<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-26473
EFFICIENT NETWORKS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2486865
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
4849 Alpha Road
Dallas, Texas 75244
(Address of principal executive office and zip code)
(972) 852-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES [X] NO [_]
As of February 11, 2000, 48,095,542 shares of the Registrant's common stock were
outstanding.
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<PAGE>
Efficient Networks, Inc.
FORM 10-Q
December 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information.......................................................................................... 3
Consolidated Balance Sheets at December 31, 1999 (unaudited) and June 30, 1999.............................. 3
Consolidated Statements of Operations (unaudited) for the Three Months Ended December 31, 1999, and 1998.... 4
Consolidated Statements of Operations (unaudited) for the Six Months Ended December 31, 1999, and 1998...... 4
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended December 31, 1999, and 1998...... 5
Notes to Consolidated Financial Statements.................................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 11
Item 3. Qualitative and Quantitative Disclosure About Market Risk.................................................... 19
Risk Factors................................................................................................ 19
Part II Other Information............................................................................................ 33
Item 1. Legal Proceedings............................................................................................ 33
Item 2. Changes In Securities and Use of Proceeds.................................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 34
Item 6. Exhibits and Reports on Form 8-K............................................................................. 34
Signatures........................................................................................................... 35
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PART I Financial Information
Item 1. Financial Statements
EFFICIENT NETWORKS, INC.
Consolidated Balance Sheets
(In thousands, except share data)
Assets December 31, 1999 June 30, 1999
----------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents
Short-term investments $ 31,803 $ 3,604
Accounts receivable, net of allowance for doubtful 3,983 -
accounts of $658 and $120 at December 31, 1999
and June 30, 1999, respectively 37,219 10,316
Inventories 26,424 5,472
Other assets 1,344 241
----------- -----------
Total current assets 100,773 19,633
Furniture and equipment, net 5,066 2,285
Other assets, net 231 29
Intangible assets, net of accumulated amortization of $7,358
at December 31, 1999 917,171 -
----------- -----------
$ 1,023,241 $ 21,947
=========== ===========
Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 16,047 $ 4,104
Accrued liabilities 23,419 2,208
Deferred revenue 3,399 736
----------- -----------
Total current liabilities 42,865 7,048
Long-term debt, net of discount - 13,396
Other liabilities 19 22
----------- -----------
Total liabilities 42,884 20,466
----------- -----------
Redeemable convertible preferred stock 431,550 40,495
Commitments and contingencies Stockholders' equity (deficit):
Common stock, par value $.001 per share, 100,000,000 shares
authorized; 44,834,917 and 4,362,221 shares issued and
outstanding at December 31, 1999 and June 30, 1999, respectively 45 4
Additional paid-in capital 641,369 29,777
Deferred stock option compensation (12,537) (14,606)
Accumulated deficit (80,070) (54,189)
----------- -----------
Total stockholders' equity (deficit) 548,807 (39,014)
----------- -----------
$ 1,023,241 $ 21,947
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- ----------------------
1999 1998 1999 1998
------------------------- ----------------------
<S> <C> <C> <C> <C>
Net revenues $ 26,424 $ 1,850 $ 38,595 $ 1,850
Cost of revenues 21,219 1,647 32,925 1,647
---------- --------- -------- -------
Gross profit 5,205 203 5,670 203
---------- --------- -------- -------
Operating expenses:
Sales and marketing 4,849 1,303 7,502 1,303
Research and development 4,318 1,790 7,371 1,790
General and administrative 1,284 411 2,330 411
Stock option compensation 1,219 475 2,608 475
Amortization of intangibles 7,358 - 7,358 -
In process research and development charge 4,970 - 4,970 -
---------- --------- -------- -------
Total operating expenses 23,998 3,979 32,139 3,979
---------- --------- -------- -------
Loss from operations (18,793) (3,776) (26,469) (3,776)
Interest income 666 31 1,263 31
Interest expense and other, net - (1) (675) (1)
---------- --------- -------- -------
Net loss $ (18,127) $ (3,746) $(25,881) $(3,746)
========== ========= ======== =======
Basic and diluted net loss per share of common stock $ (0.47) $ (1.00) $ (0.75) $ (1.00)
========== ========= ======== =======
Weighted-average shares of common stock outstanding 38,644 3,819 34,570 3,819
========== ========= ======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31,
----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (25,881) $ (7,121)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 556 379
Amortization of deferred stock option
compensation 2,608 908
Accretion of discount on subordinated promissory
notes 604 -
Amortization of intangible assets 7,358
In process research and development charge 4,970
Changes in operating assets and liabilities, net
of assets and liabilities acquired in
business combination:
Accounts receivable (17,626) (1,680)
Inventories (19,809) (762)
Other assets and liabilities (1,151) 175
Accounts payable and accrued liabilities 6,506 2,046
Deferred revenue 2,663 1
---------- ---------
Net cash used in operating activities (39,202) (6,054)
---------- ---------
Cash flows from investing activities:
Purchase of fixed assets (2,909) (924)
Purchase of investments (3,983) -
Net cash received in connection with purchase of
FlowPoint Corporation 10,916 -
---------- ---------
Net cash provided (used) in investing activities 4,024 (924)
---------- ---------
Cash flows from financing activities:
Principal payments on capital lease obligations - (12)
Proceeds from issuance of common stock, net 63,377 19
---------- ---------
Net cash provided by financing activities 63,377 7
---------- ---------
Increase (decrease) in cash and cash equivalents 28,199 (6,971)
Cash and cash equivalents at beginning of period 3,604 7,607
---------- ---------
Cash and cash equivalents at end of period $ 31,803 $ 636
========== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
Efficient Networks, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(1) Basis of Presentation
The accompanying unaudited financial data as of and for the three
months and six months ended December 31, 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
unaudited consolidated financial statements should be read in
conjunction with the audited 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 and six months ended December 31, 1999 have been made. The
results of operations for the three months and six months ended
December 31, 1999 are not necessarily indicative of the operating
results for the full year.
(2) Completion of Initial Public Offering
On July 15, 1999, the Company completed its initial public offering.
The Company issued 4.6 million shares of common stock in exchange for
net proceeds of approximately $63.1 million. Upon the completion of the
initial public offering, certain outstanding subordinated promissory
notes converted into an aggregate of 3.6 million shares of redeemable
convertible preferred stock, and all outstanding redeemable convertible
preferred stock converted into an aggregate of 28.3 million shares of
common stock.
(3) Acquisition
On November 21, 1999, the Company entered into an agreement with
Cabletron Systems, Inc. ("Cabletron") to acquire its wholly-owned
subsidiary FlowPoint Corporation ("FlowPoint") from Cabletron. The
acquisition was completed on December 17, 1999. The results of
operations of FlowPoint have been included in the Company's
consolidated statement of operations from the date of acquisition
through December 31, 1999.
The Company financed the acquisition of FlowPoint through the issuance
of 7.2 million shares of common stock and 6,300 shares of Series A
non-voting redeemable convertible preferred stock. The Series A
preferred stock is convertible into an aggregate of 6.3 million shares
of common stock and is mandatorily redeemable.
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<PAGE>
The acquisition was accounted for under the purchase method of
accounting and, accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based on the estimated fair
values at the date of acquisition. The shares issued to Cabletron for
FlowPoint had a fair market value of $924.8 million based upon the
market price of $68.50, which represents the Company's average closing
sale price for two trading days before and two trading days after the
terms of the acquisition were agreed to.
The total purchase price of $937.9 million, including direct costs of
acquisition of $13.1 million, was allocated as follows (in thousands):
Acquired technology $ 21,545
Assembled workforce 940
Sales channel and customer relationships 12,930
In process research and development 4,970
Non-compete agreements 50
Excess cost over fair value of net assets acquired 888,729
Fair value of tangible assets acquired, net of
liabilities assumed 8,695
----------
$ 937,859
==========
The allocation of acquired technology, assembled workforce, sales
channel and customer relationships, in process research and development
and non-compete agreements was based upon an independent valuation. The
Company wrote off in process research and development immediately upon
consummation of the aquisition. In addition, in connection with the
FlowPoint acquisition, 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 a rate of approximately
$46.2 million per quarter over a five-year period.
The following pro forma financial information presents a summary of the
results of operations as if the acquisition had occurred on July 1,
1998:
(Unaudited)
-----------------------------------------
Six months ended Six months ended
December 31, 1999 December 31, 1998
------------------ -----------------
Revenues $ 60,048 $ 6,096
Expenses 174,371 107,523
----------- -----------
Net loss $ (114,323) $ (101,427)
=========== ===========
Basic and diluted loss per
share of common stock $ (2.74) $ (9.20)
=========== ===========
Shares used in computing
basic and diluted loss per
share of common stock 41,770 11,019
=========== ===========
(4) Earnings Per Share
Basic and diluted earnings (loss) per share has been computed in
accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share." Basic earnings per share is computed by
dividing income or loss by the weighted average number of shares of the
Company's common stock outstanding during the period. Diluted earnings
per share is determined in the same manner 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. The
diluted earnings per share amount is the same as basic earnings per
share because the Company has a net loss in each of the periods
presented and the impact of the assumed exercise of the stock options
and warrants and the assumed preferred stock conversion is
antidilutive. Common stock equivalents of 6.5 million and 27.6 million
shares for the three months ended December 31, 1999 and 1998,
respectively, and 7.7 million and 27.6 million shares for the six
months ended December 31, 1999 and 1998, respectively, were excluded
from the calculation of diluted earnings per share because of the
antidilutive effect.
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 Six Months Ended
December 31, December 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (18,127) $ (3,746) $(25,881) $ (7,121)
Accretion of issuance costs on redeemable
convertible preferred stock - (88) - (175)
---------- -------- -------- -------
Net loss available to common stockholders $(18,127) $ (3,834) $(25,881) $ (7,296)
======== ======== ======== ========
Weighted average shares outstanding 38,644 3,819 34,570 3,766
======== -------- ======== --------
Basic and diluted net loss per share $ (0.47) $ (1.00) $ (0.75) $ (1.94)
========= ======= ======= =======
</TABLE>
(5) Inventories
Inventories consisted of the following (in thousands):
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<PAGE>
December 31, June 30,
----------- -------
1999 1999
---- ----
Raw materials $ 2,365 $ 2,265
Finished goods 24,059 3,207
-------- -------
Total $ 26,424 $ 5,472
-------- -------
(6) Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
December 31, June 30,
1999 1999
---- ----
Accrued compensation and benefits $ 7,813 $1,102
Accrued acquisition costs 10,560 -
Other 5,046 1,106
--------- ---------
Total $ 23,419 $2,208
--------- ---------
(7) Deferred revenue
Deferred revenue of $3.4 million at December 31, 1999 primarily relates
to shipments of product to customers where title and risk of ownership
has passed to the customer, but revenue recognition has been deferred
for accounting purposes due to certain stock balancing and right of
return privileges granted to the customer. The corresponding receivable
of $3.4 million is included in the accounts receivable balance at
December 31, 1999.
(8) Long-term debt
In January 1999, the Company issued subordinated promissory notes with
detachable warrants in exchange for $7.0 million in cash. On April 8,
1999, the Company issued a subordinated promissory note with a
detachable warrant in exchange for $2.0 million in cash. The notes bore
interest at 10% per annum with interest payable quarterly. The
subordinated promissory notes were issued with detachable warrants to
purchase an aggregate of 3.1 million shares of the Company's redeemable
convertible preferred stock at an exercise price of $2.92 per share. In
June 1999, the holders of the subordinated promissory notes 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 redeemable convertible
preferred stock, which shares of preferred stock automatically
converted into shares of common stock upon completion of the initial
public offering.
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<PAGE>
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 497,663 shares of
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.
(9) Statements of Cash Flows
The Company paid cash interest of $400,000 and $0 during the six months
ended December 31, 1999 and 1998, respectively. No income taxes were
paid during the six months ended December 31, 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 six months ended December 31, 1999. In
connection with the acquisition of FlowPoint, the Company exchanged 7.2
million shares of Common Stock and 6,300 shares of redeemable
convertible preferred stock for the assets and liabilities of
FlowPoint. No non-cash financing transactions occurred during the six
months ended December 31, 1998.
(10) Completion of Follow-on Public Offering
On February 8, 2000 the Company completed a follow-on public offering
of 5.75 million shares of common stock. The Company issued 2.75 million
shares of common stock in exchange for net proceeds of approximately
$182.8 million after deduction of the underwriters' discount and
estimated expenses. The selling stockholders sold 3 million shares of
common stock. The Company did not receive any of the proceeds from the
sale of shares by the selling stockholders.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," and words of similar import, may
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers are referred to the Risk
Factors section in this report and to the risk factors set out in the Company's
Annual Report on Form 10-K which describes factors that could cause actual
events to differ from those contained in the forward looking statements.
Overview
We are a worldwide independent developer and supplier of high-speed 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 98.5% of our net
revenues in the first six months 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 quarter ended December 31, 1999, sales to
three customers, American Communications Supply, Inc., a distributor for
Southwestern Bell, Innotrac Corporation, a distributor for BellSouth, and Covad
Communications Group, Inc. each represented more than 10% of our net revenues.
For the six months ended December 31, 1999, sales to four customers, American
Communications Supply, Inc., a distributor for Southwestern Bell, America
Online, Inc., Innotrac Corporation, a distributor for BellSouth, and Covad
Communications Group, Inc. each represented more than 10% 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
for the three and six months ended December 31, 1999 accounted for 80.0% and
83.0% of our net revenues, respectively. 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
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<PAGE>
the United States represented 23% and 22% of our net revenues for the three and
six months ended December 31, 1999, respectively, and 41% and 52% of our net
revenues in fiscal 1999 and 1998, respectively. 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 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 December 31, 1999, we
had an accumulated deficit of $80.1 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 six months ended
December 31, 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, $1.2 million and $2.6 million in fiscal years 1997, 1998, 1999 and the
quarter and six months ended December 31, 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.
On November 21, 1999, the Company 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.
The results of operations of FlowPoint have been included in the Company's
consolidated statement of operations from the date of acquisition through
December 31, 1999. The Company financed the acquisition of FlowPoint through
the issuance of 7.2 million shares of common stock and 6,300 shares of Series A
non-voting redeemable convertible preferred stock. The Series A preferred stock
is convertible into an aggregate of 6.3 million shares of common stock and is
mandatorily redeemable. The acquisition was accounted for under the purchase
method of accounting and, accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based on the estimated fair values at
the date of acquisition. The shares issued to Cabletron for FlowPoint had a fair
market value of $924.8 million based upon the market price of $68.50, which
represents the Company's average closing sale price for two trading days before
and two trading days after the terms of the acquisition were agreed to. In
connection with the FlowPoint acquisition, 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. In addition, the Company recorded a
one-time write off of $5.0 million of in process research and development
incurred in connection with the acquisition of FlowPoint in the December
quarter.
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<PAGE>
Results of Operations
The following table sets forth, for the periods presented, certain data
from Efficient's consolidated statement of operations expressed as a percentage
of net revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 80.3 89.0 85.3 83.0
---------- ----------- --------- ---------
Gross profit 19.7 11.0 14.7 17.0
---------- ----------- --------- ---------
Operating expenses:
Sales and marketing 18.4 70.4 19.4 81.7
Research and development 16.3 96.8 19.1 119.6
General and administrative 4.9 22.2 6.0 24.8
Stock option compensation 4.6 25.7 6.8 30.0
Amortization of intangibles 27.8 0.0 19.1 0.0
In process research and development charge 18.8 0.0 12.9 0.0
---------- --------- --------- ---------
Total operating expenses 90.8 215.1 83.3 256.1
---------- --------- --------- ---------
Loss from operations (71.1) (204.1) (68.6) (239.1)
Interest income 2.5 1.7 3.3 3.9
Interest expense and other, net (0.0) (0.1) (1.7) (0.3)
---------- --------- --------- ---------
Net loss (68.6)% (202.5)% (67.0)% (235.5)%
========== ========= ========= =========
</TABLE>
Three Months and Six Months Ended December 31, 1999 and 1998
Net Revenues
Net revenues consist of product sales, net of allowances for returns.
Net revenues increased 1,328.3% to $26.4 million for the quarter ended December
31, 1999 from $1.9 million for the comparable quarter in 1998. Net revenues
increased 1,176.3% to $38.6 million for the six months ended December 31, 1999
from $3.0 million for the comparable period in 1998. DSL product revenues
increased to $26.1 million for the quarter ended December 31, 1999 compared to
$1.6 million for the quarter ended December 31, 1998. DSL product revenues
increased to $37.9 million for the six months ended December 31, 1999 compared
to $2.0 million for the six months ended December 31, 1998. The increase in DSL
product revenues for the quarter and six months ended December 31, 1999 compared
to the same period in 1998 reflects the continued market adoption of our DSL
products, as well as the addition of new products to the Company's DSL product
line. Revenues in the December 1999 quarter also benefited from the acquisiton
in December 1999 of FlowPoint. Flowpoint contributed $3.0 million to revenues in
the quarter. Net revenues exclude $3.4 million of deferred revenues primarily
related to shipments of product to customers where title and risk of ownership
has passed to the customer, but revenue recognition has been deferred for
accounting purposes due to certain stock balancing and return rights granted to
the customer.
Cost of Revenues
Cost of revenues consists of amounts paid to third-party contract
manufacturers and the personnel and related costs of our manufacturing
operation. Cost of revenues increased 1,188% to $21.2 million, or 80.3% of net
revenues, for the quarter ended December 31, 1999 from $1.6 million, or 89.0% of
net revenues, for the quarter ended December 31, 1998. Cost of revenues
increased 1,211.8% to $32.9 million, or 85.3% of net revenues, for the six
months ended December 31, 1999 from $2.5 million, or 83.0% of net revenues, for
the six months ended December 31, 1998. The increase from the quarter and six
months ended December 31, 1998 to the comparable period in 1999 reflected the
increase in DSL product sales.
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<PAGE>
Gross margin represented 19.7% of net revenues for the quarter ended
December 31, 1999, compared to 11.0% of net revenues for the same period in
1998. Gross margin represented 14.7% of net revenues for the six months ended
December 31, 1999, compared to 17.0% of net revenues for the same period in
1998. The 1999 amounts are not comparable to the 1998 amounts due to the shift
from ATM LAN products to DSL products. For the quarter ended December 31, 1999,
our gross margin improved from the gross margin achieved in the quarter ended
September 30, 1999 due to manufacturing and other cost efficiencies associated
with higher production volumes and a change in contract manufacturer. Included
in cost of revenues for the six months ended December 31, 1999 are $1.0 million
of one-time costs associated with a change in the Company's contract
manufacturer. Excluding these one-time costs, the gross margin for the six
months ended December 31, 1999 would have been 17.3%. Although an improvement
has been achieved in the current period, gross margin continued to be adversely
affected by our efforts to bring our DSL products to market quickly and as we
continued to add personnel to our manufacturing operations in anticipation of
higher levels of business going forward. We took a number of actions that were
designed to bring our DSL products to market quickly, but which also adversely
affected our gross margins. These actions included initial volume price
discounts for key customers and incremental costs such as manufacturing start-
up, expedite and other incremental shipping and handling charges associated with
low volume manufacturing. We expect that we will continue to incur higher than
normal costs associated with the actions to bring our DSL products to market
quickly.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries,
commissions and benefits, advertising, promotional materials and trade show
exhibit expenses. Sales and marketing expenses increased 272% to $4.8 million
for the quarter ended December 31, 1999, up from $1.3 million for the same
period in 1998. Sales and marketing expenses increased 203.6% to $7.5 million
for the six months ended December 31, 1999, up from $2.5 million for the same
period in 1998. The increase in sales and marketing expenses resulted from
expanded sales and marketing activities associated with our DSL products. These
costs included significant personnel-related expenses associated with increasing
the size of our sales and marketing organization, and increased trade show
activities and related travel expenses. Sales and marketing expenses represented
18.4% of net revenues for the quarter ended December 31, 1999, and 70.4% of net
revenues for the quarter ended December 31, 1998. Sales and marketing expenses
represented 19.4% of net revenues for the six months ended December 31, 1999,
and 81.7% of net revenues for the six months ended December 31, 1998. The
decrease in sales and marketing expenses as a percentage of net revenues for the
quarter and six months ended December 31, 1999 compared to the same period in
1998 was a result of the increase in DSL revenues. We expect sales and marketing
expenses to increase in dollar amount in future periods as we continue to expand
our domestic and international sales and marketing organization.
Research and Development Expenses
Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts, including third-
party consulting and prototyping costs. Research and development expenses
increased 141% to $4.3 million for the quarter ended December 31, 1999, up from
$1.8 million for the quarter ended December 31, 1998. Research and development
expenses increased 103.8% to $7.4 million for the six months ended December 31,
1999, up from $3.6 million for the six months ended December 31, 1998. The
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 16.3% of net revenues for the quarter ended
December 31, 1999 compared to 96.8% of net revenues for the quarter ended
December 31, 1998. Research and development expenses represented 19.1% of net
revenues for the six months ended December 31, 1999 compared to 119.6% of net
revenues for the six months ended December 31, 1998. The decrease in research
and development expenses as a percentage of net revenues for the quarter and six
months ended December 31, 1999 compared to the same period in 1998 was a result
of the rapid increase in DSL revenues. We expect research and development
expenses to increase in dollar amount in future periods as we continue to expand
our research and development organization to develop new products and
technologies.
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.
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General and administrative expenses increased 212% to $1.3 million for the
quarter ended December 31, 1999, up from approximately $411,000 for the same
period in 1998. General and administrative expenses increased 210.7% to $2.3
million for the six months ended December 31, 1999, up from approximately
$750,000 for the same period in 1998. The increases in general and
administrative spending were primarily a result of increases in headcount
associated with building our infrastructure. General and administrative expenses
represented 4.9% of net revenues for the quarter ended December 31, 1999,
compared to 22.2% of net revenues for the quarter ended December 31, 1998.
General and administrative expenses represented 6.0% of net revenues for the six
months ended December 31, 1999, compared to 24.8% of net revenues for the six
months ended December 31, 1998. The decrease in general and administrative
expenses as a percentage of net revenues for the quarter and six months ended
December 31, 1999 compared to the same period in 1998 was a result of the
increase in DSL revenues. We expect general and administrative expenses to
increase in dollar amount in future periods as we continue to build our
infrastructure and as a result of operating as a publicly-held company.
Stock Option Compensation
Stock option compensation reflects the difference between the exercise
price of stock options granted and the deemed fair market value of our common
stock on the dates of grant. Amortization of deferred stock option compensation
was $1.2 million and $2.6 million for the quarter and six months ended December
31, 1999, respectively, compared to approximately $475,000 and $908,000 for the
quarter and six months ended December 31, 1998, respectively. 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.
Amortization of Intangibles and In Process Research and Development
Amortization of intangibles represents amortization of the intangible
assets recorded in connection with the FlowPoint acquisition. The Company
recorded $924.5 million in intangible assets, of which $7.4 million was
amortized in the quarter ended December 31, 1999. The remainder will be
amortized at the rate of approximately $46.2 million per quarter over a five
year period. In the quarter ended December 31, 1999, the Company also recorded a
one-time write-off of $5.0 million of in process research and development
incurred in connection with the FlowPoint acquisition.
Interest Income and Interest Expense and Other, Net
Interest income consists primarily of interest earned on cash and cash
equivalents. Interest income increased for the quarter and six months ended
December 31, 1999 from the quarter and six months ended December 31, 1998, as a
result of interest earned primarily from the net cash proceeds received in
connection with the Company's completion of its initial public offering on July
15, 1999. 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 December 31, 1999, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. The Company has significant federal net operating loss carryforwards to
offset future taxable income which will begin to expire in varying amounts
beginning in 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
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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.
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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. From 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, the Company completed an initial public
offering. The Company issued 4.6 million shares of common stock and raised $63.1
million in net proceeds. Upon the completion of the initial public offering, the
Company's promissory notes converted into redeemable convertible preferred
stock, and all then outstanding redeemable convertible preferred stock converted
into 28.3 million shares of common stock.
At December 31, 1999, we had cash and cash equivalents and highly
liquid short-term investments of $35.8 million. At December 31, 1999, we did not
have a line of credit or other borrowing facility available, nor did we have any
material capital commitments. Future capital commitments include a lease for
office space, furniture and equipment for our new corporate headquarters in
Dallas, Texas. The lease commences in February 2000 and expires in 2010 with
annual lease payments of approximately $2.8 million.
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Cash used in operating activities for the six months ended December 31,
1999 was $39.2 million. Cash used in operating activities has primarily
represented increases in inventories and receivables.
Cash provided by investing activities for the six months ended December
31, 1999 was $4.0 million. $4.0 million of cash was used to purchase highly
liquid short-term investments, and $2.9 million of cash was used to purchase
fixed assets, which was offset by cash received of $10.9 million in connection
with the acquisition of FlowPoint. In each period, purchases of furniture and
equipment related primarily to the purchase of computers and other equipment
used in our development activities and other equipment and furniture used in our
operations.
Cash provided by financing activities for the six months ended December
31, 1999 was $63.4 million, consisting primarily of funds raised from the
Company's initial public offering of common stock on July 15, 1999.
On February 8, 2000, the Company completed a follow-on public offering.
The Company issued 2.75 million shares of common stock in exchange for net
proceeds of approximately $182.8 million, after deduction of the underwriters'
discount and estimated expenses.
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
The year 2000 issues arise from the fact that 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.
Through February 11, 2000, the Company has not experienced any
significant issues associated with year 2000 issues.
We have designed our products to be year 2000 compliant and have not
detected any errors or defects associated with year 2000 date functions to date.
Further, the internal systems used to deliver our services utilize
third-party hardware and software. Prior to year end, we completed an internal
systems and processes review for year 2000 compliance and we completed our
assessment of the year 2000 risks we might encounter, and all identified
instances of noncompliance were repaired and tested. We contacted the vendors of
these products in order to gauge their year 2000 compliance. Based on these
vendors' representations, we believe that the third-party hardware and software
we use are year 2000 compliant. We have not experienced any significant year
2000 issues associated with third party hardware and software.
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Item 3. Qualitative and Quantitative Disclosure About Market Risk
The following discusses our exposure to market risk related to changes
in interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the Risk Factors section.
As of December 31, 1999, we had short-term investments of $4.0 million.
All of these short-term investments consisted of highly liquid investments with
remaining maturities of greater than 90 days. These investments are subject to
interest rate risk and will decrease in value if market interest rates increase.
A hypothetical increase or decrease in market interest rates by 10% from the
December 31, 1999 rates would cause the fair value of these short-term
investments to change by an insignificant amount. We have the ability to hold
these investments until maturity, and therefore we do not expect the value of
these investments to be affected to any significant degree by the effect of a
sudden change in market interest rates. Declines in interest rates over time
will, however, reduce our interest income.
At December 31, 1999 we did not own any equity investments. Therefore,
we did not have any direct equity price risk.
Substantially all of our revenues are realized currently in U.S.
dollars. In addition, we do not maintain significant asset or cash account
balances in currencies other than the United States dollar. Therefore, we do not
believe that we currently have any significant direct foreign currency exchange
rate risk.
Risk Factors
This report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
report.
Risks Associated With the Digital Subscriber Line Industry
Sales of our products depend on the widespread adoption of broadband access
services and if the demand for broadband access service does not develop, then
our results of operations and financial condition would be adversely affected.
Our business would be harmed, and our results of operations and
financial condition would be adversely affected, if the use of broadband access
services does not increase as anticipated, or if our customers' broadband access
services are not well received in the marketplace. Certain critical factors will
likely continue to affect the development of the broadband access services
market. These factors include:
. inconsistent quality and reliability of service;
. lack of availability of cost-effective, high-speed service;
. inability to integrate business applications on the Internet;
. lack of interoperability among multiple vendors' network equipment;
. congestion in service providers' networks;
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. 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.
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: o the demand from end users; o 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;
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. 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 o
domestic and foreign government regulation.
Risks We Face Within the DSL Industry
Competition within the DSL market is intense and includes numerous established
competitors, and if we are unable to compete effectively, our business would be
harmed.
Competition in the DSL customer premises equipment market is intense,
and we expect competition to increase. Many of our competitors and potential
competitors have substantially greater name recognition and technical, financial
and marketing resources than we have. If we are unable to compete successfully,
our business will be harmed and our results of operations and financial
condition would be adversely affected. We cannot assure you that we will have
the financial resources, technical expertise or marketing, distribution and
support capabilities to compete successfully.
Competitive pressures could adversely affect us in the following ways:
. reduce demand for our products;
. cause delays or cancellations of customer orders;
. cause us to reduce prices on our existing products; or
. increase our expenses.
Our failure to enhance our existing products or to develop and introduce new
products that meet changing customer requirements and emerging industry
standards would adversely impact our ability to sell our products.
The market for high-speed broadband access is characterized by rapidly
changing customer demands and short product life cycles. If our product
development and enhancements take longer than planned, the availability of our
products would be delayed. Any such delay would adversely impact our ability to
sell our products and our results of operations and financial condition would be
adversely affected. Our future success will depend in large part upon our
ability to:
. identify and respond to emerging technological trends in the
market;
. develop and maintain competitive products that meet changing
custo mer 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;
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. 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.
We may not be able to produce sufficient quantities of our DSL products because
we depend on third-party manufacturers. If these manufacturers fail to produce
our products on a timely manner, our ability to fulfill our customer orders
would be adversely impacted.
Any manufacturing disruption could impair our ability to fulfill
orders, and if this occurs, our revenues would be adversely affected. Although
we work with more than one third-party manufacturer, many of our products are
presently manufactured for us by only one party. Since third parties manufacture
our products and we expect this to continue in the future, our success will
depend, in significant part, on our ability to have third parties manufacture
our products cost effectively and in sufficient quantities to meet our customer
demand. There are a number of risks associated with our dependence on
third-party manufacturers, including the following:
. reduced control over delivery schedules;
. quality assurance;
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. 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
. 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.
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We may be subject to product returns and product liability claims resulting from
defects in our products. Product returns and product liability claims could
result in the failure to attain market acceptance of our products and harm our
business.
Our products are complex and may contain undetected defects, errors or
failures. The occurrence of any defects, errors or failures could result in
delays in installation, product returns and other losses to us or to our
customers or end users. Any of these occurrences could also result in the loss
of or delay in market acceptance of our products, either of which would harm our
business and adversely affect our operating results and financial condition. We
will likely have limited experience with any problems that may arise with new
products that we introduce.
Although we have not experienced any product liability claims to date, the
sale and support of our products entail the risk of these claims. A successful
product liability claim brought against us could be expensive, divert the
attention of management from ordinary business activities and, correspondingly,
harm our business.
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 $39.2 million
for the first six months of fiscal 2000. As of December 31, 1999, we had an
accumulated deficit of approximately $80.1 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;
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. 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 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
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inventory, our business would be harmed, and our results of operations and
financial condition would be adversely affected.
Our operating results in one or more future periods are likely to fluctuate
significantly and may fail to meet or exceed the expectations of securities
analysts or investors, causing our stock price to decline.
Our operating results are likely to fluctuate significantly in the future
on a quarterly and an annual basis due to a number of factors, many of which are
outside our control. If our operating results do not meet the expectations of
securities analysts or investors, our stock price may decline. We cannot assure
you that this will not occur because of the numerous factors that could cause
our revenues and costs to fluctuate. These factors include the following:
. the timing and size of sales of our products and services;
. announcements of new products and product enhancements by competitors;
. the entry of new competitors into our market, including by acquisition;
. unexpected delays in introducing new or enhanced products, including
manufacturing delays;
. our ability to control expenses;
. our ability to ship products on a timely basis and at a reasonable cost;
. the mix of our products sold;
. the volume and average cost of products manufactured;
. the type of distribution channel through which we sell our products;
. the average selling prices of our products; and
. the effectiveness of our product cost reduction efforts.
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on the level of actual and anticipated business
activities. Research and development expenses will vary as we develop new
products. Due to competitive factors in our market, in the past we have
experienced, and we anticipate that we will continue to experience, decreases in
the average selling prices of our products. Due to these and other factors, our
quarterly revenues, expenses and results of operations could vary significantly
in the future, and you should not rely upon period-to-period comparisons as
indications of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our customer base is concentrated, and the loss of one or more of our customers
could harm our business.
Because DSL service relies upon existing telephone lines to reach end
users, a substantial majority of potential DSL end-user accounts in the U.S. and
in other countries are controlled by a relatively small number of network
service providers. If we are not successful in maintaining relationships with
these few network service providers and the network equipment vendors that
supply them, our business will be harmed.
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Although deregulation and increasing competition are expanding our
potential customer base, a small number of customers has accounted for a large
portion of our revenues to date. We sell our DSL products primarily to network
service providers, network equipment vendors and telephone company-aligned
distributors. For the quarter ended December 31, 1999, sales to three customers,
American Communications Supply, Inc., a distributor for Southwestern Bell,
Innotrac Corporation, a distributor for BellSouth, and Covad Communications
Group, Inc. each represented more than 10% of our net revenues. For the six
months ended December 31, 1999, sales to four customers, American Communications
Supply, Inc., America Online, Inc., Innotrac Corporation, and Covad
Communications Group, Inc. each represented more than 10% of our net revenues.
Our top ten customers for the quarter ended December 31, 1999 represented 80.0%
of our net revenues, compared to 95% for the quarter ended September 30, 1999.
For the fiscal year ended June 30, 1999, Covad Communications Group, Inc.
represented 29.6% of our net revenues, and Soon Cabling Pte, Lte., 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. 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 23% and 22% of our net revenues for the quarter and six months
ended December 31, 1999, and 41% and 52% of our net revenues for fiscal 1999 and
1998, respectively. We believe that our continued growth and ability to attain
profitability will require us to continue to penetrate international markets. If
we are unable to successfully overcome the difficulties associated with
international operations and maintain and expand our international operations,
our business would be harmed. These difficulties include:
. difficulties staffing and managing foreign operations in our highly
technical industry;
. changes in regulatory requirements which are common in the
telecommunications industry;
. licenses, tariffs and other trade barriers imposed on products such as
ours;
. political and economic instability especially in Asia and the Pacific;
. potentially adverse tax consequences;
. difficulties obtaining approvals for products from foreign governmental
agencies which regulate networks;
. compliance with a wide variety of complex foreign laws and treaties
relating to telecommunications equipment; and
. delays or difficulties collecting accounts receivable from foreign
entities that are not subject to suit in the United States.
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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, 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.
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We cannot assure you that we will be able to maintain or expand our existing
strategic relationships or that we will be able to establish new relationships
in the future.
We continue to rapidly and significantly expand our operations, and our failure
to manage growth could harm our business and adversely affect our results of
operations and financial condition.
We have rapidly and significantly expanded our operations, including the
number of our employees, the geographic scope of our activities and our product
offerings. We expect that further significant expansion will be required to
address potential growth in our customer base and market opportunities. Any
failure to manage growth effectively could harm our business and adversely
affect our operating results and financial condition. We cannot assure you that
we will be able to do any of the following, which we believe are essential to
successfully manage the anticipated growth of our operations:
. improve our existing and implement new operational, financial and
management information controls, reporting systems and procedures;
. hire, train and manage additional qualified personnel;
. expand and upgrade our core technologies; and
. effectively manage multiple relationships with our customers, suppliers
and other third parties.
In the future, we may also experience difficulties meeting the demand for
our products. The installation and use of our products require training. If we
are unable to provide training and support for our products, more time may be
necessary to complete the implementation process and customer satisfaction may
be adversely affected. In addition, our suppliers may not be able to meet
increased demand for our products. We cannot assure you that our systems,
procedures or controls will be adequate to support the anticipated growth in our
operations.
Competition for qualified personnel in the networking equipment and
telecommunications industries is intense, and if we are not successful in
attracting and retaining these personnel, our business would be harmed.
Our future success will depend on the ability of our management to operate
effectively, both individually and as a group. Therefore, the future success of
our business will also depend on our ability to attract and retain high-caliber
personnel. The loss of the services of any of our key personnel, the inability
to attract or retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers, could harm our business.
Because competition for qualified personnel in the networking equipment and
telecommunications industries is intense, we may not be successful in attracting
and retaining such personnel. During 1999, we added 160 employees to our total
work force, representing an increase of 133% from December 31, 1998. 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.
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<PAGE>
The loss of the services of one or more of our executive officers or key
employees could harm our business.
Our executive officers and certain key sales, engineering and management
personnel may not remain with us in the future. Our executive officers and key
personnel and in particular Mark A. Floyd, our Chief Executive Officer, and
Patricia W. Hosek, our Vice President of Engineering, are critical to our
business and its future success. If we lost the services of one or more of our
executive officers or key employees, we would need to devote substantial
resources to finding replacements, and until replacements were found, Efficient
would be operating without the skills or leadership of such personnel, either of
which could have a significant adverse effect on our business. None of our
officers or key employees is bound by agreements for any specific employment
term or covenants not to compete.
Our future success will depend in part on our ability to protect our proprietary
rights and the technologies used in our principal products, and if we do not
enforce and protect our intellectual property or if others bring infringement
claims against us, our business would be harmed.
We rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights. However, these measures afford only limited protection.
Our failure to adequately protect our proprietary rights may adversely affect
us. Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary.
Our means of protecting our proprietary rights in the U.S. or abroad may
not be adequate, and competitors may independently develop similar technologies.
In addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the U.S. Issued patents may not preserve our
proprietary position. Even if they do, competitors or others may develop
technologies similar to or superior to our own.
We may become involved in litigation over proprietary rights. In the event
of an adverse result in any future litigation with third parties relating to
proprietary rights, we could be required:
. to pay substantial damages, including treble damages if we are held to
have willfully infringed;
. to halt the manufacture, use and sale of infringing products;
. to expend significant resources to develop non-infringing technology; or
. to obtain licenses to the infringing technology.
Licenses may not be available from any third party that asserts
intellectual property claims against us, on commercially reasonable terms, or at
all. In addition, litigation frequently involves substantial expenditures and
can require significant management attention, even if we ultimately prevail.
However, there can be no assurance that we would be able to successfully resolve
such disputes in the future.
From time to time, third parties, including our competitors, have asserted
patent, copyright and other intellectual property rights to technologies that
are important to us. For example, we have received a letter from Bell Atlantic
indicating that they hold a patent on certain DSL technology, and urging us to
begin negotiating a license to the patent. We are aware that Bell Atlantic has
sued a least one other company alleging that such other company's DSL services
infringe Bell Atlantic's patent. We are evaluating the Bell Atlantic patent, and
have not yet determined whether to seek a license. Although there are multiple
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<PAGE>
indications from Bell Atlantic that licenses to the patent are or will be
available, there can be no assurances we would find the license terms
acceptable. We expect that we will increasingly be subject to infringement
claims as the number of products and competitors in the high-speed data access
market grows and the functionality of products overlaps.
Our products and those of our customers are subject to government regulations,
and changes in current or future laws or regulations that negatively impact our
products and technologies could harm our business.
The jurisdiction of the Federal Communications Commission, or the FCC,
extends to the entire communications industry including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the broadband access services industry, our customers or our products
may harm our business. For example, FCC regulatory policies that affect the
availability of data and Internet services may impede our customers' penetration
into certain markets or affect the prices that they are able to charge. In
addition, international regulatory bodies are beginning to adopt standards for
the communications industry. Delays caused by our compliance with regulatory
requirements may result in order cancellations or postponements of product
purchases by our customers, which would harm our business and adversely affect
our results of operations and financial condition.
Additional Risks That May Affect Our Stock Price
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 our follow-on offering, which closed on February 8,
2000, together with the proceeds generated from our initial public offering
which closed on July 19, 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 our follow-on and initial public
offerings, which closed on February 8, 2000, and July 19, 1999, respectively,
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 Part II Other Information,
Item 2 "Changes In Securities and 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.
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<PAGE>
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;
. unanticipated 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.
There are substantial shares of common stock eligible for future sale, and such
sales may depress our stock price.
After our follow-on offering, which closed February 8, 2000, we have
outstanding approximately 53.8 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 14.5 million shares, including the 5,750,000 sold in this
offering. 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:
Number of Shares Date of Availability for Sale
---------------- -----------------------------
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.
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.
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
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<PAGE>
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 basic services such as water, electricity and telephone,
any of which could require us to close or substantially reduce the level
of activity at our facilities until service returns to normal;
. disruptions in the supply of components and manufactured goods from our
component suppliers and contract manufacturers if they experience
disruptions in the delivery of basic services;
. disruptions in our ability to ship and receive goods if third-party
transportation and delivery providers experience disruptions in their
operations; and
. delays in receiving accurate management information from our internal
accounting and management systems.
We currently have no contingency plan to address potential interruptions in
the operation of our internal systems or those of third parties upon whom we
depend as a result of Year 2000 noncompliance.
We may face claims based on Year 2000 issues arising from the integration
of multiple products within an overall network. We may also experience reduced
sales of our products as potential customers reduce their budgets for network
equipment and network services due to increased expenditures on their own Year
2000 compliance efforts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Issues."
Part II Other Information
Item 1. Legal Proceedings
The Company is not party to any material legal proceedings.
Item 2. Changes In Securities and Use of Proceeds
The Company registered the initial public offering of its common stock, par
value $0.001 per share, on a Registration Statement on Form S-1 (File No. 333-
77795) which was declared effective on July 14, 1999. The offering closed on
July 20, 1999. The managing underwriters of the offering were Credit Suisse
First Boston, BancBoston Robertson Stephens and Volpe Brown Whelan & Company. A
total of 4,600,000 shares of common stock were sold by the Company in the
offering at a price of $15.00 per share, resulting in gross proceeds of $69.0
million. The underwriting discount was $4.8 million and the other expenses
related to the offering totaled approximately $1.2 million. From the time of
receipt through December 31, 1999, the
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<PAGE>
Company has applied its net proceeds from the offering toward working capital
and funding operating losses. Net cash used from the offering for operating
activities totaled $39.2 million.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibit is filed herewith.
27.1 Financial data schedule
(b) Reports on Form 8-K
(i) On December 30, 1999, the Company filed a current report on Form
8-K dated December 17, 1999 pursuant to Item 2 thereof, reporting
the acquisition of FlowPoint Corporation.
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<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934 as
amended, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 14, 2000
/s/ Jill S. Manning
---------------------------------
Jill S. Manning
Vice President, Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
-34-
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 FINANCIAL STATEMENTS INCLUDED IN FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-END> DEC-31-1999
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