<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 8-K
__________________
Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Date of report (Date of earliest event reported): September 27, 2000
EFFICIENT NETWORKS, INC.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-26473 75-2486865
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(Commission File Number) (I.R.S. Employer Identification No.)
4849 Alpha Road
Dallas, TX 75244
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(Address of principal executive offices, including zip code)
972-852-1000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events
On September 27, 2000, Marquette Acquisition Corp., a Texas corporation
("Merger Sub"), which was a wholly-owned subsidiary of Efficient Networks, Inc.,
a Delaware corporation ("Efficient," "we" or the "Registrant"), was merged (the
"Merger") with and into MultiMedia Development Corporation, a Texas corporation
("MMD"), pursuant to an Agreement and Plan of Merger (the "Merger Agreement")
dated September 20, 2000 by and among Efficient, Merger Sub, MMD, and Barry
McConachie and Duane Schrodt (the "Shareholders"). The description contained in
this Item 5 of the transactions consummated pursuant to the terms and conditions
of the Merger Agreement is qualified in its entirety by reference to the full
text of the Merger Agreement, a copy of which is attached to this Report as
Exhibit 99.1.
In the Merger, the Registrant issued 2,442,910 shares of its common
stock to the Shareholders in exchange for all the common stock of MMD. At the
effective time of the Merger, Merger Sub ceased to exist and MMD, as the
surviving corporation in the Merger, became a wholly-owned subsidiary of
Efficient.
The Merger was intended to qualify as a tax-free reorganization under
the Internal Revenue Code of 1986, as amended, and is being accounted for as a
pooling-of-interests.
Attached as Appendix A to this current report on Form 8-K are the
Registrant's audited consolidated financial statements as of June 30, 2000 and
1999 and for each of the years in the three-year period ended June 30, 2000, all
of which have been restated to include the results of operations and financial
position of MMD as if the two companies were combined as of the beginning of the
earliest period presented. In addition, the Registrant has included the
following, all of which have been restated to reflect the acquisition of MMD as
of the beginning of the earliest period presented: the consolidated financial
statement schedule for the three years ended June 30, 2000; selected
consolidated financial data for the five years ended June 30, 2000; and
management's discussion and analysis of consolidated financial condition and
results of operations.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
The following Exhibits are filed as part of this report:
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EFFICIENT NETWORKS, INC.
Date: January 16, 2001
By: /s/ Jill S. Manning
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Jill S. Manning
Vice President and
Chief Financial Officer
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PAGE>
Appendix A
Selected Consolidated Financial Data
(in thousands, except per shares data)
The following selected consolidated financial data should be read in conjunction
with our Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations" included elsewhere in this Form 8-K. The selected consolidated
financial data has been restated to reflect the merger with MultiMedia
Development Corporation, which has been accounted for as a pooling-of-interests.
The statement of operations data for each of the years in the three-year period
ended June 30, 2000, and the balance sheet data as of June 30, 2000 and 1999 is
derived from our consolidated financial statements that have been included in
this Form 8-K. The selected consolidated balance sheet data as of June 30, 1998,
1997 and 1996 and the consolidated statement of operations data for the years
ended June 30, 1997 and 1996 is derived from consolidated financial statements
that have not been included in this Form 8-K.
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ----------
(in thousands, except per
share information)
Consolidated Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net revenues...................................... $ 4,248 $ 6,478 $ 7,564 $ 18,870 $ 206,948
Cost of revenues.................................. 2,209 2,386 2,160 14,344 156,704
-------- -------- -------- -------- ----------
Gross profit...................................... 2,039 4,092 5,404 4,526 50,244
-------- -------- -------- -------- ----------
Operating expenses:
Sales and marketing............................ 2,366 2,409 3,436 6,133 35,433
Research and development....................... 4,027 5,256 7,861 11,858 29,924
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 and
other intangible assets...................... -- -- -- -- 100,431
In-process research and
development.................................. -- -- -- -- 4,970
-------- -------- -------- -------- ----------
Total operating expenses..................... 7,673 9,569 14,103 23,100 185,050
-------- -------- -------- -------- ----------
Loss from operations.............................. (5,634) (5,477) (8,699) (18,574) (134,806)
Interest and other income (expense),
net............................................ 179 150 161 (7,847) 4,275
-------- -------- -------- -------- ----------
Net loss.......................................... $ (5,455) $ (5,327) $ (8,538) $(26,421) $(130,531)
======== ======== ======== ======== ==========
Basic and diluted net loss per share
(1)............................................ $ (1.03) $ (0.97) $ (1.50) $ (4.23) $ (2.90)
======== ======== ======== ======== ==========
Weighted average shares (1)....................... 5,281 5,470 5,697 6,336 45,072
======== ======== ======== ======== ==========
Consolidated Balance Sheet Data:
Cash and cash equivalents......................... $ 1,497 $ 4,787 $ 8,797 $ 5,601 $ 178,997
Working capital................................... 3,007 6,063 10,308 14,978 604,830
Total assets...................................... 5,561 8,213 13,137 24,389 1,560,158
Redeemable convertible preferred stock............ 16,155 23,635 34,743 40,495 --
Total stockholders' equity (deficit).............. (11,254) (15,914) (22,925) (36,581) 1,084,070
</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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MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED 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 Form 8-K.
Overview
Efficient is 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.
On September 27, 2000, we acquired MultiMedia Development
Corporation ("MMD"), a provider of network management, testing, simulation and
signaling software products. MMD's technology is designed to provide high speed
network carriers with the ability to manage broadband equipment from a number of
different vendors. MMD's products are used to enable and automate the creation
of ATM, or asynchronous transfer mode, and frame relay virtual circuits across
complex networks. Primary customers include network service providers who create
and manage large, high speed networks. MMD has industry alliances with many of
the same broadband equipment vendors as Efficient Networks, including ADC,
Copper Mountain, Cisco, Accelerated Networks, General Bandwidth, Marconi and
others. MMD works closely with these companies to offer a seamless management
platform that allows carriers to create end-to-end services and provision new
customers rapidly, across a diverse set of equipment. MMD also provides
signaling gateway products that help automate creation of connections in
broadband networks, and help transfer signaling messages between broadband and
narrowband networks.
Under the terms of the agreement, each outstanding share of MMD common
stock was exchanged for 2.44291 newly issued shares of common stock of the
Company. This resulted in the issuance of 2,442,910 shares of our common stock.
The transaction was accounted for as a pooling-of-interests and, accordingly,
the financial position, results of operations and cash flows of MMD have been
combined with those of the Company for the same dates and periods as if the
entities had been combined from the earliest date presented.
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 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 and software
related products. We shipped our first DSL products in the third quarter of
fiscal 1998. Our DSL and software related products, which accounted for less
than 56.6% of net revenues in fiscal 1998, represented 89.9% 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
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company-aligned distributors. For the fiscal year ended June 30, 2000, sales to
SBC Communications represented 31.6% of our net revenues, sales to Covad
Communications represented 19.2% of our net revenues, and sales to Hanaro
Telecom represented 10.3% of our net revenues. For the fiscal year ended June
30, 1999, sales to Covad Communications represented 23.2% of our net revenues,
sales to MCI Worldcom represented 20.8% of our net revenues, and sales to Soon
Cabling Ptc., Ltd. represented 13.8% of our net revenues. Our top ten customers
for the fiscal years ended June 30, 1999 and 2000 accounted for 83.4% and 87.9%
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 32.7% of our net revenues in fiscal 1999 and 20.9% 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.
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 $182.5 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
$19.4 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.
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.
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<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Net revenues......................................... 100.0% 100.0% 100.0%
Cost of revenues..................................... 28.6 76.0 75.7
------ ------ ------
Gross profit......................................... 71.4 24.0 24.3
------ ------ ------
Operating expenses:
Sales and marketing............................... 45.4 32.5 17.1
Research and development.......................... 103.9 62.8 14.5
General and administrative........................ 21.7 10.6 4.5
Stock option compensation......................... 15.4 16.5 2.4
Amortization of goodwill and other intangible assets -- -- 48.5
In-process research and development............... -- -- 2.4
------ ----- -----
Total operating expenses...................... 186.4 122.4 89.4
------ ------ ------
Loss from operations................................. (115.0) (98.4) (65.1)
Interest and other income (expense), net............. 2.1 41.6 2.1
------ ------ ------
Net loss............................................. (112.9)% (140.0)% (63.0)%
====== ======= =======
</TABLE>
Net Revenues
Net revenues consist primarily of product sales, net of allowances for
returns. Net revenues increased 996.7% to $206.9 million in fiscal 2000 from
$18.9 million in fiscal 1999. Net revenues in fiscal 1999 reflected a 149.5%
increase from the $7.6 million realized in fiscal 1998. DSL product and software
related revenues increased from $4.3 million in fiscal 1998 to $17.0 million in
fiscal 1999 and $205.9 million in 2000. The increases in DSL and software
related product revenues from fiscal 1998 to fiscal 2000 reflect the continued
market adoption of our DSL and software related products.
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 992.5% 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 and
software related product sales.
Gross margin represented 24.3% of net revenues in fiscal 2000, compared
to 24.0% of net revenues in fiscal 1999 and 71.4% of net revenues in fiscal
1998. Gross margin on our DSL and software related products increased from 21.1%
of the related revenues in fiscal 1999 to 24.2% 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. 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 would have been 24.8%. 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
<PAGE>
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 45.4% of net revenues in fiscal
1998, 32.5% in fiscal 1999, and 17.1% 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 152.4% from $11.9 million in fiscal 1999 to $29.9 million in fiscal
2000. This compares to an increase of 50.8% in fiscal 1999 over the $7.9 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 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
103.9% of net revenues in fiscal 1998, 62.8% in fiscal 1999, and 14.5% 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.
<PAGE>
General and Administrative Expenses
General and administrative expenses consist primarily of employee
salaries and related expenses for executive, administrative and accounting
personnel, facility costs, insurance costs and professional fees. General and
administrative expenses increased 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 21.7% of net
revenues in fiscal 1998, 10.6% in fiscal 1999, and 4.5% 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 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.
<PAGE>
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.
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 $183.2
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 $505.7 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
<PAGE>
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 $130.3 million.
Cash used in operating activities was $22.6 million in fiscal 1999 and $6.8
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 $589,000 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 $635.0 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.
<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
November 9, 2000
F-1
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Balance Sheets
Years ended June 30, 2000 and 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
Assets 2000 1999
------------- -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 178,997 $ 5,601
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 91,687 10,743
Inventory deposit 50,000 --
Inventories 29,759 5,472
Other current assets 1,665 241
----------- -----------
Total current assets 678,850 22,057
Furniture and equipment, net 21,022 2,303
Goodwill and other intangible assets, net of accumulated
amortization of $100,432 843,176 --
Other assets, net 17,110 29
----------- -----------
$ 1,560,158 $ 24,389
=========== ===========
Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 22,640 $ 4,113
Accrued liabilities 41,366 2,230
Current portion of capital lease obligations 738 --
Deferred revenue 9,275 736
----------- -----------
Total current liabilities 74,019 7,079
Convertible subordinated notes 400,000 --
Capital lease obligations, net of current portion 2,069 --
Long-term debt, net of discount -- 13,396
----------- -----------
Total liabilities 476,088 20,475
----------- -----------
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; 58,182,566 and 6,805,131 shares
issued and outstanding in 2000 and 1999, respectively 58 6
Additional paid-in capital 1,275,525 29,785
Deferred stock option compensation (9,989) (14,606)
Accumulated deficit (182,524) (51,766)
Accumulated other comprehensive income 1,000 --
----------- -----------
Total stockholders' equity (deficit) 1,084,070 (36,581)
----------- -----------
$ 1,560,158 $ 24,389
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statements of Operations
Years ended June 30, 2000, 1999 and 1998
(in thousands, except per data share)
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
Net revenues $ 206,948 $ 18,870 $ 7,564
Cost of revenues 156,704 14,344 2,160
---------- ---------- ----------
Gross profit 50,244 4,526 5,404
---------- ---------- ----------
Operating expenses:
Sales and marketing 35,433 6,133 3,436
Research and development 29,924 11,858 7,861
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 185,050 23,100 14,103
---------- ---------- ----------
Loss from operations (134,806) (18,574) (8,699)
Interest income 12,188 255 177
Interest expense and other, net (7,913) (8,102) (16)
---------- ---------- ----------
Net loss $ (130,531) $ (26,421) $ (8,538)
========== ========== ==========
Basic and diluted net loss per share of common
stock $ (2.90) $ (4.23) $ (1.50)
========== ========== ==========
Weighted-average shares of common stock outstanding 45,072 6,336 5,697
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EFFICIENT NETWORKS, INC.
Consolidated Statement 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 5,497,681 $ 5 $ 3,725 $ (2,837) $ (16,807) $ - $ (15,914)
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 - - - - (8,538) - (8,538)
---------- ------- ----------- ------------ ----------- ------------- -----------
Balance at June 30, 1998 6,059,874 6 7,229 (4,815) (25,345) - (22,925)
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 - - - - (26,421) - (26,421)
---------- ------- ----------- ------------ ----------- ------------- -----------
Balance at June 30, 1999 6,805,131 6 29,785 (14,606) (51,766) - (36,581)
Comprehensive income (loss):
Net loss - - - - (130,531) - (130,531)
Unrealized net gains on
securities - - - - - 1,000 1,000
-----------
Comprehensive loss - - - - - - (129,531)
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
Distributions paid to
MultiMedia Development
Corporation Shareholders - - - - (227) - (227)
Deferred stock option
compensation - - 3,128 (3,128) - - -
Amortization of
deferred stock
option compensation - - - 4,908 - - 4,908
---------- ------- ----------- ------------ ----------- ------------- -----------
Balance at June 30, 2000 58,182,566 $ 58 $ 1,275,525 $ (9,989) $ (182,524) $ 1,000 $ 1,084,070
========== ======= =========== ============ =========== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<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 $ (130,531) $ (26,421) $ (8,538)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,313 826 736
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:
Account receivable, net (70,855) (11,031) (569)
Inventory deposit (50,000) -- --
Inventories (23,053) (4,574) (304)
Other assets and liabilities (6,513) 49 (201)
Accounts payable and accrued liabilities 28,418 7,031 925
Deferred revenue 8,201 736 --
---------- --------- ----------
Net cash used in operating activities (130,310) (22,556) (6,786)
---------- ---------- ----------
Cash flows used in investing activities:
Purchases of furniture and equipment (17,649) (1,714) (589)
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 (331,286) (1,714) (589)
---------- ---------- ----------
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
Distributions to MultiMedia Development Corporation
shareholders (227) -- --
---------- ---------- ----------
Net cash provided by financing activities 634,992 21,074 11,385
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 173,396 (3,196) 4,010
Cash and cash equivalents at beginning of year 5,601 8,797 4,787
---------- ---------- -----------
Cash and cash equivalents at end of year $ 178,997 $ 5,601 $ 8,797
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
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.
In September 2000, the Company acquired MultiMedia Development
Corporation ("MMD"). The consolidated financial statements give
retroactive effect to the merger of a wholly owned subsidiary of the
Company into MMD on September 27, 2000, which has been accounted for as
a pooling-of-interests as described in Note 4 to the consolidated
financial statements.
(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. 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).
F-6
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
(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:
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 $9.3 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.
Revenue from services is recorded in the period services are
provided to customers.
(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
F-7
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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.
(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 $(130,531) $(26,421) $ (8,538)
Accretion of issuance costs on
redeemable convertible preferred
stock -- (350) --
--------- -------- --------
Net loss available to common
stockholders $(130,531) $(26,771) $ (8,538)
========= ======== ========
Weighted average shares outstanding 45,072 6,336 5,697
======== ======== ========
Basic and diluted net loss per share $ (2.90) $ (4.23) $ (1.50)
========= ======== ========
</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
F-8
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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.
(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.
F-9
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
(4) Acquisitions
MultiMedia Development Corporation
On September 27, 2000, the Company acquired MMD, a provider of network
management, testing, simulation and signaling software products. MMD's
technology is designed to provide high speed network carriers with the
ability to manage and support broadband equipment, virtual private networks
and integrated voice/data services. Primary customers include network
service providers who create and manage large, high speed networks.
Under the terms of the agreement, each outstanding share of MMD common
stock was exchanged for 2.44291 newly issued shares of common stock of the
Company. This resulted in the issuance of 2,442,910 shares of the Company's
common stock. The transaction was accounted for as a pooling-of-interests
and, accordingly, the financial position, results of operations and cash
flows of MMD have been combined with those of the Company for the same
dates and periods as if the entities had been combined from the earliest
date presented.
The results of operations previously reported by the separate companies and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below (in thousands):
Year Ended June 30,
-----------------------------------
2000 1999 1998
--------- -------- --------
Total revenues:
Efficient Networks, Inc. $ 202,203 $ 14,828 $ 3,370
MMD 4,745 4,042 4,194
-------- -------- --------
$ 206,948 $ 18,870 $ 7,564
======== ======== ========
Net income (loss):
Efficient Networks, Inc. $(130,446) $(26,405) $ (9,291)
MMD (85) (16) 753
--------- -------- --------
$(130,531) $(26,421) $ (8,538)
========= ======== ========
Network TeleSystems, Inc.
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.
F-10
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
The total purchase price of $19.3 million, including direct acquisition
costs of approximately $900,000, was allocated as follows (in thousands):
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
=======
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 remainder will be amortized at a rate of
approximately $3.6 million per year over a five-year period.
FlowPoint Corporation
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):
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
=========
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
F-11
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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.
The following pro forma financial information presents a summary of the
results of operations as if the acquisitions had occurred on July 1, 1998:
(Unaudited)
-----------------------------
Year ended Year ended
June 30, 2000 June 30, 1999
------------- --------------
Revenues $ 232,555 $ 41,119
Expenses 451,296 255,462
----------- -----------
Net loss $ (218,741) $ (214,343)
=========== ===========
Basic and diluted loss per share
of common stock $ (4.49) $ (15.47)
=========== ===========
Shares used in computing basic and
diluted loss per share of common
stock 48,692 13,854
=========== ===========
(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):
Gross Gross
Unrealized Unrealized
Holding Holding Market
Cost Gains Losses Value
--------- ---------- ---------- --------
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
======== ======== ======== ========
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.
F-12
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
(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.
(7) Inventories
Inventories consisted of the following (in thousands):
June 30,
----------------------
2000 1999
--------- --------
Raw materials $ 5,329 $ 2,265
Finished goods 24,430 3,207
-------- --------
Total $ 29,759 $ 5,472
======== ========
(8) Furniture and Equipment
Furniture and Equipment consisted of the following (in thousands):
June 30,
----------------------
2000 1999
--------- --------
Computers $ 6,911 $ 2,839
Purchased software 7,138 900
Equipment 5,022 593
Furniture and fixtures 3,773 148
Leasehold improvements 2,903 235
-------- --------
Total furniture and equipment 25,747 4,715
Less accumulated depreciation and amortization (4,725) (2,412)
-------- --------
Furniture and equipment, net $ 21,022 $ 2,303
======== ========
(9) Accrued Liabilities
Accrued Liabilities consisted of the following (in thousands):
June 30,
----------------------
2000 1999
--------- ---------
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 5,164 297
-------- --------
$ 41,366 $ 2,230
======== ========
F-13
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
(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 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
F-14
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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):
Dividend
Rate Per June 30,
Share 1999
-------- -------
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
=======
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
F-15
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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.
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.
F-16
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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 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.
F-17
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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.
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:
F-18
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported $(130,531) $ (26,421) $ (8,538)
Pro forma $(154,944) $ (26,639) $ (8,934)
Basic and diluted net loss per share of common stock:
As reported $ (2.90) $ (4.23) $ (1.50)
Pro forma $ (3.44) $ (4.20) $ (1.57)
</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:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise 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>
F-19
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
The following presents certain information about outstanding stock
options at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ---------------------
Weighted Weighted
Average average
Number of Exercise contractual Number of Exercise
Range of exercise price 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.
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 $2.1 million, $594,000, and $399,000,
respectively. During the year ended June 30, 2000, the Company entered
into capital leases for furniture for its new headquarters and certain
other
F-20
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
Years ended June 30:
2001 $ 1,073 $ 4,349
2002 1,065 3,999
2003 1,065 3,920
2004 276 3,966
2005 7 4,105
Thereafter - 14,286
------- -------
3,486 $34,625
=======
Less: amount representing interest (679)
-------
Present value of minimum lease payments $ 2,807
======
</TABLE>
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):
2000 1999
Deferred tax assets: -------- --------
Operating loss carry forwards..................... $ 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)
-------- --------
842 200
Deferred tax liability - furniture and equipment... (842) (200)
-------- --------
Net deferred tax assets...................... $ - $ -
======== ========
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
F-21
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
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%.
MMD was incorporated as an S Corporation. The tax consequences of all
profits and losses through June 30, 2000 were the responsibility of the
shareholders of MMD. Accordingly, the Company has not provided for
federal income taxes for MMD operations in the accompanying consolidated
financial statements. Effective September 27, 2000, MMD converted to a C
Corporation and the tax consequences subsequent to September 27, 2000
are the responsibility of the Company. Upon conversion to a C
Corporation, there were no significant differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
(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 and software related 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 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:
F-22
<PAGE>
EFFICIENT NETWORKS, INC.
Notes to Consolidated Financial Statements
June 30, 2000, 1999 and 1998 (continued)
<TABLE>
<CAPTION>
Geographic Region 2000 1999 1998
-------------------------------------------- --------- ---------- -------
<S> <C> <C> <C>
United States............................... 79% 67% 77%
Europe...................................... 6% 10% 17%
Pacific Rim:
Korea..................................... 11% 14% 1%
Other..................................... 4% 9% 5%
Product line (in thousands) 2000 1999 1998
-------------------------------------------- ---------- ---------- -------
DSL and software related revenues........... $ 205,930 $ 16,957 $ 4,278
DSL and software related gross margin....... $ 49,726 $ 3,580 $ 4,175
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%, 19%, and 10% 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 23%,
21% and 14% of total revenues, and accounts receivable related to
these customers at June 30, 1999 was approximately $2.8 million,
$385,000 and $2.6 million, respectively. For the year ended June 30,
1998, revenues from an individual customer amounted to 55.4% 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-23
<PAGE>
Independent Auditors' Report on Schedule
The Board of Directors
Efficient Networks, Inc.:
Under date of November 9, 2000, we reported on the 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. 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
November 9, 2000
<PAGE>
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 1,283 1,205 (136) $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>
