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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended: June 30, 2000
OR
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to ____________
Commission File Number 0-26473
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EFFICIENT NETWORKS, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2486865
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4849 Alpha Road
Dallas, Texas 75244
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(address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 852-1000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
(Title of Class)
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Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_____
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The aggregate market value of voting stock held by non-affiliates of the
registrant as of September 1, 2000, was approximately $1,971,895,506 based upon
the last sales price reported for such date on The Nasdaq National Market. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is not necessarily
conclusive.
At September 1, 2000, registrant had outstanding 56,082,436 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference herein.
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TABLE OF CONTENTS
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS............................. 1
PART I....................................................................... 1
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 20
ITEM 3. LEGAL PROCEEDINGS............................................. 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 20
PART II...................................................................... 21
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................... 21
ITEM 6. SELECTED HISTORICAL CONDENSED FINANCIAL INFORMATION........... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 42
PART III..................................................................... 43
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 43
ITEM 11. EXECUTIVE COMPENSATION........................................ 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND........... 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 54
PART IV...................................................................... 55
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K................................................... 55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................... F-1
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended) that involve
risks and uncertainties. Actual results and the timing of certain events could
differ materially from those projected in the forward-looking statements as a
result of a number of factors. For a discussion of important factors that could
affect our results, please refer to the Business section and to the financial
statement line item discussions and Factors Affecting Future Operating Results
and Stock Price set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations discussed elsewhere in this Annual Report on
Form 10-K.
PART I
ITEM 1. BUSINESS
Introduction
Efficient Networks is a worldwide developer and supplier of high-speed
digital subscriber line, or DSL, customer premises equipment, or CPE, for the
broadband access market. Our DSL solutions enable telecommunications and other
communication network service providers to provide high-speed, cost-effective
broadband access services over the existing copper wire telephone
infrastructure. On December 17, 1999, Efficient completed the acquisition of
FlowPoint Corporation, a provider of advanced broadband routers for deployment
at customer premises. Additionally, on May 22, 2000, Efficient completed the
acquisition of Network Telesystems, Inc., a leading provider of broadband client
services software. We believe there is significant demand for high-speed
broadband access, especially among business users and consumers who have found
alternative solutions to be inadequate or too expensive. We therefore focus on
developing and producing single- and multiple-user DSL customer premises
equipment for small- to medium-size businesses, branch offices of large
corporations and consumers. Our DSL products enable applications such as high-
speed Internet access, electronic commerce, remote access, telecommuting and
extensions of corporate networks to branch offices.
Industry Background
The Growing Need for High-Speed Broadband Communications
The amount of data being carried over the Internet and private
communications networks has grown dramatically and is expected to continue to
grow as the number of users accessing these networks increases. The increase in
the quantity of data being carried over the Internet and private networks is
also being driven by the broadening range of activities for which these networks
are being used. In order to enhance their reach to customers and suppliers,
businesses are increasingly engaging in mission-critical Internet-based
applications, such as electronic commerce, supply chain management, Web hosting,
and global marketing and customer support. Businesses also increasingly use the
Internet to create secure data networks known as virtual private networks among
corporate sites, remote offices and telecommuters. By utilizing the Internet,
businesses can streamline internal operations by facilitating employee
communications, e-mail, file sharing, and research and analysis. Consumers are
also increasingly accessing the Internet to communicate, collect and publish
bandwidth intensive information, conduct retail purchases, and access online
entertainment. These growing network-dependent activities require the
transmission of large amounts of data, which in turn, requires high-speed
broadband data access services for end users to obtain the data reliably and
within practical time constraints.
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Traditional Access Solutions are Inadequate
To meet the growing demand for high-speed, high-bandwidth data
transmission, network service providers have installed high-bandwidth fiber
optic transmission equipment, high-speed switches and core routers in the
Internet backbone and in interoffice networks. While this network backbone is
capable of delivering data at very high speeds, an access bottleneck exists
between the ends of these fiber optic networks at telephone companies' central
offices and the end users' premises. The copper line connections between the
central office and the end user are commonly known as the "last mile." Last mile
connections are typically made via dial-up analog or integrated services digital
network, commonly known as ISDN, modems over the copper infrastructure that was
originally built to transmit analog voice signals. Data transmission speed,
otherwise known as bandwidth, is typically expressed in bits per second. Along
the fiber optic network backbone, data moves at speeds up to 2.5 billion bits
per second, or 2.5 Gbps, while analog modems transmit data at rates up to 56.6
thousand bits per second, or 56.6 Kbps, and most ISDN modems transmit at rates
up to 128 Kbps. Even at ISDN speeds, several minutes are often required to
access a media rich Website, and several hours may be required to transfer or
download large files. During this time, the telephone line cannot be used for
any other purpose. This bottleneck frustrates end users and limits the
capability of network service providers to deliver applications such as
efficient Internet access, multimedia entertainment, real-time telecommuting and
branch office internetworking.
In an effort to provide greater bandwidth, telecommunications network
service providers have traditionally deployed T1 services. A T1 line is a high-
capacity, dedicated telecommunications line which can support data transmissions
rates of up to 1.5 million bits per second, or 1.5 Mbps, which is roughly 25
times the speed of analog modems. Although T1 services have helped fill the need
for broadband access for large businesses, network service providers have
generally been unable to offer T1 services to small businesses, remote offices,
telecommuters and consumers as a result of the complexity and high costs of
deployment. Because analog and ISDN modem technology fails to satisfy the
bandwidth needs of end users, and T1 access is prohibitively expensive, network
service providers continue to seek alternatives for providing cost-effective
broadband access to both businesses and consumers. Additionally, the continued
growth in both the number of analog modem users and their time spent connected
to the Internet congests many telephony networks while providing the telephony
network service provider with little or no additional revenue.
Competition is Driving Rapid DSL Deployment
Until recently, the incumbent local exchange carriers such as Ameritech,
BellSouth, Pacific Bell, Southwestern Bell and US West, were the exclusive
operators of the last mile. Since analog dialup modems, ISDN and T1 services
offered over the incumbent local exchange carriers' networks did not adequately
satisfy the demand for cost-effective broadband access for a majority of users,
alternative solutions were developed such as broadband wireless and cable
access. The deployment of these alternative broadband solutions is now
pressuring incumbent local exchange carriers to deliver cost-effective broadband
access to their customers.
In addition, the Federal Telecommunications Act of 1996 intensified the
competitive environment because that Act requires incumbent local exchange
carriers to lease portions of their networks, including the last mile, to
competitive local exchange carriers. As a result, many new companies, long
distance telephone companies and Internet service providers have applied for and
been granted regulatory approval for competitive local exchange carrier status.
Leading competitive local exchange carriers, including Covad Communications, MCI
WorldCom, NorthPoint Communications, Rhythms NetConnections and Sprint, are now
deploying high-speed services over the copper
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infrastructure owned by the incumbent local exchange carriers. In response to
these competitive pressures and in an effort to increase revenues and maintain
their existing customer base, incumbent local exchange carriers are also
committing the resources necessary to deploy cost-effective, high-speed data
services over their existing copper infrastructure.
Similar dynamics are occurring internationally. The growth in Internet use,
telecommunications deregulation and competition from alternative broadband
access technologies have caused foreign telephone network service providers to
commit similar resources to broadband access deployment.
Incumbent local exchange carriers, competitive local exchange carriers and
foreign telephone network service providers are deploying DSL technology as the
cost-effective broadband access solution. DSL technology utilizes sophisticated
data modulation techniques to achieve data transmission at speeds up to 100
times faster than analog modems using the existing copper telephone wires. The
equipment needed to enable a DSL link consists of two principal pieces, one in
the network operator's central office and one at the premises of the business or
consumer. The central office equipment is often called a DSL access multiplexer,
commonly known as a DSLAM, which aggregates data traffic from multiple DSL links
into a common link which can then be transmitted over a fiber optic network
backbone. The CPE and the DSLAM must also interoperate with the rest of the
equipment in a given network. DSL can enable cost-effective, high-speed data
transmission from the premises of a business or consumer into a DSL network
operator's central office where existing high-capacity networks can then carry
data to a destination across an Internet or other service provider's network.
The market for DSL services is expanding rapidly. All major U.S. incumbent
local exchange carriers have begun to offer DSL services to their customers
directly and through Internet service providers. For example, in October 1999,
SBC Communications announced a $6 billion initiative to make DSL service
available to an estimated 77 million Americans by the end of 2002. In addition,
competitive local exchange carriers are aggressively deploying DSL service. For
instance, Covad Communications first announced the availability of its DSL
services in the San Francisco Bay Area in December 1997. By the end of 1998,
Covad's service was available to over 6 million businesses and homes in five
major metropolitan areas, and by the end of 2000, Covad expects to be able to
offer DSL service to over 45% of U.S. homes and 50% of U.S. businesses.
Existing Customer Premises Solutions are Constraining DSL Deployment
As these and other network service providers are deploying DSL services,
they are encountering several challenges. In particular, interoperability still
presents substantial technical challenges despite recent industry efforts to
standardize the various implementations of DSL. Service providers are actively
seeking DSL CPE solutions that offer seamless end-to-end interoperability within
their networks. End-to-end interoperability requires that DSL solutions be
compatible with the customer's computer hardware, operating systems, networking
equipment and software, the CPE and DSLAM, and the switching and routing
equipment in the service providers' network. Network service providers face
additional challenges in deployment and maintenance, because DSL services are
typically targeted at branch offices, small businesses or individuals where no
particular level of networking expertise can be assumed. Therefore, to implement
rapid and widespread DSL deployment, it is of primary importance that DSL CPE
provides for simple and cost-effective installation and maintenance.
The Efficient Solution
Efficient designs and manufactures the SpeedStream family of DSL CPE and
related software as part of an overall solution for high-speed remote access and
data transmission. The SpeedStream product
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line comprises a broad set of access products, including cost-effective single
user modems, sophisticated routers for businesses, integrated access devices for
combined voice and data service, and software products supporting high-speed
access. Our solutions enable DSL deployment, ensure end-to-end interoperability
and provide for efficient and cost-effective installation and maintenance.
Enable DSL Deployments. Efficient enables network service providers to
rapidly and cost-effectively deploy DSL services, thereby allowing them to
quickly capture market share in today's intensely competitive environment.
Efficient's products are specifically targeted to small- to medium-size
companies and consumers for applications such as high-speed Internet access, and
to large corporations for applications such as remote access, telecommuting and
extensions of corporate networks to branch offices. By offering a variety of DSL
CPE categories that support DSL types compatible with a diverse set of DSL
services, we can provide network service providers with a wide range of options.
We can also reduce operational complexity for network service providers by
offering a single point of contact for training and support for their DSL CPE.
Ensure End-To-End Interoperability. Efficient's DSL solutions offer
seamless interoperability from the customer's computer through the service
providers' network. To ensure this interoperability, Efficient leverages our
core technology expertise in combination with our relationships with network
service providers, such as Ameritech, BellSouth, Covad Communications, Cable and
Wireless HKT, Singapore Telecom and TeleDanmark. We also work closely with other
network equipment vendors, such as ADC Telecommunications, Advanced Fibre
Communications, Alcatel, Copper Mountain Networks, Ericsson, Lucent
Technologies, Nokia, Nortel Networks and Siemens. Since these industry leaders
recognize that end-to-end interoperability is a necessary requirement for full
scale DSL deployment, network equipment vendors have provided us with early
releases of their systems and technologies so that we can ensure that our
products will seamlessly interoperate with their systems. Our relationships with
network service providers and network equipment vendors enable us to maintain
and use one of the most complete DSL interoperability test labs in the industry.
In addition, Efficient actively participates in developing industry-wide
standards to continue to facilitate end-to-end interoperability.
Provide for Efficient and Cost-Effective Installation. Efficient offers a
full suite of easily installable DSL solutions, including DSL CPE that provides
routing and bridging capabilities which connect seamlessly into multiple user
environments using a standard networking architecture called Ethernet. For
single user environments, Efficient provides internal DSL CPE installed directly
into the end user's computer and external CPE that connect to the end user's
computer by simply plugging into the computer's universal serial bus (USB) port
or Ethernet port. Efficient's internal and universal serial bus modems are
supported by Efficient's pre- configurable software which allows the network
service provider to configure the CPE for a particular network before the CPE is
sent out into the field. Pre-configuration of the CPE obviates the cost and time
associated with having installers perform these configuration activities with
each end-user installation.
Provide for Cost-Effective Maintenance. Efficient offers network service
providers our Advanced Status software, a troubleshooting and diagnostic tool.
With Advanced Status software, a network service provider's customer support
technician can walk an end user through the diagnostic process over the
telephone. This allows the network service provider to easily monitor, diagnose
and often remotely fix the customer's problems quickly, which can substantially
reduce the network service provider's customer support costs. In the event that
a technician needs to be dispatched, Advanced Status provides easy diagnosis and
facilitates on-site repair.
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The Efficient Strategy
Our objective is to be the leading worldwide provider of high-performance
broadband access equipment and applications for businesses, remote offices,
telecommuters and consumers. Key elements of our strategy include the following:
Capitalize upon our Early Market Acceptance by Network Service Providers.
We intend to leverage our products' early market acceptance to extend our market
share. We have been focused on the high-speed network connectivity market for
six years and specifically on the DSL market for three years. Our DSL CPE
products have been deployed by Ameritech, BellSouth, Covad Communications, Cable
and Wireless HKT, Pacific Bell, Singapore Telecom, Southwestern Bell,
TeleDanmark and several other network service providers. We work closely with
each network service provider, in most cases providing customized software or
product packages, as well as dedicated training and support services. A number
of other network service providers have begun to test our CPE solutions. We
intend to build upon this early acceptance of our products to become the primary
provider of DSL CPE to both existing and new network service providers as they
deploy their DSL networks.
Leverage Strategic Relationships with Network Equipment Vendors. We intend
to leverage both current and future relationships to continue to promote
Efficient in the industry, extend our sales capabilities, increase our volume
distribution, and build brand awareness. We believe successful deployment of DSL
necessitates close working relationships with network equipment vendors. Since
most network equipment vendors do not have complete DSL CPE solutions, they
typically bundle and sell their network equipment with third-party CPE
solutions. We have established relationships with ADC Telecommunications, AFC,
Alcatel, Copper Mountain Networks, Ericsson, Lucent, Nokia, Nortel Networks and
Siemens, among others.
Continued Development of Broadband Access CPE. We intend to continue
developing DSL CPE products that enhance the features of our current line as
well as create new bundled voice and data access products. We are developing new
products based on different physical interfaces, advanced functionality such as
integrated voice and data capability, enhanced routing and bridging
capabilities, and additional software packages and features. We are continually
pursuing techniques to reduce product costs. In developing new technologies and
products, we benefit from our relationships with key industry leaders that offer
early visibility into market requirements and deployment trends.
Broaden Distribution Channels. We plan to extend our distribution channels
to meet the growing demand for broadband access solutions. When we first
deployed our current generation DSL products, we initially targeted incumbent
local exchange carriers and network equipment providers in order to secure large
contracts, establish credibility in the marketplace and strengthen key network
service provider relationships. We have since built a direct sales force to
target competitive local exchange carriers, foreign telephone network service
providers and Internet service providers as well. Moreover, we are developing
alternative distribution channels such as telephone company-aligned
distributors, traditional two-tier distribution partners, third-party
integrators, and retail partners. We are also expanding our global presence by
extending our international direct sales force, securing additional
international value-added resellers and establishing retail sales abroad.
Finally, we have established a separate sales force whose emphasis is on
Internet service providers that deploy broadband services using DSL access. This
sales force increases awareness of our company and products, and provides
training, collateral and sales incentives for broadband Internet service
providers.
Build the Efficient Brand Name. In addition to increasing brand awareness
with network service providers and network equipment vendors, we believe it is
critical to establish brand awareness and
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differentiation from our competitors with end customers through superior
performance, ease of use and customer service. We plan to continue building
brand awareness of Efficient and SpeedStream to identify us as the leading
provider of DSL CPE solutions. In the vast majority of cases, our DSL products,
even when deployed by network service providers, carry the Efficient and
SpeedStream brand names. In addition, we plan to increase our investments in a
broad range of marketing programs, including active trade show participation,
advertising in print publications, direct marketing, and Web-based marketing.
Leverage Strategic Acquisitions to Complement Product & Technology
Offerings. In 1999 we acquired FlowPoint Corporation to add advanced broadband
routers to our product line for the customer premises equipment market. Products
from FlowPoint incorporate a broad range of DSL technologies, including ADSL,
SDSL and IDSL. FlowPoint also brought expertise in frame-based customer premises
equipment as well in the emerging voice-over-DSL market, and has provided us
with several new customer relationships. We also recently acquired Network
TeleSystems, Inc. (NTS), which supplies a popular client software package to
broadband Internet service providers worldwide. We intend to pursue strategic
acquisitions in the future as we identify companies or products that will
complement our current product offerings and expand our addressable customer
base.
Products
Efficient has developed the SpeedStream family of DSL products that enables
broadband access for businesses and consumers. Our products are designed to
support a number of computer environments, DSL implementations, and network
architectures. Our asymmetric DSL, or ADSL, products provide transmission speeds
of up to 8 Mbps in the downstream direction from the network to the end user,
and up to 1 Mbps in the upstream direction. Our symmetric DSL, or SDSL, products
provide equal upstream and downstream speeds of up to 2.3 Mbps. Our SpeedStream
products are separated into these product categories:
. 3000 Series - Designed for the single user and installable
into a peripheral component interface, or PCI, bus slot within
a personal computer.
. 4000 Series - Designed for the single user and connected to a
personal computer through a universal serial bus port.
. 5200 Series - Designed to provide simple, zero-setup DSL
access for multiple users through an Ethernet port.
. 5600 Series - Designed to provide basic routing capabilities
for a telecommuter or a small office or home office
environment.
. 5700, 5800 Series - Broadband routers designed to provide a
comprehensive feature set for a small business or a corporate
branch office.
. 7400, 7800, 8600 Series - Integrated access devices designed
to support both high speed data services and multi-line voice
services over a single broadband interface.
. Client software - Software packages that enable broadband
access for end users, in conjunction with SpeedStream customer
premises products or other broadband devices.
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Efficient also provides a full suite of pre-configuration and diagnostic
software tools. Our pre-configuration software enables network service providers
to architect scalable DSL services and ensures rapid and reliable installation
while reducing or eliminating the need for on-site configuration. Our diagnostic
and troubleshooting software, Advanced Status, is designed to reduce a network
service provider's expense associated with ongoing maintenance and repair. Our
broadband client software also provides a significant diagnostic function for
service providers. We believe that these software capabilities can reduce the
overall expense for DSL service deployment and maintenance.
The SpeedStream 3000 Series
The SpeedStream 3000 Series consists of internal modems that provide high-
speed asymmetric DSL connectivity for a personal computer. This product family
comprises several distinct products, each designed for compatibility with
specific DSLAMs from various network equipment vendors. The SpeedStream 3000
Series incorporates the following features:
. Installs into any peripheral component interface bus slot;
. Supports pre-configuration using Efficient software for easy setup;
. Includes Efficient Advanced Status diagnostic software tools for
rapid error diagnosis and correction;
. Supports prevalent data encapsulation standards to ensure network
interoperability with Internet Protocol and ATM networking
equipment;
. Provides ATM functionality that enables reliable data transmission;
. Offers remote management capability; and
. Support for a broad range of Microsoft Windows operating systems.
The SpeedStream 4000 Series
The SpeedStream 4000 Series consists of external modems that provide high-
speed asymmetric DSL connectivity through a personal computer's universal serial
bus port. This product family comprises several distinct products, each designed
for compatibility with specific DSLAMs from various network equipment vendors.
The SpeedStream 4000 Series incorporates the following features:
. Attaches externally via a personal computer's universal serial bus
port;
. Supports pre-configuration using Efficient software for easy setup;
. Includes Efficient Advanced Status diagnostic software tools for
rapid error diagnosis and correction;
. Supports prevalent data encapsulation standards to ensure network
interoperability with Internet Protocol and ATM networking
equipment;
. Provides ATM functionality that enables reliable data transmission;
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. Offers remote management capability; and
. Supports a broad range of Microsoft Windows operating systems.
The SpeedStream 5200 Series
The SpeedStream 5200 Series provides high-speed remote ADSL or SDSL
connectivity for one or more personal computers, workstations or other network
devices over a standard networking architecture called Ethernet. This product
family comprises multiple products designed to interoperate with DSLAMs from
various network equipment vendors. The SpeedStream 5200 Series incorporates the
following features:
. Facilitates cost-effective DSL connectivity for multiple users via a
standard Ethernet port;
. Provides zero setup installation, reducing the time required for
installation;
. Pre-configures for rapid network deployment;
. Supports prevalent data encapsulation standards to ensure network
interoperability with Internet Protocol and ATM networking
equipment; and
. Provides ATM functionality that enables reliable data transmission.
The SpeedStream 5600 Series
The SpeedStream 5600 Series provides high-speed remote DSL connectivity for
one or more personal computers, workstations or other network devices over a
standard networking architecture called Ethernet. This product family comprises
multiple products designed to interoperate with DSLAMs from various network
equipment vendors. Routing features help provide security, and make more
effective use of network bandwidth. The SpeedStream 5600 Series incorporates
the following features:
. Facilitates DSL connectivity for multiple users via a standard
Ethernet port;
. Provides routing or bridging capabilities for a telecommuting or
small office/home office environment;
. Pre-configures for rapid network deployment;
. Supports prevalent data encapsulation standards to ensure network
interoperability with Internet Protocol and ATM networking
equipment;
. Provides ATM functionality that enables reliable data transmission;
and
. Offers remote management capabilities.
The SpeedStream 5700 and 5800 Series
SpeedStream 5700 and 5800 Series routers provide high-speed remote
connectivity for one or more personal computers, workstations or other network
devices over a standard networking architecture
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called Ethernet. These routers support three different types of DSL, plus
several non-DSL interfaces that can enhance existing DSL modems. Our 5700 and
5800 Series routers incorporate the following features:
. Facilitates DSL connectivity for multiple users via a standard,
integrated Ethernet hub;
. Provides routing and bridging capabilities for a small business or
branch office environment;
. Pre-configures for rapid network deployment;
. Supports prevalent data encapsulation standards to ensure network
interoperability with Internet Protocol and ATM or packet-based
networking equipment;
. Supports enhanced security and virtual private network capabilities;
. Provides ATM or packet-based functionality that enables reliable data
transmission; and
. Offers remote management capabilities.
The SpeedStream 7400, 7800, 8600 Series
The SpeedStream 7400, 7800 and 8600 Series Integrated Access Devices (IADs)
support high-speed data services and multi-line voice services simultaneously
over a shared DSL interface. By using a single broadband connection and a single
access device, a carrier's costs are often reduced, while revenue potential per
customer is increased. Our IAD product line comprises multiple products designed
to support a variety of voice lines, and to interoperate with DSLAMs from
various network equipment vendors. The SpeedStream IADs incorporate the
following features:
. Facilitates cost-effective DSL connectivity for multiple users via a
standard Ethernet port;
. Pre-configures for rapid network deployment;
. Supports prevalent data encapsulation standards to ensure network
interoperability with Internet Protocol and ATM networking equipment;
. Provides ATM functionality that enables reliable data transmission;
. Supports four (7400), eight (7800) or up to 24 (8600) voice interfaces
for connection to an end user's telephony equipment; and
. Supports modular addition of new voice and data interfaces (8600).
Client Software
All of our SpeedStream DSL products for single personal computer environments
support the ability to be pre-configured for specific DSL networks. SpeedStream
software allows a network service provider to select configuration settings for
the CPE that match its specific network. This CPE pre-configuration allows a
network operator the flexibility to choose network settings unique to the
network's service offerings, without requiring an end user or an installation
technician to individually
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configure each unit. Thus, by setting the attributes for DSL, ATM and data
encapsulation prior to installation of the CPE, the speed of DSL equipment
installation is increased. We believe that this ability to pre-configure DSL CPE
provides cost savings for network service providers and allows them to scale
their DSL service offerings rapidly and reliably. We also offer broadband client
software that supports a commonly used remote access protocol known as the
Point-to-Point Protocol over Ethernet. This client capability allows Internet
Service Providers to take advantage of their existing systems for user
authentication, address management and billing. Our client software also acts
as a platform to enable management of CPE and network connections, and enables
Internet service providers to offer value-added services to users.
Advanced Status Software
All SpeedStream DSL products for single-user environments include embedded
diagnostic and troubleshooting software called Advanced Status. During normal
network conditions, the end user is unaware that this software is operating.
However, if network degradation or failure occurs, a customer service
representative can work with the end user to diagnose and isolate problems with
the DSL link, the CPE or the network itself. Advanced Status software provides
information such as status indications and performance statistics for DSL, ATM
and packet communication layers. This information helps identify problems and
determine whether they must be solved at the central office or the customer
premises. Our broadband client software also provides status and diagnostic
information that help service providers rapidly identify and resolve problems
for their customers. These software components minimize the need to send a
technician to the customer premises and speeds troubleshooting and repair. We
believe that our client software reduces the overall expense of DSL service.
Products under Development
Efficient continually develops new products, and enhances existing
products. Significant areas of new development include:
. Integrated access devices that enable simultaneous data and multi-line
voice services over a single, shared DSL connection.
. New routing platforms and software feature sets, intended for use in
business and enterprise applications.
. Client software, to enable rapid deployment and diagnosis of broadband
services, to enhance end user security, and to assist in ongoing
management of the services.
. Cost reductions and performance enhancements, intended to improve
overall profitability and performance of our products.
Technology
Efficient designs and manufactures DSL CPE as part of an overall solution
for high-speed remote access and data transmission. Efficient's SpeedStream
family of DSL CPE includes products intended for a single user such as a
telecommuter, as well as for multiple users within branch offices or small
businesses. Efficient integrates a diverse set of technologies and expertise,
primarily in the following areas:
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. DSL System Architecture
. Asynchronous Transfer Mode and Data Encapsulation Techniques
. Software
. Application Specific Integrated Circuit Design
. Routing and Bridging
. Integrated Voice and Data
DSL System Architecture Expertise
We structure our product architectures to consist of highly modular blocks
of hardware and software. By utilizing our expertise in developing multiple
products with diverse types of DSL technology, we have developed a core set of
hardware and software designs. Consequently, it is a relatively straightforward
activity to restructure the components and develop a new SpeedStream product.
Similarly, as new features are developed, they can be made available across a
number of products all based upon common components. This design modularity
helps Efficient respond quickly to new market requirements.
Our product architectures use Efficient's proprietary application specific
integrated circuits, or ASICs, as well as chipsets from third-party suppliers.
We believe that the use of our application specific integrated circuits in
conjunction with these third-party chipsets has advantages for CPE performance
and cost. Because DSL signals operate across a broad frequency range, circuits
must be carefully designed to ensure that high performance is achieved without
disrupting other equipment in the end user's home or office (such as
televisions). We believe that our techniques for DSL circuit design, component
selection and layout, emissions shielding and certification testing result in
high-performance products that meet a broad range of emissions and safety
certifications mandated by the Federal Communications Commission, international
regulatory bodies, consumer safety laboratories and network operators.
Asynchronous Transfer Mode and Data Encapsulation Techniques Expertise
Our SpeedStream CPE products employ our own ATM hardware and software
technology. ATM technology enables multiple communication sessions to occur
simultaneously and bursty packet traffic to coexist with delay-sensitive traffic
such as voice or video information. In order to allow this data to be carried
across an ATM network, it must be formatted into fixed-size ATM cells, a
technique known as data encapsulation. ATM and data encapsulation permit a
common network infrastructure to offer diverse services. There are numerous data
encapsulation techniques which network service providers, Internet service
providers or other network operators may implement.
We have been able to implement these numerous ATM and data encapsulation
techniques because of our prior experience in designing, manufacturing, and
commercializing ATM LAN equipment. Key pieces of silicon and software technology
were reused from these products to enable rapid development of our SpeedStream
CPE. We believe that this intellectual property, as well as the ATM networking
expertise associated with it, represents one of our key competitive advantages.
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Software Expertise
Our software engineers have expertise in developing code that addresses the
needs of network service providers. Our modular software architecture enables
reuse of much of our software code across products. This modularity also enables
rapid development of new products. Our knowledge of network operation and
architectures and data encapsulation techniques allows us to write software that
ensures that our products are interoperable with other network equipment
vendors' products. In addition, our understanding of various operating systems
and personal computer environments allows us to create software that provides
for trouble-free installation and network maintenance. Our software engineers
also design, build and operate comprehensive testing environments to ensure not
only that our products are interoperable, but also offer high performance.
Efficient has developed a suite of software for our single-user SpeedStream
products that enables communication in a personal computer environment. This
software is commonly called a "driver" and allows application software, such as
e-mail or a Web browser, to send and receive data over the DSL network link,
just as it would over a modem or a LAN connection. By building upon software
source code and skills developed for ATM LAN products, Efficient is able to
support a number of diverse personal computer environments. To date, Efficient
has leveraged our software expertise to develop and release high-performance,
rapidly installing drivers for our SpeedStream 3000 and 4000 Series products.
This software is interoperable with numerous brands and models of personal
computers, and with several diverse versions of the Microsoft Windows operating
system.
In addition, Efficient works closely with network service providers to
create software specific to their networks, which allows them to rapidly and
reliably deploy and maintain DSL service. Efficient also provides broadband
client software, which enables Internet service providers to offer broadband
services without making the authentication and billing infrastructure from their
dial-up services obsolete.
Application Specific Integrated Circuit Design Expertise
Efficient has developed custom application specific integrated circuits
that enable high-speed ATM networking using peripheral component interface or
universal serial bus attachments. Our application specific integrated circuits
provide high-speed interfaces to the personal computer and also perform several
ATM functions, including segmentation and reassembly functions whereby variable
length packets are converted into fixed size ATM cells. They also perform
traffic shaping functions that control the flow of data from the end user's
equipment into the service provider's network. The use of custom application
specific integrated circuits allows us to better control the cost of our
products and helps ensure their performance and interoperability with diverse
brands of personal computers and network equipment.
Routing and Bridging Expertise
Efficient's multi-user products offer a shared Ethernet port for local
attachment to a computer network and an ATM DSL port for transmission and
receipt of data across a DSL interface. A bridging device forwards Ethernet
packets between the product's Ethernet port and its ATM DSL port based on
addresses contained in the Ethernet packets. Efficient's Ethernet bridging
products examine addressing information in each packet to determine whether it
should be forwarded between the local Ethernet port and the ATM DSL port. Our
bridging CPE requires little or no configuration, thereby reducing the network
service provider's installation expense. Because all packet forwarding decisions
are made independently of the network protocol carried by the Ethernet packets,
our bridging CPE can support
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numerous network types, including older LAN environments such as Novell's IPX or
Apple's AppleTalk, as well as networks based on the Internet Protocol.
Routers are able to perform much more complex functions than those
performed by bridges including restricting certain types of data from entering
the network and directing data flow based on dynamically assigned Internet
protocol addresses. Efficient's routing products forward Internet Protocol
packets based upon addressing information contained in the packet header.
Support for several different methods of ATM data encapsulation helps ensure
network interoperability. Efficient's routing products provide features that
enhance security and ease network administration for end users, such as packet
filtering, which prevents unwanted access to local servers or other private
resources, and a technique known as network address translation, which masks the
presence of local computers from other computers on the Internet. Our routing
products also implement an address management technique called the dynamic host
configuration protocol that automates the assignment of Internet protocol
addresses to computers attached locally to the router. The network address
translation and dynamic host configuration protocol features of our routing
products can help minimize address interoperability issues, and may be able to
accelerate deployment of DSL services.
Efficient's routing products include a complete suite of management
capabilities that enable local and remote troubleshooting as well as upgrades to
system configuration or software. This is important as DSL is a complex
technology typically intended for a technologically unsophisticated user base.
We believe that our products' combination of management capabilities which can
be accessed either locally or remotely can help reduce the cost of network
administration for DSL network service providers.
Integrated Voice and Data Expertise
Efficient's integrated access products provide data services such as
routing and bridging, as well as multi-line voice services, over a shared DSL
connection. The combination of voice services along with data services increases
the complexity of the products significantly. Efficient builds upon the ATM, DSL
and data expertise gained from our data-only products, and employs a further
level of expertise to provide high performance analog and digital voice designs.
We believe that the additional complexity of the resulting integrated access
products represents a barrier to entry for many of our competitors.
Customers
Sales of our CPE have been to three main classes of customers: network
equipment vendors who supply DSL central office equipment, DSL network service
providers, and Internet service providers. Network equipment vendors include our
products as an element of a complete solution offered to their network service
provider customers. In many cases, several different network equipment vendors
specify our products as the preferred or bundled CPE in response to bid requests
issued by a network service provider for complete DSL access solutions. Network
service providers will then provide the CPE to end users for access to their DSL
network. In some cases, we sell CPE to the network equipment vendor for resale
as part of a bundled solution to the network service provider. In other cases,
we sell directly to the network service provider. We also engage in marketing
activities intended to create demand for our products among broadband Internet
service providers, and in some cases we also sell products directly to Internet
service providers.
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Strategic Relationships
We believe that establishing relationships with leaders in DSL technology
and services is critical to our success. Accordingly, we have formed strategic
relationships and, in some cases, entered into joint development agreements with
network service providers, network equipment vendors and developers of DSL
semiconductor technology. We are also pursuing strategic relationships to ensure
that high-volume distribution channels are in place for our products.
Network Service Providers
Ameritech, a subsidiary of SBC Communications. Efficient has entered into
an agreement to provide DSL CPE to Ameritech. We have worked closely with the
technical and product management staff responsible for DSL service deployment at
Ameritech. We have also provided early software releases of new products to
Ameritech, and have provided Ameritech with training for both customer service
and field support.
BellSouth. Efficient has entered into a supply agreement with BellSouth,
providing DSL CPE for their broadband service offering. Efficient has also
engaged in joint promotion programs with BellSouth for DSL CPE.
Covad Communications. Covad Communications is an investor in Efficient. We
have worked closely with Covad to tune the feature sets of several of our
SpeedStream DSL products to their network requirements. Covad purchases SDSL,
ADSL and IDSL products from Efficient, including routers, bridges and USB
modems. We are also involved in discussions with Covad about our next-generation
integrated access products. Efficient has also engaged in joint promotion
programs with Covad.
Hanaro Telecom. Hanaro is a competitive network service provider in Korea
actively engaged in DSL deployment. Hanaro offers DSL services for consumer,
academic and business applications. Efficient has worked closely with Hanaro to
enable rapid deployment of its DSL service using our SpeedStream CPE.
SBC Communications. Efficient provides our SpeedStream CPE for DSL services
offered through SBC's Southwestern Bell, Pacific Bell and Ameritech
subsidiaries. We have provided training for their installation and customer
service personnel, and have worked with their certification and test staff to
demonstrate new SpeedStream DSL products. Efficient has also engaged in joint
promotion programs with SBC.
Singapore Telecom. Efficient has worked closely with SingTel to provide
customized software with our CPE that is unique to SingTel's advanced Magix DSL
service. We are involved in discussions with SingTel with respect to the
evolution of SingTel's network architecture and service offerings. SingTel has
consistently volunteered to work with us to test our new products.
Network Equipment Vendors
Alcatel. Efficient and Alcatel have established a joint agreement for CPE
that is interoperable with Alcatel's DSLAM as well as their Litespan digital
loop carrier. Many of our DSL products employ Alcatel's DSL chipsets and
software.
Nokia. Efficient and Nokia have entered into a purchase and distribution
agreement whereby we supply our SpeedStream 3000 PCI and 4000 USB products.
Under the provisions of this agreement,
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Nokia resells our products along with its EKSOS family of DSL equipment and
their SpeedLink DSLAM.
Nortel Networks. Efficient has an agreement to supply Nortel with DSL CPE
that is interoperable with Nortel's Universal Edge 9000 access product, and
their IMAS DSLAM. Nortel offers the Universal Edge 9000 to both new and existing
customers as an upgrade for both Nortel's DMS voice switches and its access node
digital loop carriers. Based on this relationship, we are involved in
discussions with Nortel on next-generation products.
Siemens. Siemens is an investor in Efficient. We have worked with Siemens
to establish compatibility between Efficient's DSL CPE and Siemens' XpressLink D
DSLAM, as well as the DSL interfaces for Siemens' installed base of voice
switches. Anthony T. Maher, who is a member of the board of Siemens AG
Information and Communication Networks, joined our board of directors in April
1999.
Developers of DSL Semiconductor Technology
Alcatel Microelectronics. Many of our products use asymmetric DSL
technology from Alcatel Microelectronics. Efficient is one of Alcatel's largest
customers for DSL chipsets. The two companies work closely on the design of
next-generation DSL products.
Texas Instruments Incorporated. Texas Instruments is an investor in
Efficient. Some SpeedStream products under development use asymmetric DSL and
voice processing technology from Texas Instruments. We have licensed pieces of
our ATM silicon and software to Texas Instruments, and have assisted in the
development of reference designs for application of Texas Instruments'
asymmetric DSL components. Texas Instruments has provided us with access to its
asymmetric DSL components at most favored prices. Texas Instruments also
fabricates one of our ATM application specific integrated circuits and has
provided introductions for Efficient to personal computer manufacturers who are
searching for sources of DSL CPE.
Telephone Company-Aligned Distributors
Sprint North Supply. Sprint North Supply is a primary supplier of
telecommunications equipment to Sprint. Many other network service providers
also purchase networking products from Sprint North Supply. Efficient has
entered into a distribution agreement with Sprint North Supply that enables it
to carry selected members of our SpeedStream product family.
Nortel Supply. Nortel Supply is a distributor of Nortel and other network
equipment vendors' products. Through our agreement with Nortel Supply, Efficient
leverages Nortel Supply's worldwide distribution capabilities.
Innotrac. Innotrac is a distributor of consumer telecommunications
equipment for several incumbent local exchange carriers, including BellSouth.
Efficient, Innotrac and BellSouth jointly promote BellSouth's DSL services with
Efficient's SpeedStream CPE. Efficient and Innotrac also work together to create
customized product packages and documentation for major network service
providers. We believe that we can leverage Innotrac's relationship with several
incumbent local exchange carriers, as well as Innotrac's experience in
distributing products in high volume.
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Manufacturing
We outsource the assembly and testing of products and printed circuit
boards to turnkey contract manufacturers. Currently, ACT Manufacturing, Inc.
manufactures the majority of our products at its facility in Hermasillo, Mexico.
In June 2000, we advanced $50 million to ACT Manufacturing to finance the
purchase of raw materials for products to be manufactured by ACT Manufacturing
for us. See Note 6 of Notes to Consolidated Financial Statements. Several of
our routing products are manufactured by PEMSTAR, Inc. at its San Jose,
California facility. Efficient also contracts with Xetel, Inc. for the
manufacturing of our legacy ATM LAN products. Each of these manufacturers are
certified by the International Standards Organization for manufacturing and
design processes. Efficient plans to engage an additional contract manufacturer
to meet our anticipated manufacturing requirements and to continue reducing the
cost of our products.
Efficient has a limited in-house manufacturing capability. We have complete
capabilities for final test, packaging and shipping of our products. We perform
comprehensive inspection tests and use statistical process controls to assure
the reliability and quality of our products. Our manufacturing engineers design
and build all test procedures and fixtures for our products. We integrate these
manufacturing tests with the contract manufacturers' build processes. Our
manufacturing personnel work with our design engineers to ensure that the test
environment remains current as DSL technology evolves. We also perform warranty
and repair work at our Dallas facility.
Efficient's engineers design custom application specific integrated
circuits that are incorporated into the majority of our products. Efficient
contracts with silicon manufacturers to fabricate the application specific
integrated circuits for prototype testing. We perform design verification and
simulation testing at our facilities. After successful completion of these
tests, Texas Instruments, Samsung Semiconductor and VLSI Technology manufacture
our application specific integrated circuits in volume on a turnkey basis. We
purchase only packaged and tested application specific integrated circuits.
Other than our application specific integrated circuits, we try to standard
parts and components whenever possible. We currently purchase certain key parts
and components from sole-source suppliers such as Alcatel Microelectronics,
Analog Devices, Conexant Systems and Texas Instruments.
Sales and Marketing
Since 1996, Efficient has worked closely with network equipment vendors
that supply DSL-based central office equipment. These vendors offer our
SpeedStream products to network service providers as part of a complete,
interoperable DSL solution. We engage in joint sales activities with our
partners and regularly provide them with collateral materials to enable their
sales forces to promote our products. Our relationships with network equipment
vendors result in introductions to large network service providers. In many
cases, with DSL interoperability assured by Efficient and our partners, network
service providers choose to purchase CPE directly from Efficient.
Efficient also works closely with network service providers to ensure that
our CPE is matched to their DSL service offerings. Initial discussions with
network service providers generally involve our sales, marketing and business
development personnel who work to communicate the strengths of our company and
our products. Detailed responses to request for purchase documents are submitted
to network service providers, often by both Efficient and one or more network
equipment vendors. We also
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frequently provide informal consulting or recommendations on network design,
architecture and management for our customers.
Next, at the network service provider's request, we engage in a technical
certification process involving our system engineers who work in a lab
environment, in some cases for days or weeks, with their counterparts from the
network service provider. We frequently provide informal consultation on network
deployment and testing as well as customized training for network service
providers. In some cases, we create special software releases or product
combinations for major network service providers. Efficient typically creates
and delivers customized training courses and curricula for our largest
customers, to ensure that their installation and support personnel are effective
in satisfying end users' needs. While the actual sale and distribution of CPE
varies network by network, this initial relationship-building stage is critical
in every case. We believe that it is difficult to provide CPE into DSL service
offerings without these close relationships with network service providers.
We engage in a variety of marketing activities to build brand awareness. We
issue press releases concerning significant product releases, partnerships and
network design wins. We also conduct briefings for analysts and members of the
press. We participate in a number of industry trade shows and pursue speaking
engagements at related events. Efficient uses direct mail campaigns to increase
awareness of our company and our products among Internet service providers, who
are increasingly active in introducing customers to DSL services. We also engage
in joint marketing programs with selected Internet service providers whose DSL
services employ our CPE. Our broad goals are to continue to increase the
awareness of Efficient as a company, and of our DSL CPE product line brand,
SpeedStream.
As the scope of our marketing efforts expands, we expect our Website to
become a strategic resource in disseminating information to interested parties.
We also expect our Website to play an increasingly active role in collecting
sales leads, working remotely with partners and key customers, and performing
customer support. In the future, we believe that our Website may become an
important tool for direct sales of our products.
Research and Development
We believe that our future success depends on our ability to adapt to the
rapidly changing communications environment, maintain our significant expertise
in core technologies, and continue meeting and anticipating our customers'
needs. We continually review and evaluate technological changes affecting the
telecommunications market and invest substantially in applications-based
research and development. We are committed to an ongoing program of new product
development that combines internal development efforts with joint ventures and
licensing or marketing arrangements relating to new products and technologies
from outside sources.
Efficient's core research and development activities are focused on both
hardware and software technologies. In our hardware development activities, we
possess significant expertise in application specific integrated circuits
development, analog and mixed signal hardware design, ATM architecture and bus
architectures, such as peripheral component interface and universal serial bus.
In software development, Efficient has particular strengths in data networking
protocols and operating systems, device driver development and traffic
management, and techniques for advanced routing and systems management. We have
significant expertise with hardware and software technology for analog and
digital voice encoding, compression, transmission and switching techniques as
well.
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To enable successful deployment of DSL services, our CPE must be
interoperable with the DSLAM, ATM switching equipment and other networking
equipment from multiple vendors. In our development efforts, we leverage our
relationships with prominent DSLAM vendors to ensure DSL interoperability. The
continued development and use of our own industry-tested application specific
integrated circuits and software ensure ATM switching interoperability. In
addition, our support for a number of protocol stacks provides data
encapsulation interoperability with routers at Internet service providers or
within corporate networks. Finally, integrated voice and data products require a
high degree of interoperability with other voice networking products. Efficient
has a solid understanding of the end-to-end technologies in use, and we actively
work to ensure interoperability while using technology that we control. Our
design verification procedures include testing in complex network environments
created in our laboratories that simulate end-to-end network architectures used
in DSL service deployments. We believe that our stringent design verification
and test procedures allow us to provide cost-effective, high-performance DSL CPE
that minimizes the technology risk for network operators.
Another future technology involves ATM switched virtual circuits. Switched
virtual circuits create a dedicated connection between two points of a network.
Current ATM/DSL deployments typically use permanent virtual circuits to create
these dedicated connections. Permanent virtual circuits must be created
manually, while switched virtual circuits employ software to automatically
create a circuit across the ATM network without manual intervention. Some
network operators have expressed a concern that DSL deployments may not scale
rapidly if permanent virtual circuits are employed. Switched virtual circuit
implementations are complex and may represent a technology barrier for
competitors. Efficient has sold ATM LAN products supporting switched virtual
circuits for several years. We believe we are well suited to help enable large-
scale DSL deployments as network operators demand support for switched virtual
circuits.
Competition
The network equipment industry is highly competitive, and we believe that
competition may increase substantially as the introduction of new technologies,
deployment of broadband networks and potential regulatory changes create new
opportunities for established and emerging companies. In addition, a number of
our competitors and potential competitors have significantly greater financial
and other resources than us which may enable them to more aptly meet new
competitive opportunities. We compete directly with other providers of DSL CPE
including 3Com Corporation, Alcatel, Cisco Systems, Inc., Intel Corporation,
Netopia, Inc., Westell Technology, Inc., Xpeed, Inc., Zyxel Communications
Corporation among others. Many of our industry partners manufacture DSL customer
premises products that compete directly or indirectly with ours. Our integrated
access products will compete with both existing competitors, and with new
competitors such as Vina Technologies, Inc., Adtran, Inc., Woodwind
Communications Systems, Inc. and 2Wire, Inc. Furthermore, DSL as a technology
for deploying broadband connections is competing with alternative technologies
including ISDN, T1, broadband wireless and cable solutions.
The rapid technological developments within the network equipment industry
results in frequent changes to our group of competitors. The principal
competitive factors in our market include:
. Industry relationships with network service providers and network
equipment vendors;
. Product reliability, performance and interoperability;
. Product features;
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. Product availability;
. Price;
. Ability to distribute products;
. Ease of installation and use;
. Technical support and customer service; and
. Brand recognition.
We believe we are successfully addressing each of these competitive
factors. Nonetheless, we expect to face increasing competitive pressures from
both current and future competitors in the markets we serve.
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property laws, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect our
trade secrets and know-how. To date, we have been granted six U.S. patents with
counterpart patents pending in three international jurisdictions and have an
additional seven U.S. patent applications pending.
Although we employ a variety of intellectual property in the development
and manufacturing of our products, we believe that none of our intellectual
property is individually critical to our current operations. However, taken as a
whole, we believe our intellectual property rights are significant and that the
loss of all or a substantial portion of such rights could have a material
adverse effect on our results of operations. There can be no assurance that our
intellectual property protection measures will be sufficient to prevent
misappropriation of our technology. In addition, the laws of many foreign
countries do not protect our intellectual properties to the same extent as the
laws of the United States. From time to time, we may desire or be required to
renew or to obtain licenses from others in order to further develop and market
commercially viable products effectively. There can be no assurance that any
necessary licenses will be available on reasonable terms.
We have registered the trademarks "Efficient Networks" and "SpeedStream."
"Advanced Status" and "ProfileBuilder" are also our trademarks. All other
trademarks or service marks appearing in this prospectus are trademarks or
service marks of the respective companies that use them.
Employees
As of June 30, 2000, we employed approximately 430 full-time employees,
including 190 in engineering. Most of our employees are located in the United
States with various sales employees located in The Netherlands, Singapore,
China, Canada and Korea. None of our employees is represented by collective
bargaining agreements, and management considers relations with our employees to
be good.
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ITEM 2. PROPERTIES
Our primary executive, sales and marketing, and research and development
activities are conducted out of a 125,000 square foot facility in Dallas, Texas
that we occupy under a lease expiring in 2010. In addition, in September 2000 we
consolidated the former FlowPoint and NTS operations into a 40,000 square foot
facility in Los Gatos, California under a lease expiring in 2010. We lease an
approximately 2,500 square foot facility in Amsterdam, The Netherlands for our
European operations. This lease expires in 2004. For our Asian operations, we
lease an approximately 1,450 square foot facility in Singapore. This lease
expires in 2002.
ITEM 3. LEGAL PROCEEDINGS
Efficient is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 12, 2000, Efficient held an annual meeting of stockholders and a
special meeting of stockholders. At the meetings, Efficient submitted the
following matters to its stockholders:
Annual Meeting. The stockholders re-elected Efficient's Class I Directors
consisting of Messrs. Maher, Martin and Hawk. Holders of 34,986,159 shares,
34,974,881 shares and 34,986,159 shares of common stock voted in favor of
Messrs. Maher, Martin and Hawk, respectively. Holders of 6,373 shares, 17,651
shares, and 6,373 shares of common stock withheld their votes for Messrs. Maher,
Martin and Hawk, respectively
The stockholders ratified the appointment of KPMG LLP as Efficient's
independent auditors for the fiscal year ending June 30, 2000. Holders of
34,989,318 shares of common stock voted in favor of, holders of 1,462 shares of
common stock voted against, and holders of 1,752 shares of common stock
abstained from voting on, the ratification of the appointment of KPMG LLP as
Efficient's independent auditors.
Special Meeting. The stockholders approved the conversion of 6,300 shares
of preferred stock into 6,300,000 shares of common stock. The preferred stock
had been issued to Cabletron Systems, Inc. in December 1999 in connection with
Efficient's acquisition of FlowPoint Corp from Cabletron. Holders of 28,422,026
shares of common stock consented to the conversion of the preferred stock.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock began trading on the NASDAQ National Market System under
the symbol EFNT effective July 15, 1999. Prior to that date, there was no public
market for our common stock. The following table sets forth for the periods
indicated the high and low closing prices for the common stock for fiscal 2000,
as reported by NASDAQ:
<TABLE>
<CAPTION>
Fiscal Year Ending June 30, 2000 High Low
----------------------------------------------------------------- ----------- ------------
<S> <C> <C>
First quarter (beginning July 15, 1999 through Sept. 30, 1999)... $ 58.63 $36.00
Second quarter................................................... 82.50 34.00
Third quarter.................................................... 180.06 61.00
Fourth quarter................................................... 118.00 38.44
</TABLE>
As of September 1, 2000, there were 265 stockholders of record.
To date, we have not paid any cash dividends on our common stock. We
currently anticipate that we will retain any available funds to finance the
growth and operation of our business and we do not anticipate paying any cash
dividends in the foreseeable future. Certain present or future agreements may
limit or prevent the payment of dividends on our common stock.
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ITEM 6. SELECTED HISTORICAL CONDENSED FINANCIAL INFORMATION
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and are qualified by reference to the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Report. The statement
of operations data set forth below for the years ended June 30, 1998, 1999 and
2000, and the balance sheet data at June 30, 1999 and 2000, are derived from,
and are qualified by reference to, the audited Consolidated Financial Statements
of Efficient included elsewhere herein. The statement of operations data set
forth below for the years ended June 30, 1996 and 1997 and the balance sheet
data at June 30, 1996, 1997 and 1998 are derived from audited Consolidated
Financial Statements of Efficient not included herein.
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
--------- --------- ---------- --------- ---------
(in thousands, except per
share information)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net revenues................................. $ 3,687 $ 4,122 $ 3,370 $ 14,828 $ 202,203
Cost of revenues............................. 2,209 2,386 2,160 14,344 156,682
-------- -------- -------- -------- ----------
Gross profit................................. 1,478 1,736 1,210 484 45,521
-------- -------- -------- -------- ----------
Operating expenses:
Sales and marketing......................... 2,366 2,409 3,436 6,133 35,433
Research and development.................... 3,853 4,183 4,389 7,747 24,973
General and administrative.................. 1,082 1,245 1,641 1,993 9,384
Stock option compensation................... 198 659 1,165 3,116 4,908
Amortization of goodwill and other
intangible assets.......................... -- -- -- -- 100,431
In-process research and development......... -- -- -- -- 4,970
-------- -------- -------- -------- ----------
Total operating expenses.................. 7,499 8,496 10,631 18,989 180,099
-------- -------- -------- -------- ----------
Loss from operations......................... (6,021) (6,760) (9,421) (18,505) (134,578)
Interest and other income (expense), net..... 177 125 130 (7,900) 4,132
-------- -------- -------- -------- ----------
Net loss..................................... $ (5,844) $ (6,635) $ (9,291) $(26,405) $ (130,446)
======== ======== ======== ======== ==========
Basic and diluted net loss per share (1)..... $ (2.06) $ (2.19) $ (2.86) $ (6.87) $ (3.06)
======== ======== ======== ======== ==========
Weighted average shares (1).................. 2,838 3,027 3,254 3,893 42,629
======== ======== ======== ======== ==========
Consolidated Balance Sheet Data:
Cash and cash equivalents .................. $ 1,303 $ 3,413 $ 7,607 $ 3,604 $ 174,390
Working capital ............................ 2,619 4,370 7,870 12,563 602,727
Total assets ............................... 5,150 6,454 10,667 21,947 1,555,094
Redeemable convertible preferred stock ..... 16,155 23,635 34,743 40,495 --
Total stockholders' equity (deficit) ....... (11,643) (17,610) (25,374) (39,014) 1,081,949
</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.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, as well as the other
information included elsewhere in this prospectus.
Overview
We are a worldwide independent developer and supplier of high-speed DSL
customer premises equipment for the broadband access market. Our DSL solutions
enable telecommunications and other network service providers to provide high-
speed, cost-effective broadband access services over the existing copper wire
telephone infrastructure to both business and residential markets. We therefore
focus on developing and producing single- and multiple-user DSL customer
premises equipment for small- to medium-size businesses, branch offices of large
corporations and consumers. Our DSL products enable applications such as high-
speed Internet access, electronic commerce, remote access, telecommuting and
extensions of corporate networks to branch offices.
We were incorporated in June 1993. From inception through fiscal 1997, we
primarily focused on developing and selling ATM-based products for local area
network, or LAN, applications. ATM, or asynchronous transfer mode, is a widely-
used transmission technology that breaks data down into individual packets with
unique identification and destination addresses and may be used to transmit
data, voice and video within a network. During fiscal 1997 we began to leverage
our ATM, personal computing environment and networking expertise to develop DSL
modem products for high-speed Internet access. We have largely discontinued
further development efforts on our ATM LAN 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 99.5%
of our net revenues in fiscal 2000. We do not expect sales of our ATM LAN
products to represent a material portion of our revenues or business in future
periods.
We derive our revenues primarily from sales of our SpeedStream family of
DSL products. We sell our DSL products primarily to network service providers,
network equipment vendors and telephone company-aligned distributors. For the
fiscal year ended June 30, 2000, sales to SBC Communications represented 32.3%
of our net revenues, sales to Covad Communications represented 19.7% of our net
revenues, and sales to Hanaro Telecom represented 10.6% of our net revenues. For
the fiscal year ended June 30, 1999, sales to Covad Communications represented
29.6% of our net revenues, and sales to Soon Cabling Pte, Ltd. represented 17.5%
of our net revenues. Our top ten customers for the fiscal years ended June 30,
1999 and 2000 accounted for 82.3% and 89.1% of our net revenues, respectively.
We expect to continue to be dependent upon a relatively small number of large
customers in future periods, although the specific customers may vary from
period to period.
Since inception, a significant portion of our revenues has been derived
from customers located outside of the United States and we expect to continue to
depend upon international sales. Revenues derived from customers outside the
United States represented 41% of our net revenues in fiscal 1999 and 22% of our
net revenues for the fiscal year ended June 30, 2000. 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 to hire qualified personnel for these
operations.
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<PAGE>
To date, international sales have been denominated solely in U.S. dollars
and, accordingly, we have not been exposed to fluctuations in non-U.S. currency
exchange rates. In the future, a portion of our international sales may be
denominated in currencies other than U.S. dollars, which would then expose us to
gains and losses based upon exchange rate fluctuations.
Since introduction, gross margins on our DSL products have been below our
desired levels. The lower gross margins on our DSL products have been a result
of manufacturing start-up costs and aggressive customer pricing given to quickly
introduce products into the market. Recently our gross margins have improved as
a result of improved manufacturing efficiencies and component and product cost
reductions. While we are continuously focusing on cost reductions and other
measures to improve our gross margins, we cannot be certain that our gross
margins will continue to improve in future periods due to factors which 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 June 30, 2000, we had
an accumulated deficit of $184.6 million. Although our net revenues have grown
in recent quarters, we cannot be certain that our net revenues will increase at
a rate sufficient to achieve and maintain profitability.
For the fiscal years 1998, 1999 and 2000, we accrued an aggregate of $19.3
million in deferred stock option compensation. These amounts represent the
difference between the exercise price of certain stock options granted during
such periods and the deemed fair market value of our common stock at the time of
such option grants. We are amortizing the deferred stock option compensation
over the vesting periods of the applicable options, which is generally four
years. We amortized deferred stock option compensation in the amounts of $1.2
million, $3.1 million and $4.9 million in fiscal years 1998, 1999 and 2000,
respectively. We expect to amortize the remaining deferred stock option
compensation at the rate of approximately $1.0 million per quarter until fully
amortized.
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<PAGE>
Results of Operations
The following table sets forth, for the periods presented, certain data
from Efficient's consolidated statement of operations expressed as a percentage
of net revenues.
<TABLE>
<CAPTION>
1998 1999 2000
---------- --------- ---------
<S> <C> <C> <C>
Net revenues........................................ 100.0% 100.0% 100.0%
Cost of revenues.................................... 64.1 96.7 77.5
------- ------- ------
Gross profit........................................ 35.9 3.3 22.5
------- ------- ------
Operating expenses:
Sales and marketing................................ 102.0 41.4 17.5
Research and development........................... 130.2 52.2 12.4
General and administrative......................... 48.7 13.4 4.6
Stock option compensation.......................... 34.6 21.0 2.4
Amortization of goodwill and other intangible
assets............................................ -- -- 49.7
In-process research and development................ -- -- 2.5
------- ------- ------
Total operating expenses......................... 315.5 128.1 89.1
------- ------- ------
Loss from operations................................ (279.6) (124.8) (66.6)
Interest and other income (expense), net............ 3.9 53.3 2.0
------- ------- ------
Net loss............................................ (275.7)% (178.1)% (64.6)%
======= ======= ======
</TABLE>
Net Revenues
Net revenues consist of product sales, net of allowances for returns. Net
revenues increased 1,263.7% to $202.2 million in fiscal 2000 from $14.8 million
in fiscal 1999. Net revenues in fiscal 1999 reflected a 340.0% increase from the
$3.4 million realized in fiscal 1998. DSL product revenues increased from
$84,000 in fiscal 1998 to $12.9 million in fiscal 1999 and $201.2 million in
2000. The increases in DSL product revenues from fiscal 1998 to fiscal 2000
reflect the continued market adoption of our DSL products, which first became
available in the quarter ended March 31, 1998.
Cost of Revenues
Cost of revenues consists of amounts paid to third-party contract
manufacturers, manufacturing start-up expenses and the personnel and related
costs of our manufacturing operation. Cost of revenues increased 992.3% to
$156.7 million in fiscal 2000, from $14.3 million in fiscal 1999. This compares
to a 564.1% cost of revenues increase in fiscal 1999 as compared to the $2.2
million in fiscal 1998. The increase from fiscal 1999 to 2000 and the increase
from fiscal 1998 to fiscal 1999 reflect the substantial increase in DSL product
sales.
Gross margin represented 22.5% of net revenues in fiscal 2000, compared to
3.3% of net revenues in fiscal 1999 and 35.9% of net revenues in fiscal 1998.
Gross margin on our DSL products increased from a gross loss of 3.6% of the
related revenues in fiscal 1999 to a gross profit of 22.4% of the related
revenues for fiscal 2000. Our gross margin was higher in fiscal 2000, as
compared to fiscal 1999, due to lower production costs resulting from higher
sales volumes and manufacturing efficiencies. The fiscal 2000 net revenues and
gross margin amounts are not comparable to the 1999 amounts due to the shift
from ATM LAN products to DSL products. Included in cost of revenues for the
fiscal year ended June 30, 2000 are $1.0 million of one-time costs associated
with a change in our contract manufacturer. Excluding these one-time costs, the
gross margin for the fiscal year ended June 30, 2000
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<PAGE>
would have been 23.0%. Although we improved our gross margin in fiscal 2000,
gross margin continued to be adversely affected in fiscal 2000 by expedite and
other manufacturing start-up costs as well as aggressive pricing on our DSL
products as we sought to rapidly introduce products and capture market share. 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 also added
personnel to our manufacturing operations in anticipation of higher levels of
business going forward. We expect that we will continue to incur higher than
normal costs associated with the actions to bring our DSL products to market
quickly and meet customers' aggressive DSL deployment schedules. While our goal
is to improve our gross margin over the level achieved in fiscal 2000, there can
be no assurance that we will be successful in our efforts. The primary factors
that will determine the success of our efforts are the effectiveness of our cost
reduction efforts as well as pricing pressures in the market for DSL CPE.
In fiscal 2000, sales and related gross margins on our ATM LAN products
were not significant. In fiscal year 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 37.4% of related
revenues in fiscal 1998 to 49.5% in fiscal 1999. The period-to-period increase
in gross margins on our ATM LAN products was a result of manufacturing
efficiencies achieved with these more mature products. As sales of our ATM LAN
products continue to decline as a percentage of our total net revenues, any
benefit of manufacturing efficiencies, cost reduction or other gross margin
improvements in those products will have a diminishing beneficial effect on our
overall gross margins.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries,
commissions and benefits, and advertising, promotional materials and trade show
exhibit expenses. Sales and marketing expenses increased 477.7% from $6.1
million in fiscal 1999 to $35.4 million in fiscal 2000. This compares to an
increase of 78.5% in fiscal 1999 over the $3.4 million recorded in fiscal 1998.
The increases in sales and marketing expenses in absolute amount from fiscal
1998 through fiscal 2000 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 102.0% of net revenues in fiscal
1998, 41.4% in fiscal 1999, and 17.5% in fiscal 2000. The decrease in sales and
marketing expenses as a percentage of net revenues from fiscal 1998 through
fiscal 2000 was a result of the rapid increase in DSL revenues. We expect sales
and marketing expenses to increase in dollar amount in future periods as we
continue to expand our domestic and international sales and marketing
organization.
Research and Development Expenses
Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts, including third-
party consulting and prototyping costs. Research and development expenses
increased 222.4% from $7.7 million in fiscal 1999 to $25.0 million in fiscal
2000. This compares to an increase of 76.5% in fiscal 1999 over the $4.4 million
recorded in fiscal 1998. 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
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<PAGE>
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. We received no such reimbursements in the fiscal 1999 and
2000 periods. Research and development expenses represented 130.2% in fiscal
1998, 52.2% in fiscal 1999, and 12.4% in fiscal 2000. The decreases from 1998 to
2000 in research and development expenses as a percentage of net revenues was a
result of the rapid increase in DSL revenues. We expect research and development
expenses to increase in dollar amount in future periods as we continue to expand
our research and development organization to develop new products and
technologies.
General and Administrative Expenses
General and administrative expenses consist primarily of employee salaries
and related expenses for executive, administrative and accounting personnel,
facility costs, insurance costs and professional fees. General and
administrative expenses increased 370.8% from $2.0 million in fiscal 1999 to
$9.4 million in fiscal 2000. This compares to an increase of 21.5% in fiscal
1999 over the $1.6 million recorded in fiscal 1998. The increases in absolute
amount of general and administrative spending from period to period were
primarily a result of increases in headcount associated with building our
infrastructure. General and administrative expenses represented 48.7% of net
revenues in fiscal 1998, 13.4% in fiscal 1999, and 4.6% in fiscal 2000. The
decrease in general and administrative expenses as a percentage of net revenues
from fiscal 1998 through fiscal 2000 reflects the rapid increase in DSL revenues
during these periods. 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. For the fiscal years ended June 30, 1998, 1999 and
2000, we recorded aggregate deferred stock option compensation of $3.1 million,
$13.1 million, and $3.1 million respectively in connection with stock option
grants. Amortization of deferred stock option compensation was $1.2 million in
fiscal 1998, $3.1 million in fiscal 1999, and $4.9 million in fiscal 2000. We
expect to amortize the deferred stock option compensation at the rate of
approximately $1.0 million per quarter until fully amortized. See Note 12 of
Notes to Consolidated Financial Statements for a discussion of our deferred
stock option compensation. Prior to our initial public offering in July 1999,
there was no market for our common stock, and option prices were determined by
the board of directors based upon numerous factors. Upon review in connection
with our initial public offering, it was determined that the fair market value
on the date of grant of certain options was higher than originally determined by
the board of directors. Beginning with our initial public offering, we generally
price options based upon the public market price of our common stock at the date
of option grant. In some circumstances, we may price options as of the date an
employee joins Efficient, which can result in a stock option compensation
expense to the extent that the fair market value on the date of grant is greater
than the fair market value on the employee's start date.
Interest Income and Interest Expense and Other, Net
Interest income consists primarily of interest earned on cash and cash
equivalents and short-term investments. Interest income increased in fiscal 2000
compared to fiscal 1999 and 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, the follow-on public offering on February 8,
2000, and the
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<PAGE>
placement of convertible subordinated notes on March 7, 2000. Interest expense
consists primarily of interest incurred on the convertible subordinated notes,
as well as interest on capital lease obligations.
On March 7, 2000 we issued $400 million of convertible subordinated notes
due March 15, 2005. The notes bear interest at an annual rate of 5%. The notes
are convertible at any time prior to maturity into shares of common stock at a
conversion price of $181.00 per share. The notes are redeemable on or after
March 20, 2003 at 101.25% during the period beginning on March 20, 2003 and
ending on March 14, 2004, and at 100.00% beginning on March 15, 2004 and
thereafter. Issuance costs of $12.6 million, which are included as a deferred
charge in other assets, are being amortized over the term of the notes. Interest
expense in fiscal 2000 relates primarily to the subordinated convertible notes
and capital lease obligation commitments issued in fiscal 2000.
In the second half of fiscal 1999, we borrowed $9.0 million from certain
investors. These notes carried an interest rate of 10% per year, and were
payable on the earlier of January 2002 or the completion of an initial public
offering. In connection with these notes, we issued the investors warrants to
purchase 3,082,191 shares of Series H preferred stock at an exercise price of
$2.92 per share. The proceeds were allocated between the notes and the warrants
based on their pro rata fair values resulting in a discount. The discount was
amortized as interest expense over six months, which represented the expected
terms of the promissory notes. The promissory notes converted into preferred
stock which then converted into common stock upon completion of our initial
public offering in July, 1999. 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. In future periods we
expect interest income and interest expense and other, net to vary depending
upon changes in the amount and mix of interest-bearing investments outstanding
during each period.
Income Taxes
From inception through June 30, 2000, we incurred net losses for federal
and state tax purposes and have not recognized any tax provision or benefit. As
of June 30, 2000, we had approximately $79.3 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 15 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the sale
of preferred equity securities and, beginning in the second half of fiscal 1999,
through borrowings from our investors and others. Since inception through June
30, 2000, net of transaction expenses, we have raised an aggregate of $40.4
million from the private sale of equity securities, $245.9 million from the
public sale of equity securities, and an additional $414.0 million through loan
transactions, as more fully described below.
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<PAGE>
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 our initial public offering, our then outstanding promissory
notes converted into redeemable convertible preferred stock, and all then
outstanding redeemable convertible preferred stock converted into 28.3 million
shares of common stock. On February 8, 2000, we completed a follow-on public
offering. We issued 2.8 million shares of common stock and raised $182.8 million
in net proceeds. On March 7, 2000, we completed the private placement of $400
million of convertible subordinated notes. Issuance costs of $12.6 million are
being amortized over the term of the notes.
At June 30, 2000, we had cash and cash equivalents and highly liquid short-
term investments of $501.1 million. At June 30, 2000, we did not have a line of
credit or other borrowing facility available. Lease commitments include a lease
for office space, furniture and equipment for our new corporate headquarters in
Dallas, Texas. The office lease commenced in January 2000 and expires in 2010
with annual lease payments of approximately $2.7 million. The furniture and
equipment lease commenced in February 2000 and expires in 2003 with annual lease
payments of approximately $1.0 million.
Cash used in operating activities in fiscal 2000 was $145.8 million. Cash
used in operating activities was $23.4 million in fiscal 1999 and $6.6 million
in fiscal 1998. Cash used in operating activities has primarily represented
increases in inventories, receivables, and an inventory deposit in fiscal 2000.
In June 2000, we advanced $50 million to ACT Manufacturing to finance the
purchase of raw materials for products to be manufactured by ACT Manufacturing
for us. See Note 6 of Notes to Consolidated Financial Statements.
Cash used in investing activities in fiscal 2000 was $331.3 million. $325.7
million of cash was used, net of proceeds from sales and maturities, to purchase
highly liquid short-term investments, and $17.6 million of cash was used to
purchase fixed assets, which was offset by cash received of $10.9 million and
$1.2 million in connection with the acquisitions of FlowPoint Corporation and
Network TeleSystems, Inc., respectively. Cash used for investing activities was
$1.7 million in fiscal 1999 and $572,000 in fiscal 1998 for purchases of fixed
assets. In each of the fiscal years 2000, 1999 and 1998 purchases of fixed
assets 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 in fiscal 2000 was $647.8 million,
consisting of funds raised from our initial and follow-on public offerings of
common stock on July 15, 1999 and February 8, 2000, respectively, as well as the
private placement of $400 million of convertible subordinated notes on March 7,
2000. Cash provided by financing activities was $21.1 million in fiscal 1999 and
$11.4 million in fiscal 1998. See Notes to Consolidated Financial Statements for
a description of the loan and equity transactions. In fiscal 1999 and 1998,
financing activities consisted primarily of the private placement of redeemable
convertible preferred stock, and borrowings from our investors.
Our future capital requirements will depend upon a number of factors,
including the timing and level of research and development activities and sales
and marketing campaigns. We believe that our cash and cash equivalents and
short-term investments will provide sufficient capital to fund our operations at
least through the end of fiscal 2001. Thereafter, we may require additional
capital to fund our business. In addition, from time to time we evaluate
opportunities to acquire complementary technologies or companies. Should we
identify any such opportunities, we may need to raise additional capital to fund
the acquisitions. There can be no assurance that financing will be available to
us when we need it on favorable terms or at all.
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<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives
and Hedging Activities," ("SFAS No. 133") as amended by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended, is effective for fiscal years
beginning after June 15, 2000. The adoption of Statement of Financial Accounting
Standards No. 133 is not expected to have a material effect on our results of
operations, financial position or cash flows as we do not currently hold
derivative instruments or engage in hedging activities.
FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - an Interpretation of APB Opinion No. 25" ("FIN
44") in March 2000. Among other issues, this interpretation clarifies the
definition of employee for purposes of applying APB Opinion No. 25, "Accounting
for Stock Issued to Employees," the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequence of various
modifications to the terms of previously fixed stock options or awards and the
accounting for an exchange of stock compensation awards in a business
combination. The Interpretation is effective July 1, 2000, but certain
conclusions in the Interpretation cover specific events that occurred after
either December 15, 1998 or January 12, 2000. Management believes that FIN 44
will not have a material effect on our financial position and consolidated
results of operations upon adoption.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the staff's views in applying general accepted accounting principles
to revenue recognition and accounting for deferred costs in the financial
statements. The accounting and disclosure requirements of SAB 101 will be
effective for Efficient in the fourth quarter of fiscal year 2001. The SEC staff
are expected to issue additional interpretive guidance for the application of
SAB 101 in the near future. Based on our current revenue recognition policies,
and our current understanding of the requirements of SAB 101, we do not expect
the adoption of SAB 101 to materially impact our consolidated financial position
and results of operations.
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 June 30, 2000, we had short-term investments of $466.1 million, of
which $139.4 million is classified as cash equivalents as it is comprised 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 June 30, 2000 rates would
cause the fair value of these short-term investments to change by an
insignificant amount. We have the ability to hold these investments until
maturity, and therefore we do not expect the value of these investments to be
affected to any significant degree by the effect of a sudden change in market
interest rates. Declines in interest rates over time will, however, reduce our
interest income. At June 30, 2000 we did not own any equity investments in
marketable securities. Therefore, we did not have any direct equity price risk.
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Substantially all of our revenues are realized currently in U.S. dollars.
In addition, we do not maintain significant asset or cash account balances in
currencies other than the United States dollar. Therefore, we do not believe
that we currently have any significant direct foreign currency exchange rate
risk.
Factors Affecting Future Results and Stock Price
Risks Associated With the Digital Subscriber Line Industry
Sales of our products depend on the widespread adoption of broadband access
services and if the demand for broadband access services does not continue to
expand, then our results of operations and financial condition would be
adversely affected.
Our business would be harmed, and our results of operations and financial
condition would be adversely affected, if the use of broadband access services
does not increase as anticipated, or if our customers' broadband access services
are not well received in the marketplace. Certain critical factors will likely
continue to affect the development of the broadband access services market.
These factors include:
. quality and reliability of service;
. availability of cost-effective, high-speed service;
. ability to integrate business applications on the Internet;
. interoperability among multiple vendors' network equipment;
. congestion in service providers' networks;
. security concerns; and
. ability to meet growing demands for increasing bandwidth.
Even if these factors are adequately addressed, the market for broadband
access services to the Internet and corporate networks may fail to develop or
may develop more slowly than anticipated. If this market fails to develop or
develops more slowly than anticipated, our business would be harmed, and our
results of operations and financial condition would be adversely affected.
Many competing technologies serve our target market. If the DSL technology
upon which our products are based does not succeed as a technological solution
for broadband access, we would not be able to sustain or grow our business.
The market for high-speed data transmission services has several competing
technologies which offer alternative solutions, and the demand for DSL services
is uncertain in light of this competition. Technologies which compete with DSL
are:
. other access solutions provided by telephone network service
providers such as dial-up analog modems, integrated services
digital networks (ISDN) and T1 services;
. broadband wireless technologies; and
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<PAGE>
. broadband cable technologies.
The introduction of new products based on these or alternative technologies
or the emergence of new industry standards could render our products less
competitive or obsolete. If any of these events occur, we would be unable to
sustain or grow our business.
If these alternatives gain market share at the expense of DSL technologies,
demand for our products would be reduced, and we would be unable to sustain or
grow our business. Additionally, wireless and cable network service providers
are well funded, and cable network service providers have large existing
customer bases. As a result, competition from these companies is intense and
expected to increase.
We depend upon network service providers to deploy DSL services in a broad
and timely manner, and if they do not, we would be unable to sell our products.
We sell our products to network service providers who in turn sell them to
end users in connection with the service provider's deployment of DSL services.
If the network service providers fail to deploy DSL services, we would be unable
to sell our products as anticipated, if at all. Factors that impact deployments
include:
. a prolonged approval process, including laboratory tests,
technical trials, marketing trials, initial commercial deployment
and full commercial deployment;
. the development of a viable business model for DSL services,
including the capability to market, sell, install and maintain
DSL services;
. cost constraints, such as installation costs and space and power
requirements at the network service providers' central offices;
. varying and uncertain conditions of the installed copper wire,
including size and length, electrical interference, and crossover
interference with voice and data telecommunications services;
. problems of interoperability among DSL network equipment vendors'
products;
. evolving industry standards for DSL technologies; and
. domestic and foreign government regulation.
Risks Within the DSL Industry
Competition within the DSL market is intense and includes numerous, well
established competitors. If we are unable to compete effectively, our business
would be harmed.
Competition in the DSL customer premises equipment market is intense, and
we expect competition to increase. Many of our competitors and potential
competitors have substantially greater name recognition and technical, financial
and marketing resources than we have. In addition, many of our competitors are
able to offer their customers a range of products of which customer premises
equipment is only one element. Our customers may prefer to purchase from fewer
vendors, and may therefore favor competitors with broader product offerings. If
we are unable to compete successfully, our business will be harmed and our
results of operations and financial condition would be adversely
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affected. We cannot assure you that we will have the financial resources,
technical expertise or marketing, distribution and support capabilities to
compete successfully.
Competitive pressures could adversely affect us in the following ways:
. reduce demand for our products if customers shift their
purchasing to competitors; or
. cause us to reduce prices on our existing or future products and
thereby adversely affect our gross margins.
Our failure to enhance our existing products or to develop and introduce
new products that meet changing customer requirements and emerging industry
standards would adversely impact our ability to sell our products.
The market for high-speed broadband access is characterized by rapidly
changing customer demands and short product life cycles. If our product
development and enhancements take longer than planned, the availability of our
products would be delayed. Any such delay could adversely impact our ability to
sell our products and our results of operations and financial condition would be
adversely affected. Our future success will depend in large part upon our
ability to:
. identify and respond to emerging technological trends in the
market;
. develop and maintain competitive products that meet changing
customer demands;
. enhance our products by adding innovative features that
differentiate our products from those of our competitors;
. bring products to market on a timely basis;
. introduce products that have competitive prices; and
. respond effectively to new technological changes or new product
announcements by others.
Our current products are not interoperable with certain products offered by
suppliers to our customers and are subject to evolving industry standards. If
our products do not interoperate with our target customers' networks or an
industry standard that achieves market acceptance, customers may refuse to
purchase our products.
In some cases, network equipment vendors, such as Cisco Systems, Inc., sell
to our target customers proprietary or unique systems with which our products
will not function. In these cases, potential customers that have purchased
network equipment that does not function with our DSL customer premises
equipment will not purchase our products for those incompatible networks.
Also, the emergence of new industry standards, whether through adoption by
official standards committees or widespread use by our target customers, could
require us to redesign our products. If such standards become widespread and our
products do not meet these standards, our product sales would decrease, and our
business would be harmed. Additionally, the adoption of new standards increases
the risk that competitors could more easily develop products that directly
compete with our products, which could result in greater competition and pricing
pressure.
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We may not be able to produce sufficient quantities of our DSL products
because we depend on third-party manufacturers. If these manufacturers fail to
produce our products in a timely manner, our ability to fulfill our customer
orders would be adversely impacted.
We rely upon third parties to manufacture our products and we expect this
to continue in the future. In particular, ACT Manufacturing manufactures the
majority of our products. In June, 2000 we advanced ACT Manufacturing $50
million against future production of our products. If ACT Manufacturing fails to
produce products for us we may lose all or part of the $50 million advance.
In addition, our success depends, in significant part, on our third party
manufacturers to produce our products in a cost-effective manner and in
sufficient quantities to meet demand. There are a number of risks associated
with relying on third-party manufacturers, including the following:
. reduced control over delivery schedules;
. reduced control over quality and quality assurance; and
. reduced control over manufacturing yields and costs.
We have no long-term contracts or arrangements with any of our vendors that
guarantee product availability, the continuation of particular payment terms or
the extension of credit limits. The competitive dynamics of our market require
us to obtain components at favorable prices, but we may not be able to obtain
additional volume purchase or manufacturing arrangements on terms that we
consider acceptable, if at all. If we enter into a high-volume or long-term
supply arrangement and subsequently decide that we cannot use the products or
services provided for in the agreement, our business would also be harmed.
We may not be able to produce sufficient quantities of our products because
we obtain certain key components from, and depend on, certain sole-source
suppliers. If we are unable to obtain these sole-source components, we would not
be able to ship our products in a timely manner and our relationships with our
customers could be harmed.
We obtain certain parts, components and equipment used in our products from
sole sources of supply. For example, we obtain certain semiconductor chipsets
from Alcatel Microelectronics, Motorola, Inc., Analog Devices, Inc., Texas
Instruments Incorporated, and Conexant Systems, Inc. We also rely on Texas
Instruments Incorporated, Samsung Semiconductor Inc., and VLSI Technology, Inc.
to manufacture our application specific integrated circuits.
Although we have agreements with many of these component providers, these
agreements do not require the vendors to meet our supply demands. In recent
periods we have experienced difficulties in obtaining adequate supplies of
certain components, particularly chipsets from Alcatel and Motorola. In
addition, certain standard components, such as flash memory, have been in short
supply and, as a result, have not always been available to us in our desired
quantities and time frames and/or have been more expensive than anticipated.
Although these difficulties have not resulted in revenue shortfalls in
prior periods, they have lead to higher costs and to extended delivery times for
customer orders. In future periods, we could continue to experience component
supply difficulties which could continue to result in higher than anticipated
costs, extended delivery cycles and, if sufficiently severe, could cause our
revenues to fail to meet analyst expectations. Moreover, to the extent that we
experience component supply difficulties and our
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competitors do not, our customers may elect to move their business to a
competitor in order to ensure timely delivery. Recapturing any business lost due
to delayed deliveries may be difficult or impossible. Any of these outcomes
could harm our business.
We may be subject to product returns and product liability claims resulting
from defects in our products. Product returns and product liability claims could
result in the failure to attain market acceptance of our products and harm our
business.
Our products are complex and may contain undetected defects, errors or
failures. The occurrence of any defects, errors or failures could result in
delays in installation, product returns and warranty claims beyond that for
which we have established reserves. Any of these occurrences could also result
in the loss of or delay in market acceptance of our products, either of which
would harm our business and adversely affect our operating results and financial
condition.
Although we have not experienced any material product liability claims to
date, the sale and support of our products entail the risk of these claims. A
successful product liability claim brought against us could be expensive, divert
the attention of management from ordinary business activities and,
correspondingly, harm our business.
Risks That May Cause Financial Fluctuations
We have incurred net losses since our inception and expect future losses.
Accordingly, we may not be able to achieve profitability, and even if we do
become profitable, we may not be able to sustain profitability.
Due to our limited operating history and our history of losses, we may
never be able to achieve profitability, and even if we do, we may not be able to
remain profitable. To achieve profitable operations on a continuing basis, we
must successfully design, develop, test, manufacture, introduce, market and
distribute our products on a broad commercial basis.
In addition to the foregoing, in connection with our acquisition of
FlowPoint Corporation in December 1999, we recorded approximately $925.4 million
of intangible assets which we are amortizing at the rate of approximately $185.2
million per year over a five year period. In connection with the acquisition of
Network TeleSystems, Inc. in May 2000, we recorded approximately $17.9 million
of intangible assets which we are amortizing at the rate of approximately $3.6
million per year over a five year period. This goodwill amortization will
adversely affect operating results. Therefore, even if we achieve positive cash
flow from operations, we expect to continue to be unprofitable for a significant
additional period.
Our ability to become operationally profitable will depend on a number of
factors, many of which are beyond our control. These factors include:
. the rate of market acceptance of DSL broadband access in general and
the demand for our products in particular;
. our ability to reduce the manufacturing and component costs of our
products;
. the competitive environment for DSL customer premises equipment and
the rate at which the prices that we are able to command for our
products may decline; and
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. our ability to achieve manufacturing and operational efficiencies as
we grow our operations.
Due to these factors, we cannot forecast with any degree of accuracy when
or if we will become operationally profitable or, if we achieve such
profitability, that we would be able to sustain it.
We have a short operating history and, as a result, it is difficult to
predict our future results of operations.
We have a short operating history upon which to evaluate our business. We
first commenced product shipments in August 1994 and did not introduce DSL
products until March 1998. Due to our limited operating history, it is difficult
or impossible for us to predict future results of operations. You should not
expect future revenue growth to be comparable to our recent revenue growth. In
addition, we believe that comparing different periods of our operating results
is not meaningful, and you should not rely on the results for any period as an
indication of our future performance. Investors in our common stock must
consider our business and prospects in light of the risks and difficulties
typically encountered by companies in their early stages of development,
particularly those in rapidly evolving markets such as ours.
If sales forecasted for a particular period are not realized in that period
due to the lengthy sales cycle of our products, our operating results for that
period would be adversely affected.
If we fail to realize forecasted sales for a particular period, our
operating results would be adversely affected and our stock price would likely
decline and could decline significantly. The sales cycle of our products is
typically lengthy and involves:
. a significant technical evaluation;
. delays associated with network service providers' internal
procedures to commit to a particular product line offering and
approve large capital expenditures;
. time required to deploy new technologies within service providers'
networks; and
. testing and acceptance of new technologies.
For these and other reasons, a sale of our products generally requires six
to twelve months to complete. Furthermore, the announcement and projected
implementation of new standards may affect sales cycles, as network service
providers may choose to delay large-scale deployment of DSL services until
compliant products are available.
Our product cycles tend to be short, and we may incur substantial non-
recoverable expenses or devote significant resources to sales that do not occur
when anticipated.
In the rapidly changing technology environment in which we operate, product
cycles tend to be short. Therefore, the resources we devote to product sales and
marketing may not generate material revenues for us, and from time to time we
may need to write off excess and obsolete inventory. If we incur substantial
sales, marketing and inventory expenses in the future that we are not able to
recover, and we are not able to compensate for such expenses, our operating
results would be adversely affected. In addition, if we sell our products at
reduced prices in anticipation of cost reductions and we still have higher cost
products in inventory, our business would be harmed, and our results of
operations and financial condition would be adversely affected.
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Our operating results in one or more future periods are likely to fluctuate
significantly and may fail to meet the expectations of securities analysts or
investors, causing our stock price to decline.
Our operating results are likely to fluctuate significantly in the future
on a quarterly and an annual basis due to a number of factors, many of which are
outside our control. If our operating results do not meet the expectations of
securities analysts or investors, our stock price is likely to decline,
potentially dramatically. We cannot assure you that this will not occur because
of the numerous factors that could cause our revenues and costs to fluctuate.
These factors include the following:
. the timing and size of sales;
. announcements of new products and product enhancements by
competitors;
. the entry of new competitors into our market, including by
acquisition;
. unexpected delays in introducing new or enhanced products, including
manufacturing delays;
. the mix and average selling prices of the products we sell;
. the volume and average cost of products manufactured; and
. the effectiveness of our product cost reduction efforts.
Our customer base is concentrated, and the loss of one or more of our
customers could harm our business.
Because DSL service relies upon existing telephone lines to reach end
users, a substantial majority of potential DSL end-user accounts in the U.S. and
in other countries are controlled by a relatively small number of network
service providers. If we are not successful in maintaining relationships with
these few network service providers and the network equipment vendors that
supply them, our business will be harmed.
Although deregulation and increasing competition are expanding our
potential customer base, a small number of customers has accounted for a large
portion of our revenues to date. We sell our DSL products primarily to network
service providers, network equipment vendors and telephone company-aligned
distributors. We expect to continue to be dependent upon a relatively small
number of large customers in future periods, although the specific customers may
vary from period to period. If we are not successful in maintaining
relationships with key customers, and winning new customers, our business would
be harmed.
We derive a substantial amount of our revenues from international sources,
and difficulties associated with international operations could harm our
business.
Since inception, a significant portion of our revenues has been derived
from customers located outside of the United States, and we expect to continue
to depend on international sales. Revenues derived from customers located
outside of the United States represented 52% of our net revenues in fiscal 1998,
41% of our net revenues in fiscal 1999 and 22% of our net revenues in fiscal
2000. We believe that our continued growth and ability to attain and maintain
profitability will require us to continue to
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penetrate international markets. If we are unable to successfully overcome the
difficulties associated with international operations and maintain and expand
our international operations, our business would be harmed. These difficulties
include:
. difficulties staffing and managing foreign operations in our highly
technical industry;
. changes in regulatory requirements which are common in the
telecommunications industry;
. licenses, tariffs and other trade barriers imposed on products such
as ours;
. political and economic instability especially in Asia and the
Pacific;
. potentially adverse tax consequences;
. difficulties obtaining approvals for products from foreign
governmental agencies which regulate networks;
. compliance with a wide variety of complex foreign laws and treaties
relating to telecommunications equipment; and
. delays or difficulties collecting accounts receivable from foreign
entities that are not subject to suit in the United States.
To date, our international sales and component purchases have been
denominated solely in U.S. dollars and, accordingly, we have not been exposed to
fluctuations in non-U.S. currency exchange rates. In the future, a portion of
our international sales may be denominated in currencies other than U.S.
dollars, which would expose us to gains and losses based upon exchange rate
fluctuations. Such gains and losses may contribute to fluctuations in our
operating results.
Risks That May Affect Our Ability to Execute Our Business Plans
Our business could be adversely affected if we do not adequately address
the risks associated with acquired technologies or companies.
As part of our business strategy, we expect to continue to review potential
acquisitions that could complement our current product offerings, augment our
market coverage or enhance our technical capabilities, or that may otherwise
offer growth opportunities. In December 1999, we acquired FlowPoint Corporation,
and, in May 2000, we acquired Network Telesystems, Inc. In connection with
future acquisitions, we could issue equity securities that would dilute our
current stockholders' percentage ownership, incur substantial debt, or assume
contingent liabilities. Such actions by us could seriously harm our results of
operations and/or the price of our common stock. Acquisitions also entail
numerous other risks which could adversely affect our business, results of
operations and financial condition, including:
. difficulties in assimilating acquired operations, technologies or
products;
. unanticipated costs or capital expenditures associated with the
acquisition;
. acquisition-related charges and amortization of acquired technology
and other intangibles that could negatively affect our reported
results of operations;
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. diversion of management's attention from our business;
. adversely affect existing business relationships with suppliers and
customers; and
. failure to successfully integrate these businesses, products,
technologies and personnel.
We rely on indirect distribution channels and strategic relationships to
sell and manufacture our products, and if we are not able to maintain existing
and develop additional strategic relationships and indirect distribution
channels, our business would be harmed.
Our business strategy relies on our strategic relationships with network
equipment vendors, network service providers, and suppliers of DSL technology.
If our existing relationships are not successful or our competitors are better
able to develop these relationships, our business would be harmed. End users
typically purchase DSL customer premises equipment from network service
providers, and network service providers may purchase DSL customer premises
equipment from independent network equipment vendors and distributors. We
typically work closely with our potential customers and suppliers to ensure
interoperability of products with customer networks and of components with our
DSL customer premises equipment. In addition, we rely on our strategic
relationships with telephone company-aligned distributors in order to broaden
our distribution network. Also, larger vendors of DSL customer premises
equipment may be able to leverage their size and established distribution
channels to gain a significant competitive advantage over us. We cannot assure
you that we will be able to maintain or expand our existing strategic
relationships or that we will be able to establish new relationships in the
future.
We continue to rapidly and significantly expand our operations and we may
engage in future acquisitions that dilute our stockholders, cause us to incur
debt and assume contingent liabilities, and, our failure to manage this growth
could harm our business and adversely affect our results of operations and
financial condition
We have rapidly and significantly expanded our operations, including the
number of our employees, the geographic scope of our activities and our product
operations. We expect that further significant expansion will be required to
address potential growth in our customer base and market opportunities. Any
failure to manage growth effectively could harm our business and adversely
affect our operating results and financial condition. We cannot assure you that
we will be able to do any of the following, which we believe are essential to
successfully manage the anticipated growth of our operations:
. improve our existing and implement new operational, financial and
management information controls, reporting systems and procedures;
. hire, train and manage additional qualified personnel;
. expand and upgrade our core technologies; and
. effectively manage multiple relationships with our customers,
suppliers and other third parties.
In the future, we may also experience difficulties meeting the demand for
our products. The installation and use of our products require training. If we
are unable to provide training and support for our products, more time may be
necessary to complete the implementation process and customer
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satisfaction may be adversely affected. In addition, our suppliers may not be
able to meet increased demand for our products. We cannot assure you that our
systems, procedures or controls will be adequate to support the anticipated
growth in our operations.
Competition for qualified personnel in the networking equipment and
telecommunications industries is intense, and if we are not successful in
attracting and retaining these personnel, our business would be harmed.
Our future success will depend on the ability of our management to operate
effectively, both individually and as a group. Therefore, the future success of
our business will also depend on our ability to attract and retain high-caliber
personnel. The loss of the services of any of our key personnel, the inability
to attract or retain qualified personnel in the future, or delays in hiring
required personnel, particularly engineers, could harm our business.
Because competition for qualified personnel in the networking equipment and
telecommunications industries is intense, we may not be successful in attracting
and retaining such personnel. We are seeking to hire a significant number of
additional personnel in the near future, including direct sales and marketing
personnel. There may be only a limited number of people with the requisite
skills to serve in those positions, and it may become increasingly difficult to
hire these people. In addition, we are actively searching for research and
development engineers, who also are in short supply. Our business will be harmed
if we encounter delays in hiring additional engineers. Furthermore, competitors
and others have in the past and may in the future attempt to recruit our
employees. We do not have employment contracts with any of our key personnel.
The loss of the services of one or more of our executive officers or key
employees could harm our business.
Our executive officers and certain key sales, engineering and management
personnel may not remain with us in the future. Our executive officers and key
personnel and in particular Mark A. Floyd, our President and Chief Executive
Officer, and Patricia W. Hosek, our Executive Vice President of Product
Operations, are critical to our business and its future success. If we lost the
services of one or more of our executive officers or key employees, we would
need to devote substantial resources to finding replacements, and until
replacements were found, we would be operating without the skills or leadership
of such personnel, either of which could have a significant adverse effect on
our business. None of our officers or key employees is bound by agreements for
any specific employment term or covenants not to compete.
Our future success will depend in part on our ability to protect our
proprietary rights and the technologies used in our principal products, and if
we do not enforce and protect our intellectual property or if others bring
infringement claims against us, our business would be harmed.
We rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights. However, these measures afford only limited protection.
Our failure to adequately protect our proprietary rights may adversely affect
us. Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary.
From time to time, third parties, including our competitors, have asserted
patent, copyright and other intellectual property rights to technologies that
are important to us. For example, we have received
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a letter from IBM indicating that they hold patents on certain aspects of DSL
technology, and urging us to begin negotiating a license to the patent. We are
evaluating the IBM patents, and have not yet determined whether to seek a
license. Even if we elect to pursue a license from IBM, there can be no
assurances we would find the license terms acceptable. We expect that we will
increasingly be subject to infringement claims as the number of products and
competitors in the high-speed data access market grows and the functionality of
products overlaps.
Litigation of intellectual property rights can be expensive and require
significant management time and attention, even if ultimately successful.
Moreover, in the event of an adverse result in any future litigation with third
parties relating to proprietary rights, we could be required:
. to pay substantial damages, including treble damages if we are held
to have willfully infringed;
. to halt the manufacture, use and sale of infringing products;
. to expend significant resources to develop non-infringing
technology; or
. to obtain licenses to the infringing technology, if available.
Our products and those of our customers are subject to government
regulations, and changes in current or future laws or regulations that
negatively impact our products and technologies could harm our business.
The jurisdiction of the Federal Communications Commission, or the FCC,
extends to the entire communications industry including our customers and their
products and services that incorporate our products. Future FCC regulations
affecting the broadband access services industry, our customers or our products
may harm our business. For example, FCC regulatory policies that affect the
availability of data and Internet services may impede our customers' penetration
into certain markets or affect the prices that they are able to charge. In
addition, international regulatory bodies are beginning to adopt standards for
the communications industry. Delays caused by our compliance with regulatory
requirements may result in order cancellations or postponements of product
purchases by our customers, which would harm our business and adversely affect
our results of operations and financial condition.
Additional Risks That May Affect Our Stock Price
Certain provisions of our charter documents may make acquiring control of
our company more difficult for a third party, which could adversely affect our
stock's market price or lessen any premium over market price that an acquirer
might otherwise pay.
Our charter documents contain provisions providing for a classified board
of directors, eliminating cumulative voting in the election of directors and
restricting our stockholders from acting without a meeting. These provisions may
make certain corporate actions more difficult and might delay or prevent a
change in control and therefore limit the price that new investors will pay for
our stock. Further, the board of directors may issue new shares of preferred
stock with certain rights, preferences, privileges and restriction, including
voting rights, without any vote by our stockholders. Our existing stockholders
may be adversely affected by the rights of this preferred stock. New preferred
stock might also be used to make acquiring control more difficult. We have no
current plans to issue shares of preferred stock. We will also indemnify
officers and directors against losses incurred in legal proceedings to the
broadest extent permitted by Delaware law.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Consolidated Financial Statements set forth on pages F-1 through F-24 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers, and directors of Efficient as of June 30, 2000.
<TABLE>
<CAPTION>
Name Age Position
-------------------------------------------- ---- ------------------------------------------------
<S> <C> <C>
Mark A. Floyd............................... 44 Chairman of the Board, Chief Executive Officer
and President
James A. Hamilton........................... 36 Executive Vice President of Sales and Marketing
Patricia W. Hosek........................... 38 Executive Vice President of Product Operations
Gregory L. Langdon.......................... 40 Executive Vice President of Product Strategy
Jill S. Manning............................. 37 Vice President and Chief Financial Officer
Kenneth M. Siegel........................... 42 Vice President and General Counsel
Bruce W. Brown.............................. 49 Director
James P. Gauer.............................. 47 Director
Robert C. Hawk.............................. 59 Director
Robert A. Hoff.............................. 46 Director
Anthony T. Maher............................ 53 Director
William L. Martin III....................... 52 Director
Thomas H. Peterson.......................... 43 Director
</TABLE>
Mark A. Floyd co-founded Efficient in June 1993 and has served as
President, Chief Executive Officer and a director of Efficient since its
inception. Prior to founding Efficient, from June 1991 to July 1993, Mr. Floyd
was Chief Operating Officer and a director of Networth, Inc., a provider of LAN
products including Ethernet hubs, switches and network interface cards. From May
1984 to June 1991, Mr. Floyd held the positions of Executive Vice President,
Chief Financial Officer and director of Interphase Corporation, a provider of
enterprise server connectivity solutions for high-speed LAN, high capacity
storage and remote access applications. Mr. Floyd holds a B.B.A. in Finance from
the University of Texas at Austin.
James A. Hamilton joined Efficient in November 1999 as Vice President and
General Manager of Small and Medium Business (Business Unit). In July 2000, Mr.
Hamilton was promoted to Executive Vice President of Sales and Marketing. From
August 1998 to October 1999, Mr. Hamilton served as Vice President of World Wide
Sales and Services at Picazo Communications, a provider of computer telephony
solutions. From January 1996 to August 1998, Mr. Hamilton was Director of
Business Development for the Communication Products Group of Compaq Computer
Corporation, a global supplier of personal computers. From January 1992 to
January 1996, he served as Vice President of International Sales at Networth,
Inc., a developer and manufacturer of ethernet hubs, switches and related
products that was acquired by Compaq in December 1995. Mr. Hamilton holds a B.S.
in Business Administration from Lawrence Technical University.
Patricia W. Hosek joined Efficient in October 1995. From October 1995
through February 1997, Ms. Hosek served as Director of Software Engineering and
from February 1997 through March 2000 as Vice President of Engineering. In June
2000, Ms. Hosek was promoted to Executive Vice President of Product Operations.
From December 1990 to October 1995, she worked as a senior manager
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and developer at DSC Communications Corporation, a global provider of
telecommunications products. Ms. Hosek holds a B.S. in Computer Science from
Texas A&M University.
Gregory L. Langdon joined Efficient in February 1996 and served as
Efficient's Director of Product Management until February 1997. From February
1997 to October 1999, Mr. Langdon served as Vice President of Marketing, and in
October 1999, Mr. Langdon was promoted to Vice President of Product Strategy. In
December 1999, Mr. Langdon was further promoted to Executive Vice President of
Product Strategy. From January 1990 to February 1996, he worked as an engineer
at DSC Communications Corporation. Mr. Langdon holds a B.S. in Electrical
Engineering from Vanderbilt University.
Jill S. Manning has served as Vice President and Chief Financial Officer of
Efficient since February 1997. From November 1994 to February 1997, she served
as Efficient's Controller. From July 1984 to November 1994, Ms. Manning was a
senior manager at KPMG LLP, an international accounting firm. Ms. Manning holds
a B.B.A. in Accounting and in Computer Information Systems from Baylor
University.
Kenneth M. Siegel joined Efficient as Vice President and General Counsel in
February 2000. For over 13 years prior to joining Efficient, Mr. Siegel was an
attorney practicing in the corporate and securities area with the law firm of
Wilson Sonsini Goodrich & Rosati, and was a member of that firm from 1993 until
he left to join Efficient. Mr. Siegel holds a B.A. in International Policy
Studies from the Monterey Institute of International Studies and a J.D. from the
University of California Hastings College of the Law.
Bruce W. Brown has served as a director of Efficient since October 1995.
Since August 1995, he has served as President, Chief Executive Officer and a
Chairman of Vertel Corp., a provider of telecommunications network management
software and services. From July 1993 to August 1995, Mr. Brown held the
positions of President and Chief Executive Officer of ADC Fibermax Corporation,
a supplier of fiber optic networking products. Mr. Brown holds an M.P.A. from
Drake University and a B.S. in Psychology from Iowa State University.
James P. Gauer has served as a director of Efficient since July 1993. Since
April 1999, he has been a General Partner of Palomar Ventures, an investor in
Efficient and from December 1992 to November 1997, he was a General Partner of
Enterprise Partners, both of which are venture capital firms. Mr. Gauer holds a
B.A. in Mathematics from the University of California, Los Angeles.
Robert C. Hawk joined Efficient's board of directors in July 1999. Mr. Hawk
is President of Hawk Communications and recently retired as President and Chief
Executive Officer of US West Multimedia Communications, Inc., where he headed
the cable, data and telephony communications business from May 1996 to April
1997. He was president of the Carrier Division of US West Communications, a
regional telecommunications service provider, from September 1990 to May 1996.
Prior to that time, Mr. Hawk was Vice President of Marketing and Strategic
Planning for CXC Corporation. Prior to joining CXC Corporation, Mr. Hawk was
director of Advanced Systems Development for AT&T/American Bell. He currently
serves on the boards of Covad Communications, an investor in Efficient Networks,
PairGain Technologies, Inc., Concord Communications, Radcom and Com21.
Robert A. Hoff has served as a director of Efficient since July 1993. Since
1983, he has been a General Partner of Crosspoint Venture Partners, a venture
capital firm and investor in Efficient. Mr. Hoff also serves as a director of
Com21, Inc., PairGain Technologies, Inc., Onyx Acceptance Corp.
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and U.S. Web/CKS Corporation. Mr. Hoff holds an M.B.A. from Harvard University
and a B.S. in Business Administration from Bucknell University.
Anthony T. Maher was appointed to Efficient's board of directors in April
1999. Mr. Maher is a member of the board of Siemens AG Information and
Communication Networks. Siemens, a network equipment vendor, is an investor in
Efficient. Since May 1978, Mr. Maher has held various positions with Siemens,
including the following positions within the Siemens Public Communication
Networks Group: October 1997 to September 1998, member of the board of
directors; October 1995 to September 1997, Executive Director; and January 1993
to September 1995, Executive Director of Worldwide Product Planning. Prior to
his positions within the Public Communication Networks Group, Mr. Maher was
manager and then deputy director of system engineering for EWSD architecture and
processor technology. Mr. Maher is also a director of Floware Wireless Systems
Ltd. and Accelerated Networks, Inc. Mr. Maher holds a M.S. in Electrical
Engineering and Solid State Physics from the University of Illinois.
William L. Martin III has served as a director of Efficient since January
1997. Since November 1999, he has been Chief Executive Officer of White Rock
Networks, Inc. (formerly Glassware Networks, Inc.), a developer of optical
networking systems. From September 1994 to November 1999, Mr. Martin served as
Senior Vice President of ADC Telecommunications, Inc. and President of the
Business Broadband Group of ADC Telecommunications, Inc., a provider of
communications networks systems and solutions and an investor in Efficient. Mr.
Martin holds an M.B.A. from Harvard University, an M.S. of Aerospace Engineering
and a B.S. in Engineering from the California Institute of Technology. Mr.
Martin is also a director of Quary Technologies, Inc.
Thomas H. Peterson has served as a director of Efficient since July 1993.
Since May 1991, Mr. Peterson has been a General Partner of El Dorado Ventures, a
venture capital firm and investor in Efficient. Mr. Peterson holds an M.B.A.
from the University of California, Los Angeles and a B.S. in Electrical
Engineering from Iowa State University.
Classified Board
Our board of directors is currently composed of eight members. Our
certificate of incorporation provides for a classified board of directors
consisting of three classes of directors, each serving staggered three-year
terms. Messrs. Maher, Martin and Hawk have been designated Class I directors and
their terms expire at the 2002 annual meeting of stockholders. Messrs. Floyd and
Peterson have been designated Class II directors and their terms expire at the
2000 annual meeting of stockholders. Messrs. Brown, Gauer and Hoff have been
designated Class III directors and their terms expire at the 2001 annual meeting
of stockholders.
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors or officers.
Board Committees
The Board currently has three committees, the Audit Committee, the
Compensation Committee and the Option Committee. There is no Nominating
Committee.
Our audit committee consists of Messrs. Martin and Hoff. The audit
committee reviews our internal accounting procedures and consults with and
reviews the services provided by our independent
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<PAGE>
accountants. In April 2000, the Board adopted a revised charter for the Audit
Committee which is intended to comply with the recent modification to the Audit
Committee requirements promulgated by the Securities and Exchange Commission and
the Nasdaq National Market.
Our compensation committee consists of Messrs. Brown and Gauer. The
compensation committee reviews and recommends to the board of directors the
compensation and benefits of our employees. The compensation committee also
administers our stock-based employee benefit plans.
Our option committee, which presently consists of Mr. Floyd as its sole
member, has authority to grant options to employees and consultants - excluding
officers and directors. The option committee is generally responsible for
granting options in connection with individuals joining Efficient.
Compensation Committee Interlocks and Insider Participation
No member of the board of directors or the compensation committee serves as
a member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of directors
or compensation committee.
Director Compensation
Directors do not currently receive any cash compensation from us for their
service as members of the board of directors. Directors are eligible to receive
option grants under our 1999 Stock Plan. For a description of this plan, see "--
Benefit Plans." In January 2000, the board granted to each of Messrs. Brown,
Gauer, Hawk, Hoff, Maher, Martin and Peterson options to purchase 15,000 shares
of common stock with an exercise price of $63.88 per share.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities and Exchange Act of 1934 requires our
officers and directors, and persons who own more than ten percent (10%) of a
registered class of our equity securities, to file certain reports regarding
ownership of, and transactions in, our securities with the Securities and
Exchange Commission and with The Nasdaq Stock Market. These officers, directors,
and 10% shareholders are also required to furnish Efficient with copies of all
Section 16(a) forms that they file.
Based solely on our review of copies of Forms 3 and 4 and amendments
thereto furnished to Efficient pursuant to Rule 16a-3(e), we believe that, since
the fiscal year ended June 30, 1999, all Section 16(a) filing requirements
applicable to our officers and directors were complied with, except that reports
on Form 3 were filed late by each of Messrs. Bourne, Hamilton, Nadeau, Ronald,
Siegel, Waggoner and Ybarra, officers of Efficient, regarding their respective
security holdings. One report on Form 4 was filed late by Mr. Nadeau, an officer
of Efficient, and reports on Form 4 were filed late by each of Messrs. Gauer
(two), Hawk (one), Hoff (one), Maher (one), Martin (one) and Peterson (one),
directors of Efficient, regarding their respective security holdings.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The table below sets forth the compensation
earned for services rendered to Efficient in all capacities for the fiscal years
ended June 30, 1998, 1999 and 2000 by our Chief Executive Officer and our next
five most highly compensated executive officers who earned more than $100,000
during fiscal 2000. These executives are referred to as the "named executive
officers" elsewhere in this annual report on Form 10-K.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Awards
------------
Compensation Securities
Fiscal Underlying All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation
-------------------------------- ------ -------- ------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Mark A. Floyd................... 2000 $250,000 $250,000 400,000 $48,077 (2)
President and Chief Executive 1999 200,000 80,000 350,000 --
Officer 1998 178,127 20,000 350,000 16,667 (3)
David B. Stefan (1)............. 2000 125,000 225,000 100,000 7,997 (2)
Vice President of Sales 1999 125,000 112,608 100,000 --
1998 92,391 36,563 125,000 23,140 (4)
Patricia W. Hosek............... 2000 130,000 100,000 100,000 11,487 (2)
Vice President of Engineering 1999 117,000 51,479 225,000 --
1998 107,625 21,313 50,000 --
Gregory L. Langdon.............. 2000 130,000 100,000 100,000 12,993 (2)
Vice President of Marketing 1999 117,000 50,716 200,000 --
1998 103,290 21,051 50,000 --
Paul E. Couturier (1)........... 2000 125,000 225,000 75,000 24,344 (5)
Vice President of 1999 90,000 76,410 137,500 27,426 (5)
International Operations 1998 85,709 42,742 37,500 27,634 (5)
Jill S. Manning................. 2000 130,000 100,000 100,000 27,453 (6)
Vice President of Finance, CFO 1999 100,000 30,000 75,000 --
1998 100,000 10,000 55,000 --
</TABLE>
-----------------
(1) Messrs. Stefan and Couturier ceased to be executive officers at the end of
fiscal 2000.
(2) Represents payment in lieu of accrued vacation.
(3) Represents amount paid in lieu of accrued sabbatical benefit.
(4) Represents a moving allowance.
(5) Represents an annual car and vacation allowance.
(6) Includes $10,833 paid in lieu of accrued sabbatical benefit, and $16,620
paid for accrued vacation.
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<PAGE>
Option Grants During Last Fiscal Year. The following table sets forth
certain information with respect to stock options granted to each of the named
executive officers in fiscal 2000, including the potential realizable value over
the ten-year term of the options, based on assumed, annually compounded rates of
stock value appreciation. These assumed rates of appreciation comply with the
rules of the Securities and Exchange Commission and do not represent our
estimate of future stock price. Actual gains, if any, on stock option exercises
will be dependent on the future performance of our common stock.
In fiscal 2000, we granted options to purchase up to an aggregate of
6,741,700 shares to employees and directors. All options were granted at
exercise prices equal to the fair market value of our common stock on the date
of grant. All options have a term of ten years. Optionees may pay the exercise
price by cash, check or delivery of already-owned shares of our common stock.
Options generally vest over four years, with 25% of the shares vesting one year
after the option vesting start date and the remaining option shares vesting
ratably on a monthly basis over the succeeding 36 months.
Individual Grants
-----------------
<TABLE>
<CAPTION>
Percent of
Number of Total Options Potential Realizable Value at
Securities Granted to Market Assumed Annual Rates of Stock
Underlying Employees In Value at Price Appreciation for Option
Options Last Fiscal Exercise Date of Expiration Term
Name Granted Year Price Grant Date 5% 10%
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark A. Floyd.............. 400,000 5.93% $60.25 $60.25 1/6/10 $15,156,361 $38,409,193
David B. Stefan............ 100,000 3.79% $60.25 $60.25 1/6/10 $ 3,789,090 $ 9,602,298
Patricia W. Hosek.......... 100,000 3.79% $60.25 $60.25 1/6/10 $ 3,789,090 $ 9,602,298
Gregory L. Langdon......... 100,000 3.79% $60.25 $60.25 1/6/10 $ 3,789,090 $ 9,602,298
Paul E. Courturier......... 75,000 2.84% $60.25 $60.25 1/6/10 $ 2,841,818 $ 7,201,724
Jill S. Manning............ 100,000 3.79% $60.25 $60.25 1/6/10 $ 3,789,090 $ 9,602,298
</TABLE>
Aggregate Option Exercises During the Last Fiscal Year and Fiscal Year-End
Option Values. The following table sets forth information with respect to the
named executive officers concerning options exercised by them during fiscal 2000
and the exercisable and unexercisable options held by them as of June 30, 2000.
The "Value Realized" is based on the fair market value of our common stock as
quoted on the Nasdaq National Market on the date of exercise, less the per share
exercise price, multiplied by the number of shares issued. The "Value of
Unexercised In-the-Money Options at June 30, 2000" is based on the closing price
of $73.86 per share of our common stock as quoted on the Nasdaq National Market
on June 30, 2000, less the per share exercise price, multiplied by the number of
shares issuable upon exercise of the options.
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<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year-End Fiscal Year-End
----------------------------- ------------------------
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---------------------------- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark A. Floyd............... -- $ -- 572,917 777,083 $41,706,170 $32,602,330
David B. Stefan............. 22,500 $2,306,250 89,480 213,020 $ 6,463,762 $ 9,456,888
Patricia W. Hosek........... 43,208 $4,422,923 126,063 273,437 $ 9,052,537 $13,711,058
Gregory L. Langdon.......... 81,667 $7,343,815 110,000 258,333 $ 7,903,994 $12,640,112
Paul E. Couturier........... 50,000 $3,056,500 94,792 180,208 $ 6,833,576 $ 8,507,924
Jill S. Manning............. 19,000 $1,729,120 110,376 175,624 $ 8,024,170 $ 6,757,590
</TABLE>
Benefit Plans
1999 Stock Plan
Our 1999 stock plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and for the granting to employees and consultants of
nonstatutory stock options and stock purchase rights. The stock plan was
approved by the board of directors in April 1999 and by our stockholders in May
1999. Unless terminated sooner, the stock plan will terminate automatically in
2009. A total of 3,500,000 shares of our common stock was originally reserved
for issuance, plus automatic annual increases equal to the lesser of:
. 1,000,000 shares;
. 3% of the outstanding shares on such date; or
. a lesser amount determined by the board of directors.
The stock plan may be administered by the board of directors or a committee
of the board. The board or a committee of the board will have the power to
determine the terms of the options granted, including the exercise price, the
number of shares subject to each option, the vesting provisions, the
exercisability thereof and the form of consideration payable upon such exercise.
The stock plan provides that in the event of a merger of Efficient with or
into another corporation, or the sale of substantially all of our assets, each
outstanding option or stock purchase right will be assumed or substituted for by
the successor corporation. In addition, if the options are not substituted for
in the merger, each outstanding option will vest and become exercisable as to
all unvested shares and each stock purchase right shall lapse as to all the
shares for a period of 15 days after receipt of notice from Efficient.
1999 Non-Statutory Stock Option Plan
Our 1999 non-statutory stock option plan provides for the grant of
nonstatutory stock options to employees and consultants of Efficient - excluding
officers or directors. The plan was approved by our board of directors in
November 1999 and was amended in April 2000 and July 2000 to increase the number
of shares reserved for issuance thereunder by an aggregate of 2,550,000 from
950,000 to 3,500,000. Unless terminated sooner, the plan will terminate
automatically in 2009. A total of 3,500,000 shares of common stock are currently
reserved for issuance under the plan.
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<PAGE>
The plan may be administered by the board of directors or a committee of
the board. The board or a committee of the board has the power to determine the
terms of the options, including the exercise price, the number of shares subject
to each option, the exercisability thereof, and the form of consideration
payable upon exercise. In addition, the board or a committee of the board has
the authority to amend, suspend or terminate the plan, provided that no such
action may affect any share of common stock previously issued and sold or any
option previously granted under the plan.
Options granted under the plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by the optionee. Options granted under the plan must generally be exercised
within three months of the end of optionee's status as an employee or consultant
of Efficient, or within twelve months after the optionee's termination by death
or disability, but in no event later than the expiration of the option's ten
year term. The exercise price of stock options granted under the plan is
determined by the board or a committee of the board. The term of stock options
granted under the plan may not exceed ten years.
The plan provides that in the event of a merger of Efficient with or into
another corporation, or a sale of substantially all of our assets, each option
shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted, the
board or a committee of the board will provide for the optionee to have the
right to exercise the option as to all of the optioned stock, including shares
that would otherwise not be exercisable, for a period of fifteen (15) days from
the date of the notice, and the option will terminate upon the expiration of
such period.
1999 Employee Stock Purchase Plan
Our 1999 employee stock purchase plan was adopted by our board of directors
in April 1999 and by our stockholders in May 1999. A total of 200,000 shares of
common stock was originally reserved for issuance under the purchase plan, plus
automatic annual increases equal to the lesser of:
. 100,000 shares;
. 1% of the outstanding shares on such date; or
. a lesser amount determined by the board on the first day of each fiscal
year.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, contains successive six-month
offering periods. The offering periods generally start on the first trading day
on or after May 1 and November 1 of each year, except for the first such
offering period which commenced on the first trading day after the effective
date of our initial public offering and ends on the last trading day on or
before October 31.
Our employees are eligible to participate if they are employed by us or any
of our participating subsidiaries for at least 20 hours per week and more than
five months in any calendar year. However, the following employees may not
purchase stock under the purchase plan:
. any employee who immediately after grant owns stock possessing 5% or more of
the total combined voting power or value of all classes of our capital stock;
or
. any employee whose rights to purchase stock under any of our employee stock
purchase plans accrue at a rate that exceeds $25,000 worth of stock for each
calendar year.
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<PAGE>
Participants may purchase common stock through payroll deductions of up to
10% of the participant's compensation. The maximum number of shares a
participant may purchase during a single offering period is 500 shares.
Amounts deducted and accumulated by the participant will be used to
purchase shares of common stock at the end of each offering period. The price of
stock purchased under the purchase plan is 85% of the lower of the fair market
value of the common stock at the beginning of the offering period and at the end
of each offering period.
The purchase plan provides that, in the event of a merger of Efficient with
or into another corporation or a sale of substantially all of our assets,
outstanding options may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be shortened
and a new exercise date will be set, which will occur before the proposed sale
or merger.
The purchase plan will terminate in 2009. The board of directors has the
authority to amend or terminate the purchase plan, except that no such action
may adversely affect any outstanding rights to purchase stock.
401(k) Plan
On January 1, 1995, we adopted the Efficient Networks, Inc. 401(k) Plan
(the "401(k) Plan") a cash-or- deferred arrangement which covers our eligible
employees who have attained the age of 21. The 401(k) Plan is intended to
qualify under Sections 401(a), 401(m) and 401(k) of the Internal Revenue Code of
1986, as amended (the "Code") and the 401(k) Plan trust is intended to qualify
under Section 501(a) of the Code. All contributions to the 401(k) Plan by
eligible employees or by us, and the investment earnings thereon, are not
taxable to such employees until withdrawn, and any contributions we may make are
expected to be deductible by us. Our eligible employees may elect to reduce
their current eligible compensation by one percent (1%) up to fifteen (15%),
subject to the maximum statutorily prescribed annual limit of $10,500 (in 2000),
and to have such salary reductions contributed on their behalf to the 401(k)
Plan. The 401(k) Plan permits, but does not require, that we may make matching
contributions on behalf of all eligible employees who make salary reduction
contributions to the 401(k) Plan. We have elected to make matching contributions
for the Plan Year ending December 31, 2000, equal to 50% of a participant's
salary deferral contributions for each payroll period, on up to 12% of a
participant's annual compensation. Company matching contributions vest 25% for
each year of the participant's service to Efficient, over a four-year period.
The 401(k) Plan also permits, but does not require, that we may make additional
profit-sharing contributions on behalf of all eligible employees. To date, we
have not made such additional profit-sharing contributions to the 401(k) Plan.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table on the following page sets forth information regarding the
beneficial ownership of our common stock as of September 1, 2000, by (a) each
person or entity who is known by us to own beneficially more than 5% of our
outstanding stock; (b) each of our directors; (c) each of the named executive
officers; and (d) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of Shares
Name and Address Beneficially Owned Beneficially Owned
-------------------------------------------------------------- -------------------- ------------------------
<S> <C> <C>
Cabletron Systems, Inc.......................................... 10,876,099 19.39%
35 Industrial Way
Rochester, NH 03867
Texas Instruments Incorporated.................................. 3,188,706 5.68%
P.O. Box 660199, M.S. 8650
Dallas, TX 75266-0199
El Dorado Ventures(1)........................................... 3,374,382 6.02%
2400 Sand Hill Road, Suite 100
Menlo Park, CA 94025
Siemens AG...................................................... 3,716,800 6.63%
Hofmannstrasse 51
81359 Munchen, Germany
Mark A. Floyd(2)................................................ 1,321,876 2.33%
Bruce W. Brown(3)............................................... 55,000 *
Robert A. Hoff(4)............................................... 761,718 1.36%
Thomas H. Peterson(5)........................................... 3,424,294 6.10%
James P. Gauer(6)............................................... 86,595 *
Anthony T. Maher(7)............................................. 3,726,800 6.64%
William L. Martin III(8)........................................ 31,500 *
Robert Hawk(9).................................................. 150,873 *
David B. Stefan(10)............................................. 90,473 *
Patricia W. Hosek(11)........................................... 150,783 *
Gregory L. Langdon(12).......................................... 142,917 *
Paul E. Couturier(13)........................................... 117,625 *
Jill S. Manning(14)............................................. 110,669 *
All directors and officers as a group (17 persons)(15).......... 10,241,331 19.15%
</TABLE>
__________________________
Unless otherwise indicated above, each stockholder named in the table has
sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where applicable.
Unless otherwise indicated, the address for each stockholder listed in the
following table is c/o Efficient Networks, Inc., 4849 Alpha Road, Suite 1200,
Dallas, Texas 75244.
* Less than 1% of the outstanding shares of common stock.
(1) Represents 2,578,275 shares held by El Dorado Ventures III, 47,751 shares
held by El Dorado C&L Fund, L.P., 80,231 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.
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<PAGE>
(2) Includes 671,876 shares issuable upon exercise of stock options exercisable
on or before November 1, 2000.
(3) Includes 55,000 shares issuable upon exercise of stock options exercisable
on or before November 1, 2000.
(4) Mr. Hoff is a general partner of Crosspoint Venture Partners. The shares
listed represent (a) 551,061 shares held by Crosspoint Ventures LS 1997,
L.P.; (b) 173,157 shares held by Mr. Hoff; and (c) 37,500 shares issuable
upon exercise of stock options held by Mr. Hoff and exercisable on or
before November 1, 2000. Mr. Hoff disclaims beneficial ownership of the
shares held by Crosspoint Ventures LS 1997, L.P., except to the extent of
his pecuniary interest therein.
(5) Mr. Peterson is a general partner of El Dorado Ventures. The shares listed
represent (a) 2,578,275 shares held by El Dorado Ventures, III; 47,751
shares held by El Dorado C&L Fund, L.P., 80,231 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.; (b) 12,412 shares
held by Mr. Peterson; and (c) 37,500 shares issuable upon exercise of stock
options held by Mr. Petersen and exercisable on or before November 1, 2000.
Mr. Peterson disclaims beneficial ownership of the shares held by El Dorado
Ventures, except to the extent of his pecuniary interest therein.
(6) The shares listed represent (a) 74,095 shares held by Mr. Gauer, and (b)
12,500 shares issuable upon exercise of stock options held by Mr. Gauer and
exercisable on or before November 1, 2000.
(7) Mr. Maher is a member of the board of Siemens AG Information and
Communication Networks. The shares listed represent (a) 3,716,800 shares
held by Siemens AG, and (b) 10,000 shares held by Mr. Maher. Mr. Maher
disclaims beneficial ownership of the shares held by Siemens AG.
(8) Includes 12,500 shares issuable upon exercise of stock options held by Mr.
Martin and exercisable on or before November 1, 2000.
(9) Includes 150,000 shares issued upon exercise of a stock option. 75,000 of
such shares are currently subject to a right of repurchase by Efficient.
(10) Includes 80,416 shares issuable upon exercise of stock options exercisable
on or before November 1, 2000.
(11) Includes 112,417 shares issuable upon exercise of stock options exercisable
on or before November 1, 2000.
(12) Includes 96,250 shares issuable upon exercise of stock options exercisable
on or before November 1, 2000.
(13) Includes 115,625 shares issuable upon exercise of stock options exercisable
on or before November 1, 2000.
(14) Includes 90,251 shares issuable upon exercise of stock options exercisable
on or before November 1, 2000.
(15) Includes an aggregate of 1,389,543 shares issuable upon exercise of stock
options exercisable on or before November 1, 2000.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of transactions during our last fiscal year
to which we have been a party, in which the amount involved in the transaction
exceeds $60,000 and in which any director, executive officer or holder of more
than 5% of our capital stock had or will have a direct or indirect material
interest other than compensation arrangements that are otherwise required to be
described under "Management":
Siemens AG. Mr. Maher, a member of our board of directors, is affiliated
with Siemens. Efficient and Siemens are party to an original equipment
manufacture purchase agreement which provides for the purchase by Siemens of
certain of our products, software and customization services, in the ordinary
course of business. During fiscal 2000 we generated $8.0 million in revenues
from sales made to Siemens - this accounted for 3.9% of our total sales revenues
for fiscal 2000.
Cabletron Systems, Inc. Cabletron is a greater than 5% stockholder of
Efficient. In connection with our acquisition of Cabletron's subsidiary,
FlowPoint Corp., we entered into a reseller agreement with Cabletron pursuant to
which Cabletron purchases certain of our products in the ordinary course of
business. During fiscal 2000 we generated $11.6 million in revenues from sales
made to Cabletron - this accounted for 5.7% of our total sales revenues for
fiscal 2000.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See Item 8 above.
2. FINANCIAL STATEMENT SCHEDULES
See Item 14(d) below.
3. EXHIBITS
Exhibit
Number
--------
2.1(1) Agreement and Plan of Merger and Reorganization dated as of
November 21, 1999 by and among Efficient Networks, Inc., Cabletron
Systems, Inc., Flowpoint Corporation and Fire Acquisition
Corporation.
2.2(1) Amendment No. 1 to the Merger Agreement dated December 14, 1999.
2.3(1) Amendment No. 2 to the Merger Agreement dated December 17, 1999.
3.1(2) Certificate of Incorporation.
3.2(3) Amended and Restated Bylaws.
4.1(4) Form of Indenture, dated March 1, 2000, between the Registrant and
State Street Bank and Trust Company of California, N.A.
4.2(4) Form of Note issued in connection with the March 2000 Indenture.
10.1(2) Form of Indemnification Agreement between the Registrant and each
of its directors and officers.
10.2(5) Office Lease Agreement dated November 5, 1999 between the
Registrant and Jackson-Shaw/Alpha Metro Limited Partnership.
10.3 Office Lease Agreement dated March 16, 2000 between the Registrant
and Boccardo Corporation.
10.4(2) Investor's Rights Agreement dated July 30, 1993 executed in
connection with the issuance and sale of our Series A Preferred
Stock.
10.5(2) Amendment No. 1 to the Investors' Rights Agreement dated February
9, 1994, executed in connection with the issuance and sale of our
Series B Preferred Stock.
10.6(2) Amendment No. 2 to the Investors' Rights Agreement dated September
30, 1994, executed in connection with the issuance and sale of our
Series C Preferred Stock.
10.7(2) Amendment No. 3 to the Investors' Rights Agreement dated September
1, 1995, executed in connection with the issuance and sale of our
Series D Preferred Stock.
10.8(2) Amendment No. 4 to the Investors' Rights Agreement Dated December
31, 1996, executed in connection with the issuance and sale of our
Series E Preferred Stock.
10.9(2) Amendment No. 5 to the Investors' Rights Agreement Dated February
17, 1998, executed in connection with the issuance and sale of our
Series F Preferred Stock.
10.10(2) Amendment No. 6 to the Investors' Rights Agreement Dated June 10,
1998, executed in connection with the issuance and sale of our
Series G Preferred Stock.
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<PAGE>
Exhibit
Number
---------
10.11(2) Amendment No. 7 to the Investors' Rights Agreement Dated January 11,
1999, executed in connection with the issuance and sale of our
Series H Preferred Stock.
10.18(2) Amendment No. 9 to the Investor's Rights Agreement dated June 28,
1999, executed in connection with the issuance and sale of a
convertible promissory note.
10.19(2) Amendment No. 10 to the Investor's Rights Agreement dated November
21, 1999, executed in connection with shares issued in the
acquisition of FlowPoint Corp.
10.20(4) Form of Registration Rights Agreement, dated as of March 1, 2000,
by and among the Registrant and Credit Suisse First Boston
Corporation, FleetBoston Robertson Stephens Inc., Dain Rauscher
Incorporated and WR Hambrecht + Co, LLC.
10.21(5) Reseller Agreement dated December 17, 1999 between the Registrant
and Cabletron Systems, Inc.
10.22(2) 1999 Stock Plan and form of related agreements thereunder.
10.23 1999 Nonstatutory Stock Option Plan, as amended.
10.24(2) 1999 Employee Stock Purchase Plan and form of agreements thereunder.
10.25(5) Standstill and Disposition Agreement dated December 17, 1999 by and
between the Registrant and Cabletron Systems, Inc.
23.1 Consent of KPMG LLP
24.1 Power of Attorney (see page 61).
27.1 Financial Data Schedule.
________________________
(1) Incorporated by reference to exhibits filed with the Registrant's current
report on Form 8-K (File No. 000-26473) dated December 30, 1999.
(2) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (Registration No. 333-77795) declared
effective July 14, 1999.
(3) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K (File No. 000-26473) for the fiscal year ended June 30,
1999.
(4) Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q/A (File No. 000-26473) for the fiscal quarter ended
March 31, 2000 as filed with the Commission on July 14, 2000.
(5) Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (Registration No. 333-94289) declared
effective February 2, 2000.
(b) REPORTS ON FORM 8-K
On July 20, 2000, the Registrant filed a current report on Form 8-K
dated July 18, 2000 pursuant to Item 5 thereof, updating its
reported description of the general development of its business.
(c) EXHIBITS
See Item 14(a)(3) above.
(d) FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report on Schedule....................... F-2
Schedule II - Valuation and Qualifying Accounts................ F-24
-56-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1933, as amended, the registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on the 21st day of September, 2000.
EFFICIENT NETWORKS, INC.
By: /s/ Mark A. Floyd
-------------------------------------
Mark A. Floyd
President and Chief Executive Officer
S-1
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark A. Floyd and Jill S. Manning, his or
her attorney-in-fact, with the power of substitution, for him or her in any and
all capacities, to sign any amendments to this Annual Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
conforming all that said attorney-in-fact, or his or her substitute or
substitutes, any do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
----------------------------------- ------------------------------------------------- ------------------------
<S> <C> <C>
/s/ Mark A. Floyd President, Chief Executive Officer and Chairman September 21, 2000
----------------------------------- of the Board (Principal Executive Officer)
Mark A. Floyd
/s/ Jill S. Manning Vice President and Chief Financial Officer September 21, 2000
----------------------------------- (Principal Financial and Accounting Officer)
Jill S. Manning
/s/ Bruce W. Brown Director September 21, 2000
-----------------------------------
Bruce W. Brown
/s/ James P. Gauer Director September 21, 2000
-----------------------------------
James P. Gauer
/s/ Robert C. Hawk Director September 21, 2000
-----------------------------------
Robert C. Hawk
/s/ Robert A. Hoff Director September 21, 2000
-----------------------------------
Robert A. Hoff
/s/ Anthony T. Maher Director September 21, 2000
-----------------------------------
Anthony T. Maher
/s/ William L. Martin III Director September 21, 2000
-----------------------------------
William L. Martin III
/s/ Thomas H. Peterson Director September 21, 2000
-----------------------------------
Thomas H. Peterson
</TABLE>
S-2
<PAGE>
EFFICIENT NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
--------------------------------------------------------------------------------
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
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, 2000 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 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, 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Dallas, Texas
July 18, 2000
F-2
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Balance Sheets
June 30, 2000 and 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
Assets 2000 1999
-----------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 174,390 $ 3,604
Short-term investments 326,742 --
Accounts receivable, net of allowances for doubtful accounts of
$1,687 and $120 at June 30, 2000 and 1999, respectively 91,248 10,316
Inventory deposit 50,000 --
Inventories 29,759 5,472
Other current assets 1,665 241
---------- --------
Total current assets 673,804 19,633
Furniture and equipment, net 21,005 2,285
Goodwill and other intangible assets, net of accumulated amortization
of $100,432 843,176 --
Other assets, net 17,109 29
---------- --------
$1,555,094 $ 21,947
========== ========
Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 22,634 $ 4,104
Accrued liabilities 41,366 2,230
Current portion of capital lease obligations 738 --
Deferred revenue 6,338 736
---------- --------
Total current liabilities 71,076 7,070
Convertible subordinated notes 400,000 --
Capital lease obligations, net of current portion 2,069 --
Long-term debt, net of discount -- 13,396
---------- --------
Total liabilities 473,145 20,466
---------- --------
Redeemable convertible preferred stock -- 40,495
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, 9,993,700 shares authorized; none outstanding
Common stock, par value $.001 per share, 200,000,000 shares
authorized; 55,739,656 and 4,362,221 shares issued and outstanding
in 2000 and 1999, respectively 56 4
Additional paid-in capital 1,275,517 29,777
Deferred stock option compensation (9,989) (14,606)
Accumulated deficit (184,635) (54,189)
Accumulated other comprehensive income 1,000 --
---------- --------
Total stockholders' equity (deficit) 1,081,949 (39,014)
---------- --------
$1,555,094 $ 21,947
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Operations
Years ended June 30, 2000, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- -------
<S> <C> <C> <C>
Net revenues $ 202,203 $ 14,828 $ 3,370
Cost of revenues 156,682 14,344 2,160
--------- -------- -------
Gross profit 45,521 484 1,210
--------- -------- -------
Operating expenses:
Sales and marketing 35,433 6,133 3,436
Research and development 24,973 7,747 4,389
General and administrative 9,384 1,993 1,641
Stock option compensation 4,908 3,116 1,165
Amortization of goodwill and other intangible assets 100,431 -- --
In-process research and development 4,970 -- --
--------- -------- -------
Total operating expenses 180,099 18,989 10,631
--------- -------- -------
Loss from operations (134,578) (18,505) (9,421)
Interest income 12,045 202 146
Interest expense and other, net (7,913) (8,102) (16)
--------- -------- -------
Net loss $(130,446) $(26,405) $(9,291)
========= ======== =======
Basic and diluted net loss per share of common stock $ (3.06) $ (6.87) $ (2.86)
========= ======== =======
Weighted-average shares of common stock outstanding 42,629 3,893 3,254
========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended June 30, 2000, 1999 and 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated Total
Deferred other stockholders'
Common stock Additional stock option Accumulated comprehensive equity
----------------
Shares Amount paid-in capital compensation deficit income (deficit)
--------- ------ --------------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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)
Comprehensive income (loss):
Net loss -- -- -- -- (130,446) -- (130,446)
Unrealized net gains on securities -- -- -- -- -- 1,000 1,000
----------
Comprehensive loss -- -- -- -- -- -- (129,446)
Issuance of common stock under
stock option plan 1,799,755 2 976 -- -- -- 978
Stock options forfeited -- -- (2,837) 2,837 -- -- --
Issuance of common stock 7,377,800 7 246,887 -- -- -- 246,894
Stock issued in connection with
acquisition of FlowPoint
Corporation 7,200,000 7 493,193 -- -- -- 493,200
Stock issued in connection with
acquisition of Network
TeleSystems, Inc. 400,000 1 18,368 -- -- -- 18,369
Conversion of subordinated notes 3,579,650 4 14,018 -- -- -- 14,022
Conversion of redeemable preferred
stock 31,020,230 31 472,007 -- -- -- 472,038
Deferred stock option compensation -- -- 3,128 (3,128) -- -- --
Amortization of deferred stock
option compensation -- -- -- 4,908 -- -- 4,908
---------- --- ---------- -------- --------- ------------- ----------
Balance at June 30, 2000 55,739,656 $56 $1,275,517 $ (9,989) $(184,635) $1,000 $1,081,949
========== === ========== ======== ========= ============= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 2000, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(130,446) $(26,405) $(9,291)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,284 807 727
Amortization of deferred stock option
compensation 4,908 3,116 1,165
Accretion of discount on subordinated promissory
notes 604 7,712 --
Accretion of deferred issuance costs on
convertible subordinated notes 797 -- --
Amortization of goodwill and other intangible
assets 100,431 -- --
In-process research and development 4,970 -- --
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable, net (70,842) (11,873) 318
Inventory deposit (50,000) -- --
Inventories (23,053) (4,574) (304)
Other assets and liabilities (6,513) 49 (201)
Accounts payable and accrued liabilities 28,422 7,043 967
Deferred revenue 5,263 736 --
--------- -------- -------
Net cash used in operating activities (133,175) (23,389) (6,619)
--------- -------- -------
Cash flows used in investing activities:
Purchases of furniture and equipment (17,621) (1,688) (572)
Purchases of investments (486,083) -- --
Proceeds from sales and maturities of investments 160,342 -- --
Net cash received in connection with purchases of:
FlowPoint Corporation 10,916 -- --
Network TeleSystems, Inc. 1,188 -- --
--------- -------- -------
Net cash used in investing activities (331,258) (1,688) (572)
--------- -------- -------
Cash flows from financing activities:
Principal payments on capital lease obligations (53) (11) (78)
Proceeds from issuance of convertible subordinated
notes 400,000 -- --
Payment of issuance costs for convertible
subordinated notes 12,600 -- --
Proceeds from issuance of promissory notes and
warrants -- 14,000 1,000
Proceeds from issuance of common stock 247,872 1,683 362
Proceeds from issuance of preferred stock -- 5,402 10,101
--------- -------- -------
Net cash provided by financing activities 635,219 21,074 11,385
--------- -------- -------
Increase (decrease) in cash and cash equivalents 170,786 (4,003) 4,194
Cash and cash equivalents at beginning of year 3,604 7,607 3,413
--------- -------- -------
Cash and cash equivalents at end of year $ 174,390 $ 3,604 $ 7,607
========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
EXHIBIT 23.1
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998
(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
("DSL") 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
California, The Netherlands and Singapore. All significant
intercompany accounts and transactions have been eliminated
in consolidation.
(b) Cash Equivalents
Cash equivalents consist primarily of investment accounts
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) Investments
The Company accounts for investments in marketable
securities in accordance with the provisions of Statement of
Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities".
Marketable securities are composed primarily of government
and corporate fixed income securities. The Company
classifies all of its marketable securities as available-
for-sale. These securities are carried at fair value, with
the unrealized gains and losses, net of income taxes,
reported as a component of comprehensive income (loss).
(d) Inventories
Inventories are stated at the lower of average cost or
market (net realizable value).
(e) Furniture and Equipment
Furniture and equipment are stated at cost. Equipment
acquired 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:
F-7
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
Years
-----
Computers............................... 5
Software................................ 3
Equipment............................... 5
Furniture and fixtures.................. 7
(f) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the
period that includes the enactment date.
(g) Revenue Recognition
Revenue from product sales is generally recognized upon
shipment to customers. Reserves for estimated sales returns
and allowances are recorded in the same period as the
related revenues. Revenue related to sales transactions that
provide the customer with the right to return product is
either fully or partially deferred, depending on the
Company's experience with the customer, until the related
products are deployed by the customer and/or the return
privileges expire.
Deferred revenue of $6.3 million and $736,000 at June 30,
2000 and 1999, respectively, 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 due to certain stock balancing and right of return
privileges granted to the customer. Deferred revenue also
includes maintenance revenue that is recognized ratably over
the related maintenance term.
(h) 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.
(i) 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.
F-8
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
(j) Net Loss Per Share of Common Stock
Basic earnings (loss) per share is computed by dividing net
income or loss by the weighted average number of shares of
the Company's common stock outstanding during the period.
Diluted earnings (loss) per share is determined in the same
manner as basic earnings (loss) 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 loss per share amount is the
same as basic loss per share since 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 (in thousands) of 6,818, 29,007, and
21,624 shares for the years ended June 30, 2000, 1999, and
1998, respectively, were excluded from the calculation of
diluted loss per share as their inclusion would be
antidilutive.
The following table presents the calculation of basic and
diluted loss per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss $(130,446) $ (26,405) $ (9,291)
Accretion of issuance costs on
redeemable convertible preferred stock -- (350) --
--------- ------------ ------------
Net loss available to common stockholders $(130,446) $ (26,755) $ (9,291)
========= ============ ============
Weighted average shares outstanding 42,629 3,893 3,254
========= ============ ============
Basic and diluted net loss per share $ (3.06) $ (6.87) $ (2.86)
========= ============ ============
</TABLE>
(k) 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 estimated fair value, which is based
on quoted dealer prices, of the convertible subordinated
notes outstanding at June 30, 2000 (see Note 10) was $300.2
million.
The estimated fair values of the convertible promissory
notes and subordinated promissory notes and related warrants
as of June 30, 1999 were approximately $6,803,000 and
$40,294,000 respectively. These fair values 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.
(l) 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
(loss) includes all changes in equity during a period except
those resulting from investments by and distributions to
owners. In addition to net loss from operations, elements of
comprehensive loss for the year ended June 30, 2000 include
net unrealized gains on securities. Prior to the year ended
June 30, 2000, no elements of comprehensive income (loss)
existed other than net loss from operations.
F-9
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
securities. Prior to the year ended June 30, 2000, no elements of
comprehensive income (loss) existed other than net loss from
operations.
(m) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial 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) Completion of Initial and Follow-on Public Offerings
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 then outstanding redeemable convertible preferred
stock converted into an aggregate of 28.3 million shares of common stock.
On February 8, 2000 the Company completed a follow-on public offering of
5.75 million shares of common stock of which the Company issued and sold
2.75 million shares and selling stockholders sold 3.0 million shares. The
Company received net proceeds of approximately $183.2 million for the
shares issued and sold by it. The Company did not receive any of the
proceeds from the sale of shares by the selling stockholders.
(4) Acquisitions
On May 9, 2000, the Company entered into an agreement to acquire Network
TeleSystems, Inc. ("NTS"). The acquisition was completed on May 22, 2000.
The results of operations of NTS have been included in the Company's
consolidated statement of operations from the date of acquisition through
June 30, 2000. The Company financed the acquisition through the issuance of
400,000 shares of common stock. The acquisition was accounted for under the
purchase method of accounting and, accordingly, the purchase price was
allocated to the assets acquired and the liabilities assumed based upon the
estimated fair values at the date of acquisition. The shares issued to the
stockholders of NTS had a fair market value of $18.4 million based on the
market price of $45.92, which represents the average closing sale price for
two trading days before and two trading days after the terms of the
acquisition were agreed to.
The total purchase price of $19.3 million, including direct acquisition
costs of approximately $900,000, was allocated as follows (in thousands):
<TABLE>
<S> <C>
Excess cost over fair value of net assets acquired $17,923
Fair value of tangible assets acquired, net of liabilities assumed 1,345
-------
$19,268
=======
</TABLE>
In connection with the NTS acquisition, the Company recorded $17.9 million
in intangible assets, of which approximately $400,000 was amortized in the
year ended June 30, 2000. The
F-10
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
remainder will be amortized at a rate of approximately $3.6 million per
year over a five-year period.
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 June 30, 2000.
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 was
convertible into an aggregate of 6.3 million shares of common stock and was
mandatorily redeemable. On April 12, 2000, the Series A preferred stock was
converted into 6.3 million shares of common stock. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on the estimated fair values at the date of acquisition. The shares
issued to Cabletron for FlowPoint had a fair market value of $924.8 million
based upon the market price of $68.50, which represents the Company's
average closing sale price for two trading days before and two trading days
after the terms of the acquisition were agreed to.
The total purchase price of $938.7 million, including direct costs of
acquisition of $13.9 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 889,912
Fair value of tangible assets acquired, net of liabilities assumed 8,307
--------
$938,654
========
</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 $925.4 million in intangible assets, of
which $100.0 million was amortized during the fiscal year ended June 30,
2000. The remainder will be amortized at a rate of approximately $185.2
million per year over a five-year period.
F-11
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
The following pro forma financial information presents a summary of the
results of operations as if the acquisitions had occurred on July 1, 1998:
<TABLE>
<CAPTION>
(Unaudited)
------------------------------------
Year ended Year ended
June 30, 2000 June 30, 1999
------------------ ----------------
<S> <C> <C>
Revenues $ 227,810 $ 37,077
Expenses 446,466 251,404
--------- ---------
Net loss $(218,656) $(214,327)
========= =========
Basic and diluted loss per share of common stock $ (4.73) $ (18.78)
========= =========
Shares used in computing basic and diluted loss per share of 46,249 11,411
common stock ========= =========
</TABLE>
(5) Investments
All investments in marketable securities are deemed by management to be
available-for-sale and are reported at fair value with net unrealized gains
or losses reported within comprehensive income (loss). Realized gains and
losses are recorded based on the specific identification method.
Securities available for sale at June 30, 2000 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Holding Holding Market
Cost Gains Losses Value
----------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Certificates of deposit $ 11,124 $ -- $ -- $ 11,124
U.S. Government securities 186,089 799 (150) 186,738
Municipal bonds 35,821 -- (5) 35,816
Corporate bonds 40,833 12 -- 40,845
Commercial paper 51,875 355 (11) 52,219
-------- ------ ----- --------
$325,742 $1,166 $(166) $326,742
======== ====== ===== ========
</TABLE>
Differences between cost and market of $1.0 million were credited to a
separate component of stockholders' equity called "Accumulated Other
Comprehensive Income" as of June 30, 2000.
Proceeds from sales and maturities of securities available for sale were
approximately $160.3 million and $0 for the years ended June 30, 2000 and
1999, respectively. Realized gains and losses on such sales were not
significant. At June 30, 2000 and 1999, approximately $139.4 million and
$500,000 of securities available for sale with original maturities of 90
days or less were included in cash and cash equivalents.
(6) Inventory Deposit
Inventory deposit is an advance of $50.0 million made on June 29, 2000 by
the Company to one of its contract manufacturers. The advance is non-
interest bearing and has no maturity date. The purpose of the advance is
to finance the purchase of raw materials for the Company by the contract
manufacturer. The advance is expected to be recovered during the 2001
fiscal year through the offset of the advance against purchases of finished
goods inventory from the contract manufacturer, beginning April 1, 2001.
F-12
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
(7) Inventories
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------------------
2000 1999
------------- ------------
<S> <C> <C>
Raw materials $ 5,329 $2,265
Finished goods 24,430 3,207
------- ------
Total $29,759 $5,472
======= ======
</TABLE>
(8) Furniture and Equipment
Furniture and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Computers $ 6,866 $ 2,811
Purchased software 7,129 892
Equipment 5,007 585
Furniture and fixtures 3,758 136
Leasehold improvements 2,903 235
------- -------
Total furniture and equipment 25,663 4,659
Less accumulated depreciation and amortization (4,658) (2,374)
------- -------
Furniture and equipment, net $21,005 $ 2,285
======= =======
</TABLE>
(9) Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------------
2000 1999
------------ ---------
<S> <C> <C>
Accrued compensation and benefits $ 8,633 $1,102
Accrued sales and marketing expense 14,221 540
Accrued interest expense 6,333 291
Accrued inventory and fixed assets 7,015 --
Other 5,167 297
------- ------
$41,366 $2,230
======= ======
</TABLE>
(10) Convertible Subordinated Notes and Other Long-term Debt
On March 7, 2000 the Company issued $400 million of convertible
subordinated notes due March 15, 2005. The notes bear interest at an
annual rate of 5%. The notes are convertible at any time prior to maturity
into shares of the Company's common stock at a conversion price of $181.00
per share. The Company may redeem the notes on or after March 20, 2003 at
101.25% during the period beginning on March 20, 2003 and ending on March
14, 2004, and at 100.00% beginning on March 15, 2004 and thereafter. The
notes are unsecured obligations of the Company. Upon a change in control,
the noteholders may require the Company to purchase the notes at 100% of
the principal amount of the notes plus accrued and unpaid interest. On
August 8, 2000, the Company filed a shelf registration statement with the
Securities and Exchange Commission with respect to the notes and the common
stock issuable upon conversion
F-13
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
of the notes pursuant to a registration rights agreement. Issuance costs of
$12.6 million, which are included as a deferred charge in other assets, are
being amortized to interest expense over the term of the notes. Accrued
interest of $6.3 million as of June 30, 2000 is included in accrued
liabilities.
In January 1999, the Company issued subordinated promissory notes with
detachable warrants in exchange for $7.0 million in cash. On April 8, 1999,
the Company issued a subordinated promissory note with a detachable warrant
in exchange for $2.0 million in cash. The notes bore interest at 10% per
annum with interest payable quarterly. The subordinated promissory notes
were issued with detachable warrants to purchase an aggregate of 3.1
million shares of the Company's redeemable convertible preferred stock at
an exercise price of $2.92 per share. In June 1999, the holders of the
subordinated promissory notes entered into a note repayment and warrant
exercise agreement with the Company which stipulated that immediately prior
to the closing of an initial public offering, the aggregate $9.0 million
principal amount of the notes would be applied toward the aggregate
exercise price of the detachable warrants. Accordingly, immediately prior
to the closing of the Company's initial public offering on July 15, 1999,
the warrants were exercised to purchase the Company's redeemable
convertible preferred stock, which shares of preferred stock automatically
converted into shares of common stock upon completion of the initial public
offering.
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 on July 15,
1999, 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.
(11) Redeemable Convertible Preferred Stock
On December 17, 1999, the Company issued 6,300 shares of Series A non-
voting mandatorily redeemable convertible preferred stock in connection
with the Company's acquisition of FlowPoint Corporation from Cabletron
Systems, Inc. On April 12, 2000 all of the Series A preferred stock was
converted into 6.3 million shares of common stock. On August 1, 2000 the
Company filed a registration statement on Form S-3 with the Securities and
Exchange Commission to register all of the common stock received by
Cabletron in connection with the acquisition of FlowPoint. The Company and
Cabletron entered into an agreement containing standstill provisions,
voting provisions, restrictions on transfer, and registration rights.
The following indicates the series of redeemable convertible preferred
stock in existence at June 30, 1999. Series for which preferred stock had
been issued and outstanding at June 30, 1999 were stated at the redemption
amount; issuance costs were 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):
F-14
<PAGE>
EFFECIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
<TABLE>
<CAPTION>
Dividend
Rate Per June 30,
Share 1999
---------- --------
<S> <C> <C>
Series A--7,096,000 shares authorized; 7,000,000 shares issued
and outstanding............................................................ $0.03 $ 3,500
Series B--522,848 shares authorized, issued and outstanding.................. $0.07 625
Series C--5,895,832 shares authorized; 5,858,332 shares issued
and outstanding............................................................ $0.07 7,030
Series D--2,473,644 shares authorized, issued and
outstanding................................................................ $0.12 5,000
Series E--3,091,430 shares authorized, issued and
outstanding................................................................ $0.15 7,480
Series F--2,057,159 shares authorized, issued and outstanding
in 1998 and 1999........................................................... $0.18 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 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 --
-------
$40,495
=======
</TABLE>
At June 30, 1999, outstanding preferred stock, which was converted into
24.7 million shares of common stock upon completion of the Company's
initial public offering on July 15, 1999, had voting rights equal to the
number of shares of common stock into which the preferred stock was
convertible. The preferred stock was 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 was the original issue price
adjusted for any dilution that would have occurred from future offerings.
The holders of the redeemable convertible preferred stock were entitled to
a liquidation preference equivalent to the original issue price of the
respective series of preferred stock plus declared but unpaid dividends.
Dividends were not declared and were noncumulative.
Upon completion of the Company's initial public offering on July 15, 1999,
all then outstanding redeemable preferred stock, including those shares
outstanding as a result of the conversion of the 10% subordinated
promissory notes and the 8% convertible promissory note (see Note 10), was
converted into 28.3 million shares of common stock.
(12) Common Stock and Stock Incentive Plans
On July 20, 1999, the Company adopted a new stock option plan (the "1999
Plan"). The 1999 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 was initially 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.
F-15
<PAGE>
EFFECIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
The 1999 Plan may be administered by the Board of Directors or a committee
of the board. The board or a committee of the board determines 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 options
generally vest ratably over a period of four years from the date of grant.
The 1999 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 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 November 19, 1999, the Company adopted a nonstatutory stock option plan
(the "NSO Plan"), which provides for the grant of nonstatutory stock
options to employees and consultants (excluding officers or directors) of
the Company. The plan was amended in April and July 2000 to increase the
number of shares reserved for issuance thereunder by an aggregate of
2,550,000 from 950,000 to 3,500,000. Unless terminated sooner, the plan
will terminate automatically in 2009. A total of 1,500,000 shares of
common stock were reserved for issuance under the plan at June 30, 2000.
The plan may be administered by the board of directors or a committee of
the board. The board or a committee of the board has the power to
determine the terms of the options, including the exercise price, the
number of shares subject to each option, the exercisability thereof, and
the form of consideration payable upon exercise. The options generally
vest ratably over a period of four years from the date of grant. The plan
provides that in the event of a merger of Efficient with or into another
corporation, or a sale of substantially all of our assets, each option
shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted,
the board or a committee of the board will provide for the optionee to have
the right to exercise the option as to all of the optioned stock, including
shares that would otherwise not be exercisable, for a period of fifteen
(15) days from the date of the notice, and the option will terminate upon
the expiration of such period.
In 1998, the Company adopted the Directors' Stock Option Plan (the
"Directors' Plan") pursuant to which stock options were granted to non-
employee members of the Company's Board of Directors. The Directors' Plan
authorized grants of options to purchase up to 275,000 shares of common
stock.
Option grants under the Directors' Plan were 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 were granted an option to purchase 15,000
shares on the date they become a director. After their initial grant, non-
employee directors were to be granted an option to purchase 15,000 shares
on January 1 of each year provided they had served on the Board for at
least six months. With the establishment of the 1999 Plan on July 20,
1999, new option grants are no longer made under the Directors' Plan.
In 1993, the Company adopted a stock option plan (the "1993 Plan") pursuant
to which the Company's Board of Directors granted stock options to
officers, directors and key employees. The 1993 Plan authorized grants of
options to purchase up to 10,000,000 shares of unissued
F-16
<PAGE>
EFFECIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
common stock. The Board of Directors determined 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 was exercisable. The options
generally vested ratably over a period of four years from the date of
grant. With the establishment of the 1999 Plan on July 20, 1999, new option
grants are no longer made under the 1993 Plan.
At June 30, 2000, there were options to purchase 86,300 shares available
for grant under the 1999 Plan. The per share weighted-average fair value
of stock options granted during each of the years ended June 30, 2000, 1999
and 1998 was $58.77, $5.17 and $2.60, respectively, on the date of grant as
estimated using the minimum value option-pricing model in 1999 and 1998,
and the Black-Scholes pricing model in 2000 with the following weighted-
average assumptions in all years: expected dividend yield of 0.0%, an
expected life of four years, a risk-free interest rate of 6% and a
volatility factor of 75% for 2000.
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 was
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 ended on
the last trading day on or before October 31, 1999.
Generally, 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.
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.
F-17
<PAGE>
EFFECIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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.
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 approximately $3.1 million, $13.1 million, and
$3.1 million of deferred stock option compensation during each of the years
ended June 30, 2000, 1999 and 1998, 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 and
is being amortized as a charge to operations over the vesting period of the
applicable options. Amortization of deferred stock option compensation of
$4.9 million, $3.1 million, and $1.2 million was recognized in the years
ended June 30, 2000, 1999 and 1998, respectively.
Had the Company determined compensation cost related to stock-based awards
to employees (including employee stock options and shares issued under the
Purchase Plan, collectively called "Options") 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,
------------------------------------------------
2000 1999 1998
---------- ---------- --------
<S> <C> <C> <C>
Net loss:
As reported $(130,446) $(26,405) $(9,291)
Pro forma $(154,859) $(26,187) $(9,687)
Basic and diluted net loss per share of common stock:
As reported $ (3.06) $ (6.87) $ (2.86)
Pro forma $ (3.63) $ (6.73) $ (2.98)
</TABLE>
Pro forma net loss reflects only stock options granted after June 30, 1995.
Therefore, the full impact of calculating compensation cost for 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
Options granted in prior periods is not considered.
Stock option activity for both the 1999 Plan and the 1993 Plan during the
periods indicated is as follows:
F-18
<PAGE>
EFFECIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
------------- ------------
<S> <C> <C>
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
Granted 6,741,700 58.77
Exercised (1,593,268) 0.61
Forfeited (883,622) 15.71
----------
Balance at June 30, 2000 10,396,804 36.68
==========
</TABLE>
The following presents certain information about outstanding stock options
at June 30, 2000:
<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>
$0.05-0.60 2,282,424 $ 0.40 6.9 years 1,505,002 $0.35
$1.50-2.50 2,049,860 $ 2.24 8.5 years 664,500 $2.20
$7.50-11.00 236,820 $ 10.13 8.9 years 8,514 $7.50
$38.44-69.75 4,136,500 $ 54.34 9.5 years -- --
$70.75-98.38 1,105,200 $ 73.42 9.5 years -- --
$105.00-115.25 337,500 $108.91 9.8 years -- --
$121.25-174.50 248,500 $147.29 9.7 years -- --
---------- ---------
10,396,804 2,178,016
---------- ---------
</TABLE>
At June 30, 2000, 1999 and 1998, the number of options exercisable was
2,178,016, 2,117,604, and 1,625,531, respectively, and the weighted-average
exercise price of those options was $0.94, $0.33, and $0.21, 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 $1.6 million, 6% demand
note payable. The demand note was repaid with interest in July 1999.
(13) Research and Development Arrangements
In October 1997, the Company entered into a development and license
agreement with a customer who owned 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.
F-19
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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.
(14) Lease Commitments
The Company leases certain property and equipment under capital leases,
and certain other facilities and equipment is leased under noncancelable
operating leases which expire at various dates.
Rent expense on operating leases for the years ended June 30, 2000, 1999,
and 1998 was approximately $2.0 million, $548,000, and $381,000,
respectively. During the year ended June 30, 2000, the Company entered
into capital leases for furniture for its new headquarters and certain
other manufacturing equipment. Future minimum lease payments under
noncancelable operating leases and the present value of future minimum
lease payments as of June 30, 2000 are:
Capital Operating
Leases Leases
--------- ---------
Years ended June 30:
2001 $1,073 $ 4,339
2002 1,065 3,989
2003 1,065 3,912
2004 276 3,965
2005 7 4,105
Thereafter -- 14,286
------ -------
3,486 $34,596
=======
Less: amount representing interest (679)
------
Present value of minimum lease payments 2,807
======
The Company leases certain equipment and office furniture under capital
lease arrangements. At June 30, 2000 and 1999, the cost of assets acquired
under such leases was approximately $3,419,000 and $0, and related
accumulated amortization was approximately $170,000 and $0, respectively.
Amortization of assets acquired under capital leases is included in
depreciation expense.
(15) Income Taxes
The Company has not recognized any tax benefits for its net operating loss
carryforwards.
Net deferred tax assets as of June 30, 2000 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards..................... $ 27,748 $ 17,275
Receivables and inventory reserves............... 589 136
Accrued liabilities.............................. 68 233
----------- ------------
Deferred tax assets............................ 28,405 17,644
Valuation allowance............................ (27,563) (17,444)
----------- ------------
</TABLE>
F-20
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
842 200
Deferred tax liability - furniture (842) (200)
and equipment..................................... ------------ ------------
Net deferred tax assets...................... $ -- $ --
=========== ============
</TABLE>
The net change in the valuation allowance for the years ended June 30,
2000 and 1999 was $10,119,000 and $8,133,000 respectively.
As of June 30, 2000, the Company has net operating loss carryforwards of
approximately $79.3 million 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
bond rate of 4.98%.
(16) Statements of Cash Flows
The Company paid cash interest of approximately $2.0 million, $0 and
$4,000 during the fiscal years ended June 30, 2000, 1999, and 1998,
respectively. No income taxes were paid during the years ended June 30,
2000, 1999, and 1998. Non-cash financing transactions during the fiscal
year ended June 30, 2000 included new capital lease obligations of $3.4
million, 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
$486.1 million for 34.6 million shares of common stock during the year
ended June 30, 2000. 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 with an aggregate value of $924.8
million, which was subsequently converted into 6.3 million shares of the
Company's common stock, for the assets and liabilities of FlowPoint. In
connection with the acquisition of Network TeleSystems, Inc., the Company
exchanged 400,000 shares of common stock with an aggregate value of $18.4
million for all of the then outstanding common stock of Network
TeleSystems, Inc. Non-cash financing transactions during the fiscal years
ended June 30, 1999 and 1998 were $0 and approximately $1.0 million,
respectively, in connection with the exchange of promissory notes and
related interest for redeemable convertible preferred stock.
(17) 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 1998, the Company also developed and marketed
asynchronous transfer mode ("ATM") network products which are no longer
actively marketed by the Company. In May 2000 the Company acquired Network
TeleSystems, Inc., which develops and markets client services software.
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
F-21
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
Company's products are produced in the United States. The Company grants
credit to customers located in several geographical regions in North
America, Europe and the Pacific Rim.
The following represents sales to customers in each of those geographical
regions as a percentage of total revenues, and revenues and gross margins
by product line for the years ended June 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Geographic Region 2000 1999 1998
------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
United States.......................... 78% 59% 48%
Europe................................. 6% 12% 40%
Pacific Rim:
Korea.............................. 12% 18% 2%
Other.............................. 4% 11% 10%
Product line (in thousands) 2000 1999 1998
------------------------------------------- -------- -------- --------
DSL revenues........................... $201,185 $ 12,915 $ 84
DSL gross margin....................... $ 45,003 $ (462) $ (19)
ATM LAN revenues....................... $ 1,018 $ 1,913 $ 3,286
ATM LAN gross margin................... $ 518 $ 946 $ 1,229
</TABLE>
For the year ended June 30, 2000, revenues from individual customers
amounted to 32%, 20%, and 11% of total revenues, and accounts receivable
related to these customers at June 30, 2000 was approximately $28.9
million, $18.8 million, and $16.6 million, respectively. 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 $2.8 million and $2.6
million, respectively. For the year ended June 30, 1998, revenues from
individual customers amounted to 20% and 13% of total revenues. During the
year ended June 30, 2000, the Company had revenues of $11.6 million and a
receivable balance at June 30, 2000 of $5.8 million from Cabletron
Systems, Inc., a significant stockholder. The Company performs ongoing
evaluations of its customers' financial conditions and generally does not
require collateral.
F-22
<PAGE>
Independent Auditors' Report on Schedule
The Board of Directors
Efficient Networks, Inc.:
Under date of July 18, 2000, we reported on the consolidated balance sheets
of Efficient Networks, Inc. and subsidiary as of June 30, 2000 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,
2000. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule. 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 18, 2000
F-23
<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, 2000
Allowances Deducted from Assets
Accounts receivable.......................... $ 120 921 780 (134) 1,687
Inventories.................................. 280 362 425 (2) 1,065
----------- ------------ ------------ ------------ -------------
Total Allowances Deducted from Assets....... $ 400 1,289 1,205 (142) $ 2,752
=========== ============ ============ ============ =============
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
=========== ============ ============ ============ =============
</TABLE>
F-24
