....................... 76
Experts............................. 76
Additional Efficient Information.... 76
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.
<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 worldwide 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. 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,
Web browsing and access to computer networks from remote locations 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 rely upon 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. By offering a broad
product line we can support DSL services targeted at both businesses and
consumers.
. Ensure End-To-End Interoperability. Our technology expertise and ongoing
product development coordination with network equipment vendors, such as ADC
Telecommunications, Advanced Fibre Communications, Alcatel, Copper Mountain
Networks, 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. The software included
with many of our products 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. As demand for DSL service grows, pre-
configuration helps network operators meet their customers' expectations for
rapid service activation.
3
<PAGE>
. 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.
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. Also, we intend to
continue to target strategic partnerships and acquisitions to augment our
product offerings, sales channels and worldwide operations. 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 December 31, 1999, our products have been deployed by
Ameritech, Bell Atlantic, BellSouth, Covad Communications, Hanaro Telecom, Hong
Kong Telecom, Pacific Bell, Singapore Telecom, Southwestern Bell, and
TeleDanmark, among others, and purchased by several network equipment vendors.
A number of other 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.
Recent Developments
On December 17, 1999 we completed the acquisition of FlowPoint Corporation,
a wholly-owned subsidiary of Cabletron Systems, Inc., based in Santa Clara,
California, in exchange for a combination of common stock and convertible
preferred stock equal to an aggregate of 13,500,000 shares of our common stock
on an as-converted basis. FlowPoint's primary business is the design,
manufacture and sale of a comprehensive line of advanced broadband routers for
deployment at customer premises. FlowPoint's product line consists of routing
products for use in business-class DSL services. According to the Dell'Oro
Group's November 1999 study of market performance for the first three quarters
of 1999, FlowPoint was the market leader in SDSL and IDSL customer premises
equipment. We now provide the industry's most comprehensive line of DSL
customer premises equipment, including internal and universal serial bus modems
for personal computers, DSL local area network modems, small office and
telecommuter DSL routers, and DSL routers for small businesses and branch
offices. FlowPoint's customers include major incumbent and competitive local
exchange carriers, including Ameritech, Covad and NorthPoint, and several
European incumbent carriers such as British Telecom. FlowPoint also works
closely with a number of Internet service providers offering DSL services to
businesses. FlowPoint recently announced the availability of an integrated
access device that supports both voice and data service delivery over a single
DSL line. The acquisition of FlowPoint is expected to increase our revenue and
market share, it expands our product line and customer base, adds key
personnel, and establishes a presence for Efficient Networks in Silicon Valley.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by 2,000,000 shares
Efficient........................
Common stock offered by the 3,000,000 shares
selling stockholders.............
Common stock outstanding after 53,156,248 shares
this offering....................
Use of proceeds................... For general corporate purposes, principally
working capital, additional sales and
marketing efforts, and potential
acquisitions.
Nasdaq National Market symbol..... EFNT
</TABLE>
- --------
The above table is based on shares outstanding as of December 31, 1999. See
"Capitalization." This table includes 6,300,000 shares of common stock issuable
to Cabletron Systems, Inc. upon conversion of preferred stock held by
Cabletron. For a description of the preferred stock held by Cabletron, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments" and "Description of Capital Stock." This table
excludes:
. options outstanding to purchase a total of 8,164,384 shares of common
stock at a weighted average exercise price of $10.73 per share and
2,778,750 shares reserved for grant of future options under our stock
option plans;
. 184,889 shares reserved for future grants under our 1999 Employee Stock
Purchase Plan; and
. 34,246 shares issuable upon exercise of outstanding warrants.
----------------
You should be aware that our fiscal year ends on June 30; thus, a reference
to "fiscal 1999," for example, is to the fiscal year ended June 30, 1999. In
addition, except as otherwise indicated, information in this prospectus assumes
that the underwriters' over-allotment option will not be exercised.
5
<PAGE>
Summary Consolidated Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended Three Months Ended
Fiscal Year Ended June 30, September 30, September 30,
----------------------------- -------------------- ------------------
1997 1998 1999 1998 1999 1999
-------- -------- --------- --------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 4,122 $ 3,370 $ 14,828 $ 1,174 $ 12,171 $ 19,601
Cost of revenues........ 2,386 2,160 14,344 863 11,706 16,552
-------- -------- --------- --------- --------- --------
Gross profit............ 1,736 1,210 484 311 465 3,049
Loss from operations.... (6,760) (9,421) (18,505) (3,455) (7,677) (53,662)
Net loss................ $ (6,635) $ (9,291) $ (26,405) $ (3,375) $ (7,754) $(53,588)
======== ======== ========= ========= ========= ========
Net loss per share:
Basic and diluted..... $ (2.19) $ (2.86) $ (6.87) $ (0.93) $ (0.25) $ (1.42)
======== ======== ========= ========= ========= ========
Weighted average
shares............... 3,027 3,254 3,893 3,713 30,496 37,696
======== ======== ========= ========= ========= ========
Pro forma net loss per
share:
Basic and diluted..... $ (0.97)
=========
Weighted average
shares............... 28,342
=========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ---------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $ 47,456 $ 47,758 $ 177,354
Working capital................................. 69,051 58,447 188,043
Total assets.................................... 88,680 1,026,163 1,155,719
Total stockholders' equity...................... 72,252 560,482 690,078
</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 give effect to the issuance of 7,200,000 shares of common
stock and 6,300 shares of redeemable preferred stock (convertible into an
aggregate of 6,300,000 shares of common stock) to Cabletron in connection with
the acquisition of FlowPoint Corporation in December 1999. The as adjusted
numbers give effect to our receipt of the estimated net proceeds from the sale
of the 2,000,000 shares of common stock offered by Efficient hereby at an
assumed public offering price of $68.375 per share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. See "Use of Proceeds" and "Capitalization."
6
<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 services 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.
7
<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 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;
8
<PAGE>
. develop and maintain competitive products that meet changing customer
demands;
. enhance our products by adding innovative features that differentiate our
products from those of our competitors;
. bring products to market on a timely basis;
. introduce products that have competitive prices; and
. respond effectively to new technological changes or new product
announcements by others.
The technical innovations required for us to remain competitive in the DSL
industry are inherently complex, require long development cycles and sometimes
depend on sole-source suppliers. We will be required to continue to invest in
research and development in order to maintain and enhance our existing
technologies and products, but we may not have sufficient funds available to do
so. Even if we have sufficient funds, these investments may not serve the needs
of customers or be interoperable with changing technological requirements or
standards. We will have to incur most research and development expenses before
the technical feasibility or commercial viability of enhanced or new products
can be ascertained. Our revenues from future or enhanced products may not be
sufficient to recover our associated development costs.
Our current products are not interoperable with certain products offered by
suppliers to our customers and are subject to evolving industry standards. If
our products do not interoperate with our target customers' networks or an
industry standard that achieves market acceptance, customers may refuse to
purchase our products.
In some cases, network equipment vendors, such as Cisco Systems, Inc., sell
to our target customers proprietary or non-interoperable systems with which our
products will not function. In these cases, potential 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. Although we work with
more than one third-party manufacturer, many of our products are presently
manufactured for us by only one party. Since third parties manufacture our
products and we expect this to continue in the future, our success will depend,
in significant part, on our ability to have third parties manufacture our
products cost effectively and in sufficient quantities to meet our customer
demand. There are a number of risks associated with our dependence on third-
party manufacturers, including the following:
. reduced control over delivery schedules;
. quality assurance;
9
<PAGE>
. manufacturing yields and costs;
. the potential lack of adequate capacity during periods of excess demand;
. limited warranties on products supplied to us;
. increases in prices; and
. the potential misappropriation of our intellectual property.
Any of these risks, if not adequately addressed by our third-party
manufacturers, would harm our business.
We have no long-term contracts or arrangements with any of our vendors that
guarantee product availability, the continuation of particular payment terms or
the extension of credit limits. The competitive dynamics of our market require
us to obtain components at favorable prices, but we may not be able to obtain
additional volume purchase or manufacturing arrangements on terms that we
consider acceptable, if at all. If we enter into a high-volume or long-term
supply arrangement and subsequently decide that we cannot use the products or
services provided for in the agreement, our business would also be harmed.
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
10
<PAGE>
of our products, either of which would harm our business and adversely affect
our operating results and financial condition. We will likely have limited
experience with any problems that may arise with new products that we
introduce.
Although we have not experienced any product liability claims to date, the
sale and support of our products entail the risk of these claims. A successful
product liability claim brought against us could be expensive, divert the
attention of management from ordinary business activities and, correspondingly,
harm our business.
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 $6.6 million
in fiscal 1998, $23.4 million in fiscal 1999, and $9.5 million for the first
three months of fiscal 2000. As of September 30, 1999, we had an accumulated
deficit of approximately $61.9 million. Due to our limited operating history
and our history of losses, we may never be able to achieve profitability, and
even if we do, we may not be able to remain profitable. To achieve profitable
operations on a continuing basis, we must successfully design, develop, test,
manufacture, introduce, market and distribute our products on a broad
commercial basis.
Our ability to generate future revenues will depend on a number of factors,
many of which are beyond our control. These factors include:
. the rate of market acceptance of DSL broadband access;
. the level of demand for DSL systems that incorporate our products;
. changes in industry standards governing DSL technology solutions;
. the extent and timing of new customer transactions;
. changes in our development schedules and those of system companies that
provide complementary DSL products, or changes in their levels of
expenditure on research and development;
. personnel changes, particularly those involving engineering and technical
personnel;
. the costs associated with protecting our intellectual property;
. regulatory developments; and
. general economic trends.
Due to these factors, we cannot forecast with any degree of accuracy what
our revenues will be in future periods or how quickly network service providers
will select our products for use in their systems. In view of these factors, we
may not be able to achieve or sustain profitability.
We have a short operating history and, as a result, it is difficult to predict
our future results of operations.
We have a short operating history upon which to base your investment
decision. We first commenced product shipments in August 1994 and did not
introduce DSL products until March 1998. Due to our limited operating history,
it is difficult or impossible for us to predict future results of operations
and you should not expect future revenue growth to be comparable to our recent
revenue growth. In addition, we believe that comparing different periods of our
operating results is not meaningful, and you should not rely on the results
11
<PAGE>
for any period as an indication of our future performance. Investors in our
common stock must consider our business and prospects in light of the risks and
difficulties typically encountered by companies in their early stages of
development, particularly those in rapidly evolving markets such as ours.
If sales forecasted for a particular period are not realized in that period due
to the lengthy sales cycle of our products, our operating results for that
period would be adversely affected.
If we fail to realize forecasted sales for a particular period, our
operating results would be adversely affected and our stock price would likely
decline and could decline significantly. The sales cycle of our products is
typically lengthy and involves:
. a significant technical evaluation;
. delays associated with network service providers' internal procedures to
commit to a particular product line offering and approve large capital
expenditures;
. time required to deploy new technologies within service providers'
networks; and
. testing and acceptance of new technologies.
For these and other reasons, a sale of our products generally requires six
to 12 months to complete. Furthermore, the announcement and projected
implementation of new standards may affect sales cycles, as network service
providers may choose to delay large-scale deployment of DSL services until
compliant products are available.
Our product cycles tend to be short, and we may incur substantial non-
recoverable expenses or devote significant resources to sales that do not occur
when anticipated.
In the rapidly changing technology environment in which we operate, product
cycles tend to be short. Therefore, the resources we devote to product sales
and marketing may not generate material revenues for us, and from time to time
we may need to write off excess and obsolete inventory. If we incur substantial
sales, marketing and inventory expenses in the future that we are not able to
recover, and we are not able to compensate for such expenses, our operating
results would be adversely affected. In addition, if we sell our products at
reduced prices in anticipation of cost reductions and we still have higher cost
products in inventory, our business would be harmed, and our results of
operations and financial condition would be adversely affected.
Our operating results in one or more future periods are likely to fluctuate
significantly and may fail to meet or exceed the expectations of securities
analysts or investors, causing our stock price to decline.
Our operating results are likely to fluctuate significantly in the future on
a quarterly and an annual basis due to a number of factors, many of which are
outside our control. If our operating results do not meet the expectations of
securities analysts or investors, our stock price may decline. We cannot assure
you that this will not occur because of the numerous factors that could cause
our revenues and costs to fluctuate. These factors include the following:
. the timing and size of sales of our products and services;
. announcements of new products and product enhancements by competitors;
. 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;
12
<PAGE>
. the mix of our products sold;
. the volume and average cost of products manufactured;
. the type of distribution channel through which we sell our products;
. the average selling prices of our products; and
. the effectiveness of our product cost reduction efforts.
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on the level of actual and anticipated business
activities. Research and development expenses will vary as we develop new
products. Due to competitive factors in our market, in the past we have
experienced, and we anticipate that we will continue to experience, decreases
in the average selling prices of our products which could adversely affect
gross margins. 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 three months ended September 30, 1999, sales to four
customers, American Communications Supply, Inc., a distributor for Southwestern
Bell, America Online, Inc., Innotrac Corporation, a distributor for BellSouth,
and Lucent Technologies each represented more than 10% of our net revenues. Our
top ten customers for the three months ended September 30, 1999 accounted for
94.8% of our net revenues. For the fiscal year ended June 30, 1999, Covad
Communications Group, Inc. represented 29.6% of our net revenues, and Soon
Cabling Pte, Ltd., a distributor for Daewoo Telecom, represented 17.5% of our
net revenues. Our top ten customers in fiscal 1999 accounted for 82.3% 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. 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 the United States
represented 52% of our net revenues in fiscal 1998, 41% of our net revenues in
fiscal 1999 and 19% of our net revenues for the first quarter of fiscal 2000.
We believe that our continued growth and ability to attain profitability will
require us to continue to penetrate international markets. If we are unable to
successfully overcome the difficulties associated with international operations
and maintain and expand our international operations, our business would be
harmed. These difficulties include:
. difficulties staffing and managing foreign operations in our highly
technical industry;
. changes in regulatory requirements which are common in the
telecommunications industry;
13
<PAGE>
. licenses, tariffs and other trade barriers imposed on products such as
ours;
. political and economic instability especially in Asia and the Pacific;
. potentially adverse tax consequences;
. difficulties obtaining approvals for products from foreign governmental
agencies which regulate networks;
. compliance with a wide variety of complex foreign laws and treaties
relating to telecommunications equipment; and
. delays or difficulties collecting accounts receivable from foreign
entities that are not subject to suit in the United States.
To date, our international sales and component purchases have been
denominated solely in U.S. dollars and, accordingly, we have not been exposed
to fluctuations in non-U.S. currency exchange rates. In the future, a portion
of our international sales may be denominated in currencies other than U.S.
dollars, which would expose us to gains and losses based upon exchange rate
fluctuations. Such gains and losses may contribute to fluctuations in our
operating results.
Risks That May Affect Our Ability to Execute Our Business Plans
Our business could be adversely affected if we do not adequately address the
risks associated with our recent acquisition of FlowPoint Corporation.
In December 1999, we completed the acquisition of FlowPoint Corporation.
This transaction is accompanied by a number of risks, any of which could
adversely affect our business or stock price, including:
. the difficulty of assimilating the operations and personnel of FlowPoint;
. the potential disruption of our and FlowPoint's ongoing business and
distraction of management;
. possible unanticipated expenses related to technology and business
integration;
. the potential impairment of relationships with employees and customers as
a result of the integration of management; and
. potential liabilities associated with FlowPoint.
In addition, the market price of our common stock could decline as a result
of the acquisition if:
. Efficient does not achieve the perceived benefits of the acquisition as
rapidly or to the extent anticipated by financial analysts; or
. the effect of the acquisition on the combined financial results is not
consistent with the expectations of financial analysts.
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,
14
<PAGE>
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 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 1999, we added 160 employees to
our total work force, representing an increase of 133% from December 31, 1998.
During 1998, we added 36 employees to our total work force, representing an
increase of approximately 61% from December 31, 1997. We expect to hire
additional personnel in the near future, including direct sales and marketing
personnel. There may be only a limited number of people with the requisite
skills to serve in those positions, and it may become increasingly difficult to
hire these people. In addition, we are actively searching 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.
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
15
<PAGE>
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 can
require significant management attention, even if we ultimately prevail.
However, there can be no assurance that we would be able to successfully
resolve such disputes in the future.
From time to time, third parties, including our competitors, have asserted
patent, copyright and other intellectual property rights to technologies that
are important to us. For example, we have received a letter from Bell Atlantic
indicating that they hold a patent on certain DSL technology, and urging us to
begin negotiating a license to the patent. We are aware that Bell Atlantic has
sued at least one other company alleging that such other company's DSL services
infringe Bell Atlantic's patent. We are evaluating the Bell Atlantic patent,
and have not yet determined whether to seek a license. Although there are
multiple indications from Bell Atlantic that licenses to the patent are or will
be available, there can be no assurances we would find the license terms
acceptable. We expect that we will increasingly be subject to infringement
claims as the number of products and competitors in the high-speed data access
market grows and the functionality of products overlaps. 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.
16
<PAGE>
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
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 the proceeds generated from
our initial public offering which closed in July 1999, 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.
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 engage in future acquisitions that dilute our stockholders, cause us to
incur debt and assume contingent liabilities.
As part of business strategy, we expect to continue to review potential
acquisitions that could complement our current product offerings, augment our
market coverage or enhance our technical capabilities, or that may otherwise
offer growth opportunities. While we have no current agreements or negotiations
underway with respect to any such acquisitions, we may acquire businesses,
products or technologies in the future. In the event of such future
acquisitions, we could issue equity securities that would dilute our current
stockholders' percentage ownership, incur substantial debt, or assume
contingent liabilities. Such actions by us could seriously harm our results of
operations and/or the price of our common stock. Acquisitions also entail
numerous other risks which could adversely affect our business, results of
operations and financial condition, including:
. difficulties in assimilating acquired operations, technologies or
products;
. unticipated costs or capital expenditures associated with the
acquisition;
. acquisition related charges and amortization of acquired technology and
other intangibles that could negatively affect our reported results of
operations;
. diversion of management's attention from our business;
. adversely affect existing business relationships with suppliers and
customers; and
. failure to successfully integrate these businesses, products,
technologies and personnel.
17
<PAGE>
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 approximately 53.2 million
shares of common stock after giving pro forma effect to the conversion of all
outstanding shares of Series A non-voting convertible redeemable preferred
stock issued to Cabletron, of which approximately 14.6 million shares,
including the 5,000,000 sold in this offering, plus any shares issued upon
exercise of the underwriters' over-allotment option, will be freely tradeable.
See "Capitalization" for a discussion of the shares included in and excluded
from this number. The remaining approximately 38.6 million shares of common
stock outstanding after this offering will become available for sale in the
public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date of Availability for Sale
---------------- -----------------------------
<S> <C>
3.1 million April 3, 2000
23.6 million May 3, 2000
11.9 million At various times thereafter, upon the expiration of
respective 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."
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 9,993,700 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.
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. Although we cannot predict with any
certainty what adverse effects we may suffer from Year 2000 compliance issues,
possible effects include:
. disruptions in the supply of components and manufactured goods from our
component suppliers and contract manufacturers if they experience
disruptions;
. 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.
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<PAGE>
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."
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.
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<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 2,000,000 shares of common stock
offered by us are estimated to be $129.6 million, or approximately $178.6
million if the underwriters' over-allotment option is exercised in full, at an
assumed public offering price of $68.375 per share, after deducting
underwriting discounts and commissions and the estimated offering expenses. We
will not receive any proceeds from the sale of shares by the selling
stockholders.
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. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in interest-bearing, investment-
grade securities.
PRICE RANGE OF COMMON STOCK
Our Common Stock began trading on the NASDAQ National Market System under
the symbol "EFNT" effective July 15, 1999. Prior to that date, there was no
public market for our Common Stock. The following table sets forth for the
periods indicated the high and low closing prices for the Common Stock, as
reported by NASDAQ:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ending June 30, 2000
First Quarter............................................... $68.00 $29.35
Second Quarter.............................................. $82.50 $33.65
Third Quarter (through January 14, 2000).................... $69.75 $58.75
</TABLE>
The last reported sale price for our common stock on The Nasdaq Stock Market
was $68.375 per share on January 14, 2000. As of December 31, 1999, there were
approximately 160 holders of record of our common stock.
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.
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<PAGE>
CAPITALIZATION
The table below sets forth the following information:
. the actual capitalization of Efficient as of September 30, 1999;
. the actual capitalization on a pro forma basis giving effect to the
issuance of 7,200,000 shares of common stock and 6,300 shares of
redeemable preferred stock (convertible into an aggregate of 6,300,000
shares of common stock) to Cabletron in connection with the acquisition
of FlowPoint Corporation in December 1999; and
. the as adjusted capitalization giving effect to the sale of 2,000,000
shares of common stock at an assumed public offering price of $68.375
per share, less estimated underwriting discounts and commissions and the
estimated offering expenses payable by Efficient.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
and per share data)
<S> <C> <C> <C>
Series A redeemable convertible preferred
stock, $0.001 par value; 6,300 shares
authorized; no shares issued and
outstanding, actual; 6,300 shares issued and
outstanding pro forma and as adjusted....... $ -- $431,550 $ 431,550
Stockholders' equity:
Common stock, $0.001 par value; 100,000,000
shares authorized; 37,482,465 shares issued
and outstanding, 44,682,465 shares issued
and outstanding pro forma and 46,682,465
shares issued and outstanding, as
adjusted................................... 37 43 45
Additional paid-in capital.................. 150,320 643,514 773,108
Deferred stock option compensation.......... (16,162) (16,162) (16,162)
Accumulated deficit.......................... (61,943) (66,913) (66,913)
-------- -------- ----------
Total stockholders' equity................... 72,252 560,482 690,078
-------- -------- ----------
Total capitalization......................... $ 72,252 $992,032 $1,121,628
======== ======== ==========
</TABLE>
This table excludes the following shares:
. options outstanding to purchase a total of 6,954,329 shares of common
stock at a weighted average exercise price of $2.81 per share and
3,325,000 shares reserved for grant of future options under our stock
option plans;
. 200,000 shares reserved for future grants under our 1999 Employee Stock
Purchase Plan; and
. 34,246 shares issuable upon exercise of outstanding warrants.
See "Management--Benefit Plans," "Description of Capital Stock" and Notes to
Consolidated Financial Statements.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated 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 consolidated statement of operations data set forth below for the years
ended June 30, 1997, 1998 and 1999, and the consolidated balance sheet data at
June 30, 1998 and 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, 1995 and 1996 and the balance sheet data at June 30, 1995,
1996 and 1997 are derived from audited Consolidated Financial Statements of
Efficient not included in this prospectus. The consolidated statement of
operations data for the three months ended September 30, 1998 and 1999 and the
consolidated balance sheet data at September 30, 1999 are derived from, and are
qualified by reference to, the unaudited condensed consolidated financial
statements included elsewhere in this prospectus. In the opinion of management,
the unaudited statement of operations data shown for the three month periods
ended September 30, 1998 and 1999 and the unaudited balance sheet data as of
September 30, 1999 have been prepared on 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 position and results of operations for such periods.
<TABLE>
<CAPTION>
Three Months Ended
Fiscal Year Ended June 30, September 30,
----------------------------------------------- --------------------
1995 1996 1997 1998 1999 1998 1999
------- -------- -------- -------- -------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $ 2,314 $ 3,687 $ 4,122 $ 3,370 $ 14,828 $ 1,174 $ 12,171
Cost of revenues........ 1,125 2,209 2,386 2,160 14,344 863 11,706
------- -------- -------- -------- -------- --------- ---------
Gross profit............ 1,189 1,478 1,736 1,210 484 311 465
------- -------- -------- -------- -------- --------- ---------
Operating expenses:
Sales and marketing... 1,505 2,366 2,409 3,436 6,133 1,168 2,652
Research and
development.......... 3,405 3,853 4,183 4,389 7,747 1,826 3,053
General and
administrative....... 822 1,082 1,245 1,641 1,993 339 1,048
Stock option
compensation......... -- 198 659 1,165 3,116 433 1,389
------- -------- -------- -------- -------- --------- ---------
Total operating
expenses............ 5,732 7,499 8,496 10,631 18,989 3,766 8,142
------- -------- -------- -------- -------- --------- ---------
Loss from operations.... (4,543) (6,021) (6,760) (9,421) (18,505) (3,455) (7,677)
Interest and other
income (expense), net.. 248 177 125 130 (7,900) 80 (77)
------- -------- -------- -------- -------- --------- ---------
Net loss................ $(4,295) $ (5,844) $ (6,635) $ (9,291) $(26,405) $ (3,375) $ (7,754)
======= ======== ======== ======== ======== ========= =========
Basic and diluted net
loss per share(1)...... $ (1.56) $ (2.06) $ (2.19) $ (2.86) $ (6.87) $ (0.93) $ (0.25)
======= ======== ======== ======== ======== ========= =========
Weighted average
shares(1).............. 2,750 2,838 3,027 3,254 3,893 3,713 30,496
======= ======== ======== ======== ======== ========= =========
Unaudited pro forma
basic and diluted net
loss per share(1)...... $ (0.97)
========
Weighted average shares
used to compute
unaudited pro forma
basic and diluted net
loss per share(1)...... 28,342
========
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 2,650 $ 1,303 $ 3,413 $ 7,607 $ 3,604 $ 47,456
Working capital......... 3,400 2,619 4,370 7,870 12,585 69,051
Total assets............ 6,357 5,150 6,454 10,667 23,965 88,680
Redeemable convertible
preferred stock........ 11,155 16,155 23,635 34,743 40,495 --
Total stockholders'
equity (deficit)....... (6,008) (11,643) (17,610) (25,374) (39,014) 72,252
</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.
22
<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 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 3% of net revenues in fiscal 1998, represented 87.1% of
our net revenues in fiscal 1999 and 98.1% of our net revenues in the first
quarter of fiscal 2000. 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 three months ended September 30, 1999,
sales to four customers, American Communications Supply, Inc., a distributor
for Southwestern Bell, America Online, Inc., Innotrac Corporation, a
distributor for BellSouth, and Lucent Technologies each represented more than
10% of our net revenues. For the fiscal year ended June 30, 1999, Covad
Communications represented 29.6% of our net revenues, and Soon Cabling Pte,
Ltd., a distributor for Daewoo Telecom represented 17.5% 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 three months ended September 30, 1999 accounted for 94.8% 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, 41% of our net revenues for fiscal 1999
and 19% of our net revenues for the three months ended September 30, 1999. We
currently maintain a European sales office in Amsterdam and an Asian sales
office in Singapore. 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 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
23
<PAGE>
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. Other factors that will affect
our gross margin include the product mix sold in any particular period,
distribution channels, competitive pressures and levels of volume discounts.
Our limited operating history in the DSL market makes it difficult to
forecast our future operating results. To date, we have not achieved
profitability in any quarter or annual period, and as of September 30, 1999, we
had an accumulated deficit of $61.9 million. Although our net revenues have
grown in recent quarters, we cannot be certain that our net revenues will
increase at a rate sufficient to achieve and maintain profitability.
For the fiscal years 1997, 1998 and 1999 and for the three months ended
September 30, 1999, we recorded an aggregate of $21.7 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, which is generally four years. We amortized deferred
stock option compensation in the amounts of $659,000, $1.2 million, $3.1
million and $1.4 million in fiscal years 1997, 1998, 1999 and the three months
ended September 30, 1999, respectively. We expect to amortize the remaining
deferred stock option compensation at the rate of approximately $1.2 million
per quarter until fully amortized.
Recent Development--FlowPoint Acquisition
On November 21, 1999, we entered into an agreement with Cabletron Systems,
Inc. to acquire its wholly-owned subsidiary FlowPoint Corporation from
Cabletron. The acquisition was completed on December 17, 1999, and is being
accounted for under the purchase method of accounting.
We paid for the acquisition of FlowPoint through the issuance of 7,200,000
shares of our common stock and 6,300 shares of our Series A non-voting
redeemable convertible preferred stock. The Series A preferred stock is
convertible into an aggregate of 6,300,000 shares of our common stock. See
"Description of Capital Stock" for a more complete description of the Series A
redeemable convertible preferred stock.
The shares issued to Cabletron for FlowPoint were worth $924.8 million based
upon the market price of $68.50, which represents Efficient's average closing
sale price for two trading days before and two trading days after the terms of
the acquisition were agreed to.
Recent Financial Results
The following table sets certain unaudited consolidated statement of
operations data for the quarter and six months ended December 31, 1999,
together with comparative prior year data.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
December 31, December 31,
----------------- -----------------
1998 1999 1998 1999
------- -------- ------- --------
<S> <C> <C> <C> <C>
Statement of Operations Data (in
thousands):
Net revenue....................... $ 1,850 $ 26,424 $ 3,024 $ 38,595
Gross profit...................... 203 5,205 514 5,670
Operating expenses................ 3,979 23,998 7,745 32,139
Net loss.......................... (3,746) (18,127) (7,121) (25,881)
</TABLE>
Revenues for the quarter ended December 31, 1999 represented an increase of
117.1% over revenues of $12.2 million for the quarter ended September 30, 1999.
Revenues for the December quarter included
24
<PAGE>
$3.0 million from FlowPoint Corporation, which we acquired during December
1999. Without the addition of the FlowPoint revenue, our revenues would have
been $23.4 million, an increase of 92.7% over the level achieved in the
September quarter.
The net loss for the December quarter was $18.1 million, or $0.47 per share.
Net loss included stock option compensation expense of $1.2 million and a one-
time write-off of $5.0 million of in-process research and development incurred
in connection with the FlowPoint acquisition. In addition, in connection with
the acquisition of FlowPoint, the Company recorded $924.5 million in intangible
assets, of which $7.4 million was amortized in the December quarter and the
remainder will be amortized at the rate of approximately $46.2 million per
quarter over a five-year period. This compared with a net loss of $7.8 million
(including stock option compensation expense of $1.4 million), or $0.25 per
share for the quarter ended September 30, 1999, and a loss of $3.7 million
(including stock option compensation expense of $0.5 million), for the
corresponding period one year ago.
For the first half of fiscal 2000, revenues were $38.6 million, a 1,176%
increase over $3.0 million for the first half of fiscal 1999. The net loss for
the first half of fiscal 2000 was $25.9 million, or $0.75 per share, compared
to a loss of $7.1 million, or $1.94 per share, for the first half of fiscal
1999.
Results of Operations
The following table sets forth, for the periods presented, certain data from
Efficient's consolidated statement of operations expressed as a percentage of
net revenues.
<TABLE>
<CAPTION>
Three Months
Fiscal Year Ended Ended
June 30, September 30,
------------------------ ----------------
1997 1998 1999 1998 1999
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Net revenues.................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues................ 57.9 64.1 96.7 73.5 96.2
------ ------ ------ ------- ------
Gross profit.................... 42.1 35.9 3.3 26.5 3.8
------ ------ ------ ------- ------
Operating expenses:
Sales and marketing............. 58.4 102.0 41.4 99.5 21.8
Research and development........ 101.5 130.2 52.2 155.5 25.1
General and administrative...... 30.2 48.7 13.4 28.9 8.6
Stock option compensation....... 16.0 34.6 21.0 36.9 11.4
------ ------ ------ ------- ------
Total operating expenses...... 206.1 315.5 128.1 320.8 66.9
------ ------ ------ ------- ------
Loss from operations............ (164.0) (279.6) (124.8) (294.3) (63.1)
Interest and other income
(expense), net................. 3.0 3.9 53.3 6.8 (0.6)
------ ------ ------ ------- ------
Net loss........................ (161.0)% (275.7)% (178.1)% (287.5)% (63.7)%
====== ====== ====== ======= ======
</TABLE>
Three Months Ended September 30, 1998 and 1999
Net Revenues
Net revenues consist of product sales, net of allowances for returns. Net
revenues increased 936.7%, from $1.2 million for the three months ended
September 30, 1998 to $12.2 million for the three months ended September 30,
1999. DSL product revenues increased from $410,000 for the three months ended
September 30, 1998 to $11.9 million for the three months ended September 30,
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, as well as the addition of new products to
our DSL product line. During fiscal 1997, we made the strategic decision to
focus on developing our DSL products, and, as a result, significantly reduced
the level of development and support activities associated with our ATM LAN
products. We expect ATM LAN product revenues to continue to decrease over time.
25
<PAGE>
Cost of Revenues
Cost of revenues consists of amounts paid to third-party contract
manufacturers, manufacturing start-up expenses and the personnel and related
costs of our manufacturing operation. Cost of revenues increased 1,256.4% from
$863,000 or 73.5% of net revenues for the three months ended September 30, 1998
to $11.7 million or 96.2% of net revenues for the three months ended September
30, 1999, reflecting the substantial increase in DSL product sales. Gross
margin represented 26.5% of net revenues for the three months ended September
30, 1998, compared to 3.8% for the three months ended September 30, 1999. These
amounts are not comparable due to our shift from ATM LAN products to DSL
products. Included in cost of revenues for the three months ended September 30,
1999 are $1.0 million of one-time costs associated with the change in our
contract manufacturer. Excluding these one time costs, the gross margin for the
three months ended September 30, 1999 would have been 12.0%. Our gross margin
increased in the current period as a result of a change in our contract
manufacturer and other cost efficiencies associated with higher production
volumes. We took a number of actions that were designed to bring our DSL
products to market quickly but which also partially offset the improvement in
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 products to market
quickly.
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 127.1% from $1.2
million for the three months ended September 30, 1998 to $2.7 million for the
three months ended September 30, 1999. The increase in sales and marketing
expenses resulted from expanded sales and marketing activities associated with
our DSL products. These costs included significant personnel-related expenses
associated with increasing the size of our sales and marketing organization,
and increased trade show activities and related travel expenses. Sales and
marketing expenses represented 99.5% of net revenues for the three months ended
September 30, 1998, and 21.8% of net revenues for the three months ended
September 30, 1999. The decrease in sales and marketing expenses as a
percentage of net revenues for the three months ended September 30, 1999
compared to the same period in 1998 was a result of the increase in revenues.
We expect sales and marketing expenses to increase in dollar amount in future
periods as we continue to expand our domestic and international sales and
marketing organization.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related
costs associated with our product development efforts, including third-party
consulting and prototyping costs. Research and development expenses increased
67.2% from $1.8 million for the three months ended September 30, 1998 to $3.1
million for the three months ended September 30, 1999. The substantial increase
in research and development spending was primarily a result of increased
personnel and related costs associated with an expanded research and
development organization in connection with our DSL products. Research and
development expenses represented 155.5% of net revenues for the three months
ended September 30, 1998 compared to 25.1% of net revenues for the three months
ended September 30, 1999. The decrease in research and development expenses as
a percentage of net revenues for the three months ended September 30, 1999
compared to the same period in 1998 was a result of the rapid increase in
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 increased 209.1% from $339,000 for the three months
ended September 30, 1998 to $1.1 million for the three months ended September
30, 1999. The increases in general
26
<PAGE>
and administrative spending were primarily a result of increases in headcount
associated with building our infrastructure. General and administrative
expenses represented 28.9% of net revenues for the three months ended September
30, 1998, compared to 8.6% of net revenues for the three months ended September
30, 1998. The decrease in general and administrative expenses as a percentage
of net revenues for the three months ended September 30, 1999 compared to the
same period in 1998 was a result of the increase in revenues. We expect general
and administrative expenses to increase in dollar amount in future periods as
we continue to build our infrastructure and as a result of operating as a
publicly-held company.
Stock Option Compensation
Stock option compensation reflects the difference between the exercise price
of stock options granted and the deemed fair market value of our common stock
on the dates of grant. A charge of $3.1 million of deferred stock option
compensation was recorded in the quarter ended September 30, 1999 in connection
with stock option grants made prior to the completion of our initial public
offering on July 15, 1999. Amortization of deferred stock option compensation
was $433,000 for the three months ended September 30, 1998 compared to $1.4
million for the three months ended September 30, 1999. We expect to amortize
the deferred stock option compensation at the rate of approximately $1.2
million per quarter until fully amortized. Prior to our initial public offering
on July 15, 1999, there was no market for our common stock, and option prices
were determined by the Board of Directors based upon numerous factors. Upon
review in connection with our initial public offering, it was determined that
the fair market value on the date of grant of certain options was higher than
originally determined by the Board of Directors. Beginning with our initial
public offering, we began pricing options based upon the public market price of
our common stock, and do not anticipate accruing additional deferred stock
option compensation in future periods.
Interest and Other Income (Expense), Net
Interest income consists primarily of interest earned on cash and cash
equivalents. Interest income increased for the three months ended September 30,
1999 from the three months ended September 30, 1998 as a result of interest
earned on the net cash proceeds received in connection with the completion of
our initial public offering on July 15, 1999. Interest expense and other income
(expense), net primarily represents the current period accretion of the
discount on subordinated promissory notes through the date of their conversion
into preferred stock. In future periods we expect interest income and interest
expense and other, net to vary depending upon changes in the amount and mix of
interest-bearing investments and short and long-term debt outstanding during
each period.
Income Taxes
From inception through September 30, 1999, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. We had significant 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, initial public offering 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.
27
<PAGE>
Fiscal Years Ended June 30, 1997, 1998 and 1999
Net Revenues
Net revenues consist of product sales, net of allowances for returns. Net
revenues increased 340.0% to $14.8 million in fiscal 1999 from $3.4 million in
fiscal 1998. Net revenues in fiscal 1998 reflected a 18.2% decrease from the
$4.1 million realized in fiscal 1997. DSL product revenues, which didn't exist
in fiscal 1997, increased from $84,000 in fiscal 1998 to $12.9 million in
fiscal 1999. The increases in DSL product revenues from fiscal 1998 to fiscal
1999 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. 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 $4.1 million in fiscal 1997 to $3.3 million in fiscal 1998, and
further declined to $1.9 million in fiscal 1999. From fiscal 1997 to fiscal
1998, this decrease was only slightly offset by sales of prototype DSL products
that began in the second half of fiscal 1998. 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 564.1% to
$14.3 million in fiscal 1999 from $2.2 million in fiscal 1998. This compares to
a decrease of 9.5% for fiscal 1998 as compared to the $2.4 million in cost of
sales incurred in fiscal 1997. The increase from fiscal 1998 to fiscal 1999
reflected the substantial increase in DSL product sales. The decrease from 1997
to 1998 reflected the declining sales of our ATM LAN products.
Gross margin represented 3.3% of net revenues in fiscal 1999, compared to
35.9% of net revenues in fiscal 1998 and 42.1% of net revenues in fiscal 1997.
Gross margin on our DSL products increased from a gross loss of 22.6% of the
related revenues in fiscal 1998 to a gross loss of 3.6% of the related revenues
for fiscal 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 products to market 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 42.1% of
related revenues in fiscal 1997 to 37.4% in fiscal 1998 and to 49.5% in fiscal
1999. 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 net 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.
Sales and Marketing Expense
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 78.5% from $3.4
million in fiscal 1998 to $6.1 million in fiscal 1999. This compares to an
increase of 42.6% in fiscal 1998 over the $2.4 million recorded in fiscal 1997.
The increases in sales and marketing expenses in absolute amount from fiscal
1997 through fiscal 1999 resulted primarily from sales and marketing activities
associated with the launch of our DSL products. These launch costs included
significant personnel-related
28
<PAGE>
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 58.4% of net revenues in fiscal 1997,
102.0% in fiscal 1998 and 41.4% in fiscal 1999. The increase in sales and
marketing expenses as a percentage of net revenues from fiscal 1997 to 1998 was
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. The decrease in such expenses as a percentage of net revenues
from fiscal 1998 to fiscal 1999 was a result of the rapid increase in revenues.
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
76.5% from $4.4 million in fiscal 1998 to $7.7 million in fiscal 1999. This
compares to an increase of 4.9% in fiscal 1998 over the $4.2 million recorded
in fiscal 1997. 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 $850,000 of nonrecurring engineering expenses
reimbursed by third parties. These amounts are treated as an offset to the
related research and development spending. Accordingly, while the net amount of
research and development spending in fiscal 1998 was relatively consistent with
the fiscal 1997 level, our gross research and development spending increased
25.2% from fiscal 1997 to 1998. We received no such reimbursements in the
fiscal 1999 period. Research and development expenses represented 101.5% of net
revenues in fiscal 1997, 130.2% in fiscal 1998 and 52.2% in fiscal 1999. 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. The decrease from 1998 to 1999 in such expenses as
a percentage of net revenues was a result of the rapid increase in revenues.
General and Administrative Expenses
General and administrative expenses consist primarily of employee salaries
and related expenses for executive, administrative and accounting personnel,
facility costs, insurance costs and professional fees. General and
administrative expenses increased 21.5% from $1.6 million in fiscal 1998 to
$2.0 million in fiscal 1999. This compares to an increase of 31.8% in fiscal
1998 over the $1.2 million recorded in fiscal 1997. 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 30.2% of net
revenues in fiscal 1997, 48.7% in fiscal 1998 and 13.4% in fiscal 1999. The
substantial increase in general and administrative expenses as a percentage of
net revenues in fiscal 1998 primarily reflected lower revenues in that year,
while the decrease from fiscal 1998 to fiscal 1999 reflected the rapid increase
in revenues in fiscal 1999.
Stock Option Compensation
Stock option compensation reflects the difference between the exercise price
of stock options granted and the deemed fair market value of our common stock
on the dates of grant. For the years ended June 30, 1997, 1998 and 1999 we
recorded aggregate deferred stock option compensation of $2.3 million, $3.1
million and $13.1 million, respectively in connection with stock option grants.
Amortization of deferred stock option compensation was $659,000 in fiscal 1997,
$1.2 million in fiscal 1998 and $3.1 million in fiscal 1999. See Note 8 of
Notes to Consolidated Financial Statements for a discussion of our deferred
stock option compensation. Prior to our initial public offering in July 1999,
there was no market for our common stock, and option prices were determined by
the Board of Directors based upon numerous factors. Upon review in connection
with our initial public offering, it was determined that the fair market value
on the date of grant of certain options was higher than originally determined
by the Board of Directors.
29
<PAGE>
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 $125,000
in fiscal 1997 to $130,000 in fiscal 1998 and to an expense of $7.9 million in
fiscal 1999. In the second half of fiscal 1999, we borrowed $9.0 million from
certain investors. These notes carried an interest rate of 10% per year, and
were 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 3,082,191 shares of Series H preferred stock at an
exercise price of $2.92 per share. The proceeds were allocated between the
notes and the warrants based on their pro rata fair values resulting in a
discount. The discount was amortized as interest expense over six months, which
represented the expected terms of the promissory notes. In addition, in June
1999, we borrowed an additional $5.0 million from Covad Communications Group,
Inc. The Covad note carried an interest rate of 8% per year, and the principal
amount and interest on the note converted into an aggregate of 497,663 shares
of common stock upon completion of our initial public offering in July 1999.
Upon the issuance of the Covad note we recorded $2.1 million of interest
expense which represented the intrinsic value of the beneficial conversion
feature of the Covad note. In future periods 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.
Income Taxes
From inception through June 30, 1999, we incurred net losses for federal and
state tax purposes and have not recognized any tax provision or benefit. As of
June 30, 1999, we had approximately $48.0 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
resulting from Efficient's redeemable convertible preferred stock and note
financings and Efficient's initial public offering, utilization of the net
operating losses and tax credits may be subject to substantial annual
limitations due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended, and similar state provisions. The annual
limitation may result in the expiration of net operating losses and tax credits
before utilization. See Note 11 of Notes to Consolidated Financial Statements.
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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 the opinion of
management, 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
----------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1997 1997 1998 1998 1998 1998 1999 1999 1999
--------- -------- -------- -------- --------- -------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 676 $ 833 $ 1,194 $ 667 $ 1,174 $ 1,850 $ 4,115 $ 7,689 $ 12,171
Cost of revenues........ 396 413 744 607 863 1,647 4,189 7,645 11,706
-------- -------- -------- -------- -------- -------- -------- --------- --------
Gross profit (loss)..... 280 420 450 60 311 203 (74) 44 465
Operating expenses:
Sales and marketing..... 643 694 895 1,204 1,168 1,303 1,385 2,277 2,652
Research and
development............ 1,044 737 1,064 1,544 1,826 1,790 1,930 2,201 3,053
General and
administrative......... 305 346 546 444 339 411 484 759 1,048
Stock option
compensation........... 233 241 275 416 433 475 991 1,217 1,389
-------- -------- -------- -------- -------- -------- -------- --------- --------
Total operating
expenses............... 2,225 2,018 2,780 3,608 3,766 3,979 4,790 6,454 8,142
-------- -------- -------- -------- -------- -------- -------- --------- --------
Loss from operations.... (1,945) (1,598) (2,330) (3,548) (3,455) (3,776) (4,864) (6,410) (7,677)
Interest and other
income (expense), net.. 34 12 35 49 80 30 (2,090) (5,920) (77)
-------- -------- -------- -------- -------- -------- -------- --------- --------
Net loss................ $ (1,911) $ (1,586) $ (2,295) $ (3,499) $ (3,375) $ (3,746) $ (6,954) $ (12,330) $ (7,754)
======== ======== ======== ======== ======== ======== ======== ========= ========
As a Percentage of Net
Revenues:
Net revenues............ 100.0 % 100.0 % 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 99.4 96.2
-------- -------- -------- -------- -------- -------- -------- --------- --------
Gross profit (loss)..... 41.4 50.4 37.7 9.0 26.5 11.0 (1.8) 0.6 3.8
Operating expenses:
Sales and marketing..... 95.1 83.3 75.0 180.5 99.5 70.4 33.6 29.6 21.8
Research and
development............ 154.5 88.5 89.1 231.5 155.5 96.8 46.9 28.6 25.1
General and
administrative......... 45.1 41.5 45.7 66.6 28.9 22.2 11.8 9.9 8.6
Stock option
compensation........... 34.5 28.9 23.0 62.4 36.9 25.7 24.1 15.8 11.4
-------- -------- -------- -------- -------- -------- -------- --------- --------
Total operating
expenses............... 329.2 242.2 232.8 541.0 320.8 215.1 116.4 83.9 66.9
-------- -------- -------- -------- -------- -------- -------- --------- --------
Loss from operations.... (287.8) (191.8) (195.1) (532.0) (294.3) (204.1) (118.2) (83.3) (63.1)
Interest and other
income (expense), net.. 5.0 1.4 2.9 7.3 6.8 1.6 (50.8) (77.0) (0.6)
-------- -------- -------- -------- -------- -------- -------- --------- --------
Net loss................ (282.8)% (190.4)% (192.2)% (524.7)% (287.5)% (202.5)% (169.0)% (160.3)% (63.7)%
======== ======== ======== ======== ======== ======== ======== ========= ========
</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 nine quarters
in the period ended September 30, 1999.
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.
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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. 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 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 September 30,
1999, interest and other income (expense), net was an expense of $77,000. 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 second half of fiscal 1999, through
borrowings from our investors and others. Since inception through June 30,
1999, we raised an aggregate of $40.4 million (net of transaction expenses)
from the sale of equity securities and an additional $14.0 million through loan
transactions.
On July 15, 1999, we completed our initial public offering. We issued 4.6
million shares of common stock and raised $63.1 million in net proceeds. Upon
the completion of the initial public offering, our promissory notes converted
into redeemable convertible preferred stock, and all outstanding redeemable
convertible preferred stock then converted into 28,300,067 shares of common
stock.
At September 30, 1999, we had cash and cash equivalents and highly liquid
short-term investments of $56.1 million. At September 30, 1999, we did not have
a line of credit or other borrowing facility available, nor did we have any
material capital commitments.
Cash used in operating activities for the quarter ended September 30, 1999
was $9.5 million. Cash used in operating activities has primarily represented
net investments in working capital and funding of our net losses.
Cash used in investing activities for the quarter ended September 30, 1999
was $9.8 million. Of this amount, $8.7 million of cash was used to purchase
highly liquid short-term investments. In each period, purchases of furniture
and equipment related primarily to the purchase of computers and other
equipment used in our development activities and other equipment and furniture
used in our operations.
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Cash provided by financing activities for the three months ended September
30, 1999 was $63.1 million, consisting primarily of funds raised from our
initial public offering of common stock on July 15, 1999.
Our future capital requirements will depend upon a number of factors,
including the rate of growth of our sales, the timing and level of research and
development activities and sales and marketing campaigns. We believe that our
cash, cash equivalents and short-term investments will provide sufficient
capital to fund our operations at least through the end of fiscal 2000.
Thereafter, we may require additional capital to fund our business. In
addition, from time to time we may evaluate opportunities to acquire
complementary technologies or companies. Should we identify any such
opportunities, we may need to raise additional capital to fund the
acquisitions. There can be no assurance that financing will be available to us
when we need it on favorable terms or at all.
Year 2000 Issues
Many currently installed computer systems, software products and other
control devices are unable to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, many companies' computer
systems, software products and control devices may need to be upgraded or
replaced in order to operate properly in the current calendar year and beyond.
We have designed our products to be year 2000 compliant. However, although
we are not aware of any errors or defects associated with our products' date
functions in the year 2000, there can be no assurance that undetected errors or
defects may become evident. If such errors or defects occur, 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 our assessment of year 2000 risks, and
all identified instances of noncompliance have been repaired and tested. We
have contacted the vendors of these products in order to gauge their year 2000
compliance. Based on these vendors' representations, we believe that the third-
party hardware and software will remain 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 in fact 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.
Recent Accounting Pronouncements
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") as amended by Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement 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, as amended, is effective for fiscal years
beginning after June 15, 2000. 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.
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<PAGE>
As of September 30, 1999, we had short-term investments of $8.7 million. All
of these short-term investments consisted of highly liquid investments with
remaining maturities 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% from the September 30, 1999 rates would cause the fair
value of these short-term investments to change by an insignificant amount. We
have the ability to hold these investments until maturity, and therefore we do
not expect the value of these investments to be affected to any significant
degree by the effect of a sudden change in market interest rates. Declines in
interest rates over time will, however, reduce our interest income.
As of September 30, 1999, we did not own any equity investments. Therefore,
we did not have any direct equity price risk.
Substantially all of our revenues are currently realized 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 worldwide 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. On December 17, 1999 Efficient completed the acquisition of
FlowPoint Corporation, a provider of advanced broadband routers for deployment
at customer premises. 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.
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<PAGE>
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
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 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 incumbent local exchange carriers' 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 incumbent local exchange carriers 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 incumbent local exchange
carriers to lease portions of their networks, including the last mile, to
competitive local exchange carriers. As a result, many new companies, long
distance telephone companies and Internet service providers have applied for
and been granted regulatory approval for competitive local exchange carrier
status. Leading competitive local exchange carriers, including Covad
Communications, MCI WorldCom, NorthPoint Communications, Rhythms NetConnections
and Sprint, are now deploying high-speed services over the copper
infrastructure owned by the incumbent local exchange carriers. In response to
these competitive pressures and in an effort to increase revenues and maintain
their existing customer base, incumbent local exchange carriers 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 to
commit similar resources to broadband access deployment.
Incumbent local exchange carriers, competitive local exchange carriers and
foreign telephone network 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. 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. All major U.S. incumbent
local exchange carriers have begun to offer DSL services to their customers
directly and through Internet service providers. For example, in October 1999,
SBC Communications announced a $6 billion initiative to make DSL service
available to an
36
<PAGE>
estimated 77 million Americans by the end of 2002. In addition, competitive
local exchange carriers are aggressively deploying DSL service. For instance,
Covad Communications first 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 October 1999, Covad had deployed DSL capability to
over 25 million homes and businesses in 51 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. Through our recent acquisition of Flowpoint, we also
provide a comprehensive line of broadband access routers. 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. By offering a variety
of DSL CPE categories that support DSL types compatible with a diverse set of
DSL services, we can provide network service providers with a wide range of
options. We can also reduce operational complexity for network service
providers by offering a single point of contact for training and support for
their DSL CPE.
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, Bell Atlantic, BellSouth, Covad Communications,
Hong Kong Telecom, Singapore Telecom and TeleDanmark, and network equipment
vendors, such as ADC Telecommunications, Advanced Fibre Communications,
Alcatel, Copper Mountain Networks, 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
37
<PAGE>
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 universal serial bus modems
are supported by Efficient's pre-configurable 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, Bell Atlantic, BellSouth, Covad
Communications, Hong Kong Telecom, Pacific Bell, Singapore Telecom,
Southwestern Bell, TeleDanmark and several other network service providers. We
work closely with each network service provider, in most cases providing
customized software or product packages, as well as dedicated training and
support services. A number of other 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, Copper Mountain Networks, Ericsson, Lucent, 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.
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 incumbent
local exchange carriers 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 competitive local exchange carriers, foreign telephone network
service providers and Internet service providers as well. Moreover, we are
developing alternative distribution
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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.
Leverage Strategic Acquisitions to Complement Product & Technology
Offerings. We recently acquired FlowPoint Corporation to add advanced broadband
routers to our product line for the customer premises equipment market. Our
FlowPoint products incorporate a broad range of DSL technologies, including
ADSL, SDSL and IDSL. FlowPoint also brings expertise in frame-based customer
premises equipment as well in the emerging voice-over-DSL market, and has
provided us with several new customer relationships. We intend to pursue
strategic acquisitions in the future as we identify companies or products that
will complement our current product offerings and expand our addressable
customer base.
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 computer environments, 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 end
user, and up to 1 Mbps in the upstream direction. Our symmetric DSL, or SDSL,
products provide equal upstream and downstream speeds of up to 2.3 Mbps. Our
SpeedStream products are separated into these product categories:
. 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 universal serial bus port.
. 5200 Series--Designed to provide simple, zero-setup DSL access for
multiple users through an Ethernet port.
. 5600 Series--Designed to provide basic routing capabilities for a
telecommuter or a small office or home office environment.
. FlowPoint routers and Integrated Access Device--Designed to provide a
comprehensive routing feature set for a small business or a corporate
branch office, or to provide routing plus multiple voice lines over DSL.
Efficient also provides a full suite of pre-configuration and diagnostic
software tools. Our pre-configuration software 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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The SpeedStream 3000 Series
The SpeedStream 3000 Series consists of internal modems that provide high-
speed asymmetric DSL connectivity for a personal computer. This product family
comprises four distinct products, each designed for compatability with specific
DSLAMs from various network equipment vendors. The SpeedStream 3000 Series
incorporates the following features:
. Installs into any peripheral component interface bus slot;
. Supports pre-configuration using Efficient software for easy setup;
. Includes Efficient Advanced Status diagnostic software tools for rapid
error diagnosis and correction;
. Supports 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; and
. Has list prices ranging from $129 to $269.
The SpeedStream 4000 Series
The SpeedStream 4000 Series consists of external modems that provide high-
speed asymmetric DSL connectivity through a personal computer's universal
serial bus port. This product family comprises four distinct products, each
designed for compatability with specific DSLAMs from various network equipment
vendors. The SpeedStream 4000 Series incorporates the following features:
. Attaches externally via a personal computer's universal serial bus port;
. Supports pre-configuration using Efficient software for easy setup;
. Includes Efficient Advanced Status diagnostic software tools for rapid
error diagnosis and correction;
. Supports 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; and
. Has a list price of $299.
The SpeedStream 5200 Series
The SpeedStream 5200 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. This product
family is currently comprised of two products designed to interoperate with
DSLAMs from various network equipment vendors. The SpeedStream 5200 Series
incorporates the following features:
. Facilitates cost-effective DSL connectivity for multiple users via a
standard Ethernet port;
. Provides zero setup installation, reducing the time required for
installation;
. Pre-configures for rapid network deployment;
. Supports prevalent data encapsulation standards to ensure network
interoperability with Internet Protocol and ATM networking equipment;
. Provides ATM functionality that enables reliable data transmission; and
. Has a list price of $349.
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The SpeedStream 5600 Series
The SpeedStream 5600 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. This product
family is currently comprised of three products designed to interoperate with
DSLAMs from various network equipment vendors. Routing features help provide
security, and make more effective use of network bandwidth. The SpeedStream
5600 Series incorporates the following features:
. Facilitates DSL connectivity for multiple users via a standard Ethernet
port;
. Provides routing or bridging capabilities for a telecommuting or small
office/home office environment;
. Pre-configures for rapid network deployment;
. Supports 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 capabilities; and
. Has a list price of $595.
FlowPoint Routers and Integrated Access Devices
Routers developed by FlowPoint Corporation provide high-speed remote
connectivity for one or more personal computers, workstations or other network
devices over a standard networking architecture called Ethernet. FlowPoint
routers support three different types of DSL, plus several non-DSL interfaces
that can enhance existing DSL modems. The FlowPoint Integrated Access Devices
add support for multiple voice lines over DSL, in addition to the routing
capabilities. Our FlowPoint routers incorporate the following features:
. Facilitate DSL connectivity for multiple users via a standard, integrated
Ethernet hub;
. Provide routing and bridging capabilities for a small business or branch
office environment;
. Pre-configureable for rapid network deployment;
. Support prevalent data encapsulation standards to ensure network
interoperability with Internet Protocol and ATM or packet-based
networking equipment;
. Support enhanced security and virtual private network capabilities;
. Provide ATM or packet-based functionality that enables reliable data
transmission; and
. Offer remote management capabilities.
The following table demonstrates some of the features of our routers and
integrated access devices:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
FlowPoint Routers, Integrated Access Devices
-----------------------------------------------------------------------
2200 255 144 245/2025 2200V--IAD
<S> <C> <C> <C> <C> <C>
DSLAM Nokia, Copper Alcatel, Lucent, Copper Any--with Nokia, Copper
Interoperability Mountain Copper Mountain, external DSL Mountain
Mountain, Nokia, modem
Pulsecom Pulsecom
- ----------------------------------------------------------------------------------------
Wide Area Network SDSL ADSL IDSL Ethernet/ SDSL
Interface ATM25
- ----------------------------------------------------------------------------------------
Suggested Retail $599 $649 $499 $649/$649 $995
Price
</TABLE>
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Pre-configurable Software
All of our SpeedStream DSL products for single personal computer
environments support the ability to be pre-configured for specific DSL
networks. SpeedStream Software allows a network service 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.
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. These integrated access products
will take advantage of the cost-effective nature of DSL access, but will
ultimately expand to support other high-speed access technologies as well. 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.
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
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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 application specific integrated circuits 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 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.
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Application Specific Integrated Circuit Design Expertise
Efficient has developed custom application specific integrated circuits that
enable high-speed ATM networking using peripheral component interface or
universal serial bus attachments. Our application specific integrated circuits
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 application
specific integrated circuits 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 Internet protocol
addresses. Efficient's routing products forward Internet Protocol 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 Internet
protocol 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.
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
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. 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.
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The following table sets forth the top 20 customers for our DSL products in
the fiscal year ended June 30, 1999, categorized by customer type. These
customers accounted for an aggregate of 22.6% of our total revenues in fiscal
1998, 85.9% of our total revenues in fiscal 1999, and 95% of our total revenues
for the first quarter of fiscal 2000.
<TABLE>
<CAPTION>
Network Equipment Vendors Network Service Providers Telephone Company-Aligned
and Other Distributors
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ADC Telecommunications Ameritech Daehan Information Service Corp.
Alcatel Covad Communications* Global Technology Integrator
Diamond Lane Communications Flashcom Innotrac for BellSouth's network
Ericsson Hong Kong Telecom Soon Cabling Pte, Ltd.* for Daewoo
Lucent Technologies Panhandle Telecommunication Telecom's network
Nokia Services Telecom Equipment for Singapore
Nortel Networks Southwestern Bell Telecom's network
Siemens Universe Computers
</TABLE>
* The customers indicated accounted for 10% or more of our net revenues in
fiscal 1999. For the first quarter of fiscal 2000, sales to four customers,
American Communications Supply, Inc., a distributor for Southwestern Bell,
America Online, Inc., Innotrac Corporation, a distributor for BellSouth, and
Lucent Technologies each represented more than 10% of our net revenues.
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.
Bell Atlantic. Efficient has entered into an agreement to provide DSL CPE to
Bell Atlantic. Two of our SpeedStream products are offered by Bell Atlantic as
CPE options for their Infospeed DSL service. Efficient has developed custom
hardware and software to help enable Bell Atlantic's DSL deployment, and we
have provided them 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 symmetric DSL 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. In addition, on June 28, 1999, we
issued a $5.0 million convertible promissory note to Covad which converted into
497,663 shares of common stock upon completion of our initial public offering
in July 1999.
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Hanaro Telecom. Hanaro is a competitive network service provider in Korea
actively engaged in DSL deployment. Hanaro offers DSL services for consumer,
academic and business applications. Efficient has worked closely with Hanaro to
enable rapid deployment of its DSL service using our SpeedStream CPE.
SBC Communications. Efficient provides our SpeedStream CPE for DSL services
offered through SBC's Southwestern Bell and Pacific Bell subsidiaries. We have
provided training for their installation and customer service personnel, and
have worked with their certification and test staff to demonstrate new
SpeedStream DSL products.
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
Alcatel. Efficient and Alcatel have established a joint development and
marketing agreement for CPE that is interoperable with Alcatel's DSLAM as well
as their Litespan digital loop carrier. We are working together to develop two
successive generations of DSL CPE based around our universal serial bus, 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.
Ericsson. Efficient and Ericsson have entered into a long term agreement
whereby we supply our SpeedStream 3000 PCI and 4000 USB products. We have
developed DSL products intended to ensure ongoing compatibility with their DSL
equipment.
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 their SpeedLink DSLAM.
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 is an investor in Efficient. 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 asymmetric DSL 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.
Texas Instruments Incorporated. Texas Instruments is an investor in
Efficient. Some SpeedStream products under development use asymmetric DSL
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' asymmetric DSL
components. Texas Instruments has provided us with access to its asymmetric DSL
components at most favored prices. Texas Instruments also fabricates one of our
ATM application specific integrated circuits and has provided introductions for
Efficient to personal computer manufacturers who are searching for sources of
DSL CPE.
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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 incumbent local exchange carriers, including BellSouth. Efficient,
Innotrac and BellSouth jointly promote BellSouth's DSL services with
Efficient's SpeedStream CPE. Efficient and Innotrac also work together to
create customized product packages and documentation for major network service
providers. We believe that we can leverage Innotrac's relationship with several
incumbent local exchange carriers, as well as Innotrac's experience in
distributing products in high volume.
Manufacturing
We outsource the assembly and testing of products and printed circuit boards
to turnkey contract manufacturers. Currently, ACT Manufacturing, Inc.
manufactures the majority of our products at its facility in Hermasillo,
Mexico. Our FlowPoint products are manufactured by PEMSTAR, Inc. at its San
Jose, California facility. Efficient also contracts with Xetel, Inc. for the
manufacturing of its ATM LAN products and a portion of our DSL products at its
facility in Dallas, Texas. Each 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 application specific integrated circuits
that are incorporated into the majority of our products. Efficient contracts
with silicon manufacturers to fabricate the application specific integrated
circuits 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
application specific integrated circuits in volume on a turnkey basis. We
purchase only packaged and tested application specific integrated circuits.
Other than our application specific integrated circuits, 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.
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
47
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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. Efficient typically
creates and delivers customized training courses and curricula for our largest
customers, to ensure that their installation and support personnel are
effective in satisfying end users' needs. 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. We also
engage in joint marketing programs with selected Internet service providers
whose DSL services employ our CPE. 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 application specific integrated circuits
development, analog and mixed signal hardware design, ATM architecture and bus
architectures, such as peripheral component interface and universal serial bus.
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. We have
significant expertise with hardware and software technology for analog and
digital voice transmission and switching techniques as well.
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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 application specific
integrated circuits 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. Asymmetric DSL supports high frequency digital data
transmission simultaneously with analog voice signals on a single copper phone
line, but 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 Corporation, Alcatel, Cisco Systems, Netopia, Westell Technology
and Xpeed 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, Intel Corporation, Nortel Networks,
Orckit Communications and PairGain Technologies. 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;
. product availability;
49
<PAGE>
. 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 two U.S. patents
with counterpart patents pending in three international jurisdictions and have
an additional 10 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.
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.
Employees
As of September 30, 1999, we employed approximately 163 full-time employees,
including 41 in sales and marketing, 18 in manufacturing, 83 in engineering, 17
in finance and administration and four in customer service. Most of our
employees are located in the United States with seven sales and sales
engineering employees located in The Netherlands and three sales and
engineering employees located in Singapore. 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. In February
2000 we intend to relocate our executive, sales and marketing, and research and
development personnel and activities into a 125,000 square foot facility in
Dallas, Texas. We lease this new facility under a lease expiring in 2010. We
plan to sublease our current space until the expiration of the lease. We lease
two facilities in Dallas, Texas for manufacturing, shipping and receiving of
product. One facility is 11,000 square feet for which the lease expires in
2001. The other facility is 10,000 square feet for which the lease expires at
the end of March 2000. In connection with the acquisition of FlowPoint, we
entered into an agreement with Cabletron to permit us to retain, for a
transitional period, the space being used by the
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FlowPoint employees at a Cabletron facility in Santa Clara, California. We
expect to lease space to relocate the Flowpoint operations to another facility
in the Silicon Valley in the first half of calendar 2000. We lease an
approximately 2,500 square foot facility in Amsterdam, The Netherlands for our
European operations. This lease expires in 2004. For our Asian operations, we
lease an approximately 1,450 square foot facility in Singapore. This lease
expires in 2002.
Legal Proceedings
Efficient is not a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to the
executive officers and directors of Efficient as of December 31, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mark A. Floyd (1)....... 44 Chairman of the Board, Chief Executive Officer and
President
Peter Bourne............ 31 Vice President of Integrated Access (Business Unit)
Paul E. Couturier....... 37 Vice President of International Operations
James Hamilton.......... 36 Vice President of Small and Medium Business
(Business Unit)
Patricia W. Hosek....... 38 Vice President of Engineering
Gregory L. Langdon...... 39 Vice President of Product Strategy
Jill S. Manning......... 37 Vice President and Chief Financial Officer
James N. Nadeau......... 39 Vice President of Residential Access (Business Unit)
Brian M. Ronald......... 41 Vice President of Operations
David B. Stefan......... 37 Vice President of Sales
Dano Ybarra............. 42 Vice President of Corporate Marketing
Charles Waggoner........ 60 President, Flowpoint
Bruce W. Brown (2)...... 49 Director
James P. Gauer (2)...... 47 Director
Robert Hawk............. 59 Director
Robert A. Hoff (3)...... 46 Director
Anthony T. Maher........ 53 Director
William L. Martin III 52 Director
(3)....................
Thomas H. Peterson...... 43 Director
</TABLE>
- --------
(1) Member of the Employee Option Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
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.
Peter Bourne joined Efficient in April 1994 and has served as Vice President
of Integrated Access Business Unit since October 1999. From September 1997 to
September 1999, Mr. Bourne served as Efficient's director of product marketing.
From October 1995 to August 1997, Mr. Bourne served as a systems engineer for
us. Prior to serving in such capacity, Mr. Bourne worked as a software
engineer. Mr. Bourne attended the University of California at Santa Barbara.
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.
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<PAGE>
James Hamilton joined Efficient in November 1999 as Vice President of Small
and Medium Business-Business Unit. From August 1998 to October 1999, Mr.
Hamilton served as Vice President of World Wide Sales and Services at Picazo
Communications, a provider of computer telephony solutions. From January 1996
to August 1998, Mr. Hamilton was Director of Business Development for the
Communication Products Group of Compaq Computer Corporation, a global supplier
of personal computers. From January 1992 to January 1996, he served as Vice
President of International Sales at Networth, Inc., a developer and
manufacturer of ethernet hubs, switches and related products that was acquired
by Compaq in December 1995. Mr. Hamilton holds a B.S. in Business
Administration from Lawrence Technical University.
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 Product Strategy of
Efficient since October 1999. From February 1997 to October 1999, Mr. Langdon
served as Vice President of Marketing, and 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.
James F. Nadeau has served as Vice President of Residential Access Business
Unit since October 1999. From February 1997 to October 1999, Mr. Nadeau served
as Vice President of Business Development, and from January 1995 to February
1997, he served as a director of sales for Efficient. From May 1993 to January
1995, he worked as North American Channel Sales Manager for Madge Networks.
Prior to that, Mr. Nadeau was a co-founder of CWS Inc., a networking
integration company. Mr. Nadeau attended Northeastern University in Boston, MA.
Brian M. Ronald joined Efficient in July 1999 as Vice President of
Operations. From March 1996 to July 1999, Mr. Ronald had been Manager,
Manufacturing Program Management at 3Com Corporation, a computer networking
products company. Prior to joining 3Com, Mr. Ronald had been Manager, Global
Electronic Manufacturing at General Electric Lighting since September 1992. Mr.
Ronald holds a B.S. in Industrial Technology from Southern Illinois University
at Carbondale.
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. Mr. Stefan holds an
M.S.E.E. from George Washington University and a B.S. in Electrical Engineering
from Michigan State University.
Chuck Waggoner joined Efficient in December 1999 upon the acquisition of
FlowPoint Corporation. Mr. Waggoner has more than 26 years of technology and
management experience in the development and manufacturing of computer and
communications systems. Prior to joining FlowPoint, Mr. Waggoner held various
management positions, including Vice President of Engineering, at LIR
Corporation where he managed the design and development of wide area network
portable software protocols, Senior Vice President of Operations at GRiD
Systems, where he was responsible for the development and manufacture of all
portable computer products, and Vice President of Development at Packet
Technologies, Inc. Mr. Waggoner received a B.S.E.E. from South Dakota State
University.
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<PAGE>
Dano Ybarra joined Efficient in the capacity of Vice President of Corporate
Marketing in December 1999 upon the acquisition of FlowPoint Corporation. At
FlowPoint, Mr. Ybarra served as Vice President of Sales and Marketing where he
was responsible for the management of FlowPoint's sales strategies, product
strategy and marketing programs. Prior to joining FlowPoint, Mr. Ybarra was
Vice President of Sales and Marketing at Information Presentation Technologies,
Inc., a provider of integrated server solutions for the multimedia and
publishing markets. Previously, he was Business Manager for Adobe Systems,
where he was responsible for OEM relationships and sales channel management.
Mr. Ybarra received a B.S. in Computer Science from Portland 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 Ocean Park
Ventures, and from December 1992 to November 1997, he was a General Partner of
Enterprise Partners, all 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 C. Hawk joined Efficient's board of directors in July 1999. Mr. Hawk
is President of Hawk Communications and recently retired as President and Chief
Executive Officer of US 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 US West 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 Com21, Concord Communications, Covad Communications
Group, Inc. and PairGain Technologies, Inc.
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., Onyx Acceptance Corp., PairGain Technologies, Inc., 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 November 1999, he has been Chief Executive Officer of Glassware
Networks, Inc., a developer of optical networking systems. From September 1994
to November 1999, Mr. Martin served as 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.
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<PAGE>
Thomas H. Peterson has served as a director of Efficient since July 1993.
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.
Classified Board
Our board of directors is currently composed of eight members. Our
certificate of incorporation provides 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 our
initial public offering, three of our directors were elected to one-year terms,
two were elected to two-year terms and three were elected to three-year terms.
On a going forward basis, each of our directors will be elected for three-year
terms. Messrs. Maher, Martin and Hawk have been designated Class I directors
whose terms expire at the upcoming annual meeting of stockholders. Messrs.
Floyd and Peterson have been designated Class II directors whose terms expire
at the following annual meeting of stockholders. Messrs. Brown, Gauer and Hoff
have been designated Class III directors whose terms expire 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.
In October 1999, the board of directors established an employee option
committee. The function of this committee is to determine stock option grants
for employees who are not executive officers. Mark Floyd is currently the only
member of the employee option committee.
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. 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 Messrs. Maher and Hawk options to purchase 15,000
and 150,000 shares of common stock, respectively, at an exercise price of
$10.50 per share.
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<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 years ended June 30, 1998 and 1999
by our Chief Executive Officer and our next four most highly compensated
executive officers who earned more than $100,000 during fiscal 1999. These
executives are referred to as the "named executive officers" elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual Compensation Securities
Name and Principal Fiscal ------------------- Underlying All Other
Position Year Salary Bonus Options(#) Compensation
------------------ ------ ------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Mark A. Floyd............. 1999 $ 200,000 $ 80,000 350,000 $ --
President and Chief
Executive Officer 1998 178,127 20,000 350,000 16,667(1)
David B. Stefan........... 1999 125,000 112,608 100,000 --
Vice President of Sales 1998 92,391 36,563 125,000 23,140(2)
Patricia W. Hosek......... 1999 117,000 51,479 225,000 --
Vice President of
Engineering 1998 107,625 21,313 50,000 --
Gregory L. Langdon........ 1999 117,000 50,716 200,000 --
Vice President of Product
Strategy 1998 103,290 21,051 50,000 --
Paul E. Couturier......... 1999 90,000 76,410 137,500 27,426(3)
Vice President of
International Operations 1998 85,709 42,742 37,500 27,634(3)
</TABLE>
- --------
(1) Represents amount paid in lieu of accrued sabbatical benefit.
(2) Represents a moving allowance.
(3) Represents an annual car and vacation allowance.
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 1999, including the potential realizable value
over the ten-year term of the options, based on assumed, annually compounded
rates of stock value appreciation. 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 1999, we granted options to purchase up to an aggregate of
2,638,500 shares to employees, directors and consultants. All options were
granted at exercise prices which the board of directors believed to be equal to
the fair market value of our common stock on the date of grant. 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.
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<PAGE>
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------
Percent of Potential Realizable
Total Value at Assumed
Number of Options Market Annual Rates of Stock Price
Securities Granted to Value Appreciation for Option Term
Underlying Employees at --------------------------------
Options In Last Exercise Date of Expiration
Name Granted Fiscal Year Price Grant(1) Date 0%(1) 5% 10%
---- ---------- ----------- -------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mark A. Floyd........... 250,000 9.48% $1.50 $2.63 8/27/08 $ 282,500 $ 695,998 $1,330,386
100,000 3.79% $2.50 $9.00 1/28/09 $ 650,000 $1,216,005 $2,084,368
David B. Stefan......... 100,000 3.79% $2.50 $9.00 1/28/09 $ 650,000 $1,216,005 $2,084,368
Patricia W. Hosek....... 225,000 8.53% $2.50 $9.00 1/28/09 $1,462,500 $2,736,012 $4,689,828
Gregory L. Langdon...... 200,000 7.58% $2.50 $9.00 1/28/09 $1,300,000 $2,432,010 $4,168,736
Paul E. Couturier....... 137,500 5.21% $2.50 $9.00 1/28/09 $ 893,750 $1,672,007 $2,866,006
</TABLE>
- --------
(1) Based upon a subsequent review of the fair value of our common stock at the
option grant dates, we determined the value of the common stock to be as
reflected in the "Market Value at Date of Grant" column. The amount shown
in the "0%" column reflects the difference between the exercise price and
the deemed fair market value as of the date of option grant.
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 the exercisable and unexercisable options
held by them as of June 30, 1999. None of the named executive officers
exercised options during fiscal 1999. The "Value of Unexercised In-the-Money
Options at June 30, 1999" is based on a value of $12.00 per share, the fair
market value of our common stock as of June 30, 1999 as determined in a
subsequent review of fair market values, 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 Year- In-the-Money Options at
Shares End Fiscal Year-End
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Floyd........... -- -- 272,917 577,083 $ 3,165,938 $ 6,386,563
David B. Stefan......... -- -- 45,313 179,688 $ 519,531 $ 1,862,969
Patricia W. Hosek....... -- -- 61,979 280,729 $ 724,033 $ 2,780,807
Gregory L. Langdon...... -- -- 84,375 265,625 $ 989,792 $ 2,660,208
Paul E. Couturier....... -- -- 78,802 171,198 $ 927,047 $ 1,696,703
</TABLE>
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.
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<PAGE>
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 May 1 and November 1 of each year.
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.
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.
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<PAGE>
1999 Non-Statutory Stock Option Plan
Our 1999 non-statutory stock option plan provides for the grant of
nonstatutory stock options to employees and consultants (excluding officers or
directors) of Efficient. The plan was approved by our board of directors in
November 1999. Unless terminated sooner, the plan will terminate automatically
in 2009. A total of 950,000 shares of common stock are currently reserved for
issuance under the plan.
The plan may be administered by the board of directors or a committee of the
board. The board or a committee of the board has the power to determine the
terms of the options, including the exercise price, the number of shares
subject to each option, the exercisability thereof, and the form of
consideration payable upon exercise. In addition, the board or a committee of
the board has the authority to amend, suspend or terminate the plan, provided
that no such action may affect any share of common stock previously issued and
sold or any option previously granted under the plan.
Options granted under the plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by the optionee. Options granted under the plan must generally be
exercised within three months of the end of optionee's status as an employee or
consultant of Efficient, or within twelve months after the optionee's
termination by death or disability, but in no event later than the expiration
of the option's ten year term. The exercise price of stock options granted
under the plan is determined by the board or a committee of the board. The term
of stock options granted under the plan may not exceed ten years.
The 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, each option
shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted, the
board or a committee of the board will provide for the optionee to have the
right to exercise the option as to all of the optioned stock, including shares
that would otherwise not be exercisable, for a period of fifteen (15) days from
the date of the notice, and the option will terminate upon the expiration of
such period.
401(k) Plan
On January 1, 1995, we adopted the Efficient Networks, Inc. 401(k) Plan (the
"401(k) Plan") a cash-or- deferred arrangement which covers our eligible
employees who have attained the age of 21. The 401(k) Plan is intended to
qualify under Sections 401(a), 401(m) and 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code") and the 401(k) Plan trust is intended to
qualify under Section 501(a) of the Code. All contributions to the 401(k) Plan
by eligible employees or by us, and the investment earnings thereon, are not
taxable to such employees until withdrawn, and any contributions we may make
are expected to be deductible by us. Our eligible employees may elect to reduce
their current eligible compensation by one percent (1%) up to fifteen (15%),
subject to the maximum statutorily prescribed annual limit of $10,500 (in
2000), and to have such salary reductions contributed on their behalf to the
401(k) Plan. The 401(k) Plan permits, but does not require, that we may make
matching contributions on behalf of all eligible employees who make salary
reduction contributions to the 401(k) Plan. We have elected to make matching
contributions for the Plan Year ending December 31, 2000, equal to 50% of a
participant's salary deferral contributions for each payroll period, on up to
12% of a participant's annual compensation. The 401(k) Plan also permits, but
does not require, that we may make additional profit-sharing contributions on
behalf of all eligible employees. To date, we have not made such additional
profit-sharing contributions to the 401(k) Plan.
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;
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. 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.
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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 December 1996, we sold 3,091,430 shares of Series E preferred stock
in a private placement at a purchase price of $2.42 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;
. 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; and
. On June 28, 1999, we issued a $5.0 million convertible promissory note
to Covad. The note bore interest at the rate of 8% per year, and was
payable on the fifth anniversary of issuance. Upon completion of our
initial public offering in July 1999, the principal amount plus interest
of the note converted into 497,663 shares of common stock.
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
Siemens................. -- -- -- 3,716,800 -- --
Palomar Ventures........ -- -- -- -- $2,000,000 684,931
OceanPark Ventures...... -- 88,612 27,258 -- -- --
</TABLE>
Mr. Martin, a member of our board of directors, was formerly 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 and Ocean Park Ventures.
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Note Repayment and Warrant Exercise Agreement
Each holder of a 10% subordinated promissory note entered into a note
repayment and warrant exercise agreement with Efficient. Pursuant to the terms
of the agreement, immediately prior to the closing of our initial public
offering, the aggregate $9.0 million principal amount of the notes was 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 effected the issuance of 150,000 shares of common
stock by granting Robert Hawk an immediately exercisable option to purchase
150,000 shares of common stock at an exercise price of $10.50 per share in
exchange for a $1,575,000 6% demand note. Mr. Hawk exercised this option in May
1999. The note, together with accrued interest, was repaid in July 1999.
Covad Communications Convertible Note Transaction
On June 28, 1999, we issued a $5.0 million convertible promissory note to
Covad Communications as described above. Mr. Hawk, a member of our board of
directors, also serves on the board of directors of Covad Communications.
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PRINCIPAL AND SELLING STOCKHOLDERS
The table on the following page sets forth information regarding the
beneficial ownership of our common stock as of December 31, 1999, and as
adjusted to reflect the sale of the shares hereby, 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; (c) each of our executive officers listed in the
Summary Compensation Table; (d) all directors and executive officers as a
group; and (e) all other selling stockholders.
<TABLE>
<CAPTION>
Shares
Beneficially Shares Beneficially
Owned Prior Owned After
to Offering Offering
--------------------- -----------------------
Shares Sold
Name and Address Number Percent In Offering Number Percent
---------------- ---------- ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
ADC Telecommunications,
Inc. .................. 2,169,113 4.2% 43,851 2,125,262 4.0%
2240 Campbell Creek
Road
Richardson, TX 75082
Cabletron Systems,
Inc. .................. 13,500,000(1) 26.4% 1,990,308 11,509,692 21.7%
35 Industrial Way
Rochester, NH 03867
Covad Communications
Group, Inc. ........... 497,663 1.0% 10,178 487,485 *
2330 Central
Expressway
Santa Clara, CA 95050
Crosspoint Venture
Partners............... 4,948,930(2) 9.7% 104,645 4,844,285 9.1%
18552 MacArthur Blvd.,
Suite 400
Irvine, CA 92612
El Dorado Ventures...... 3,877,712(3) 7.6% 83,480 3,794,232 7.1%
2400 Sand Hill Road,
Suite 100
Menlo Park, CA 94025
Enterprise Partners..... 3,633,141(4) 7.1% 78,155 3,554,986 6.7%
5000 Birch Street,
Suite 6200
Newport Beach, CA
92600
Ocean Park Ventures,
LP..................... 1,211,058 2.4% 26,050 1,185,008 2.2%
100 Wilshire
Boulevard, Suite 400
Santa Monica, CA 90401
Palomar Ventures........ 684,931 1.3% 14,008 670,923 1.3%
100 Wilshire
Boulevard, Suite 400
Santa Monica, CA 90401
Siemens AG.............. 3,716,800 7.3% 76,015 3,640,785 6.8%
Hofmannstrasse 51
81359 Munchen, Germany
Texas Instruments
Incorporated........... 4,185,973 8.2% 83,787 4,102,186 7.7%
P.O. Box 660199, M.S.
8650
Dallas, TX 75266-0199
Mark A. Floyd(5)........ 1,613,542 3.2% 205,000 1,408,542 2.6%
Bruce W. Brown(6)....... 75,000 * 10,000 65,000 *
Robert A. Hoff(7)....... 4,973,930 9.7% 104,645 4,869,285 9.2%
Thomas H. Peterson(8)... 3,902,712 7.6% 83,480 3,819,232 7.2%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficially Shares Beneficially
Owned Prior Owned After
to Offering Offering
------------------ -----------------------
Shares Sold
Name and Address Number Percent In Offering Number Percent
---------------- ---------- ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
James P. Gauer(9)........ 1,920,989 3.8% 40,058 1,880,931 3.5%
Anthony T. Maher(10)..... 3,720,550 7.3% 72,064 3,648,486 6.9%
William L. Martin III.... -- -- -- -- --
Robert Hawk(11).......... 150,000 * -- 150,000 *
David B. Stefan(12)...... 97,975 * 22,500 75,475 *
Patricia W. Hosek(13).... 180,752 * 37,500 143,252 *
Gregory L. Langdon(14)... 172,916 * 35,000 137,916 *
Paul E. Couturier(15).... 132,293 * 25,000 107,293 *
James Nadeau............. 114,517 * 22,500 92,017 *
Jill Manning............. 139,836 * 22,500 117,336 *
Peter Bourne............. 73,154 * 10,200 62,954 *
Kevin Dibble............. 229,167 * 27,500 201,667 *
Klaus Fosmark............ 248,692 * 32,500 216,192 *
William Perry............ 249,226 * 32,500 216,726 *
Vicki Smith.............. 23,125 * 5,000 18,125 *
All directors and
officers as a group (19
persons)(16)............ 17,268,166 33.8% 690,447 16,577,719 32.4%
</TABLE>
Applicable percentage ownership in the above table is based on 51,156,248
shares of common stock outstanding as of December 31, 1999, after giving pro
forma effect to the conversion of preferred stock held by Cabletron into an
aggregate of 6,300,000 shares of common stock.
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 7,200,000 shares of common stock and 6,300 shares of Series A
non-voting convertible preferred stock held by Cabletron. The preferred
stock is automatically convertible into an aggregate of 6,300,000 shares
of common stock, and is expected to be converted in early 2000.
(2) Represents 3,138,855 shares held by Crosspoint Venture Partners 1993,
97,746 shares held by Crosspoint 1993 Entrepreneurs Fund and 1,712,329
shares held by Crosspoint Ventures LS 1997 L.P.
(3) Represents 3,041,790 shares held by El Dorado Ventures III, 56,335 shares
held by El Dorado C&L Fund, L.P., 94,656 shares held by El Dorado
Technology IV, L.P., 52,305 shares held by El Dorado Technology 98, L.P.,
and 632,626 shares held by El Dorado Ventures IV, L.P.
(4) Represents 3,330,397 shares held by Enterprise Partners II, L.P., and
302,744 shares held by Enterprise Partners Associates, L.P.
(5) Includes 513,542 shares issuable upon exercise of stock options
exercisable on or before March 31, 2000.
(6) Includes 75,000 shares issuable upon exercise of stock options exercisable
on or before March 31, 2000.
(7) Mr. Hoff is a general partner of Crosspoint Venture Partners. The shares
listed represent (a) 4,948,930 shares held by Crosspoint Venture Partners
and (b) 25,000 shares held by Mr. Hoff issuable upon exercise of stock
options exercisable on or before March 31, 2000. Mr. Hoff disclaims
beneficial ownership of the shares held by Crosspoint Venture Partners,
except to the extent of his pecuniary interest therein.
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<PAGE>
(8) Mr. Peterson is a general partner of El Dorado Ventures. The shares listed
represent (a) 3,877,712 shares held by El Dorado Ventures and (b) 25,000
shares held by Mr. Peterson issuable upon exercise of stock options
exercisable on or before March 31, 2000. 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) 684,931 shares held by
Palomar Ventures, (b) 1,211,058 shares held by Ocean Park Ventures and (c)
25,000 shares held by Mr. Gauer issuable upon exercise of stock options
exercisable on or before March 31, 2000. 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) The shares listed represented (a) 3,716,800 shares beneficially owned by
Siemens AG, and (b) 3,750 shares held by Mr. Maher issuable upon exercise
of stock options exercisable on or before March 31, 2000. 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.
(11) All of such shares are currently subject to a right of repurchase by
Efficient.
(12) Includes 97,918 shares issuable upon exercise of stock options exercisable
on or before March 31, 2000.
(13) Includes 148,460 shares issuable upon exercise of stock options
exercisable on or before March 31, 2000.
(14) Includes 172,916 shares issuable upon exercise of stock options
exercisable on or before March 31, 2000.
(15) Includes 132,293 shares issuable upon exercise of stock options
exercisable on or before March 31, 2000.
(16) Includes an aggregate of 1,475,359 shares issuable upon exercise of stock
options exercisable on or before March 31, 2000.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are 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, and by the
provisions of applicable Delaware law.
Common Stock
As of December 31, 1999, there were 51,156,248 shares of common stock
outstanding after giving pro forma effect to the conversion of all outstanding
shares of Series A non-voting convertible redeemable preferred stock issued to
Cabletron. These shares were held of record by approximately 156 stockholders.
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.
Series A Non-Voting Convertible Preferred Stock
In connection with the acquisition of Flowpoint Corporation from Cabletron,
the Board of Directors designated an aggregate of 6,300 shares of preferred
stock as "Series A Non-Voting Convertible Preferred Stock." The following is a
summary of the rights, preferences, privileges and restrictions of Series A
Preferred:
. Voting. The Series A Preferred is non-voting. However, without the
consent of holders of at least 66% of the Series A Preferred, Efficient
may not: (a) alter the rights of the Series A Preferred; (b) create any
securities that rank on a parity with or senior to the Series A Preferred
as to dividends or distribution of assets upon liquidation; or (c)
increase or decrease the number of shares of preferred stock authorized.
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. Dividends. Each share of Series A Preferred is entitled to receive
dividends, when and if declared by the Board of Directors, at least equal
in amount to the dividends declared on the common stock, multiplied by
the conversion ratio of the Series A Preferred. Dividends are not
mandatory or cumulative.
. Liquidation. In the event of a liquidation of Efficient, the holders of
the Series A Preferred are entitled to receive the par value of such
shares in preference to the holders of common stock, and thereafter share
on a pro rata basis with the common stock, treating the Series A
Preferred as if converted into common stock.
. Automatic Conversion. The Series A Preferred automatically converts into
common stock, at the rate of 1,000 shares of common stock for each share
of Series A Preferred (subject to adjustment for stock splits and the
like), immediately following the affirmative vote of such conversion by
holders of a majority of our common stock.
. Redemption. In the event that the Series A Preferred has not converted
into common stock on or before July 21, 2000, one fifth of the Series A
Preferred shall be redeemed on each of December 31, 2000, 2001, 2002,
2003, and 2004. The redemption price of the Series A Preferred is
approximately $78,000 per share.
It is the mutual intention and understanding of Efficient and Cabletron
that Efficient will hold a special meeting of stockholders. Holders of a
majority of Efficient's common stock have entered into Voting Agreements
pursuant to which they have agreed to vote in favor of conversion of the
Series A Preferred into common stock. The special meeting is expected to be
held in early 2000.
Warrants
At September 30, 1999, there were warrants outstanding to purchase 34,246
shares of our common stock.
Standstill and Registration Rights
On December 17, 1999, pursuant to an Agreement and Plan of Reorganization,
Efficient completed the acquisition of FlowPoint Corporation, a wholly-owned
subsidiary of Cabletron, in exchange for a combination of common stock and
preferred stock equal to an aggregate of 13,500,000 shares of common stock on
an as-converted basis. In connection with this transaction, Efficient and
Cabletron also entered into a Standstill and Disposition Agreement containing
certain standstill provisions, voting provisions, restrictions on transfer,
and registration rights.
The standstill provisions contained in the Standstill and Disposition
Agreement provide that, without the prior consent of Efficient's board,
Cabletron may not:
. acquire additional shares of Efficient;
. solicit proxies or participate in an election contest;
. act in concert with others to acquire, hold or dispose of Efficient
stock;
. seek to elect or replace members of Efficient's board;
. seek to control management, the board, or policies of Efficient;
. pursue a business combination with Efficient;
. coordinate with any third person to form a business combination with
Efficient;
. coordinate with any third person in connection with a tender offer for
voting securities of Efficient; and
. assist, participate, solicit or encourage any third party to do any of
the above.
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The voting provisions contained in the Standstill and Disposition Agreement
provide that on matters requiring the vote of Efficient stockholders, Cabletron
must vote shares in excess of 10% of the voting stock of Efficient in
proportion with the vote of other stockholders of Efficient. However, Cabletron
must vote all voting shares which it owns proportionately with respect to:
. any transaction between Efficient and one or more person in which
Cabletron controls a 5% equity interest; or
. a change of control of Efficient with any of the top five data networking
companies, from time to time, as measured by revenues.
The standstill and voting provisions will terminate if and when Cabletron
owns less than 5% of the voting securities of Efficient or upon a change of
control of Efficient.
The restrictions on transfer provisions contained in the Standstill and
Disposition Agreement provide that, without the prior consent of Efficient's
board, Cabletron may not sell, transfer, or otherwise dispose of Efficient
stock, except:
. to a controlled affiliate of Cabletron;
. in connection with a firm commitment, underwritten public offering;
. pursuant to Rule 144 or the shelf registration statement, except in
certain circumstances;
. in a private sale if, after giving effect to the sale, the purchaser
would own more than 5% of the voting stock of Efficient, unless the
purchaser is a passive investor in which case the amount may be up to 10%
of the voting stock of Efficient; and
. in response to a tender offer which is not opposed by Efficient's board.
The restriction on transfer provisions will terminate if and when Cabletron
owns less than 5% of the voting securities of Efficient, or upon a change of
control of Efficient, or November 2009.
The registration rights provisions contained in the Standstill and
Disposition Agreement provide that, in addition to the shares to which
Cabletron is entitled to include in this offering:
. by July 21, 2000, Efficient shall use commercially reasonable efforts to
file a shelf registration statement so that Cabletron may sell shares on
a continuous basis, however, Cabletron may not sell greater than 2
million shares pursuant to this registration statement and Rule 144;
. after July 21, 2000, Cabletron shall be entitled to two demand
registrations as long as the demand is for 2 million shares or more;
. if Efficient determines to commence any public offering after this
offering before December 31, 2000, Cabletron shall be entitled to include
the greater of 40% of the shares to be sold in the offering or 3 million
shares;
. Cabletron shall also be entitled to the same registration rights held by
other stockholders of Efficient stock, as described in the following
paragraph; and
. expenses of registration, other than underwriting discounts and
commissions, will be borne by us.
In addition to the specific registration rights of Cabletron described
above, which are senior, the holders of approximately 27.5 million shares of
common stock and Cabletron are entitled to certain registration rights.
Beginning on December 31, 2000, the 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;
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<PAGE>
. 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;
and
. include their shares of common stock in a registration in which we elect
to register shares of common stock of Efficient, but we may reduce the
number of shares proposed to be registered in view of market conditions
to an amount not less than 30% of the shares in the offering.
All expenses incurred in connection with any registration, other than
underwriting discounts and commissions attributable to registrable securities,
will be borne by us. These registration rights will terminate in July 2005 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.
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 "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.
69
<PAGE>
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 and
Savings Bank.
The Nasdaq Stock Market Listing
Our shares have been approved for listing on The Nasdaq Stock Market under
the symbol "EFNT."
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and based on shares outstanding at December
31, 1999, we will have outstanding approximately 53.2 million shares of common
stock after giving pro forma effect to the conversion of all outstanding shares
of Series A non-voting convertible redeemable preferred stock issued to
Cabletron. Of these shares, approximately 14.6 million shares including the
5,000,000 shares sold in this offering plus any shares issued upon exercise of
the underwriters' over-allotment option, will be freely tradable.
Our directors, officers and certain stockholders have entered into lock-up
agreements with the underwriters of this offering providing that they will not
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our shares for a period not to exceed 90 days after the effective
date of the registration statement filed pursuant to this offering, as
described below, 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 lock-up period, the following shares
will be eligible for sale in the public market at the following times:
. beginning April 3, 2000, approximately 3.1 million additional shares will
be available for sale in the public market, certain of which are
restricted securities;
. beginning May 3, 2000, approximately 23.6 million additional shares will
be available for sale in the public market, certain of which are
restricted securities;
. the remaining approximately 11.9 million shares will be eligible for sale
from time to time thereafter, subject in some cases to compliance with
Rule 144.
"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,
including applicable volume limitations, 144(k) or 701 promulgated under the
Securities Act, which are summarized below.
In general, under Rule 144 as currently in effect, 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 532,000 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 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.
71
<PAGE>
On October 13, 1999, we filed three separate registration statements on Form
S-8 registering in the aggregate 10,479,329 shares of common stock subject to
outstanding options or reserved for future issuance under our stock plans. As
of December 31, 1999, options to purchase a total of 8.2 million shares were
outstanding and 2.8 million shares were reserved for future issuance under our
stock plans.
Upon completion of this offering, holders of 39.1 million restricted 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.
72
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, Efficient and the selling stockholders have
agreed to sell to the underwriters named below, for whom Credit Suisse First
Boston Corporation, FleetBoston Robertson Stephens, Dain Rauscher Incorporated
and WR Hambrecht + Co., 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..........................
FleetBoston Robertson Stephens..................................
DainRauscher Incorporated.......................................
WR Hambrecht + Co., LLC.........................................
---------
Total......................................................... 5,000,000
=========
</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 750,000 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 broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay:
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions payable
by us.................. $ $ $ $
Expenses payable by us.. $ $ $ $
Underwriting discounts
and commissions payable
by selling
stockholders........... $ $ $ $
</TABLE>
We, our officers and directors, the selling stockholders and other
stockholders holding an aggregate of shares have agreed that we and they
will not offer, 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 shares of
our common stock, or publicly disclose the intention to make any offer, sale,
pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation for a period not to exceed 90 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.
We and the selling stockholders 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.
73
<PAGE>
Our common stock is listed on The Nasdaq National Market under the symbol
"EFNT."
We and the selling stockholders 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.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
. 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 stabilizing or syndicate member when the common stock originally
sold by the syndicate member is purchased in a stabilizing or syndicate
covering transaction to cover syndicate short positions.
. In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations,
make bids for or purchases of the common stock until the time, if any,
at which a stabilizing bid is made.
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.
A limited number of shares allocated to WR Hambrecht + Co will be
distributed in this offering through the use of the Internet. WR Hambrecht + Co
will post on its Web site (www.wrhambrecht.com) a brief description of the
offering which contains only the information permitted under Rule 134. Visitors
to this Web site will have access to the preliminary prospectus by links on the
Web site. WR Hambrecht + Co will accept conditional offers to purchase shares
from account holders that are determined eligible to participate. In the event
that the demand for shares exceeds the amount of shares allocated to it, WR
Hambrecht + Co will, at the request of GetThere.com, first allocate shares to
persons with an established relationship with GetThere.com. If any shares
remain, WR Hambrecht + Co will allocate them to individual and institutional
account holders, considering the following criteria: trading history of the
account with respect to initial public offerings, post-offering activity in
previous offerings and tenure of the account.
WR Hambrecht + Co is an investment banking firm formed as a limited
liability company in February 1998. In addition to this offering, WR Hambrecht
+ Co has engaged in the business of public and private equity investing and
financial advisory services since its inception. The chairman and chief
executive officer of WR Hambrecht + Co, William R. Hambrecht, has 40 years of
experience in the securities industry.
74
<PAGE>
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 and the selling
stockholders 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, the selling stockholders and
the dealer from whom such purchase confirmation is received that (i) 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, (ii) where required by law, that the purchaser is purchasing
as principal and not as agent, and (iii) 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 and the selling stockholders 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.
75
<PAGE>
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. Kenneth M. Siegel, a member of Wilson Sonsini Goodrich &
Rosati, will be leaving that firm to joint Efficient as an executive officer
effective February 1, 2000. Mr. Siegel owns 2,500 shares of our common stock
and, in connection with his decision to join Efficient, was granted an option
to purchase 500,000 shares of our common stock at an exercise price of $58.50
per share. 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, 1998 and 1999, and for each of the years in the three-year period ended
June 30, 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.
The financial statements of FlowPoint Corporation as of March 31, 1998,
August 31, 1998 and February 28, 1999 and for the years ended March 31, 1997
and 1998, the five-month period ended August 31, 1998 and the six-month period
ended February 28, 1999, included in this prospectus and registration statement
have been audited by KPMG LLP, independent auditors, as set forth in their
report, which is included in this prospectus and registration statement, and is
included in reliance upon their report 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.
Efficient is subject to the information and periodic reporting requirements
of the Securities Exchange Act and, accordingly, files 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.
76
<PAGE>
EFFICIENT NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Efficient Networks, Inc.
Annual Financial Statements
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
Interim Financial Statements
Unaudited Condensed Consolidated Balance Sheets......................... F-19
Unaudited Condensed Consolidated Statements of Operations............... F-20
Unaudited Condensed Consolidated Statements of Cash Flows............... F-21
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-22
Pro Forma Condensed Combined Financial Statements........................ F-25
Unaudited Pro Forma Condensed Combined Balance Sheet.................... F-26
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet........... F-27
Unaudited Pro Forma Condensed Combined Statement of Operations For the
Year ended June 30, 1999............................................... F-28
Unaudited Pro Forma Condensed Combined Statement of Operations For the
Three Months ended September 30, 1999.................................. F-29
Notes to Unaudited Pro Forma Condensed Combined Statements of
Operations............................................................. F-30
FlowPoint Corporation
Independent Auditors' Report............................................ F-31
Balance Sheets.......................................................... F-32
Statements of Operations................................................ F-33
Statements of Cash Flows................................................ F-34
Statements of Stockholders' Equity (Deficit)............................ F-35
Notes to Financial Statements........................................... F-36
</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 subsidiaries as of June 30, 1998 and 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, 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 subsidiaries as of June 30, 1998 and 1999, and the results
of their operations and their cash flows for each of the years in the three-
year period ended June 30, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Dallas, Texas
July 6, 1999, except as to
note 13 which is as of
July 20, 1999
F-2
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Balance Sheets
June 30, 1998 and 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30,
-----------------------------
Pro forma
1999
1998 1999 (unaudited)
------- ------- -----------
<S> <C> <C> <C>
Assets (Note 2(l))
Current assets:
Cash and cash equivalents...................... $ 7,607 $ 3,604 $ 3,604
Accounts receivable, net of allowance for
doubtful accounts of $15 in 1998 and $120 in
1999.......................................... 461 12,334 12,334
Inventories.................................... 898 5,472 5,472
Other assets................................... 202 241 241
------- ------- ----------
Total current assets......................... 9,168 21,651 21,651
Furniture and equipment, net..................... 1,404 2,285 2,285
Other assets, net................................ 95 29 29
------- ------- ----------
$10,667 $23,965 $ 23,965
======= ======= ==========
Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity
(Deficit)
Current liabilities:
Accounts payable............................... $ 547 $ 5,689 $ 5,689
Accrued liabilities............................ 751 2,641 2,641
Deferred revenue............................... -- 736 736
------- ------- ----------
Total current liabilities.................... 1,298 9,066 9,066
Long-term debt, net of discount.................. -- 13,396 --
Other liabilities................................ -- 22 22
------- ------- ----------
Total liabilities............................ 1,298 22,484 9,088
------- ------- ----------
Redeemable convertible preferred stock (note 7).. 34,743 40,495 --
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, par value $.001 per share,
100,000,000 shares authorized; 3,616,964 and
4,362,221 shares issued and outstanding in
1998 and 1999, respectively; pro forma--
32,662,288 shares issued and outstanding...... 4 4 33
Additional paid-in capital..................... 7,221 29,777 84,265
Deferred stock option compensation............. (4,815) (14,606) (14,606)
Accumulated deficit............................ (27,784) (54,189) (54,815)
------- ------- ----------
Total stockholders' equity (deficit)......... (25,374) (39,014) 14,877
------- ------- ----------
$10,667 $23,965 $ 23,965
======= ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Operations
Years ended June 30, 1997, 1998 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net revenues....................................... $ 4,122 $ 3,370 $ 14,828
Cost of revenues................................... 2,386 2,160 14,344
------- ------- --------
Gross profit................................... 1,736 1,210 484
------- ------- --------
Operating expenses:
Sales and marketing.............................. 2,409 3,436 6,133
Research and development......................... 4,183 4,389 7,747
General and administrative....................... 1,245 1,641 1,993
Stock option compensation........................ 659 1,165 3,116
------- ------- --------
Total operating expenses....................... 8,496 10,631 18,989
------- ------- --------
Loss from operations........................... (6,760) (9,421) (18,505)
Interest expense................................... -- (10) (8,092)
Interest income.................................... 144 146 202
Other, net......................................... (19) (6) (10)
------- ------- --------
Net loss....................................... $(6,635) $(9,291) $(26,405)
======= ======= ========
Basic and diluted net loss per share of common
stock......................................... $ (2.19) $ (2.86) $ (6.87)
======= ======= ========
Weighted-average shares of common stock
outstanding................................... 3,027 3,254 3,893
======= ======= ========
Unaudited pro forma basic and diluted net loss
per share..................................... $ (0.97)
========
Weighted average shares used to compute
unaudited pro forma basic and diluted net loss
per share..................................... 28,342
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Stockholders Equity (Deficit)
Years ended June 30, 1997, 1998 and 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,
1996................... 2,992,271 $ 3 $ 1,439 $ (1,227) $(11,858) $(11,643)
Issuance of common
stock under stock
option plan........... 62,500 -- 9 -- -- 9
Deferred stock option
compensation.......... -- -- 2,269 (2,269) -- --
Amortization of
deferred stock option
compensation.......... -- -- -- 659 -- 659
Net loss............... -- -- -- -- (6,635) (6,635)
---------- ---- ------- -------- -------- --------
Balance at June 30,
1997................... 3,054,771 3 3,717 (2,837) (18,493) (17,610)
Issuance of common
stock under stock
option plan........... 448,125 1 61 -- -- 62
Issuance of common
stock................. 114,068 -- 300 -- -- 300
Deferred stock option
compensation.......... -- -- 3,143 (3,143) -- --
Amortization of
deferred stock option
compensation.......... -- -- -- 1,165 -- 1,165
Net loss............... -- -- -- -- (9,291) (9,291)
---------- ---- ------- -------- -------- --------
Balance at June 30,
1998................... 3,616,964 4 7,221 (4,815) (27,784) (25,374)
Issuance of common
stock under stock
option plan........... 745,257 -- 1,683 -- -- 1,683
Stock options
forfeited............. -- -- (223) 223 -- --
Issuance of warrants... -- -- 6,173 -- -- 6,173
Convertible promissory
note.................. -- -- 2,143 -- -- 2,143
Deferred stock option
compensation.......... -- -- 13,130 (13,130) -- --
Amortization of
deferred stock option
compensation.......... -- -- -- 3,116 -- 3,116
Accretion of issuance
costs on redeemable
convertible preferred
stock................. -- -- (350) -- -- (350)
Net loss............... -- -- -- -- (26,405) (26,405)
---------- ---- ------- -------- -------- --------
Balance at June 30,
1999................... 4,362,221 4 29,777 (14,606) (54,189) (39,014)
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
issuance of common
stock upon conversion
of convertible
promissory note plus
accrued interest...... 497,663 1 5,021 -- (22) 5,000
Unaudited pro forma net
loss related to
accretion of remaining
discount on
subordinated
promissory notes...... -- -- -- -- (604) (604)
Unaudited pro forma
issuance of common
stock upon exercise of
warrants.............. 3,082,191 3 8,997 -- -- 9,000
---------- ---- ------- -------- -------- --------
Unaudited pro forma
balance at June 30,
1999................... 32,662,288 $ 33 $84,265 $(14,606) $(54,815) $ 14,877
========== ==== ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(6,635) $(9,291) $(26,405)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 861 727 807
Amortization of deferred stock option
compensation.................................... 659 1,165 3,116
Accretion of discount on subordinated promissory
notes........................................... -- -- 7,712
Changes in operating assets and liabilities:
Accounts receivable.............................. (12) 318 (11,873)
Inventories...................................... 443 (304) (4,574)
Other assets and liabilities..................... 59 (201) 49
Accounts payable and accrued liabilities......... (18) 967 7,043
Deferred revenue................................. -- -- 736
------- ------- --------
Net cash used in operating activities.............. (4,643) (6,619) (23,389)
------- ------- --------
Cash flows used in investing activities--purchase
of furniture and equipment........................ (525) (572) (1,688)
------- ------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations... (192) (78) (11)
Proceeds from issuance of promissory notes and
warrants......................................... 1,500 1,000 14,000
Proceeds from issuance of common stock............ 9 362 1,683
Proceeds from issuance of preferred stock......... 5,961 10,101 5,402
------- ------- --------
Net cash provided by financing activities....... 7,278 11,385 21,074
------- ------- --------
Increase (decrease) in cash and cash equivalents... 2,110 4,194 (4,003)
Cash and cash equivalents at beginning of year..... 1,303 3,413 7,607
------- ------- --------
Cash and cash equivalents at end of year........... $ 3,413 $ 7,607 $ 3,604
======= ======= ========
Supplemental disclosure--cash paid during the year
for:
Interest.......................................... $ 6 $ 4 $ --
======= ======= ========
Non-cash financing transaction--
Exchange of promissory notes and related interest
for redeemable convertible preferred stock....... $ 1,519 $ 1,007 $ --
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 1997, 1998 and 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 is a worldwide
developer and supplier of high speed digital subscriber line customer
premises equipment for the high speed, high volume digital communication,
or 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 subsidiaries located in The Netherlands
and Singapore. 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................. 7
</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
F-7
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
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)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 is recorded on the date of grant only if the current market
price of the underlying stock exceeds 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>
Year ended June 30,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Numerator:
Net loss.................................... $(6,635) $(9,291) $(26,405)
Accretion of issuance costs on redeemable
convertible preferred stock................ -- -- (350)
------- ------- --------
Numerator for basic and diluted net loss per
share...................................... $(6,635) $(9,291) $(26,755)
======= ======= ========
Denominator for basic and diluted net loss per
share--weighted average common shares
outstanding.................................. 3,027 3,254 3,893
======= ======= ========
</TABLE>
F-8
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
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, 1999, as if the redeemable convertible
preferred stock had converted immediately upon its issuance, resulting
in 23,332,713 additional weighted average shares of common stock
outstanding; (b) the warrants issued in 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 1,113,014 additional weighted average
shares of common stock outstanding and a charge of $603,806 against
earnings for the accretion of the remaining discount recorded on the
notes; and (c) the convertible debt issued June 28, 1999, was converted
immediately upon issuance resulting in 2,727 additional weighted
average shares of common stock outstanding.
(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 convertible promissory notes and
subordinated promissory notes and related 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 ($12.00 at June 30,
1999); and the exercise price of the detachable warrants. The estimated
fair values of the convertible promissory notes and subordinated
promissory notes and related warrants as of June 30, 1999 are
approximately $6,802,691 and $40,294,044 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 June 30, 1999 (see notes 6 and 7):
. the conversion of $9,000,000 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,
. the conversion of the $5,000,000 convertible promissory note plus
accrued interest into an aggregate of 497,663 shares of redeemable
convertible preferred stock, 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
F-9
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
the financial 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,
-----------
1998 1999
---- ------
<S> <C> <C>
Raw materials.................................................... $354 $2,265
Finished goods................................................... 544 3,207
---- ------
Total............................................................ $898 $5,472
==== ======
</TABLE>
(4)Furniture and Equipment
Furniture and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------
1998 1999
------ ------
<S> <C> <C>
Computers.................................................... $1,941 $2,811
Purchased software........................................... 611 892
Equipment.................................................... 241 585
Furniture and fixtures....................................... 66 136
Leasehold improvements....................................... 121 235
------ ------
Total furniture and equipment................................ 2,980 4,659
Less accumulated depreciation and amortization............... (1,576) (2,374)
------ ------
Furniture and equipment, net................................. $1,404 $2,285
====== ======
</TABLE>
The Company leases certain equipment under capital lease arrangements. At
June 30, 1998, the cost of assets under such leases aggregated $152,183,
and related accumulated amortization was $134,065. At June 30, 1999, there
were no assets under capital lease arrangements. 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,
-----------
1998 1999
---- ------
<S> <C> <C>
Accrued compensation and benefits............................... $247 $1,102
Accrued professional fees....................................... 320 55
Other........................................................... 184 1,484
---- ------
Total........................................................... $751 $2,641
==== ======
</TABLE>
F-10
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 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. In April 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 year
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 subordinated promissory notes were issued with detachable warrants to
purchase an aggregate of 3,082,191 shares 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 were valued at $6,172,699. 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. The holders
of the subordinated promissory notes have entered into a note repayment and
warrant exercise agreement with the Company which stipulates that
immediately prior to the closing of an initial public offering, the
aggregate $9,000,000 principal amount of the notes will be applied toward
the aggregate exercise price of the detachable warrants (see note 13).
On June 28, 1999, the Company issued a convertible promissory note in
exchange for $5,000,000 in cash. The note bears interest of 8.0% per year.
The holder of the note has the right to demand prepayment of 50% of the
principal amount of the note at any time after the first anniversary and
full prepayment at any time after the second anniversary of issuance. The
note is convertible at the holder's option into shares of Series I
preferred stock at a conversion price of $10.09 per share of Series I
preferred stock. Upon the completion of an initial public offering, the
note will automatically convert into Series I preferred stock at a
conversion price equal to the lesser of (1) 70% of the initial public
offering price per share or (2) $10.09 per share. Upon the issuance of the
convertible promissory note, the Company recognized $2,143,000 of interest
expense and a corresponding increase to additional paid-in capital. This
amount represents the intrinsic value of the beneficial conversion feature
of the convertible promissory note (see note 13).
(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 is 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
F-11
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
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 (see note 13).
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 June 30, 1999. Series for which preferred stock has
been issued and remains outstanding are stated at the redemption 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 Per ----------------
Share 1998 1999
-------- ------- -------
<S> <C> <C> <C>
Series A - 7,096,000 shares authorized; 7,000,000
shares issued and outstanding................... $0.03 $ 3,500 $ 3,500
Series B - 522,848 shares authorized, issued and
outstanding..................................... $0.07 625 625
Series C - 5,895,832 shares authorized; 5,858,332
shares issued and outstanding................... $0.07 7,030 7,030
Series D - 2,473,644 shares authorized, issued
and outstanding................................. $0.12 5,000 5,000
Series E - 3,091,430 shares authorized, issued
and outstanding................................. $0.15 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
Series H - 4,000,000 shares authorized, none
issued or outstanding........................... $0.18 -- --
Series I - 750,000 shares authorized, none issued
or outstanding.................................. $0.60 -- --
Issuance costs, net of accretion................. (350) --
------- -------
$34,743 $40,495
======= =======
</TABLE>
The Company issued promissory notes in exchange for cash of $1,000,000 and
$500,000 in September and December, 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 in January,
1998. The promissory notes bore interest at 6% and were due on demand. In
February, 1998, the Company issued 2,057,159 shares of
F-12
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
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 (see note 13).
(8)Common Stock and Stock Incentive Plans
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.
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 June 30, 1999, there were options to purchase 75,000 shares available
for grant under the Directors' Plan.
At June 30, 1999, there were options to purchase 2,369,853 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, 1997, 1998
and 1999 was $2.09, $2.60, and $5.17, 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 $2,269,000, $3,143,000 and $13,130,000 of
deferred stock option compensation during each of the years ended June 30,
1997, 1998 and 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 $659,000, $1,165,000 and $3,116,000 was recognized in the
years ended June 30, 1997, 1998 and 1999, respectively.
F-13
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 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 or decreased, as
applicable, to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported.................................. $(6,635) $(9,291) $(26,405)
Pro forma.................................... $(6,680) $(9,687) $(26,187)
Basic and diluted net loss per share of common
stock:
As reported.................................. $ (2.19) $ (2.86) $ (6.87)
Pro forma.................................... $ (2.21) $ (2.98) $ (6.82)
</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 0.46
Granted.............................................. 2,638,500 2.88
Exercised............................................ (745,257) 2.24
Forfeited............................................ (195,666) 1.01
---------
Balance at June 30, 1999................................. 6,131,994 1.39
=========
</TABLE>
Options granted during the years ended June 30, 1997, 1998 and 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 $1.37, $2.10 and $7.89,
respectively.
F-14
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
The following presents certain information about outstanding stock options
at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- ---------------------
Weighted Weighted
average 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.............. 2,216,535 $0.19 6.7 years 1,648,075 $ 0.18
$0.50-0.60.............. 1,501,459 $0.58 8.7 years 469,529 $ 0.58
$1.50-2.50.............. 2,324,000 $2.22 9.5 years -- --
$7.50-10.50............. 90,000 $8.00 9.8 years -- --
</TABLE>
At June 30, 1997, 1998 and 1999, the number of options exercisable was
1,224,042, 1,625,531 and 2,117,604, respectively, and the weighted-average
exercise price of those options was $0.15, $0.21 and $0.33, respectively.
In May 1999, the Company effected the issuance of 150,000 shares of common
stock to a board member-elect, in exchange for a $1,575,000, 6% demand
note. The demand note was repaid with interest in July 1999.
(9)Research and Development Arrangements
In October 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.
In November 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 of
$300,000. The Company has fulfilled its development obligations.
(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, 1997, 1998, and 1999 was $367,308,
$380,794 and $547,774, respectively. 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 year ended June 30,
1999. Future minimum lease payments under noncancelable operating leases as
of June 30, 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, 1998 and 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, 1998 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards.......................... $ 8,943 $ 17,275
Receivables and inventory reserves.................... 59 136
Accrued liabilities................................... 87 233
------- --------
Deferred tax assets................................. 9,089 17,644
Valuation allowance................................. (8,892) (17,444)
------- --------
197 200
Deferred tax liability -- furniture and equipment....... (197) (200)
------- --------
Net deferred tax assets............................. $ -- $ --
======= ========
</TABLE>
The net change in the valuation allowance for the years ended June 30, 1998
and 1999 was $3,073,000 and $8,133,000 respectively.
As of June 30, 1999, the Company has net operating loss carryforwards of
approximately $48,000,000 which begin to expire in 2008. The Company
believes that as a result of the Company's initial public offering in July
1999, and the resulting conversion of outstanding redeemable preferred
stock into common stock, the Company has undergone an ownership change
within the meaning of section 382 of the Internal Revenue Code (IRC). As a
result, the Company's ability to utilize its operating loss carryforwards
incurred prior to the ownership change are limited on an annual basis to an
amount equal to the value of the Company, as defined by the IRC, as of the
date of change of ownership, multiplied by the long-term tax-exempt rate of
4.98%.
(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 1997 and 1998, the Company also
developed and marketed asynchronous transfer mode ("ATM") network products
which are no longer actively marketed by the Company. For management
purposes, the Company does not disaggregate financial information by
product or geographically, other than export sales by region and sales by
product. 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.
F-16
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
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 for the years ended June 30, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Geographic Region 1997 1998 1999
----------------- ------ ------ -------
<S> <C> <C> <C>
United States................................... 65% 48% 59%
Europe.......................................... 25% 40% 12%
Pacific Rim..................................... 10% 12% 29%
<CAPTION>
Product line (in thousands) 1997 1998 1999
--------------------------- ------ ------ -------
<S> <C> <C> <C>
DSL revenues.................................... $ -- $ 84 $12,915
DSL gross margin................................ $ -- $ (19) $ (462)
ATM LAN revenues................................ $4,122 $3,286 $ 1,913
ATM LAN gross margin............................ $1,736 $1,229 $ 946
</TABLE>
For the year ended June 30, 1997, revenues from an individual customer
amounted to 38% of total revenue. For the year ended June 30, 1998,
revenues from individual customers amounted to 20% and 13% of total
revenues. For the year ended June 30, 1999, revenues from individual
customers amounted to 30% and 18% of total revenues, and accounts
receivable related to these customers at June 30, 1999 was approximately
$2,875,000 and $2,600,000, respectively. The Company performs ongoing
evaluations of its customers' financial conditions and generally does not
require collateral.
(13)Subsequent Event
On July 15, 1999, the Company completed the initial public offering of its
common stock. The Company issued 4,600,000 shares of common stock in
exchange for gross proceeds of $69,000,000, net of underwriters' discount
of $4,830,000. Upon the completion of the initial public offering, the
Company's subordinated promissory notes converted into 3,082,191 shares of
Series H redeemable convertible preferred stock, the convertible promissory
note plus accrued interest converted into 497,663 shares of Series I
redeemable convertible preferred stock, and all outstanding redeemable
convertible preferred stock converted into 28,300,067 shares of common
stock.
On July 20, 1999, the Company adopted a new stock option plan (the "Stock
Plan") and an employee stock purchase plan. The Stock Plan provides for the
granting of stock options and stock purchase rights to employees and
consultants. A total of 3,500,000 shares of common stock has been reserved
for issuance plus annual increases equal to the lesser of:
. 1,000,000 shares;
. 3% of the outstanding shares on such a date; or
. a lesser amount determined by the board on the first day of each fiscal
year.
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 the Company with
or into another corporation, or the sale of substantially all of its
assets, each outstanding option or stock purchase right will be assumed
F-17
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
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 the Company.
On July 20, 1999, the Company also adopted an Employee Stock Purchase Plan
("the Purchase Plan"). 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 a 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 May 1 and November 1 of each year, except for the first
such offering period which commenced on the first trading day after the
effective date of the Company's initial public offering and ends on the
last trading day on or before October 31.
Employees are eligible to participate if they are employed by the Company
or any of its 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
capital stock; or
. any employee whose rights to purchase stock under any of the 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 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.
The Purchase Plan provides that, in the event of a merger of the Company
with or into another corporation or a sale of substantially all of its
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.
F-18
<PAGE>
EFFICIENT NETWORKS, INC.
Condensed Consolidated Balance Sheets
September 30, 1999 (Unaudited) and June 30, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 47,456 $ 3,604
Short-term investments................................ 8,663 --
Accounts receivable, net of allowance for doubtful
accounts of $165 and $120 at September 30, 1999 and
June 30, 1999, respectively.......................... 13,852 10,316
Other receivables..................................... 7,110 2,018
Inventories........................................... 7,326 5,472
Other assets.......................................... 1,051 241
-------- -------
Total current assets................................ 85,458 21,651
Furniture and equipment, net............................ 3,187 2,285
Other assets, net....................................... 35 29
-------- -------
$ 88,680 $23,965
======== =======
<CAPTION>
Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)
<S> <C> <C>
Current liabilities:
Accounts payable...................................... $ 11,184 $ 6,122
Accrued liabilities................................... 2,782 2,208
Deferred revenue...................................... 2,441 736
-------- -------
Total current liabilities........................... 16,407 9,066
Long-term debt, net of discount......................... -- 13,396
Other liabilities....................................... 21 22
-------- -------
Total liabilities................................... 16,428 22,484
-------- -------
Redeemable convertible preferred stock.................. -- 40,495
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, par value $.001 per share, 100,000,000
shares authorized; 37,482,465 and 4,362,221 shares
issued and outstanding at September 30, 1999 and June
30, 1999, respectively............................... 37 4
Additional paid-in capital............................ 150,320 29,777
Deferred stock option compensation.................... (16,162) (14,606)
Accumulated deficit................................... (61,943) (54,189)
-------- -------
Total stockholders' equity (deficit)................ 72,252 (39,014)
-------- -------
$ 88,680 $23,965
======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-19
<PAGE>
EFFICIENT NETWORKS, INC.
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net revenues............................................. $ 12,171 $ 1,174
Cost of revenues......................................... 11,706 863
--------- ---------
Gross profit......................................... 465 311
--------- ---------
Operating expenses:
Sales and marketing.................................... 2,652 1,168
Research and development............................... 3,053 1,826
General and administrative............................. 1,048 339
Stock option compensation.............................. 1,389 433
--------- ---------
Total operating expenses............................. 8,142 3,766
--------- ---------
Loss from operations................................. (7,677) (3,455)
Interest income.......................................... 597 87
Interest expense and other, net.......................... (674) (7)
--------- ---------
Net loss............................................. $ (7,754) $ (3,375)
========= =========
Basic and diluted net loss per share of common
stock............................................... $ (0.25) $ (0.93)
========= =========
Weighted-average shares of common stock outstanding.. 30,496 3,713
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-20
<PAGE>
EFFICIENT NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (7,754) $ (3,375)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 240 179
Amortization of deferred stock option compensation..... 1,389 433
Accretion of discount on subordinated promissory
notes................................................. 604 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (3,536) (191)
Other receivables...................................... (5,092) --
Inventories............................................ (1,854) (62)
Other assets and liabilities........................... (817) 220
Accounts payable and accrued liabilities............... 5,658 125
Deferred revenue....................................... 1,705 --
--------- ---------
Net cash used in operating activities................... (9,457) (2,671)
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets................................ (1,142) (596)
Purchase of investments................................. (8,663) --
--------- ---------
Net cash used for investing activities................. (9,805) (596)
--------- ---------
Cash flows from financing activities:
Principal payments on capital lease obligations......... -- (11)
Proceeds from issuance of common stock, net............. 63,114 14
--------- ---------
Net cash provided by financing activities............ 63,114 3
--------- ---------
Increase in cash and cash equivalents.................... 43,852 (3,264)
Cash and cash equivalents at beginning of period......... 3,604 7,607
--------- ---------
Cash and cash equivalents at end of period............... $ 47,456 $ 4,343
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-21
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Three Months Ended September 30, 1999
(1)Basis of Presentation
The accompanying unaudited financial data as of and for the quarters ended
September 30, 1999 and 1998 have been prepared by the Company, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1999.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows as of and for the three months ended
September 30, 1999 have been made. The results of operations for the
quarter ended September 30, 1999 are not necessarily indicative of the
operating results for the full year.
(2)Completion of Initial Public Offering
On July 15, 1999, the Company completed its initial public offering. The
Company issued 4.6 million shares of its common stock (the "Common Stock")
in exchange for gross proceeds of approximately $69 million, before
underwriters' discount of $4.8 million and other related expenses of $1.1
million. Upon the completion of the initial public offering, the Company's
subordinated promissory notes converted into 3.1 million shares of Series H
redeemable convertible preferred stock, the convertible promissory note
plus accrued interest converted into .5 million shares of Series I
redeemable convertible preferred stock, and all outstanding redeemable
convertible preferred stock converted into 28.3 million shares of Common
Stock.
(3)Earnings Per Share
Basic and diluted earnings (loss) per share has been computed in accordance
with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share." Basic earnings per share is computed by dividing income or loss
by the weighted average number of shares of Common Stock outstanding during
the period. Diluted earnings per share is determined in the same manners as
basic earnings per share except that the number of shares is increased
assuming exercise of dilutive stock options and warrants using the treasury
stock method and conversion of the Company's redeemable convertible
preferred stock ("Preferred Stock"). The diluted earnings per share amount
is the same as basic earnings per share because the Company had a net loss
in each of the periods presented and the impact of the assumed exercise of
the stock options and warrants and the assumed Preferred Stock conversion
is antidilutive. Common Stock equivalents of 7.0 million and 27.7 million
shares for the three months ended September 30, 1999 and 1998,
respectively, were excluded from the calculation of diluted earnings per
share because of the anti-dilutive effect.
All oustanding Preferred Stock converted into Common Stock upon the
completion of the Company's initial public offering.
F-22
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements--(continued)
Three Months Ended September 30, 1999
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net loss............................................. $ (7,754) $ (3,375)
Accretion of issuance costs on redeemable convertible
preferred stock..................................... -- (88)
--------- ---------
Net loss available to common stockholders............ $ (7,754) $ (3,463)
========= =========
Weighted average shares outstanding.................. 30,496 3,713
========= =========
Basic and diluted net loss per share................. $ (0.25) $ (0.93)
========= =========
</TABLE>
(4)Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------
<S> <C> <C>
Raw materials......................................... $1,844 $2,265
Finished goods........................................ 5,482 3,207
------ ------
Total................................................. $7,326 $5,472
====== ======
</TABLE>
(5)Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------
<S> <C> <C>
Accrued compensation and benefits..................... $1,041 $1,102
Other................................................. 1,741 1,106
------ ------
Total................................................. $2,782 $2,208
====== ======
</TABLE>
(6)Deferred revenue
Deferred revenue of $2.4 million at September 30, 1999 primarily related to
shipments of product to customers where title and risk of ownership passed
to the customer, but revenue recognition was deferred for accounting
purposes due to certain stock balancing and right of return privileges
granted to the customer. The corresponding receivable of $2.4 million was
included in the accounts receivable balance at September 30, 1999.
(7)Long-term debt
In January 1999, the Company issued subordinated promissory notes with
detachable warrants in exchange for $7.0 million in cash. On April 8, 1999,
the Company issued a subordinated promissory note with a detachable warrant
in exchange for $2.0 million in cash. The notes bore interest at 10% per
annum with interest payable quarterly. The subordinated promissory notes
were issued with detachable warrants to
F-23
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements--(continued)
Three Months Ended September 30, 1999
purchase an aggregate of 3.1 million shares of the Company's Series H
redeemable convertible preferred stock at an exercise price of $2.92 per
share. The holders of the subordinated promissory notes had entered into a
note repayment and warrant exercise agreement with the Company which
stipulated that immediately prior to the closing of an initial public
offering, the aggregate $9.0 million principal amount of the notes would be
applied toward the aggregate exercise price of the detachable warrants.
Accordingly, immediately prior to the closing of the Company's initial
public offering on July 15, 1999, the warrants were exercised to purchase
the Company's Series H redeemable convertible preferred stock, which shares
of preferred stock automatically converted into shares of Common Stock upon
completion of the initial public offering.
On June 28, 1999, the Company issued a convertible promissory note in
exchange for $5.0 million in cash. The note bore interest at 8.0% per
annum. In accordance with the conversion feature of the note, immediately
prior to the closing of the Company's initial public offering, the note
automatically converted into .5 million shares of Series I preferred stock
at a conversion price $10.09 per share, and such shares of preferred stock
automatically converted into shares of Common Stock upon completion of the
initial public offering.
(8)Statements of Cash Flows
The Company paid cash interest of $.4 million and $0 during the three
months ended September 30, 1999 and 1998, respectively. No income taxes
were paid during the three months ended September 30, 1999 and 1998. Non-
cash financing transactions included the exchange of promissory notes of
$13.4 million and related accrued interest for $14.0 million of redeemable
convertible preferred stock, and the exchange of redeemable convertible
preferred stock of $54.5 million for 28.3 million shares of common stock
during the three months ended September 30, 1999. No non-cash financing
transactions occurred during the three months ended September 30, 1998.
(9)Subsequent Event
On November 21, 1999 the Company entered into an agreement with Cabletron
Systems, Inc. ("Cabletron") to acquire its wholly-owned subsidiary
FlowPoint Corporation from Cabletron. The Company agreed to issue 7.2
million shares of common stock and 6,300 shares of Series A non-voting
convertible preferred stock ("the Series A Preferred") as consideration in
the transaction. The Series A preferred is convertible into an aggregate of
6.3 million shares of common stock. The acquisition was completed on
December 17, 1999, and is being accounted for under the purchase method of
accounting.
F-24
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Effective December 17, 1999, Efficient Networks, Inc. ("Efficient" or the
"Company") completed the acquisition of FlowPoint Corporation ("FlowPoint"),
formerly a wholly-owned subsidiary of Cabletron Systems, Inc. ("Cabletron"), in
exchange for 7,200,000 shares of common stock and 6,300 shares of Series A non-
voting convertible preferred stock ("Series A Preferred"). The Series A
Preferred is convertible into 6,300,000 shares of common stock. The total cost
of the acquisition, including transaction costs, was approximately $937.9
million. The acquisition was accounted for as a purchase business combination.
Attached is an unaudited pro forma condensed combined balance sheet as of
September 30, 1999 and unaudited pro forma condensed combined statements of
operations for Efficient for the year ended June 30, 1999 and for the three
months ended September 30, 1999, including related notes thereto. The unaudited
pro forma condensed combined balance sheet assumes the acquisition had been
consummated on September 30, 1999, and the unaudited pro forma condensed
combined statements of operations, including the weighted average number of
shares used in the calculation of the pro forma per share data, assume the
acquisition had been consummated on July 1, 1998.
The unaudited pro forma condensed combined financial information has been
derived from the historical financial statements of the Company and FlowPoint.
The pro forma adjustments and the assumptions on which they are based are
described in the accompanying notes to the unaudited pro forma condensed
combined balance sheet and statements of operations. The unaudited pro forma
condensed combined financial information is based on and should be read in
conjunction with the historical consolidated financial statements and related
notes thereto of the Company and the historical financial statements of
FlowPoint. The unaudited pro forma condensed combined financial results are not
necessarily indicative of the financial position or operating results that
would have occurred had the acquisition been consummated at that date, or at
the beginning of the period for which such transactions have been given effect,
nor of the combined results of future operations.
F-25
<PAGE>
EFFICIENT NETWORKS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
September 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Efficient FlowPoint Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ----------
Assets
<S> <C> <C> <C> <C>
Cash......................... $ 47,456 $ 302 $ -- $ 47,758
Short-term investments....... 8,663 -- -- 8,663
Accounts receivable.......... 13,852 3,485 (245)(1) 17,092
Other receivables............ 7,110 -- -- 7,110
Inventories.................. 7,326 3,172 -- 10,498
Other assets................. 1,051 382 -- 1,433
-------- -------- -------- ----------
Total current assets....... 85,458 7,341 (245) 92,554
Intangible assets, net....... -- 12,282 917,818 (1) 930,100
Other noncurrent assets,
net......................... 3,222 287 -- 3,509
-------- -------- -------- ----------
Total assets............... $ 88,680 $ 19,910 $917,573 $1,026,163
======== ======== ======== ==========
<CAPTION>
Liabilities, Redeemable
Convertible Preferred Stock
and Stockholders' Equity
<S> <C> <C> <C> <C>
Accounts payable............. $ 11,184 $ 3,764 $ -- $ 14,948
Accrued liabilities.......... 2,782 827 13,109 (1) 16,718
Deferred revenue............. 2,441 -- -- 2,441
Related party payable........ -- 2,111 (2,111)(2) --
-------- -------- -------- ----------
Total current liabilities.. 16,407 6,702 10,998 34,107
Noncurrent liabilities....... 21 3 -- 24
-------- -------- -------- ----------
Total liabilities.......... 16,428 6,705 10,998 34,131
-------- -------- -------- ----------
Redeemable convertible
preferred stock............. -- -- 431,550 (1) 431,550
Stockholders' equity:
Common stock............... 37 1 7 (1) 44
(1)(2)
Additional paid-in
capital................... 150,320 25,383 493,193 (1) 643,513
(25,383)(2)
Deferred stock option
compensation.............. (16,162) -- -- (16,162)
Accumulated deficit........ (61,943) (12,179) (4,970)(1) (66,913)
12,179 (2)
-------- -------- -------- ----------
Total stockholders'
equity.................... 72,252 13,205 475,025 560,482
-------- -------- -------- ----------
Total liabilities and
stockholders' equity...... $ 88,680 $ 19,910 $917,573 $1,026,163
======== ======== ======== ==========
</TABLE>
See accompanying notes.
F-26
<PAGE>
EFFICIENT NETWORKS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
1. The acquisition of FlowPoint will be accounted for as a purchase business
combination. The accompanying unaudited pro forma condensed combined balance
sheet reflects an aggregate purchase price of approximately $937.9 million,
consisting of the fair value of $924.8 million for 7,200,000 shares of
common stock issuable and 6,300 shares of Series A non-voting convertible
preferred stock issuable, which shares are convertible into 6,300,000 shares
of common stock, as well as estimated transaction costs of $13.1 million.
The following table presents the allocation of the purchase price (in
thousands):
<TABLE>
<S> <C>
Acquired technology............................................... $ 21,545
Assembled workforce............................................... 940
Sales channel and customer relationships.......................... 12,930
In-process research and development............................... 4,970
Excess cost over fair value of net assets acquired................ 894,685
Fair value of tangible assets acquired, net of liabilities
assumed.......................................................... 2,789
--------
$937,859
========
</TABLE>
The allocation of acquired technology, assembled workforce, sale channel
and customer relationships and in-process research and development was
based upon an independent valuation. Efficient will record an immediate
write-off of in-process research and development at the consummation of the
purchase business combination.
2. Reflects the elimination of FlowPoint's equity, accumulated deficit and
liabilities not assumed by Efficient.
F-27
<PAGE>
EFFICIENT NETWORKS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended June 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Efficient FlowPoint Pro Forma Pro Forma
Historical Historical (1) Adjustments Combined
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues.............. $ 14,828 $ 18,236 $ -- $ 33,064
Cost of revenues.......... 14,344 12,310 -- 26,654
-------- -------- --------- ---------
Gross profit............ 484 5,926 -- 6,410
-------- -------- --------- ---------
Operating expenses:
Sales, marketing,
general and
administrative......... 8,126 3,404 -- 11,530
Research and
development............ 7,747 1,609 -- 9,356
Amortization of
intangibles............ -- 1,214 184,806 (2) 186,020
In-process research and
development............ -- 11,953 (11,953)(3) --
Stock option
compensation........... 3,116 -- -- 3,116
-------- -------- --------- ---------
Total operating
expenses............. 18,989 18,180 172,853 210,022
-------- -------- --------- ---------
Loss from operations.. (18,505) (12,254) (172,853) (203,612)
Interest income and
expense and other, net... (7,900) (1) -- (7,901)
-------- -------- --------- ---------
Loss before income
taxes................ (26,405) (12,255) (172,853) (211,513)
Income tax expense........ -- (466) 466 (4) --
-------- -------- --------- ---------
Net loss.............. $(26,405) $(12,721) $(172,387) $(211,513)
======== ======== ========= =========
Basic and diluted loss per
share of common stock.... $ (6.87) $ (19.10)
======== =========
Shares used in computing
basic and diluted loss
per share of common
stock.................... 3,893 11,093
======== =========
</TABLE>
See accompanying notes.
F-28
<PAGE>
EFFICIENT NETWORKS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Three Months Ended September 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Efficient FlowPoint Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues................... $12,171 $7,430 $ -- $ 19,601
Cost of revenues............... 11,706 4,846 -- 16,552
------- ------ -------- --------
Gross profit................. 465 2,584 -- 3,049
------- ------ -------- --------
Operating expenses:
Sales, marketing, general and
administrative.............. 3,700 1,542 -- 5,242
Research and development..... 3,053 522 -- 3,575
Amortization of intangibles.. -- 364 46,141 (2) 46,505
Stock option compensation.... 1,389 -- -- 1,389
------- ------ -------- --------
Total operating expenses... 8,142 2,428 46,141 56,711
------- ------ -------- --------
Loss from operations....... (7,677) 156 (46,141) (53,662)
Interest income and expense and
other, net.................... (77) 3 -- (74)
------- ------ -------- --------
Income (loss) before income
taxes....................... (7,754) 159 (46,141) (53,588)
Income tax expense............. -- (79) 79 (4) --
------- ------ -------- --------
Net income (loss)............ $(7,754) $ 80 $(46,062) $(53,588)
======= ====== ======== ========
Basic and diluted loss per
share of common stock......... $ (0.25) $ (1.42)
======= ========
Shares used in computing basic
and diluted loss per share of
common stock.................. 30,496 37,696
======= ========
</TABLE>
See accompanying notes.
F-29
<PAGE>
EFFICIENT NETWORKS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
1. The historical statement of operations for the twelve-month period ended
June 30, 1999 was derived by adding the unaudited historical results of
operations of FlowPoint for the two months ended August 31, 1998, the
audited historical results of operations of FlowPoint for the six months
ended February 28, 1999 and the unaudited historical results of operations
of FlowPoint for the four months ended June 30, 1999.
2. Represents the adjustment to reflect amortization of the acquired
intangibles over an amortization period of five years.
3. Represents the exclusion of the one-time impact for the write-off of in-
process research and development recorded by Cabletron in connection with
its acquisition of FlowPoint on September 1, 1998.
4. Represents the elimination of FlowPoint's income tax expense.
Efficient will record an immediate write-off of in-process research and
development of $4,970,000 at the consummation of the purchase business
combination. The unaudited pro forma condensed combined statements of
operations exclude this charge.
F-30
<PAGE>
Independent Auditors' Report
The Board of Directors
Cabletron Systems, Inc.:
We have audited the accompanying balance sheets of FlowPoint Corporation
(the "Company") as of February 28, 1999, August 31, 1998, and March 31, 1998
and the related statements of operations, cash flows, and stockholder's equity
for the six months ended February 28, 1999, five months ended August 31, 1998,
and the years ended March 31, 1998 and 1997 (as defined in note 2a). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of February
28, 1999, August 31, 1998, and March 31, 1998 and the results of its operations
and its cash flows for the six months ended February 28, 1999, five months
ended August 31, 1998, and the years ended March 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 2(a) to the financial statements, the Company was
acquired by Cabletron Systems, Inc. as of September 1, 1998 in a business
combination accounted for as a purchase. As a result of the application of
purchase accounting, the financial statements of the Company for the six months
ended February 28, 1999 are presented on a different cost basis than those for
periods prior to September 1, 1998, and accordingly, are not directly
comparable.
KPMG LLP
Boston, Massachusetts
November 15, 1999
F-31
<PAGE>
FLOWPOINT CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
Successor (Note 2(a)) Predecessor (Note 2(a))
--------------------------- ------------------------
September 30, February 28, August 31, March 31,
1999 1999 1998 1998
Assets ------------- ------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 302,381 1,202,150 457,153 2,566,498
Accounts receivables, net of allowances of $240,788, $136,265, $86,114,
and $58,298 respectively................................................ 3,484,467 1,589,130 592,330 528,599
Related party receivable (note 12)....................................... -- -- 575,491 162,428
Inventories.............................................................. 3,172,188 1,577,191 1,325,110 773,859
Prepaid expenses......................................................... 243,247 154,805 93,102 80,182
Deferred income taxes.................................................... 138,734 332,597 -- --
------------ ----------- ----------- -----------
Total current assets.................................................... 7,341,017 4,855,873 3,043,186 4,111,566
------------ ----------- ----------- -----------
Property, plant and equipment............................................. 416,224 197,966 402,908 364,903
Accumulated depreciation.................................................. (137,882) (62,831) (250,004) (195,853)
------------ ----------- ----------- -----------
278,342 135,135 152,904 169,050
------------ ----------- ----------- -----------
Intangible assets, net.................................................... 12,282,489 13,203,507 -- --
Deferred income taxes..................................................... 8,329 6,810 -- --
Deposits.................................................................. -- 15,147 13,311 15,090
------------ ----------- ----------- -----------
Total assets............................................................ $ 19,910,177 18,216,472 3,209,401 4,295,706
============ =========== =========== ===========
Liabilities and Stockholder's Equity (Deficit)
Current liabilities:
Accounts payable......................................................... $ 3,763,984 1,786,727 1,118,634 646,167
Accrued expenses......................................................... 804,427 418,565 488,066 376,295
Related party payable (note 12).......................................... 2,111,073 3,603,329 -- --
Current portion of related party notes payable........................... -- -- 2,307,776 2,307,776
Current portion of obligations under capital leases...................... 22,718 39,616 51,186 53,164
------------ ----------- ----------- -----------
Total current liabilities............................................... 6,702,202 5,848,237 3,965,662 3,383,402
Non-current portion of obligations under capital leases.................. 3,409 11,988 26,264 31,782
Non-current portion of related party notes payable....................... -- -- 103,224 110,374
------------ ----------- ----------- -----------
Total liabilities....................................................... 6,705,611 5,860,225 4,095,150 3,525,558
Stockholder's Equity (Deficit)
Preferred stock (notes 3 and 13):
Series A, no par value. Authorized, issued and outstanding 400,000
shares at August 31, 1998 and March 31, 1998............................ -- -- 200,000 200,000
Series B, no par value. Authorized, issued and outstanding 360,000
shares at August 31, 1998 and March 31, 1998............................ -- -- 367,500 367,500
Series C, no par value. Authorized 1,200,000 shares; issued and
outstanding 1,167,667 shares at August 31, 1998 and March 31, 1998...... -- -- 2,800,000 2,800,000
Series D, no par value. Authorized 1,000,000 shares; issued and
outstanding 700,000 shares at August 31, 1998 and March 31, 1998........ -- -- 1,995,000 1,995,000
------------ ----------- ----------- -----------
-- -- 5,362,500 5,362,500
Common stock, $.01 par value. Authorized, issued and outstanding, 10,000
shares at September 30, 1999 and February 28, 1999. Common Stock, no par
value. Authorized 6,000,000 shares; issued and outstanding 1,730,430 and
1,721,000 shares at August 31, 1998 and March 31, 1998, respectively.... 100 100 70,619 68,162
Additional paid-in-capital............................................... 25,383,308 25,383,308 -- --
Accumulated deficit...................................................... (12,178,842) (13,027,161) (6,318,868) (4,660,514)
------------ ----------- ----------- -----------
Total stockholder's equity (deficit).................................... 13,204,566 12,356,247 (885,749) 770,148
------------ ----------- ----------- -----------
Total liabilities and stockholder's equity (deficit).................... $ 19,910,177 18,216,472 3,209,401 4,295,706
============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-32
<PAGE>
FLOWPOINT CORPORATION
Statements of Operations
<TABLE>
<CAPTION>
Successor (Note 2(a)) Predecessor (Note 2(a))
-------------------------- ----------------------------------
Seven Six Five
months months months Years ended
ended ended ended March 31,
September 30, February 28, August 31, ----------------------
1999 1999 1998 1998 1997
------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Trade sales.................................................. $14,844,576 3,968,625 940,918 2,138,310 362,331
Related party sales (notes 3 and 10)......................... 5,139,911 809,586 808,555 1,538,859 3,128,202
----------- ----------- ---------- ---------- ----------
Net sales.................................................. 19,984,487 4,778,211 1,749,473 3,677,169 3,490,533
Cost of sales................................................ 13,147,058 3,251,208 1,660,765 2,994,542 2,901,194
----------- ----------- ---------- ---------- ----------
Gross profit............................................. 6,837,429 1,527,003 88,708 682,627 589,339
Operating expenses:
Selling, general and administrative........................ 3,027,613 1,559,825 1,323,017 1,704,221 1,103,487
Research and engineering................................... 1,218,122 660,727 419,591 1,049,983 984,985
Amortization of intangibles................................ 850,948 727,304 -- -- --
In process research and development charge (note 3)........ -- 11,953,093 -- -- --
----------- ----------- ---------- ---------- ----------
Income (loss) from operations............................ 1,740,746 (13,373,946) (1,653,900) (2,071,577) (1,499,133)
----------- ----------- ---------- ---------- ----------
Interest (income) expense, net............................... 8,521 (8,178) 4,454 1,542 2,047
----------- ----------- ---------- ---------- ----------
Income (loss) before income taxes........................ 1,732,225 (13,365,768) (1,658,354) (2,073,119) (1,501,180)
Income tax expense (benefit)................................. 883,906 (338,607) -- -- 800
----------- ----------- ---------- ---------- ----------
Net income (loss)........................................ $ 848,319 (13,027,161) (1,658,354) (2,073,119) (1,501,980)
=========== =========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-33
<PAGE>
FLOWPOINT CORPORATION
Statements of Cash Flows
<TABLE>
<CAPTION>
Successor (Note 2(a)) Predecessor (Note 2(a))
-------------------------- ----------------------------------
Seven Six Five
months months months Years ended
ended ended ended March 31,
September 30, February 28, August 31, ----------------------
1999 1999 1998 1998 1997
------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Cash flows from operating activities:
Net income (loss).......................................... $ 848,319 (13,027,161) (1,658,354) (2,073,119) (1,501,980)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation............................................... 75,051 62,831 54,151 112,978 76,231
Amortization of intangibles................................ 850,948 727,304 -- -- --
Purchased research and development from acquisition........ -- 11,953,093 -- -- --
Deferred income taxes...................................... 192,344 (339,407) -- -- --
Accounts receivable........................................ (1,895,337) (321,309) (63,731) (497,074) 57,475
Related party receivable................................... -- -- (413,063) 759,731 (914,631)
Inventories................................................ (1,594,997) (52,081) (551,251) (141,747) (420,474)
Prepaid expenses........................................... (88,442) (61,703) (12,920) (36,106) (38,095)
Deposits................................................... 15,147 (1,836) 1,779 (4,119) (6,724)
Accounts payable........................................... 1,977,357 667,993 472,467 307,343 210,422
Accrued expenses........................................... 385,862 (69,501) 126,557 31,646 287,753
----------- ----------- ---------- ---------- ----------
Net cash provided by (used in) operating activities...... 766,252 (461,777) (2,044,365) (1,540,467) (2,250,023)
----------- ----------- ---------- ---------- ----------
Cash flows from investing activity:
Capital expenditures....................................... (218,258) (45,062) (38,005) (80,336) (169,365)
----------- ----------- ---------- ---------- ----------
Net cash used in investing activity...................... (218,258) (45,062) (38,005) (80,336) (169,365)
----------- ----------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of related party note payable....... -- -- -- 2,225,000 --
Payments on related party note payable..................... -- (186,000) (7,150) (16,250) (22,625)
Payments on capital leases................................. (25,285) (25,846) (22,282) (36,809) (13,133)
Proceeds from issuance of common stock..................... -- 100 2,457 6,538 2,063
Proceeds from issuance of preferred stock.................. -- -- -- 997,500 2,555,000
Related party payable...................................... (1,422,478) 1,463,582 -- -- --
----------- ----------- ---------- ---------- ----------
Net cash provided by (used in) financing................. (1,447,763) 1,251,836 (26,975) 3,175,979 2,521,305
----------- ----------- ---------- ---------- ----------
Net increase (decrease) increase in cash..................... (899,769) 744,997 (2,109,345) 1,555,176 101,917
Cash and cash equivalents, beginning of period............... 1,202,150 457,153 2,566,498 1,011,322 909,405
----------- ----------- ---------- ---------- ----------
Cash and cash equivalents, end of period..................... $ 302,381 1,202,150 457,153 2,566,498 1,011,322
=========== =========== ========== ========== ==========
Cash paid for interest....................................... $ -- -- -- 10,910 21,531
=========== =========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
FLOWPOINT CORPORATION
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
Total
Preferred Preferred Preferred Preferred Additional stockholder's
Stock Stock Stock Stock Common paid-in Accumulated equity
Series A Series B Series C Series D Stock capital deficit (deficit)
--------- --------- ---------- ---------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1996................... $ 200,000 310,000 1,300,000 -- 59,561 -- (1,085,415) 784,146
Net loss............... -- -- -- -- -- -- (1,501,980) (1,501,980)
Issuance of Preferred
Stock Series B........ -- 57,500 -- -- -- -- -- 57,500
Issuance of Preferred
Stock Series C........ -- -- 1,500,000 -- -- -- -- 1,500,000
Issuance of Preferred
Stock Series D........ -- -- -- 997,500 -- -- -- 997,500
Issuance of Common
Stock................. -- -- -- -- 2,063 -- -- 2,063
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at March 31,
1997................... $ 200,000 367,500 2,800,000 997,500 61,624 -- (2,587,395) 1,839,229
Net loss............... -- -- -- -- -- -- (2,073,119) (2,073,119)
Issuance of Preferred
Stock Series D........ -- -- -- 997,500 -- -- -- 997,500
Issuance of Common
Stock................. -- -- -- -- 6,538 -- -- 6,538
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at March 31,
1998................... $ 200,000 367,500 2,800,000 1,995,000 68,162 -- (4,660,514) 770,148
Net loss............... -- -- -- -- -- -- (1,658,354) (1,658,354)
Issuance of Common
Stock................. -- -- -- -- 2,457 -- -- 2,457
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at August 31,
1998................... $ 200,000 367,500 2,800,000 1,995,000 70,619 -- (6,318,868) (885,749)
Conversion of preferred
stock to common
stock................. (200,000) (367,500) (2,800,000) (1,995,000) 5,362,500 -- -- --
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
-- -- -- -- 5,433,119 -- (6,318,868) (885,749)
Cabletron acquisition
(notes 2(a) and 3).... -- -- -- -- (5,433,119) -- 6,318,868 885,749
Cabletron acquisition
(notes 2(a) and 3).... -- -- -- -- -- 25,383,308 -- 25,383,308
Issuance of Common
Stock................. -- -- -- -- 100 -- -- 100
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at September 1,
1998................... $ -- -- -- -- 100 25,383,308 -- 25,383,408
Net loss............... -- -- -- -- -- -- (13,027,161) (13,027,161)
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at February 28,
1999................... $ -- -- -- -- 100 25,383,308 (13,027,161) 12,356,247
Net income
(unaudited)........... -- -- -- -- -- -- 848,319 848,319
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at
September 30, 1999
(unaudited)............ $ -- -- -- -- 100 25,383,308 (12,178,842) 13,204,566
========= ======== ========== ========== ========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
(1) Business Operations
FlowPoint Corporation, (the "Company"), develops, manufactures, markets,
designs, installs and supports a complete line of broadband remote access,
high-speed corporate and internet access modems and routers primarily
utilizing digital subscriber line ("DSL") technologies.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The financial statements of the Company are derived from its historic
books and records through August 31, 1998. As a result of the
acquisition of the Company by Cabletron Systems, Inc. ("Cabletron")
effective as of September 1, 1998, the financial statements of the
Company after the acquisition date are derived from the historic books
and records of Cabletron and reflect the "pushdown" of Cabletron's
basis in the assets acquired and liabilities assumed.
As a result of the acquisition by Cabletron and the application of
purchase accounting, financial information in the accompanying
financial statements and notes thereto as of and for the six months
ended February 28, 1999 (the "Successor Period") are presented on a
different cost basis than the financial information as of August 31,
1998 and March 31, 1998 and for the five months ended August 31, 1998
and the years ended March 31, 1998 and 1997 (the "Predecessor Period"),
and therefore, such information is not comparable.
The statement of operations includes all revenues and costs directly
attributable to the Company including charges for shared facilities,
functions and services used by the Company and provided by Cabletron.
Certain costs and expenses have been allocated based upon management's
estimates of the cost of services provided to the Company by Cabletron.
Such costs include sales support, customer service and technical
support, and general and administrative expenses (see note 12). Such
allocations and charges are based on a percentage of total costs for
the services provided based on factors such as headcount or revenues.
Management believes that these allocations are based on assumptions
that are reasonable under the circumstances. However, these allocations
and estimates are not necessarily indicative of the cost and expenses
which would have resulted if the Company had been operated as a
separate entity.
The Company has historically incurred recurring losses from operations.
Cabletron has committed to provide the funds required for the conduct
of the Company's operations up to the date on which it ceases to be the
controlling shareholder.
(b) Change in fiscal year
Prior to its acquisition by Cabletron, the Company's fiscal year end
was March 31. Upon the acquisition the Company adopted Cabletron's
February 28 fiscal year end.
(c) Inventories
Inventories are stated at the lower of cost or market. Costs are
determined principally by use of the average-cost method, which
approximates the first-in, first-out (FIFO) method.
F-36
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
provided on a straight-line method over the estimated useful lives of
the assets. The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If it is determined that the
carrying amount of an asset cannot be fully recovered, an impairment
loss is recognized.
(e) Intangible Assets
Intangible assets consist of goodwill and developed technology
resulting from the "pushdown" of the fair market value of the
intangible assets attributable to the Company as recorded on
Cabletron's books as part of Cabletron's acquisition of the Company.
Amortization of these intangible assets is provided on a straight-line
basis over the respective useful lives which range from five to ten
years. Purchased in-process research and development without
alternative future use is expensed when acquired. The carrying amount
of intangible assets is reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The measurement of possible impairment is based
primarily on an evaluation of undiscounted projected cash flows through
the remaining amortization period.
(f) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this 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 of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date.
As a result of its acquisition by Cabletron, the Company is included in
the consolidated federal income tax return of Cabletron. Income taxes
in the Company's financial statements subsequent to the acquisition
have been determined on a separate-return basis.
(g) Advertising Costs
Advertising costs of $17,594, $105,547, $308,061, $297,360 and $67,134
were expensed as incurred during the seven months ended September 30,
1999, the six months ended February 28, 1999, the five months ended
August 31, 1998 and the years ended March 31, 1998 and 1997,
respectively. No assets were recorded related to advertising costs at
the respective balance sheet dates.
(h) Statements of Cash Flows
Cash and cash equivalents consist of cash in banks and short-term
investments with original maturities of three months or less.
F-37
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
(i) Revenue Recognition
The vast majority of the Company's revenues are related to hardware
based routers with revenue recognized based upon shipment of the
products. The Company accrues for estimated warranty costs related to
product shipments based on historical experience. The Company generates
an insignificant portion of its revenues from software products and
records such revenue in accordance with (SOP) 97-2, "Software Revenue
Recognition".
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(k) Research and Engineering
Research and engineering costs are charged to expense as incurred.
(l) Employee Stock Plan
The Company accounts for its stock option plan in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees." In 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). SFAS 123 provides an alternative to APB 25 and is effective
for fiscal years beginning after December 15, 1999. As permitted under
SFAS 123, the Company continues to account for its stock option plan in
accordance with the provisions of APB 25 and provides the disclosure
pro forma net income as if the fair value method under SFAS 123 had
been applied.
(m) New Accounting Pronouncements
In the period ended February 28, 1999, the Company adopted Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130) which establishes standards for reporting and
display of comprehensive income and its components in a full set of
financial statements. For the Company, comprehensive income includes
net income or loss only. The adoption of SFAS 130 did not have any
impact on the Company's financial statements for any of the periods
presented.
In the period ended February 28, 1999, the Company adopted Financial
Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) which
establishes standards for the way that public business enterprises
report selected information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not have any impact on the
Company's financial statement disclosures for the period ended February
28, 1999.
F-38
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
In October 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition"
which provides guidance on applying generally accepted accounting
principles in recognizing revenue for licensing, selling, leasing or
otherwise marketing computer software and supersedes SOP 91-1. The
adoption of SOP 97-2 did not have a material impact on the Company's
results of operations for the period ended February 28, 1999.
(n) Unaudited Results
The financial statements as of and for the seven months ended September
30, 1999 have been prepared using the same accounting principles as
were used in preparing the audited financial statements and in the
opinion of management reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly the Company's
financial position, results of operations and cash flows. The results
for the seven months ended September 30, 1999 are not necessarily
indicative of future results.
(3) Cabletron Acquisition
Effective as of September 1, 1999 Cabletron acquired all of the outstanding
common stock of FlowPoint Corporation, a privately held manufacturer of DSL
router networking products. Immediately prior to the acquisition each share
of FlowPoint preferred stock Series A, B, C, and D was converted into one
share of FlowPoint common stock. Cabletron owned 1,866,667 shares of
FlowPoint preferred stock (at a cost of approximately $1,700,000), and as a
result of the preferred stock conversion owned 42.8% of the outstanding
common stock. Pursuant to the acquisition agreement the amount paid for the
remaining 57.2% of FlowPoint common stock amounted to approximately
$20,600,000 to be paid in four installments, within nine months of the
acquisition date. Each installment could be paid in either cash or
Cabletron common stock, as determined by Cabletron management at the time
of the distribution. In addition, Cabletron assumed approximately 478,000
FlowPoint options, valued at approximately $2,700,000.
Cabletron recorded the cost of the acquisition at $25,383,306 including
direct costs of approximately $400,000. The acquisition was accounted for
under the purchase method of accounting, and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair market value.
The total purchase price of $25,383,306 was allocated as follows: a
$11,953,093 special charge for in process research and development
("IPR&D") projects, $14,136,655 for goodwill and other intangibles and net
liabilities of $706,442.
The following unaudited pro forma financial information presents a summary
of the results of operations as if the acquisition had occurred on March 1,
1998, the first day of the fiscal year ending February 28, 1999.
<TABLE>
<CAPTION>
(Unaudited)
Twelve months ended
February 28, 1999
-------------------
<S> <C>
Net sales................ $ 7,098,515
Operating loss........... $(15,326,163)
</TABLE>
In management's opinion, the unaudited pro forma results of operations are
not indicative of actual results that would have occurred had the
acquisition been consummated on March 1, 1998.
F-39
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
The valuation of the IPR&D incorporated the guidance on IPR&D valuation
methodologies promulgated by the Securities and Exchange Commission
("SEC"). These methodologies incorporate the notion that cash flows
attributable to development efforts, including the effort to be completed
on the development effort underway, and development of future versions of
the product that have not yet been undertaken, should be excluded in the
valuation of IPR&D. This allocation represents risk-adjusted cash flows
related to the incomplete products. At the date of acquisition, the
development of these projects had not yet reached technological feasibility
and the research and development in progress had no alternative future
uses. Accordingly, these costs were expensed as of the acquisition date.
Cabletron used independent third-party appraisers to assess and allocate
values to the in-process research and development. The value assigned to
these assets were determined by identifying significant research projects
for which technological feasibility had not been established, including
development, engineering and testing activities associated with the
introduction of the Company's next-generation router technologies.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products principally relate to the completion of
all planning, designing, prototyping, high-volume verification, and testing
activities that are necessary to establish that the proposed technologies
meet their design specifications including functional, technical, and
economic performance requirements.
To date, the Company's results have not differed significantly from the
forecast assumptions. The Company's research and development expenditures
since the acquisition have not differed materially from expectations. The
Company has completed the projects that were underway at the time of the
acquisition and began to realize the economic benefits related to these
projects during the six months ended February 28, 1999.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from
the projects and discounting the net cash flows to their present value. The
revenue projection used to value the in-process research and development is
based on estimates of relevant market sizes and growth factors, expected
trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors.
For purposes of the IPR&D valuation, the total revenues attributable to the
Company were projected to exceed $150 million within 5 years, assuming the
successful completion and market acceptance of the major research and
development efforts. As of the valuation date, the Company had a few
existing products, which lack the technological breadth and depth necessary
in the evolving networking equipment market. Accordingly, for purposes of
the IPR&D valuation, it was estimated that significant revenue growth in
the first several years would be primarily related to the in-process
technologies. The estimated revenues for the in-process projects were
projected to peak in 2004 and then decline as other new products and
technologies were expected to enter the market.
Cost of sales was estimated based on the Company's internally generated
projections and discussions with management regarding anticipated gross
margin improvements. Due to the market opportunities in the network
equipment arena and the Company's unique technology architecture,
substantial gross margins were projected through the forecast period. Cost
of sales as a percentage of sales was forecasted to decline until 2003 and
then remain constant at 55%. Selling, general and administrative expenses
(including depreciation) as a percentage of sales were projected to remain
constant at 23%. Research and development expenditures as a percentage of
sales were projected to decline significantly from 30% in 1999 to 10% in
2001 and remain constant at 10% thereafter.
F-40
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
The rates utilized to discount the net cash flows to their present value
were based on venture capital rates of return. Due to the nature of the
forecast and the risks associated with the projected growth, profitability
and developmental projects, a discount rate of 27.5 percent was determined
to be appropriate for the IPR&D. This discount rate was commensurate with
the Company's stage of development; the uncertainties in the economic
estimates described above; the inherent uncertainty surrounding the
successful development of the purchased in-process technology; the useful
life of such technology; the profitability levels of such technology; and,
the uncertainty of technological advances that were unknown at the time of
the acquisition.
The forecasts used by Cabletron in valuing in-process research and
development were based upon assumptions Cabletron believes to be reasonable
but which are inherently uncertain and unpredictable. Cabletron's
assumptions may be incomplete or inaccurate, and unanticipated events and
circumstances are likely to occur. For these reasons, actual results may
vary from the projected results.
Cabletron believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with
such projects, will transpire as estimated. For these reasons, actual
results may vary from the projected results.
The Company's in-process research and development value is comprised of
several significant individual on-going projects. Remaining development
efforts for these projects include various phases of design, development
and testing. Anticipated completion dates for the projects in progress are
estimated to occur over the first nine months following the acquisition.
The Company estimated it will begin generating the economic benefits from
the technologies in the second half of fiscal year 2000. Funding for such
projects was estimated to be obtained from internally generated sources.
Expenditures to complete these projects were estimated to total
approximately $1.0 million over the next six months. These estimates are
subject to change, given the uncertainties of the development process, and
no assurance can be given that deviations from these estimates will not
occur.
Cabletron management expects to continue their support of these efforts and
believes the Company has a reasonable chance of successfully completing the
research and development programs. However, there is risk associated with
the completion of the projects and there is no assurance that any will meet
with either technological or commercial success.
(4) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- --------------------
September 30, February 28, August 31, March 31,
1999 1999 1998 1998
------------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Raw materials................... $1,864,122 1,237,660 893,461 666,255
Work-in-process................. 79,344 147,467 214,100 105,854
Finished goods.................. 1,228,722 192,064 217,549 1,750
---------- --------- --------- -------
Total........................... $3,172,188 1,577,191 1,325,110 773,859
========== ========= ========= =======
</TABLE>
F-41
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
(5) Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- -------------------
March Estimated
September 30, February 28, August 31, 31, useful
1999 1999 1998 1998 lives
------------- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Capitalized software.... $ 38,886 27,139 29,186 25,818 3 years
Machinery and
equipment.............. 357,592 163,967 360,642 326,005 3-5 years
Furniture and fixtures.. 19,746 6,860 13,080 13,080 3-5 years
-------- ------- -------- --------
416,224 197,966 402,908 364,903
Less accumulated
depreciation and
amortization........... (137,882) (62,831) (250,004) (195,853)
-------- ------- -------- --------
$278,342 135,135 152,904 169,050
======== ======= ======== ========
</TABLE>
(6) Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
September February Estimated
30, 28, useful
1999 1999 lives
----------- ---------- ---------
<S> <C> <C> <C>
Goodwill.................................. $13,409,105 13,479,175 10 years
Acquired patents and technologies......... 451,636 451,636 5 years
----------- ----------
13,860,741 13,930,811
Less accumulated amortization............. (1,578,252) (727,304)
----------- ----------
$12,282,489 13,203,507
=========== ==========
</TABLE>
Goodwill has been reduced by $70,070 and $205,844 at September 30, 1999 and
February 28, 1999 respectively. This reduction is a result of acquired tax
benefits from stock options exercised.
(7) Leases
The Company is obligated under various capital leases for certain machinery
and equipment. Future minimum lease payments by fiscal year and in the
aggregate under capital leases as of February 28, 1999 are as follows:
<TABLE>
<CAPTION>
Fiscal year ending February 28,
<S> <C>
2000.............................................................. $41,241
2001.............................................................. 14,237
2002.............................................................. 1,241
-------
Total minimum lease payments...................................... 56,719
Less amounts representing interest (at 12.79%)...................... 5,115
-------
Present value of net minimum capital lease payments............... 51,604
Less current portion of obligations under capital leases............ 39,616
-------
Obligations under capital leases excluding current portion........ $11,988
=======
</TABLE>
F-42
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
Included in property plant and equipment are the following assets held under
capital leases:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- --------------------
September 30, February 28, August 31, March 31,
1999 1999 1998 1998
------------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Machinery and equipment...... $72,780 72,780 176,162 157,505
Less accumulated
amortization................ 50,277 27,173 103,382 78,804
------- ------ ------- -------
$22,503 45,607 72,780 78,701
======= ====== ======= =======
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
Prior to the acquisition by Cabletron, the Company leased a manufacturing
and office facility under an operating lease. In June 1999, the Company
relocated to a facility leased by Cabletron. Cabletron allocates a portion
of its lease cost to the Company. Rent expense, including intercompany
allocations for the seven months ended September 30, 1999, the six months
ended February 28, 1999, the five months ended August 31, 1998 and the
years ended March 31, 1998, and 1997, was $225,819, $100,001, $71,742,
$135,018 and $73,912, respectively.
(8) Income Taxes
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- -----------------------------------
Seven months Six months Five months Fiscal year Fiscal year
ended ended ended ended ended
September 30, February 28, August 31, March 31, March 31,
1999 1999 1998 1998 1997
------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income from continuing
operations............. $883,906 (338,607) -- -- 800
Reduction in goodwill,
for recognition of tax
benefits from stock
options exercised...... (70,070) (205,844) -- -- --
-------- -------- --- --- ---
$813,836 (544,451) -- -- 800
======== ======== === === ===
</TABLE>
Income tax attributable to income from continuing operations consist of:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- -----------------------------------
Seven months Six months Five months Fiscal year Fiscal year
ended ended ended ended ended
September 30, February 28, August 31, March 31, March 31,
1999 1999 1998 1998 1997
------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Currently payable:
Federal................. $538,238 -- -- -- --
State................... 153,324 800 -- -- 800
Deferred tax expense
(benefit).............. 192,344 (339,407) -- -- --
-------- -------- --- --- ---
Tax expense (benefit)... $883,906 (338,607) -- -- 800
======== ======== === === ===
</TABLE>
F-43
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
The following is a reconciliation of the effective tax rates to the
statutory federal tax rate:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- -----------------------------------
Seven months Six months Five months Fiscal year Fiscal year
ended ended ended ended ended
September 30, February 28, August 31, March 31, March 31,
1999 1999 1998 1998 1997
------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statutory federal income
tax (benefit) rate..... 35.0% (35.0)% (35.0)% (35.0)% (35.0)%
State income tax, net of
federal tax benefit.... 5.8 -- -- -- --
Exempt income of foreign
sales corporation, net
of tax................. (0.2) -- -- -- --
Research and
experimentation
credit................. (6.4) (0.7) -- -- --
Unbenefitted net
operating loss......... -- -- 35.0 35.0 35.0
Nondeductible
amortization of
intangible assets...... 16.8 1.9 -- -- --
Nondeductible in--
process research and
development charge..... -- 31.3 -- -- --
---- ----- ----- ----- -----
51.0% (2.5)% 0.0% 0.0% 0.0%
==== ===== ===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- ------------------------
Seven months Six months Five months Fiscal year
ended ended ended ended
September 30, February 28, August 31, March 31,
1999 1999 1998 1998
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Accounts receivable....... $ 8,343 8,266 8,266 8,343
Inventories............... 70,000 70,000 -- --
Property, plant and
equipment................ 40,478 38,959 30,991 19,531
Other reserves and
accruals................. 113,946 (4,815) 35 --
Net operating loss
carryforwards............ 2,112,231 2,424,932 2,112,231 1,541,505
---------- ---------- ---------- ----------
Total gross deferred tax
assets................... 2,344,998 2,537,342 2,151,523 1,569,379
Less valuation allowance.. (2,148,806) (2,148,806) (2,148,806) (1,569,067)
---------- ---------- ---------- ----------
Net deferred tax assets... 196,192 388,536 2,717 312
---------- ---------- ---------- ----------
Deferred tax liabilities:
Other reserves and
accruals................. (49,129) (49,129) (2,717) (312)
---------- ---------- ---------- ----------
Total gross deferred
liabilities.............. (49,129) (49,129) (2,717) (312)
---------- ---------- ---------- ----------
Net deferred tax assets... $ 147,063 339,407 -- --
========== ========== ========== ==========
</TABLE>
At September 30, 1999, February 28, 1999, August 31, 1998 and March 31,
1998, the Company had net operating loss (NOL) carryforwards for tax
purposes of $5,695,112, $6,187,662, $5,695,112, and $4,129,836 respectively
expiring in fiscal February 2008 through fiscal February 2011. The
utilization of these net operating losses may be limited pursuant to
Internal Revenue Code section 382 as a result of ownership changes.
F-44
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
The valuation allowance was increased by $0, $0, $579,739 and $721,065
during the periods ended September 30, 1999, February 28, 1999, August 31,
1998 and March 31, 1998, respectively. Subsequently reported tax benefits
relating to the valuation allowance for deferred tax assets as of September
30, 1999, February 28, 1999 and August 31, 1998 will be recorded as a
decrease to goodwill and other non-current intangible assets. In assessing
the realizability of net deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Based upon the level of historical taxable
income and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowance at September 30, 1999.
(9)Related Party Notes Payable
On August 8, 1995, the Company entered into a $250,000 note payable with
Soliton Systems, K.K. ("Soliton") with an interest rate of five percent. On
August 5, 1997, the note was amended to require variable quarterly
repayments of the note over three years with the principle amount
outstanding at the end of three years due in full. The Company repaid the
note in full on October 8, 1998. Soliton was a preferred stock shareholder
of the Company.
In anticipation of Cabletron's acquisition of the Company, the two parties
entered into a Memorandum of Understanding ("MOU") on February 4, 1998. As
part of the MOU, the Company entered into a note payable to Cabletron for
$2,225,000 with an interest rate of six percent. The note payable was
convertible into shares of Series E Preferred Stock of the Company at $7.50
per share if the acquisition was not consummated.
(10) Financial Instruments and Concentration of Credit Risk
The carrying amounts of cash and cash equivalents, accounts receivables,
and current liabilities approximate fair value because of the short
maturity of these financial instruments.
The carrying amount of the notes payable to Cabletron, as discussed in note
9, approximated fair value based on the short maturity of the instrument.
The carrying amount of the note payable to Soliton also approximated fair
value based on estimated discounted cash flows prior to the repayment by
the Company.
For the seven months ended September 30, 1999 and the six months ended
February 28, 1999, the Company had one customer, Covad and a related party,
Cabletron, which accounted for 52% and 26% of sales and 70% and 17% of
sales, respectively. For the five months ended August 31, 1998, the Company
had two customers, Covad and British Telecom that accounted for 28% and 19%
of sales, respectively. Additionally for this same period sales to related
parties, Cabletron and Soliton, accounted for 25% and 21% of sales,
respectively. For the year ended March 31, 1998, the Company had one
customer, Diamond Lane, which accounted for 36% of sales. Additionally for
this same period sales to related parties, Cabletron and Soliton, accounted
for 31% and 11% of sales, respectively. For the year ended March 31, 1997,
sales to related parties, Cabletron and Soliton, accounted for 69% and 20%
of sales, respectively.
(11) Segment and Geographical Information
The Company operates in one operating segment. The Company provides a line
of broadband remote access, high-speed corporate and internet access modems
and routers primarily utilizing DSL technologies. Substantially all
revenues result from the sales of hardware products. The vast majority of
the Company's sales are generated in the United States.
F-45
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
(12) Related Party
Subsequent to the acquisition date, the Company maintained a certain level
of autonomy. During the six months ended February 28, 1999, Cabletron
provided the Company with certain services including cash management,
payroll processing, insurance, limited legal and information technology
support as well as the ability for Company employees to participate in
Cabletron's medical plan beginning in January of 1999. During this period,
Cabletron began to allocate expenses primarily related to the medical plan
coverage to the Company on a monthly basis as the costs associated with the
other services were nominal. The total amount of expenses allocated to the
Company by Cabletron during the six months ended February 28, 1999 was
$15,026 and is included in the respective categories in the statement of
operations including cost of sales, selling general and administrative, and
research and engineering expenses.
Also beginning in the six month period ending February 28, 1999, Company
employees were able to participate in Cabletron's incentive plans. These
plans include Cabletron's Equity Incentive Plan and the Employee Stock
Purchase Plan. These plans are accounted for by Cabletron as non-
compensatory under APB 25 and thus there is no expense allocation.
Beginning in the seven month period ending September 30, 1999, Cabletron
began to provide the Company with services in addition to those described
above. These services included external and inside sales support, customer
service and technical support, software licenses, limited software
development and assistance with year 2000 remediation processes. The
Company also moved into a Cabletron facility in June of 1999 and began to
receive a related cost allocation from Cabletron representing rent and
other occupancy costs. The total amount of expenses allocated to the
Company by Cabletron during the seven months ended September 30, 1999 was
$574,151 and is included in the respective categories in the statement of
operations including cost of sales, selling general and administrative, and
research and engineering expenses.
Cabletron was a significant customer of the Company prior to the completion
of the acquisition and the Company has generated significant intercompany
sales to Cabletron subsequent to the acquisition as outlined in footnote 10
of these financial statements.
(13) Stockholders' Equity
The Company's preferred stock was convertible into common stock on a one-
for-one conversion rate. Each holder of preferred stock was entitled to
vote on all matters and was entitled to the number of votes equal to the
whole number of shares of common stock into which such preferred shares
could be converted. Dividends on the preferred stock were not cumulative
and no right to any dividends would accrue to the holders unless declared
by the Board of Directors.
The preferred stock had liquidation preferences as follows:
<TABLE>
<CAPTION>
Series A..................... $0.50 per share
<S> <C>
Series B..................... $1.00 per share
Series C..................... $2.40 per share
Series D..................... $2.85 per share
</TABLE>
Prior to the acquisition by Cabletron, the Company maintained a 1994 Stock
Option Plan (the "Plan") which provided for up to 400,000 shares of common
stock of the Company for purchase by employees, directors or consultants of
the Company. The Plan was amended on October 1, 1997 to provide up to
F-46
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
600,000 shares. The Plan provides for issuance of options at their fair
market value on the date of the grant. The Plan allowed varying vesting
provisions but in each case the options were issued with four year vesting
periods. The Plan also includes a provision whereby at least 20% per year
of the total number of shares pursuant to a grant would vest. The maximum
term for an option was ten years from the date of grant. As part of the
acquisition by Cabletron, the options for Company common stock were
converted to options for Cabletron common stock.
A summary of option transactions follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Exercise
options Price
------- ----------------
<S> <C> <C>
Options outstanding at March 31, 1996.............. --
Granted.......................................... 314,750 $0.14
Exercised........................................ (14,479) $0.15
Forfeited........................................ (60,521) $0.15
-------
Options outstanding at March 31, 1997.............. 239,750 $0.14
Granted.......................................... 222,400 $0.25
Exercised........................................ (47,706) $0.12
Forfeited........................................ (1,615) $0.20
-------
Options outstanding at March 31, 1998.............. 412,829 $0.19
Granted.......................................... 67,100 $0.75
Exercised........................................ (885) $0.20
Forfeited........................................ (1,000) $0.75
-------
Options outstanding at August 31, 1998............. 478,044 $0.27
=======
Options exercisable at:
March 31, 1997................................... 73,141 $0.11
March 31, 1998................................... 122,777 $0.16
August 31, 1998.................................. 170,678 $0.27
</TABLE>
Subsequent to the acquisition by Cabletron, Company employees were eligible
to participate in Cabletron's Equity Incentive Plan ("EIP") which provides
shares of common stock for the granting of a variety of incentive awards to
eligible employees. As of February 28, 1999, Cabletron had issued Company
employees 75,100 stock options under the EIP, which were granted at fair
market value at the date of grant, vest over a three to five year period
and expire within six to ten years from the date of grant.
F-47
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
A summary of option transactions follows:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise
of options Price
---------- ----------------
<S> <C> <C>
Company options outstanding at August 31, 1998
assumed by and converted to Cabletron options
at a ratio of 1.033 to 1...................... 493,970 $0.26
Granted........................................ 75,100 $7.63
Exercised...................................... (86,020) $0.16
Forfeited...................................... (1,983) $0.60
-------
Options outstanding at February 28, 1999....... 481,067 $1.42
Granted...................................... -- --
Exercised.................................... (80,835) $0.28
Forfeited.................................... (7,566) $0.60
-------
Options outstanding at September 30, 1999...... 392,666 $1.69
=======
Options exercisable at :
February 28, 1999............................ 209,983 $0.75
September 30, 1999........................... 190,608 $0.82
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options as of February 28, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (years) Price Exercisable Price
------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.00 to $0.25.......... 218,592 7.7 $0.17 139,760 $0.15
$0.26 to $0.50.......... 121,443 8.6 $0.27 36,341 $0.26
$0.51 to $0.75.......... 65,932 9.2 $0.64 18,862 $0.63
$0.76 to $14.00......... 75,100 9.6 $7.63 15,020 $7.63
------- -------
$0.00 to $14.00......... 481,067 8.1 $1.42 209,983 $0.75
======= === ===== =======
</TABLE>
The Company accounts for its stock option plans in accordance with the
provisions of APB 25. As such compensation expense is recorded on the date
of grant only if the fair value of the underlying stock exceeds the
exercise price. Had compensation cost associated with options held by
Company employees been determined consistent with SFAS 123, the Company
would have reported net losses of $13,078,156, $1,660,426, $2,077,613, and
$1,503,479, respectively for the six months ended February 28, 1999, the
five months ended August 31, 1998 and the years ended March 31, 1998 and
1997.
F-48
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
The Company estimates the fair value of each option as of the date of grant
using a Black-Scholes pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Six Months Five Months Fiscal year Fiscal year
ended ended ended ended
February 28, August 31, March 31, March 31,
1999 1998 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Expected volatility........ *76.32% -- -- --
Dividend yield............. -- -- -- --
Risk-free interest rate.... 5.1% 4.87% 5.70% 6.57%
Expected life, in years.... 3.7 3.8 3.8 3.7
</TABLE>
--------
*based on Company employee holdings in Cabletron common stock
The weighted average estimated fair values of stock options granted during
the six months ended February 28, 1999, the five months ended August 31,
1998 and the fiscal years ended March 31, 1998 and 1997 were $7.63, $.73,
$.25 and $.17 per share, respectively.
Also subsequent to the acquisition by Cabletron, Company employees were
eligible to participate in Cabletron' two Employee Stock Purchase Plans
("ESPPs"), which provide shares of common stock to be purchased by
employees who have completed a minimum period of employment. Under the 1989
ESPP, employees must be continuously employed for a period of six months
and under the 1995 ESPP employees must be continuously employed for a
period of two years. Under these plans, options are granted to eligible
employees twice yearly and are exercisable through the accumulation of
employee payroll deductions from two to ten percent of employee
compensation as defined in the plan, to a maximum of $12,500 annually, for
each plan, (adjusted to reflect increases in the consumer price index)
which may be used to purchase stock at 85 percent of the fair market value
of the common stock at the beginning or end of the option period, whichever
amount is lower. In the seven months ended September 30, 1999, 6,932 shares
were purchased at a weighted average price of $6.96.
(14)Subsequent Event (Unaudited)
On November 22, 1999, Cabletron announced that it had reached an agreement
for the sale of the Company to Efficient Networks ("Efficient") a leading,
independent supplier of DSL access products for the customer premises.
Under the terms of the sale, Efficient would pay a combination of 7.2
million common shares and 6,300 convertible preferred shares (convertible
into an aggregate of 6.3 million common shares of Efficient) to Cabletron
in exchange for all the outstanding common stock of the Company. The sale
closed on December 17, 1999.
F-49
<PAGE>
[LOGO OF EFFICIENT NETWORKS, INC. APPEARS HERE]
<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............................................. $ 99,998
NASD filing fee.................................................. 30,500
Nasdaq National Market listing fee............................... 17,500
Printing and engraving costs..................................... 100,000
Legal fees and expenses.......................................... 350,000
Accounting fees and expenses..................................... 150,000
Blue Sky fees and expenses....................................... 5,000
Miscellaneous expenses........................................... 247,002
----------
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) under the
Securities Act.
In December 1996, we sold 3,091,430 shares of Series E Preferred Stock to
certain accredited investors 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
certain accredited investors 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 to Hambrecht & Quist LLC at an exercise price of $2.92 per
share.
In January 1999, we issued Subordinated Promissory Notes for an aggregate
principal amount of $7.0 million and warrants to purchase an aggregate of
2,397,261 shares of Series H Preferred Stock to El Dorado Ventures IV, LP and
Crosspoint Ventures LS 1997 LP, at an exercise price of $2.92 per share.
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 684,932 shares of
Series H Preferred Stock to Palomar Ventures L.P., at an exercise price of
$2.92 per share.
In June 1999, we issued a convertible promissory note to an affiliate of
Covad Communications Group, Inc. for an aggregate principal amount of $5.0
million. The note was convertible into 497,663 shares of Series I Preferred
Stock at an exercise price of $10.09 per share.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1(1) Restated Certificate of Incorporation of the Registrant.
3.2(2) Restated Bylaws of the Registrant.
3.3* Certificate of Determination defining rights, preferences and
privileges of Registrant's Series A non-voting convertible preferred
stock.
4.1(1) Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1(1) Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2(1) 1999 Stock Plan and form of agreements thereunder.
10.3(1) 1999 Employee Stock Purchase Plan and form of agreements thereunder.
10.4* 1999 Nonstatutory Stock Option Plan and form of agreements
thereunder.
10.5(1) Investor's Rights Agreement dated July 30, 1993 executed in
connection with the issuance and sale of our Series A Preferred
Stock.
10.6(1) Amendment No. 1 to the Investors' Rights Agreement, dated February 9,
1994.
10.7(1) Amendment No. 2 to the Investors' Rights Agreement, dated September
30, 1994.
10.8(1) Amendment No. 3 to the Investors' Rights Agreement, dated September
1, 1995.
10.9(1) Amendment No. 4 to the Investors' Rights Agreement, dated December
31, 1996.
10.10(1) Amendment No. 5 to the Investors' Rights Agreement, dated February
17, 1998
10.11(1) Amendment No. 6 to the Investors' Rights Agreement, dated June 10,
1998.
10.12(1) Amendment No. 7 to the Investors' Rights Agreement, dated January 11,
1999.
10.13(1) Amendment No. 9 to the Investors' Rights Agreement, dated June 28,
1999.
10.14* Amendment No. 10 to the Investors' Rights Agreement, dated November
21, 1999.
10.15(1) Geico Building Office Lease dated August 19, 1993 by and between
Government Employees Insurance Company and Efficient.
10.16(1) Modification of Geico Office Lease dated May 8, 1995 by and between
Government Employees Insurance Company and Efficient.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.17(1) Graystone Office Park Lease dated September 8, 1998 by and between
Lanny Houillion and Efficient.
10.18* Office Lease Agreement dated November 5, 1999 by and between Jackson-
Shaw/Alpha Metro Limited Partnership and Efficient.
10.19(3) Agreement and Plan of Merger and Reorganization dated as of November
21, 1999 by and among Efficient Networks, Inc., Cabletron Systems,
Inc., Flowpoint Corporation and Fire Acquisition Corporation (the
"Merger Agreement").
10.20(3) Amendment No. 1 to the Merger Agreement dated December 14, 1999.
10.21(3) Amendment No. 2 to the Merger Agreement dated December 17, 1999.
10.22* Voting Agreement dated November 20, 1999 entered into in connection
with the Merger Agreement.
10.23* Reseller Agreement effective as of December 17, 1999 between the
Registrant and Cabletron Systems, Inc.
10.24* Standstill and Disposition Agreement dated December 17, 1999 between
the Registrant and Cabletron Systems, Inc.
10.25* Cross License Agreement dated December 17, 1999 between the
Registrant and Cabletron Systems, Inc.
23.1 Consent of Independent Auditors regarding Efficient Networks, Inc.
23.2 Consent of Independent Auditors regarding FlowPoint Corporation.
23.3 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney--See Page II-5.
</TABLE>
- --------
* Previously filed.
(1) Incorporated by reference to Registrant's Registration Statement on Form S-
1 declared effective July 14, 1999 (Commission File No. 333-77795).
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal 1999, filed September 13, 1999.
(3) Incorporated by reference to Registrant's Current Report on Form 8-K filed
December 30, 1999.
(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.
II-3
<PAGE>
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 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 Amendment No. 1 to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas, on the 17th day of January, 2000.
EFFICIENT NETWORKS, INC.
/s/ Mark A. Floyd
By:__________________________________
Mark A. Floyd
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 has been signed by the following persons in the capacities and
on the dates indicated below.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mark A. Floyd President, Chief Executive January 17, 2000
______________________________________ Officer and Chairman of
Mark A. Floyd the Board (Principal
Executive Officer)
/s/ Jill S. Manning Vice President and Chief January 17, 2000
______________________________________ Financial Officer
Jill S. Manning (Principal Financial
Officer)
/s/ Bruce W. Brown Director January 17, 2000
______________________________________
Bruce W. Brown
/s/ James P. Gauer Director January 17, 2000
______________________________________
James P. Gauer
Director January 17, 2000
______________________________________
Robert Hawk
Director January 17, 2000
______________________________________
Robert A. Hoff
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director January 17, 2000
______________________________________
Anthony Maher
/s/ William L. Martin III Director January 17, 2000
______________________________________
William L. Martin III
/s/ Thomas H. Peterson Director January 17, 2000
______________________________________
Thomas H. Peterson
</TABLE>
II-6
<PAGE>
Independent Auditors' Report on Schedule
The Board of Directors
Efficient Networks, Inc.:
Under date of July 6, 1999, except as to note 13 which is as of July 20,
1999, we reported on the consolidated balance sheets of Efficient Networks,
Inc. and subsidiary as of June 30, 1998 and 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, 1999, which are
included in the Company's annual report on form 10-K. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule included in the annual
report on form 10-K. 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
July 6, 1999
S-1
<PAGE>
EFFICIENT NETWORKS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to Balance at
Beginning costs and other end of
Description of period expenses accounts Deductions period
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JUNE
30, 1999
Allowances Deducted
from Assets
Accounts receivable... $ 15 105 -- -- $120
Inventories........... 150 130 -- -- 280
---- --- --- --- ----
Total Allowances
Deducted from
Assets.............. $165 235 -- -- $400
==== === === === ====
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
==== === === === ====
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1(1) Restated Certificate of Incorporation of the Registrant.
3.2(2) Restated Bylaws of the Registrant.
3.3* Certificate of Determination defining rights, preferences and
privileges of Registrant's Series A non-voting convertible preferred
stock.
4.1(1) Specimen Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1(1) Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2(1) 1999 Stock Plan and form of agreements thereunder.
10.3(1) 1999 Employee Stock Purchase Plan and form of agreements thereunder.
10.4* 1999 Nonstatutory Stock Option Plan and form of agreements
thereunder.
10.5(1) Investor's Rights Agreement dated July 30, 1993 executed in
connection with the issuance and sale of our Series A Preferred
Stock.
10.6(1) Amendment No. 1 to the Investors' Rights Agreement, dated February 9,
1994.
10.7(1) Amendment No. 2 to the Investors' Rights Agreement, dated September
30, 1994.
10.8(1) Amendment No. 3 to the Investors' Rights Agreement, dated September
1, 1995.
10.9(1) Amendment No. 4 to the Investors' Rights Agreement, dated December
31, 1996.
10.10(1) Amendment No. 5 to the Investors' Rights Agreement, dated February
17, 1998
10.11(1) Amendment No. 6 to the Investors' Rights Agreement, dated June 10,
1998.
10.12(1) Amendment No. 7 to the Investors' Rights Agreement, dated January 11,
1999.
10.13(1) Amendment No. 9 to the Investors' Rights Agreement, dated June 28,
1999.
10.14* Amendment No. 10 to the Investors' Rights Agreement, dated November
21, 1999.
10.15(1) Geico Building Office Lease dated August 19, 1993 by and between
Government Employees Insurance Company and Efficient.
10.16(1) Modification of Geico Office Lease dated May 8, 1995 by and between
Government Employees Insurance Company and Efficient.
10.17(1) Graystone Office Park Lease dated September 8, 1998 by and between
Lanny Houillion and Efficient.
10.18* Office Lease Agreement dated November 5, 1999 by and between Jackson-
Shaw/Alpha Metro Limited Partnership and Efficient.
10.19(3) Agreement and Plan of Merger and Reorganization dated as of November
21, 1999 by and among Efficient Networks, Inc., Cabletron Systems,
Inc., Flowpoint Corporation and Fire Acquisition Corporation (the
"Merger Agreement").
10.20(3) Amendment No. 1 to the Merger Agreement dated December 14, 1999.
10.21(3) Amendment No. 2 to the Merger Agreement dated December 17, 1999.
10.22* Voting Agreement dated November 20, 1999 entered into in connection
with the Merger Agreement.
10.23* Reseller Agreement effective as of December 17, 1999 between the
Registrant and Cabletron Systems, Inc.
10.24* Standstill and Disposition Agreement dated December 17, 1999 between
the Registrant and Cabletron Systems, Inc.
10.25* Cross License Agreement dated December 17, 1999 between the
Registrant and Cabletron Systems, Inc.
23.1 Consent of Independent Auditors regarding Efficient Networks, Inc.
23.2 Consent of Independent Auditors regarding FlowPoint Corporation.
23.3 Consent of Counsel (see Exhibit 5.1).
24.1* Power of Attorney--See Page II-5.
</TABLE>
- --------
* Previously filed.
(1) Incorporated by reference to Registrant's Registration Statement on Form S-
1 declared effective July 14, 1999 (Commission File No. 333-77795).
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for
fiscal 1999, filed September 13, 1999.
(3) Incorporated by reference to Registrant's Current Report on Form 8-K filed
December 30, 1999.
<PAGE>
EXHIBIT 1.1
5,000,000 Shares
EFFICIENT NETWORKS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
___________ __, 2000
Credit Suisse First Boston Corporation
FleetBoston Robertson Stephens
Dain Rauscher Incorporated
WR Hambrecht + Co., LLC
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 Two Million (2,000,000) shares of its
common stock, par value $0.001 per share ("Securities"), and the stockholders
listed in Schedule A hereto ("Selling Stockholders") propose severally to sell
an aggregate of Three Million (3,000,000) outstanding shares of the Securities
(such 5,000,000 shares of Securities being hereinafter referred to as the "Firm
Securities"). The Company also proposes to sell to the Underwriters, at the
option of the Underwriters, an aggregate of not more than Seven Hundred Fifty
Thousand (750,000) additional shares of its Securities, as set forth below (such
750,0000 additional shares being hereinafter referred to as the "Optional
Securities"). The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities". The Company and the Selling
Stockholders hereby agree with the several Underwriters named in Schedule B
hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders. (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) 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 (A) has been
declared effective under the Securities Act of 1933 ("Act") and is not
proposed to be amended or (B) is proposed to be amended by amendment or
post-effective amendment. If such registration statement (the "initial
registration statement") has been declared effective, either (A) an
additional registration statement (the "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 (B) such an additional registration statement is
proposed to be filed with the Commission pursuant to Rule 462(b) and will
become
1
<PAGE>
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 (A) 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 (B) if the Company has advised the
Representatives that it proposes to file an amendment or 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 are hereinafter 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.
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all respects to the requirements of the Act and the
rules and regulations of the Commission ("Rules and Regulations") 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, (B) 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 (C) on
2
<PAGE>
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(c) hereof.
(iii) 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.
(iv) 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.
(v) The Offered Securities and all other outstanding shares of capital
stock of the Company have been duly authorized and validly issued, 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.
(vi) 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.
(vii) 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.
3
<PAGE>
(viii) The Securities are listed on The Nasdaq Stock Market's National
Market.
(ix) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required to be obtained or
made by the Company for the consummation of the transactions contemplated
by this Agreement in connection with the sale of the Offered Securities,
except such as have been obtained and made under the Act and such as may be
required under state securities laws.
(x) The execution, delivery and performance of this Agreement, and the
consummation of the transactions herein contemplated 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.
(xi) This Agreement has been duly authorized, executed and delivered by
the Company.
(xii) 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.
(xiii) 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").
(xiv) 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.
(xv) 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
employed by them, 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.
(xvi) 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
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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 Material
Adverse Effect; and the Company is not aware of any pending investigation
which might lead to such a claim.
(xvii) 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.
(xviii) 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; 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 assumptions, and the pro forma columns therein reflect the
proper application of those adjustments to the corresponding historical
financial statement amounts.
(xix) 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.
(xx) 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.
(b) Each Selling Stockholder severally represents and warrants to, and
agrees with, the several Underwriters that:
(i) Such Selling Stockholder has and on each Closing Date hereinafter
mentioned will have valid and unencumbered title to the Offered Securities
to be delivered by such Selling Stockholder on such Closing Date and full
right, power and authority to enter into this Agreement and to sell,
assign, transfer and deliver the Offered Securities to be delivered by such
Selling Stockholder on such Closing Date hereunder; and upon the delivery
of and payment for the Offered Securities on each Closing Date hereunder
the several Underwriters will acquire valid and unencumbered title to the
Offered Securities to be delivered by such Selling Stockholder on such
Closing Date.
(ii) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
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Registration Statement conformed in all respects to the requirements of the
Act and the Rules and Regulations 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, (B) 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 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 (C) 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. The two preceding sentences
apply only to the extent that any statements in or omissions from a
Registration Statement or the Prospectus are based on written information
furnished to the Company by such Selling Stockholder specifically for use
therein.
(iii) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between such Selling Stockholder and any
person that would give rise to a valid claim against such Selling
Stockholder or any Underwriter for a brokerage commission, finder's fee or
other like payment in connection with this offering.
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 and each Selling Stockholder
agree, severally and not jointly, to sell to each Underwriter, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
each Selling Stockholder, at a purchase price of $ per share, that
number of Firm Securities (rounded up or down, as determined by Credit Suisse
First Boston Corporation ("CSFBC") in its discretion, in order to avoid
fractions) obtained by multiplying 2,000,000 Firm Securities in the case of the
Company and the number of Firm Securities set forth opposite the name of such
Selling Stockholder in Schedule A hereto, in the case of a Selling Stockholder,
in each case by a fraction the numerator of which is the number of Firm
Securities set forth opposite the name of such Underwriter in Schedule B hereto
and the denominator of which is the total number of Firm Securities.
Certificates in negotiable form for the Offered Securities to be sold by
the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with Mark A. Floyd, as
custodian ("Custodian"). Each Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholders
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law, whether by
the death of any individual Selling Stockholder or the occurrence of any other
event, or in the case of a trust, by the death of any trustee or trustees or the
termination of such trust. If any individual Selling Stockholder or any such
trustee or trustees should die, or if any other such event should occur, or if
any of such trusts should terminate, before the delivery of the Offered
Securities
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hereunder, certificates for such Offered Securities shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death or other event or termination had not occurred, regardless of whether
or not the Custodian shall have received notice of such death or other event or
termination.
The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, at the office of Brobeck,
Phleger & Harrison LLP, 13455 Noel Road, Suite 1710, Two Galleria Tower, Dallas,
Texas 75240 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
reasonably acceptable to CSFBC drawn to the order of the Company in the case of
2,000,000 shares of Firm Securities and to the Custodian in the case of
3,000,000 shares of Firm Securities, at the office of Brobeck, Phleger &
Harrison LLP, 13455 Noel Road, Suite 1710, Two Galleria Tower, Dallas, Texas
75240, at 8:00 A.M., New York time, on , 2000, 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". 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 of Brobeck, Phleger & Harrison LLP 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 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 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
from the Company for the account of each Underwriter in the same proportion as
the number of Firm Securities set forth opposite such Underwriter's name bears
to the total number 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(3) 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, at the office of
Brobeck, Phleger & Harrison LLP, 13455 Noel Road, Suite 1710, Two Galleria
Tower, Dallas, Texas 75240, 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 the Company at the
above office of Brobeck, Phleger & Harrison LLP. 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 of Brobeck,
Phleger & Harrison LLP at a reasonable time in advance of such Optional 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.
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5. Certain Agreements of the Company and the Selling Stockholders. The
Company agrees with the several Underwriters and the Selling Stockholders 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 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.
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<PAGE>
(e) The Company will furnish to the Representatives copies of each
Registration Statement (two (2) 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 such
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) For a period of 90 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 or exchange of
convertible or exchangeable securities or the exercise of warrants or
options, in each case outstanding on the date hereof, 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 or
issuances of Securities pursuant to the Company's dividend reinvestment
plan.
(i) The Company and each Selling Stockholder agree with the several
Underwriters that the Company and such Selling Stockholder will pay all
expenses incident to the performance of the obligations of the Company and
such Selling Stockholder, as the case may be, under this Agreement, for any
filing fees and other expenses (including fees and disbursements of
counsel) 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 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, for any transfer taxes on the sale by the Selling Stockholders
of the Offered Securities to the Underwriters and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(j) Each Selling Stockholder agrees to deliver to CSFBC, attention:
Transactions Advisory Group on or prior to the First Closing Date a
properly completed and executed United States Treasury Department Form W-9
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
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(k) Each Selling Stockholder agrees that, except as otherwise may be
expressly agreed to in a lock-up agreement entered into prior to the date
hereof between such Selling Stockholder and CSFBC, on behalf of the
Representatives, for a period of 90 days after the date of the initial
public offering of the Offered Securities, such Selling Stockholder shall
not offer, sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, any additional shares of the Securities of the Company or
securities convertible into or exchangeable or exercisable for any shares
of Securities, or publicly disclose the intention to make any such offer,
sale, pledge or disposition, without the prior written consent of CSFBC.
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 and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their 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), of 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) the unaudited consolidated net revenues, gross profit and
net loss amounts for the 6 -month period ended December 31, 1999
included in the Prospectus do not agree with the amounts set
forth in the unaudited consolidated
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financial statements for those same periods or were not
determined on a basis substantially consistent with that of the
corresponding amounts in the audited statements of income;
(C) 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
(D) 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 previous year, in consolidated net revenues or net loss from
operations or in the total or per share amounts of consolidated
net loss;
except in all cases set forth in clauses (A) and (D) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(iii) 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 Statements 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 Statements is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration Statement 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
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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 any Selling Stockholder, 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 or its
subsidiaries 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 suspension or 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, New York or
Texas 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 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, 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
[California, Texas and others to be listed];
(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;
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<PAGE>
(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 to be
obtained or made by the Company or any Selling Stockholder for the
consummation of the transactions contemplated by this Agreement or the
Custody Agreement in connection with the sale of the Offered
Securities, 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
or the Custody Agreement and the consummation of the transactions
herein or therein contemplated 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;
(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 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
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<PAGE>
(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 Wilson, Sonsini, Goodrich & Rosati, in its capacity as
special counsel for the Selling Stockholders, to the effect that:
(i) Each Selling Stockholder had valid and unencumbered title
to the Offered Securities delivered by such Selling Stockholder on
such Closing Date and had full right, power and authority to sell,
assign, transfer and deliver the Offered Securities delivered by such
Selling Stockholder on such Closing Date hereunder; and the several
Underwriters have acquired valid and unencumbered title to the Offered
Securities purchased by them from the Selling Stockholders on such
Closing Date hereunder;
(ii) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by any Selling Stockholder for the consummation of
the transactions contemplated by the Custody Agreement or this
Agreement in connection with the sale of the Offered Securities sold
by the Selling Stockholders, except such as have been obtained and
made under the Act and such as may be required under state securities
laws;
(iii) The execution, delivery and performance of the Custody
Agreement and this Agreement and the consummation of the transactions
therein and herein contemplated 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 any
Selling Stockholder or any of their respective properties or any
agreement or instrument to which any Selling Stockholder is a party or
by which any Selling Stockholder is bound or to which any of the
properties of any Selling Stockholder is subject, or the charter or
by-laws of any Selling Stockholder which is a corporation;
(iv) The Power of Attorney and related Custody Agreement with
respect to each Selling Stockholder has been duly authorized, executed
and delivered by such Selling Stockholder and constitute valid and
legally binding obligations of each such Selling Stockholder
enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles; and
(v) This Agreement has been duly authorized, executed and
delivered by each Selling Stockholder.
(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 Selling Stockholders 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 Chief Executive Officer and the Vice President
and Chief Financial Officer of the Company in which
14
<PAGE>
such officers, to the best of their knowl edge 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 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 Selling Stockholders and 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 (c) below.
(b) The Selling Stockholders, jointly and severally, will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person 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
15
<PAGE>
statements therein not misleading, and will reimburse each Underwriter for any
legal or other expens es 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 Selling
Stockholders 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 an 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 (c) below; provided, further, that
if such Selling Stockholder is other than the Chief Executive Officer or Chief
Financial Officer of the Company, then such Selling Stockholders shall only be
subject to such liability to the extent that the untrue statement or alleged
untrue statement or omission or alleged omission is based upon information
provided by such Selling Stockholder or contained in a representation or
warranty given by such Selling Stockholder in this Agreement or the Custody
Agreement; and, provided, further, that the liability under this subsection of
each Selling Stockholder shall be limited to an amount equal to the aggregate
gross proceeds to such Selling Stockholder from the sale of Securities sold by
such Selling Stockholder hereunder.
(c) 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, and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder 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 and each Selling
Stockholder 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 (i) the following information in the Prospectus furnished on behalf of each
Underwriter: the concession and reallowance figures appearing in the fourth
paragraph under the caption "Underwriting" and the information contained in the
last paragraph under the caption "Underwriting".
(d) 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 an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
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), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies an 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 suc h 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
16
<PAGE>
by such indemnified party unless such (i) settlement 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.
(e) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) 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), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other from the offering of the 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 and the Selling Stockholders 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 and the Selling Stockholders 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 and the Selling Stockholders 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, the Selling
Stockholders 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 (e) 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 (e).
Notwithstanding the provisions of this subsection (e), 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
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under this
Section shall be in addition to any liability which the Company and the Selling
Stockholders 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 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 and the Selling Stockholders 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
17
<PAGE>
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, the Company and the Selling Stockholders 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, the Company or the Selling Stockholders, 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
Selling Stockholders, 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, any Selling
Stockholder, 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 and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Stockholders, 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 and the Selling
Stockholders will, jointly and severally, 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 75244-3666, Attention: Chief Executive Officer, or, if
sent to the Selling Stockholders or any of them, will be mailed, delivered or
telegraphed and confirmed to Efficient Networks, Inc. at 4201 Spring Valley
Road, Suite 1200, Dallas, Texas 75244-3666, Attention: 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 personal representatives and
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. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action under this Agreement taken by the Representatives jointly or by
CSFBC will be binding upon all the Underwriters. Mark A. Floyd will act for the
Selling Stockholders in connection with such transactions, and any action under
or in respect of this Agreement taken by Mark A. Floyd will be binding upon all
the Selling Stockholders.
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
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<PAGE>
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.
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.
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<PAGE>
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 among the Selling
Stockholders, the Company and the several Underwriters in accordance with its
terms.
Very truly yours,
[Selling Stockholders:]
By:
---------------------------------------------------
Mark A. Floyd, Attorney-in-Fact
-------------------------------------------------------
Mark A. Floyd, in his capacity as a Selling Stockholder
EFFICIENT NETWORKS, INC.
By:
---------------------------------------------------
Mark A. Floyd
Chief Executive Officer and President
20
<PAGE>
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.
Credit Suisse First Boston Corporation
FleetBoston Robertson Stephens
Dain Rauscher Incorporated
WR Hambrecht + Co., LLC
Acting on behalf of themselves and as the
Representatives of the several
Underwriters.
By Credit Suisse First Boston Corporation
By
------------------------------------------
[Insert title]
21
<PAGE>
SCHEDULE A
Number of
Firm Securities
Selling Stockholder to be Sold
-------------------- ---------------
---------
Total........................................ 3,000,000
22
<PAGE>
SCHEDULE B
Number of
Firm Securities
Underwriter to be Purchased
----------- ---------------
Credit Suisse First Boston Corporation............
FleetBoston Robertson Stephens....................
Dain Rauscher Incorporated........................
WR Hambrecht + Co., LLC...........................
-------------
Total........................... 5,000,000
=============
23
<PAGE>
Exhibit 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI APPEARS HERE]
January 17, 2000
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 January 10, 2000 (the
"Registration Statement"), in connection with registration under the Securities
Act of 1933, as amended, of up to 5,000,000 shares of your Common Stock and an
over-allotment option granted to the underwriters of the offering to purchase up
to 750,000 shares from you (collectively, the "Shares"). Of the Shares, we
understand that up to 2,750,000 shares (including up to 750,000 shares that may
be issued to cover the underwriters overallotment option) will be issued by you
(the "Company Shares"), and the remaining shares will be sold by certain persons
holding previously issued shares of your common stock (the "Selling Stockholder
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 Company Shares. We have also examined the
actions taken in connection with the original issuance of the Selling
Stockholder Shares.
It is our opinion that, (1) the Company Shares, when issued and sold
in the manner described in the Registration Statement, will be legally issued,
fully paid and nonassessable and (2) the Selling Stockholder Shares have been
legally issued and are fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name wherever
appearing in the Registration Statement, including the Prospectus constituting a
part thereof, and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI, P.C.
<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.
/s/ KPMG LLP
Dallas, Texas
January 17, 2000
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors
Efficient Networks, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Boston, Massachusetts
January 17, 2000
