<PAGE>
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
[_] Preliminary Information Statement
[_] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14c-
5(d)(2))
[X] Definitive Information Statement
Efficient Networks, Inc.
-------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14c-5(g) and O-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule O-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
O-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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<PAGE>
EFFICIENT NETWORKS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
WEDNESDAY, APRIL 12, 2000
AT 12:00 P.M.
----------------
To the Stockholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Efficient
Networks, Inc., a Delaware corporation (the "Company"), will be held on
Wednesday, April 12, 2000 at 12:00 p.m., local time, at the Crowne Plaza North
Dallas/Addison, 14315 Midway Road, Addison, Texas 75001, for the following
purpose:
To approve the conversion of 6,300 shares of outstanding non-voting
preferred stock into 6,300,000 shares of voting common stock.
The foregoing item of business is more fully described in the Information
Statement accompanying this Notice.
Only stockholders of record at the close of business on February 25, 2000
are entitled to receive notice of, to attend and to vote at the meeting and any
adjournment thereof.
All stockholders are cordially invited to attend the meeting and vote in
person.
For the Board of Directors
Mark A. Floyd
President, Chief Executive Officer
and
Chairman of the Board
Dallas, Texas
March 21, 2000
IMPORTANT: WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO
SEND US A PROXY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE CONVERSION OF THE PREFERRED STOCK........ 1
INFORMATION CONCERNING THE SPECIAL MEETING............................... 2
PROPOSAL NO. 1-- CONVERSION OF PREFERRED STOCK........................... 3
SUMMARY OF EFFICIENT AND THE FLOWPOINT ACQUISITION ...................... 4
CAPITALIZATION........................................................... 6
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 7
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 8
PRINCIPAL STOCKHOLDERS................................................... 20
DESCRIPTION OF CAPITAL STOCK............................................. 22
INDEPENDENT AUDITORS..................................................... 27
ADDITIONAL INFORMATION ABOUT EFFICIENT................................... 27
EFFICIENT INDEX TO FINANCIAL STATEMENTS.................................. F-1
FLOWPOINT INDEX TO FINANCIAL STATEMENTS.................................. F-30
</TABLE>
i
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE CONVERSION OF THE PREFERRED STOCK
Q: Why is Efficient holding a Special Meeting?
A: In connection with our acquisition of Flowpoint Corporation from
Cabletron Systems, Inc., we were able to close the acquisition more quickly by
issuing a combination of common stock and non-voting preferred stock, on the
condition that we later convert the preferred stock into common stock. We are
now submitting this proposal to convert the preferred stock into common stock
to the stockholders for approval at this time in order to honor our obligations
to Cabletron.
Q: Why did Efficient issue preferred stock?
A: Efficient issued preferred stock in connection with the recent
acquisition of Flowpoint Corporation from Cabletron Systems Inc. The reason we
issued preferred stock was to enable Efficient to acquire Flowpoint quickly in
order compete more effectively in the DSL marketplace. In connection with the
acquisition agreement with Cabletron, we agreed that we would hold this special
stockholders meeting to convert their 6,300 shares of preferred stock into
6,300,000 shares of common stock. Additionally, in connection with the
acquisition of Flowpoint, certain stockholders of Efficient which in the
aggregate hold enough shares of Efficient to cause the preferred to convert
into common, agreed with Cabletron, at the time of the acquisition of
Flowpoint, to vote in favor of the conversion proposal. For a description of
the Flowpoint acquisition see "Summary Flowpoint Acquisition".
Q: Why is the preferred stock being converted?
A: In connection with the acquisition of Flowpoint from Cabletron, Cabletron
agreed to allow Efficient to issue to Cabletron a combination of 7,200,000
shares common stock and 6,300 preferred stock, provided that (i) Cabletron
received assurances that the preferred would convert into common and (ii) the
conversion ratio of the preferred was 1000 to 1. Since certain of our
stockholders provided Cabletron with this assurance, we were able to acquire
Flowpoint quickly. Now, we are simply honoring our obligations to Cabletron to
convert the preferred stock that they hold into common stock.
Q: Why is the conversion ratio of the preferred stock 1000 to 1? Doesn't that
mean Efficient is giving shares away?
A: No. If we had not wanted to acquire Flowpoint quickly, we would have
simply issued an aggregate of 13,500,000 shares of common stock to Cabletron.
Instead, we issued 7,200,000 shares of common stock and 6,300 shares of
preferred stock, convertible into 6,300,000 shares of common stock, to
Cabletron in exchange for Flowpoint. So, the 1000-to-1 conversion exchange
ration simply accounts for the true economics of the Flowpoint acquisition. For
a more detailed description of our capital stock, see "Description of Capital
Stock" at page .
Q: Why is Efficient not soliciting a proxy from me?
A: As mentioned above, certain stockholders of Efficient, which in the
aggregate hold enough shares of Efficient to cause the preferred to convert
into common agreed with Cabletron, at the time of the acquisition of Flowpoint,
to vote in favor of the conversion proposal. Thus, we believe that the proposal
will pass without requiring proxies to be solicited.
Q: May I still attend and vote at the Special Meeting?
A: Yes. As a stockholder of Efficient, you are entitled to attend the
special meeting and vote upon the conversion proposal.
1
<PAGE>
INFORMATION CONCERNING THE SPECIAL MEETING
INFORMATION STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
The enclosed Information Statement is being distributed for use at the
Special Meeting of Stockholders (the "Special Meeting") to be held Wednesday,
April 12, 2000, at 12:00 p.m., local time, or at any and all continuation(s) or
adjournment(s) thereof, for the purposes set forth herein and in the
accompanying Notice of Special Meeting of Stockholders. The Special Meeting
will be held at the Crowne Plaza North Dallas/Addison, 14315 Midway Road,
Addison, Texas 75001. The telephone number at that location is (972) 980-8877.
The Company's headquarters are located at 4849 Alpha Road, Dallas, Texas 75244
and the telephone number is (972) 852-1000.
This Information Statement was mailed on or about March 21, 2000 to all
stockholders entitled to vote at the Annual Meeting.
INFORMATION CONCERNING VOTING
Purpose of the Special Meeting
The purpose of the Special Meeting is to approve the conversion of 6,300
shares of outstanding non-voting preferred stock into 6,300,000 shares of
voting common stock.
Record Date and Shares Outstanding
Stockholders of record at the close of business on February 25, 2000 (the
"Record Date") are entitled to notice of, and to vote at the Special Meeting.
At the Record Date, 48,226,757 shares of the Company's Common Stock were issued
and outstanding. For information regarding security ownership by management and
5% stockholders, see "OTHER INFORMATION--Security Ownership of Certain
Beneficial Owners and Management." The closing price of the Company's Common
Stock on The Nasdaq Stock Market on the last trading day immediately prior to
the Record Date was $138 per share.
Voting and Reasons for No Solicitation
Each share of Common Stock outstanding on the Record Date will be entitled
to one vote on all matters. The conversion of the preferred stock into common
stock will require the affirmative vote of a majority of the shares of the
Company's outstanding Common Stock on the Record Date (the "Required Vote").
Proxies are not being solicited because stockholders holding enough shares
to effect the Required Vote have previously entered into voting agreements with
the FlowPoint Acquisition to effect the commissions.
Quorum
The required quorum for the transaction of business at the Special Meeting
is a majority of the shares of Common Stock outstanding on the Record Date.
2
<PAGE>
PROPOSAL NO. 1
CONVERSION OF PREFERRED STOCK
Background Information in connection with the Proposal to convert the
outstanding Preferred Stock into common stock.
In connection with our acquisition of Flowpoint Corporation from Cabletron
Systems, Inc., we were able to close the acquisition more quickly by issuing a
combination of common stock and non-voting preferred stock, on the condition
that we later convert the preferred stock into common stock. We are submitting
this proposal to the stockholders for approval at this time.
Some additional information which should be noted in connection with
Proposal No. 1 is that certain stockholders holding the Requisite Vote to
approve Proposal No. 1 have already entered into voting agreements with
Cabletron to effect the conversion of the 6,300 outstanding shares of non-
voting preferred stock into 6,300,000 shares of voting common stock. We want to
emphasize to our stockholders that the ability to initially issue this
preferred stock to Cabletron was advantageous to us since it enabled us to
acquire Flowpoint quickly. In connection with the acquisition of Flowpoint, we
agreed with Cabletron to convert their 6,300 shares of our preferred stock into
6,300,000 shares of common stock as soon as practicable. The acquisition of
Flowpoint, and the various transactions consummated thereby were unanimously
approved by the Board of Directors of Efficient.
Cabletron Systems, Inc., a holder of 4,176,099 shares of our voting common
stock and 6,300 shares of non-voting preferred stock shares of 11,476,099
common stock, on an as converted basis, has agreed to vote in favor of the
conversion of the preferred stock into common stock. Cabletron is the sole
owner of the preferred stock. However, Cabletron has previously agreed to
certain voting restrictions on its holdings in Efficient. More a more detailed
discussion of these restrictions, see "Description of Capital Stock--Standstill
and Registration Rights" at page .
Required Vote
The conversion of the 6,300 shares of outstanding preferred stock into
6,300,000 shares of common stock requires the affirmative vote of a majority of
the shares of common stock outstanding on the Record Date.
Recommendation of the Board of Directors
The Board of Directors is not soliciting proxies in connection with Proposal
No. 1, however, you should be aware that the directors and their affiliated
entities have entered into voting agreements with Cabletron whereby they have
agreed to vote in favor of the conversion of preferred stock into common stock.
3
<PAGE>
SUMMARY OF EFFICIENT AND THE FLOWPOINT ACQUISITION
This summary highlights information contained elsewhere in this information
statement. You should read the entire prospectus carefully.
Efficient Networks, Inc.
----------------
Efficient Networks is a worldwide developer and supplier of high-speed
digital subscriber line customer premises equipment for the high-speed, high-
volume digital communication, or broadband, access market. Digital subscriber
line, or DSL, solutions enable telecommunications and other communication
network service providers to provide high-speed, cost-effective broadband
access services over the existing copper wire telephone infrastructure. We
believe there is significant demand for broadband access, especially among
business users and consumers who have found current solutions to be inadequate
or too expensive. DSL networks generally consist of two core components, one
installed at the network operator's facility--typically referred to as the
central office--and one installed at the customer's home or business. The DSL
equipment installed at the customer premises is generally referred to as
customer premises equipment. We develop and produce DSL customer premises
equipment, and in particular single- and multiple-user DSL customer premises
equipment for small- to medium-size businesses, branch offices of large
corporations and consumers. Our DSL products enable applications such as high-
speed Internet access, electronic commerce, access to computer networks from
remote locations, telecommuting and extensions of corporate networks to branch
offices.
Business-critical Internet-based applications, such as electronic commerce,
Web browsing and access to computer networks from remote locations for
telecommuters, generate enormous data traffic over the existing communications
infrastructure. The growth in Internet use, increased competition resulting
from domestic and international deregulation, and pressure from alternative
means of providing high-speed, high-volume access services have led both
traditional and new operators of the existing copper telephone wire-based
networks to deploy DSL. DSL technology enables these network service providers
to rely upon the existing copper telephone wire infrastructure to cost-
effectively provide broadband access to most businesses and homes currently
connected by telephone lines.
In order to offer cost-effective DSL services to end users, network service
providers are actively seeking DSL customer premises equipment solutions that
offer interoperability from the end user's personal computer through the
service provider's networks and which provide for simple and low-cost
installation and maintenance. The products that make up our SpeedStream family
of customer premises equipment satisfy the requirements of network service
providers as they:
. Enable DSL Deployments. We enable network service providers to rapidly deploy
DSL services, thereby allowing them to quickly capture market share in
today's intensely competitive broadband services market. By offering a broad
product line we can support DSL services targeted at both businesses and
consumers.
. Ensure End-To-End Interoperability. Our technology expertise and ongoing
product development coordination with network equipment vendors, such as ADC
Telecommunications, Advanced Fibre Communications, Alcatel, Copper Mountain
Networks, Ericsson, Lucent Technologies, Newbridge Networks, Nokia, Nortel
Networks and Siemens, and network service providers enable us to ensure
interoperability between the end user's personal computer and the service
provider's network.
. Provide for Efficient and Cost-Effective Installation. The software included
with many of our products allows a network service provider to pre-configure
the customer premises equipment to the parameters of a particular network,
reducing the costs associated with having installers perform these activities
during each end-user installation. As demand for DSL service grows, pre-
configuration helps network operators meet their customers' expectations for
rapid service activation.
4
<PAGE>
. Provide for Cost-Effective Maintenance. Our Advanced Status software allows a
network service provider to easily monitor, diagnose and often remotely fix
the customer's problems quickly, which can substantially reduce the network
service provider's customer support costs.
Our objective is to be the leading worldwide provider of high-performance
DSL broadband access customer premises equipment for businesses, remote
offices, telecommuters and consumers. To achieve this goal, we intend to
capitalize on our early market acceptance by network service providers and to
leverage our relationships with network equipment vendors. In addition, we will
continue developing enhancements to our current DSL products and expect to
develop products that are capable of processing both voice and data
communications through the same DSL equipment and network. Also, we intend to
continue to target strategic partnerships and acquisitions to augment our
product offerings, sales channels and worldwide operations. Finally, we plan to
extend our distribution channels to meet the growing demand for broadband
access solutions and increase our brand awareness.
We sell our products to network equipment vendors and DSL network service
providers. As of December 31, 1999, our products have been deployed by
Ameritech, Bell Atlantic, BellSouth, Covad Communications, Hanaro Telecom, Hong
Kong Telecom, Pacific Bell, Singapore Telecom, Southwestern Bell, and
TeleDanmark, among others, and purchased by several network equipment vendors.
A number of other network service providers have begun to test our customer
premises equipment solutions.
We were incorporated in Delaware in 1993. Our principal executive offices
are located at 4201 Spring Valley Road, Suite 1200, Dallas, Texas 75244-3666
and our telephone number is (972) 991-3884. Our Website is located at
http://www.efficient.com. Information contained on our Website does not
constitute part of this prospectus.
Flowpoint Acquisition
On December 17, 1999 we completed the acquisition of FlowPoint Corporation,
a wholly-owned subsidiary of Cabletron Systems, Inc., based in Santa Clara,
California, in exchange for a combination of common stock and convertible
preferred stock equal to an aggregate of 13,500,000 shares of our common stock
on an as-converted basis. FlowPoint's primary business is the design,
manufacture and sale of a comprehensive line of advanced broadband routers for
deployment at customer premises. FlowPoint's product line consists of routing
products for use in business-class DSL services. According to the Dell'Oro
Group's November 1999 study of market performance for the first three quarters
of 1999, FlowPoint was the market leader in SDSL and IDSL customer premises
equipment. We now provide the industry's most comprehensive line of DSL
customer premises equipment, including internal and universal serial bus modems
for personal computers, DSL local area network modems, small office and
telecommuter DSL routers, and DSL routers for small businesses and branch
offices. FlowPoint's customers include major incumbent and competitive local
exchange carriers, including Ameritech, Covad and NorthPoint, and several
European incumbent carriers such as British Telecom. FlowPoint also works
closely with a number of Internet service providers offering DSL services to
businesses. FlowPoint recently announced the availability of an integrated
access device that supports both voice and data service delivery over a single
DSL line.
5
<PAGE>
CAPITALIZATION
The table below sets forth the following information:
. the actual capitalization of Efficient as of December 31, 1999;
<TABLE>
<CAPTION>
December 31, 1999
---------------------------
Actual
---------------------------
(in thousands, except share
and per share data)
<S> <C>
5% Convertible Subordinated Notes due 2005......... $ --
Series A redeemable convertible preferred stock,
$0.001 par value; 6,300 shares authorized, issued
and outstanding................................... $ 431,550
Stockholders' equity:
Common stock, $0.001 par value; 200,000,000 shares
authorized; 44,834,917 shares issued and
outstanding, 47,584,917 shares issued and
outstanding pro forma and pro forma, as
adjusted......................................... 45
Additional paid-in capital........................ 641,369
Deferred stock option compensation................ (12,537)
Accumulated deficit................................ (80,070)
---------
Total stockholders' equity....................... 548,807
---------
Total capitalization........................... $ 980,357
=========
</TABLE>
This table excludes the following shares:
. options outstanding to purchase a total of 6,954,329 shares of common
stock at a weighted average exercise price of $2.81 per share and
3,325,000 shares reserved for grant of future options under our stock
option plans;
. 200,000 shares reserved for future grants under our 1999 Employee Stock
Purchase Plan;
. 34,246 shares issuable upon exercise of outstanding warrants; and
. 1,933,702 shares issuable upon conversion of the notes (assuming the
initial purchasers do not exercise their over-allotment option).
. 2,750,000 shares of common stock issued on February 8, 2000 at a public
offering price of $70.00 per share, less underwriting discounts and
commissions, and expenses
. shares of our common stock issuable upon conversion of $400 million of
convertible notes issued on March 7, 2000, at an initial conversion
price of $181.00 per share.
See Notes to Consolidated Financial Statements.
6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and are qualified by reference to the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this prospectus.
The consolidated statement of operations data set forth below for the years
ended June 30, 1997, 1998 and 1999, and the consolidated balance sheet data at
June 30, 1998 and 1999, are derived from, and are qualified by reference to,
the audited Consolidated Financial Statements of Efficient included elsewhere
in this prospectus. The statement of operations data set forth below for the
years ended June 30, 1995 and 1996 and the balance sheet data at June 30, 1995,
1996 and 1997 are derived from audited Consolidated Financial Statements of
Efficient not included in this prospectus. The consolidated statement of
operations data for the six months ended December 31, 1998 and 1999 and the
consolidated balance sheet data at December 31, 1999 are derived from, and are
qualified by reference to, the unaudited condensed consolidated financial
statements included elsewhere in this prospectus. In the opinion of management,
the unaudited statement of operations data shown for the six month periods
ended December 31, 1998 and 1999 and the unaudited balance sheet data as of
December 31, 1999 have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for such periods.
<TABLE>
<CAPTION>
Six Months Ended
Fiscal Year Ended June 30, December 31,
----------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
------- -------- -------- -------- -------- ------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $ 2,314 $ 3,687 $ 4,122 $ 3,370 $ 14,828 $ 3,024 $ 38,595
Cost of revenues........ 1,125 2,209 2,386 2,160 14,344 2,510 32,925
------- -------- -------- -------- -------- ------- ----------
Gross profit............ 1,189 1,478 1,736 1,210 484 514 5,670
------- -------- -------- -------- -------- ------- ----------
Operating expenses:
Sales and marketing... 1,505 2,366 2,409 3,436 6,133 2,471 7,502
Research and
development.......... 3,405 3,853 4,183 4,389 7,747 3,616 7,371
General and
administrative....... 822 1,082 1,245 1,641 1,993 750 2,330
Stock option
compensation......... -- 198 659 1,165 3,116 908 2,608
Amortization of
intangibles.......... -- -- -- -- -- -- 7,358
In process research
and development
charge............... -- -- -- -- -- -- 4,970
------- -------- -------- -------- -------- ------- ----------
Total operating
expenses............ 5,732 7,499 8,496 10,631 18,989 7,745 32,139
------- -------- -------- -------- -------- ------- ----------
Loss from operations.... (4,543) (6,021) (6,760) (9,421) (18,505) (7,231) (26,469)
Interest and other
income (expense), net.. 248 177 125 130 (7,900) 110 588
------- -------- -------- -------- -------- ------- ----------
Net loss................ $(4,295) $ (5,844) $ (6,635) $ (9,291) $(26,405) $(7,121) $ (25,881)
======= ======== ======== ======== ======== ======= ==========
Basic and diluted net
loss per share(1)...... $ (1.56) $ (2.06) $ (2.19) $ (2.86) $ (6.87) $ (1.94) $ (0.75)
======= ======== ======== ======== ======== ======= ==========
Weighted average
shares(1).............. 2,750 2,838 3,027 3,254 3,893 3,766 34,570
======= ======== ======== ======== ======== ======= ==========
Unaudited pro forma
basic and diluted net
loss per share(1)...... $ (0.97)
========
Weighted average shares
used to compute
unaudited pro forma
basic and diluted net
loss per share(1)...... 28,342
========
Other Consolidated
Financial Data:
Deficiency of earnings
available to cover
fixed charges(2)....... $(4,295) $ (5,844) $ (6,635) $ (9,291) $(26,405) $(7,121) $ (25,881)
======= ======== ======== ======== ======== ======= ==========
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 2,650 $ 1,303 $ 3,413 $ 7,607 $ 3,604 $ 31,803
Working capital......... 3,400 2,619 4,370 7,870 12,585 57,908
Total assets............ 6,357 5,150 6,454 10,667 21,947 1,023,241
Redeemable convertible
preferred stock........ 11,155 16,155 23,635 34,743 40,495 431,550
Total stockholders'
equity (deficit)....... (6,008) (11,643) (17,610) (25,374) (39,014) 548,807
</TABLE>
- -------
(1) Note 2 of Notes to Consolidated Financial Statements provides an
explanation of the determination of the weighted average shares used to
compute basic and diluted net loss per share and unaudited pro forma basic
and diluted net loss per share.
(2) Earnings were inadequate to cover fixed charges in each period presented.
The deficiency is calculated by subtracting total fixed charges from
earnings. Earnings consist of pretax loss plus fixed charges. Fixed charges
consist of interest, accretion of discount on subordinated promissory
notes, and the component of rental expense believed by management to be
representative of the interest factor thereon.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto, as well as the other information
included elsewhere in this Information Statement.
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 two
quarters 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 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. Our top ten customers for the six months ended
December 31, 1999 accounted for 83.0% of our net revenues. For the fiscal year
ended June 30, 1999, Covad Communications represented 29.6% of our net
revenues, and Soon Cabling Pte, Ltd., a distributor for Daewoo Telecom
represented 17.5% of our net revenues. Our top ten customers in fiscal 1999
accounted for 82.3% of our net revenues. For the fiscal year ended June 30,
1998, Victron, a manufacturer for Xylan, represented 19.6% of our net revenues,
and Telecom Equipment, a distributor for Singapore Telecom, represented 12.6%
of our net revenues. We expect to continue to be dependent upon a relatively
small number of large customers in future periods, although the specific
customers may vary from period to period.
Since inception, a substantial portion of our revenues has been derived from
customers located outside of the United States and we expect this trend to
continue. Revenues derived from customers outside the United States represented
52% of our net revenues in fiscal 1998, 41% of our net revenues for fiscal 1999
and 22% of our net revenues for the six months ended December 31, 1999. We
currently maintain a European sales office in Amsterdam and an Asian sales
office in Singapore. We believe that in order to continue growing and attain
profitability, we must continue to penetrate international markets.
Accordingly, we will need to expand our international operations and hire
qualified personnel for these operations.
To date, international sales have been denominated solely in U.S. dollars
and, accordingly, we have not been exposed to fluctuations in non-U.S. currency
exchange rates. In the future, a portion of our international
8
<PAGE>
sales may be denominated in currencies other than U.S. dollars, which would
then expose us to gains and losses based upon exchange rate fluctuations.
The gross margins on our DSL products have been below the levels that our
business has historically achieved. The lower gross margins on our DSL products
have been a result of manufacturing start-up costs and volume discounts given
to quickly introduce products into the market. Other factors that will affect
our gross margin include the product mix sold in any particular period,
distribution channels, competitive pressures and levels of volume discounts.
Our limited operating history in the DSL market makes it difficult to
forecast our future operating results. To date, we have not achieved
profitability in any quarter or annual period, and as of 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 and $2.6 million in fiscal years 1997, 1998, 1999 and the 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.
Recent Development--FlowPoint Acquisition
On November 21, 1999, we entered into an agreement with Cabletron Systems,
Inc. to acquire its wholly-owned subsidiary FlowPoint Corporation from
Cabletron. The acquisition was completed on December 17, 1999, and is being
accounted for under the purchase method of accounting.
We paid for the acquisition of FlowPoint through the issuance of 7,200,000
shares of our common stock and 6,300 shares of our Series A non-voting
redeemable convertible preferred stock. The Series A preferred stock is
convertible into an aggregate of 6,300,000 shares of our common stock. See
"Description of Capital Stock" for a more complete description of the Series A
redeemable convertible preferred stock.
The shares issued to Cabletron for FlowPoint were worth $924.8 million based
upon the market price of $68.50, which represents Efficient's average closing
sale price for two trading days before and two trading days after the terms of
the acquisition were agreed to.
Recent Development--Follow-on Offering
On February 8, 2000, we completed a follow-on public offering. We 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
expenses.
Recent Development--Convertible Debt Offering
On March 7, 2000, Efficient completed the private placement of $400,000,000
in aggregate principal amount of its 5% Convertible Subordinated Notes due
March 15, 2005. The conversion price for the notes is initially $181.00.
Efficient intends to use the net proceeds of the offering primarily for general
corporate purposes including working capital and sales and marketing efforts.
9
<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>
Six Months
Fiscal Year Ended Ended
June 30, December 31,
------------------------ --------------
1997 1998 1999 1998 1999
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Net revenues...................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues.................. 57.9 64.1 96.7 83.0 85.3
------ ------ ------ ------ -----
Gross profit...................... 42.1 35.9 3.3 17.0 14.7
------ ------ ------ ------ -----
Operating expenses:
Sales and marketing............... 58.4 102.0 41.4 81.7 19.4
Research and development.......... 101.5 130.2 52.2 119.6 19.1
General and administrative........ 30.2 48.7 13.4 24.8 6.0
Stock option compensation......... 16.0 34.6 21.0 30.0 6.8
Amortization of intangibles....... 0.0 0.0 0.0 0.0 19.1
In process research and
development charge............... 0.0 0.0 0.0 0.0 12.9
------ ------ ------ ------ -----
Total operating expenses........ 206.1 315.5 128.1 256.1 83.3
------ ------ ------ ------ -----
Loss from operations.............. (164.0) (279.6) (124.8) (239.1) (68.6)
Interest and other income
(expense), net................... 3.0 3.9 (53.3) 3.6 1.6
------ ------ ------ ------ -----
Net loss.......................... (161.0)% (275.7)% (178.1)% (235.5)% (67.0)%
====== ====== ====== ====== =====
</TABLE>
Three and Six Months Ended December 31, 1998 and 1999
Net Revenues
Net revenues consist of product sales, net of allowances for returns. Net
revenues increased 1,328% 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% 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
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 acquisition 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.
10
<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 Efficient'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.
11
<PAGE>
General and Administrative Expenses
General and administrative expenses consist primarily of employee salaries
and related expenses for executive, administrative and accounting personnel,
facility costs, insurance costs and professional fees. General and
administrative expenses increased 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. Efficient 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, we 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 and Other Income (Expense), 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 completion of our initial public offering on July 15, 1999.
In future periods we expect interest and other income (expense), net to vary
depending upon changes in the amount and mix of interest-bearing investments
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. We
have significant federal net operating loss carryforwards
12
<PAGE>
to offset future taxable income which will begin to expire in varying amounts
beginning in 2008. Given our limited operating history, losses incurred to date
and the difficulty in accurately forecasting our future results, management
does not believe that the recognition of the related deferred income tax asset
meets the criteria required by generally accepted accounting principles.
Accordingly, a 100% valuation allowance has been recorded. Furthermore, as a
result of changes in Efficient's equity ownership resulting from Efficient's
redeemable convertible preferred stock and note financings and Efficient's
initial public offering, utilization of the net operating losses and tax
credits may be subject to substantial annual limitations due to the ownership
change limitations provided by the Internal Revenue Code of 1986, as amended,
and similar state provisions. The annual limitation may result in the
expiration of net operating losses and tax credits before utilization.
Fiscal Years Ended June 30, 1997, 1998 and 1999
Net Revenues
Net revenues increased 340.0% to $14.8 million in fiscal 1999 from $3.4
million in fiscal 1998. Net revenues in fiscal 1998 reflected a 18.2% decrease
from the $4.1 million realized in fiscal 1997. DSL product revenues, which
didn't exist in fiscal 1997, increased from $84,000 in fiscal 1998 to $12.9
million in fiscal 1999. The increases in DSL product revenues from fiscal 1998
to fiscal 1999 reflect the beginning market adoption of our DSL products, which
first became available in the quarter ended March 31, 1998. The increase in DSL
product revenues was partially offset by a decrease in revenues from our ATM
LAN products. During fiscal 1997, we made the strategic decision to begin
focusing on developing our DSL products and, as a result, significantly reduced
the level of development and support activities associated with our ATM LAN
products. As a result of this change in focus, ATM LAN product revenues
declined from $4.1 million in fiscal 1997 to $3.3 million in fiscal 1998, and
further declined to $1.9 million in fiscal 1999. From fiscal 1997 to fiscal
1998, this decrease was only slightly offset by sales of prototype DSL products
that began in the second half of fiscal 1998.
Cost of Revenues
Cost of revenues increased 564.1% to $14.3 million in fiscal 1999 from $2.2
million in fiscal 1998. This compares to a decrease of 9.5% for fiscal 1998 as
compared to the $2.4 million in cost of sales incurred in fiscal 1997. The
increase from fiscal 1998 to fiscal 1999 reflected the substantial increase in
DSL product sales. The decrease from 1997 to 1998 reflected the declining sales
of our ATM LAN products.
Gross margin represented 3.3% of net revenues in fiscal 1999, compared to
35.9% of net revenues in fiscal 1998 and 42.1% of net revenues in fiscal 1997.
Gross margin on our DSL products increased from a gross loss of 22.6% of the
related revenues in fiscal 1998 to a gross loss of 3.6% of the related revenues
for fiscal 1999. Our gross margin was lower in the current period as we focused
on bringing our DSL products to market quickly and as we began to add personnel
to our manufacturing operations in anticipation of higher levels of business
going forward. We took a number of actions that were designed to bring our DSL
products to market quickly but which also adversely affected our gross margins.
These actions included initial volume price discounts for key customers and
incremental costs such as manufacturing start-up, expedite and other
incremental shipping and handling charges associated with initial low volume
manufacturing. We expect that we will continue to incur higher than normal
costs associated with the actions to bring our DSL products to market quickly
through at least the end of calendar 1999. The higher costs incurred on our DSL
products were partially offset by improved gross margins realized on our ATM
LAN products. Gross margin on our ATM LAN products improved from 42.1% of
related revenues in fiscal 1997 to 37.4% in fiscal 1998 and to 49.5% in fiscal
1999. The period-to-period increase in gross margins on our ATM LAN products
was a result of manufacturing efficiencies achieved with these more mature
products.
Sales and Marketing Expense
Sales and marketing expenses increased 78.5% from $3.4 million in fiscal
1998 to $6.1 million in fiscal 1999. This compares to an increase of 42.6% in
fiscal 1998 over the $2.4 million recorded in fiscal 1997. The
13
<PAGE>
increases in sales and marketing expenses in absolute amount from fiscal 1997
through fiscal 1999 resulted primarily from sales and marketing activities
associated with the launch of our DSL products. These launch costs included
significant personnel-related expenses associated with increasing the size of
our sales and marketing organization, and increased trade show activities and
related travel expenses. Sales and marketing expenses represented 58.4% of net
revenues in fiscal 1997, 102.0% in fiscal 1998 and 41.4% in fiscal 1999. The
increase in sales and marketing expenses as a percentage of net revenues from
fiscal 1997 to 1998 was primarily a result of the up-front spending required to
launch our DSL products, which only began to constitute a significant portion
of our revenues in fiscal 1999. The decrease in such expenses as a percentage
of net revenues from fiscal 1998 to fiscal 1999 was a result of the rapid
increase in revenues.
Research and Development Expenses
Research and development expenses increased 76.5% from $4.4 million in
fiscal 1998 to $7.7 million in fiscal 1999. This compares to an increase of
4.9% in fiscal 1998 over the $4.2 million recorded in fiscal 1997. The
substantial increase in research and development spending from period to period
was primarily a result of increased personnel and related costs associated with
a larger research and development organization, as well as design and prototype
expenses incurred in connection with the roll-out of our DSL products.
Additionally, research and development spending in fiscal 1998 was partially
offset by $850,000 of nonrecurring engineering expenses reimbursed by third
parties. These amounts are treated as an offset to the related research and
development spending. Accordingly, while the net amount of research and
development spending in fiscal 1998 was relatively consistent with the fiscal
1997 level, our gross research and development spending increased 25.2% from
fiscal 1997 to 1998. We received no such reimbursements in the fiscal 1999
period. Research and development expenses represented 101.5% of net revenues in
fiscal 1997, 130.2% in fiscal 1998 and 52.2% in fiscal 1999. The substantial
increases in research and development expenses as a percentage of net revenues
from fiscal 1997 to 1998 reflected our early investment in developing our DSL
products. The decrease from 1998 to 1999 in such expenses as a percentage of
net revenues was a result of the rapid increase in revenues.
General and Administrative Expenses
General and administrative expenses increased 21.5% from $1.6 million in
fiscal 1998 to $2.0 million in fiscal 1999. This compares to an increase of
31.8% in fiscal 1998 over the $1.2 million recorded in fiscal 1997. The
increases in absolute amount of general and administrative spending from period
to period were primarily a result of increases in headcount associated with
building our infrastructure. General and administrative expenses represented
30.2% of net revenues in fiscal 1997, 48.7% in fiscal 1998 and 13.4% in fiscal
1999. The substantial increase in general and administrative expenses as a
percentage of net revenues in fiscal 1998 primarily reflected lower revenues in
that year, while the decrease from fiscal 1998 to fiscal 1999 reflected the
rapid increase in revenues in fiscal 1999.
Stock Option Compensation
For the years ended June 30, 1997, 1998 and 1999 we recorded aggregate
deferred stock option compensation of $2.3 million, $3.1 million and $13.1
million, respectively in connection with stock option grants. Amortization of
deferred stock option compensation was $659,000 in fiscal 1997, $1.2 million in
fiscal 1998 and $3.1 million in fiscal 1999. See Note 8 of Notes to
Consolidated Financial Statements for a discussion of our deferred stock option
compensation.
Interest and Other Income (Expense), Net
Interest and other income (expense), net went from income of $125,000 in
fiscal 1997 to $130,000 in fiscal 1998 and to an expense of $7.9 million in
fiscal 1999. In the second half of fiscal 1999, we borrowed $9.0 million from
certain investors. These notes carried an interest rate of 10% per year, and
were payable on the earlier of January 2002 or the completion of an initial
public offering. In connection with these notes, we
14
<PAGE>
issued the investors warrants to purchase 3,082,191 shares of Series H
preferred stock at an exercise price of $2.92 per share. The proceeds were
allocated between the notes and the warrants based on their pro rata fair
values resulting in a discount. The discount was amortized as interest expense
over six months, which represented the expected terms of the promissory notes.
In addition, in June 1999, we borrowed an additional $5.0 million from Covad
Communications Group, Inc. The Covad note carried an interest rate of 8% per
year, and the principal amount and interest on the note converted into an
aggregate of 497,663 shares of common stock upon completion of our initial
public offering in July 1999. Upon the issuance of the Covad note we recorded
$2.1 million of interest expense which represented the intrinsic value of the
beneficial conversion feature of the Covad note.
Income Taxes
From inception through June 30, 1999, we incurred net losses for federal and
state tax purposes and have not recognized any tax provision or benefit. As of
June 30, 1999, we had approximately $48.0 million of federal net operating loss
carryforwards to offset future taxable income which will begin to expire in
varying amounts beginning in 2008. Given our limited operating history, losses
incurred to date and the difficulty in accurately forecasting our future
results, management does not believe that the recognition of the related
deferred income tax asset meets the criteria required by generally accepted
accounting principles. Accordingly, a 100% valuation allowance has been
recorded. Furthermore, as a result of changes in Efficient's equity ownership
resulting from Efficient's redeemable convertible preferred stock and note
financings and Efficient's initial public offering, utilization of the net
operating losses and tax credits may be subject to substantial annual
limitations due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended, and similar state provisions. The annual
limitation may result in the expiration of net operating losses and tax credits
before utilization. See Note 11 of Notes to Consolidated Financial Statements.
15
<PAGE>
Quarterly Results of Operations
The following table sets forth, for the periods presented, certain data from
Efficient's consolidated statement of operations and such data as a percentage
of net revenues. The consolidated statement of operations data have been
derived from our unaudited consolidated financial statements. In the opinion of
management, these statements have been prepared on substantially the same basis
as the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods presented. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this prospectus. The
operating results in any quarter are not necessarily indicative of the results
that may be expected for any future period. We have incurred net losses in each
quarter since inception, and we expect to continue to incur losses for the
foreseeable future.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1997 1997 1998 1998 1998 1998 1999 1999 1999
--------- -------- -------- -------- --------- -------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net revenues...... $ 676 $ 833 $ 1,194 $ 667 $ 1,174 $ 1,850 $ 4,115 $ 7,689 $ 12,171
Cost of revenues.. 396 413 744 607 863 1,647 4,189 7,645 11,706
------- -------- -------- -------- -------- -------- ------- --------- --------
Gross profit
(loss)........... 280 420 450 60 311 203 (74) 44 465
Operating
expenses:
Sales and
marketing........ 643 694 895 1,204 1,168 1,303 1,385 2,277 2,652
Research and
development...... 1,044 737 1,064 1,544 1,826 1,790 1,930 2,201 3,053
General and
administrative... 305 346 546 444 339 411 484 759 1,048
Stock option
compensation..... 233 241 275 416 433 475 991 1,217 1,389
Amortization of
intangibles...... -- -- -- -- -- -- -- -- --
In process
research and
development
charge........... -- -- -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- ------- --------- --------
Total operating
expenses......... 2,225 2,018 2,780 3,608 3,766 3,979 4,790 6,454 8,142
------- -------- -------- -------- -------- -------- ------- --------- --------
Loss from
operations....... (1,945) (1,598) (2,330) (3,548) (3,455) (3,776) (4,864) (6,410) (7,677)
Interest and other
income (expense),
net.............. 34 12 35 49 80 30 (2,090) (5,920) (77)
------- -------- -------- -------- -------- -------- ------- --------- --------
$
Net loss.......... $(1,911) $ (1,586) $ (2,295) $ (3,499) $ (3,375) $ (3,746) (6,954) $ (12,330) $ (7,754)
======= ======== ======== ======== ======== ======== ======= ========= ========
As a Percentage of
Net Revenues:
Net revenues...... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues.. 58.6 49.6 62.3 91.0 73.5 89.0 101.8 99.4 96.2
------- -------- -------- -------- -------- -------- ------- --------- --------
Gross profit
(loss)........... 41.4 50.4 37.7 9.0 26.5 11.0 (1.8) 0.6 3.8
Operating
expenses:
Sales and
marketing........ 95.1 83.3 75.0 180.5 99.5 70.4 33.6 29.6 21.8
Research and
development...... 154.5 88.5 89.1 231.5 155.5 96.8 46.9 28.6 25.1
General and
administrative... 45.1 41.5 45.7 66.6 28.9 22.2 11.8 9.9 8.6
Stock option
compensation..... 34.5 28.9 23.0 62.4 36.9 25.7 24.1 15.8 11.4
Amortization of
intangibles...... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
In process
research and
development
charge........... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
------- -------- -------- -------- -------- -------- ------- --------- --------
Total operating
expenses......... 329.2 242.2 232.8 541.0 320.8 215.1 116.4 83.9 66.9
------- -------- -------- -------- -------- -------- ------- --------- --------
Loss from
operations....... (287.8) (191.8) (195.1) (532.0) (294.3) (204.1) (118.2) (83.3) (63.1)
Interest and other
income (expense),
net.............. 5.0 1.4 2.9 7.3 6.8 1.6 (50.8) (77.0) (0.6)
------- -------- -------- -------- -------- -------- ------- --------- --------
Net loss.......... (282.8)% (190.4)% (192.2)% (524.7)% (287.5)% (202.5)% (169.0)% (160.3)% (63.7)%
======= ======== ======== ======== ======== ======== ======= ========= ========
<CAPTION>
Dec. 31,
1999
----------
<S> <C>
Statement of
Operations Data:
Net revenues...... $ 26,424
Cost of revenues.. 21,219
----------
Gross profit
(loss)........... 5,205
Operating
expenses:
Sales and
marketing........ 4,849
Research and
development...... 4,318
General and
administrative... 1,284
Stock option
compensation..... 1,219
Amortization of
intangibles...... 7,358
In process
research and
development
charge........... 4,970
----------
Total operating
expenses......... 23,998
----------
Loss from
operations....... (18,793)
Interest and other
income (expense),
net.............. 666
----------
Net loss.......... (18,127)
==========
As a Percentage of
Net Revenues:
Net revenues...... 100.0 %
Cost of revenues.. 80.3
----------
Gross profit
(loss)........... 19.7
Operating
expenses:
Sales and
marketing........ 18.4
Research and
development...... 16.3
General and
administrative... 4.9
Stock option
compensation..... 4.6
Amortization of
intangibles...... 27.8
In process
research and
development
charge........... 18.8
----------
Total operating
expenses......... 90.8
----------
Loss from
operations....... (71.1)
Interest and other
income (expense),
net.............. 2.5
----------
Net loss.......... (68.6)%
==========
</TABLE>
16
<PAGE>
Our net revenues and results of operations have fluctuated significantly
from quarter to quarter in the past, and we expect these fluctuations to
continue in the future. The following discussion highlights significant events
that have impacted our net revenues and financial results for the ten quarters
in the period ended December 31, 1999.
Net Revenues
Net revenues increased each quarter beginning in the quarter ended June 30,
1998 due to increased sales of our new DSL products, partially offset in two
quarters by decreased revenues from our ATM LAN products. Sales of our DSL
products have increased significantly quarter to quarter since we introduced
them in the third quarter of fiscal 1998. Net revenues increased in the first
three quarters of fiscal 1998 as demand for our ATM LAN products was
increasing. With the decision to focus on DSL products, we greatly reduced our
sales, marketing and development efforts for our ATM LAN products. As a result,
sales of these products began to decline in the fourth quarter of fiscal 1998.
Cost of Revenues
Cost of revenues has increased in absolute dollars in most quarterly
periods. Gross margins have fluctuated from a high of 50.4% in the second
quarter of fiscal 1998 to a gross loss of 1.8% for the quarter ended March 31,
1999. Gross margins have been adversely affected by volume price discounts for
customers in order to get our DSL products quickly into the marketplace as well
as manufacturing start-up costs and inefficiencies related to the relatively
low manufacturing levels for some of our DSL products.
Operating Expenses
Operating expenses generally increased in absolute amount from quarter to
quarter during fiscal 1998 and 1999. As a percentage of net revenues, these
expenses fluctuated, in some periods significantly, as a result of the
fluctuations in revenues.
Interest and Other Income (Expense), Net
Interest and other income (expense), net has varied from quarter to quarter,
based primarily upon changes in the amount and mix of interest-bearing
investments outstanding during each period. In the quarter ended December 31,
1999, interest and other income (expense), net was income of $666,000. This was
a result of interest income of $1.3 million earned on the investment of
proceeds from our initial public offering, partially offset by interest expense
of $675,000 related to the notes and warrants converted to common stock in that
period.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the sale
of preferred equity securities and, in the second half of fiscal 1999, through
borrowings from our investors and others. Since inception through June 30,
1999, we raised an aggregate of $40.4 million (net of transaction expenses)
from the sale of equity securities and an additional $14.0 million through loan
transactions.
On July 15, 1999, we completed our initial public offering. We issued 4.6
million shares of common stock and raised $63.1 million in net proceeds. Upon
the completion of the initial public offering, our promissory notes converted
into redeemable convertible preferred stock, and all outstanding redeemable
convertible preferred stock then converted into 28,300,067 shares of common
stock.
At 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,
17
<PAGE>
furniture and equipment for our new corporate headquarters in Dallas, Texas.
The lease commenced in February 2000 and expires in 2010 with annual lease
payments of approximately $2.8 million.
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 net investments in working capital and funding of our net losses.
Cash used in investing activities for the six months ended December 31,
1999 was $4.0 million. Of this amount, $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 our initial
public offering of common stock on July 15, 1999.
On February 8, 2000, we completed a follow-on public offering. We 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 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 and the proceeds from
this offering will provide sufficient capital to fund our operations at least
through the end of calendar 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 25, 2000, we have 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and
Hedging Activities," ("SFAS No. 133") as amended by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,"
which establishes accounting and
18
<PAGE>
reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended, is effective for fiscal years beginning after June 15, 2000.
The adoption of Statement of Financial Accounting Standards No. 133 is not
expected to have a material effect on our results of operations, financial
position or cash flows as we do not currently hold derivative instruments or
engage in hedging activities.
Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the Risk Factors section.
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 at the date of purchase of less than 90 days. These
investments are subject to interest rate risk and will decrease in value if
market interest rates increase. A hypothetical increase or decrease in market
interest rates by 10% from the 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.
As of 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 currently realized in U.S. dollars. In
addition, we do not maintain significant asset or cash account balances in
currencies other than the United States dollar. Therefore, we do not believe
that we currently have any significant direct foreign currency exchange rate
risk.
19
<PAGE>
OTHER INFORMATION
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of Efficient Networks' common stock as of February 25, 2000 by (i)
each director of Efficient Networks, (ii) Efficient Networks' Chief Executive
Officer and each of the four other most highly compensated executive officers
of Efficient Networks' during fiscal 1999, (iii) all directors and executive
officers of Efficient Networks as a group, and (iv) all those known by
Efficient Networks to be beneficial owners of more than five percent of
outstanding shares of Efficient Networks' common stock. This table is based on
information provided to Efficient Networks or filed with the Securities and
Exchange Commission by Efficient Networks' directors, executive officers and
principal stockholders. Unless otherwise indicated in the footnotes below, and
subject to community property laws where applicable, each of the named persons
has sole voting and investment power with respect to the shares shown as
beneficially owned.
Unless otherwise indicated, the address for each stockholder listed in the
following table is c/o Efficient Networks, Inc., 4849 Alpha Road, Dallas, Texas
75244. Applicable percentage ownership in the following table is based on
48,226,757 shares of common stock outstanding as of February 25, 2000.
<TABLE>
<CAPTION>
Number of Percentage of
Shares Beneficially Shares Beneficially
Name and Address Owned Owned
---------------- ------------------- -------------------
<S> <C> <C>
Cabletron Systems, Inc.(1)............ 5,176,099 10.73
35 Industrial Way
Rochester, NH 03867
Crosspoint Venture Partners(2)........ 4,829,958 10.02
18552 MacArthur Blvd., Suite 400
Irvine, CA 92612
Texas Instruments Incorporated........ 3,474,291 7.20
P.O. Box 660199, M.S. 8650
Dallas, TX 75266-0199
El Dorado Ventures(3)................. 3,782,562 7.84
2400 Sand Hill Road, Suite 100
Menlo Park, CA 94025
Enterprise Partners(4)................ 2,776,952 5.76
7979 Ivanhoe Avenue, Suite 550
La Jolla, CA 92037
Siemens AG............................ 3,716,800 7.71
Hofmannstrasse 51
81359 Munchen, Germany
Mark A. Floyd(5)...................... 1,428,333 2.93
Bruce W. Brown(6)..................... 55,000 *
Robert A. Hoff(7)..................... 4,854,958 10.06
Thomas H. Peterson(8)................. 3,807,562 7.89
James P. Gauer(9)..................... 1,644,624 3.41
Anthony T. Maher(10).................. 3,723,050 7.72
William L. Martin III................. 0 --
Robert Hawk(11)....................... 150,000 *
David B. Stefan(12)................... 80,162 *
Patricia W. Hosek(13)................. 150,521 *
Gregory L. Langdon(14)................ 144,187 *
Paul E. Couturier(15)................. 111,459 *
All directors and officers as a group
(20 persons)(16)..................... 16,433,052 33.21
</TABLE>
20
<PAGE>
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Excludes 6,300 shares of Series A non-voting convertible preferred stock
held by Cabletron. The preferred stock is convertible into an aggregate of
6,300,000 shares of common stock and is expected to be converted in 2000.
(2) Represents 3,063,207 shares held by Crosspoint Venture Partners 1993,
95,390 shares held by Crosspoint 1993 Entrepreneurs Fund and 1,671,061
shares held by Crosspoint Ventures LS 1997 L.P.
(3) Represents 2,967,151 shares held by El Dorado Ventures III, 54,953 shares
held by El Dorado C&L Fund, L.P., 92,333 shares held by El Dorado
Technology IV, L.P., 617,103 shares held by El Dorado Ventures IV, L.P.,
and 51,022 shares held by El Dorado Technology "98, L.P.
(4) Represents 2,545,553 shares held by Enterprise Partners II, L.P., and
231,399 shares held by Enterprise Partners Associates, L.P.
(5) Includes 533,333 shares issuable upon exercise of stock options
exercisable on or before April 25, 2000.
(6) Includes 55,000 shares issuable upon exercise of stock options exercisable
on or before April 25, 2000.
(7) Mr. Hoff is a general partner of Crosspoint Venture Partners. The shares
listed represent (a) 4,829,958 shares held by Crosspoint Venture Partners
and (b) 25,000 shares issuable upon exercise of stock options held by Mr.
Hoff and exercisable on or before April 25, 2000. Mr. Hoff disclaims
beneficial ownership of the shares held by Crosspoint Venture Partners,
except to the extent of his pecuniary interest therein.
(8) Mr. Peterson is a general partner of El Dorado Ventures. The shares listed
represent (a) 3,782,562 shares held by El Dorado Ventures and (b) 25,000
shares issuable upon exercise of stock options held by Mr. Petersen and
exercisable on or before April 25, 2000. Mr. Peterson disclaims beneficial
ownership of the shares held by El Dorado Ventures, except to the extent
of his pecuniary interest therein.
(9) Mr. Gauer is a general partner of Palomar Ventures and Ocean Park
Ventures, L.P. The shares listed represent (a) 668,965 shares held by
Palomar Ventures, (b) 925,659 shares held by Ocean Park Ventures and (c)
25,000 shares issuable upon exercise of stock options held by Mr. Gauer
and exercisable on or before April 25, 2000. Mr. Gauer disclaims
beneficial ownership of the shares held by Palomar Ventures and Ocean Park
Ventures, except to the extent of his pecuniary interest therein.
(10) Includes 3,716,800 shares beneficially owned by Siemens AG. Mr. Maher is
a member of the board of Siemens AG Information and Communication
Networks. Mr. Maher disclaims beneficial ownership of the shares held by
Siemens AG.
(11) Includes 150,000 shares issued upon exercise of a stock option. All of
such shares are currently subject to a right of repurchase by Efficient.
(12) Includes 80,105 shares issuable upon exercise of stock options
exercisable on or before April 25, 2000.
(13) Includes 112,521 shares issuable upon exercise of stock options
exercisable on or before April 25, 2000.
(14) Includes 126,687 shares issuable upon exercise of stock options
exercisable on or before April 25, 2000.
(15) Includes 96,459 shares issuable upon exercise of stock options
exercisable on or before April 25, 2000.
(16) Includes an aggregate of 1,249,011 shares issuable upon exercise of stock
options exercisable on or before April 25, 2000.
21
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 200,000,000 shares of common stock, $0.001 par
value, and 10,000,000 shares of undesignated preferred stock, $0.001 par value.
The following description of our capital stock is subject to and qualified in
its entirety by our certificate of incorporation and bylaws, and by the
provisions of applicable Delaware law.
Common Stock
As of December 31, 1999, there were 51,156,248 shares of common stock
outstanding after giving pro forma effect to the conversion of all outstanding
shares of Series A non-voting convertible redeemable preferred stock issued to
Cabletron. These shares were held of record by approximately 156 stockholders.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of Efficient, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The holders
of common stock have no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel to Efficient, shall opine that the shares of common stock to be issued
upon the closing of this offering, when issued and sold in the manner described
in this prospectus and in accordance with the resolutions adopted by the board
of directors, will be fully paid and nonassessable.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of Efficient without further
action by the stockholders.
Series A Non-Voting Convertible Preferred Stock
In connection with the acquisition of Flowpoint Corporation from Cabletron,
the Board of Directors designated an aggregate of 6,300 shares of preferred
stock as "Series A Non-Voting Convertible Preferred Stock." The following is a
summary of the rights, preferences, privileges and restrictions of Series A
Preferred:
. Voting. The Series A Preferred is non-voting. However, without the
consent of holders of at least 66% of the Series A Preferred, Efficient
may not: (a) alter the rights of the Series A Preferred; (b) create any
securities that rank on a parity with or senior to the Series A Preferred
as to dividends or distribution of assets upon liquidation; or (c)
increase or decrease the number of shares of preferred stock authorized.
22
<PAGE>
. Dividends. Each share of Series A Preferred is entitled to receive
dividends, when and if declared by the Board of Directors, at least equal
in amount to the dividends declared on the common stock, multiplied by
the conversion ratio of the Series A Preferred. Dividends are not
mandatory or cumulative.
. Liquidation. In the event of a liquidation of Efficient, the holders of
the Series A Preferred are entitled to receive the par value of such
shares in preference to the holders of common stock, and thereafter share
on a pro rata basis with the common stock, treating the Series A
Preferred as if converted into common stock.
. Automatic Conversion. The Series A Preferred automatically converts into
common stock, at the rate of 1,000 shares of common stock for each share
of Series A Preferred (subject to adjustment for stock splits and the
like), immediately following the affirmative vote of such conversion by
holders of a majority of our common stock.
. Redemption. In the event that the Series A Preferred has not converted
into common stock on or before July 21, 2000, one fifth of the Series A
Preferred shall be redeemed on each of December 31, 2000, 2001, 2002,
2003, and 2004. The redemption price of the Series A Preferred is
approximately $78,000 per share.
It is the mutual intention and understanding of Efficient and Cabletron
that Efficient will hold a special meeting of stockholders. Holders of a
majority of Efficient's common stock have entered into Voting Agreements
pursuant to which they have agreed to vote in favor of conversion of the
Series A Preferred into common stock. The special meeting is expected to be
held in early 2000.
Warrants
At September 30, 1999, there were warrants outstanding to purchase 34,246
shares of our common stock.
Standstill and Registration Rights
On December 17, 1999, pursuant to an Agreement and Plan of Reorganization,
Efficient completed the acquisition of FlowPoint Corporation, a wholly-owned
subsidiary of Cabletron, in exchange for a combination of common stock and
preferred stock equal to an aggregate of 13,500,000 shares of common stock on
an as-converted basis. In connection with this transaction, Efficient and
Cabletron also entered into a Standstill and Disposition Agreement containing
certain standstill provisions, voting provisions, restrictions on transfer,
and registration rights.
The standstill provisions contained in the Standstill and Disposition
Agreement provide that, without the prior consent of Efficient's board,
Cabletron may not:
. acquire additional shares of Efficient;
. solicit proxies or participate in an election contest;
. act in concert with others to acquire, hold or dispose of Efficient
stock;
. seek to elect or replace members of Efficient's board;
. seek to control management, the board, or policies of Efficient;
. pursue a business combination with Efficient;
. coordinate with any third person to form a business combination with
Efficient;
. coordinate with any third person in connection with a tender offer for
voting securities of Efficient; and
. assist, participate, solicit or encourage any third party to do any of
the above.
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<PAGE>
The voting provisions contained in the Standstill and Disposition Agreement
provide that on matters requiring the vote of Efficient stockholders, Cabletron
must vote shares in excess of 10% of the voting stock of Efficient in
proportion with the vote of other stockholders of Efficient. However, Cabletron
must vote all voting shares which it owns proportionately with respect to:
. any transaction between Efficient and one or more person in which
Cabletron controls a 5% equity interest; or
. a change of control of Efficient with any of the top five data networking
companies, from time to time, as measured by revenues.
The standstill and voting provisions will terminate if and when Cabletron
owns less than 5% of the voting securities of Efficient or upon a change of
control of Efficient.
The restrictions on transfer provisions contained in the Standstill and
Disposition Agreement provide that, without the prior consent of Efficient's
board, Cabletron may not sell, transfer, or otherwise dispose of Efficient
stock, except:
. to a controlled affiliate of Cabletron;
. in connection with a firm commitment, underwritten public offering;
. pursuant to Rule 144 or the shelf registration statement, except in
certain circumstances;
. in a private sale if, after giving effect to the sale, the purchaser
would own more than 5% of the voting stock of Efficient, unless the
purchaser is a passive investor in which case the amount may be up to 10%
of the voting stock of Efficient; and
. in response to a tender offer which is not opposed by Efficient's board.
The restriction on transfer provisions will terminate if and when Cabletron
owns less than 5% of the voting securities of Efficient, or upon a change of
control of Efficient, or November 2009.
The registration rights provisions contained in the Standstill and
Disposition Agreement provide that, in addition to the shares to which
Cabletron is entitled to include in this offering:
. by July 21, 2000, Efficient shall use commercially reasonable efforts to
file a shelf registration statement so that Cabletron may sell shares on
a continuous basis, however, Cabletron may not sell greater than 2
million shares pursuant to this registration statement and Rule 144;
. after July 21, 2000, Cabletron shall be entitled to two demand
registrations as long as the demand is for 2 million shares or more;
. if Efficient determines to commence any public offering after this
offering before December 31, 2000, Cabletron shall be entitled to include
the greater of 40% of the shares to be sold in the offering or 3 million
shares;
. Cabletron shall also be entitled to the same registration rights held by
other stockholders of Efficient stock, as described in the following
paragraph; and
. expenses of registration, other than underwriting discounts and
commissions, will be borne by us.
In addition to the specific registration rights of Cabletron described
above, which are senior, the holders of approximately 27.5 million shares of
common stock and Cabletron are entitled to certain registration rights.
Beginning on December 31, 2000, the holders of at least 50% of the then
outstanding registrable securities may require:
. on up to two occasions, that we register their shares for public resale;
24
<PAGE>
. on one occasion within any twelve month period, that we register their
shares for public resale on Form S-3 or similar short-form registration
if the value of the securities to be registered is at least $1.0 million;
and
. include their shares of common stock in a registration in which we elect
to register shares of common stock of Efficient, but we may reduce the
number of shares proposed to be registered in view of market conditions
to an amount not less than 30% of the shares in the offering.
All expenses incurred in connection with any registration, other than
underwriting discounts and commissions attributable to registrable securities,
will be borne by us. These registration rights will terminate in July 2005 or,
with respect to each holder of registrable securities, at such time as the
holder is entitled to sell all of its shares in any three-month period under
Rule 144(k) of the Securities Act.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following transactions more difficult:
. the acquisition of Efficient by means of a tender offer;
. the acquisition of Efficient by means of a proxy contest or otherwise;
or
. the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of Efficient
to first negotiate with our board of directors. We believe that the benefits of
our increased ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Efficient outweigh the
disadvantages of discouraging such proposals as negotiation of such proposals
could result in an improvement of their terms.
Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
one class being elected each year by our stockholders. See "Management--
Executive Officers and Directors." This system of electing and removing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of Efficient because it generally makes
it more difficult for stockholders to replace a majority of the directors.
Stockholder Meetings. Under our bylaws, only our board of directors,
Chairman of the Board and President may call special meetings of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by our
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
25
<PAGE>
Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.
Elimination of Cumulative Voting. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to change control of Efficient. These and other provisions may have the
effect of deterring hostile takeovers or delaying changes in control or
management of Efficient.
Amendment of Charter Provisions. The amendment of any of the above
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Harris Trust and
Savings Bank.
The Nasdaq Stock Market Listing
Our shares have been approved for listing on The Nasdaq Stock Market under
the symbol "EFNT."
26
<PAGE>
INDEPENDENT AUDITORS
The consolidated financial statements of Efficient Networks, Inc. as of June
30, 1998 and 1999, and for each of the years in the three-year period ended
June 30, 1999 included in this offering circular have been audited by KPMG LLP,
independent auditors, as set forth in their report, which are included in this
offering circular in reliance upon their report.
The financial statements of FlowPoint Corporation as of March 31, 1998,
August 31, 1998 and February 28, 1999 and for the years ended March 31, 1997
and 1998, the five-month period ended August 31, 1998 and the six-month period
ended February 28, 1999, included in this offering circular have been audited
by KPMG LLP, independent auditors, as set forth in their report, which is
included in this offering circular in reliance upon their report.
ADDITIONAL INFORMATION ABOUT EFFICIENT
Efficient is subject to the information and periodic reporting requirements
of the Securities Exchange Act and, accordingly, files periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Securities and Exchange Commission
located at Seven World Trade Center, 13th Floor, New York, NY 10048, and the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the Securities and Exchange Commission at 1-800-
SEC-0330 for further information about public reference rooms. You may also
inspect periodic reports, proxy, and information statements and other
information regarding Efficient that we file electronically with the Securities
and Exchange Commission without charge at a Web site maintained by the
Securities and Exchange Commission at http://www.sec.gov.
We will furnish to the holders or beneficial holders of the notes or the
underlying common stock and prospective purchasers, upon their request, the
information required under Rule 144A(d)(4) under the Securities Act until such
time as such securities are no longer "restricted securities" within the
meaning of Rule 144 under the Securities Act, assuming these securities have
not been owned by an affiliate of Efficient.
27
<PAGE>
EFFICIENT NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Efficient Networks, Inc.
Annual Financial Statements
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)............... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Interim Financial Statements
Unaudited Condensed Consolidated Balance Sheets......................... F-19
Unaudited Condensed Consolidated Statements of Operations............... F-20
Unaudited Condensed Consolidated Statements of Cash Flows............... F-21
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-22
Pro Forma Condensed Combined Financial Statements........................ F-26
Unaudited Pro Forma Condensed Combined Statement of Operations For the
Year ended June 30, 1999............................................... F-27
Unaudited Pro Forma Condensed Combined Statement of Operations For the
Six Months ended December 31, 1999..................................... F-28
Notes to Unaudited Pro Forma Condensed Combined Statements of
Operations............................................................. F-29
FlowPoint Corporation
Independent Auditors' Report............................................ F-30
Balance Sheets.......................................................... F-31
Statements of Operations................................................ F-32
Statements of Cash Flows................................................ F-33
Statements of Stockholders' Equity (Deficit)............................ F-34
Notes to Financial Statements........................................... F-35
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Efficient Networks, Inc.:
We have audited the accompanying consolidated balance sheets of Efficient
Networks, Inc. and subsidiaries as of June 30, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Efficient
Networks, Inc. and subsidiaries as of June 30, 1998 and 1999, and the results
of their operations and their cash flows for each of the years in the three-
year period ended June 30, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Dallas, Texas
July 6, 1999, except as to
note 13 which is as of
July 20, 1999
F-2
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Balance Sheets
June 30, 1998 and 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30,
-------------------------------
Pro forma
1999
1998 1999 (unaudited)
-------- -------- -----------
<S> <C> <C> <C>
Assets (Note 2(l))
Current assets:
Cash and cash equivalents.................... $ 7,607 $ 3,604 $ 3,604
Accounts receivable, net of allowance for
doubtful accounts of $15 in 1998 and $120 in
1999........................................ 461 10,316 10,316
Inventories.................................. 898 5,472 5,472
Other assets................................. 202 241 241
-------- -------- ----------
Total current assets....................... 9,168 19,633 19,633
Furniture and equipment, net................... 1,404 2,285 2,285
Other assets, net.............................. 95 29 29
-------- -------- ----------
$ 10,667 $ 21,947 $ 21,947
======== ======== ==========
Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity
(Deficit)
Current liabilities:
Accounts payable............................. $ 547 $ 4,104 $ 4,104
Accrued liabilities.......................... 751 2,208 2,208
Deferred revenue............................. -- 736 736
-------- -------- ----------
Total current liabilities.................. 1,298 7,048 7,048
Long-term debt, net of discount................ -- 13,396 --
Other liabilities.............................. -- 22 22
-------- -------- ----------
Total liabilities.......................... 1,298 20,466 7,070
-------- -------- ----------
Redeemable convertible preferred stock (note
7)............................................ 34,743 40,495 --
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, par value $.001 per share,
100,000,000 shares authorized; 3,616,964 and
4,362,221 shares issued and outstanding in
1998 and 1999, respectively; pro forma--
32,662,288 shares issued and outstanding.... 4 4 33
Additional paid-in capital................... 7,221 29,777 84,265
Deferred stock option compensation........... (4,815) (14,606) (14,606)
Accumulated deficit.......................... (27,784) (54,189) (54,815)
-------- -------- ----------
Total stockholders' equity (deficit)....... (25,374) (39,014) 14,877
-------- -------- ----------
$ 10,667 $ 21,947 $ 21,947
======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Operations
Years ended June 30, 1997, 1998 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net revenues....................................... $ 4,122 $ 3,370 $ 14,828
Cost of revenues................................... 2,386 2,160 14,344
------- ------- --------
Gross profit................................... 1,736 1,210 484
------- ------- --------
Operating expenses:
Sales and marketing.............................. 2,409 3,436 6,133
Research and development......................... 4,183 4,389 7,747
General and administrative....................... 1,245 1,641 1,993
Stock option compensation........................ 659 1,165 3,116
------- ------- --------
Total operating expenses....................... 8,496 10,631 18,989
------- ------- --------
Loss from operations........................... (6,760) (9,421) (18,505)
Interest expense................................... -- (10) (8,092)
Interest income.................................... 144 146 202
Other, net......................................... (19) (6) (10)
------- ------- --------
Net loss....................................... $(6,635) $(9,291) $(26,405)
======= ======= ========
Basic and diluted net loss per share of common
stock......................................... $ (2.19) $ (2.86) $ (6.87)
======= ======= ========
Weighted-average shares of common stock
outstanding................................... 3,027 3,254 3,893
======= ======= ========
Unaudited pro forma basic and diluted net loss
per share..................................... $ (0.97)
========
Weighted average shares used to compute
unaudited pro forma basic and diluted net loss
per share..................................... 28,342
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Stockholders Equity (Deficit)
Years ended June 30, 1997, 1998 and 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
Total
Common Stock Additional Deferred stockholders'
----------------- paid-in stock option Accumulated equity
Shares Amount capital Compensation deficit (deficit)
---------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1996................... 2,992,271 $ 3 $ 1,439 $ (1,227) $(11,858) $(11,643)
Issuance of common
stock under stock
option plan........... 62,500 -- 9 -- -- 9
Deferred stock option
compensation.......... -- -- 2,269 (2,269) -- --
Amortization of
deferred stock option
compensation.......... -- -- -- 659 -- 659
Net loss............... -- -- -- -- (6,635) (6,635)
---------- ---- ------- -------- -------- --------
Balance at June 30,
1997................... 3,054,771 3 3,717 (2,837) (18,493) (17,610)
Issuance of common
stock under stock
option plan........... 448,125 1 61 -- -- 62
Issuance of common
stock................. 114,068 -- 300 -- -- 300
Deferred stock option
compensation.......... -- -- 3,143 (3,143) -- --
Amortization of
deferred stock option
compensation.......... -- -- -- 1,165 -- 1,165
Net loss............... -- -- -- -- (9,291) (9,291)
---------- ---- ------- -------- -------- --------
Balance at June 30,
1998................... 3,616,964 4 7,221 (4,815) (27,784) (25,374)
Issuance of common
stock under stock
option plan........... 745,257 -- 1,683 -- -- 1,683
Stock options
forfeited............. -- -- (223) 223 -- --
Issuance of warrants... -- -- 6,173 -- -- 6,173
Convertible promissory
note.................. -- -- 2,143 -- -- 2,143
Deferred stock option
compensation.......... -- -- 13,130 (13,130) -- --
Amortization of
deferred stock option
compensation.......... -- -- -- 3,116 -- 3,116
Accretion of issuance
costs on redeemable
convertible preferred
stock................. -- -- (350) -- -- (350)
Net loss............... -- -- -- -- (26,405) (26,405)
---------- ---- ------- -------- -------- --------
Balance at June 30,
1999................... 4,362,221 4 29,777 (14,606) (54,189) (39,014)
Unaudited pro forma
issuance of common
stock upon conversion
of redeemable
convertible preferred
stock................. 24,720,213 25 40,470 -- -- 40,495
Unaudited pro forma
issuance of common
stock upon conversion
of convertible
promissory note plus
accrued interest...... 497,663 1 5,021 -- (22) 5,000
Unaudited pro forma net
loss related to
accretion of remaining
discount on
subordinated
promissory notes...... -- -- -- -- (604) (604)
Unaudited pro forma
issuance of common
stock upon exercise of
warrants.............. 3,082,191 3 8,997 -- -- 9,000
---------- ---- ------- -------- -------- --------
Unaudited pro forma
balance at June 30,
1999................... 32,662,288 $ 33 $84,265 $(14,606) $(54,815) $ 14,877
========== ==== ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(6,635) $(9,291) $(26,405)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 861 727 807
Amortization of deferred stock option
compensation.................................... 659 1,165 3,116
Accretion of discount on subordinated promissory
notes........................................... -- -- 7,712
Changes in operating assets and liabilities:
Accounts receivable.............................. (12) 318 (11,873)
Inventories...................................... 443 (304) (4,574)
Other assets and liabilities..................... 59 (201) 49
Accounts payable and accrued liabilities......... (18) 967 7,043
Deferred revenue................................. -- -- 736
------- ------- --------
Net cash used in operating activities.............. (4,643) (6,619) (23,389)
------- ------- --------
Cash flows used in investing activities--purchase
of furniture and equipment........................ (525) (572) (1,688)
------- ------- --------
Cash flows from financing activities:
Principal payments on capital lease obligations... (192) (78) (11)
Proceeds from issuance of promissory notes and
warrants......................................... 1,500 1,000 14,000
Proceeds from issuance of common stock............ 9 362 1,683
Proceeds from issuance of preferred stock......... 5,961 10,101 5,402
------- ------- --------
Net cash provided by financing activities....... 7,278 11,385 21,074
------- ------- --------
Increase (decrease) in cash and cash equivalents... 2,110 4,194 (4,003)
Cash and cash equivalents at beginning of year..... 1,303 3,413 7,607
------- ------- --------
Cash and cash equivalents at end of year........... $ 3,413 $ 7,607 $ 3,604
======= ======= ========
Supplemental disclosure--cash paid during the year
for:
Interest.......................................... $ 6 $ 4 $ --
======= ======= ========
Non-cash financing transaction--
Exchange of promissory notes and related interest
for redeemable convertible preferred stock....... $ 1,519 $ 1,007 $ --
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 1997, 1998 and 1999
(1)Incorporation and Nature of Business
Efficient Networks, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on June 10, 1993. The Company is a worldwide
developer and supplier of high speed digital subscriber line customer
premises equipment for the high speed, high volume digital communication,
or broadband, access market.
(2)Summary of Significant Accounting Policies
(a)Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries located in The Netherlands
and Singapore. All significant intercompany accounts and transactions
have been eliminated in consolidation.
(b)Cash Equivalents
Cash equivalents consist primarily of an investment account comprised
of investments in commercial paper, repurchase agreements and money
market funds. For purposes of the statements of cash flows, the Company
considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
(c)Inventories
Inventories are stated at the lower of average cost or market (net
realizable value).
(d)Furniture and Equipment
Furniture and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.
Depreciation on plant and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Plant and
equipment held under capital leases and leasehold improvements are
amortized on a straight-line basis over the shorter of the lease term
or estimated useful life of the asset. The estimated useful lives are
as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Computers.............................. 5
Software............................... 3
Equipment.............................. 5
Furniture and fixtures................. 7
</TABLE>
(e)Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary
F-7
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(f)Revenue Recognition
Revenue from product sales is recognized upon shipment to the customer.
Reserves for estimated sales returns and allowances are recorded in the
same period as the related revenues. Revenue related to sales
transactions that provide a customer with the right to return product
is deferred until the product is deployed by the customer and/or the
return privileges expire.
(g)Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
in accounting for its fixed plan stock options. As such, compensation
expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price.
(h)Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(i)Net Loss Per Share of Common Stock
Net loss per share of common stock is presented in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share. Under SFAS No. 128, basic earnings/loss per
share excludes dilution for potentially dilutive securities and is
computed by dividing income or loss available to common stockholders by
the weighted average number of common shares outstanding during the
period. Diluted earnings/loss per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Potentially dilutive
securities are excluded from the computation of diluted earnings/loss
per share when their inclusion would be antidilutive. The computation
of basic and diluted weighted average shares is as follows (in
thousands):
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Numerator:
Net loss.................................... $(6,635) $(9,291) $(26,405)
Accretion of issuance costs on redeemable
convertible preferred stock................ -- -- (350)
------- ------- --------
Numerator for basic and diluted net loss per
share...................................... $(6,635) $(9,291) $(26,755)
======= ======= ========
Denominator for basic and diluted net loss per
share--weighted average common shares
outstanding.................................. 3,027 3,254 3,893
======= ======= ========
</TABLE>
F-8
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
Pro forma basic and diluted net loss per share has been calculated
assuming: (a) the conversion of redeemable convertible preferred stock
outstanding at June 30, 1999, as if the redeemable convertible
preferred stock had converted immediately upon its issuance, resulting
in 23,332,713 additional weighted average shares of common stock
outstanding; (b) the warrants issued in 1999 in connection with the
issuance of subordinated promissory notes were exercised immediately
upon their issuance using the principal amount of the notes to satisfy
the exercise price, resulting in 1,113,014 additional weighted average
shares of common stock outstanding and a charge of $603,806 against
earnings for the accretion of the remaining discount recorded on the
notes; and (c) the convertible debt issued June 28, 1999, was converted
immediately upon issuance resulting in 2,727 additional weighted
average shares of common stock outstanding.
(j)Fair Value of Financial Instruments
The carrying values of cash equivalents, accounts receivable and
accounts payable approximate fair value due to their short maturities.
The fair values of the Company's convertible promissory notes and
subordinated promissory notes and related warrants were determined
using a valuation model with the following assumptions: a volatility
factor of 40% obtained from the stock price volatility experienced by
certain of the Company's principal competitors; a risk-free interest
rate of 5.71%; the contractual term of the respective notes; the
estimated fair value of the Company's common stock ($12.00 at June 30,
1999); and the exercise price of the detachable warrants. The estimated
fair values of the convertible promissory notes and subordinated
promissory notes and related warrants as of June 30, 1999 are
approximately $6,802,691 and $40,294,044 respectively.
(k)Comprehensive Income
On July 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and
presentation of comprehensive income and its components in the
financial statements. Comprehensive income includes all changes in
equity during a period except those resulting from investments by and
distributions to owners. To date, no elements of comprehensive income
exist other than net loss from operations.
(l)Pro Forma Balance Sheet
The pro forma balance sheet reflects the following transactions as
though they had occurred as of June 30, 1999 (see notes 6 and 7):
. the conversion of $9,000,000 of subordinated promissory notes into
an aggregate of 3,082,191 shares of redeemable convertible preferred
stock through the exercise of the warrants issued therewith,
. the conversion of the $5,000,000 convertible promissory note plus
accrued interest into an aggregate of 497,663 shares of redeemable
convertible preferred stock, and
. the conversion of each outstanding share of redeemable convertible
preferred stock into one share of common stock.
(m)Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
F-9
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
the financial statements and the reported amounts of revenue and
expenses during the reporting period to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(3)Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------
1998 1999
---- ------
<S> <C> <C>
Raw materials.................................................... $354 $2,265
Finished goods................................................... 544 3,207
---- ------
Total............................................................ $898 $5,472
==== ======
</TABLE>
(4)Furniture and Equipment
Furniture and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------
1998 1999
------- -------
<S> <C> <C>
Computers.................................................. $ 1,941 $ 2,811
Purchased software......................................... 611 892
Equipment.................................................. 241 585
Furniture and fixtures..................................... 66 136
Leasehold improvements..................................... 121 235
------- -------
Total furniture and equipment.............................. 2,980 4,659
Less accumulated depreciation and amortization............. (1,576) (2,374)
------- -------
Furniture and equipment, net............................... $ 1,404 $ 2,285
======= =======
</TABLE>
The Company leases certain equipment under capital lease arrangements. At
June 30, 1998, the cost of assets under such leases aggregated $152,183,
and related accumulated amortization was $134,065. At June 30, 1999, there
were no assets under capital lease arrangements. Amortization of assets
leased under capital lease arrangements is included in amortization
expense.
(5)Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------
1998 1999
---- ------
<S> <C> <C>
Accrued compensation and benefits............................... $247 $1,102
Accrued professional fees....................................... 320 55
Other........................................................... 184 1,484
---- ------
Total........................................................... $751 $2,641
==== ======
</TABLE>
F-10
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
(6)Long-term Debt
In January 1999, the Company issued subordinated promissory notes with
detachable warrants in exchange for $7,000,000 in cash. In April 1999, the
Company issued a subordinated promissory note with a detachable warrant in
exchange for $2,000,000 in cash. The notes bear interest of 10% per year
and interest is payable quarterly. The notes are due at the earlier of
January 2002 or (a) a consummation of a qualifying liquidation event which
includes a firm commitment underwritten offering pursuant to a registration
statement under the Securities Act of 1933, the public offering price of
which is not less than $5.00 per share and $10,000,000 in the aggregate;
(b) any consolidation or merger of the Company with or into any other
corporation or corporations; (c) sale, conveyance or disposition of all or
substantially all of the assets of the Company; or (d) the effectuation by
the Company of a transaction or series of related transactions in which
more than 50% of the voting power of the Company is disposed.
The subordinated promissory notes were issued with detachable warrants to
purchase an aggregate of 3,082,191 shares of the Company's Series H
redeemable convertible preferred stock at an exercise price of $2.92 per
share. The warrants expire at the earlier of January 2002 or the
consummation by the Company of the sale of its common stock in a firm
commitment underwritten offering at a price not less than $5.00 per share
and providing not less than $10,000,000 of net proceeds. The proceeds were
allocated between the notes and the warrants based on their pro-rata fair
values, as determined using a valuation model (see note 2(j)). As a result,
the warrants were valued at $6,172,699. This amount was recorded as paid-in
capital. The resulting discount on the notes is being accreted as interest
expense over the expected term of the related promissory notes. The holders
of the subordinated promissory notes have entered into a note repayment and
warrant exercise agreement with the Company which stipulates that
immediately prior to the closing of an initial public offering, the
aggregate $9,000,000 principal amount of the notes will be applied toward
the aggregate exercise price of the detachable warrants (see note 13).
On June 28, 1999, the Company issued a convertible promissory note in
exchange for $5,000,000 in cash. The note bears interest of 8.0% per year.
The holder of the note has the right to demand prepayment of 50% of the
principal amount of the note at any time after the first anniversary and
full prepayment at any time after the second anniversary of issuance. The
note is convertible at the holder's option into shares of Series I
preferred stock at a conversion price of $10.09 per share of Series I
preferred stock. Upon the completion of an initial public offering, the
note will automatically convert into Series I preferred stock at a
conversion price equal to the lesser of (1) 70% of the initial public
offering price per share or (2) $10.09 per share. Upon the issuance of the
convertible promissory note, the Company recognized $2,143,000 of interest
expense and a corresponding increase to additional paid-in capital. This
amount represents the intrinsic value of the beneficial conversion feature
of the convertible promissory note (see note 13).
(7)Redeemable Convertible Preferred Stock
Preferred stock has voting rights equal to the number of shares of common
stock into which the preferred stock is convertible. The preferred stock is
convertible at the option of the holder into such number of shares of
common stock as is determined by dividing the original issue price of the
preferred stock plus all declared but unpaid dividends by the applicable
conversion price at the date of conversion. The conversion price per share
is the original issue price adjusted for any dilution that may occur from
future offerings.
Each share of outstanding preferred stock is required to convert to common
stock upon the earlier of the time of the Company's initial public
offering, if certain offering parameters are met, or the date on which
F-11
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
the Company obtains the consent of the holders of a majority of the then
outstanding shares of preferred stock.
The outstanding preferred stock is redeemable into cash at the request of a
majority of the holders of the then outstanding shares of preferred stock
at an amount equal to the original issue price plus all declared but unpaid
dividends. Amounts due to the preferred shareholders on redemption are
payable in three equal annual installments on the fifth, sixth and seventh
anniversaries of the original purchase dates (see note 13).
Dividends may be declared at the sole discretion of the Board of Directors
and are noncumulative. To date, no such dividends have been declared. The
holders of the preferred stock are entitled to a liquidation preference
equivalent to the original issue price of the respective series of
preferred stock plus declared but unpaid dividends.
The following indicates the series of redeemable convertible preferred
stock in existence at June 30, 1999. Series for which preferred stock has
been issued and remains outstanding are stated at the redemption amount;
issuance costs are netted against the proceeds and accreted as a charge
against additional paid-in capital over the expected life of the related
series of preferred stock (all in thousands, except share and per share
data):
<TABLE>
<CAPTION>
Dividend June 30,
Rate Per ----------------
Share 1998 1999
-------- ------- -------
<S> <C> <C> <C>
Series A - 7,096,000 shares authorized; 7,000,000
shares issued and outstanding................... $0.03 $ 3,500 $ 3,500
Series B - 522,848 shares authorized, issued and
outstanding..................................... $0.07 625 625
Series C - 5,895,832 shares authorized; 5,858,332
shares issued and outstanding................... $0.07 7,030 7,030
Series D - 2,473,644 shares authorized, issued
and outstanding................................. $0.12 5,000 5,000
Series E - 3,091,430 shares authorized, issued
and outstanding................................. $0.15 7,480 7,480
Series F - 2,057,159 shares authorized, issued
and outstanding in 1998 and 1999................ $0.18 6,007 6,007
Series G - 6,000,000 shares authorized; 1,866,800
and 3,716,800 shares issued and outstanding in
1998 and 1999................................... $0.18 5,451 10,853
Series H - 4,000,000 shares authorized, none
issued or outstanding........................... $0.18 -- --
Series I - 750,000 shares authorized, none issued
or outstanding.................................. $0.60 -- --
Issuance costs, net of accretion................. (350) --
------- -------
$34,743 $40,495
======= =======
</TABLE>
The Company issued promissory notes in exchange for cash of $1,000,000 and
$500,000 in September and December, 1996, respectively. The promissory
notes bore interest at 6% and were due on demand. On December 31, 1996, the
Company issued 3,091,430 shares of Series E redeemable convertible
preferred stock in exchange for the principal and related accrued interest
on the promissory notes amounting to $1,518,657 and $5,961,498 in cash.
The Company issued promissory notes in exchange for $1,000,000 in January,
1998. The promissory notes bore interest at 6% and were due on demand. In
February, 1998, the Company issued 2,057,159 shares of
F-12
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
Series F redeemable convertible preferred stock in exchange for the
principal and related accrued interest on the promissory notes amounting to
$1,006,904 and $5,000,000 in cash.
In June, 1998, the Company issued 1,866,800 shares of Series G redeemable
convertible preferred stock for $5,451,056 in cash. The issuance was
recorded net of issuance costs of $350,000. In March, 1999, the Company
issued an additional 1,850,000 shares of Series G redeemable convertible
preferred stock for $5,402,000 in cash (see note 13).
(8)Common Stock and Stock Incentive Plans
In 1993, the Company adopted a stock option plan (the "Plan") pursuant to
which the Company's Board of Directors may grant stock options to officers,
directors and key employees. The Plan authorizes grants of options to
purchase up to 10,000,000 shares of unissued common stock. The Board of
Directors determines the terms of each option, including exercise price
(within limits set forth in the plan), number of shares and the rate at
which each option is exercisable. The options generally vest ratably over a
period of four years from the date of grant.
In 1998, the Company adopted the Directors' Stock Option Plan (the
"Directors' Plan") pursuant to which stock options may be granted to non-
employee members of the Company's Board of Directors. The Directors' Plan
authorizes grants of options to purchase up to 275,000 shares of common
stock.
Option grants under the Directors' Plan are nondiscretionary and automatic.
Non-employee directors serving on the Company's board of directors at the
date of the adoption of the Directors' Plan were granted options to
purchase 50,000 shares on the effective date of the plan. Subsequent non-
employee directors are granted an option to purchase 15,000 shares on the
date they become a director. After their initial grant, non-employee
directors are granted an option to purchase 15,000 shares on January 1 of
each year provided they have served on the board for at least six months.
At June 30, 1999, there were options to purchase 75,000 shares available
for grant under the Directors' Plan.
At June 30, 1999, there were options to purchase 2,369,853 shares available
for grant under both plans. The per share weighted-average fair value of
stock options granted during each of the years ended June 30, 1997, 1998
and 1999 was $2.09, $2.60, and $5.17, respectively, on the date of grant as
estimated using the minimum value option-pricing model with the following
weighted-average assumptions in all years: expected dividend yield of 0.0%,
an expected life of four years, and a risk-free interest rate of 6%.
The Company applies APB Opinion No. 25 in accounting for stock options
granted to employees and non-employee directors under its stock option
plans. The Company recorded $2,269,000, $3,143,000 and $13,130,000 of
deferred stock option compensation during each of the years ended June 30,
1997, 1998 and 1999, respectively, as a result of granting stock options
with exercise prices below the estimated fair value per share of the
Company's common stock at the date of grant. Deferred stock option
compensation has been recorded as a component of stockholders' equity
(deficit) and is being amortized as a charge to operations over the vesting
period of the applicable options. Amortization of deferred stock option
compensation of $659,000, $1,165,000 and $3,116,000 was recognized in the
years ended June 30, 1997, 1998 and 1999, respectively.
F-13
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
Had the Company determined compensation cost based on the estimated fair
value of stock options at the grant date in accordance with SFAS No. 123,
the Company's net loss would have been increased or decreased, as
applicable, to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported.................................. $(6,635) $(9,291) $(26,405)
Pro forma.................................... $(6,680) $(9,687) $(26,187)
Basic and diluted net loss per share of common
stock:
As reported.................................. $ (2.19) $ (2.86) $ (6.87)
Pro forma.................................... $ (2.21) $ (2.98) $ (6.82)
</TABLE>
Pro forma net loss reflects only stock options granted after June 30, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options' vesting periods of four years and compensation expense pertaining
to stock options granted in prior periods is not considered.
Stock option activity for both plans during the periods indicated is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Balance at June 30, 1996................................. 2,396,500 $0.11
Granted.............................................. 1,716,883 0.24
Exercised............................................ (62,500) 0.15
Forfeited............................................ (454,883) 0.15
---------
Balance at June 30, 1997................................. 3,596,000 0.19
Granted.............................................. 1,631,000 0.58
Exercised............................................ (448,125) 0.12
Forfeited............................................ (344,458) 0.22
---------
Balance at June 30, 1998................................. 4,434,417 0.46
Granted.............................................. 2,638,500 2.88
Exercised............................................ (745,257) 2.24
Forfeited............................................ (195,666) 1.01
---------
Balance at June 30, 1999................................. 6,131,994 1.39
=========
</TABLE>
Options granted during the years ended June 30, 1997, 1998 and 1999 had an
exercise price less than the estimated fair value of the Company's common
stock on the date of grant; the weighted-average grant-date fair value of
options granted during those periods was $1.37, $2.10 and $7.89,
respectively.
F-14
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
The following presents certain information about outstanding stock options
at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- ---------------------
Weighted Weighted
average Average
Number Exercise contractual Number of Exercise
Range of exercise price of options price life Options Price
----------------------- ---------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.05-0.25.............. 2,216,535 $0.19 6.7 years 1,648,075 $ 0.18
$0.50-0.60.............. 1,501,459 $0.58 8.7 years 469,529 $ 0.58
$1.50-2.50.............. 2,324,000 $2.22 9.5 years -- --
$7.50-10.50............. 90,000 $8.00 9.8 years -- --
</TABLE>
At June 30, 1997, 1998 and 1999, the number of options exercisable was
1,224,042, 1,625,531 and 2,117,604, respectively, and the weighted-average
exercise price of those options was $0.15, $0.21 and $0.33, respectively.
In May 1999, the Company effected the issuance of 150,000 shares of common
stock to a board member-elect, in exchange for a $1,575,000, 6% demand
note. The demand note was repaid with interest in July 1999.
(9)Research and Development Arrangements
In October 1997, the Company entered into a development and license
agreement with a customer who owns preferred stock of the Company. The
agreement obligated the Company to develop a product that meets mutually
agreed upon specifications in exchange for $850,000. The Company has
fulfilled its development obligations and the proceeds under the
arrangement were offset against research and development expense during the
year ended June 30, 1998.
In November 1997, the Company entered into a development and marketing
agreement with a customer. The agreement obligated the Company to develop a
product in accordance with certain specifications and to provide 114,068
shares of the Company's common stock for an aggregate purchase price of
$300,000. The common stock issuance was recorded at estimated fair value of
$300,000. The Company has fulfilled its development obligations.
(10)Lease Commitments
The Company has operating lease agreements relating to certain facilities
and equipment which expire at various dates. Rent expense on operating
leases for the years ended June 30, 1997, 1998, and 1999 was $367,308,
$380,794 and $547,774, respectively. The Company entered into several
agreements for the sale and leaseback of certain equipment. The leases were
classified as capital leases and expired during the year ended June 30,
1999. Future minimum lease payments under noncancelable operating leases as
of June 30, 1999 are:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
Years ended June 30:
2000........................................................... $417,097
2001........................................................... 329,765
2002........................................................... 124,327
2003........................................................... 35,955
2004........................................................... 5,993
--------
Total minimum lease payments................................. $913,137
========
</TABLE>
F-15
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
In connection with certain capital lease transactions, the Company issued
warrants to purchase (a) 96,000 shares of Series A preferred stock at $0.50
per share expiring on the earlier of December 16, 2003 or the fifth annual
anniversary of the consummation of the Company's initial public offering of
its common stock, if certain offering parameters are met, and (b) 37,500
shares of its Series C preferred stock at $1.20 per share expiring on the
later of March 13, 2005 or five years from the effective date of the
Company's initial public offering.
(11)Income Taxes
The Company has not recognized any tax benefits for its net operating loss
carryforwards.
Net deferred tax assets as of June 30, 1998 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards.......................... $ 8,943 $ 17,275
Receivables and inventory reserves.................... 59 136
Accrued liabilities................................... 87 233
------- --------
Deferred tax assets................................. 9,089 17,644
Valuation allowance................................. (8,892) (17,444)
------- --------
197 200
Deferred tax liability -- furniture and equipment....... (197) (200)
------- --------
Net deferred tax assets............................. $ -- $ --
======= ========
</TABLE>
The net change in the valuation allowance for the years ended June 30, 1998
and 1999 was $3,073,000 and $8,133,000 respectively.
As of June 30, 1999, the Company has net operating loss carryforwards of
approximately $48,000,000 which begin to expire in 2008. The Company
believes that as a result of the Company's initial public offering in July
1999, and the resulting conversion of outstanding redeemable preferred
stock into common stock, the Company has undergone an ownership change
within the meaning of section 382 of the Internal Revenue Code (IRC). As a
result, the Company's ability to utilize its operating loss carryforwards
incurred prior to the ownership change are limited on an annual basis to an
amount equal to the value of the Company, as defined by the IRC, as of the
date of change of ownership, multiplied by the long-term tax-exempt rate of
4.98%.
(12)Segment Information and Concentration of Credit Risk
The Company operates in one reportable segment as it has one family of DSL
products and markets its products to network equipment vendors and DSL
service providers. In fiscal years 1997 and 1998, the Company also
developed and marketed asynchronous transfer mode ("ATM") network products
which are no longer actively marketed by the Company. For management
purposes, the Company does not disaggregate financial information by
product or geographically, other than export sales by region and sales by
product. Substantially all of the Company's assets are located within the
United States. The Company does not account for, and does not report to
management, its assets or capital expenditures by revenue source. All of
the Company's products are produced in the United States. The Company
grants credit to customers located in several geographical regions in North
America, Europe and the Pacific Rim.
F-16
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
The following represents sales to customers in each of those geographical
regions as a percentage of total revenues, and revenues and gross margins
by product line for the years ended June 30, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Geographic Region 1997 1998 1999
----------------- ------ ------ -------
<S> <C> <C> <C>
United States................................... 65% 48% 59%
Europe.......................................... 25% 40% 12%
Pacific Rim..................................... 10% 12% 29%
<CAPTION>
Product line (in thousands) 1997 1998 1999
--------------------------- ------ ------ -------
<S> <C> <C> <C>
DSL revenues.................................... $ -- $ 84 $12,915
DSL gross margin................................ $ -- $ (19) $ (462)
ATM LAN revenues................................ $4,122 $3,286 $ 1,913
ATM LAN gross margin............................ $1,736 $1,229 $ 946
</TABLE>
For the year ended June 30, 1997, revenues from an individual customer
amounted to 38% of total revenue. For the year ended June 30, 1998,
revenues from individual customers amounted to 20% and 13% of total
revenues. For the year ended June 30, 1999, revenues from individual
customers amounted to 30% and 18% of total revenues, and accounts
receivable related to these customers at June 30, 1999 was approximately
$2,875,000 and $2,600,000, respectively. The Company performs ongoing
evaluations of its customers' financial conditions and generally does not
require collateral.
(13)Subsequent Event
On July 15, 1999, the Company completed the initial public offering of its
common stock. The Company issued 4,600,000 shares of common stock in
exchange for gross proceeds of $69,000,000, net of underwriters' discount
of $4,830,000. Upon the completion of the initial public offering, the
Company's subordinated promissory notes converted into 3,082,191 shares of
Series H redeemable convertible preferred stock, the convertible promissory
note plus accrued interest converted into 497,663 shares of Series I
redeemable convertible preferred stock, and all outstanding redeemable
convertible preferred stock converted into 28,300,067 shares of common
stock.
On July 20, 1999, the Company adopted a new stock option plan (the "Stock
Plan") and an employee stock purchase plan. The Stock Plan provides for the
granting of stock options and stock purchase rights to employees and
consultants. A total of 3,500,000 shares of common stock has been reserved
for issuance plus annual increases equal to the lesser of:
. 1,000,000 shares;
. 3% of the outstanding shares on such a date; or
. a lesser amount determined by the board on the first day of each fiscal
year.
The Stock Plan may be administered by the board of directors or a committee
of the board. The board or a committee of the board will have the power to
determine the terms of the options granted, including the exercise price,
the number of shares subject to each option, the vesting provisions, the
exercisability thereof and the form of consideration payable upon such
exercise.
The Stock Plan provides that in the event of a merger of the Company with
or into another corporation, or the sale of substantially all of its
assets, each outstanding option or stock purchase right will be assumed
F-17
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements--(continued)
June 30, 1997, 1998 and 1999
or substituted for by the successor corporation. In addition, if the
options are not substituted for in the merger, each outstanding option will
vest and become exercisable as to all unvested shares and each stock
purchase right shall lapse as to all the shares for a period of 15 days
after receipt of notice from the Company.
On July 20, 1999, the Company also adopted an Employee Stock Purchase Plan
("the Purchase Plan"). A total of 200,000 shares of common stock has been
reserved for issuance under the purchase plan, plus annual increases equal
to the lesser of:
. 100,000 shares;
. 1% of the outstanding shares on such a date; or
. a lesser amount determined by the board on the first day of each fiscal
year.
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, contains successive six-month
offering periods. The offering periods generally start on the first trading
day on or after May 1 and November 1 of each year, except for the first
such offering period which commenced on the first trading day after the
effective date of the Company's initial public offering and ends on the
last trading day on or before October 31.
Employees are eligible to participate if they are employed by the Company
or any of its participating subsidiaries for at least 20 hours per week and
more than five months in any calendar year. However, the following
employees may not purchase stock under the Purchase Plan:
. any employee who immediately after grant owns stock possessing 5% or
more of the total combined voting power or value of all classes of
capital stock; or
. any employee whose rights to purchase stock under any of the employee
stock purchase plans accrue at a rate that exceeds $25,000 worth of
stock for each calendar year.
Participants may purchase common stock through deductions of up to 10% of
the participant's compensation. The maximum number of shares a participant
may purchase during a single offering period is 500 shares.
Amounts deducted and accumulated by the participant will be used to
purchase shares of common stock at the end of each offering period. The
price of stock purchased under the Purchase Plan is 85% of the lower of the
fair market value of the common stock at the beginning of the offering
period and at the end of each offering period.
The Purchase Plan provides that, in the event of a merger of the Company
with or into another corporation or a sale of substantially all of its
assets, outstanding options may be assumed or substituted for by the
successor corporation. If the successor corporation refuses to assume or
substitute for the outstanding options, the offering period then in
progress will be shortened and a new exercise date will be set, which will
occur before the proposed sale or merger.
The Purchase Plan will terminate in 2009. The board of directors has the
authority to amend or terminate the Purchase Plan, except that no such
action may adversely affect any outstanding rights to purchase stock.
F-18
<PAGE>
EFFICIENT NETWORKS, INC.
Condensed Consolidated Balance Sheets
December 31, 1999 (Unaudited) and June 30, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ --------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 31,803 $ 3,604
Short-term investments................................ 3,983 --
Accounts receivable, net of allowance for doubtful
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
========== ========
<CAPTION>
Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)
<S> <C> <C>
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, 200,000,000
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 condensed consolidated financial
statements.
F-19
<PAGE>
EFFICIENT NETWORKS, INC.
Condensed Consolidated Statements of Operations
Six Months Ended December 31, 1999 and 1998
(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 $ 3,024
Cost of revenues....................... 21,219 1,647 32,925 2,510
--------- -------- -------- -------
Gross profit....................... 5,205 203 5,670 514
--------- -------- -------- -------
Operating expenses:
Sales and marketing.................. 4,849 1,303 7,502 2,471
Research and development............. 4,318 1,790 7,371 3,616
General and administrative........... 1,284 411 2,330 750
Stock option compensation............ 1,219 475 2,608 908
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 7,745
--------- -------- -------- -------
Loss from operations............... (18,793) (3,776) (26,469) (7,231)
Interest income........................ 666 31 1,263 118
Interest expense and other, net........ -- (1) (675) (8)
--------- -------- -------- -------
Net loss........................... $ (18,127) $ (3,746) $(25,881) $(7,121)
========= ======== ======== =======
Basic and diluted net loss per
share of common stock............. $ (0.47) $ (1.00) $ (0.75) $ (1.94)
========= ======== ======== =======
Weighted-average shares of common
stock outstanding................. 38,644 3,819 34,570 3,766
========= ======== ======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-20
<PAGE>
EFFICIENT NETWORKS, INC.
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 1999 and 1998
(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 the purchase of
FlowPoint Corporation..................................... 10,916 --
-------- -------
Net cash used for 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 condensed consolidated financial
statements.
F-21
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Six Months Ended 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.
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.
F-22
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements--(continued)
Six Months Ended December 31, 1999
The total purchase price of $937.9 million, including direct costs of
acquisition of $13.1 million, was allocated as follows (in thousands):
<TABLE>
<S> <C>
Acquired technology............................................... $ 21,545
Assembled workforce............................................... 940
Sales channel and customer relationships.......................... 12,930
In process research and development............................... 4,970
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
========
</TABLE>
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 acquisition. 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:
<TABLE>
<CAPTION>
(Unaudited)
-----------------------------------
Six months ended Six months ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Revenues............................... $ 60,059 $ 6,096
Expenses............................... 164,379 107,523
--------- ---------
Net loss............................... $(104,320) $(101,427)
========= =========
Basic and diluted loss per share of
common stock.......................... $ (2.53) $ (9.20)
========= =========
Shares used in computing basic and
diluted loss per share of common
stock................................. 41,222 11,019
========= =========
</TABLE>
(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.
F-23
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements--(continued)
Six Months Ended December 31, 1999
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months
Ended December Six Months Ended
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):
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ --------
<S> <C> <C>
Raw materials.......................................... $ 2,365 $2,265
Finished goods......................................... 24,059 3,207
------- ------
Total.................................................. $26,424 $5,472
======= ======
</TABLE>
(6)Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ --------
<S> <C> <C>
Accrued compensation and benefits...................... $ 7,813 $1,102
Accrued acquisition costs.............................. 10,560 --
Other.................................................. 5,046 1,106
------- ------
Total.................................................. $23,419 $2,208
======= ======
</TABLE>
(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
F-24
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements--(continued)
Six Months Ended December 31, 1999
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.
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.
F-25
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Effective December 17, 1999, Efficient Networks, Inc. ("Efficient" or the
"Company") completed the acquisition of FlowPoint Corporation ("FlowPoint"),
formerly a wholly-owned subsidiary of Cabletron Systems, Inc. ("Cabletron"), in
exchange for 7,200,000 shares of common stock and 6,300 shares of Series A non-
voting convertible preferred stock ("Series A Preferred"). The Series A
Preferred is convertible into 6,300,000 shares of common stock. The total cost
of the acquisition, including transaction costs, was approximately $937.9
million. The acquisition was accounted for as a purchase business combination.
Attached is the unaudited pro forma condensed combined statements of
operations for Efficient for the year ended June 30, 1999 and for the six
months ended December 31, 1999, including related notes thereto. The unaudited
pro forma condensed combined balance sheet has not been presented, since as of
December 31, 1999, the acquisition had been consummated and is reflected in the
unaudited condensed consolidated balance sheet included elsewhere in this
offering circular. The unaudited pro forma condensed combined statements of
operations, including the weighted average number of shares used in the
calculation of the pro forma per share data, assume the acquisition had been
consummated on July 1, 1998.
The unaudited pro forma condensed combined financial information has been
derived from the historical financial statements of the Company and FlowPoint.
The pro forma adjustments and the assumptions on which they are based are
described in the accompanying notes to the unaudited pro forma condensed
combined statements of operations. The unaudited pro forma condensed combined
financial information is based on and should be read in conjunction with the
historical consolidated financial statements and related notes thereto of the
Company and the historical financial statements of FlowPoint. The unaudited pro
forma condensed combined financial results are not necessarily indicative of
the financial position or operating results that would have occurred had the
acquisition been consummated at the beginning of the period for which such
transactions have been given effect, nor of the combined results of future
operations.
F-26
<PAGE>
EFFICIENT NETWORKS, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended June 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Efficient FlowPoint Pro Forma Pro Forma
Historical Historical (1) Adjustments Combined
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues.............. $ 14,828 $ 18,236 $ -- $ 33,064
Cost of revenues.......... 14,344 12,310 -- 26,654
-------- -------- --------- ---------
Gross profit............ 484 5,926 -- 6,410
-------- -------- --------- ---------
Operating expenses:
Sales, marketing,
general and
administrative......... 8,126 3,404 -- 11,530
Research and
development............ 7,747 1,609 -- 9,356
Amortization of
intangibles............ -- 1,214 184,806 (2) 186,020
In-process research and
development............ -- 11,953 (11,953)(3) --
Stock option
compensation........... 3,116 -- -- 3,116
-------- -------- --------- ---------
Total operating
expenses............. 18,989 18,180 172,853 210,022
-------- -------- --------- ---------
Loss from operations.. (18,505) (12,254) (172,853) (203,612)
Interest income and
expense and other, net... (7,900) (1) -- (7,901)
-------- -------- --------- ---------
Loss before income
taxes................ (26,405) (12,255) (172,853) (211,513)
Income tax expense........ -- (466) 466 (4) --
-------- -------- --------- ---------
Net loss.............. $(26,405) $(12,721) $(172,387) $(211,513)
======== ======== ========= =========
Basic and diluted loss per
share of common stock.... $ (6.87) $ (19.10)
======== =========
Shares used in computing
basic and diluted loss
per share of common
stock.................... 3,893 11,093
======== =========
</TABLE>
See accompanying notes.
F-27
<PAGE>
EFFICIENT NETWORKS, INC.
Unaudited Pro Forma Condensed Combined Statement of Operations
Six Months Ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Efficient FlowPoint Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues................. $ 38,595 $21,464 $ -- $ 60,059
Cost of revenues............. 32,925 15,694 -- 48,619
-------- ------- -------- ---------
Gross profit............... 5,670 5,770 -- 11,440
-------- ------- -------- ---------
Operating expenses:
Sales, marketing, general
and administrative........ 9,832 2,481 -- 12,313
Research and development... 7,371 1,028 -- 8,399
Amortization of
intangibles............... 7,358 668 84,984 (2) 93,010
Stock option compensation.. 2,608 -- -- 2,608
In process research and
development charge........ 4,970 -- (4,970) --
-------- ------- -------- ---------
Total operating
expenses................ 32,139 4,177 80,014 116,330
-------- ------- -------- ---------
Income (loss) from
operations.............. (26,469) 1,593 (80,014) (104,890)
Interest and other income
(expense), net.............. 588 (18) -- 570
-------- ------- -------- ---------
Income (loss) before income
taxes..................... (25,881) 1,575 (80,014) (104,320)
Income tax benefit
(expense)................... -- 747 (747) (4) --
-------- ------- -------- ---------
Net income (loss).......... $(25,881) $ 828 $(79,267) $(104,320)
======== ======= ======== =========
Basic and diluted loss per
share of common stock....... $ (0.75) $ (2.53)
======== =========
Shares used in computing
basic and diluted loss per
share of common stock....... 34,570 41,222
======== =========
</TABLE>
See accompanying notes.
F-28
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Unaudited Pro Forma Condensed Combined Statements of Operations
1. The historical statement of operations for the twelve-month period ended
June 30, 1999 was derived by adding the unaudited historical results of
operations of FlowPoint for the two months ended August 31, 1998, the
audited historical results of operations of FlowPoint for the six months
ended February 28, 1999 and the unaudited historical results of operations
of FlowPoint for the four months ended June 30, 1999.
2. Represents the adjustment to reflect amortization of the acquired
intangibles over an amortization period of five years.
3. Represents the exclusion of the one-time impact for the write-off of in-
process research and development recorded by Cabletron in connection with
its acquisition of FlowPoint on September 1, 1998.
4. Represents the elimination of FlowPoint's income tax expense.
Efficient recorded an immediate write-off of in-process research and
development of $4,970,000 at the consummation of the purchase business
combination. The unaudited pro forma condensed combined statements of
operations exclude this charge.
F-29
<PAGE>
Independent Auditors' Report
The Board of Directors
Cabletron Systems, Inc.:
We have audited the accompanying balance sheets of FlowPoint Corporation
(the "Company") as of February 28, 1999, August 31, 1998, and March 31, 1998
and the related statements of operations, cash flows, and stockholder's equity
for the six months ended February 28, 1999, five months ended August 31, 1998,
and the years ended March 31, 1998 and 1997 (as defined in note 2a). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of February
28, 1999, August 31, 1998, and March 31, 1998 and the results of its operations
and its cash flows for the six months ended February 28, 1999, five months
ended August 31, 1998, and the years ended March 31, 1998 and 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 2(a) to the financial statements, the Company was
acquired by Cabletron Systems, Inc. as of September 1, 1998 in a business
combination accounted for as a purchase. As a result of the application of
purchase accounting, the financial statements of the Company for the six months
ended February 28, 1999 are presented on a different cost basis than those for
periods prior to September 1, 1998, and accordingly, are not directly
comparable.
KPMG LLP
Boston, Massachusetts
November 15, 1999
F-30
<PAGE>
FLOWPOINT CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
Successor (Note 2(a)) Predecessor (Note 2(a))
--------------------------- ------------------------
September 30, February 28, August 31, March 31,
1999 1999 1998 1998
Assets ------------- ------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 302,381 1,202,150 457,153 2,566,498
Accounts receivables, net
of allowances of
$240,788, $136,265,
$86,114, and $58,298
respectively............ 3,484,467 1,589,130 592,330 528,599
Related party receivable
(note 12)............... -- -- 575,491 162,428
Inventories.............. 3,172,188 1,577,191 1,325,110 773,859
Prepaid expenses......... 243,247 154,805 93,102 80,182
Deferred income taxes.... 138,734 332,597 -- --
------------ ----------- ----------- -----------
Total current assets.... 7,341,017 4,855,873 3,043,186 4,111,566
------------ ----------- ----------- -----------
Property, plant and
equipment................ 416,224 197,966 402,908 364,903
Accumulated depreciation.. (137,882) (62,831) (250,004) (195,853)
------------ ----------- ----------- -----------
278,342 135,135 152,904 169,050
------------ ----------- ----------- -----------
Intangible assets, net.... 12,282,489 13,203,507 -- --
Deferred income taxes..... 8,329 6,810 -- --
Deposits.................. -- 15,147 13,311 15,090
------------ ----------- ----------- -----------
Total assets............ $ 19,910,177 18,216,472 3,209,401 4,295,706
============ =========== =========== ===========
Liabilities and
Stockholder's Equity
(Deficit)
Current liabilities:
Accounts payable......... $ 3,763,984 1,786,727 1,118,634 646,167
Accrued expenses......... 804,427 418,565 488,066 376,295
Related party payable
(note 12)............... 2,111,073 3,603,329 -- --
Current portion of
related party notes
payable................. -- -- 2,307,776 2,307,776
Current portion of
obligations under
capital leases.......... 22,718 39,616 51,186 53,164
------------ ----------- ----------- -----------
Total current
liabilities............ 6,702,202 5,848,237 3,965,662 3,383,402
Non-current portion of
obligations under
capital leases.......... 3,409 11,988 26,264 31,782
Non-current portion of
related party notes
payable................. -- -- 103,224 110,374
------------ ----------- ----------- -----------
Total liabilities....... 6,705,611 5,860,225 4,095,150 3,525,558
Stockholder's Equity
(Deficit)
Preferred stock (notes 3
and 13):
Series A, no par value.
Authorized, issued and
outstanding 400,000
shares at August 31,
1998 and March 31,
1998.................... -- -- 200,000 200,000
Series B, no par value.
Authorized, issued and
outstanding 360,000
shares at August 31,
1998 and March 31,
1998.................... -- -- 367,500 367,500
Series C, no par value.
Authorized 1,200,000
shares; issued and
outstanding 1,167,667
shares at August 31,
1998 and March 31,
1998.................... -- -- 2,800,000 2,800,000
Series D, no par value.
Authorized 1,000,000
shares; issued and
outstanding 700,000
shares at August 31,
1998 and March 31,
1998.................... -- -- 1,995,000 1,995,000
------------ ----------- ----------- -----------
-- -- 5,362,500 5,362,500
Common stock, $.01 par
value. Authorized,
issued and outstanding,
10,000 shares at
September 30, 1999 and
February 28, 1999.
Common Stock, no par
value. Authorized
6,000,000 shares; issued
and outstanding
1,730,430 and 1,721,000
shares at August 31,
1998 and March 31, 1998,
respectively............ 100 100 70,619 68,162
Additional paid-in-
capital................. 25,383,308 25,383,308 -- --
Accumulated deficit...... (12,178,842) (13,027,161) (6,318,868) (4,660,514)
------------ ----------- ----------- -----------
Total stockholder's
equity (deficit)....... 13,204,566 12,356,247 (885,749) 770,148
------------ ----------- ----------- -----------
Total liabilities and
stockholder's equity
(deficit).............. $ 19,910,177 18,216,472 3,209,401 4,295,706
============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-31
<PAGE>
FLOWPOINT CORPORATION
Statements of Operations
<TABLE>
<CAPTION>
Successor (Note 2(a)) Predecessor (Note 2(a))
-------------------------- ----------------------------------
Seven Six Five
months months months Years ended
ended ended ended March 31,
September 30, February 28, August 31, ----------------------
1999 1999 1998 1998 1997
------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Trade sales............. $14,844,576 3,968,625 940,918 2,138,310 362,331
Related party sales
(notes 3 and 10)....... 5,139,911 809,586 808,555 1,538,859 3,128,202
----------- ----------- ---------- ---------- ----------
Net sales............. 19,984,487 4,778,211 1,749,473 3,677,169 3,490,533
Cost of sales........... 13,147,058 3,251,208 1,660,765 2,994,542 2,901,194
----------- ----------- ---------- ---------- ----------
Gross profit........ 6,837,429 1,527,003 88,708 682,627 589,339
Operating expenses:
Selling, general and
administrative....... 3,027,613 1,559,825 1,323,017 1,704,221 1,103,487
Research and
engineering.......... 1,218,122 660,727 419,591 1,049,983 984,985
Amortization of
intangibles.......... 850,948 727,304 -- -- --
In process research
and development
charge (note 3)...... -- 11,953,093 -- -- --
----------- ----------- ---------- ---------- ----------
Income (loss) from
operations......... 1,740,746 (13,373,946) (1,653,900) (2,071,577) (1,499,133)
----------- ----------- ---------- ---------- ----------
Interest (income)
expense, net........... 8,521 (8,178) 4,454 1,542 2,047
----------- ----------- ---------- ---------- ----------
Income (loss) before
income taxes....... 1,732,225 (13,365,768) (1,658,354) (2,073,119) (1,501,180)
Income tax expense
(benefit).............. 883,906 (338,607) -- -- 800
----------- ----------- ---------- ---------- ----------
Net income (loss)... $ 848,319 (13,027,161) (1,658,354) (2,073,119) (1,501,980)
=========== =========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-32
<PAGE>
FLOWPOINT CORPORATION
Statements of Cash Flows
<TABLE>
<CAPTION>
Successor (Note 2(a)) Predecessor (Note 2(a))
-------------------------- ----------------------------------
Seven Six Five
months months months Years ended
ended ended ended March 31,
September 30, February 28, August 31, ----------------------
1999 1999 1998 1998 1997
------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Cash flows from
operating activities:
Net income (loss)..... $ 848,319 (13,027,161) (1,658,354) (2,073,119) (1,501,980)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation.......... 75,051 62,831 54,151 112,978 76,231
Amortization of
intangibles.......... 850,948 727,304 -- -- --
Purchased research and
development from
acquisition.......... -- 11,953,093 -- -- --
Deferred income
taxes................ 192,344 (339,407) -- -- --
Accounts receivable... (1,895,337) (321,309) (63,731) (497,074) 57,475
Related party
receivable........... -- -- (413,063) 759,731 (914,631)
Inventories........... (1,594,997) (52,081) (551,251) (141,747) (420,474)
Prepaid expenses...... (88,442) (61,703) (12,920) (36,106) (38,095)
Deposits.............. 15,147 (1,836) 1,779 (4,119) (6,724)
Accounts payable...... 1,977,357 667,993 472,467 307,343 210,422
Accrued expenses...... 385,862 (69,501) 126,557 31,646 287,753
----------- ----------- ---------- ---------- ----------
Net cash provided by
(used in) operating
activities......... 766,252 (461,777) (2,044,365) (1,540,467) (2,250,023)
----------- ----------- ---------- ---------- ----------
Cash flows from
investing activity:
Capital expenditures.. (218,258) (45,062) (38,005) (80,336) (169,365)
----------- ----------- ---------- ---------- ----------
Net cash used in
investing
activity........... (218,258) (45,062) (38,005) (80,336) (169,365)
----------- ----------- ---------- ---------- ----------
Cash flows from
financing activities:
Proceeds from issuance
of related party note
payable.............. -- -- -- 2,225,000 --
Payments on related
party note payable... -- (186,000) (7,150) (16,250) (22,625)
Payments on capital
leases............... (25,285) (25,846) (22,282) (36,809) (13,133)
Proceeds from issuance
of common stock...... -- 100 2,457 6,538 2,063
Proceeds from issuance
of preferred stock... -- -- -- 997,500 2,555,000
Related party
payable.............. (1,422,478) 1,463,582 -- -- --
----------- ----------- ---------- ---------- ----------
Net cash provided by
(used in)
financing.......... (1,447,763) 1,251,836 (26,975) 3,175,979 2,521,305
----------- ----------- ---------- ---------- ----------
Net increase (decrease)
increase in cash....... (899,769) 744,997 (2,109,345) 1,555,176 101,917
Cash and cash
equivalents, beginning
of period.............. 1,202,150 457,153 2,566,498 1,011,322 909,405
----------- ----------- ---------- ---------- ----------
Cash and cash
equivalents, end of
period................. $ 302,381 1,202,150 457,153 2,566,498 1,011,322
=========== =========== ========== ========== ==========
Cash paid for interest.. $ -- -- -- 10,910 21,531
=========== =========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
FLOWPOINT CORPORATION
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
Total
Preferred Preferred Preferred Preferred Additional stockholder's
Stock Stock Stock Stock Common paid-in Accumulated equity
Series A Series B Series C Series D Stock capital deficit (deficit)
--------- --------- ---------- ---------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1996................... $ 200,000 310,000 1,300,000 -- 59,561 -- (1,085,415) 784,146
Net loss............... -- -- -- -- -- -- (1,501,980) (1,501,980)
Issuance of Preferred
Stock Series B........ -- 57,500 -- -- -- -- -- 57,500
Issuance of Preferred
Stock Series C........ -- -- 1,500,000 -- -- -- -- 1,500,000
Issuance of Preferred
Stock Series D........ -- -- -- 997,500 -- -- -- 997,500
Issuance of Common
Stock................. -- -- -- -- 2,063 -- -- 2,063
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at March 31,
1997................... $ 200,000 367,500 2,800,000 997,500 61,624 -- (2,587,395) 1,839,229
Net loss............... -- -- -- -- -- -- (2,073,119) (2,073,119)
Issuance of Preferred
Stock Series D........ -- -- -- 997,500 -- -- -- 997,500
Issuance of Common
Stock................. -- -- -- -- 6,538 -- -- 6,538
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at March 31,
1998................... $ 200,000 367,500 2,800,000 1,995,000 68,162 -- (4,660,514) 770,148
Net loss............... -- -- -- -- -- -- (1,658,354) (1,658,354)
Issuance of Common
Stock................. -- -- -- -- 2,457 -- -- 2,457
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at August 31,
1998................... $ 200,000 367,500 2,800,000 1,995,000 70,619 -- (6,318,868) (885,749)
Conversion of preferred
stock to common
stock................. (200,000) (367,500) (2,800,000) (1,995,000) 5,362,500 -- -- --
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
-- -- -- -- 5,433,119 -- (6,318,868) (885,749)
Cabletron acquisition
(notes 2(a) and 3).... -- -- -- -- (5,433,119) -- 6,318,868 885,749
Cabletron acquisition
(notes 2(a) and 3).... -- -- -- -- -- 25,383,308 -- 25,383,308
Issuance of Common
Stock................. -- -- -- -- 100 -- -- 100
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at September 1,
1998................... $ -- -- -- -- 100 25,383,308 -- 25,383,408
Net loss............... -- -- -- -- -- -- (13,027,161) (13,027,161)
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at February 28,
1999................... $ -- -- -- -- 100 25,383,308 (13,027,161) 12,356,247
Net income
(unaudited)........... -- -- -- -- -- -- 848,319 848,319
--------- -------- ---------- ---------- ---------- ---------- ----------- -----------
Balances at
September 30, 1999
(unaudited)............ $ -- -- -- -- 100 25,383,308 (12,178,842) 13,204,566
========= ======== ========== ========== ========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
(1) Business Operations
FlowPoint Corporation, (the "Company"), develops, manufactures, markets,
designs, installs and supports a complete line of broadband remote access,
high-speed corporate and internet access modems and routers primarily
utilizing digital subscriber line ("DSL") technologies.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The financial statements of the Company are derived from its historic
books and records through August 31, 1998. As a result of the
acquisition of the Company by Cabletron Systems, Inc. ("Cabletron")
effective as of September 1, 1998, the financial statements of the
Company after the acquisition date are derived from the historic books
and records of Cabletron and reflect the "pushdown" of Cabletron's
basis in the assets acquired and liabilities assumed.
As a result of the acquisition by Cabletron and the application of
purchase accounting, financial information in the accompanying
financial statements and notes thereto as of and for the six months
ended February 28, 1999 (the "Successor Period") are presented on a
different cost basis than the financial information as of August 31,
1998 and March 31, 1998 and for the five months ended August 31, 1998
and the years ended March 31, 1998 and 1997 (the "Predecessor Period"),
and therefore, such information is not comparable.
The statement of operations includes all revenues and costs directly
attributable to the Company including charges for shared facilities,
functions and services used by the Company and provided by Cabletron.
Certain costs and expenses have been allocated based upon management's
estimates of the cost of services provided to the Company by Cabletron.
Such costs include sales support, customer service and technical
support, and general and administrative expenses (see note 12). Such
allocations and charges are based on a percentage of total costs for
the services provided based on factors such as headcount or revenues.
Management believes that these allocations are based on assumptions
that are reasonable under the circumstances. However, these allocations
and estimates are not necessarily indicative of the cost and expenses
which would have resulted if the Company had been operated as a
separate entity.
The Company has historically incurred recurring losses from operations.
Cabletron has committed to provide the funds required for the conduct
of the Company's operations up to the date on which it ceases to be the
controlling shareholder.
(b) Change in fiscal year
Prior to its acquisition by Cabletron, the Company's fiscal year end
was March 31. Upon the acquisition the Company adopted Cabletron's
February 28 fiscal year end.
(c) Inventories
Inventories are stated at the lower of cost or market. Costs are
determined principally by use of the average-cost method, which
approximates the first-in, first-out (FIFO) method.
F-35
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
provided on a straight-line method over the estimated useful lives of
the assets. The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If it is determined that the
carrying amount of an asset cannot be fully recovered, an impairment
loss is recognized.
(e) Intangible Assets
Intangible assets consist of goodwill and developed technology
resulting from the "pushdown" of the fair market value of the
intangible assets attributable to the Company as recorded on
Cabletron's books as part of Cabletron's acquisition of the Company.
Amortization of these intangible assets is provided on a straight-line
basis over the respective useful lives which range from five to ten
years. Purchased in-process research and development without
alternative future use is expensed when acquired. The carrying amount
of intangible assets is reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The measurement of possible impairment is based
primarily on an evaluation of undiscounted projected cash flows through
the remaining amortization period.
(f) Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period that includes the
enactment date.
As a result of its acquisition by Cabletron, the Company is included in
the consolidated federal income tax return of Cabletron. Income taxes
in the Company's financial statements subsequent to the acquisition
have been determined on a separate-return basis.
(g) Advertising Costs
Advertising costs of $17,594, $105,547, $308,061, $297,360 and $67,134
were expensed as incurred during the seven months ended September 30,
1999, the six months ended February 28, 1999, the five months ended
August 31, 1998 and the years ended March 31, 1998 and 1997,
respectively. No assets were recorded related to advertising costs at
the respective balance sheet dates.
(h) Statements of Cash Flows
Cash and cash equivalents consist of cash in banks and short-term
investments with original maturities of three months or less.
F-36
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
(i) Revenue Recognition
The vast majority of the Company's revenues are related to hardware
based routers with revenue recognized based upon shipment of the
products. The Company accrues for estimated warranty costs related to
product shipments based on historical experience. The Company generates
an insignificant portion of its revenues from software products and
records such revenue in accordance with (SOP) 97-2, "Software Revenue
Recognition".
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(k) Research and Engineering
Research and engineering costs are charged to expense as incurred.
(l) Employee Stock Plan
The Company accounts for its stock option plan in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees." In 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). SFAS 123 provides an alternative to APB 25 and is effective
for fiscal years beginning after December 15, 1999. As permitted under
SFAS 123, the Company continues to account for its stock option plan in
accordance with the provisions of APB 25 and provides the disclosure
pro forma net income as if the fair value method under SFAS 123 had
been applied.
(m) New Accounting Pronouncements
In the period ended February 28, 1999, the Company adopted Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130) which establishes standards for reporting and
display of comprehensive income and its components in a full set of
financial statements. For the Company, comprehensive income includes
net income or loss only. The adoption of SFAS 130 did not have any
impact on the Company's financial statements for any of the periods
presented.
In the period ended February 28, 1999, the Company adopted Financial
Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) which
establishes standards for the way that public business enterprises
report selected information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not have any impact on the
Company's financial statement disclosures for the period ended February
28, 1999.
F-37
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
In October 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition"
which provides guidance on applying generally accepted accounting
principles in recognizing revenue for licensing, selling, leasing or
otherwise marketing computer software and supersedes SOP 91-1. The
adoption of SOP 97-2 did not have a material impact on the Company's
results of operations for the period ended February 28, 1999.
(n) Unaudited Results
The financial statements as of and for the seven months ended September
30, 1999 have been prepared using the same accounting principles as
were used in preparing the audited financial statements and in the
opinion of management reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly the Company's
financial position, results of operations and cash flows. The results
for the seven months ended September 30, 1999 are not necessarily
indicative of future results.
(3) Cabletron Acquisition
Effective as of September 1, 1999 Cabletron acquired all of the outstanding
common stock of FlowPoint Corporation, a privately held manufacturer of DSL
router networking products. Immediately prior to the acquisition each share
of FlowPoint preferred stock Series A, B, C, and D was converted into one
share of FlowPoint common stock. Cabletron owned 1,866,667 shares of
FlowPoint preferred stock (at a cost of approximately $1,700,000), and as a
result of the preferred stock conversion owned 42.8% of the outstanding
common stock. Pursuant to the acquisition agreement the amount paid for the
remaining 57.2% of FlowPoint common stock amounted to approximately
$20,600,000 to be paid in four installments, within nine months of the
acquisition date. Each installment could be paid in either cash or
Cabletron common stock, as determined by Cabletron management at the time
of the distribution. In addition, Cabletron assumed approximately 478,000
FlowPoint options, valued at approximately $2,700,000.
Cabletron recorded the cost of the acquisition at $25,383,306 including
direct costs of approximately $400,000. The acquisition was accounted for
under the purchase method of accounting, and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair market value.
The total purchase price of $25,383,306 was allocated as follows: a
$11,953,093 special charge for in process research and development
("IPR&D") projects, $14,136,655 for goodwill and other intangibles and net
liabilities of $706,442.
The following unaudited pro forma financial information presents a summary
of the results of operations as if the acquisition had occurred on March 1,
1998, the first day of the fiscal year ending February 28, 1999.
<TABLE>
<CAPTION>
(Unaudited)
Twelve months ended
February 28, 1999
-------------------
<S> <C>
Net sales................ $ 7,098,515
Operating loss........... $(15,326,163)
</TABLE>
In management's opinion, the unaudited pro forma results of operations are
not indicative of actual results that would have occurred had the
acquisition been consummated on March 1, 1998.
F-38
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
The valuation of the IPR&D incorporated the guidance on IPR&D valuation
methodologies promulgated by the Securities and Exchange Commission
("SEC"). These methodologies incorporate the notion that cash flows
attributable to development efforts, including the effort to be completed
on the development effort underway, and development of future versions of
the product that have not yet been undertaken, should be excluded in the
valuation of IPR&D. This allocation represents risk-adjusted cash flows
related to the incomplete products. At the date of acquisition, the
development of these projects had not yet reached technological feasibility
and the research and development in progress had no alternative future
uses. Accordingly, these costs were expensed as of the acquisition date.
Cabletron used independent third-party appraisers to assess and allocate
values to the in-process research and development. The value assigned to
these assets were determined by identifying significant research projects
for which technological feasibility had not been established, including
development, engineering and testing activities associated with the
introduction of the Company's next-generation router technologies.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products principally relate to the completion of
all planning, designing, prototyping, high-volume verification, and testing
activities that are necessary to establish that the proposed technologies
meet their design specifications including functional, technical, and
economic performance requirements.
To date, the Company's results have not differed significantly from the
forecast assumptions. The Company's research and development expenditures
since the acquisition have not differed materially from expectations. The
Company has completed the projects that were underway at the time of the
acquisition and began to realize the economic benefits related to these
projects during the six months ended February 28, 1999.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from
the projects and discounting the net cash flows to their present value. The
revenue projection used to value the in-process research and development is
based on estimates of relevant market sizes and growth factors, expected
trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors.
For purposes of the IPR&D valuation, the total revenues attributable to the
Company were projected to exceed $150 million within 5 years, assuming the
successful completion and market acceptance of the major research and
development efforts. As of the valuation date, the Company had a few
existing products, which lack the technological breadth and depth necessary
in the evolving networking equipment market. Accordingly, for purposes of
the IPR&D valuation, it was estimated that significant revenue growth in
the first several years would be primarily related to the in-process
technologies. The estimated revenues for the in-process projects were
projected to peak in 2004 and then decline as other new products and
technologies were expected to enter the market.
Cost of sales was estimated based on the Company's internally generated
projections and discussions with management regarding anticipated gross
margin improvements. Due to the market opportunities in the network
equipment arena and the Company's unique technology architecture,
substantial gross margins were projected through the forecast period. Cost
of sales as a percentage of sales was forecasted to decline until 2003 and
then remain constant at 55%. Selling, general and administrative expenses
(including depreciation) as a percentage of sales were projected to remain
constant at 23%. Research and
F-39
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
development expenditures as a percentage of sales were projected to decline
significantly from 30% in 1999 to 10% in 2001 and remain constant at 10%
thereafter.
The rates utilized to discount the net cash flows to their present value
were based on venture capital rates of return. Due to the nature of the
forecast and the risks associated with the projected growth, profitability
and developmental projects, a discount rate of 27.5 percent was determined
to be appropriate for the IPR&D. This discount rate was commensurate with
the Company's stage of development; the uncertainties in the economic
estimates described above; the inherent uncertainty surrounding the
successful development of the purchased in-process technology; the useful
life of such technology; the profitability levels of such technology; and,
the uncertainty of technological advances that were unknown at the time of
the acquisition.
The forecasts used by Cabletron in valuing in-process research and
development were based upon assumptions Cabletron believes to be reasonable
but which are inherently uncertain and unpredictable. Cabletron's
assumptions may be incomplete or inaccurate, and unanticipated events and
circumstances are likely to occur. For these reasons, actual results may
vary from the projected results.
Cabletron believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with
such projects, will transpire as estimated. For these reasons, actual
results may vary from the projected results.
The Company's in-process research and development value is comprised of
several significant individual on-going projects. Remaining development
efforts for these projects include various phases of design, development
and testing. Anticipated completion dates for the projects in progress are
estimated to occur over the first nine months following the acquisition.
The Company estimated it will begin generating the economic benefits from
the technologies in the second half of fiscal year 2000. Funding for such
projects was estimated to be obtained from internally generated sources.
Expenditures to complete these projects were estimated to total
approximately $1.0 million over the next six months. These estimates are
subject to change, given the uncertainties of the development process, and
no assurance can be given that deviations from these estimates will not
occur.
Cabletron management expects to continue their support of these efforts and
believes the Company has a reasonable chance of successfully completing the
research and development programs. However, there is risk associated with
the completion of the projects and there is no assurance that any will meet
with either technological or commercial success.
(4) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- --------------------
September 30, February 28, August 31, March 31,
1999 1999 1998 1998
------------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Raw materials................ $1,864,122 1,237,660 893,461 666,255
Work-in-process.............. 79,344 147,467 214,100 105,854
Finished goods............... 1,228,722 192,064 217,549 1,750
---------- --------- --------- -------
Total........................ $3,172,188 1,577,191 1,325,110 773,859
========== ========= ========= =======
</TABLE>
F-40
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
(5) Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- -------------------
March Estimated
September 30, February 28, August 31, 31, useful
1999 1999 1998 1998 lives
------------- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Capitalized software.... $ 38,886 27,139 29,186 25,818 3 years
Machinery and
equipment.............. 357,592 163,967 360,642 326,005 3-5 years
Furniture and fixtures.. 19,746 6,860 13,080 13,080 3-5 years
-------- ------- -------- --------
416,224 197,966 402,908 364,903
Less accumulated
depreciation and
amortization........... (137,882) (62,831) (250,004) (195,853)
-------- ------- -------- --------
$278,342 135,135 152,904 169,050
======== ======= ======== ========
</TABLE>
(6) Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
September February Estimated
30, 28, useful
1999 1999 lives
----------- ---------- ---------
<S> <C> <C> <C>
Goodwill.................................. $13,409,105 13,479,175 10 years
Acquired patents and technologies......... 451,636 451,636 5 years
----------- ----------
13,860,741 13,930,811
Less accumulated amortization............. (1,578,252) (727,304)
----------- ----------
$12,282,489 13,203,507
=========== ==========
</TABLE>
Goodwill has been reduced by $70,070 and $205,844 at September 30, 1999 and
February 28, 1999 respectively. This reduction is a result of acquired tax
benefits from stock options exercised.
(7) Leases
The Company is obligated under various capital leases for certain machinery
and equipment. Future minimum lease payments by fiscal year and in the
aggregate under capital leases as of February 28, 1999 are as follows:
<TABLE>
<CAPTION>
Fiscal year ending February 28,
<S> <C>
2000.............................................................. $41,241
2001.............................................................. 14,237
2002.............................................................. 1,241
-------
Total minimum lease payments...................................... 56,719
Less amounts representing interest (at 12.79%)...................... 5,115
-------
Present value of net minimum capital lease payments............... 51,604
Less current portion of obligations under capital leases............ 39,616
-------
Obligations under capital leases excluding current portion........ $11,988
=======
</TABLE>
F-41
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
Included in property plant and equipment are the following assets held under
capital leases:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- --------------------
September 30, February 28, August 31, March 31,
1999 1999 1998 1998
------------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Machinery and equipment.... $72,780 72,780 176,162 157,505
Less accumulated
amortization.............. 50,277 27,173 103,382 78,804
------- ------ ------- -------
$22,503 45,607 72,780 78,701
======= ====== ======= =======
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
Prior to the acquisition by Cabletron, the Company leased a manufacturing
and office facility under an operating lease. In June 1999, the Company
relocated to a facility leased by Cabletron. Cabletron allocates a portion
of its lease cost to the Company. Rent expense, including intercompany
allocations for the seven months ended September 30, 1999, the six months
ended February 28, 1999, the five months ended August 31, 1998 and the
years ended March 31, 1998, and 1997, was $225,819, $100,001, $71,742,
$135,018 and $73,912, respectively.
(8) Income Taxes
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- -----------------------------------
Seven months Six months Five months Fiscal year Fiscal year
ended ended ended ended ended
September 30, February 28, August 31, March 31, March 31,
1999 1999 1998 1998 1997
------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income from continuing
operations............. $883,906 (338,607) -- -- 800
Reduction in goodwill,
for recognition of tax
benefits from stock
options exercised...... (70,070) (205,844) -- -- --
-------- -------- --- --- ---
$813,836 (544,451) -- -- 800
======== ======== === === ===
</TABLE>
Income tax attributable to income from continuing operations consist of:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- -----------------------------------
Seven months Six months Five months Fiscal year Fiscal year
ended ended ended ended ended
September 30, February 28, August 31, March 31, March 31,
1999 1999 1998 1998 1997
------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Currently payable:
Federal................. $538,238 -- -- -- --
State................... 153,324 800 -- -- 800
Deferred tax expense
(benefit).............. 192,344 (339,407) -- -- --
-------- -------- --- --- ---
Tax expense (benefit)... $883,906 (338,607) -- -- 800
======== ======== === === ===
</TABLE>
F-42
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
The following is a reconciliation of the effective tax rates to the
statutory federal tax rate:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- -----------------------------------
Seven months Six months Five months Fiscal year Fiscal year
ended ended ended ended ended
September 30, February 28, August 31, March 31, March 31,
1999 1999 1998 1998 1997
------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statutory federal income
tax (benefit) rate..... 35.0% (35.0)% (35.0)% (35.0)% (35.0)%
State income tax, net of
federal tax benefit.... 5.8 -- -- -- --
Exempt income of foreign
sales corporation, net
of tax................. (0.2) -- -- -- --
Research and
experimentation
credit................. (6.4) (0.7) -- -- --
Unbenefitted net
operating loss......... -- -- 35.0 35.0 35.0
Nondeductible
amortization of
intangible assets...... 16.8 1.9 -- -- --
Nondeductible in--
process research and
development charge..... -- 31.3 -- -- --
---- ----- ----- ----- -----
51.0% (2.5)% 0.0% 0.0% 0.0%
==== ===== ===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------- ------------------------
Seven months Six months Five months Fiscal year
ended ended ended ended
September 30, February 28, August 31, March 31,
1999 1999 1998 1998
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Accounts receivable... $ 8,343 8,266 8,266 8,343
Inventories........... 70,000 70,000 -- --
Property, plant and
equipment............ 40,478 38,959 30,991 19,531
Other reserves and
accruals............. 113,946 (4,815) 35 --
Net operating loss
carryforwards........ 2,112,231 2,424,932 2,112,231 1,541,505
---------- ---------- ---------- ----------
Total gross deferred
tax assets........... 2,344,998 2,537,342 2,151,523 1,569,379
Less valuation
allowance............ (2,148,806) (2,148,806) (2,148,806) (1,569,067)
---------- ---------- ---------- ----------
Net deferred tax
assets............... 196,192 388,536 2,717 312
---------- ---------- ---------- ----------
Deferred tax
liabilities:
Other reserves and
accruals............. (49,129) (49,129) (2,717) (312)
---------- ---------- ---------- ----------
Total gross deferred
liabilities.......... (49,129) (49,129) (2,717) (312)
---------- ---------- ---------- ----------
Net deferred tax
assets............... $ 147,063 339,407 -- --
========== ========== ========== ==========
</TABLE>
At September 30, 1999, February 28, 1999, August 31, 1998 and March 31,
1998, the Company had net operating loss (NOL) carryforwards for tax
purposes of $5,695,112, $6,187,662, $5,695,112, and $4,129,836 respectively
expiring in fiscal February 2008 through fiscal February 2011. The
utilization of these net operating losses may be limited pursuant to
Internal Revenue Code section 382 as a result of ownership changes.
F-43
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
The valuation allowance was increased by $0, $0, $579,739 and $721,065
during the periods ended September 30, 1999, February 28, 1999, August 31,
1998 and March 31, 1998, respectively. Subsequently reported tax benefits
relating to the valuation allowance for deferred tax assets as of September
30, 1999, February 28, 1999 and August 31, 1998 will be recorded as a
decrease to goodwill and other non-current intangible assets. In assessing
the realizability of net deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Based upon the level of historical taxable
income and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowance at September 30, 1999.
(9)Related Party Notes Payable
On August 8, 1995, the Company entered into a $250,000 note payable with
Soliton Systems, K.K. ("Soliton") with an interest rate of five percent. On
August 5, 1997, the note was amended to require variable quarterly
repayments of the note over three years with the principle amount
outstanding at the end of three years due in full. The Company repaid the
note in full on October 8, 1998. Soliton was a preferred stock shareholder
of the Company.
In anticipation of Cabletron's acquisition of the Company, the two parties
entered into a Memorandum of Understanding ("MOU") on February 4, 1998. As
part of the MOU, the Company entered into a note payable to Cabletron for
$2,225,000 with an interest rate of six percent. The note payable was
convertible into shares of Series E Preferred Stock of the Company at $7.50
per share if the acquisition was not consummated.
(10) Financial Instruments and Concentration of Credit Risk
The carrying amounts of cash and cash equivalents, accounts receivables,
and current liabilities approximate fair value because of the short
maturity of these financial instruments.
The carrying amount of the notes payable to Cabletron, as discussed in note
9, approximated fair value based on the short maturity of the instrument.
The carrying amount of the note payable to Soliton also approximated fair
value based on estimated discounted cash flows prior to the repayment by
the Company.
For the seven months ended September 30, 1999 and the six months ended
February 28, 1999, the Company had one customer, Covad and a related party,
Cabletron, which accounted for 52% and 26% of sales and 70% and 17% of
sales, respectively. For the five months ended August 31, 1998, the Company
had two customers, Covad and British Telecom that accounted for 28% and 19%
of sales, respectively. Additionally for this same period sales to related
parties, Cabletron and Soliton, accounted for 25% and 21% of sales,
respectively. For the year ended March 31, 1998, the Company had one
customer, Diamond Lane, which accounted for 36% of sales. Additionally for
this same period sales to related parties, Cabletron and Soliton, accounted
for 31% and 11% of sales, respectively. For the year ended March 31, 1997,
sales to related parties, Cabletron and Soliton, accounted for 69% and 20%
of sales, respectively.
(11) Segment and Geographical Information
The Company operates in one operating segment. The Company provides a line
of broadband remote access, high-speed corporate and internet access modems
and routers primarily utilizing DSL technologies. Substantially all
revenues result from the sales of hardware products. The vast majority of
the Company's sales are generated in the United States.
F-44
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
(12) Related Party
Subsequent to the acquisition date, the Company maintained a certain level
of autonomy. During the six months ended February 28, 1999, Cabletron
provided the Company with certain services including cash management,
payroll processing, insurance, limited legal and information technology
support as well as the ability for Company employees to participate in
Cabletron's medical plan beginning in January of 1999. During this period,
Cabletron began to allocate expenses primarily related to the medical plan
coverage to the Company on a monthly basis as the costs associated with the
other services were nominal. The total amount of expenses allocated to the
Company by Cabletron during the six months ended February 28, 1999 was
$15,026 and is included in the respective categories in the statement of
operations including cost of sales, selling general and administrative, and
research and engineering expenses.
Also beginning in the six month period ending February 28, 1999, Company
employees were able to participate in Cabletron's incentive plans. These
plans include Cabletron's Equity Incentive Plan and the Employee Stock
Purchase Plan. These plans are accounted for by Cabletron as non-
compensatory under APB 25 and thus there is no expense allocation.
Beginning in the seven month period ending September 30, 1999, Cabletron
began to provide the Company with services in addition to those described
above. These services included external and inside sales support, customer
service and technical support, software licenses, limited software
development and assistance with year 2000 remediation processes. The
Company also moved into a Cabletron facility in June of 1999 and began to
receive a related cost allocation from Cabletron representing rent and
other occupancy costs. The total amount of expenses allocated to the
Company by Cabletron during the seven months ended September 30, 1999 was
$574,151 and is included in the respective categories in the statement of
operations including cost of sales, selling general and administrative, and
research and engineering expenses.
Cabletron was a significant customer of the Company prior to the completion
of the acquisition and the Company has generated significant intercompany
sales to Cabletron subsequent to the acquisition as outlined in footnote 10
of these financial statements.
(13) Stockholders' Equity
The Company's preferred stock was convertible into common stock on a one-
for-one conversion rate. Each holder of preferred stock was entitled to
vote on all matters and was entitled to the number of votes equal to the
whole number of shares of common stock into which such preferred shares
could be converted. Dividends on the preferred stock were not cumulative
and no right to any dividends would accrue to the holders unless declared
by the Board of Directors.
The preferred stock had liquidation preferences as follows:
<TABLE>
<CAPTION>
Series A..................... $0.50 per share
<S> <C>
Series B..................... $1.00 per share
Series C..................... $2.40 per share
Series D..................... $2.85 per share
</TABLE>
Prior to the acquisition by Cabletron, the Company maintained a 1994 Stock
Option Plan (the "Plan") which provided for up to 400,000 shares of common
stock of the Company for purchase by employees, directors or consultants of
the Company. The Plan was amended on October 1, 1997 to provide up to
F-45
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
600,000 shares. The Plan provides for issuance of options at their fair
market value on the date of the grant. The Plan allowed varying vesting
provisions but in each case the options were issued with four year vesting
periods. The Plan also includes a provision whereby at least 20% per year
of the total number of shares pursuant to a grant would vest. The maximum
term for an option was ten years from the date of grant. As part of the
acquisition by Cabletron, the options for Company common stock were
converted to options for Cabletron common stock.
A summary of option transactions follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Exercise
options Price
------- ----------------
<S> <C> <C>
Options outstanding at March 31, 1996.............. --
Granted.......................................... 314,750 $0.14
Exercised........................................ (14,479) $0.15
Forfeited........................................ (60,521) $0.15
-------
Options outstanding at March 31, 1997.............. 239,750 $0.14
Granted.......................................... 222,400 $0.25
Exercised........................................ (47,706) $0.12
Forfeited........................................ (1,615) $0.20
-------
Options outstanding at March 31, 1998.............. 412,829 $0.19
Granted.......................................... 67,100 $0.75
Exercised........................................ (885) $0.20
Forfeited........................................ (1,000) $0.75
-------
Options outstanding at August 31, 1998............. 478,044 $0.27
=======
Options exercisable at:
March 31, 1997................................... 73,141 $0.11
March 31, 1998................................... 122,777 $0.16
August 31, 1998.................................. 170,678 $0.27
</TABLE>
Subsequent to the acquisition by Cabletron, Company employees were eligible
to participate in Cabletron's Equity Incentive Plan ("EIP") which provides
shares of common stock for the granting of a variety of incentive awards to
eligible employees. As of February 28, 1999, Cabletron had issued Company
employees 75,100 stock options under the EIP, which were granted at fair
market value at the date of grant, vest over a three to five year period
and expire within six to ten years from the date of grant.
F-46
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
A summary of option transactions follows:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise
of options Price
---------- ----------------
<S> <C> <C>
Company options outstanding at August 31, 1998
assumed by and converted to Cabletron options
at a ratio of 1.033 to 1...................... 493,970 $0.26
Granted........................................ 75,100 $7.63
Exercised...................................... (86,020) $0.16
Forfeited...................................... (1,983) $0.60
-------
Options outstanding at February 28, 1999....... 481,067 $1.42
Granted...................................... -- --
Exercised.................................... (80,835) $0.28
Forfeited.................................... (7,566) $0.60
-------
Options outstanding at September 30, 1999...... 392,666 $1.69
=======
Options exercisable at :
February 28, 1999............................ 209,983 $0.75
September 30, 1999........................... 190,608 $0.82
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options as of February 28, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (years) Price Exercisable Price
------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.00 to $0.25.......... 218,592 7.7 $0.17 139,760 $0.15
$0.26 to $0.50.......... 121,443 8.6 $0.27 36,341 $0.26
$0.51 to $0.75.......... 65,932 9.2 $0.64 18,862 $0.63
$0.76 to $14.00......... 75,100 9.6 $7.63 15,020 $7.63
------- -------
$0.00 to $14.00......... 481,067 8.1 $1.42 209,983 $0.75
======= === ===== =======
</TABLE>
The Company accounts for its stock option plans in accordance with the
provisions of APB 25. As such compensation expense is recorded on the date
of grant only if the fair value of the underlying stock exceeds the
exercise price. Had compensation cost associated with options held by
Company employees been determined consistent with SFAS 123, the Company
would have reported net losses of $13,078,156, $1,660,426, $2,077,613, and
$1,503,479, respectively for the six months ended February 28, 1999, the
five months ended August 31, 1998 and the years ended March 31, 1998 and
1997.
F-47
<PAGE>
FLOWPOINT CORPORATION
Notes to Financial Statements--(Continued)
(Information as of and for the seven months ended September 30, 1999 is
unaudited)
The Company estimates the fair value of each option as of the date of grant
using a Black-Scholes pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Six Months Five Months Fiscal year Fiscal year
ended ended ended ended
February 28, August 31, March 31, March 31,
1999 1998 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Expected volatility........ *76.32% -- -- --
Dividend yield............. -- -- -- --
Risk-free interest rate.... 5.1% 4.87% 5.70% 6.57%
Expected life, in years.... 3.7 3.8 3.8 3.7
</TABLE>
--------
*based on Company employee holdings in Cabletron common stock
The weighted average estimated fair values of stock options granted during
the six months ended February 28, 1999, the five months ended August 31,
1998 and the fiscal years ended March 31, 1998 and 1997 were $7.63, $.73,
$.25 and $.17 per share, respectively.
Also subsequent to the acquisition by Cabletron, Company employees were
eligible to participate in Cabletron' two Employee Stock Purchase Plans
("ESPPs"), which provide shares of common stock to be purchased by
employees who have completed a minimum period of employment. Under the 1989
ESPP, employees must be continuously employed for a period of six months
and under the 1995 ESPP employees must be continuously employed for a
period of two years. Under these plans, options are granted to eligible
employees twice yearly and are exercisable through the accumulation of
employee payroll deductions from two to ten percent of employee
compensation as defined in the plan, to a maximum of $12,500 annually, for
each plan, (adjusted to reflect increases in the consumer price index)
which may be used to purchase stock at 85 percent of the fair market value
of the common stock at the beginning or end of the option period, whichever
amount is lower. In the seven months ended September 30, 1999, 6,932 shares
were purchased at a weighted average price of $6.96.
(14)Subsequent Event (Unaudited)
On November 22, 1999, Cabletron announced that it had reached an agreement
for the sale of the Company to Efficient Networks ("Efficient") a leading,
independent supplier of DSL access products for the customer premises.
Under the terms of the sale, Efficient would pay a combination of 7.2
million common shares and 6,300 convertible preferred shares (convertible
into an aggregate of 6.3 million common shares of Efficient) to Cabletron
in exchange for all the outstanding common stock of the Company. The sale
closed on December 17, 1999.
F-48
<PAGE>
Independent Auditors' Report on Schedule
The Board of Directors
Efficient Networks, Inc.:
Under date of July 6, 1999, except as to note 13 which is as of July 20,
1999, we reported on the consolidated balance sheets of Efficient Networks,
Inc. and subsidiary as of June 30, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended June 30, 1999, which are
included in the Company's annual report on form 10-K. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule included in the annual
report on form 10-K. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Dallas, Texas
July 6, 1999
S-1
<PAGE>
EFFICIENT NETWORKS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at charged to charged to Balance at
Beginning costs and other end of
Description of period expenses accounts Deductions period
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JUNE
30, 1999
Allowances Deducted
from Assets
Accounts receivable... $ 15 105 -- -- $120
Inventories........... 150 130 -- -- 280
---- --- --- --- ----
Total Allowances
Deducted from
Assets.............. $165 235 -- -- $400
==== === === === ====
FOR THE YEAR ENDED JUNE
30, 1998
Allowances Deducted
from Assets
Accounts receivable... $ 25 11 -- 21 $ 15
Inventories........... 57 124 -- 31 150
---- --- --- --- ----
Total Allowances
Deducted from
Assets.............. $ 82 135 -- 52 $165
==== === === === ====
FOR THE YEAR ENDED JUNE
30, 1997
Allowances Deducted
from Assets
Accounts receivable... $ 23 2 -- -- $ 25
Inventories........... -- 57 -- -- 57
---- --- --- --- ----
Total Allowances
Deducted from
Assets.............. $ 23 59 -- -- $ 82
==== === === === ====
</TABLE>
S-2
