-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N7mTLus+k1SMd0VvKyEZWlGN7Eo/qT+1PLXC0vEVasfmRvw6fK1MFv9syUfMg278 QZPD8Ic89d1nsTyB+kY4AQ== 0000929624-00-000011.txt : 20000202 0000929624-00-000011.hdr.sgml : 20000202 ACCESSION NUMBER: 0000929624-00-000011 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20000110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EFFICIENT NETWORKS INC CENTRAL INDEX KEY: 0001085061 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 752486865 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-94289 FILM NUMBER: 503764 BUSINESS ADDRESS: STREET 1: 4201 SPRING VALLEY ROAD STREET 2: SUITE 1200 CITY: DALLAS STATE: TX ZIP: 75244 BUSINESS PHONE: 9729913884 MAIL ADDRESS: STREET 1: 4201 SPRING VALLEY ROAD STREET 2: SUITE 1200 CITY: DALLAS STATE: TX ZIP: 75244 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on January 10, 2000 Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 ---------------- EFFICIENT NETWORKS, INC. (Exact name of Registrant as specified in its charter) Delaware 3661 75-2486865 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
---------------- 4201 Spring Valley Road, Suite 1200 Dallas, Texas 75244-3666 (972) 991-3884 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ---------------- MARK A. FLOYD Chief Executive Officer 4201 Spring Valley Road, Suite 1200 Dallas, Texas 75244-3666 (972) 991-3884 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- Copies to: KENNETH M. SIEGEL S. MICHAEL DUNN, P.C. ADAM R. DOLINKO MICHELLE KWAN MONTOYA HELEN E. QUINN Brobeck, Phleger & Harrison LLP Wilson Sonsini Goodrich & Rosati 301 Congress Avenue, Suite 1200 Professional Corporation Austin, Texas 78701 650 Page Mill Road (512) 477-5495 Palo Alto, California 94304 (650) 493-9300 ---------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Proposed Maximum Title of Each Class of Amount Maximum Aggregate Amount of Securities to be To Be Offering Price Offering Registration Registered Registered(1) Per Share(2) Price(2) Fee - -------------------------------------------------------------------------------- Common Stock, $0.001 par value................. 5,750,000 $58.875 $338,531,250 $89,372.25 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) Includes 750,000 shares that the Underwriters have the option to purchase from the Company to cover over-allotments, if any. (2) The price is estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) promulgated under the Securities Act of 1933, as amended, and represents the average of the high and low market prices of a share of the Company's Common Stock on January 6, 2000 as reported on the Nasdaq National Market. ---------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall hereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +This information in this prospectus is not complete and may be changed. We + +may not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JANUARY 10, 2000. 5,000,000 Shares [LOGO OF EFFICIENT NETWORKS, INC. APPEARS HERE] Common Stock --------- We are selling 2,000,000 shares of common stock and the selling stockholders are selling 3,000,000 shares of common stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders. The underwriters have an option to purchase a maximum of 750,000 additional shares from us to cover over-allotments of shares. Our common stock is quoted on The Nasdaq Stock Market's National Market under the symbol "EFNT". The last reported sale price of the common stock on January 6, 2000 was $60.25 per share. Investing in our common stock involves risks. See "Risk Factors" on page 7.
Underwriting Proceeds to Price Discounts and Proceeds to Selling to Public Commissions Efficient Stockholders -------------- -------------- -------------- -------------- Per Share................... $ $ $ $ Total....................... $ $ $ $
Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston Robertson Stephens Prudential Volpe Technology a unit of Prudential Securities Dain Rauscher Incorporated The date of this prospectus is , 2000. ------------ TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 3 Risk Factors........................ 7 Special Note Regarding Forward- Looking Statements................. 19 Use Of Proceeds..................... 20 Price Range of Common Stock......... 20 Dividend Policy..................... 20 Capitalization...................... 21 Selected Consolidated Financial Data............................... 22 Management's Discussion and Analysis Of Financial Condition and Results Of Operations...................... 23
Page ---- Business............................ 35 Management.......................... 52 Certain Transactions................ 61 Principal and Selling Stockholders.. 63 Description Of Capital Stock........ 66 Shares Eligible For Future Sale..... 70 Underwriting........................ 72 Notice To Canadian Residents........ 74 Legal Matters....................... 75 Experts............................. 75 Additional Efficient Information.... 75 Index To Consolidated Financial Statements......................... F-1
------------ You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. Efficient Networks, Inc. ---------------- Efficient Networks is a worldwide developer and supplier of high-speed digital subscriber line customer premises equipment for the high-speed, high- volume digital communication, or broadband, access market. Digital subscriber line, or DSL, solutions enable telecommunications and other communication network service providers to provide high-speed, cost-effective broadband access services over the existing copper wire telephone infrastructure. We believe there is significant demand for broadband access, especially among business users and consumers who have found current solutions to be inadequate or too expensive. DSL networks generally consist of two core components, one installed at the network operator's facility--typically referred to as the central office--and one installed at the customer's home or business. The DSL equipment installed at the customer premises is generally referred to as customer premises equipment. We develop and produce DSL customer premises equipment, and in particular single- and multiple-user DSL customer premises equipment for small- to medium-size businesses, branch offices of large corporations and consumers. Our DSL products enable applications such as high- speed Internet access, electronic commerce, access to computer networks from remote locations, telecommuting and extensions of corporate networks to branch offices. Business-critical Internet-based applications, such as electronic commerce, Web browsing and access to computer networks from remote locations for telecommuters, generate enormous data traffic over the existing communications infrastructure. The growth in Internet use, increased competition resulting from domestic and international deregulation, and pressure from alternative means of providing high-speed, high-volume access services have led both traditional and new operators of the existing copper telephone wire-based networks to deploy DSL. DSL technology enables these network service providers to rely upon the existing copper telephone wire infrastructure to cost- effectively provide broadband access to most businesses and homes currently connected by telephone lines. In order to offer cost-effective DSL services to end users, network service providers are actively seeking DSL customer premises equipment solutions that offer interoperability from the end user's personal computer through the service provider's networks and which provide for simple and low-cost installation and maintenance. The products that make up our SpeedStream family of customer premises equipment satisfy the requirements of network service providers as they: . Enable DSL Deployments. We enable network service providers to rapidly deploy DSL services, thereby allowing them to quickly capture market share in today's intensely competitive broadband services market. By offering a broad product line we can support DSL services targeted at both businesses and consumers. . Ensure End-To-End Interoperability. Our technology expertise and ongoing product development coordination with network equipment vendors, such as ADC Telecommunications, Advanced Fibre Communications, Alcatel, Copper Mountain Networks, Ericsson, Lucent Technologies, Newbridge Networks, Nokia, Nortel Networks and Siemens, and network service providers enable us to ensure interoperability between the end user's personal computer and the service provider's network. . Provide for Efficient and Cost-Effective Installation. The software included with many of our products allows a network service provider to pre-configure the customer premises equipment to the parameters of a particular network, reducing the costs associated with having installers perform these activities during each end-user installation. As demand for DSL service grows, pre- configuration helps network operators meet their customers' expectations for rapid service activation. 3 . Provide for Cost-Effective Maintenance. Our Advanced Status software allows a network service provider to easily monitor, diagnose and often remotely fix the customer's problems quickly, which can substantially reduce the network service provider's customer support costs. Our objective is to be the leading worldwide provider of high-performance DSL broadband access customer premises equipment for businesses, remote offices, telecommuters and consumers. To achieve this goal, we intend to capitalize on our early market acceptance by network service providers and to leverage our relationships with network equipment vendors. In addition, we will continue developing enhancements to our current DSL products and expect to develop products that are capable of processing both voice and data communications through the same DSL equipment and network. Also, we intend to continue to target strategic partnerships and acquisitions to augment our product offerings, sales channels and worldwide operations. Finally, we plan to extend our distribution channels to meet the growing demand for broadband access solutions and increase our brand awareness. We sell our products to network equipment vendors and DSL network service providers. As of December 31, 1999, our products have been deployed by Ameritech, Bell Atlantic, BellSouth, Covad Communications, Hanaro Telecom, Hong Kong Telecom, Pacific Bell, Singapore Telecom, Southwestern Bell, and TeleDanmark, among others, and purchased by several network equipment vendors. A number of other network service providers have begun to test our customer premises equipment solutions. We were incorporated in Delaware in 1993. Our principal executive offices are located at 4201 Spring Valley Road, Suite 1200, Dallas, Texas 75244-3666 and our telephone number is (972) 991-3884. Our Website is located at http://www.efficient.com. Information contained on our Website does not constitute part of this prospectus. Recent Developments On December 17, 1999 we completed the acquisition of FlowPoint Corporation, a wholly-owned subsidiary of Cabletron Systems, Inc., based in Santa Clara, California, in exchange for a combination of common stock and convertible preferred stock equal to an aggregate of 13,500,000 shares of our common stock on an as-converted basis. FlowPoint's primary business is the design, manufacture and sale of a comprehensive line of advanced broadband routers for deployment at customer premises. FlowPoint's product line consists of routing products for use in business-class DSL services. According to the Dell'Oro Group's November 1999 study of market performance for the first three quarters of 1999, FlowPoint was the market leader in SDSL and IDSL customer premises equipment. We now provide the industry's most comprehensive line of DSL customer premises equipment, including internal and universal serial bus modems for personal computers, DSL local area network modems, small office and telecommuter DSL routers, and DSL routers for small businesses and branch offices. FlowPoint's customers include major incumbent and competitive local exchange carriers, including Ameritech, Covad and NorthPoint, and several European incumbent carriers such as British Telecom. FlowPoint also works closely with a number of Internet service providers offering DSL services to businesses. FlowPoint recently announced the availability of an integrated access device that supports both voice and data service delivery over a single DSL line. The acquisition of FlowPoint is expected to increase our revenue and market share, it expands our product line and customer base, adds key personnel, and establishes a presence for Efficient Networks in Silicon Valley. 4 The Offering Common stock offered by 2,000,000 shares Efficient........................ Common stock offered by the 3,000,000 shares selling stockholders............. Common stock outstanding after 53,156,248 shares this offering.................... Use of proceeds................... For general corporate purposes, principally working capital, additional sales and marketing efforts, and potential acquisitions. Nasdaq National Market symbol..... EFNT
- -------- The above table is based on shares outstanding as of December 31, 1999. See "Capitalization." This table includes 6,300,000 shares of common stock issuable to Cabletron Systems, Inc. upon conversion of preferred stock held by Cabletron. For a description of the preferred stock held by Cabletron, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments" and "Description of Capital Stock." This table excludes: . options outstanding to purchase a total of 8,164,384 shares of common stock at a weighted average exercise price of $10.73 per share and 2,778,750 shares reserved for grant of future options under our stock option plans; . 184,889 shares reserved for future grants under our 1999 Employee Stock Purchase Plan; and . 34,246 shares issuable upon exercise of outstanding warrants. ---------------- You should be aware that our fiscal year ends on June 30; thus, a reference to "fiscal 1999," for example, is to the fiscal year ended June 30, 1999. In addition, except as otherwise indicated, information in this prospectus assumes that the underwriters' over-allotment option will not be exercised. 5 Summary Consolidated Financial Information (in thousands, except per share data)
Three Months Ended Fiscal Year Ended June 30, September 30, ----------------------------- -------------------- 1997 1998 1999 1998 1999 -------- -------- --------- --------- --------- Statement of Operations Data: Net revenues............. $ 4,122 $ 3,370 $ 14,828 $ 1,174 $ 12,171 Cost of revenues......... 2,386 2,160 14,344 863 11,706 -------- -------- --------- --------- --------- Gross profit............. 1,736 1,210 484 311 465 Loss from operations..... (6,760) (9,421) (18,505) (3,455) (7,677) Net loss................. $ (6,635) $ (9,291) $ (26,405) $ (3,375) $ (7,754) ======== ======== ========= ========= ========= Net loss per share: Basic and diluted...... $ (2.19) $ (2.86) $ (6.87) $ (0.93) $ (0.25) ======== ======== ========= ========= ========= Weighted average shares................ 3,027 3,254 3,893 3,713 30,496 ======== ======== ========= ========= ========= Pro forma net loss per share: Basic and diluted...... $ (0.97) ========= Weighted average shares................ 28,342 =========
September 30, 1999 -------------------- Actual As Adjusted -------- ----------- Balance Sheet Data: Cash and cash equivalents.................................. $ 47,456 $160,931 Working capital............................................ 69,051 182,526 Total assets............................................... 88,680 202,155 Total stockholders' equity................................. 72,252 185,727
---------------- See Note 2 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing per share data. The as adjusted numbers give effect to our receipt of the estimated net proceeds from the sale of the 2,000,000 shares of common stock offered by Efficient hereby at an assumed public offering price of $60.25 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. See "Use of Proceeds" and "Capitalization." 6 RISK FACTORS You should carefully consider the risks described below before making a decision to invest in Efficient. Risks Associated With the Digital Subscriber Line Industry Sales of our products depend on the widespread adoption of broadband access services and if the demand for broadband access services does not develop, then our results of operations and financial condition would be adversely affected. Our business would be harmed, and our results of operations and financial condition would be adversely affected, if the use of broadband access services does not increase as anticipated, or if our customers' broadband access services are not well received in the marketplace. Certain critical factors will likely continue to affect the development of the broadband access services market. These factors include: . inconsistent quality and reliability of service; . lack of availability of cost-effective, high-speed service; . inability to integrate business applications on the Internet; . lack of interoperability among multiple vendors' network equipment; . congestion in service providers' networks; . inadequate security; and . inability to meet growing demands for increasing bandwidth. Even if these factors are adequately addressed, the market for broadband access services to the Internet and corporate networks may fail to develop or may develop more slowly than anticipated. If this market fails to develop or develops more slowly than anticipated, our business would be harmed, and our results of operations and financial condition would be adversely affected. Many competing technologies may serve our target market, and if the DSL technology upon which our products is based does not succeed as a technological solution for broadband access, we would not be able to sustain or grow our business. The market for high-speed data transmission services has several competing technologies which offer alternative solutions, and the demand for DSL services is uncertain in light of this competition. The introduction of new products by competitors, market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our products less competitive or obsolete. If any of these events occur, we would be unable to sustain or grow our business. Technologies which compete with DSL are: . other access solutions provided by telephone network service providers such as dial-up analog modems, integrated services digital networks and T1 services; . broadband wireless technologies; and . broadband cable technologies. If these alternatives gain market share at the expense of DSL technologies, demand for our products would be reduced, and we would be unable to sustain or grow our business. Additionally, wireless and cable network service providers are well funded, and cable network service providers have large existing customer bases. As a result, competition from these companies is intense and expected to increase. 7 We depend upon network service providers to deploy DSL technologies and services in a broad and timely manner, and if they do not, we would be unable to sell our products. If network service providers do not increase their deployment of DSL services rapidly, we would be unable to sell our products as anticipated, if at all. Factors that impact deployments include: . the demand from end users; . a prolonged approval process, including laboratory tests, technical trials, marketing trials, initial commercial deployment and full commercial deployment; . the development of a viable business model for DSL services, including the capability to market, sell, install and maintain DSL services; . cost constraints, such as installation costs and space and power requirements at the network service providers' central offices; . varying and uncertain conditions of the installed copper wire, including size and length, electrical interference, and crossover interference with voice and data telecommunications services; . problems of interoperability among DSL network equipment vendors' products; . evolving industry standards for DSL technologies; and . domestic and foreign government regulation. Risks Within the DSL Industry Competition within the DSL market is intense and includes numerous established competitors, and if we are unable to compete effectively, our business would be harmed. Competition in the DSL customer premises equipment market is intense, and we expect competition to increase. Many of our competitors and potential competitors have substantially greater name recognition and technical, financial and marketing resources than we have. If we are unable to compete successfully, our business will be harmed and our results of operations and financial condition would be adversely affected. We cannot assure you that we will have the financial resources, technical expertise or marketing, distribution and support capabilities to compete successfully. See "Business-- Industry Background" and "--Competition." Competitive pressures could adversely affect us in the following ways: . reduce demand for our products; . cause delays or cancellations of customer orders; . cause us to reduce prices on our existing products; or . increase our expenses. Our failure to enhance our existing products or to develop and introduce new products that meet changing customer requirements and emerging industry standards would adversely impact our ability to sell our products. The market for high-speed broadband access is characterized by rapidly changing customer demands and short product life cycles. If our product development and enhancements take longer than planned, the availability of our products would be delayed. Any such delay would adversely impact our ability to sell our products and our results of operations and financial condition would be adversely affected. Our future success will depend in large part upon our ability to: . identify and respond to emerging technological trends in the market; 8 . develop and maintain competitive products that meet changing customer demands; . enhance our products by adding innovative features that differentiate our products from those of our competitors; . bring products to market on a timely basis; . introduce products that have competitive prices; and . respond effectively to new technological changes or new product announcements by others. The technical innovations required for us to remain competitive in the DSL industry are inherently complex, require long development cycles and sometimes depend on sole-source suppliers. We will be required to continue to invest in research and development in order to maintain and enhance our existing technologies and products, but we may not have sufficient funds available to do so. Even if we have sufficient funds, these investments may not serve the needs of customers or be interoperable with changing technological requirements or standards. We will have to incur most research and development expenses before the technical feasibility or commercial viability of enhanced or new products can be ascertained. Our revenues from future or enhanced products may not be sufficient to recover our associated development costs. Our current products are not interoperable with certain products offered by suppliers to our customers and are subject to evolving industry standards. If our products do not interoperate with our target customers' networks or an industry standard that achieves market acceptance, customers may refuse to purchase our products. In some cases, network equipment vendors, such as Cisco Systems, Inc., sell to our target customers proprietary or non-interoperable systems with which our products will not function. In these cases, potential customers who wish to purchase DSL customer premises equipment and who have purchased other network equipment which does not function with our DSL customer premises equipment may not purchase our products. Also, the emergence of new industry standards, whether through adoption by official standards committees or widespread use by our target customers, could require us to redesign our products. If such standards become widespread and our products do not meet these standards, our customers and potential customers would not purchase our products. In this case, our business would be harmed, and our financial condition and results of operations would be adversely affected. The rapid development of new standards increases the risk that competitors could develop products that would reduce the competitiveness of our products or could result in greater competition and additional pricing pressure. If we fail to develop and introduce new products or enhancements in the face of new industry standards, our product sales would decrease, and our business would be harmed. See "Business--Competition." We may not be able to produce sufficient quantities of our DSL products because we depend on third-party manufacturers. If these manufacturers fail to produce our products in a timely manner, our ability to fulfill our customer orders would be adversely impacted. Any manufacturing disruption could impair our ability to fulfill orders, and if this occurs, our revenues would be adversely affected. Although we work with more than one third-party manufacturer, many of our products are presently manufactured for us by only one party. Since third parties manufacture our products and we expect this to continue in the future, our success will depend, in significant part, on our ability to have third parties manufacture our products cost effectively and in sufficient quantities to meet our customer demand. There are a number of risks associated with our dependence on third- party manufacturers, including the following: . reduced control over delivery schedules; . quality assurance; 9 . manufacturing yields and costs; . the potential lack of adequate capacity during periods of excess demand; . limited warranties on products supplied to us; . increases in prices; and . the potential misappropriation of our intellectual property. Any of these risks, if not adequately addressed by our third-party manufacturers, would harm our business. We have no long-term contracts or arrangements with any of our vendors that guarantee product availability, the continuation of particular payment terms or the extension of credit limits. The competitive dynamics of our market require us to obtain components at favorable prices, but we may not be able to obtain additional volume purchase or manufacturing arrangements on terms that we consider acceptable, if at all. If we enter into a high-volume or long-term supply arrangement and subsequently decide that we cannot use the products or services provided for in the agreement, our business would also be harmed. We may not be able to produce sufficient quantities of our products because we obtain certain key components from, and depend on, certain sole-source suppliers. If we are unable to obtain these sole-source components, we would not be able to ship our products in a timely manner and our strategic relationships with our customers would be detrimentally affected. We obtain certain parts, components and equipment used in our products from sole sources of supply. For example, we obtain certain semiconductor chipsets from Alcatel Microelectronics, Analog Devices, Inc., Texas Instruments Incorporated, and Conexant Systems, Inc. If we fail to obtain components in sufficient quantities when required, and are unable to meet customer demand, our business could be harmed, as our customers would consider purchasing products from our competitors. We also rely on Texas Instruments Incorporated, Samsung Semiconductor Inc., and VLSI Technology, Inc. to manufacture our application specific integrated circuits. Developing and maintaining these strategic relationships is critical in order for us to be successful. If our relationships with our equipment vendor and network service provider customers are harmed as a result of a failure to obtain sole-source components for our products on a timely basis, our business would be harmed. Any of our sole-source suppliers may: . enter into exclusive arrangements with our competitors; . stop selling their products or components to us at commercially reasonable prices; or . refuse to sell their products or components to us at any price. If we are unable to obtain sufficient quantities of sole-source components or to develop alternative sources for components for any reason, our business would be harmed. Furthermore, additional sole-source components may be incorporated into our future products, thereby increasing our sole-source supplier risks. If any of our sole-source manufacturers delay or halt production of any of their components, our business would be harmed, and our results of operations and financial condition would be adversely affected. We may be subject to product returns and product liability claims resulting from defects in our products. Product returns and product liability claims could result in the failure to attain market acceptance of our products and harm our business. Our products are complex and may contain undetected defects, errors or failures. The occurrence of any defects, errors or failures could result in delays in installation, product returns and other losses to us or to our customers or end users. Any of these occurrences could also result in the loss of or delay in market acceptance 10 of our products, either of which would harm our business and adversely affect our operating results and financial condition. We will likely have limited experience with any problems that may arise with new products that we introduce. Although we have not experienced any product liability claims to date, the sale and support of our products entail the risk of these claims. A successful product liability claim brought against us could be expensive, divert the attention of management from ordinary business activities and, correspondingly, harm our business. Risks That May Cause Financial Fluctuations We have incurred net losses since our inception and expect future losses. Accordingly, we may not be able to achieve profitability, and even if we do become profitable, we may not be able to sustain profitability. We have incurred net losses in every fiscal quarter and annual period since inception and expect to continue to operate at a loss for the foreseeable future. In addition, we had negative cash flow from operations of $6.6 million in fiscal 1998, $23.4 million in fiscal 1999, and $9.5 million for the first three months of fiscal 2000. As of September 30, 1999, we had an accumulated deficit of approximately $61.9 million. Due to our limited operating history and our history of losses, we may never be able to achieve profitability, and even if we do, we may not be able to remain profitable. To achieve profitable operations on a continuing basis, we must successfully design, develop, test, manufacture, introduce, market and distribute our products on a broad commercial basis. Our ability to generate future revenues will depend on a number of factors, many of which are beyond our control. These factors include: . the rate of market acceptance of DSL broadband access; . the level of demand for DSL systems that incorporate our products; . changes in industry standards governing DSL technology solutions; . the extent and timing of new customer transactions; . changes in our development schedules and those of system companies that provide complementary DSL products, or changes in their levels of expenditure on research and development; . personnel changes, particularly those involving engineering and technical personnel; . the costs associated with protecting our intellectual property; . regulatory developments; and . general economic trends. Due to these factors, we cannot forecast with any degree of accuracy what our revenues will be in future periods or how quickly network service providers will select our products for use in their systems. In view of these factors, we may not be able to achieve or sustain profitability. We have a short operating history and, as a result, it is difficult to predict our future results of operations. We have a short operating history upon which to base your investment decision. We first commenced product shipments in August 1994 and did not introduce DSL products until March 1998. Due to our limited operating history, it is difficult or impossible for us to predict future results of operations and you should not expect future revenue growth to be comparable to our recent revenue growth. In addition, we believe that comparing different periods of our operating results is not meaningful, and you should not rely on the results 11 for any period as an indication of our future performance. Investors in our common stock must consider our business and prospects in light of the risks and difficulties typically encountered by companies in their early stages of development, particularly those in rapidly evolving markets such as ours. If sales forecasted for a particular period are not realized in that period due to the lengthy sales cycle of our products, our operating results for that period would be adversely affected. If we fail to realize forecasted sales for a particular period, our operating results would be adversely affected and our stock price would likely decline and could decline significantly. The sales cycle of our products is typically lengthy and involves: . a significant technical evaluation; . delays associated with network service providers' internal procedures to commit to a particular product line offering and approve large capital expenditures; . time required to deploy new technologies within service providers' networks; and . testing and acceptance of new technologies. For these and other reasons, a sale of our products generally requires six to 12 months to complete. Furthermore, the announcement and projected implementation of new standards may affect sales cycles, as network service providers may choose to delay large-scale deployment of DSL services until compliant products are available. Our product cycles tend to be short, and we may incur substantial non- recoverable expenses or devote significant resources to sales that do not occur when anticipated. In the rapidly changing technology environment in which we operate, product cycles tend to be short. Therefore, the resources we devote to product sales and marketing may not generate material revenues for us, and from time to time we may need to write off excess and obsolete inventory. If we incur substantial sales, marketing and inventory expenses in the future that we are not able to recover, and we are not able to compensate for such expenses, our operating results would be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions and we still have higher cost products in inventory, our business would be harmed, and our results of operations and financial condition would be adversely affected. Our operating results in one or more future periods are likely to fluctuate significantly and may fail to meet or exceed the expectations of securities analysts or investors, causing our stock price to decline. Our operating results are likely to fluctuate significantly in the future on a quarterly and an annual basis due to a number of factors, many of which are outside our control. If our operating results do not meet the expectations of securities analysts or investors, our stock price may decline. We cannot assure you that this will not occur because of the numerous factors that could cause our revenues and costs to fluctuate. These factors include the following: . the timing and size of sales of our products and services; . announcements of new products and product enhancements by competitors; . the entry of new competitors into our market, including by acquisition; . unexpected delays in introducing new or enhanced products, including manufacturing delays; . our ability to control expenses; . our ability to ship products on a timely basis and at a reasonable cost; 12 . the mix of our products sold; . the volume and average cost of products manufactured; . the type of distribution channel through which we sell our products; . the average selling prices of our products; and . the effectiveness of our product cost reduction efforts. The amount and timing of our operating expenses generally will vary from quarter to quarter depending on the level of actual and anticipated business activities. Research and development expenses will vary as we develop new products. Due to competitive factors in our market, in the past we have experienced, and we anticipate that we will continue to experience, decreases in the average selling prices of our products which could adversely affect gross margins. Due to these and other factors, our quarterly revenues, expenses and results of operations could vary significantly in the future, and you should not rely upon period-to-period comparisons as indications of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our customer base is concentrated, and the loss of one or more of our customers could harm our business. Because DSL service relies upon existing telephone lines to reach end users, a substantial majority of potential DSL end-user accounts in the U.S. and in other countries are controlled by a relatively small number of network service providers. If we are not successful in maintaining relationships with these few network service providers and the network equipment vendors that supply them, our business will be harmed. Although deregulation and increasing competition are expanding our potential customer base, a small number of customers has accounted for a large portion of our revenues to date. We sell our DSL products primarily to network service providers, network equipment vendors and telephone company-aligned distributors. For the three months ended September 30, 1999, sales to four customers, American Communications Supply, Inc., a distributor for Southwestern Bell, America Online, Inc., Innotrac Corporation, a distributor for BellSouth, and Lucent Technologies each represented more than 10% of our net revenues. Our top ten customers for the three months ended September 30, 1999 accounted for 94.8% of our net revenues. For the fiscal year ended June 30, 1999, Covad Communications Group, Inc. represented 29.6% of our net revenues, and Soon Cabling Pte, Ltd., a distributor for Daewoo Telecom, represented 17.5% of our net revenues. Our top ten customers in fiscal 1999 accounted for 82.3% of our net revenues. For the fiscal year ended June 30, 1998, Victron, Inc., a manufacturer for Xylan Corporation, represented 19.6% of our net revenues, and Telecom Equipment, a distributor for Singapore Telecom, represented 12.6% of our net revenues. We expect to continue to be dependent upon a relatively small number of large customers in future periods, although the specific customers may vary from period to period. If we are not successful in maintaining relationships with key customers, and winning new customers, our business would be harmed. We derive a substantial amount of our revenues from international sources, and difficulties associated with international operations could harm our business. Since inception, a substantial portion of our revenues has been derived from customers located outside of the United States, and we expect this trend to continue. Revenues derived from customers located outside of the United States represented 52% of our net revenues in fiscal 1998, 41% of our net revenues in fiscal 1999 and 20% of our net revenues for the first quarter of fiscal 2000. We believe that our continued growth and ability to attain profitability will require us to continue to penetrate international markets. If we are unable to successfully overcome the difficulties associated with international operations and maintain and expand our international operations, our business would be harmed. These difficulties include: . difficulties staffing and managing foreign operations in our highly technical industry; . changes in regulatory requirements which are common in the telecommunications industry; 13 . licenses, tariffs and other trade barriers imposed on products such as ours; . political and economic instability especially in Asia and the Pacific; . potentially adverse tax consequences; . difficulties obtaining approvals for products from foreign governmental agencies which regulate networks; . compliance with a wide variety of complex foreign laws and treaties relating to telecommunications equipment; and . delays or difficulties collecting accounts receivable from foreign entities that are not subject to suit in the United States. To date, our international sales and component purchases have been denominated solely in U.S. dollars and, accordingly, we have not been exposed to fluctuations in non-U.S. currency exchange rates. In the future, a portion of our international sales may be denominated in currencies other than U.S. dollars, which would expose us to gains and losses based upon exchange rate fluctuations. Such gains and losses may contribute to fluctuations in our operating results. Risks That May Affect Our Ability to Execute Our Business Plans Our business could be adversely affected if we do not adequately address the risks associated with our recent acquisition of FlowPoint Corporation. In December 1999, we completed the acquisition of FlowPoint Corporation. This transaction is accompanied by a number of risks, any of which could adversely affect our business or stock price, including: . the difficulty of assimilating the operations and personnel of FlowPoint; . the potential disruption of our and FlowPoint's ongoing business and distraction of management; . possible unanticipated expenses related to technology and business integration; . the potential impairment of relationships with employees and customers as a result of the integration of management; and . potential liabilities associated with FlowPoint. In addition, the market price of our common stock could decline as a result of the acquisition if: . Efficient does not achieve the perceived benefits of the acquisition as rapidly or to the extent anticipated by financial analysts; or . the effect of the acquisition on the combined financial results is not consistent with the expectations of financial analysts. We rely on indirect distribution channels and strategic relationships to sell and manufacture our products, and if we are not able to maintain existing and develop additional strategic relationships and indirect distribution channels, our business would be harmed. Our business strategy relies on our strategic relationships with network equipment vendors, network service providers, and suppliers of DSL technology. If our existing relationships are not successful or our competitors are better able to develop these relationships, our business would be harmed. End users typically purchase DSL customer premises equipment from network service providers, and network service providers may purchase DSL customer premises equipment from independent network equipment vendors and distributors. We typically work closely with our potential customers and suppliers to ensure interoperability of products with customer networks and of components with our DSL customer premises equipment. In addition, 14 we rely on our strategic relationships with telephone company-aligned distributors in order to broaden our distribution network. Also, larger vendors of DSL customer premises equipment may be able to leverage their size and established distribution channels to gain a significant competitive advantage over us. We cannot assure you that we will be able to maintain or expand our existing strategic relationships or that we will be able to establish new relationships in the future. See "Business--Strategic Relationships." We continue to rapidly and significantly expand our operations, and our failure to manage growth could harm our business and adversely affect our results of operations and financial condition. We have rapidly and significantly expanded our operations, including the number of our employees, the geographic scope of our activities and our product offerings. We expect that further significant expansion will be required to address potential growth in our customer base and market opportunities. Any failure to manage growth effectively could harm our business and adversely affect our operating results and financial condition. We cannot assure you that we will be able to do any of the following, which we believe are essential to successfully manage the anticipated growth of our operations: . improve our existing and implement new operational, financial and management information controls, reporting systems and procedures; . hire, train and manage additional qualified personnel; . expand and upgrade our core technologies; and . effectively manage multiple relationships with our customers, suppliers and other third parties. In the future, we may also experience difficulties meeting the demand for our products. The installation and use of our products require training. If we are unable to provide training and support for our products, more time may be necessary to complete the implementation process and customer satisfaction may be adversely affected. In addition, our suppliers may not be able to meet increased demand for our products. We cannot assure you that our systems, procedures or controls will be adequate to support the anticipated growth in our operations. Competition for qualified personnel in the networking equipment and telecommunications industries is intense, and if we are not successful in attracting and retaining these personnel, our business would be harmed. Our future success will depend on the ability of our management to operate effectively, both individually and as a group. Therefore, the future success of our business will also depend on our ability to attract and retain high-caliber personnel. The loss of the services of any of our key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly engineers, could harm our business. Because competition for qualified personnel in the networking equipment and telecommunications industries is intense, we may not be successful in attracting and retaining such personnel. During 1999, we added 160 employees to our total work force, representing an increase of 133% from December 31, 1998. During 1998, we added 36 employees to our total work force, representing an increase of approximately 61% from December 31, 1997. We expect to hire additional personnel in the near future, including direct sales and marketing personnel. There may be only a limited number of people with the requisite skills to serve in those positions, and it may become increasingly difficult to hire these people. In addition, we are actively searching for research and development engineers, who also are in short supply. Our business will be harmed if we encounter delays in hiring additional engineers. Furthermore, competitors and others have in the past and may in the future attempt to recruit our employees. We do not have employment contracts with any of our key personnel. The loss of the services of one or more of our executive officers or key employees could harm our business. Our executive officers and certain key sales, engineering and management personnel may not remain with us in the future. Our executive officers and key personnel and in particular Mark A. Floyd, our Chief Executive 15 Officer, and Patricia W. Hosek, our Vice President of Engineering, are critical to our business and its future success. If we lost the services of one or more of our executive officers or key employees, we would need to devote substantial resources to finding replacements, and until replacements were found, Efficient would be operating without the skills or leadership of such personnel, either of which could have a significant adverse effect on our business. None of our officers or key employees is bound by agreements for any specific employment term or covenants not to compete. Our future success will depend in part on our ability to protect our proprietary rights and the technologies used in our principal products, and if we do not enforce and protect our intellectual property or if others bring infringement claims against us, our business would be harmed. We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights. However, these measures afford only limited protection. Our failure to adequately protect our proprietary rights may adversely affect us. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary. Our means of protecting our proprietary rights in the U.S. or abroad may not be adequate, and competitors may independently develop similar technologies. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the U.S. Issued patents may not preserve our proprietary position. Even if they do, competitors or others may develop technologies similar to or superior to our own. We may become involved in litigation over proprietary rights. In the event of an adverse result in any future litigation with third parties relating to proprietary rights, we could be required: . to pay substantial damages, including treble damages if we are held to have willfully infringed; . to halt the manufacture, use and sale of infringing products; . to expend significant resources to develop non-infringing technology; or . to obtain licenses to the infringing technology. Licenses may not be available from any third party that asserts intellectual property claims against us, on commercially reasonable terms, or at all. In addition, litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. However, there can be no assurance that we would be able to successfully resolve such disputes in the future. From time to time, third parties, including our competitors, have asserted patent, copyright and other intellectual property rights to technologies that are important to us. For example, we have received a letter from Bell Atlantic indicating that they hold a patent on certain DSL technology, and urging us to begin negotiating a license to the patent. We are aware that Bell Atlantic has sued at least one other company alleging that such other company's DSL services infringe Bell Atlantic's patent. We are evaluating the Bell Atlantic patent, and have not yet determined whether to seek a license. Although there are multiple indications from Bell Atlantic that licenses to the patent are or will be available, there can be no assurances we would find the license terms acceptable. We expect that we will increasingly be subject to infringement claims as the number of products and competitors in the high-speed data access market grows and the functionality of products overlaps. See "Business-- Intellectual Property." Our products and those of our customers are subject to government regulations, and changes in current or future laws or regulations that negatively impact our products and technologies could harm our business. The jurisdiction of the Federal Communications Commission, or the FCC, extends to the entire communications industry including our customers and their products and services that incorporate our products. 16 Future FCC regulations affecting the broadband access services industry, our customers or our products may harm our business. For example, FCC regulatory policies that affect the availability of data and Internet services may impede our customers' penetration into certain markets or affect the prices that they are able to charge. In addition, international regulatory bodies are beginning to adopt standards for the communications industry. Delays caused by our compliance with regulatory requirements may result in order cancellations or postponements of product purchases by our customers, which would harm our business and adversely affect our results of operations and financial condition. Additional Risks That May Affect Our Stock Price We may need additional capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we may be unable to execute our business plan. If the proceeds of this offering, together with the proceeds generated from our initial public offering which closed in July 1999, our existing cash balances and cash flow expected from future operations, are not sufficient to meet our liquidity needs, we will need to raise additional funds. If adequate funds are not available on acceptable terms or at all, we may not be able to take advantage of market opportunities, to develop new products or to otherwise respond to competitive pressures. This inability would harm our business. We have broad discretion to use the offering proceeds, and we cannot assure you that how we invest these proceeds will yield a favorable return. Substantially all of the net proceeds of this offering are not allocated for specific uses other than working capital and general corporate purposes. Thus, our management will have broad discretion over how these proceeds are used and could spend most of these proceeds in ways with which the stockholders may not agree. We cannot assure you that the proceeds will be invested to yield a favorable return. See "Use of Proceeds." We may engage in future acquisitions that dilute our stockholders, cause us to incur debt and assume contingent liabilities. As part of business strategy, we expect to continue to review potential acquisitions that could complement our current product offerings, augment our market coverage or enhance our technical capabilities, or that may otherwise offer growth opportunities. While we have no current agreements or negotiations underway with respect to any such acquisitions, we may acquire businesses, products or technologies in the future. In the event of such future acquisitions, we could issue equity securities that would dilute our current stockholders' percentage ownership, incur substantial debt, or assume contingent liabilities. Such actions by us could seriously harm our results of operations and/or the price of our common stock. Acquisitions also entail numerous other risks which could adversely affect our business, results of operations and financial condition, including: . difficulties in assimilating acquired operations, technologies or products; . unticipated costs or capital expenditures associated with the acquisition; . acquisition related charges and amortization of acquired technology and other intangibles that could negatively affect our reported results of operations; . diversion of management's attention from our business; . adversely affect existing business relationships with suppliers and customers; and . failure to successfully integrate these businesses, products, technologies and personnel. 17 There are substantial shares of common stock eligible for future sale, and such sales may depress our stock price. After this offering, we will have outstanding approximately 53.2 million shares of common stock after giving pro forma effect to the conversion of all outstanding shares of Series A non-voting convertible redeemable preferred stock issued to Cabletron, of which approximately 14.6 million shares, including the 5,000,000 sold in this offering, plus any shares issued upon exercise of the underwriters' over-allotment option, will be freely tradeable. See "Capitalization" for a discussion of the shares included in and excluded from this number. The remaining approximately 38.6 million shares of common stock outstanding after this offering will become available for sale in the public market as follows:
Number of Shares Date of Availability for Sale ---------------- ----------------------------- 3.1 million April 3, 2000 23.6 million May 3, 2000 11.9 million At various times thereafter, upon the expiration of respective one-year holding periods.
If our stockholders sell substantial amounts of common stock in the public market, including shares issuable upon the exercise of outstanding options, the market price of our common stock could fall. See "Shares Eligible for Future Sale" and "Underwriting." Certain provisions of our charter documents may make acquiring control of our company more difficult for a third party, which could adversely affect our stock's market price or lessen any premium over market price that an acquiror might otherwise pay. Our charter documents contain provisions providing for a classified board of directors, eliminating cumulative voting in the election of directors and restricting our stockholders from acting without a meeting. These provisions may make certain corporate actions more difficult and might delay or prevent a change in control and therefore limit the price that new investors will pay for our stock. Further, the board of directors may issue up to 9,993,700 new shares of preferred stock with certain rights, preferences, privileges and restrictions, including voting rights, without any vote by our stockholders. Our existing stockholders may be adversely affected by the rights of this preferred stock. New preferred stock might also be used to make acquiring control more difficult. We have no current plans to issue shares of preferred stock. We will also indemnify officers and directors against losses incurred in legal proceedings to the broadest extent permitted by Delaware law. Our failure or the failure of our key suppliers and customers to be Year 2000 compliant would harm our business. Many currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. Although we cannot predict with any certainty what adverse effects we may suffer from Year 2000 compliance issues, possible effects include: . disruptions in the supply of components and manufactured goods from our component suppliers and contract manufacturers if they experience disruptions; . disruptions in our ability to ship and receive goods if third-party transportation and delivery providers experience disruptions in their operations; and . delays in receiving accurate management information from our internal accounting and management systems. We currently have no contingency plan to address potential interruptions in the operation of our internal systems or those of third parties upon whom we depend as a result of Year 2000 noncompliance. 18 We may face claims based on Year 2000 issues arising from the integration of multiple products within an overall network. We may also experience reduced sales of our products as potential customers reduce their budgets for network equipment and network services due to increased expenditures on their own Year 2000 compliance efforts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issues." SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business," contains forward-looking statements. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include, among other things, those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results. 19 USE OF PROCEEDS The net proceeds to us from the sale of the 2,000,000 shares of common stock offered by us are estimated to be $113.5 million, or approximately $156.4 million if the underwriters' over-allotment option is exercised in full, at an assumed public offering price of $60.25 per share, after deducting underwriting discounts and commissions and the estimated offering expenses. We will not receive any proceeds from the sale of shares by the selling stockholders. We intend to use the net proceeds of this offering primarily for general corporate purposes including working capital and sales and marketing efforts. We may also use a portion of the net proceeds to acquire complementary products, technologies or businesses. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, investment- grade securities. PRICE RANGE OF COMMON STOCK Our Common Stock began trading on the NASDAQ National Market System under the symbol "EFNT" effective July 15, 1999. Prior to that date, there was no public market for our Common Stock. The following table sets forth for the periods indicated the high and low closing prices for the Common Stock, as reported by NASDAQ:
High Low ------ ------ Fiscal Year Ending June 30, 2000 First Quarter............................................... $68.00 $29.35 Second Quarter.............................................. $82.50 $33.65 Third Quarter (through January 6, 2000)..................... $63.85 $58.75
The last reported sale price for our common stock on The Nasdaq Stock Market was $60.25 per share on January 6, 2000. As of December 31, 1999, there were approximately 156 holders of record of our common stock. DIVIDEND POLICY We have never declared or paid any dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. 20 CAPITALIZATION The table below sets forth the following information: .the actual capitalization of Efficient as of September 30, 1999; and . the as adjusted capitalization giving effect to the sale of 2,000,000 shares of common stock at an assumed public offering price of $60.25 per share, less estimated underwriting discounts and commissions and the estimated offering expenses payable by Efficient.
September 30, 1999 ------------------------------- Actual As Adjusted ------------- ---------------- (in thousands, except share and per share data) Stockholders' equity: Common stock, $0.001 par value; 100,000,000 shares authorized; 37,482,465 shares issued and outstanding, actual; 39,482,465 shares issued and outstanding, as adjusted................... $ 37 $ 39 Additional paid-in capital...................... 150,320 263,793 Deferred stock option compensation.............. (16,162) (16,162) Accumulated deficit............................. (61,943) (61,943) ------------- ------------- Total stockholders' equity...................... 72,252 185,727 ------------- ------------- Total capitalization............................ $ 72,252 $ 185,727 ============= =============
This table excludes the following shares: . 7,200,000 shares of common stock and 6,300 shares of preferred stock (convertible into an aggregate of 6,300,000 shares of common stock) issued to Cabletron in December 1999; . options outstanding to purchase a total of 6,954,329 shares of common stock at a weighted average exercise price of $2.81 per share and 3,325,000 shares reserved for grant of future options under our stock option plans; . 200,000 shares reserved for future grants under our 1999 Employee Stock Purchase Plan; and . 34,246 shares issuable upon exercise of outstanding warrants. See "Management--Benefit Plans," "Description of Capital Stock" and Notes to Consolidated Financial Statements. 21 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are qualified by reference to the Consolidated Financial Statements and Notes thereto appearing elsewhere in this prospectus. The consolidated statement of operations data set forth below for the years ended June 30, 1997, 1998 and 1999, and the consolidated balance sheet data at June 30, 1998 and 1999, are derived from, and are qualified by reference to, the audited Consolidated Financial Statements of Efficient included elsewhere in this prospectus. The statement of operations data set forth below for the years ended June 30, 1995 and 1996 and the balance sheet data at June 30, 1995, 1996 and 1997 are derived from audited Consolidated Financial Statements of Efficient not included in this prospectus. The consolidated statement of operations data for the three months ended September 30, 1998 and 1999 and the consolidated balance sheet data at September 30, 1999 are derived from, and are qualified by reference to, the unaudited condensed consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited statement of operations data shown for the three month periods ended September 30, 1998 and 1999 and the unaudited balance sheet data as of September 30, 1999 have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for such periods.
Three Months Ended Fiscal Year Ended June 30, September 30, ----------------------------------------------- -------------------- 1995 1996 1997 1998 1999 1998 1999 ------- -------- -------- -------- -------- --------- --------- (in thousands, except per share data) Consolidated Statement of Operations Data: Net revenues............ $ 2,314 $ 3,687 $ 4,122 $ 3,370 $ 14,828 $ 1,174 $ 12,171 Cost of revenues........ 1,125 2,209 2,386 2,160 14,344 863 11,706 ------- -------- -------- -------- -------- --------- --------- Gross profit............ 1,189 1,478 1,736 1,210 484 311 465 ------- -------- -------- -------- -------- --------- --------- Operating expenses: Sales and marketing... 1,505 2,366 2,409 3,436 6,133 1,168 2,652 Research and development.......... 3,405 3,853 4,183 4,389 7,747 1,826 3,053 General and administrative....... 822 1,082 1,245 1,641 1,993 339 1,048 Stock option compensation......... -- 198 659 1,165 3,116 433 1,389 ------- -------- -------- -------- -------- --------- --------- Total operating expenses............ 5,732 7,499 8,496 10,631 18,989 3,766 8,142 ------- -------- -------- -------- -------- --------- --------- Loss from operations.... (4,543) (6,021) (6,760) (9,421) (18,505) (3,455) (7,677) Interest and other income (expense), net.. 248 177 125 130 (7,900) 80 (77) ------- -------- -------- -------- -------- --------- --------- Net loss................ $(4,295) $ (5,844) $ (6,635) $ (9,291) $(26,405) $ (3,375) $ (7,754) ======= ======== ======== ======== ======== ========= ========= Basic and diluted net loss per share(1)...... $ (1.56) $ (2.06) $ (2.19) $ (2.86) $ (6.87) $ (0.93) $ (0.25) ======= ======== ======== ======== ======== ========= ========= Weighted average shares(1).............. 2,750 2,838 3,027 3,254 3,893 3,713 30,496 ======= ======== ======== ======== ======== ========= ========= Unaudited pro forma basic and diluted net loss per share(1)...... $ (0.97) ======== Weighted average shares used to compute unaudited pro forma basic and diluted net loss per share(1)...... 28,342 ======== Consolidated Balance Sheet Data: Cash and cash equivalents............ $ 2,650 $ 1,303 $ 3,413 $ 7,607 $ 3,604 $ 47,456 Working capital......... 3,400 2,619 4,370 7,870 12,585 69,051 Total assets............ 6,357 5,150 6,454 10,667 23,965 88,680 Redeemable convertible preferred stock........ 11,155 16,155 23,635 34,743 40,495 -- Total stockholders' equity (deficit)....... (6,008) (11,643) (17,610) (25,374) (39,014) 72,252
- -------- (1) Note 2 of Notes to Consolidated Financial Statements provides an explanation of the determination of the weighted average shares used to compute basic and diluted net loss per share and unaudited pro forma basic and diluted net loss per share. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto, as well as the other information included elsewhere in this prospectus. Overview We are a worldwide independent developer and supplier of high-speed DSL customer premises equipment for the broadband access market. Our DSL solutions enable telecommunications and other network service providers to provide high- speed, cost-effective broadband access services over the existing copper wire telephone infrastructure to both business and residential markets. We therefore focus on developing and producing single- and multiple-user DSL customer premises equipment for small- to medium-size businesses, branch offices of large corporations and consumers. Our DSL products enable applications such as high-speed Internet access, electronic commerce, remote access, telecommuting and extensions of corporate networks to branch offices. We were incorporated in June 1993. From inception through fiscal 1997, we primarily focused on developing and selling ATM-based products for local area network, or LAN, applications. ATM, or asynchronous transfer mode, is a widely- used transmission technology that breaks data down into individual packets with unique identification and destination addresses and may be used to transmit data, voice and video within a network. During fiscal 1997 we began to leverage our ATM, personal computing environment and networking expertise to develop DSL modem products for high-speed Internet access. Although we continue to sell ATM LAN products, we have largely discontinued further development efforts on such products and are currently focusing on our DSL products. We shipped our first DSL products in the third quarter of fiscal 1998. Our DSL products, which accounted for less than 3% of net revenues in fiscal 1998, represented 87.1% of our net revenues in fiscal 1999 and 98.1% of our net revenues in the first quarter of fiscal 2000. We expect sales of our ATM LAN products to continue to gradually decrease in absolute amount over the next one to two years, and to decrease substantially as a percentage of net revenues during that time. We derive our revenues from sales of our SpeedStream family of DSL products and, to a lesser extent, our ATM LAN products. We sell our DSL products primarily to network service providers, network equipment vendors and telephone company-aligned distributors. For the three months ended September 30, 1999, sales to four customers, American Communications Supply, Inc., a distributor for Southwestern Bell, America Online, Inc., Innotrac Corporation, a distributor for BellSouth, and Lucent Technologies each represented more than 10% of our net revenues. For the fiscal year ended June 30, 1999, Covad Communications represented 29.6% of our net revenues, and Soon Cabling Pte, Ltd., a distributor for Daewoo Telecom represented 17.5% of our net revenues. For the fiscal year ended June 30, 1998, Victron, a manufacturer for Xylan, represented 19.6% of our net revenues, and Telecom Equipment, a distributor for Singapore Telecom, represented 12.6% of our net revenues. Our top ten customers for the three months ended September 30, 1999 accounted for 94.8% of our net revenues. We expect to continue to be dependent upon a relatively small number of large customers in future periods, although the specific customers may vary from period to period. Since inception, a substantial portion of our revenues has been derived from customers located outside of the United States and we expect this trend to continue. Revenues derived from customers outside the United States represented 52% of our net revenues in fiscal 1998, 41% of our net revenues for fiscal 1999 and 20% of our net revenues for the three months ended September 30, 1999. We currently maintain a European sales office in Amsterdam and an Asian sales office in Singapore. We believe that in order to continue growing and attain profitability, we must continue to penetrate international markets. Accordingly, we will need to expand our international operations and hire qualified personnel for these operations. To date, international sales have been denominated solely in U.S. dollars and, accordingly, we have not been exposed to fluctuations in non-U.S. currency exchange rates. In the future, a portion of our international 23 sales may be denominated in currencies other than U.S. dollars, which would then expose us to gains and losses based upon exchange rate fluctuations. The gross margins on our DSL products have been below the levels that our business has historically achieved. The lower gross margins on our DSL products have been a result of manufacturing start-up costs and volume discounts given to quickly introduce products into the market. Other factors that will affect our gross margin include the product mix sold in any particular period, distribution channels, competitive pressures and levels of volume discounts. Our limited operating history in the DSL market makes it difficult to forecast our future operating results. To date, we have not achieved profitability in any quarter or annual period, and as of September 30, 1999, we had an accumulated deficit of $61.9 million. Although our net revenues have grown in recent quarters, we cannot be certain that our net revenues will increase at a rate sufficient to achieve and maintain profitability. For the fiscal years 1997, 1998 and 1999 and for the three months ended September 30, 1999, we recorded an aggregate of $21.7 million in deferred stock option compensation. This amount represents the difference between the exercise price of certain stock options granted during such periods and the deemed fair market value of our common stock at the time of such option grants. We are amortizing the deferred stock option compensation over the vesting periods of the applicable options, which is generally four years. We amortized deferred stock option compensation in the amounts of $659,000, $1.2 million, $3.1 million and $1.4 million in fiscal years 1997, 1998, 1999 and the three months ended September 30, 1999, respectively. We expect to amortize the remaining deferred stock option compensation at the rate of approximately $1.3 million per quarter until fully amortized. Recent Development--FlowPoint Acquisition On November 21, 1999, we entered into an agreement with Cabletron Systems, Inc. to acquire its wholly-owned subsidiary FlowPoint Corporation from Cabletron. The acquisition was completed on December 17, 1999, and is being accounted for under the purchase method of accounting. We paid for the acquisition of FlowPoint through the issuance of 7,200,000 shares of our common stock and 6,300 shares of our Series A non-voting convertible preferred stock. The Series A preferred stock is convertible into an aggregate of 6,300,000 shares of our common stock. See "Description of Capital Stock" for a more complete description of the Series A preferred stock. The shares issued to Cabletron for FlowPoint were worth $924.8 million based upon the market price of $68.50, which represents Efficient's average closing sale price for two trading days before and two trading days after the terms of the acquisition were agreed to. 24 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.
Three Months Fiscal Year Ended Ended June 30, September 30, ------------------------ ---------------- 1997 1998 1999 1998 1999 ------ ------ ------ ------- ------ Net revenues.................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues................ 57.9 64.1 96.7 73.5 96.2 ------ ------ ------ ------- ------ Gross profit.................... 42.1 35.9 3.3 26.5 3.8 ------ ------ ------ ------- ------ Operating expenses: Sales and marketing............. 58.4 102.0 41.4 99.5 21.8 Research and development........ 101.5 130.2 52.2 155.5 25.1 General and administrative...... 30.2 48.7 13.4 28.9 8.6 Stock option compensation....... 16.0 34.6 21.0 36.9 11.4 ------ ------ ------ ------- ------ Total operating expenses...... 206.1 315.5 128.1 320.8 66.9 ------ ------ ------ ------- ------ Loss from operations............ (164.0) (279.6) (124.8) (294.3) (63.1) Interest and other income (expense), net................. 3.0 3.9 53.3 6.8 (0.6) ------ ------ ------ ------- ------ Net loss........................ (161.0)% (275.7)% (178.1)% (287.5)% (63.7)% ====== ====== ====== ======= ======
Three Months Ended September 30, 1998 and 1999 Net Revenues Net revenues consist of product sales, net of allowances for returns. Net revenues increased 936.7%, from $1.2 million for the three months ended September 30, 1998 to $12.2 million for the three months ended September 30, 1999. DSL product revenues increased from $410,000 for the three months ended September 30, 1998 to $11.9 million for the three months ended September 30, 1999. The period-over-period increases in DSL product revenues reflect the beginning market adoption of our DSL products, which first became available in the quarter ended March 31, 1998, as well as the addition of new products to our DSL product line. During fiscal 1997, we made the strategic decision to focus on developing our DSL products, and, as a result, significantly reduced the level of development and support activities associated with our ATM LAN products. We expect ATM LAN product revenues to continue to decrease over time. Cost of Revenues Cost of revenues consists of amounts paid to third-party contract manufacturers, manufacturing start-up expenses and the personnel and related costs of our manufacturing operation. Cost of revenues increased 1,256.4% from $863,000 or 73.5% of net revenues for the three months ended September 30, 1998 to $11.7 million or 96.2% of net revenues for the three months ended September 30, 1999, reflecting the substantial increase in DSL product sales. Gross margin represented 26.5% of net revenues for the three months ended September 30, 1998, compared to 3.8% for the three months ended September 30, 1999. These amounts are not comparable due to our shift from ATM LAN products to DSL products. Included in cost of revenues for the three months ended September 30, 1999 are $1.0 million of one-time costs associated with the change in our 25 contract manufacturer. Excluding these one time costs, the gross margin for the three months ended September 30, 1999 would have been 12.0%. Our gross margin increased in the current period as a result of a change in our contract manufacturer and other cost efficiencies associated with higher production volumes. We took a number of actions that were designed to bring our DSL products to market quickly but which also partially offset the improvement in our gross margins. These actions included initial volume price discounts for key customers and incremental costs such as manufacturing start-up, expedite and other incremental shipping and handling charges associated with initial low volume manufacturing. We expect that we will continue to incur higher than normal costs associated with the actions to bring our DSL products to market quickly. Sales and Marketing Expenses Sales and marketing expenses consist primarily of employee salaries, commissions and benefits, and advertising, promotional materials and trade show exhibit expenses. Sales and marketing expenses increased 127.1% from $1.2 million for the three months ended September 30, 1998 to $2.7 million for the three months ended September 30, 1999. The increase in sales and marketing expenses resulted from expanded sales and marketing activities associated with our DSL products. These costs included significant personnel-related expenses associated with increasing the size of our sales and marketing organization, and increased trade show activities and related travel expenses. Sales and marketing expenses represented 99.5% of net revenues for the three months ended September 30, 1998, and 21.8% of net revenues for the three months ended September 30, 1999. The decrease in sales and marketing expenses as a percentage of net revenues for the three months ended September 30, 1999 compared to the same period in 1998 was a result of the increase in revenues. We expect sales and marketing expenses to increase in dollar amount in future periods as we continue to expand our domestic and international sales and marketing organization. Research and Development Expenses Research and development expenses consist primarily of personnel and related costs associated with our product development efforts, including third-party consulting and prototyping costs. Research and development expenses increased 67.2% from $1.8 million for the three months ended September 30, 1998 to $3.1 million for the three months ended September 30, 1999. The substantial increase in research and development spending was primarily a result of increased personnel and related costs associated with an expanded research and development organization in connection with our DSL products. Research and development expenses represented 155.5% of net revenues for the three months ended September 30, 1998 compared to 25.1% of net revenues for the three months ended September 30, 1999. The decrease in research and development expenses as a percentage of net revenues for the three months ended September 30, 1999 compared to the same period in 1998 was a result of the rapid increase in revenues. We expect research and development expenses to increase in dollar amount in future periods as we continue to expand our research and development organization to develop new products and technologies. General and Administrative Expenses General and administrative expenses consist primarily of employee salaries and related expenses for executive, administrative and accounting personnel, facility costs, insurance costs and professional fees. General and administrative expenses increased 209.1% from $339,000 for the three months ended September 30, 1998 to $1.1 million for the three months ended September 30, 1999. The increases in general and administrative spending were primarily a result of increases in headcount associated with building our infrastructure. General and administrative expenses represented 28.9% of net revenues for the three months ended September 30, 1998, compared to 8.6% of net revenues for the three months ended September 30, 1998. The decrease in general and administrative expenses as a percentage of net revenues for the three months ended September 30, 1999 compared to the same period in 1998 was a result of the increase in revenues. We expect general and administrative expenses to increase in dollar amount in future periods as we continue to build our infrastructure and as a result of operating as a publicly-held company. 26 Stock Option Compensation Stock option compensation reflects the difference between the exercise price of stock options granted and the deemed fair market value of our common stock on the dates of grant. A charge of $3.1 million of deferred stock option compensation was recorded in the quarter ended September 30, 1999 in connection with stock option grants made prior to the completion of our initial public offering on July 15, 1999. Amortization of deferred stock option compensation was $433,000 for the three months ended September 30, 1998 compared to $1.4 million for the three months ended September 30, 1999. We expect to amortize the deferred stock option compensation at the rate of approximately $1.3 million per quarter until fully amortized. Prior to our initial public offering on July 15, 1999, there was no market for our common stock, and option prices were determined by the Board of Directors based upon numerous factors. Upon review in connection with our initial public offering, it was determined that the fair market value on the date of grant of certain options was higher than originally determined by the Board of Directors. Beginning with our initial public offering, we began pricing options based upon the public market price of our common stock, and do not anticipate accruing additional deferred stock option compensation in future periods. Interest and Other Income (Expense), Net Interest income consists primarily of interest earned on cash and cash equivalents. Interest income increased for the three months ended September 30, 1999 from the three months ended September 30, 1998 as a result of interest earned on the net cash proceeds received in connection with the completion of our initial public offering on July 15, 1999. Interest expense and other income (expense), net primarily represents the current period accretion of the discount on subordinated promissory notes through the date of their conversion into preferred stock. In future periods we expect interest income and interest expense and other, net to vary depending upon changes in the amount and mix of interest-bearing investments and short and long-term debt outstanding during each period. Income Taxes From inception through September 30, 1999, we incurred net losses for federal and state tax purposes and have not recognized any tax provision or benefit. We had significant federal net operating loss carryforwards to offset future taxable income which will begin to expire in varying amounts beginning in 2008. Given our limited operating history, losses incurred to date and the difficulty in accurately forecasting our future results, management does not believe that the recognition of the related deferred income tax asset meets the criteria required by generally accepted accounting principles. Accordingly, a 100% valuation allowance has been recorded. Furthermore, as a result of changes in Efficient's equity ownership from Efficient's redeemable convertible preferred stock financings, note financings, initial public offering and this offering, utilization of the net operating losses and tax credits may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and tax credits before utilization. Fiscal Years Ended June 30, 1997, 1998 and 1999 Net Revenues Net revenues consist of product sales, net of allowances for returns. Net revenues increased 340.0% to $14.8 million in fiscal 1999 from $3.4 million in fiscal 1998. Net revenues in fiscal 1998 reflected a 18.2% decrease from the $4.1 million realized in fiscal 1997. DSL product revenues, which didn't exist in fiscal 1997, increased from $84,000 in fiscal 1998 to $12.9 million in fiscal 1999. The increases in DSL product revenues from fiscal 1998 to fiscal 1999 reflect the beginning market adoption of our DSL products, which first became available in the quarter ended March 31, 1998. The increase in DSL product revenues was partially offset by a 27 decrease in revenues from our ATM LAN products. During fiscal 1997, we made the strategic decision to begin focusing on developing our DSL products and, as a result, significantly reduced the level of development and support activities associated with our ATM LAN products. As a result of this change in focus, ATM LAN product revenues declined from $4.1 million in fiscal 1997 to $3.3 million in fiscal 1998, and further declined to $1.9 million in fiscal 1999. From fiscal 1997 to fiscal 1998, this decrease was only slightly offset by sales of prototype DSL products that began in the second half of fiscal 1998. We expect ATM LAN product revenues to continue to decrease over time. Cost of Revenues Cost of revenues consists of amounts paid to third-party contract manufacturers, manufacturing start-up expenses and the personnel and related costs of our manufacturing operation. Cost of revenues increased 564.1% to $14.3 million in fiscal 1999 from $2.2 million in fiscal 1998. This compares to a decrease of 9.5% for fiscal 1998 as compared to the $2.4 million in cost of sales incurred in fiscal 1997. The increase from fiscal 1998 to fiscal 1999 reflected the substantial increase in DSL product sales. The decrease from 1997 to 1998 reflected the declining sales of our ATM LAN products. Gross margin represented 3.3% of net revenues in fiscal 1999, compared to 35.9% of net revenues in fiscal 1998 and 42.1% of net revenues in fiscal 1997. Gross margin on our DSL products increased from a gross loss of 22.6% of the related revenues in fiscal 1998 to a gross loss of 3.6% of the related revenues for fiscal 1999. Our gross margin was lower in the current period as we focused on bringing our DSL products to market quickly and as we began to add personnel to our manufacturing operations in anticipation of higher levels of business going forward. We took a number of actions that were designed to bring our DSL products to market quickly but which also adversely affected our gross margins. These actions included initial volume price discounts for key customers and incremental costs such as manufacturing start-up, expedite and other incremental shipping and handling charges associated with initial low volume manufacturing. We expect that we will continue to incur higher than normal costs associated with the actions to bring our DSL products to market quickly through at least the end of calendar 1999. The higher costs incurred on our DSL products were partially offset by improved gross margins realized on our ATM LAN products. Gross margin on our ATM LAN products improved from 42.1% of related revenues in fiscal 1997 to 37.4% in fiscal 1998 and to 49.5% in fiscal 1999. The period-to-period increase in gross margins on our ATM LAN products was a result of manufacturing efficiencies achieved with these more mature products. As sales of our ATM LAN products continue to decline as a percentage of our total net revenues, any benefit of manufacturing efficiencies, cost reduction or other gross margin improvements in those products will have a diminishing beneficial effect on our overall gross margins. Sales and Marketing Expense Sales and marketing expenses consist primarily of employee salaries, commissions and benefits, and advertising, promotional materials and trade show exhibit expenses. Sales and marketing expenses increased 78.5% from $3.4 million in fiscal 1998 to $6.1 million in fiscal 1999. This compares to an increase of 42.6% in fiscal 1998 over the $2.4 million recorded in fiscal 1997. The increases in sales and marketing expenses in absolute amount from fiscal 1997 through fiscal 1999 resulted primarily from sales and marketing activities associated with the launch of our DSL products. These launch costs included significant personnel-related expenses associated with increasing the size of our sales and marketing organization, and increased trade show activities and related travel expenses. Sales and marketing expenses represented 58.4% of net revenues in fiscal 1997, 102.0% in fiscal 1998 and 41.4% in fiscal 1999. The increase in sales and marketing expenses as a percentage of net revenues from fiscal 1997 to 1998 was primarily a result of the up-front spending required to launch our DSL products, which only began to constitute a significant portion of our revenues in fiscal 1999. The decrease in such expenses as a percentage of net revenues from fiscal 1998 to fiscal 1999 was a result of the rapid increase in revenues. 28 Research and Development Expenses Research and development expenses consist primarily of personnel and related costs associated with our product development efforts, including third-party consulting and prototyping costs. Research and development expenses increased 76.5% from $4.4 million in fiscal 1998 to $7.7 million in fiscal 1999. This compares to an increase of 4.9% in fiscal 1998 over the $4.2 million recorded in fiscal 1997. The substantial increase in research and development spending from period to period was primarily a result of increased personnel and related costs associated with a larger research and development organization, as well as design and prototype expenses incurred in connection with the roll-out of our DSL products. Additionally, research and development spending in fiscal 1998 was partially offset by $850,000 of nonrecurring engineering expenses reimbursed by third parties. These amounts are treated as an offset to the related research and development spending. Accordingly, while the net amount of research and development spending in fiscal 1998 was relatively consistent with the fiscal 1997 level, our gross research and development spending increased 25.2% from fiscal 1997 to 1998. We received no such reimbursements in the fiscal 1999 period. Research and development expenses represented 101.5% of net revenues in fiscal 1997, 130.2% in fiscal 1998 and 52.2% in fiscal 1999. The substantial increases in research and development expenses as a percentage of net revenues from fiscal 1997 to 1998 reflected our early investment in developing our DSL products. The decrease from 1998 to 1999 in such expenses as a percentage of net revenues was a result of the rapid increase in revenues. General and Administrative Expenses General and administrative expenses consist primarily of employee salaries and related expenses for executive, administrative and accounting personnel, facility costs, insurance costs and professional fees. General and administrative expenses increased 21.5% from $1.6 million in fiscal 1998 to $2.0 million in fiscal 1999. This compares to an increase of 31.8% in fiscal 1998 over the $1.2 million recorded in fiscal 1997. The increases in absolute amount of general and administrative spending from period to period were primarily a result of increases in headcount associated with building our infrastructure. General and administrative expenses represented 30.2% of net revenues in fiscal 1997, 48.7% in fiscal 1998 and 13.4% in fiscal 1999. The substantial increase in general and administrative expenses as a percentage of net revenues in fiscal 1998 primarily reflected lower revenues in that year, while the decrease from fiscal 1998 to fiscal 1999 reflected the rapid increase in revenues in fiscal 1999. Stock Option Compensation Stock option compensation reflects the difference between the exercise price of stock options granted and the deemed fair market value of our common stock on the dates of grant. For the years ended June 30, 1997, 1998 and 1999 we recorded aggregate deferred stock option compensation of $2.3 million, $3.1 million and $13.1 million, respectively in connection with stock option grants. Amortization of deferred stock option compensation was $659,000 in fiscal 1997, $1.2 million in fiscal 1998 and $3.1 million in fiscal 1999. We expect to amortize the deferred stock option compensation at the rate of approximately $1.3 million per quarter until fully amortized. See Note 8 of Notes to Consolidated Financial Statements for a discussion of our deferred stock option compensation. Prior to our initial public offering in July 1999, there was no market for our common stock, and option prices were determined by the Board of Directors based upon numerous factors. Upon review in connection with our initial public offering, it was determined that the fair market value on the date of grant of certain options was higher than originally determined by the Board of Directors. Beginning with our initial public offering, we began pricing options based upon the public market price of our common stock, and do not anticipate accruing additional deferred stock option compensation in periods after the first quarter of fiscal 2000. Interest and Other Income (Expense), Net Interest and other income (expense), net consists primarily of interest earned on cash and cash equivalents offset by miscellaneous non-operating expenses. Interest and other income (expense), net went from income of 29 $125,000 in fiscal 1997 to $130,000 in fiscal 1998 and to an expense of $7.9 million in fiscal 1999. In the second half of fiscal 1999, we borrowed $9.0 million from certain investors. These notes carried an interest rate of 10% per year, and were payable on the earlier of January 2002 or the completion of an initial public offering. In connection with these notes, we issued the investors warrants to purchase 3,082,191 shares of Series H preferred stock at an exercise price of $2.92 per share. The proceeds were allocated between the notes and the warrants based on their pro rata fair values resulting in a discount. The discount was amortized as interest expense over six months, which represented the expected terms of the promissory notes. In addition, in June 1999, we borrowed an additional $5.0 million from Covad Communications Group, Inc. The Covad note carried an interest rate of 8% per year, and the principal amount and interest on the note converted into an aggregate of 497,663 shares of common stock upon completion of our initial public offering in July 1999. Upon the issuance of the Covad note we recorded $2.1 million of interest expense which represented the intrinsic value of the beneficial conversion feature of the Covad note. In future periods we expect interest and other income (expense), net to vary depending upon changes in the amount and mix of interest-bearing investments outstanding during each period. Income Taxes From inception through June 30, 1999, we incurred net losses for federal and state tax purposes and have not recognized any tax provision or benefit. As of June 30, 1999, we had approximately $48.0 million of federal net operating loss carryforwards to offset future taxable income which will begin to expire in varying amounts beginning in 2008. Given our limited operating history, losses incurred to date and the difficulty in accurately forecasting our future results, management does not believe that the recognition of the related deferred income tax asset meets the criteria required by generally accepted accounting principles. Accordingly, a 100% valuation allowance has been recorded. Furthermore, as a result of changes in Efficient's equity ownership resulting from Efficient's redeemable convertible preferred stock and note financings and Efficient's initial public offering, utilization of the net operating losses and tax credits may be subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and tax credits before utilization. See Note 11 of Notes to Consolidated Financial Statements. 30 Quarterly Results of Operations The following table sets forth, for the periods presented, certain data from Efficient's consolidated statement of operations and such data as a percentage of net revenues. The consolidated statement of operations data have been derived from our unaudited consolidated financial statements. In the opinion of management, these statements have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods presented. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this prospectus. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period. We have incurred net losses in each quarter since inception, and we expect to continue to incur losses for the foreseeable future.
Quarter Ended ---------------------------------------------------------------------------------------------------- Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, 1997 1997 1998 1998 1998 1998 1999 1999 1999 --------- -------- -------- -------- --------- -------- -------- --------- --------- (in thousands) Statement of Operations Data: Net revenues............ $ 676 $ 833 $ 1,194 $ 667 $ 1,174 $ 1,850 $ 4,115 $ 7,689 $ 12,171 Cost of revenues........ 396 413 744 607 863 1,647 4,189 7,645 11,706 -------- -------- -------- -------- -------- -------- -------- --------- -------- Gross profit (loss)..... 280 420 450 60 311 203 (74) 44 465 Operating expenses: Sales and marketing..... 643 694 895 1,204 1,168 1,303 1,385 2,277 2,652 Research and development............ 1,044 737 1,064 1,544 1,826 1,790 1,930 2,201 3,053 General and administrative......... 305 346 546 444 339 411 484 759 1,048 Stock option compensation........... 233 241 275 416 433 475 991 1,217 1,389 -------- -------- -------- -------- -------- -------- -------- --------- -------- Total operating expenses............... 2,225 2,018 2,780 3,608 3,766 3,979 4,790 6,454 8,142 -------- -------- -------- -------- -------- -------- -------- --------- -------- Loss from operations.... (1,945) (1,598) (2,330) (3,548) (3,455) (3,776) (4,864) (6,410) (7,677) Interest and other income (expense), net.. 34 12 35 49 80 30 (2,090) (5,920) (77) -------- -------- -------- -------- -------- -------- -------- --------- -------- Net loss................ $ (1,911) $ (1,586) $ (2,295) $ (3,499) $ (3,375) $ (3,746) $ (6,954) $ (12,330) $ (7,754) ======== ======== ======== ======== ======== ======== ======== ========= ======== As a Percentage of Net Revenues: Net revenues............ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenues........ 58.6 49.6 62.3 91.0 73.5 89.0 101.8 99.4 96.2 -------- -------- -------- -------- -------- -------- -------- --------- -------- Gross profit (loss)..... 41.4 50.4 37.7 9.0 26.5 11.0 (1.8) 0.6 3.8 Operating expenses: Sales and marketing..... 95.1 83.3 75.0 180.5 99.5 70.4 33.6 29.6 21.8 Research and development............ 154.5 88.5 89.1 231.5 155.5 96.8 46.9 28.6 25.1 General and administrative......... 45.1 41.5 45.7 66.6 28.9 22.2 11.8 9.9 8.6 Stock option compensation........... 34.5 28.9 23.0 62.4 36.9 25.7 24.1 15.8 11.4 -------- -------- -------- -------- -------- -------- -------- --------- -------- Total operating expenses............... 329.2 242.2 232.8 541.0 320.8 215.1 116.4 83.9 66.9 -------- -------- -------- -------- -------- -------- -------- --------- -------- Loss from operations.... (287.8) (191.8) (195.1) (532.0) (294.3) (204.1) (118.2) (83.3) (63.1) Interest and other income (expense), net.. 5.0 1.4 2.9 7.3 6.8 1.6 (50.8) (77.0) (0.6) -------- -------- -------- -------- -------- -------- -------- --------- -------- Net loss................ (282.8)% (190.4)% (192.2)% (524.7)% (287.5)% (202.5)% (169.0)% (160.3)% (63.7)% ======== ======== ======== ======== ======== ======== ======== ========= ========
Our net revenues and results of operations have fluctuated significantly from quarter to quarter in the past, and we expect these fluctuations to continue in the future. The following discussion highlights significant events that have impacted our net revenues and financial results for the nine quarters in the period ended September 30, 1999. Net Revenues Net revenues increased each quarter beginning in the quarter ended June 30, 1998 due to increased sales of our new DSL products, partially offset in two quarters by decreased revenues from our ATM LAN products. 31 Sales of our DSL products have increased significantly quarter to quarter since we introduced them in the third quarter of fiscal 1998. Net revenues increased in the first three quarters of fiscal 1998 as demand for our ATM LAN products was increasing. With the decision to focus on DSL products, we greatly reduced our sales, marketing and development efforts for our ATM LAN products. As a result, sales of these products began to decline in the fourth quarter of fiscal 1998. We expect sales of our ATM LAN products to continue to gradually decrease in absolute amount over the next one to two years, although sales of such products may fluctuate from quarter to quarter. Cost of Revenues Cost of revenues has increased in absolute dollars in most quarterly periods. Gross margins have fluctuated from a high of 50.4% in the second quarter of fiscal 1998 to a gross loss of 1.8% for the quarter ended March 31, 1999. Gross margins have been adversely affected by volume price discounts for customers in order to get our DSL products quickly into the marketplace as well as manufacturing start-up costs and inefficiencies related to the relatively low manufacturing levels for some of our DSL products. Operating Expenses Operating expenses generally increased in absolute amount from quarter to quarter during fiscal 1998 and 1999. As a percentage of net revenues, these expenses fluctuated, in some periods significantly, as a result of the fluctuations in revenues. Interest and Other Income (Expense), Net Interest and other income (expense), net has varied from quarter to quarter, based primarily upon changes in the amount and mix of interest-bearing investments outstanding during each period. In the quarter ended September 30, 1999, interest and other income (expense), net was an expense of $77,000. As indicated above, this was a result of the note and warrant transaction consummated in that quarter. After the interest expense associated with that transaction is fully amortized, we expect interest and other income (expense), net to increase from historical levels as we invest the proceeds of this offering pending use in our business. Liquidity and Capital Resources Since inception, we have financed our operations primarily through the sale of preferred equity securities and, in the second half of fiscal 1999, through borrowings from our investors and others. Since inception through June 30, 1999, we raised an aggregate of $40.4 million (net of transaction expenses) from the sale of equity securities and an additional $14.0 million through loan transactions. On July 15, 1999, we completed our initial public offering. We issued 4.6 million shares of common stock and raised $63.1 million in net proceeds. Upon the completion of the initial public offering, our promissory notes converted into redeemable convertible preferred stock, and all outstanding redeemable convertible preferred stock then converted into 28,300,067 shares of common stock. At September 30, 1999, we had cash and cash equivalents and highly liquid short-term investments of $56.1 million. At September 30, 1999, we did not have a line of credit or other borrowing facility available, nor did we have any material capital commitments. Cash used in operating activities for the quarter ended September 30, 1999 was $9.5 million. Cash used in operating activities has primarily represented net investments in working capital and funding of our net losses. Cash used in investing activities for the quarter ended September 30, 1999 was $9.8 million. Of this amount, $8.7 million of cash was used to purchase highly liquid short-term investments. In each period, purchases of furniture and equipment related primarily to the purchase of computers and other equipment used in our development activities and other equipment and furniture used in our operations. 32 Cash provided by financing activities for the three months ended September 30, 1999 was $63.1 million, consisting primarily of funds raised from our initial public offering of common stock on July 15, 1999. Our future capital requirements will depend upon a number of factors, including the rate of growth of our sales, the timing and level of research and development activities and sales and marketing campaigns. We believe that our cash, cash equivalents and short-term investments will provide sufficient capital to fund our operations at least through the end of fiscal 2000. Thereafter, we may require additional capital to fund our business. In addition, from time to time we may evaluate opportunities to acquire complementary technologies or companies. Should we identify any such opportunities, we may need to raise additional capital to fund the acquisitions. There can be no assurance that financing will be available to us when we need it on favorable terms or at all. Year 2000 Issues Many currently installed computer systems, software products and other control devices are unable to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' computer systems, software products and control devices may need to be upgraded or replaced in order to operate properly in the current calendar year and beyond. We have designed our products to be year 2000 compliant. However, although we are not aware of any errors or defects associated with our products' date functions in the year 2000, there can be no assurance that undetected errors or defects may become evident. If such errors or defects occur, we may incur material costs to resolve them. The internal systems used to deliver our services utilize third-party hardware and software. We have completed our assessment of year 2000 risks, and all identified instances of noncompliance have been repaired and tested. We have contacted the vendors of these products in order to gauge their year 2000 compliance. Based on these vendors' representations, we believe that the third- party hardware and software will remain year 2000 compliant. There can be no assurance, however, that we will not experience unanticipated negative consequences, including material costs, caused by undetected errors or defects in the technology used in our internal systems. We have no specific contingency plan to address the effect of year 2000 noncompliance. If, in the future, it comes to our attention that certain of our products need modification, or certain of our third-party hardware and software are not in fact year 2000 compliant, then we will seek to make modifications. In such cases, we expect such modifications to be made on a timely basis and we do not believe that the cost of such modifications will have a material effect on our operating results. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities," ("SFAS No. 133") as amended by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended, is effective for fiscal years beginning after June 15, 2000. The adoption of Statement of Financial Accounting Standards No. 133 is not expected to have a material effect on our results of operations, financial position or cash flows as we do not currently hold derivative instruments or engage in hedging activities. Disclosures About Market Risk The following discusses our exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in the Risk Factors section. 33 As of September 30, 1999, we had short-term investments of $8.7 million. All of these short-term investments consisted of highly liquid investments with remaining maturities at the date of purchase of less than 90 days. These investments are subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical increase or decrease in market interest rates by 10% from the September 30, 1999 rates would cause the fair value of these short-term investments to change by an insignificant amount. We have the ability to hold these investments until maturity, and therefore we do not expect the value of these investments to be affected to any significant degree by the effect of a sudden change in market interest rates. Declines in interest rates over time will, however, reduce our interest income. As of September 30, 1999, we did not own any equity investments. Therefore, we did not have any direct equity price risk. Substantially all of our revenues are currently realized in U.S. dollars. In addition, we do not maintain significant asset or cash account balances in currencies other than the United States dollar. Therefore, we do not believe that we currently have any significant direct foreign currency exchange rate risk. 34 BUSINESS Efficient Networks is a worldwide developer and supplier of high-speed digital subscriber line customer premises equipment, or CPE, for the broadband access market. Our DSL solutions enable telecommunications and other communication network service providers to provide high-speed, cost-effective broadband access services over the existing copper wire telephone infrastructure. On December 17, 1999 Efficient completed the acquisition of FlowPoint Corporation, a provider of advanced broadband routers for deployment at customer premises. We believe there is significant demand for high-speed broadband access, especially among business users and consumers who have found current solutions to be inadequate or too expensive. We therefore focus on developing and producing single- and multiple-user DSL customer premises equipment for small- to medium-size businesses, branch offices of large corporations and consumers. Our DSL products enable applications such as high- speed Internet access, electronic commerce, remote access, telecommuting and extensions of corporate networks to branch offices. Industry Background The Growing Need for High-Speed Broadband Communications The amount of data being carried over the Internet and private communications networks has grown dramatically and is expected to continue to grow as the number of users accessing these networks increases. The increase in the quantity of data being carried over the Internet and private networks also is being driven by the broadening range of activities for which these networks are being used. In order to enhance their reach to customers and suppliers, businesses are increasingly engaging in mission-critical Internet-based applications, such as electronic commerce, supply chain management, Web hosting, and global marketing and customer support. Businesses also increasingly use the Internet to create secure data networks known as virtual private networks among corporate sites, remote offices and telecommuters. International Data Corporation estimates that there were approximately ten million telecommuters in 1998, of which 72 percent used online services at least once a day. By utilizing the Internet, businesses can streamline internal operations by facilitating employee communications, e-mail, file sharing, and research and analysis. Consumers are also increasingly accessing the Internet to communicate, collect and publish bandwidth intensive information, conduct retail purchases, and access online entertainment. These growing network- dependent activities require the transmission of large amounts of data, which in turn, requires high-speed broadband data access services for end users to obtain the data reliably and within practical time constraints. Traditional Access Solutions are Inadequate To meet the growing demand for high-speed, high-bandwidth data transmission, network service providers have installed high-bandwidth fiber optic transmission equipment, high-speed switches and core routers in the Internet backbone and in interoffice networks. While this network backbone is capable of delivering data at very high speeds, an access bottleneck exists between the ends of these fiber optic networks at telephone companies' central offices and the end users' premises. The copper line connections between the central office and the end user are commonly known as the "last mile." Last mile connections are typically made via dial-up analog or integrated services digital network, commonly known as ISDN, modems over the copper infrastructure that was originally built to transmit analog voice signals. Data transmission speed, otherwise known as bandwidth, is typically expressed in bits per second. Along the fiber optic network backbone, data moves at speeds up to 2.5 billion bits per second, or 2.5 Gbps, while analog modems transmit data at rates up to 56.6 thousand bits per second, or 56.6 Kbps, and most ISDN modems transmit at rates up to 128 Kbps. Even at ISDN speeds, several minutes are often required to access a media rich Website, and several hours may be required to transfer or download large files. During this time, the telephone line cannot be used for any other purpose. This bottleneck frustrates end users and limits the capability of network service providers to deliver applications such as efficient Internet access, multimedia entertainment, real-time telecommuting and branch office internetworking. 35 In an effort to provide greater bandwidth, telecommunications network service providers have traditionally deployed T1 services. A T1 line is a high- capacity, dedicated telecommunications line which can support data transmissions rates of up to 1.5 million bits per second, or 1.5 Mbps, which is roughly 25 times the speed of analog modems. Although T1 services have helped fill the need for broadband access for large businesses, network service providers have generally been unable to offer T1 services to small businesses, remote offices, telecommuters and consumers as a result of the complexity and high costs of deployment. Because analog and ISDN modem technology fails to satisfy the bandwidth needs of end users, and T1 access is prohibitively expensive, network service providers continue to seek alternatives for providing cost-effective broadband access to both businesses and consumers. Additionally, the continued growth in both the number of analog modem users and their time spent connected to the Internet congests many network service providers' networks while providing them with little or no additional revenue. Competition is Driving Rapid DSL Deployment Until recently, the incumbent local exchange carriers such as Ameritech, Bell Atlantic, BellSouth, GTE, Pacific Bell, SBC Communications and US West, were the exclusive operators of the last mile. Since analog dialup modems, ISDN and T1 services offered over the incumbent local exchange carriers' networks did not adequately satisfy the demand for cost-effective broadband access for a majority of users, alternative solutions were developed such as broadband wireless and cable access. The deployment of these alternative broadband solutions is now pressuring incumbent local exchange carriers to deliver cost- effective broadband access to their customers. In addition, the Federal Telecommunications Act of 1996 intensified the competitive environment because that Act requires incumbent local exchange carriers to lease portions of their networks, including the last mile, to competitive local exchange carriers. As a result, many new companies, long distance telephone companies and Internet service providers have applied for and been granted regulatory approval for competitive local exchange carrier status. Leading competitive local exchange carriers, including Covad Communications, MCI WorldCom, NorthPoint Communications, Rhythms NetConnections and Sprint, are now deploying high-speed services over the copper infrastructure owned by the incumbent local exchange carriers. In response to these competitive pressures and in an effort to increase revenues and maintain their existing customer base, incumbent local exchange carriers are now beginning to commit the resources necessary to deploy cost-effective, high- speed data services over their existing copper infrastructure. Similar dynamics are occurring internationally. The growth in Internet use, telecommunications deregulation and competition from alternative broadband access technologies have caused foreign telephone network service providers to commit similar resources to broadband access deployment. Incumbent local exchange carriers, competitive local exchange carriers and foreign telephone network service providers are deploying DSL technology as the cost-effective broadband access solution. DSL technology utilizes sophisticated data modulation techniques to achieve high-speed data transmission 100 times faster than analog modems over existing copper telephone wires. The equipment needed to enable a DSL link generally consists of two pieces, one in the network operator's central office and one at the premises of the business or consumer. The central office equipment is often called a DSL access multiplexer, commonly known as a DSLAM, which aggregates data traffic from multiple DSL links into a common link to a fiber optic network backbone. The CPE and the DSLAM must also interoperate with the rest of the equipment in a given network. DSL can enable cost-effective, high-speed data transmission from the premises of a business or consumer into a DSL network operator's central office where existing high-capacity networks can then carry data to a destination across an Internet or other service provider's network. The market for DSL services is expanding rapidly. All major U.S. incumbent local exchange carriers have begun to offer DSL services to their customers directly and through Internet service providers. For example, in October 1999, SBC Communications announced a $6 billion initiative to make DSL service available to an 36 estimated 77 million Americans by the end of 2002. In addition, competitive local exchange carriers are aggressively deploying DSL service. For instance, Covad Communications first announced the availability of its DSL services in the San Francisco Bay area in December 1997. By May 1998, Covad's service was available to over one million potential customers. By the end of 1998, Covad extended its DSL offerings to over 6 million businesses and homes in five major metropolitan areas, and by October 1999, Covad had deployed DSL capability to over 25 million homes and businesses in 51 metropolitan areas. Existing Customer Premises Solutions are Constraining DSL Deployment As these and other network service providers are deploying DSL services, they are encountering several challenges. In particular, interoperability still presents substantial technical challenges despite recent industry efforts to standardize the various implementations of DSL. Service providers are actively seeking DSL CPE solutions that offer seamless end-to-end interoperability within their networks. End-to-end interoperability requires that DSL solutions be compatible with the customer's computer hardware, operating systems, networking equipment and software, the CPE and DSLAM, and the switching and routing equipment in the service providers' network. Network service providers face additional challenges in deployment and maintenance, because DSL services are typically targeted at branch offices, small businesses or individuals where no particular level of networking expertise can be assumed. Therefore, to implement rapid and widespread DSL deployment, it is of primary importance that DSL CPE provides for simple and cost-effective installation and maintenance. The Efficient Solution Efficient designs and manufactures the SpeedStream family of DSL CPE and related software as part of an overall solution for high-speed remote access and data transmission. Through our recent acquisition of Flowpoint, we also provide a comprehensive line of broadband access routers. Our solutions enable DSL deployment, ensure end-to-end interoperability and provide for efficient and cost-effective installation and maintenance. Enable DSL Deployments. Efficient enables network service providers to rapidly and cost-effectively deploy DSL services, thereby allowing them to quickly capture market share in today's intensely competitive environment. Efficient's products are specifically targeted to small- to medium-size companies and consumers for applications such as high-speed Internet access, and to large corporations for applications such as remote access, telecommuting and extensions of corporate networks to branch offices. By offering a variety of DSL CPE categories that support DSL types compatible with a diverse set of DSL services, we can provide network service providers with a wide range of options. We can also reduce operational complexity for network service providers by offering a single point of contact for training and support for their DSL CPE. Ensure End-To-End Interoperability. Efficient's DSL solutions offer seamless interoperability from the customer's computer through the service providers' network. To ensure this interoperability, Efficient leverages our core technology expertise in combination with our relationships with network service providers, such as Ameritech, Bell Atlantic, BellSouth, Covad Communications, Hong Kong Telecom, Singapore Telecom and TeleDanmark, and network equipment vendors, such as ADC Telecommunications, Advanced Fibre Communications, Alcatel, Copper Mountain Networks, Ericsson, Lucent Technologies, Newbridge Networks, Nokia, Nortel Networks and Siemens. Since these industry leaders recognize that end-to-end interoperability is a necessary requirement for full scale DSL deployment, network equipment vendors have provided us with early releases of their systems and technologies so that we can ensure that our products will seamlessly interoperate with their systems. Our relationships with network service providers and network equipment vendors enable us to maintain and use one of the most complete DSL interoperability test labs in the industry. In addition, Efficient actively participates in developing industry- wide standards to continue to facilitate end-to-end interoperability. Provide for Efficient and Cost-Effective Installation. Efficient offers a full suite of easily installable DSL solutions, including DSL CPE that provides routing and bridging capabilities which connect seamlessly into 37 multiple user environments using a standard networking architecture called Ethernet. For single user environments, Efficient provides internal DSL CPE installed directly into the end user's computer and external CPE that connect to the end user's computer by simply plugging into the computer's universal serial bus, or USB, port. Efficient's internal and universal serial bus modems are supported by Efficient's pre-configurable software which allows the network service provider to configure the CPE for a particular network before the CPE is sent out into the field. Pre-configuration of the CPE obviates the cost and time associated with having installers perform these configuration activities with each end-user installation. Provide for Cost-Effective Maintenance. Efficient offers network service providers our Advanced Status software, a troubleshooting and diagnostic tool. With Advanced Status software, a network service provider's customer support technician can walk an end user through the diagnostic process over the telephone. This allows the network service provider to easily monitor, diagnose and often remotely fix the customer's problems quickly, which can substantially reduce the network service provider's customer support costs. In the event that a technician needs to be dispatched, Advanced Status provides easy diagnosis and facilitates on-site repair. The Efficient Strategy Our objective is to be the leading worldwide provider of high-performance DSL broadband access customer premises equipment for businesses, remote offices, telecommuters and consumers. Key elements of our strategy include the following: Capitalize upon our Early Market Acceptance by Network Service Providers. We intend to leverage our products' early market acceptance to extend our market share. We have been focused on the high-speed network connectivity market for six years and specifically on the DSL market for three years. Our DSL CPE products have been deployed by Ameritech, Bell Atlantic, BellSouth, Covad Communications, Hong Kong Telecom, Pacific Bell, Singapore Telecom, Southwestern Bell, TeleDanmark and several other network service providers. We work closely with each network service provider, in most cases providing customized software or product packages, as well as dedicated training and support services. A number of other network service providers have begun to test our CPE solutions. We intend to build upon this early acceptance of our products to become the primary provider of DSL CPE to these and other network service providers as they deploy their DSL networks. Leverage Strategic Relationships with Network Equipment Vendors. We intend to leverage both current and future relationships to continue to promote Efficient in the industry, extend our sales capabilities, increase our volume distribution, and build brand awareness. We believe successful deployment of DSL necessitates close working relationships with network equipment vendors. Since most network equipment vendors do not have complete DSL CPE solutions, they typically bundle and sell their network equipment with third-party CPE solutions. We have established relationships with ADC Telecommunications, Alcatel, Copper Mountain Networks, Ericsson, Lucent, Nokia, Nortel Networks and Siemens, among others. Continued Development of Broadband Access CPE. We intend to continue developing DSL CPE products that enhance the features of our current line as well as create new bundled voice and data access products. We are developing advanced functionality, enhanced routing and bridging capabilities, additional software, and new products based on different physical interfaces. We are continually pursuing techniques to reduce product costs. In developing new technologies and products, we benefit from our relationships with key industry leaders that offer early visibility into market requirements and deployment trends. Broaden Distribution Channels. We plan to extend our distribution channels to meet the growing demand for broadband access solutions. When we first deployed our current generation DSL products, we initially targeted incumbent local exchange carriers and network equipment providers in order to secure large contracts, establish credibility in the marketplace and strengthen key network service provider relationships. We have since built a direct sales force to target competitive local exchange carriers, foreign telephone network service providers and Internet service providers as well. Moreover, we are developing alternative distribution 38 channels such as telephone company-aligned distributors, traditional two-tier distribution partners, third-party integrators, and retail partners. To this end, we have recently signed agreements with Innotrac, Nortel Supply and Sprint North Supply, three leading telephone company-aligned distributors. We are also expanding our global presence by extending our international direct sales force, securing additional international value-added resellers and establishing retail sales abroad. Build the Efficient Brand Name. In addition to increasing brand awareness with network service providers and network equipment vendors, we believe it is critical to establish brand awareness and differentiation from our competitors with end customers through superior performance, ease of use and customer service. We plan to continue building brand awareness of Efficient and SpeedStream to identify us as the leading provider of DSL CPE solutions. All of our DSL products, even when deployed by network service providers, carry the Efficient and SpeedStream brand names. In some instances, we co-brand our products with prominent network equipment vendors such as Alcatel in order to build this name recognition. In addition, we plan to increase our investments in a broad range of marketing programs, including active trade show participation, advertising in print publications, direct marketing and Web- based marketing. Leverage Strategic Acquisitions to Complement Product & Technology Offerings. We recently acquired FlowPoint Corporation to add advanced broadband routers to our product line for the customer premises equipment market. Our FlowPoint products incorporate a broad range of DSL technologies, including ADSL, SDSL and IDSL. FlowPoint also brings expertise in frame-based customer premises equipment as well in the emerging voice-over-DSL market, and has provided us with several new customer relationships. We intend to pursue strategic acquisitions in the future as we identify companies or products that will complement our current product offerings and expand our addressable customer base. Products Efficient has developed the SpeedStream family of DSL products that enables broadband access for businesses and consumers. Our products are designed to support a number of computer environments, DSL implementations, and network architectures. Our asymmetric DSL, or ADSL, products provide transmission speeds of up to 8 Mbps in the downstream direction from the network to the end user, and up to 1 Mbps in the upstream direction. Our symmetric DSL, or SDSL, products provide equal upstream and downstream speeds of up to 2.3 Mbps. Our SpeedStream products are separated into these product categories: . 3000 Series--Designed for the single user and installable into a peripheral component interface, or PCI, bus slot within a personal computer. . 4000 Series--Designed for the single user and connected to a personal computer through a universal serial bus port. . 5200 Series--Designed to provide simple, zero-setup DSL access for multiple users through an Ethernet port. . 5600 Series--Designed to provide basic routing capabilities for a telecommuter or a small office or home office environment. . FlowPoint routers and Integrated Access Device--Designed to provide a comprehensive routing feature set for a small business or a corporate branch office, or to provide routing plus multiple voice lines over DSL. Efficient also provides a full suite of pre-configuration and diagnostic software tools. Our pre-configuration software enables network service providers to architect scalable DSL services and ensures rapid and reliable installation while reducing or eliminating the need for on-site configuration. Our diagnostic and troubleshooting software, Advanced Status, is designed to reduce a network service provider's expense associated with ongoing maintenance and repair. We believe that these software capabilities can reduce the overall expense for DSL service deployment and maintenance. 39 The SpeedStream 3000 Series The SpeedStream 3000 Series consists of internal modems that provide high- speed asymmetric DSL connectivity for a personal computer. This product family comprises four distinct products, each designed for compatability with specific DSLAMs from various network equipment vendors. The SpeedStream 3000 Series incorporates the following features: . Installs into any peripheral component interface bus slot; . Supports pre-configuration using Efficient software for easy setup; . Includes Efficient Advanced Status diagnostic software tools for rapid error diagnosis and correction; . Supports prevalent data encapsulation standards to ensure network interoperability with Internet Protocol and ATM networking equipment; . Provides ATM functionality that enables reliable data transmission; . Offers remote management capability; . Supports Microsoft Windows 95, Windows 98 and Windows NT operating systems; and . Has list prices ranging from $129 to $269. The SpeedStream 4000 Series The SpeedStream 4000 Series consists of external modems that provide high- speed asymmetric DSL connectivity through a personal computer's universal serial bus port. This product family comprises four distinct products, each designed for compatability with specific DSLAMs from various network equipment vendors. The SpeedStream 4000 Series incorporates the following features: . Attaches externally via a personal computer's universal serial bus port; . Supports pre-configuration using Efficient software for easy setup; . Includes Efficient Advanced Status diagnostic software tools for rapid error diagnosis and correction; . Supports prevalent data encapsulation standards to ensure network interoperability with Internet Protocol and ATM networking equipment; . Provides ATM functionality that enables reliable data transmission; . Offers remote management capability; . Supports Microsoft Windows 98 operating system; and . Has a list price of $299. The SpeedStream 5200 Series The SpeedStream 5200 Series provides high-speed remote ADSL or SDSL connectivity for one or more personal computers, workstations or other network devices over a standard networking architecture called Ethernet. This product family is currently comprised of two products designed to interoperate with DSLAMs from various network equipment vendors. The SpeedStream 5200 Series incorporates the following features: . Facilitates cost-effective DSL connectivity for multiple users via a standard Ethernet port; . Provides zero setup installation, reducing the time required for installation; . Pre-configures for rapid network deployment; . Supports prevalent data encapsulation standards to ensure network interoperability with Internet Protocol and ATM networking equipment; . Provides ATM functionality that enables reliable data transmission; and . Has a list price of $349. 40 The SpeedStream 5600 Series The SpeedStream 5600 Series provides high-speed remote ADSL or SDSL connectivity for one or more personal computers, workstations or other network devices over a standard networking architecture called Ethernet. This product family is currently comprised of three products designed to interoperate with DSLAMs from various network equipment vendors. Routing features help provide security, and make more effective use of network bandwidth. The SpeedStream 5600 Series incorporates the following features: . Facilitates DSL connectivity for multiple users via a standard Ethernet port; . Provides routing or bridging capabilities for a telecommuting or small office/home office environment; . Pre-configures for rapid network deployment; . Supports prevalent data encapsulation standards to ensure network interoperability with Internet Protocol and ATM networking equipment; . Provides ATM functionality that enables reliable data transmission; . Offers remote management capabilities; and . Has a list price of $595. FlowPoint Routers and Integrated Access Devices Routers developed by FlowPoint Corporation provide high-speed remote connectivity for one or more personal computers, workstations or other network devices over a standard networking architecture called Ethernet. FlowPoint routers support three different types of DSL, plus several non-DSL interfaces that can enhance existing DSL modems. The FlowPoint Integrated Access Devices add support for multiple voice lines over DSL, in addition to the routing capabilities. Our FlowPoint routers incorporate the following features: . Facilitate DSL connectivity for multiple users via a standard, integrated Ethernet hub; . Provide routing and bridging capabilities for a small business or branch office environment; . Pre-configureable for rapid network deployment; . Support prevalent data encapsulation standards to ensure network interoperability with Internet Protocol and ATM or packet-based networking equipment; . Support enhanced security and virtual private network capabilities; . Provide ATM or packet-based functionality that enables reliable data transmission; and . Offer remote management capabilities. The following table demonstrates some of the features of our routers and integrated access devices: --------------------------------------------------------------
FlowPoint Routers, Integrated Access Devices ----------------------------------------------------------------------- 2200 255 144 245/2025 2200V--IAD DSLAM Nokia, Copper Alcatel, Lucent, Copper Any--with Nokia, Copper Interoperability Mountain Copper Mountain, external DSL Mountain Mountain, Nokia, modem Pulsecom Pulsecom - ---------------------------------------------------------------------------------------- Wide Area Network SDSL ADSL IDSL Ethernet/ SDSL Interface ATM25 - ---------------------------------------------------------------------------------------- Suggested Retail $599 $649 $499 $649/$649 $995 Price
41 Pre-configurable Software All of our SpeedStream DSL products for single personal computer environments support the ability to be pre-configured for specific DSL networks. SpeedStream Software allows a network service provider to select configuration settings for the CPE that match its specific network. This CPE pre-configuration allows a network operator the flexibility to choose network settings unique to the network's service offerings, without requiring an end user or an installation technician to individually configure each unit. Thus, by setting the attributes for DSL, ATM and data encapsulation prior to installation of the CPE, the speed of DSL equipment installation is increased. We believe that this ability to pre-configure DSL CPE provides cost savings for network service providers and allows them to scale their DSL service offerings rapidly and reliably. Advanced Status Software All SpeedStream DSL products for single-user environments include embedded diagnostic and troubleshooting software called Advanced Status. During normal network conditions, the end user is unaware that this software is operating. However, if network degradation or failure occurs, a customer service representative can work with the end user to diagnose and isolate problems with the DSL link, the CPE or the network itself. Advanced Status software provides information such as status indications and performance statistics for DSL, ATM and packet communication layers. This information helps identify problems and determine whether they must be solved at the central office or the customer premises. Advanced Status software minimizes the need to send a technician to the customer premises and speeds troubleshooting and repair. We believe that our Advanced Status software reduces the overall expense of DSL service. Products under Development Efficient is developing a new family of business class products that will integrate voice and data traffic through a single platform. This family of products is intended to enable service providers to offer bundled voice and data services over a single copper connection. These integrated access products will take advantage of the cost-effective nature of DSL access, but will ultimately expand to support other high-speed access technologies as well. We intend to release the first of these new products in the first half of calendar 2000. We believe that as competition among network service providers intensifies, the ability to provide bundled voice and data services will provide competitive differentiation among network service providers. In addition, Efficient is presently working to add new features, enhance existing features and reduce the cost of our SpeedStream products. Specifically, we are working to integrate advanced filtering technology, routing capabilities, advanced management tools and new hardware interfaces into SpeedStream products. Technology Efficient designs and manufactures DSL CPE as part of an overall solution for high-speed remote access and data transmission. Efficient's SpeedStream family of DSL CPE includes products intended for a single user such as a telecommuter, as well as for multiple users within branch offices or small businesses. Efficient integrates a diverse set of technologies and expertise, primarily in the following areas: . DSL System Architecture . Asynchronous Transfer Mode and Data Encapsulation Techniques . Software . Application Specific Integrated Circuit Design . Routing and Bridging DSL System Architecture Expertise We structure our product architectures to consist of highly modular blocks of hardware and software. By utilizing our expertise in developing multiple products with diverse types of DSL technology, we have developed a core set of hardware and software designs. Consequently, it is a relatively straightforward activity 42 to restructure the components and develop a new SpeedStream product. Similarly, as new features are developed, they can be made available across a number of products all based upon common components. This design modularity helps Efficient respond quickly to new market requirements. Our product architectures use Efficient's proprietary application specific integrated circuits, or ASICs, as well as chipsets from third-party suppliers. We believe that the use of our application specific integrated circuits in conjunction with these third-party chipsets has advantages for CPE performance and cost. Because DSL signals operate across a broad frequency range, circuits must be carefully designed to ensure that high performance is achieved without disrupting other equipment in the end user's home or office (such as televisions). We believe that our techniques for DSL circuit design, component selection and layout, emissions shielding and certification testing result in high-performance products that meet a broad range of emissions and safety certifications mandated by the Federal Communications Commission, international regulatory bodies, consumer safety laboratories and network operators. Asynchronous Transfer Mode and Data Encapsulation Techniques Expertise All of our SpeedStream CPE products employ our own ATM hardware and software technology. ATM technology enables multiple communication sessions to occur simultaneously and bursty packet traffic to co-exist with delay-sensitive traffic such as voice or video information. In order to allow this data to be carried across an ATM network, it must be formatted into fixed-size ATM cells, a technique known as data encapsulation. ATM and data encapsulation permit a common network infrastructure to offer diverse services. There are numerous data encapsulation techniques which network service providers, Internet service providers or other network operators may implement. We have been able to implement these numerous ATM and data encapsulation techniques because of our prior experience in designing, manufacturing, and commercializing ATM LAN equipment. Key pieces of silicon and software technology were re-used from these products to enable rapid development of our SpeedStream CPE. We believe that this intellectual property, as well as the ATM networking expertise associated with it, represents one of our key competitive advantages. Software Expertise Our software engineers have expertise in developing code that addresses the needs of network service providers. Our modular software architecture enables re-use of much of our software code across products. This modularity also enables rapid development of new products. Our knowledge of network operation and architectures and data encapsulation techniques allows us to write software that ensures that our products are interoperable with other network equipment vendors' products. In addition, our understanding of various operating systems and personal computer environments allows us to create software that provides for trouble-free installation and network maintenance. Our software engineers also design, build and operate comprehensive testing environments to ensure not only that our products are interoperable, but also offer high performance. Efficient has developed a suite of software for our single-user SpeedStream products that enables communication in a personal computer environment. This software is commonly called a "driver" and allows application software, such as e-mail or a Web browser, to send and receive data over the DSL network link, just as it would over a modem or a LAN connection. By building upon software source code and skills developed for ATM LAN products, Efficient is able to support a number of diverse personal computer environments. To date, Efficient has leveraged our software expertise to develop and release high-performance, rapidly installing drivers for our SpeedStream 3000 and 4000 Series products. This software is interoperable with numerous brands and models of personal computers, operating system environments such as Windows 95, Windows 98 and Windows NT version 4, and upcoming environments such as Windows 2000. Efficient has also developed and released our ProfileBuilder and Advanced Status software tools. In addition, Efficient works closely with network service providers to create software specific to their networks, which allows them to rapidly and reliably deploy and maintain DSL service. 43 Application Specific Integrated Circuit Design Expertise Efficient has developed custom application specific integrated circuits that enable high-speed ATM networking using peripheral component interface or universal serial bus attachments. Our application specific integrated circuits provide high-speed interfaces to the personal computer and also perform several ATM functions, including segmentation and reassembly functions whereby variable length packets are converted into fixed size ATM cells. They also perform traffic shaping functions that control the flow of data from the end user's equipment into the service provider's network. The use of custom application specific integrated circuits allows us to better control the cost of our products and helps ensure their performance and interoperability with diverse brands of personal computers and network equipment. Routing and Bridging Expertise Efficient's multi-user products offer a shared Ethernet port for local attachment to a computer network and an ATM DSL port for transmission and receipt of data across a DSL interface. A bridging device forwards Ethernet packets between the product's Ethernet port and its ATM DSL port based on addresses contained in the Ethernet packets. Efficient's Ethernet bridging products examine addressing information in each packet to determine whether it should be forwarded between the local Ethernet port and the ATM DSL port. Our bridging CPE requires little or no configuration, thereby reducing the network service provider's installation expense. Because all packet forwarding decisions are made independently of the network protocol carried by the Ethernet packets, our bridging CPE can support numerous network types, including older LAN environments such as Novell's IPX or Apple's AppleTalk, as well as networks based on the Internet Protocol. Routers are able to perform much more complex functions than those performed by bridges including restricting certain types of data from entering the network and directing data flow based on dynamically assigned Internet protocol addresses. Efficient's routing products forward Internet Protocol packets based upon addressing information contained in the packet header. Support for several different methods of ATM data encapsulation helps ensure network interoperability. Efficient's routing products provide features that enhance security and ease network administration for end users, such as packet filtering, which prevents unwanted access to local servers or other private resources, and a technique known as network address translation, which masks the presence of local computers from other computers on the Internet. Our routing products also implement an address management technique called the dynamic host configuration protocol that automates the assignment of Internet protocol addresses to computers attached locally to the router. The network address translation and dynamic host configuration protocol features of our routing products can help minimize address interoperability issues, and may be able to accelerate deployment of DSL services. Efficient's routing products include a complete suite of management capabilities that enable local and remote troubleshooting as well as upgrades to system configuration or software. This is important as DSL is a complex technology typically intended for a technologically unsophisticated user base. We believe that our products' combination of management capabilities which can be accessed either locally or remotely can help reduce the cost of network administration for DSL network service providers. Customers Sales of our CPE have been to two main classes of customers: network equipment vendors who supply DSL central office equipment and DSL network service providers. Network equipment vendors include our products as an element of a complete solution offered to their network service provider customers. In many cases, several different network equipment vendors specify our products as the preferred or bundled CPE in response to bid requests issued by a network service provider for complete DSL access solutions. Network service providers will then provide the CPE to end users for access to their DSL network. In some cases, we sell CPE to the network equipment vendor for resale as part of a bundled solution to the network service provider. In other cases, we sell directly to the network service provider. 44 The following table sets forth the top 20 customers for our DSL products in the fiscal year ended June 30, 1999, categorized by customer type. These customers accounted for an aggregate of 22.6% of our total revenues in fiscal 1998, 85.9% of our total revenues in fiscal 1999, and 95% of our total revenues for the first quarter of fiscal 2000.
Network Equipment Vendors Network Service Providers Telephone Company-Aligned and Other Distributors - --------------------------------------------------------------------------------------------- ADC Telecommunications Ameritech Daehan Information Service Corp. Alcatel Covad Communications* Global Technology Integrator Diamond Lane Communications Flashcom Innotrac for BellSouth's network Ericsson Hong Kong Telecom Soon Cabling Pte, Ltd.* for Daewoo Lucent Technologies Panhandle Telecommunication Telecom's network Nokia Services Telecom Equipment for Singapore Nortel Networks Southwestern Bell Telecom's network Siemens Universe Computers
* The customers indicated accounted for 10% or more of our net revenues in fiscal 1999. For the first quarter of fiscal 2000, sales to four customers, American Communications Supply, Inc., a distributor for Southwestern Bell, America Online, Inc., Innotrac Corporation, a distributor for BellSouth, and Lucent Technologies each represented more than 10% of our net revenues. Strategic Relationships We believe that establishing relationships with leaders in DSL technology and services is critical to our success. Accordingly, we have formed strategic relationships and, in some cases, entered into joint development agreements with network service providers, network equipment vendors and developers of DSL semiconductor technology. We are also pursuing strategic relationships to ensure that high-volume distribution channels are in place for our products. Network Service Providers Ameritech. Efficient has entered into an agreement to provide DSL CPE to Ameritech. We have worked closely with the technical and product management staff responsible for DSL service deployment at Ameritech. We have also provided early software releases of new products to Ameritech, and have provided Ameritech with training for both customer service and field support. Bell Atlantic. Efficient has entered into an agreement to provide DSL CPE to Bell Atlantic. Two of our SpeedStream products are offered by Bell Atlantic as CPE options for their Infospeed DSL service. Efficient has developed custom hardware and software to help enable Bell Atlantic's DSL deployment, and we have provided them with training for both customer service and field support. BellSouth. Efficient has entered into a joint promotion agreement with BellSouth for DSL CPE. BellSouth provides a financial incentive for Internet service providers that bring customers into the BellSouth DSL service. For the term of the program, subscribing Internet service providers are offered SpeedStream CPE at a reduced cost. Efficient has also entered into a supply agreement with BellSouth. We believe that the joint promotion agreement in conjunction with the supply agreement with BellSouth will create significant demand for our products. Covad Communications. Efficient has worked closely with Covad to tune the feature set of our SpeedStream 5250 symmetric DSL bridging modem to their network requirements. We are working with Covad to develop new products intended specifically for its network and also are involved in discussions with Covad about our next-generation products. In addition, on June 28, 1999, we issued a $5.0 million convertible promissory note to Covad which converted into 497,663 shares of common stock upon completion of our initial public offering in July 1999. 45 Hanaro Telecom. Hanaro is a competitive network service provider in Korea actively engaged in DSL deployment. Hanaro offers DSL services for consumer, academic and business applications. Efficient has worked closely with Hanaro to enable rapid deployment of its DSL service using our SpeedStream CPE. SBC Communications. Efficient provides our SpeedStream CPE for DSL services offered through SBC's Southwestern Bell and Pacific Bell subsidiaries. We have provided training for their installation and customer service personnel, and have worked with their certification and test staff to demonstrate new SpeedStream DSL products. Singapore Telecom. Efficient has worked closely with SingTel to provide customized software with our CPE that is unique to SingTel's advanced Magix DSL service. We are involved in discussions with SingTel with respect to the evolution of SingTel's network architecture and service offerings. SingTel has consistently volunteered to work with us to test our new products. Network Equipment Vendors Alcatel. Efficient and Alcatel have established a joint development and marketing agreement for CPE that is interoperable with Alcatel's DSLAM as well as their Litespan digital loop carrier. We are working together to develop two successive generations of DSL CPE based around our universal serial bus, ATM and software technology, and employing Alcatel's DSL chipsets and software. In certain cases, we co-brand products which are sold by both Efficient and Alcatel. Ericsson. Efficient and Ericsson have entered into a long term agreement whereby we supply our SpeedStream 3000 PCI and 4000 USB products. We have developed DSL products intended to ensure ongoing compatibility with their DSL equipment. Nokia. Efficient and Nokia have entered into a purchase and distribution agreement whereby we supply our SpeedStream 3000 PCI and 4000 USB products. Under the provisions of this agreement, Nokia resells our products along with its EKSOS family of DSL equipment and their SpeedLink DSLAM. Nortel Networks. Efficient has an agreement to supply Nortel with DSL CPE that is interoperable with Nortel's Universal Edge 9000 access product. Nortel offers the Universal Edge 9000 to both new and existing customers as an upgrade for both Nortel's DMS voice switches and its access node digital loop carriers. Based on this relationship, we are working with Nortel on next-generation products. Siemens. Siemens is an investor in Efficient. We have worked with Siemens to specifically design and produce certain DSL CPE that is interoperable with both Siemens' XpressLink D DSLAM and with DSL interfaces for Siemens' installed base of voice switches. Anthony T. Maher, who is a member of the board of Siemens AG Information and Communication Networks, joined our board of directors in April 1999. Developers of DSL Semiconductor Technology Analog Devices. Many of our products use asymmetric DSL technology from ADI. Efficient was one of two CPE vendors to engage in an early availability program with ADI for G.lite, a splitterless DSL technology. G.lite is expected to enable deployment of DSL service without requiring a network service provider technician to perform on-site wiring changes or installation of CPE. Texas Instruments Incorporated. Texas Instruments is an investor in Efficient. Some SpeedStream products under development use asymmetric DSL technology from Texas Instruments. We have licensed pieces of our ATM silicon and software to Texas Instruments, and have assisted in the development of reference designs for application of Texas Instruments' asymmetric DSL components. Texas Instruments has provided us with access to its asymmetric DSL components at most favored prices. Texas Instruments also fabricates one of our ATM application specific integrated circuits and has provided introductions for Efficient to personal computer manufacturers who are searching for sources of DSL CPE. 46 Telephone Company-Aligned Distributors Sprint North Supply. Sprint North Supply is a primary supplier of telecommunications equipment to Sprint. Many other network service providers also source networking products from Sprint North Supply. Efficient has entered into a distribution agreement with Sprint North Supply that enables it to carry selected members of our SpeedStream product family. Nortel Supply. Nortel Supply is a distributor of Nortel and other network equipment vendors' products. Through our agreement with Nortel Supply, Efficient leverages Nortel Supply's worldwide distribution capabilities. Innotrac. Innotrac is a distributor of consumer telecommunications equipment for several incumbent local exchange carriers, including BellSouth. Efficient, Innotrac and BellSouth jointly promote BellSouth's DSL services with Efficient's SpeedStream CPE. Efficient and Innotrac also work together to create customized product packages and documentation for major network service providers. We believe that we can leverage Innotrac's relationship with several incumbent local exchange carriers, as well as Innotrac's experience in distributing products in high volume. Manufacturing We outsource the assembly and testing of products and printed circuit boards to turnkey contract manufacturers. Currently, ACT Manufacturing, Inc. manufactures the majority of our products at its facility in Hermasillo, Mexico. Our FlowPoint products are manufactured by PEMSTAR, Inc. at its San Jose, California facility. Efficient also contracts with Xetel, Inc. for the manufacturing of its ATM LAN products and a portion of our DSL products at its facility in Dallas, Texas. Each of these manufacturers are certified by the International Standards Organization for manufacturing and design processes. Efficient plans to engage an additional contract manufacturer to meet our anticipated manufacturing requirements and to continue reducing the cost of our products. Efficient has a limited in-house manufacturing capability. We have complete capabilities for final test, packaging and shipping of our products. We perform comprehensive inspection tests and use statistical process controls to assure the reliability and quality of our products. Our manufacturing engineers design and build all test procedures and fixtures for our products. We integrate these manufacturing tests with the contract manufacturers' build processes. Our manufacturing personnel work with our design engineers to ensure that the test environment remains current as DSL technology evolves. We also perform warranty and repair work at our Dallas facility. Efficient's engineers design custom application specific integrated circuits that are incorporated into the majority of our products. Efficient contracts with silicon manufacturers to fabricate the application specific integrated circuits for prototype testing. We perform design verification and simulation testing at our facilities. After successful completion of these tests, Texas Instruments, Samsung Semiconductor and VLSI Technology manufacture our application specific integrated circuits in volume on a turnkey basis. We purchase only packaged and tested application specific integrated circuits. Other than our application specific integrated circuits, we try to use standard parts and components whenever possible. We currently purchase certain key parts and components from sole-source suppliers such as Alcatel Microelectronics, Analog Devices, Conexant Systems and Texas Instruments. Sales and Marketing Since 1996, Efficient has worked closely with network equipment vendors that supply DSL-based central office equipment. These vendors offer our SpeedStream products to network service providers as part of a complete, interoperable DSL solution. We engage in joint sales activities with our partners and regularly 47 provide them with collateral materials to enable their sales forces to promote our products. Our relationships with network equipment vendors result in introductions to large network service providers. In many cases, with DSL interoperability assured by Efficient and our partners, network service providers choose to purchase CPE directly from Efficient. Efficient also works closely with network service providers to ensure that our CPE is matched to their DSL service offerings. Initial discussions with network service providers generally involve our sales, marketing and business development personnel who work to communicate the strengths of our company and our products. Detailed responses to request for purchase documents are submitted to network service providers, often by both Efficient and one or more network equipment vendors. Next, at the network service provider's request, we engage in a technical certification process involving our system engineers who work in a lab environment, in some cases for days or weeks, with their counterparts from the network service provider. We frequently provide informal consultation on network deployment and testing as well as customized training for network service providers. In some cases, we create special software releases or product combinations for major network service providers. Efficient typically creates and delivers customized training courses and curricula for our largest customers, to ensure that their installation and support personnel are effective in satisfying end users' needs. While the actual sale and distribution of CPE varies network by network, this initial relationship- building stage is critical in every case. We believe that it is difficult to provide CPE into DSL service offerings without these close relationships with network service providers. We engage in a variety of marketing activities to build brand awareness. We issue press releases concerning significant product releases, partnerships and network design wins. We also conduct briefings for analysts and members of the press. We participate in a number of industry trade shows and pursue speaking engagements at related events. Efficient uses direct mail campaigns to increase awareness of our company and our products among Internet service providers, who are increasingly active in introducing customers to DSL services. We also engage in joint marketing programs with selected Internet service providers whose DSL services employ our CPE. Our broad goals are to continue to increase the awareness of Efficient as a company, and of our DSL CPE product line brand, SpeedStream. As the scope of our marketing efforts expands, our Website continues to be a strategic resource in disseminating information to interested parties. Our Website also plays an active role in collecting sales leads, working remotely with partners and key customers, and performing customer support. In the future, we believe that our Website may become an important tool for direct sales of our products. Research and Development We believe that our future success depends on our ability to adapt to the rapidly changing communications environment, maintain our significant expertise in core technologies, and continue meeting and anticipating our customers' needs. We continually review and evaluate technological changes affecting the telecommunications market and invest substantially in applications-based research and development. We are committed to an ongoing program of new product development that combines internal development efforts with joint ventures and licensing or marketing arrangements relating to new products and technologies from outside sources. Efficient's core research and development activities are focused on both hardware and software technologies. In our hardware development activities, we possess significant expertise in application specific integrated circuits development, analog and mixed signal hardware design, ATM architecture and bus architectures, such as peripheral component interface and universal serial bus. In software development, Efficient has particular strengths in data networking protocols and operating systems, device driver development and traffic management, and techniques for advanced routing and systems management. We have significant expertise with hardware and software technology for analog and digital voice transmission and switching techniques as well. 48 To enable successful deployment of DSL services, our CPE must be interoperable with the DSLAM, ATM switching equipment and other networking equipment from multiple vendors. In our development efforts, we leverage our relationships with prominent DSLAM vendors to ensure DSL interoperability. The continued development and use of our own industry-tested application specific integrated circuits and software ensure ATM switching interoperability. In addition, our support for a number of protocol stacks provides data encapsulation interoperability with routers at Internet service providers or within corporate networks. Efficient has a solid understanding of the end-to- end technologies in use, and we actively work to ensure interoperability while using technology that we control. Our design verification procedures include testing in complex network environments created in our laboratories that simulate end-to-end network architectures used in DSL service deployments. We believe that our stringent design verification and test procedures allow us to provide cost-effective, high-performance DSL CPE that minimizes the technology risk for network operators. Most of the technology associated with Efficient's SpeedStream products continues to evolve. Asymmetric DSL supports high frequency digital data transmission simultaneously with analog voice signals on a single copper phone line, but digital data and analog voice have the capability to disrupt one another. One common method of minimizing this disruption is to electrically separate the voice signals from the data signals using a circuit known as a filter or a "splitter." At present, the use of a splitter often requires a network technician or the end user to install the device using hand tools and to modify phone wiring inside a home or business. We are currently researching analog filtering circuit technology and are working with other companies to enable filter designs that can be installed without tools or changes to interior wiring. Another future technology involves ATM switched virtual circuits. Switched virtual circuits create a dedicated connection between two points of a network. Current ATM/DSL deployments typically use permanent virtual circuits to create these dedicated connections. Permanent virtual circuits must be created manually, while switched virtual circuits employ software to automatically create a circuit across the ATM network without manual intervention. Some network operators have expressed a concern that DSL deployments may not scale rapidly if permanent virtual circuits are employed. Switched virtual circuit implementations are complex and may represent a technology barrier for competitors. Efficient has sold ATM LAN products supporting switched virtual circuits for several years. We believe we are well suited to help enable large- scale DSL deployments as network operators demand support for switched virtual circuits. Competition The network equipment industry is highly competitive, and we believe that competition may increase substantially as the introduction of new technologies, deployment of broadband networks and potential regulatory changes create new opportunities for established and emerging companies. In addition, a number of our competitors and potential competitors have significantly greater financial and other resources than us which may enable them to more aptly meet new competitive opportunities. We compete directly with other providers of DSL CPE including 3Com Corporation, Alcatel, Cisco Systems, Netopia, Westell Technology and Xpeed among others. Other vendors with whom we compete also have proprietary systems with which our products are not interoperable. Included among these vendors are Cisco Systems, Intel Corporation, Nortel Networks, Orckit Communications and PairGain Technologies. Furthermore, DSL as a technology for deploying broadband connections is competing with alternative technologies including ISDN, T1, broadband wireless and cable solutions. The rapid technological developments within the network equipment industry results in frequent changes to our group of competitors. The principal competitive factors in our market include: . Industry relationships with network service providers and network equipment vendors; . product reliability, performance and interoperability; . product features; . product availability; 49 . price; . ability to distribute products; . ease of installation and use; . technical support and customer service; and . brand recognition. We believe we are successfully addressing each of these competitive factors. Nonetheless, we expect to face increasing competitive pressures from both current and future competitors in the markets we serve. Intellectual Property We rely on a combination of copyright, patent, trademark, trade secret and other intellectual property laws, nondisclosure agreements and other protective measures to protect our proprietary rights. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect our trade secrets and know-how. To date, we have been granted two U.S. patents with counterpart patents pending in three international jurisdictions and have an additional 10 U.S. patent applications pending. Although we employ a variety of intellectual property in the development and manufacturing of our products, we believe that none of our intellectual property is individually critical to our current operations. However, taken as a whole, we believe our intellectual property rights are significant and that the loss of all or a substantial portion of such rights could have a material adverse effect on our results of operations. There can be no assurance that our intellectual property protection measures will be sufficient to prevent misappropriation of our technology. In addition, the laws of many foreign countries do not protect our intellectual properties to the same extent as the laws of the United States. From time to time, we may desire or be required to renew or to obtain licenses from others in order to further develop and market commercially viable products effectively. There can be no assurance that any necessary licenses will be available on reasonable terms. We have registered the trademarks "Efficient Networks" and "SpeedStream." "Advanced Status" and "ProfileBuilder" are also our trademarks. All other trademarks or service marks appearing in this prospectus are trademarks or service marks of the respective companies that use them. Employees As of September 30, 1999, we employed approximately 163 full-time employees, including 41 in sales and marketing, 18 in manufacturing, 83 in engineering, 17 in finance and administration and four in customer service. Most of our employees are located in the United States with seven sales and sales engineering employees located in The Netherlands and three sales and engineering employees located in Singapore. None of our employees is represented by collective bargaining agreements, and management considers relations with our employees to be good. Properties We lease an approximately 26,000 square foot facility in Dallas, Texas for executive offices and for administrative, sales and marketing, and research and development purposes. The lease for this facility expires in 2001. In February 2000 we intend to relocate our executive, sales and marketing, and research and development personnel and activities into a 125,000 square foot facility in Dallas, Texas. We lease this new facility under a lease expiring in 2010. We plan to sublease our current space until the expiration of the lease. We lease two facilities in Dallas, Texas for manufacturing, shipping and receiving of product. One facility is 11,000 square feet for which the lease expires in 2001. The other facility is 10,000 square feet for which the lease expires at the end of March 2000. In connection with the acquisition of FlowPoint, we entered into an agreement with Cabletron to permit us to retain, for a transitional period, the space being used by the 50 FlowPoint employees at a Cabletron facility in Santa Clara, California. We expect to lease space to relocate the Flowpoint operations to another facility in the Silicon Valley in the first half of calendar 2000. We lease an approximately 2,500 square foot facility in Amsterdam, The Netherlands for our European operations. This lease expires in 2004. For our Asian operations, we lease an approximately 1,450 square foot facility in Singapore. This lease expires in 2002. Legal Proceedings Efficient is not a party to any material legal proceedings. 51 MANAGEMENT Executive Officers and Directors The following table sets forth certain information with respect to the executive officers and directors of Efficient as of December 31, 1999.
Name Age Position ---- --- -------- Mark A. Floyd (1)....... 44 Chairman of the Board, Chief Executive Officer and President Peter Bourne............ 31 Vice President of Integrated Access (Business Unit) Paul E. Couturier....... 37 Vice President of International Operations James Hamilton.......... 36 Vice President of Small and Medium Business (Business Unit) Patricia W. Hosek....... 38 Vice President of Engineering Gregory L. Langdon...... 39 Vice President of Product Strategy Jill S. Manning......... 37 Vice President and Chief Financial Officer James N. Nadeau......... 39 Vice President of Residential Access (Business Unit) Brian M. Ronald......... 41 Vice President of Operations David B. Stefan......... 37 Vice President of Sales Dano Ybarra............. 42 Vice President of Corporate Marketing Charles Waggoner........ 60 President, Flowpoint Bruce W. Brown (2)...... 49 Director James P. Gauer (2)...... 47 Director Robert Hawk............. 59 Director Robert A. Hoff (3)...... 46 Director Anthony T. Maher........ 53 Director William L. Martin III 52 Director (3).................... Thomas H. Peterson...... 43 Director
- -------- (1) Member of the Employee Option Committee. (2) Member of the Compensation Committee. (3) Member of the Audit Committee. Mark A. Floyd co-founded Efficient in June 1993 and has served as President, Chief Executive Officer and a director of Efficient since its inception. Prior to founding Efficient, from June 1991 to July 1993, Mr. Floyd was Chief Operating Officer and a director of Networth, Inc., a provider of LAN products including Ethernet hubs, switches and network interface cards. From May 1984 to June 1991, Mr. Floyd held the positions of Executive Vice President, Chief Financial Officer and director of Interphase Corporation, a provider of enterprise server connectivity solutions for high-speed LAN, high capacity storage and remote access applications. Mr. Floyd holds a B.B.A. in Finance from the University of Texas at Austin. Peter Bourne joined Efficient in April, 1994 and has served as Vice President of Integrated Access Business Unit since October 1999. From September 1997 to September 1999, Mr. Bourne served as Efficient's director of product marketing. From October 1995 to August 1997, Mr. Bourne served as a systems engineer for us. Prior to serving in such capacity, Mr. Bourne worked as a software engineer. Mr. Bourne attended the University of California at Santa Barbara. Paul E. Couturier has served as Efficient's Vice President of International Operations since February 1997. From March 1995 to February 1997, he served as Efficient's Managing Director, Europe. From June 1993 to January 1995, he was Pan-European Business Development Manager at SynOptics, a manufacturer of synthetic crystals and optical products. Prior to that, Mr. Couturier held the position of Director of Sales and Marketing at Gandalf Benelux, a division of Mitel Corporation dedicated to the corporate access segment of the remote access market. Mr. Couturier has a bachelors degree in Marketing and in Foreign Languages from the University of Amsterdam. 52 James Hamilton joined Efficient in November 1999 as Vice President of Small and Medium Business-Business Unit. From August 1998 to October 1999, Mr. Hamilton served as Vice President of World Wide Sales and Services at Picazo Communications, a provider of computer telephony solutions. From January 1996 to August 1998, Mr. Hamilton was Director of Business Development for the Communication Products Group of Compaq Computer Corporation, a global supplier of personal computers. From January 1992 to January 1996, he served as Vice President of International Sales at Networth, Inc., a developer and manufacturer of ethernet hubs, switches and related products that was acquired by Compaq in December 1995. Mr. Hamilton holds a B.S. in Business Administration from Lawrence Technical University. Patricia W. Hosek has served as Vice President of Engineering of Efficient since February 1997. From October 1995 to February 1997, she served as Efficient's Director of Software Engineering. From December 1990 to October 1995, she worked as a senior manager and developer at DSC Communications Corporation, a global provider of telecommunications products. Ms. Hosek holds a B.S. in Computer Science from Texas A&M University. Gregory L. Langdon has served as Vice President of Product Strategy of Efficient since October 1999. From February 1997 to October 1999, Mr. Langdon served as Vice President of Marketing, and from February 1996 to February 1997, he served as Efficient's Director of Product Management. From January 1990 to February 1996, he worked as an engineer at DSC Communications Corporation. Mr. Langdon holds a B.S. in Electrical Engineering from Vanderbilt University. Jill S. Manning has served as Vice President and Chief Financial Officer of Efficient since February 1997. From November 1994 to February 1997, she served as Efficient's Controller. From July 1984 to November 1994, Ms. Manning was a senior manager at KPMG LLP, an international accounting firm. Ms. Manning holds a B.B.A. in Accounting and in Computer Information Systems from Baylor University. James F. Nadeau has served as Vice President of Residential Access Business Unit since October 1999. From February 1997 to October 1999, Mr. Nadeau served as Vice President of Business Development, and from January 1995 to February 1997, he served as a director of sales for Efficient. From May 1993 to January 1995, he worked as North American Channel Sales Manager for Madge Networks. Prior to that, Mr. Nadeau was a co-founder of CWS Inc., a networking integration company. Mr. Nadeau attended Northeastern University in Boston, MA. Brian M. Ronald joined Efficient in July 1999 as Vice President of Operations. From March 1996 to July 1999, Mr. Ronald had been Manager, Manufacturing Program Management at 3Com Corporation, a computer networking products company. Prior to joining 3Com, Mr. Ronald had been Manager, Global Electronic Manufacturing at General Electric Lighting since September 1992. Mr. Ronald holds a B.S. in Industrial Technology from Southern Illinois University at Carbondale. David B. Stefan has served as Vice President of Sales of Efficient since October 1997. From March 1997 to October 1997, Mr. Stefan worked as Vice President of Sales of Dagaz Technologies, a manufacturer of telecommunications equipment that was acquired by Cisco Systems in September 1997. From May 1996 to March 1997, Mr. Stefan held the position of Director of Sales of Sourcecom Corporation, a computer networking equipment and software reseller. From November 1992 to May 1996, he worked as a territory manager and system engineer for Primary Access, a division of 3Com Corporation. Mr. Stefan holds an M.S.E.E. from George Washington University and a B.S. in Electrical Engineering from Michigan State University. Chuck Waggoner joined Efficient in December 1999 upon the acquisition of FlowPoint Corporation. Mr. Waggoner has more than 26 years of technology and management experience in the development and manufacturing of computer and communications systems. Prior to joining FlowPoint, Mr. Waggoner held various management positions, including Vice President of Engineering, at LIR Corporation where he managed the design and development of wide area network portable software protocols, Senior Vice President of Operations at GRiD Systems, where he was responsible for the development and manufacture of all portable computer products, and Vice President of Development at Packet Technologies, Inc. Mr. Waggoner received a B.S.E.E. from South Dakota State University. 53 Dano Ybarra joined Efficient in the capacity of Vice President of Corporate Marketing in December 1999 upon the acquisition of FlowPoint Corporation. At FlowPoint, Mr. Ybarra served as Vice President of Sales and Marketing where he was responsible for the management of FlowPoint's sales strategies, product strategy and marketing programs. Prior to joining FlowPoint, Mr. Ybarra was Vice President of Sales and Marketing at Information Presentation Technologies, Inc., a provider of integrated server solutions for the multimedia and publishing markets. Previously, he was Business Manager for Adobe Systems, where he was responsible for OEM relationships and sales channel management. Mr. Ybarra received a B.S. in Computer Science from Portland State University. Bruce W. Brown has served as a director of Efficient since October 1995. Since August 1995, he has served as President, Chief Executive Officer and a director of Vertel Corp., a provider of telecommunications network management software and services. From July 1993 to August 1995, Mr. Brown held the positions of President and Chief Executive Officer of ADC Fibermax Corporation, a supplier of fiber optic networking products. Mr. Brown holds an M.P.A. from Drake University and a B.S. in Psychology from Iowa State University. James P. Gauer has served as a director of Efficient since July 1993. Since April 1999, he has been a General Partner of Palomar Ventures and Ocean Park Ventures, and from December 1992 to November 1997, he was a General Partner of Enterprise Partners, all of which are venture capital firms and investors in Efficient. Mr. Gauer holds a B.A. in Mathematics from the University of California, Los Angeles. Robert C. Hawk joined Efficient's board of directors in July 1999. Mr. Hawk is President of Hawk Communications and recently retired as President and Chief Executive Officer of US West Multimedia Communications, Inc., where he headed the cable, data and telephony communications business from May 1996 to April 1997. He was president of the Carrier Division of US West Communications, a regional telecommunications service provider, from September 1990 to May 1996. Prior to that time, Mr. Hawk was Vice President of Marketing and Strategic Planning for CXC Corporation. Prior to joining CXC Corporation, Mr. Hawk was director of Advanced Systems Development for AT&T/American Bell. He currently serves on the boards of Com21, Concord Communications, Covad Communications Group, Inc., PairGain Technologies, Inc. and Radcom. Robert A. Hoff has served as a director of Efficient since July 1993. Since 1983, he has been a General Partner of Crosspoint Venture Partners, a venture capital firm and investor in Efficient. Mr. Hoff also serves as a director of Com21, Inc., Onyx Acceptance Corp., PairGain Technologies, Inc., and U.S. Web/CKS Corporation. Mr. Hoff holds an M.B.A. from Harvard University and a B.S. in Business Administration from Bucknell University. Anthony T. Maher was appointed to Efficient's board of directors in April 1999. Mr. Maher is a member of the board of Siemens AG Information and Communication Networks. Siemens, a network equipment vendor, is an investor in Efficient. Since May 1978, Mr. Maher has held various positions with Siemens, including the following positions within the Siemens Public Communication Networks Group: October 1997 to September 1998, member of the board of directors; October 1995 to September 1997, Executive Director; and January 1993 to September 1995, Executive Director of Worldwide Product Planning. Prior to his positions within the Public Communication Networks Group, Mr. Maher was manager and then deputy director of system engineering for EWSD architecture and processor technology. Mr. Maher holds a M.S. in Electrical Engineering and Solid State Physics from the University of Illinois. William L. Martin III has served as a director of Efficient since January 1997. From September 1994 to November 1999, Mr. Martin served as Senior Vice President of ADC Telecommunications, Inc. and President of the Business Broadband Group of ADC Telecommunications, Inc., a provider of communications networks systems and solutions and an investor in Efficient. Mr. Martin holds an M.B.A. from Harvard University, an M.S. of Aerospace Engineering and a B.S. in Engineering from the California Institute of Technology. 54 Thomas H. Peterson has served as a director of Efficient since July 1993. Since May 1991, Mr. Peterson has been a General Partner of El Dorado Ventures, a venture capital firm and investor in Efficient. Mr. Peterson holds an M.B.A. from the University of California, Los Angeles and a B.S. in Electrical Engineering from Iowa State University. Classified Board Our board of directors is currently composed of eight members. Our certificate of incorporation provides for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of our board of directors will be elected each year. To implement the classified structure, prior to the consummation of our initial public offering, three of our directors were elected to one-year terms, two were elected to two-year terms and three were elected to three-year terms. On a going forward basis, each of our directors will be elected for three-year terms. Messrs. Maher, Martin and Hawk have been designated Class I directors whose term expires at the upcoming annual meeting of stockholders. Messrs. Floyd and Peterson have been designated Class II directors whose term expires at the 2000 annual meeting of stockholders. Messrs. Brown, Gauer and Hoff have been designated Class III directors whose term expires at the 2001 annual meeting of stockholders. See "Description of Capital Stock--Delaware Anti- Takeover Law and Certain Charter and Bylaw Provisions." Executive officers are appointed by the board of directors on an annual basis and serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors, officers or key employees. Board Committees We established an audit committee and a compensation committee in April 1999. Our audit committee consists of Messrs. Martin and Hoff. The audit committee reviews our internal accounting procedures and consults with and reviews the services provided by our independent accountants. Our compensation committee consists of Messrs. Brown and Gauer. The compensation committee reviews and recommends to the board of directors the compensation and benefits of our employees. The compensation committee also administers our stock-based employee benefit plans. In October 1999, the board of directors established an employee option committee. The function of this committee is to determine stock option grants for employees who are not executive officers. Mark Floyd is currently the only member of the employee option committee. Compensation Committee Interlocks and Insider Participation Prior to establishing the compensation committee, the board of directors as a whole performed the functions delegated to the compensation committee. No member of the board of directors or the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. Director Compensation Directors do not currently receive any cash compensation from us for their service as members of the board of directors. In December 1996, the board granted options to Mr. Brown to purchase 100,000 shares of common stock with an exercise price of $0.25 per share. During fiscal 1999, the board granted to each of Messrs. Gauer, Hoff, Martin and Peterson options to purchase 50,000 shares of common stock with an exercise price of $1.50 per share. During May 1999, the board granted to Messrs. Maher and Hawk options to purchase 15,000 and 150,000 shares of common stock, respectively, at an exercise price of $10.50 per share. 55 Executive Compensation Summary Compensation Table The table below sets forth the compensation earned for services rendered to Efficient in all capacities for the fiscal years ended June 30, 1998 and 1999 by our Chief Executive Officer and our next four most highly compensated executive officers who earned more than $100,000 during fiscal 1999. These executives are referred to as the "named executive officers" elsewhere in this prospectus.
Long-Term Compensation Awards ------------ Annual Compensation Securities Name and Principal Fiscal ------------------- Underlying All Other Position Year Salary Bonus Options(#) Compensation ------------------ ------ ------------------- ------------ ------------ Mark A. Floyd............. 1999 $ 200,000 $ 80,000 350,000 $ -- President and Chief Executive Officer 1998 178,127 20,000 350,000 16,667(1) David B. Stefan........... 1999 125,000 112,608 100,000 -- Vice President of Sales 1998 92,391 36,563 125,000 23,140(2) Patricia W. Hosek......... 1999 117,000 51,479 225,000 -- Vice President of Engineering 1998 107,625 21,313 50,000 -- Gregory L. Langdon........ 1999 117,000 50,716 200,000 -- Vice President of Product Strategy 1998 103,290 21,051 50,000 -- Paul E. Couturier......... 1999 90,000 76,410 137,500 27,426(3) Vice President of International Operations 1998 85,709 42,742 37,500 27,634(3)
- -------- (1) Represents amount paid in lieu of accrued sabbatical benefit. (2) Represents a moving allowance. (3) Represents an annual car and vacation allowance. Option Grants During Last Fiscal Year. The following table sets forth certain information with respect to stock options granted to each of the named executive officers in fiscal 1999, including the potential realizable value over the ten-year term of the options, based on assumed, annually compounded rates of stock value appreciation. These assumed rates of appreciation comply with the rules of the Securities and Exchange Commission and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will be dependent on the future performance of our common stock. In fiscal 1999, we granted options to purchase up to an aggregate of 2,638,500 shares to employees, directors and consultants. All options were granted at exercise prices which the board of directors believed to be equal to the fair market value of our common stock on the date of grant. All options have a term of ten years. Optionees may pay the exercise price by cash, check or delivery of already-owned shares of our common stock. All option shares vest over four years, with 25% of the option shares vesting one year after the option grant date and the remaining option shares vesting ratably on a monthly basis over the succeeding 36 months. 56
Potential Realizable Value at Assumed Annual Rates of Stock Price Individual Grants Appreciation for Option Term --------------------------------------------------- -------------------------------- Percent of Total Number of Options Market Securities Granted to Value Underlying Employees at Options In Last Exercise Date of Expiration Name Granted Fiscal Year Price Grant(1) Date 0%(1) 5% 10% ---- ---------- ----------- -------- -------- ---------- ---------- ---------- ---------- Mark A. Floyd........... 250,000 9.48% $1.50 $2.63 8/27/08 $ 282,500 $ 695,998 $1,330,386 100,000 3.79% $2.50 $9.00 1/28/09 $ 650,000 $1,216,005 $2,084,368 David B. Stefan......... 100,000 3.79% $2.50 $9.00 1/28/09 $ 650,000 $1,216,005 $2,084,368 Patricia W. Hosek....... 225,000 8.53% $2.50 $9.00 1/28/09 $1,462,500 $2,736,012 $4,689,828 Gregory L. Langdon...... 200,000 7.58% $2.50 $9.00 1/28/09 $1,300,000 $2,432,010 $4,168,736 Paul E. Couturier....... 137,500 5.21% $2.50 $9.00 1/28/09 $ 893,750 $1,672,007 $2,866,006
- -------- (1) Based upon a subsequent review of the fair value of our common stock at the option grant dates, we determined the value of the common stock to be as reflected in the "Market Value at Date of Grant" column. The amount shown in the "0%" column reflects the difference between the exercise price and the deemed fair market value as of the date of option grant. Aggregate Option Exercises During the Last Fiscal Year and Fiscal Year-End Option Values. The following table sets forth information with respect to the named executive officers concerning the exercisable and unexercisable options held by them as of June 30, 1999. None of the named executive officers exercised options during fiscal 1999. The "Value of Unexercised In-the-Money Options at June 30, 1999" is based on a value of $12.00 per share, the fair market value of our common stock as of June 30, 1999 as determined in a subsequent review of fair market values, less the per share exercise price, multiplied by the number of shares issuable upon exercise of the options.
Number of Securities Underlying Unexercised Value of Unexercised Options at Fiscal Year- In-the-Money Options at Shares End Fiscal Year-End Acquired Value ------------------------- ------------------------- Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------- ----------- ------------- ----------- ------------- Mark A. Floyd........... -- -- 272,917 577,083 $ 3,165,938 $ 6,386,563 David B. Stefan......... -- -- 45,313 179,688 $ 519,531 $ 1,862,969 Patricia W. Hosek....... 61,979 280,729 $ 724,033 $ 2,780,807 Gregory L. Langdon...... -- -- 84,375 265,625 $ 989,792 $ 2,660,208 Paul E. Couturier....... -- -- 78,802 171,198 $ 927,047 $ 1,696,703
The value realized by Ms. Hosek upon the exercise of her options represents the aggregate amount of the difference between $2.63 per share, the deemed fair market value of the common stock on the date the option was exercised, and the $0.15 exercise price of such options. Benefit Plans 1999 Stock Plan Our 1999 stock plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for the granting to employees and consultants of nonstatutory stock options and stock purchase rights. The stock plan was approved by the board of directors in April 1999 and by our stockholders in May 1999. Unless terminated sooner, the stock plan will terminate automatically in 2009. A total of 3,500,000 shares of our common stock is reserved for issuance, plus annual increases equal to the lesser of: . 1,000,000 shares; . 3% of the outstanding shares on such date; or 57 . a lesser amount determined by the board of directors. The stock plan may be administered by the board of directors or a committee of the board. The board or a committee of the board will have the power to determine the terms of the options granted, including the exercise price, the number of shares subject to each option, the vesting provisions, the exercisability thereof and the form of consideration payable upon such exercise. The stock plan provides that in the event of a merger of Efficient with or into another corporation, or the sale of substantially all of our assets, each outstanding option or stock purchase right will be assumed or substituted for by the successor corporation. In addition, if the options are not substituted for in the merger, each outstanding option will vest and become exercisable as to all unvested shares and each stock purchase right shall lapse as to all the shares for a period of 15 days after receipt of notice from Efficient. 1999 Employee Stock Purchase Plan Our 1999 employee stock purchase plan was adopted by our board of directors in April 1999 and by our stockholders in May 1999. A total of 200,000 shares of common stock has been reserved for issuance under the purchase plan, plus annual increases equal to the lesser of: . 100,000 shares; . 1% of the outstanding shares on such date; or . a lesser amount determined by the board on the first day of each fiscal year. The purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended, contains successive six-month offering periods. The offering periods generally start on the first trading day on or after May 1 and November 1 of each year, except for the first such offering period which commences on the first trading day on or after the effective date of this offering and ends on the last trading day on or before October 31. Our employees are eligible to participate if they are employed by us or any of our participating subsidiaries for at least 20 hours per week and more than five months in any calendar year. However, the following employees may not purchase stock under the purchase plan: . any employee who immediately after grant owns stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock; or . any employee whose rights to purchase stock under any of our employee stock purchase plans accrue at a rate that exceeds $25,000 worth of stock for each calendar year. Participants may purchase common stock through payroll deductions of up to 10% of the participant's compensation. The maximum number of shares a participant may purchase during a single offering period is 500 shares. Amounts deducted and accumulated by the participant will be used to purchase shares of common stock at the end of each offering period. The price of stock purchased under the purchase plan is 85% of the lower of the fair market value of the common stock at the beginning of the offering period and at the end of each offering period. The purchase plan provides that, in the event of a merger of Efficient with or into another corporation or a sale of substantially all of our assets, outstanding options may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set, which will occur before the proposed sale or merger. The purchase plan will terminate in 2009. The board of directors has the authority to amend or terminate the purchase plan, except that no such action may adversely affect any outstanding rights to purchase stock. 58 1999 Non-Statutory Stock Option Plan Our 1999 non-statutory stock option plan provides for the grant of nonstatutory stock options to employees and consultants (excluding officers or directors) of Efficient. The plan was approved by our board of directors in November 1999. Unless terminated sooner, the plan will terminate automatically in 2009. A total of 950,000 shares of common stock are currently reserved for issuance under the plan. The plan may be administered by the board of directors or a committee of the board. The board or a committee of the board has the power to determine the terms of the options, including the exercise price, the number of shares subject to each option, the exercisability thereof, and the form of consideration payable upon exercise. In addition, the board or a committee of the board has the authority to amend, suspend or terminate the plan, provided that no such action may affect any share of common stock previously issued and sold or any option previously granted under the plan. Options granted under the plan are not generally transferable by the optionee, and each option is exercisable during the lifetime of the optionee only by the optionee. Options granted under the plan must generally be exercised within three months of the end of optionee's status as an employee or consultant of Efficient, or within twelve months after the optionee's termination by death or disability, but in no event later than the expiration of the option's ten year term. The exercise price of stock options granted under the plan is determined by the board or a committee of the board. The term of stock options granted under the plan may not exceed ten years. The plan provides that in the event of a merger of Efficient with or into another corporation, or a sale of substantially all of our assets, each option shall be assumed or an equivalent option substituted by the successor corporation. If the outstanding options are not assumed or substituted, the board or a committee of the board will provide for the optionee to have the right to exercise the option as to all of the optioned stock, including shares that would otherwise not be exercisable, for a period of fifteen (15) days from the date of the notice, and the option will terminate upon the expiration of such period. 401(k) Plan On January 1, 1995, we adopted the Efficient Networks, Inc. 401(k) Plan (the "401(k) Plan") a cash-or- deferred arrangement which covers our eligible employees who have attained the age of 21. The 401(k) Plan is intended to qualify under Sections 401(a), 401(m) and 401(k) of the Internal Revenue Code of 1986, as amended (the "Code") and the 401(k) Plan trust is intended to qualify under Section 501(a) of the Code. All contributions to the 401(k) Plan by eligible employees or by us, and the investment earnings thereon are not taxable to such employees until withdrawn, and any contributions we may make are expected to be deductible by us. Our eligible employees may elect to reduce their current eligible compensation by one percent (1%) up to fifteen (15%), subject to the maximum statutorily prescribed annual limit of $10,500 (in 2000), and to have such salary reductions contributed on their behalf to the 401(k) Plan. The 401(k) Plan permits, but does not require, that we may make matching contributions on behalf of all eligible employees who make salary reduction contributions to the 401(k) Plan. We have elected to make matching contributions for the Plan Year ending December 31, 2000, equal to 50% of a participant's salary deferral contributions for each payroll period, on up to 6% of a participant's annual compensation. The 401(k) Plan also permits, but does not require, that we may make additional profit-sharing contributions on behalf of all eligible employees. To date, we have not made such additional profit-sharing contributions to the 401(k) Plan. Limitations on Directors' Liability and Indemnification Our certificate of incorporation limits the liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following: . any breach of their duty of loyalty to the corporation or its stockholders; . acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; 59 . unlawful payments of dividends or unlawful stock repurchases or redemptions; or . any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws provide that we will indemnify our directors and executive officers, and that we may indemnify our other officers and employees and other agents, to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We have entered into agreements to indemnify our directors and executive officers, in addition to indemnification provided for in our bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for expenses, judgments, fines and settlement amounts incurred by any such person in any action or proceeding arising out of such person's services as a director or executive officer of Efficient or at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. We also maintain directors and officers liability insurance. At present, we are not aware of any pending litigation or proceeding involving any director, officer, employee or agent of Efficient where indemnification will be required or permitted. Furthermore, we are not aware of any threatened litigation or proceeding that might result in a claim for indemnity by these individuals. 60 CERTAIN TRANSACTIONS The following is a description of transactions during our last three fiscal years to which we have been a party, in which the amount involved in the transaction exceeds $60,000 and in which any director, executive officer or holder of more than 5% of our capital stock had or will have a direct or indirect material interest other than compensation arrangements that are otherwise required to be described under "Management." During the past three fiscal years, we have issued redeemable convertible preferred stock, subordinated promissory notes and warrants as follows: . In December 1996, we sold 3,091,430 shares of Series E preferred stock in a private placement at a purchase price of $2.42 per share; . In February 1998, we sold 2,057,159 shares of Series F preferred stock in a private placement at a purchase price of $2.92 per share; . In June 1998, we sold 1,866,800 shares of Series G preferred stock in a private placement at a purchase price of $2.92 per share; . In January 1999, we issued an aggregate $7.0 million of 10% subordinated promissory notes due January 2002, together with warrants to purchase 2,397,260 shares of Series H preferred stock in a private placement at an exercise price of $2.92 per share; . In March 1999, we sold 1,850,000 shares of Series G preferred stock in a private placement at a purchase price of $2.92 per share; . In April 1999, we issued an aggregate $2.0 million of 10% subordinated promissory notes due January 2002, together with warrants to purchase 684,931 shares of Series H preferred stock in a private placement at an exercise price of $2.92 per share; and . On June 28, 1999, we issued a $5.0 million convertible promissory note to Covad. The note bore interest at the rate of 8% per year, and was payable on the fifth anniversary of issuance. Upon completion of our initial public offering in July 1999, the principal amount plus interest of the note converted into 497,663 shares of common stock. Our officers, directors and 5% stockholders participated in the foregoing transactions as follows:
Principal Number of Number of Number of Number of Amount Number of Shares of Shares of Shares of Shares of of 10% Series H Name Of Purchaser Series D Series E Series F Series G Notes Warrants ----------------- --------- --------- --------- --------- ---------- --------- Texas Instruments Incorporated........... 2,473,644 -- 1,712,329 -- -- -- ADC Telecommunications.. -- 2,066,420 45,881 -- -- -- Enterprise Partners..... -- 265,836 81,773 -- -- -- Crosspoint Venture Partners............... -- 236,880 72,848 -- $5,000,000 1,712,329 El Dorado Ventures...... -- 236,367 72,689 -- $2,000,000 684,931 Menlo Ventures.......... -- 144,322 44,381 -- -- -- Siemens................. -- -- -- 3,716,800 -- -- Palomar Ventures........ -- -- -- -- $2,000,000 684,931 OceanPark Ventures...... -- 88,612 27,258 -- -- --
Mr. Martin, a member of our board of directors, was formerly affiliated with ADC Telecommunications. Mr. Hoff, a member of our board of directors, is affiliated with Crosspoint Venture Partners. Mr. Peterson, a member of our board of directors, is affiliated with El Dorado Ventures. Mr. Maher, a member of our board of directors, is affiliated with Siemens. Mr. Gauer, a member of our board of directors, was formerly affiliated with Enterprise Partners and is presently affiliated with Palomar Ventures and Ocean Park Ventures. 61 Note Repayment and Warrant Exercise Agreement Each holder of a 10% subordinated promissory note entered into a note repayment and warrant exercise agreement with Efficient. Pursuant to the terms of the agreement, immediately prior to the closing of our initial public offering, the aggregate $9.0 million principal amount of the notes was applied toward the aggregate exercise price of the warrants to purchase 3,082,191 shares of Series H preferred stock at an exercise price of $2.92 per share. ADC Telecommunications, Inc., December 1996 In December 1996, Efficient entered into a seven-year strategic alliance agreement with ADC. The agreement provides for joint development and promotion of products incorporating ADC's and Efficient's technology. Texas Instruments Incorporated, November 1997 In November 1997, Efficient and Texas Instruments Incorporated entered into an agreement to develop a DSL network interface card and associated software. In February 1998, Efficient and Texas Instruments amended the agreement to provide that Efficient would focus a percentage of our resources on products, product developments and marketing programs that support Texas Instruments ADSL integrated circuits. In March 1999, Efficient and Texas Instruments amended the agreement to provide Texas Instruments with the right to make and license a certain Efficient ASIC. Siemens AG, June 1998 In June 1998, Efficient entered into an original equipment manufacturer purchase agreement with Siemens. The agreement provides for the purchase by Siemens of our SpeedStream 3010 and 3040 models, including supporting software and hardware and software design, customization and support services. Director Option and Loan In May 1999, Efficient effected the issuance of 150,000 shares of common stock by granting Robert Hawk an immediately exercisable option to purchase 150,000 shares of common stock at an exercise price of $10.50 per share in exchange for a $1,575,000 6% demand note. Mr. Hawk exercised this option in May 1999. The note, together with accrued interest, was repaid in July 1999. Covad Communications Convertible Note Transaction On June 28, 1999, we issued a $5.0 million convertible promissory note to Covad Communications as described above. Mr. Hawk, a member of our board of directors, also serves on the board of directors of Covad Communications. 62 PRINCIPAL AND SELLING STOCKHOLDERS The table on the following page sets forth information regarding the beneficial ownership of our common stock as of December 31, 1999, and as adjusted to reflect the sale of the shares hereby, by (a) each person or entity who is known by us to own beneficially more than 5% of our outstanding stock; (b) each of our directors; (c) each of our executive officers listed in the Summary Compensation Table; (d) all directors and executive officers as a group; and (e) all other selling stockholders.
Shares Beneficially Shares Beneficially Owned Prior Owned After to Offering Offering --------------------- ----------------------- Shares Sold Name and Address Number Percent In Offering Number Percent ---------------- ---------- ------- ----------- ------------ ---------- ADC Telecommunications, Inc. .................. 2,169,113 4.3% 41,573 2,127,540 4.0% 2240 Campbell Creek Road Richardson, TX 75082 Cabletron Systems, Inc. .................. 13,500,000(1) 26.4% 1,977,820 11,522,180 21.7% 35 Industrial Way Rochester, NH 03867 Covad Communications Group, Inc. ........... 497,663 1.0% 9,649 488,014 * 2330 Central Expressway Santa Clara, CA 95050 Crosspoint Venture Partners............... 5,116,619(2) 10.0% 99,207 5,017,412 9.5% 18552 MacArthur Blvd., Suite 400 Irvine, CA 92612 El Dorado Ventures...... 4,081,800(3) 8.0% 79,141 4,002,659 7.5% 2400 Sand Hill Road, Suite 100 Menlo Park, CA 94025 Enterprise Partners..... 3,821,374(4) 7.5% 74,093 3,747,281 7.1% 5000 Birch Street, Suite 6200 Newport Beach, CA 92600 Menlo Ventures.......... 2,043,210 4.0% 39,617 2,003,593 3.8% 3000 Sand Hill Road, Bldg. 4, Suite 100 Menlo Park, CA 94025 Ocean Park Ventures, LP..................... 1,273,803 2.5% 24,698 1,249,105 2.4% 100 Wilshire Boulevard, Suite 400 Santa Monica, CA 90401 Palomar Ventures........ 684,931 1.3% 13,280 671,651 1.3% 100 Wilshire Boulevard, Suite 400 Santa Monica, CA 90401 Siemens AG.............. 3,716,800 7.3% 72,064 3,644,736 6.9% Hofmannstrasse 51 81359 Munchen, Germany Texas Instruments Incorporated........... 4,185,973 8.2% 81,158 4,104,815 7.7% P.O. Box 660199, M.S. 8650 Dallas, TX 75266-0199 Mark A. Floyd(5)........ 1,613,542 3.2% 205,000 1,408,542 2.7% Bruce W. Brown(6)....... 75,000 * 10,000 65,000 * Robert A. Hoff(7)....... 5,141,619 10.1% 99,207 5,042,412 9.5% Thomas H. Peterson(8)... 4,106,800 8.0% 79,141 4,027,659 7.6%
63
Shares Beneficially Shares Beneficially Owned Prior Owned After to Offering Offering ------------------ ----------------------- Shares Sold Name and Address Number Percent In Offering Number Percent ---------------- ---------- ------- ----------- ------------ ---------- James P. Gauer(9)........ 1,983,734 3.9% 37,978 1,945,756 3.7% Anthony T. Maher(10)..... 3,720,550 7.3% 72,064 3,648,486 6.9% William L. Martin III.... -- -- -- -- -- Robert Hawk(11).......... 150,000 * -- 150,000 * David B. Stefan(12)...... 97,975 * 22,500 75,475 * Patricia W. Hosek(13).... 180,752 * 37,500 143,252 * Gregory L. Langdon(14)... 172,916 * 35,000 137,916 * Paul E. Couturier(15).... 132,293 * 25,000 107,293 * James Nadeau............. 114,517 * 22,500 92,017 * Jill Manning............. 139,836 * 22,500 117,336 * Peter Bourne............. 73,154 * 10,200 62,954 * Kevin Dibble............. 229,167 * 27,500 201,667 * Klaus Fosmark............ 248,692 * 32,500 216,192 * William Perry............ 249,226 * 32,500 216,726 * Vicki Smith.............. 23,125 * 5,000 18,125 * All directors and officers as a group (19 persons)(16)............ 17,702,988 34.7% 672,371 17,030,617 32.1%
Applicable percentage ownership in the above table is based on 51,063,586 shares of common stock outstanding as of December 31, 1999, after giving pro forma effect to the conversion of preferred stock held by Cabletron into an aggregate of 6,300,000 shares of common stock. Unless otherwise indicated above, each stockholder named in the table has sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable. Unless otherwise indicated, the address for each stockholder listed in the following table is c/o Efficient Networks, Inc., 4201 Spring Valley Road, Suite 1200, Dallas, Texas 75244. * Less than 1% of the outstanding shares of common stock. (1) Represents 7,200,000 shares of common stock and 6,300 shares of Series A non-voting convertible preferred stock held by Cabletron. The preferred stock is automatically convertible into an aggregate of 6,300,000 shares of common stock, and is expected to be converted in early 2000. (2) Represents 3,301,480 shares held by Crosspoint Venture Partners III, 102,810 shares held by Crosspoint 1993 Entrepreneurs Fund and 1,712,329 shares held by Crosspoint Ventures LS 1997 L.P. (3) Represents 3,236,226 shares held by El Dorado Ventures III, 59,936 shares held by El Dorado C&L Fund, L.P., 100,707 shares held by El Dorado Technology IV, L.P., 52,305 shares held by El Dorado Technology 98, L.P., and 632,626 shares held by El Dorado Ventures IV, L.P. (4) Represents 3,502,945 shares held by Enterprise Partners II, L.P., and 318,429 shares held by Enterprise Partners Associates, L.P. (5) Includes 513,542 shares issuable upon exercise of stock options exercisable on or before March 31, 2000. (6) Includes 75,000 shares issuable upon exercise of stock options exercisable on or before March 31, 2000. (7) Mr. Hoff is a general partner of Crosspoint Venture Partners. The shares listed represent (a) 5,116,619 shares held by Crosspoint Venture Partners and (b) 25,000 shares held by Mr. Hoff issuable upon exercise of stock options exercisable on or before March 31, 2000. Mr. Hoff disclaims beneficial ownership of the shares held by Crosspoint Venture Partners, except to the extent of his pecuniary interest therein. 64 (8) Mr. Peterson is a general partner of El Dorado Ventures. The shares listed represent (a) 4,081,800 shares held by El Dorado Ventures and (b) 25,000 shares held by Mr. Peterson issuable upon exercise of stock options exercisable on or before March 31, 2000. Mr. Peterson disclaims beneficial ownership of the shares held by El Dorado Ventures, except to the extent of his pecuniary interest therein. (9) Mr. Gauer is a general partner of Palomar Ventures and Ocean Park Ventures, L.P. The shares listed represent (a) 684,931 shares held by Palomar Ventures, (b) 1,273,803 shares held by Ocean Park Ventures and (c) 25,000 shares held by Mr. Gauer issuable upon exercise of stock options exercisable on or before March 31, 2000. Mr. Gauer disclaims beneficial ownership of the shares held by Palomar Ventures and Ocean Park Ventures, except to the extent of his pecuniary interest therein. (10) The shares listed represented (a) 3,716,800 shares beneficially owned by Siemens AG, and (b) 3,750 shares held by Mr. Maher issuable upon exercise of stock options exercisable on or before March 31, 2000. Mr. Maher is a member of the board of Siemens AG Information and Communication Networks. Mr. Maher disclaims beneficial ownership of the shares held by Siemens. (11) All of such shares are currently subject to a right of repurchase by Efficient. (12) Includes 97,918 shares issuable upon exercise of stock options exercisable on or before March 31, 2000. (13) Includes 148,460 shares issuable upon exercise of stock options exercisable on or before March 31, 2000. (14) Includes 172,916 shares issuable upon exercise of stock options exercisable on or before March 31, 2000. (15) Includes 132,293 shares issuable upon exercise of stock options exercisable on or before March 31, 2000. (16) Includes an aggregate of 1,475,359 shares issuable upon exercise of stock options exercisable on or before March 31, 2000. 65 DESCRIPTION OF CAPITAL STOCK General We are authorized to issue 200,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares of undesignated preferred stock, $0.001 par value. The following description of our capital stock is subject to and qualified in its entirety by our certificate of incorporation and bylaws, and by the provisions of applicable Delaware law. Common Stock As of December 31, 1999, there were 51,156,248 shares of common stock outstanding after giving pro forma effect to the conversion of all outstanding shares of Series A non-voting convertible redeemable preferred stock issued to Cabletron. These shares were held of record by approximately 156 stockholders. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for that purpose. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of Efficient, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to Efficient, shall opine that the shares of common stock to be issued upon the closing of this offering, when issued and sold in the manner described in this prospectus and in accordance with the resolutions adopted by the board of directors, will be fully paid and nonassessable. Preferred Stock The board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things: . restricting dividends on the common stock; . diluting the voting power of the common stock; . impairing the liquidation rights of the common stock; or . delaying or preventing a change in control of Efficient without further action by the stockholders. Series A Non-Voting Convertible Preferred Stock In connection with the acquisition of Flowpoint Corporation from Cabletron, the Board of Directors designated an aggregate of 6,300 shares of preferred stock as "Series A Non-Voting Convertible Preferred Stock." The following is a summary of the rights, preferences, privileges and restrictions of Series A Preferred: . Voting. The Series A Preferred is non-voting. However, without the consent of holders of at least /66% of the Series A Preferred, Efficient may not: (a) alter the rights of the Series A Preferred; (b) create any securities that rank on a parity with or senior to the Series A Preferred as to dividends or distribution of assets upon liquidation; or (c) increase or decrease the number of shares of preferred stock authorized. 66 . Dividends. Each share of Series A Preferred is entitled to receive dividends, when and if declared by the Board of Directors, at least equal in amount to the dividends declared on the common stock, multiplied by the conversion ratio of the Series A Preferred. Dividends are not mandatory or cumulative. . Liquidation. In the event of a liquidation of Efficient, the holders of the Series A Preferred are entitled to receive the par value of such shares in preference to the holders of common stock, and thereafter share on a pro rata basis with the common stock, treating the Series A Preferred as if converted into common stock. . Automatic Conversion. The Series A Preferred automatically converts into common stock, at the rate of 1,000 shares of common stock for each share of Series A Preferred (subject to adjustment for stock splits and the like), immediately following the affirmative vote of such conversion by holders of a majority of our common stock. . Redemption. In the event that the Series A Preferred has not converted into common stock on or before July 21, 2000, one fifth of the Series A Preferred shall be redeemed on each of December 31, 2000, 2001, 2002, 2003, and 2004. The redemption price of the Series A Preferred is approximately $78,000 per share. It is the mutual intention and understanding of Efficient and Cabletron that Efficient will hold a special meeting of stockholders. Holders of a majority of Efficient's common stock have entered into Voting Agreements pursuant to which they have agreed to vote in favor of conversion of the Series A Preferred into common stock. The special meeting is expected to be held in early 2000. Warrants At September 30, 1999, there were warrants outstanding to purchase 34,246 shares of our common stock. Standstill and Registration Rights On December 17, 1999, pursuant to an Agreement and Plan of Reorganization, Efficient completed the acquisition of FlowPoint Corporation, a wholly-owned subsidiary of Cabletron, in exchange for a combination of common stock and preferred stock equal to an aggregate of 13,500,000 shares of common stock on an as-converted basis. In connection with this transaction, Efficient and Cabletron also entered into a Standstill and Disposition Agreement containing certain standstill provisions, voting provisions, restrictions on transfer, and registration rights. The standstill provisions contained in the Standstill and Disposition Agreement provide that, without the prior consent of Efficient's board, Cabletron may not: . acquire additional shares of Efficient; . solicit proxies or participate in an election contest; . act in concert with others to acquire, hold or dispose of Efficient stock; . seek to elect or replace members of Efficient's board; . seek to control management, the board, or policies of Efficient; . pursue a business combination with Efficient; . coordinate with any third person to form a business combination with Efficient; . coordinate with any third person in connection with a tender offer for voting securities of Efficient; and . assist, participate, solicit or encourage any third party to do any of the above. 67 The voting provisions contained in the Standstill and Disposition Agreement provide that on matters requiring the vote of Efficient stockholders, Cabletron must vote shares in excess of 10% of the voting stock of Efficient in proportion with the vote of other stockholders of Efficient. However, Cabletron must vote all voting shares which it owns proportionately with respect to: . any transaction between Efficient and one or more person in which Cabletron controls a 5% equity interest; or . a change of control of Efficient with any of the top five data networking companies, from time to time, as measured by revenues. The standstill and voting provisions will terminate if and when Cabletron owns less than 5% of the voting securities of Efficient or upon a change of control of Efficient. The restrictions on transfer provisions contained in the Standstill and Disposition Agreement provide that, without the prior consent of Efficient's board, Cabletron may not sell, transfer, or otherwise dispose of Efficient stock, except: . to a controlled affiliate of Cabletron; . in connection with a firm commitment, underwritten public offering; . pursuant to Rule 144 or the shelf registration statement, except in certain circumstances; . in a private sale, except if, after giving effect to the sale, the purchaser would own more than 5% of the voting stock of Efficient, unless the purchaser is a passive investor in which case the amount may be up to 10% of the voting stock of Efficient; and . in response to a tender offer which is not opposed by Efficient's board. The restriction on transfer provisions will terminate if and when Cabletron owns less than 5% of the voting securities of Efficient, or upon a change of control of Efficient, or November 2009. The registration rights provisions contained in the Standstill and Disposition Agreement provide that, in addition to the shares to which Cabletron is entitled to include in this offering: . by July 21, 2000, Efficient shall use commercially reasonable efforts to file a shelf registration statement so that Cabletron may sell shares on a continuous basis, however, Cabletron may not sell greater than 2 million shares pursuant to this registration statement and Rule 144; . after July 21, 2000, Cabletron shall be entitled to two demand registrations as long as the demand is for 2 million shares or more; . if Efficient determines to commence any public offering after this offering before December 31, 2000, Cabletron shall be entitled to include the greater of 40% of the shares to be sold in the offering or 3 million shares; . Cabletron shall also be entitled to the same registration rights held by other stockholders of Efficient stock, as described in the following paragraph; and . expenses of registration, other than underwriting discounts and commissions, will be borne by us. In addition to the specific registration rights of Cabletron described above, which are senior, the holders of approximately 27.5 million shares of common stock and Cabletron are entitled to certain registration rights. Beginning on December 31, 2000, the holders of at least 50% of the then outstanding registrable securities may require: . on up to two occasions, that we register their shares for public resale; 68 . on one occasion within any twelve month period that we register their shares for public resale on Form S-3 or similar short-form registration if the value of the securities to be registered is at least $1.0 million, include their shares of common stock in a registration in which we elect to register shares of common stock of Efficient, but we may reduce the number of shares proposed to be registered in view of market conditions to an amount not less than 30% of the shares in the offering. All expenses incurred in connection with any registration, other than underwriting discounts and commissions attributable to registrable securities, will be borne by us. These registration rights will terminate in July 2005, or, with respect to each holder of registrable securities, at such time as the holder is entitled to sell all of its shares in any three-month period under Rule 144(k) of the Securities Act. Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions Certain provisions of Delaware law and our certificate of incorporation and bylaws could make the following transactions more difficult: . the acquisition of Efficient by means of a tender offer; . the acquisition of Efficient by means of a proxy contest or otherwise; or . the removal of our incumbent officers and directors. These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of Efficient to first negotiate with our board of directors. We believe that the benefits of our increased ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure Efficient outweigh the disadvantages of discouraging such proposals as negotiation of such proposals could result in an improvement of their terms. Election and Removal of Directors. Our board of directors is divided into three classes. The directors in each class will serve for a three-year term, one class being elected each year by our stockholders. See "Management-- Executive Officers and Directors." This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of Efficient because it generally makes it more difficult for stockholders to replace a majority of the directors. Stockholder Meetings. Under our bylaws, only our board of directors, Chairman of the Board and President may call special meetings of stockholders. Requirements for Advance Notification of Stockholder Nominations and Proposals. Our bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board. Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. The existence of this provision may have an anti- takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders. 69 Elimination of Stockholder Action By Written Consent. Our certificate of incorporation eliminates the right of stockholders to act by written consent without a meeting. Elimination of Cumulative Voting. Our certificate of incorporation and bylaws do not provide for cumulative voting in the election of directors. Undesignated Preferred Stock. The authorization of undesignated preferred stock makes it possible for the board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of Efficient. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of Efficient. Amendment of Charter Provisions. The amendment of any of the above provisions would require approval by holders of at least 66 2/3% of the outstanding common stock. Transfer Agent and Registrar The transfer agent and registrar for the common stock is Harris Trust and Savings Bank. The Nasdaq Stock Market Listing Our shares have been approved for listing on The Nasdaq Stock Market under the symbol "EFNT." 70 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering and based on shares outstanding at December 31, 1999, we will have outstanding approximately 53.2 million shares of common stock after giving pro forma effect to the conversion of all outstanding shares of Series A non-voting convertible redeemable preferred stock issued to Cabletron. Of these shares, approximately 14.6 million shares including the 5,000,000 shares sold in this offering plus any shares issued upon exercise of the underwriters' over-allotment option, will be freely tradable. Our directors, officers and certain stockholders have entered into lock-up agreements with the underwriters of this offering providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of our shares for a period not to exceed 90 days after the effective date of the registration statement filed pursuant to this offering, as described below, without the prior written consent of Credit Suisse First Boston Corporation. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold until such agreements expire or are waived by Credit Suisse First Boston Corporation. Taking into account the lock-up agreements, and assuming Credit Suisse First Boston Corporation does not release stockholders from these agreements prior to the expiration of the lock-up period, the following shares will be eligible for sale in the public market at the following times: . beginning April 3, 2000, approximately 3.1 million additional shares will be available for sale in the public market, certain of which are restricted securities; . beginning May 3, 2000, approximately 23.6 million additional shares will be available for sale in the public market, certain of which are restricted securities; . the remaining approximately 11.9 million shares will be eligible for sale from time to time thereafter, subject in some cases to compliance with Rule 144. "Restricted securities" within the meaning of Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, including applicable volume limitations, 144(k) or 701 promulgated under the Securities Act, which are summarized below. In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares for at least one year, including the holding period of any prior owner except an affiliate, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: . 1% of the number of shares of common stock then outstanding, which will equal approximately 532,000 shares immediately after this offering; or . the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about Efficient. Under Rule 144(k), a person who is not deemed to have been an affiliate of Efficient at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner except an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701, as currently in effect, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of Rule 144. Any of our employees, officers, directors, or consultant who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. 71 On October 13, 1999, we filed three separate registration statements on Form S-8 registering in the aggregate 10,479,329 shares of common stock subject to outstanding options or reserved for future issuance under our stock plans. As of December 31, 1999, options to purchase a total of 8.2 million shares were outstanding and 2.8 million shares were reserved for future issuance under our stock plans. Upon completion of this offering, holders of 39.1 million restricted shares of common stock will be entitled to certain registration rights. See "Description of Capital Stock--Registration Rights." Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of such registration. 72 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 2000, Efficient and the selling stockholders have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson Stephens, Prudential Securities Incorporated and Dain Rauscher Incorporated are acting as representatives, the following respective numbers of shares of common stock:
Number of Underwriters Shares ------------ --------- Credit Suisse First Boston Corporation.......................... FleetBoston Robertson Stephens.................................. Prudential Securities Incorporated.............................. DainRauscher Incorporated....................................... --------- Total......................................................... 5,000,000 =========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that, if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 750,000 additional shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we and the selling stockholders will pay:
Per Share Total ----------------------------- ----------------------------- Without With Without With Over-allotment Over-allotment Over-allotment Over-allotment -------------- -------------- -------------- -------------- Underwriting discounts and commissions payable by us.................. $ $ $ $ Expenses payable by us.. $ $ $ $ Underwriting discounts and commissions payable by selling stockholders........... $ $ $ $
We, our officers and directors, the selling stockholders and other stockholders holding an aggregate of shares have agreed that we and they will not offer, sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to any additional shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period not to exceed 90 days after the date of this prospectus, except in the case of issuances by Efficient upon the exercise of employee stock options outstanding on the date hereof. We and the selling stockholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect. 73 Our common stock is listed on The Nasdaq National Market under the symbol "EFNT." We and the selling stockholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Securities Exchange Act of 1934. . Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. . Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. . Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. . Penalty bids permit the representatives to reclaim a selling concession from a stabilizing or syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. . In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchases of the common stock until the time, if any, at which a stabilizing bid is made. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on The Nasdaq National Market or otherwise, and if commenced, may be discontinued at any time. 74 NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling stockholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. Representations of Purchasers Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us, the selling stockholders and the dealer from whom such purchase confirmation is received that (i) the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under these securities laws, (ii) where required by law, that the purchaser is purchasing as principal and not as agent, and (iii) the purchaser has reviewed the text above under "Resale Restrictions." Rights of Action of Ontario Purchasers The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. Enforcement of Legal Rights All of the issuer's directors and officers as well as the experts named herein and the selling stockholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or these persons. All or a substantial portion of the assets of the issuer and these persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or these persons in Canada or to enforce a judgment obtained in Canadian courts against the issuer or these persons outside of Canada. Notice to British Columbia Residents A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that the purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by the purchaser pursuant to this offering. This report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. Taxation and Eligibility for Investment Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 75 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for Efficient by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Kenneth M. Siegel, a member of Wilson Sonsini Goodrich & Rosati, will be leaving that firm to joint Efficient as an executive officer effective February 1, 2000. Mr. Siegel owns 2,500 shares of our common stock and, in connection with his decision to join Efficient, was granted an option to purchase 500,000 shares of our common stock at an exercise price of $58.50 per share. The due authorization of the shares to be sold by Efficient and the execution and delivery of the underwriting agreement for this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Austin, Texas. EXPERTS The consolidated financial statements of Efficient Networks, Inc. as of June 30, 1998 and 1999, and for each of the years in the three-year period ended June 30, 1999 included in this prospectus and registration statement have been audited by KPMG LLP, independent auditors, as set forth in their reports, which are included in this prospectus and registration statement, and are included in reliance upon their reports given on their authority as experts in accounting and auditing. The financial statements of FlowPoint Corporation as of March 31, 1998, August 31, 1998 and February 28, 1999 and for the years ended March 31, 1997 and 1998, the five-month period ended August 31, 1998 and the six-month period ended February 28, 1999, included in this prospectus and registration statement have been audited by KPMG LLP, independent auditors, as set forth in their report, which is included in this prospectus and registration statement, and is included in reliance upon their report given on their authority as experts in accounting and auditing. ADDITIONAL EFFICIENT INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock offered in this offering. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to Efficient and the common stock offered in this offering, we refer you to the registration statement and to the attached exhibits and schedules. With respect to each such document filed as an exhibit to the registration statement, we refer you to the exhibit for a more complete description of the matter involved. You may inspect our registration statement and the attached exhibits and schedules without charge at the public reference facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Securities and Exchange Commission located at Seven World Trade Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the Securities and Exchange Commission at 1-800- SEC-0330 for further information about public reference rooms. You may obtain copies of all or any part of our registration statement from the Securities and Exchange Commission upon payment of prescribed fees. You may also inspect reports, proxy, and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission without charge at a Web site maintained by the Securities and Exchange Commission at http://www.sec.gov. Upon completion of this offering, Efficient will become subject to the information and periodic reporting requirements of the Securities Exchange Act and, accordingly, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. Such periodic reports, proxy statements and other information will be available for inspection and copying at the Securities and Exchange Commission's public reference rooms, and the Web site of the Securities and Exchange Commission referred to above. 76 EFFICIENT NETWORKS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Efficient Networks, Inc. Annual Financial Statements Independent Auditors' Report............................................. F-2 Consolidated Balance Sheets.............................................. F-3 Consolidated Statements of Operations.................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit)................ F-5 Consolidated Statements of Cash Flows.................................... F-6 Notes to Consolidated Financial Statements............................... F-7 Interim Financial Statements Unaudited Condensed Consolidated Balance Sheets.......................... F-19 Unaudited Condensed Consolidated Statements of Operations................ F-20 Unaudited Condensed Consolidated Statements of Cash Flows................ F-21 Notes to Unaudited Condensed Consolidated Financial Statements........... F-22 FlowPoint Corporation Independent Auditors' Report............................................. F-25 Balance Sheets........................................................... F-26 Statements of Operations................................................. F-27 Statements of Cash Flows................................................. F-28 Statements of Stockholders' Equity (Deficit)............................. F-29 Notes to Financial Statements............................................ F-30
F-1 Independent Auditors' Report The Board of Directors Efficient Networks, Inc.: We have audited the accompanying consolidated balance sheets of Efficient Networks, Inc. and subsidiaries as of June 30, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Efficient Networks, Inc. and subsidiaries as of June 30, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three- year period ended June 30, 1999, in conformity with generally accepted accounting principles. KPMG LLP Dallas, Texas July 6, 1999, except as to note 13 which is as of July 20, 1999 F-2 EFFICIENT NETWORKS, INC. Consolidated Balance Sheets June 30, 1998 and 1999 (in thousands, except share data)
June 30, ----------------------------- Pro forma 1999 1998 1999 (unaudited) ------- ------- ----------- Assets (Note 2(l)) Current assets: Cash and cash equivalents...................... $ 7,607 $ 3,604 $ 3,604 Accounts receivable, net of allowance for doubtful accounts of $15 in 1998 and $120 in 1999.......................................... 461 12,334 12,334 Inventories.................................... 898 5,472 5,472 Other assets................................... 202 241 241 ------- ------- ---------- Total current assets......................... 9,168 21,651 21,651 Furniture and equipment, net..................... 1,404 2,285 2,285 Other assets, net................................ 95 29 29 ------- ------- ---------- $10,667 $23,965 $ 23,965 ======= ======= ========== Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Current liabilities: Accounts payable............................... $ 547 $ 5,689 $ 5,689 Accrued liabilities............................ 751 2,641 2,641 Deferred revenue............................... -- 736 736 ------- ------- ---------- Total current liabilities.................... 1,298 9,066 9,066 Long-term debt, net of discount.................. -- 13,396 -- Other liabilities................................ -- 22 22 ------- ------- ---------- Total liabilities............................ 1,298 22,484 9,088 ------- ------- ---------- Redeemable convertible preferred stock (note 7).. 34,743 40,495 -- Commitments and contingencies Stockholders' equity (deficit): Common stock, par value $.001 per share, 100,000,000 shares authorized; 3,616,964 and 4,362,221 shares issued and outstanding in 1998 and 1999, respectively; pro forma-- 32,662,288 shares issued and outstanding...... 4 4 33 Additional paid-in capital..................... 7,221 29,777 84,265 Deferred stock option compensation............. (4,815) (14,606) (14,606) Accumulated deficit............................ (27,784) (54,189) (54,815) ------- ------- ---------- Total stockholders' equity (deficit)......... (25,374) (39,014) 14,877 ------- ------- ---------- $10,667 $23,965 $ 23,965 ======= ======= ==========
See accompanying notes to consolidated financial statements. F-3 EFFICIENT NETWORKS, INC. Consolidated Statements of Operations Years ended June 30, 1997, 1998 and 1999 (in thousands, except per share data)
1997 1998 1999 ------- ------- -------- Net revenues....................................... $ 4,122 $ 3,370 $ 14,828 Cost of revenues................................... 2,386 2,160 14,344 ------- ------- -------- Gross profit................................... 1,736 1,210 484 ------- ------- -------- Operating expenses: Sales and marketing.............................. 2,409 3,436 6,133 Research and development......................... 4,183 4,389 7,747 General and administrative....................... 1,245 1,641 1,993 Stock option compensation........................ 659 1,165 3,116 ------- ------- -------- Total operating expenses....................... 8,496 10,631 18,989 ------- ------- -------- Loss from operations........................... (6,760) (9,421) (18,505) Interest expense................................... -- (10) (8,092) Interest income.................................... 144 146 202 Other, net......................................... (19) (6) (10) ------- ------- -------- Net loss....................................... $(6,635) $(9,291) $(26,405) ======= ======= ======== Basic and diluted net loss per share of common stock......................................... $ (2.19) $ (2.86) $ (6.87) ======= ======= ======== Weighted-average shares of common stock outstanding................................... 3,027 3,254 3,893 ======= ======= ======== Unaudited pro forma basic and diluted net loss per share..................................... $ (0.97) ======== Weighted average shares used to compute unaudited pro forma basic and diluted net loss per share..................................... 28,342 ========
See accompanying notes to consolidated financial statements. F-4 EFFICIENT NETWORKS, INC. Consolidated Statements of Stockholders Equity (Deficit) Years ended June 30, 1997, 1998 and 1999 (in thousands, except share data)
Total Common Stock Additional Deferred stockholders' ----------------- paid-in stock option Accumulated equity Shares Amount capital Compensation deficit (deficit) ---------- ------ ---------- ------------ ----------- ------------- Balance at June 30, 1996................... 2,992,271 $ 3 $ 1,439 $ (1,227) $(11,858) $(11,643) Issuance of common stock under stock option plan........... 62,500 -- 9 -- -- 9 Deferred stock option compensation.......... -- -- 2,269 (2,269) -- -- Amortization of deferred stock option compensation.......... -- -- -- 659 -- 659 Net loss............... -- -- -- -- (6,635) (6,635) ---------- ---- ------- -------- -------- -------- Balance at June 30, 1997................... 3,054,771 3 3,717 (2,837) (18,493) (17,610) Issuance of common stock under stock option plan........... 448,125 1 61 -- -- 62 Issuance of common stock................. 114,068 -- 300 -- -- 300 Deferred stock option compensation.......... -- -- 3,143 (3,143) -- -- Amortization of deferred stock option compensation.......... -- -- -- 1,165 -- 1,165 Net loss............... -- -- -- -- (9,291) (9,291) ---------- ---- ------- -------- -------- -------- Balance at June 30, 1998................... 3,616,964 4 7,221 (4,815) (27,784) (25,374) Issuance of common stock under stock option plan........... 745,257 -- 1,683 -- -- 1,683 Stock options forfeited............. -- -- (223) 223 -- -- Issuance of warrants... -- -- 6,173 -- -- 6,173 Convertible promissory note.................. -- -- 2,143 -- -- 2,143 Deferred stock option compensation.......... -- -- 13,130 (13,130) -- -- Amortization of deferred stock option compensation.......... -- -- -- 3,116 -- 3,116 Accretion of issuance costs on redeemable convertible preferred stock................. -- -- (350) -- -- (350) Net loss............... -- -- -- -- (26,405) (26,405) ---------- ---- ------- -------- -------- -------- Balance at June 30, 1999................... 4,362,221 4 29,777 (14,606) (54,189) (39,014) Unaudited pro forma issuance of common stock upon conversion of redeemable convertible preferred stock................. 24,720,213 25 40,470 -- -- 40,495 Unaudited pro forma issuance of common stock upon conversion of convertible promissory note plus accrued interest...... 497,663 1 5,021 -- (22) 5,000 Unaudited pro forma net loss related to accretion of remaining discount on subordinated promissory notes...... -- -- -- -- (604) (604) Unaudited pro forma issuance of common stock upon exercise of warrants.............. 3,082,191 3 8,997 -- -- 9,000 ---------- ---- ------- -------- -------- -------- Unaudited pro forma balance at June 30, 1999................... 32,662,288 $ 33 $84,265 $(14,606) $(54,815) $ 14,877 ========== ==== ======= ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 EFFICIENT NETWORKS, INC. Consolidated Statements of Cash Flows Years ended June 30, 1997, 1998 and 1999 (in thousands)
1997 1998 1999 ------- ------- -------- Cash flows from operating activities: Net loss.......................................... $(6,635) $(9,291) $(26,405) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................... 861 727 807 Amortization of deferred stock option compensation.................................... 659 1,165 3,116 Accretion of discount on subordinated promissory notes........................................... -- -- 7,712 Changes in operating assets and liabilities: Accounts receivable.............................. (12) 318 (11,873) Inventories...................................... 443 (304) (4,574) Other assets and liabilities..................... 59 (201) 49 Accounts payable and accrued liabilities......... (18) 967 7,043 Deferred revenue................................. -- -- 736 ------- ------- -------- Net cash used in operating activities.............. (4,643) (6,619) (23,389) ------- ------- -------- Cash flows used in investing activities--purchase of furniture and equipment........................ (525) (572) (1,688) ------- ------- -------- Cash flows from financing activities: Principal payments on capital lease obligations... (192) (78) (11) Proceeds from issuance of promissory notes and warrants......................................... 1,500 1,000 14,000 Proceeds from issuance of common stock............ 9 362 1,683 Proceeds from issuance of preferred stock......... 5,961 10,101 5,402 ------- ------- -------- Net cash provided by financing activities....... 7,278 11,385 21,074 ------- ------- -------- Increase (decrease) in cash and cash equivalents... 2,110 4,194 (4,003) Cash and cash equivalents at beginning of year..... 1,303 3,413 7,607 ------- ------- -------- Cash and cash equivalents at end of year........... $ 3,413 $ 7,607 $ 3,604 ======= ======= ======== Supplemental disclosure--cash paid during the year for: Interest.......................................... $ 6 $ 4 $ -- ======= ======= ======== Non-cash financing transaction-- Exchange of promissory notes and related interest for redeemable convertible preferred stock....... $ 1,519 $ 1,007 $ -- ======= ======= ========
See accompanying notes to consolidated financial statements. F-6 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements June 30, 1997, 1998 and 1999 (1)Incorporation and Nature of Business Efficient Networks, Inc. (the "Company") was incorporated under the laws of the State of Delaware on June 10, 1993. The Company is a worldwide developer and supplier of high speed digital subscriber line customer premises equipment for the high speed, high volume digital communication, or broadband, access market. (2)Summary of Significant Accounting Policies (a)Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries located in The Netherlands and Singapore. All significant intercompany accounts and transactions have been eliminated in consolidation. (b)Cash Equivalents Cash equivalents consist primarily of an investment account comprised of investments in commercial paper, repurchase agreements and money market funds. For purposes of the statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. (c)Inventories Inventories are stated at the lower of average cost or market (net realizable value). (d)Furniture and Equipment Furniture and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments. Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Plant and equipment held under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. The estimated useful lives are as follows:
Years ----- Computers.............................. 5 Software............................... 3 Equipment.............................. 5 Furniture and fixtures................. 7
(e)Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary F-7 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (f)Revenue Recognition Revenue from product sales is recognized upon shipment to the customer. Reserves for estimated sales returns and allowances are recorded in the same period as the related revenues. Revenue related to sales transactions that provide a customer with the right to return product is deferred until the product is deployed by the customer and/or the return privileges expire. (g)Stock-Based Compensation The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. (h)Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (i)Net Loss Per Share of Common Stock Net loss per share of common stock is presented in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. Under SFAS No. 128, basic earnings/loss per share excludes dilution for potentially dilutive securities and is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings/loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potentially dilutive securities are excluded from the computation of diluted earnings/loss per share when their inclusion would be antidilutive. The computation of basic and diluted weighted average shares is as follows (in thousands):
Year ended June 30, -------------------------- 1997 1998 1999 ------- ------- -------- Numerator: Net loss.................................... $(6,635) $(9,291) $(26,405) Accretion of issuance costs on redeemable convertible preferred stock................ -- -- (350) ------- ------- -------- Numerator for basic and diluted net loss per share...................................... $(6,635) $(9,291) $(26,755) ======= ======= ======== Denominator for basic and diluted net loss per share--weighted average common shares outstanding.................................. 3,027 3,254 3,893 ======= ======= ========
F-8 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 Pro forma basic and diluted net loss per share has been calculated assuming: (a) the conversion of redeemable convertible preferred stock outstanding at June 30, 1999, as if the redeemable convertible preferred stock had converted immediately upon its issuance, resulting in 23,332,713 additional weighted average shares of common stock outstanding; (b) the warrants issued in 1999 in connection with the issuance of subordinated promissory notes were exercised immediately upon their issuance using the principal amount of the notes to satisfy the exercise price, resulting in 1,113,014 additional weighted average shares of common stock outstanding and a charge of $603,806 against earnings for the accretion of the remaining discount recorded on the notes; and (c) the convertible debt issued June 28, 1999, was converted immediately upon issuance resulting in 2,727 additional weighted average shares of common stock outstanding. (j)Fair Value of Financial Instruments The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. The fair values of the Company's convertible promissory notes and subordinated promissory notes and related warrants were determined using a valuation model with the following assumptions: a volatility factor of 40% obtained from the stock price volatility experienced by certain of the Company's principal competitors; a risk-free interest rate of 5.71%; the contractual term of the respective notes; the estimated fair value of the Company's common stock ($12.00 at June 30, 1999); and the exercise price of the detachable warrants. The estimated fair values of the convertible promissory notes and subordinated promissory notes and related warrants as of June 30, 1999 are approximately $6,802,691 and $40,294,044 respectively. (k)Comprehensive Income On July 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income and its components in the financial statements. Comprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to owners. To date, no elements of comprehensive income exist other than net loss from operations. (l)Pro Forma Balance Sheet The pro forma balance sheet reflects the following transactions as though they had occurred as of June 30, 1999 (see notes 6 and 7): . the conversion of $9,000,000 of subordinated promissory notes into an aggregate of 3,082,191 shares of redeemable convertible preferred stock through the exercise of the warrants issued therewith, . the conversion of the $5,000,000 convertible promissory note plus accrued interest into an aggregate of 497,663 shares of redeemable convertible preferred stock, and . the conversion of each outstanding share of redeemable convertible preferred stock into one share of common stock. (m)Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of F-9 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 the financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3)Inventories Inventories consisted of the following (in thousands):
June 30, ----------- 1998 1999 ---- ------ Raw materials.................................................... $354 $2,265 Finished goods................................................... 544 3,207 ---- ------ Total............................................................ $898 $5,472 ==== ======
(4)Furniture and Equipment Furniture and equipment consisted of the following (in thousands):
June 30, -------------- 1998 1999 ------ ------ Computers.................................................... $1,941 $2,811 Purchased software........................................... 611 892 Equipment.................................................... 241 585 Furniture and fixtures....................................... 66 136 Leasehold improvements....................................... 121 235 ------ ------ Total furniture and equipment................................ 2,980 4,659 Less accumulated depreciation and amortization............... (1,576) (2,374) ------ ------ Furniture and equipment, net................................. $1,404 $2,285 ====== ======
The Company leases certain equipment under capital lease arrangements. At June 30, 1998, the cost of assets under such leases aggregated $152,183, and related accumulated amortization was $134,065. At June 30, 1999, there were no assets under capital lease arrangements. Amortization of assets leased under capital lease arrangements is included in amortization expense. (5)Accrued Liabilities Accrued liabilities consisted of the following (in thousands):
June 30, ----------- 1998 1999 ---- ------ Accrued compensation and benefits............................... $247 $1,102 Accrued professional fees....................................... 320 55 Other........................................................... 184 1,484 ---- ------ Total........................................................... $751 $2,641 ==== ======
F-10 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 (6)Long-term Debt In January 1999, the Company issued subordinated promissory notes with detachable warrants in exchange for $7,000,000 in cash. In April 1999, the Company issued a subordinated promissory note with a detachable warrant in exchange for $2,000,000 in cash. The notes bear interest of 10% per year and interest is payable quarterly. The notes are due at the earlier of January 2002 or (a) a consummation of a qualifying liquidation event which includes a firm commitment underwritten offering pursuant to a registration statement under the Securities Act of 1933, the public offering price of which is not less than $5.00 per share and $10,000,000 in the aggregate; (b) any consolidation or merger of the Company with or into any other corporation or corporations; (c) sale, conveyance or disposition of all or substantially all of the assets of the Company; or (d) the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed. The subordinated promissory notes were issued with detachable warrants to purchase an aggregate of 3,082,191 shares of the Company's Series H redeemable convertible preferred stock at an exercise price of $2.92 per share. The warrants expire at the earlier of January 2002 or the consummation by the Company of the sale of its common stock in a firm commitment underwritten offering at a price not less than $5.00 per share and providing not less than $10,000,000 of net proceeds. The proceeds were allocated between the notes and the warrants based on their pro-rata fair values, as determined using a valuation model (see note 2(j)). As a result, the warrants were valued at $6,172,699. This amount was recorded as paid-in capital. The resulting discount on the notes is being accreted as interest expense over the expected term of the related promissory notes. The holders of the subordinated promissory notes have entered into a note repayment and warrant exercise agreement with the Company which stipulates that immediately prior to the closing of an initial public offering, the aggregate $9,000,000 principal amount of the notes will be applied toward the aggregate exercise price of the detachable warrants (see note 13). On June 28, 1999, the Company issued a convertible promissory note in exchange for $5,000,000 in cash. The note bears interest of 8.0% per year. The holder of the note has the right to demand prepayment of 50% of the principal amount of the note at any time after the first anniversary and full prepayment at any time after the second anniversary of issuance. The note is convertible at the holder's option into shares of Series I preferred stock at a conversion price of $10.09 per share of Series I preferred stock. Upon the completion of an initial public offering, the note will automatically convert into Series I preferred stock at a conversion price equal to the lesser of (1) 70% of the initial public offering price per share or (2) $10.09 per share. Upon the issuance of the convertible promissory note, the Company recognized $2,143,000 of interest expense and a corresponding increase to additional paid-in capital. This amount represents the intrinsic value of the beneficial conversion feature of the convertible promissory note (see note 13). (7)Redeemable Convertible Preferred Stock Preferred stock has voting rights equal to the number of shares of common stock into which the preferred stock is convertible. The preferred stock is convertible at the option of the holder into such number of shares of common stock as is determined by dividing the original issue price of the preferred stock plus all declared but unpaid dividends by the applicable conversion price at the date of conversion. The conversion price per share is the original issue price adjusted for any dilution that may occur from future offerings. Each share of outstanding preferred stock is required to convert to common stock upon the earlier of the time of the Company's initial public offering, if certain offering parameters are met, or the date on which F-11 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 the Company obtains the consent of the holders of a majority of the then outstanding shares of preferred stock. The outstanding preferred stock is redeemable into cash at the request of a majority of the holders of the then outstanding shares of preferred stock at an amount equal to the original issue price plus all declared but unpaid dividends. Amounts due to the preferred shareholders on redemption are payable in three equal annual installments on the fifth, sixth and seventh anniversaries of the original purchase dates (see note 13). Dividends may be declared at the sole discretion of the Board of Directors and are noncumulative. To date, no such dividends have been declared. The holders of the preferred stock are entitled to a liquidation preference equivalent to the original issue price of the respective series of preferred stock plus declared but unpaid dividends. The following indicates the series of redeemable convertible preferred stock in existence at June 30, 1999. Series for which preferred stock has been issued and remains outstanding are stated at the redemption amount; issuance costs are netted against the proceeds and accreted as a charge against additional paid-in capital over the expected life of the related series of preferred stock (all in thousands, except share and per share data):
Dividend June 30, Rate Per ---------------- Share 1998 1999 -------- ------- ------- Series A - 7,096,000 shares authorized; 7,000,000 shares issued and outstanding................... $0.03 $ 3,500 $ 3,500 Series B - 522,848 shares authorized, issued and outstanding..................................... $0.07 625 625 Series C - 5,895,832 shares authorized; 5,858,332 shares issued and outstanding................... $0.07 7,030 7,030 Series D - 2,473,644 shares authorized, issued and outstanding................................. $0.12 5,000 5,000 Series E - 3,091,430 shares authorized, issued and outstanding................................. $0.15 7,480 7,480 Series F - 2,057,159 shares authorized, issued and outstanding in 1998 and 1999................ $0.18 6,007 6,007 Series G - 6,000,000 shares authorized; 1,866,800 and 3,716,800 shares issued and outstanding in 1998 and 1999................................... $0.18 5,451 10,853 Series H - 4,000,000 shares authorized, none issued or outstanding........................... $0.18 -- -- Series I - 750,000 shares authorized, none issued or outstanding.................................. $0.60 -- -- Issuance costs, net of accretion................. (350) -- ------- ------- $34,743 $40,495 ======= =======
The Company issued promissory notes in exchange for cash of $1,000,000 and $500,000 in September and December, 1996, respectively. The promissory notes bore interest at 6% and were due on demand. On December 31, 1996, the Company issued 3,091,430 shares of Series E redeemable convertible preferred stock in exchange for the principal and related accrued interest on the promissory notes amounting to $1,518,657 and $5,961,498 in cash. The Company issued promissory notes in exchange for $1,000,000 in January, 1998. The promissory notes bore interest at 6% and were due on demand. In February, 1998, the Company issued 2,057,159 shares of F-12 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 Series F redeemable convertible preferred stock in exchange for the principal and related accrued interest on the promissory notes amounting to $1,006,904 and $5,000,000 in cash. In June, 1998, the Company issued 1,866,800 shares of Series G redeemable convertible preferred stock for $5,451,056 in cash. The issuance was recorded net of issuance costs of $350,000. In March, 1999, the Company issued an additional 1,850,000 shares of Series G redeemable convertible preferred stock for $5,402,000 in cash (see note 13). (8)Common Stock and Stock Incentive Plans In 1993, the Company adopted a stock option plan (the "Plan") pursuant to which the Company's Board of Directors may grant stock options to officers, directors and key employees. The Plan authorizes grants of options to purchase up to 10,000,000 shares of unissued common stock. The Board of Directors determines the terms of each option, including exercise price (within limits set forth in the plan), number of shares and the rate at which each option is exercisable. The options generally vest ratably over a period of four years from the date of grant. In 1998, the Company adopted the Directors' Stock Option Plan (the "Directors' Plan") pursuant to which stock options may be granted to non- employee members of the Company's Board of Directors. The Directors' Plan authorizes grants of options to purchase up to 275,000 shares of common stock. Option grants under the Directors' Plan are nondiscretionary and automatic. Non-employee directors serving on the Company's board of directors at the date of the adoption of the Directors' Plan were granted options to purchase 50,000 shares on the effective date of the plan. Subsequent non- employee directors are granted an option to purchase 15,000 shares on the date they become a director. After their initial grant, non-employee directors are granted an option to purchase 15,000 shares on January 1 of each year provided they have served on the board for at least six months. At June 30, 1999, there were options to purchase 75,000 shares available for grant under the Directors' Plan. At June 30, 1999, there were options to purchase 2,369,853 shares available for grant under both plans. The per share weighted-average fair value of stock options granted during each of the years ended June 30, 1997, 1998 and 1999 was $2.09, $2.60, and $5.17, respectively, on the date of grant as estimated using the minimum value option-pricing model with the following weighted-average assumptions in all years: expected dividend yield of 0.0%, an expected life of four years, and a risk-free interest rate of 6%. The Company applies APB Opinion No. 25 in accounting for stock options granted to employees and non-employee directors under its stock option plans. The Company recorded $2,269,000, $3,143,000 and $13,130,000 of deferred stock option compensation during each of the years ended June 30, 1997, 1998 and 1999, respectively, as a result of granting stock options with exercise prices below the estimated fair value per share of the Company's common stock at the date of grant. Deferred stock option compensation has been recorded as a component of stockholders' equity (deficit) and is being amortized as a charge to operations over the vesting period of the applicable options. Amortization of deferred stock option compensation of $659,000, $1,165,000 and $3,116,000 was recognized in the years ended June 30, 1997, 1998 and 1999, respectively. F-13 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 Had the Company determined compensation cost based on the estimated fair value of stock options at the grant date in accordance with SFAS No. 123, the Company's net loss would have been increased or decreased, as applicable, to the pro forma amounts indicated below:
Year ended June 30, -------------------------- 1997 1998 1999 ------- ------- -------- Net loss: As reported.................................. $(6,635) $(9,291) $(26,405) Pro forma.................................... $(6,680) $(9,687) $(26,187) Basic and diluted net loss per share of common stock: As reported.................................. $ (2.19) $ (2.86) $ (6.87) Pro forma.................................... $ (2.21) $ (2.98) $ (6.82)
Pro forma net loss reflects only stock options granted after June 30, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting periods of four years and compensation expense pertaining to stock options granted in prior periods is not considered. Stock option activity for both plans during the periods indicated is as follows:
Weighted Average Number of Exercise Shares Price --------- -------- Balance at June 30, 1996................................. 2,396,500 $0.11 Granted.............................................. 1,716,883 0.24 Exercised............................................ (62,500) 0.15 Forfeited............................................ (454,883) 0.15 --------- Balance at June 30, 1997................................. 3,596,000 0.19 Granted.............................................. 1,631,000 0.58 Exercised............................................ (448,125) 0.12 Forfeited............................................ (344,458) 0.22 --------- Balance at June 30, 1998................................. 4,434,417 0.46 Granted.............................................. 2,638,500 2.88 Exercised............................................ (745,257) 2.24 Forfeited............................................ (195,666) 1.01 --------- Balance at June 30, 1999................................. 6,131,994 1.39 =========
Options granted during the years ended June 30, 1997, 1998 and 1999 had an exercise price less than the estimated fair value of the Company's common stock on the date of grant; the weighted-average grant-date fair value of options granted during those periods was $1.37, $2.10 and $7.89, respectively. F-14 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 The following presents certain information about outstanding stock options at June 30, 1999:
Options Outstanding Options Exercisable ------------------------------- --------------------- Weighted Weighted average Average Number Exercise contractual Number of Exercise Range of exercise price of options price life Options Price ----------------------- ---------- -------- ----------- ----------- --------- $0.05-0.25.............. 2,216,535 $0.19 6.7 years 1,648,075 $ 0.18 $0.50-0.60.............. 1,501,459 $0.58 8.7 years 469,529 $ 0.58 $1.50-2.50.............. 2,324,000 $2.22 9.5 years -- -- $7.50-10.50............. 90,000 $8.00 9.8 years -- --
At June 30, 1997, 1998 and 1999, the number of options exercisable was 1,224,042, 1,625,531 and 2,117,604, respectively, and the weighted-average exercise price of those options was $0.15, $0.21 and $0.33, respectively. In May 1999, the Company effected the issuance of 150,000 shares of common stock to a board member-elect, in exchange for a $1,575,000, 6% demand note. The demand note was repaid with interest in July 1999. (9)Research and Development Arrangements In October 1997, the Company entered into a development and license agreement with a customer who owns preferred stock of the Company. The agreement obligated the Company to develop a product that meets mutually agreed upon specifications in exchange for $850,000. The Company has fulfilled its development obligations and the proceeds under the arrangement were offset against research and development expense during the year ended June 30, 1998. In November 1997, the Company entered into a development and marketing agreement with a customer. The agreement obligated the Company to develop a product in accordance with certain specifications and to provide 114,068 shares of the Company's common stock for an aggregate purchase price of $300,000. The common stock issuance was recorded at estimated fair value of $300,000. The Company has fulfilled its development obligations. (10)Lease Commitments The Company has operating lease agreements relating to certain facilities and equipment which expire at various dates. Rent expense on operating leases for the years ended June 30, 1997, 1998, and 1999 was $367,308, $380,794 and $547,774, respectively. The Company entered into several agreements for the sale and leaseback of certain equipment. The leases were classified as capital leases and expired during the year ended June 30, 1999. Future minimum lease payments under noncancelable operating leases as of June 30, 1999 are:
Operating Leases --------- Years ended June 30: 2000........................................................... $417,097 2001........................................................... 329,765 2002........................................................... 124,327 2003........................................................... 35,955 2004........................................................... 5,993 -------- Total minimum lease payments................................. $913,137 ========
F-15 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 In connection with certain capital lease transactions, the Company issued warrants to purchase (a) 96,000 shares of Series A preferred stock at $0.50 per share expiring on the earlier of December 16, 2003 or the fifth annual anniversary of the consummation of the Company's initial public offering of its common stock, if certain offering parameters are met, and (b) 37,500 shares of its Series C preferred stock at $1.20 per share expiring on the later of March 13, 2005 or five years from the effective date of the Company's initial public offering. (11)Income Taxes The Company has not recognized any tax benefits for its net operating loss carryforwards. Net deferred tax assets as of June 30, 1998 and 1999 are as follows (in thousands):
1998 1999 ------- -------- Deferred tax assets: Operating loss carryforwards.......................... $ 8,943 $ 17,275 Receivables and inventory reserves.................... 59 136 Accrued liabilities................................... 87 233 ------- -------- Deferred tax assets................................. 9,089 17,644 Valuation allowance................................. (8,892) (17,444) ------- -------- 197 200 Deferred tax liability -- furniture and equipment....... (197) (200) ------- -------- Net deferred tax assets............................. $ -- $ -- ======= ========
The net change in the valuation allowance for the years ended June 30, 1998 and 1999 was $3,073,000 and $8,133,000 respectively. As of June 30, 1999, the Company has net operating loss carryforwards of approximately $48,000,000 which begin to expire in 2008. The Company believes that as a result of the Company's initial public offering in July 1999, and the resulting conversion of outstanding redeemable preferred stock into common stock, the Company has undergone an ownership change within the meaning of section 382 of the Internal Revenue Code (IRC). As a result, the Company's ability to utilize its operating loss carryforwards incurred prior to the ownership change are limited on an annual basis to an amount equal to the value of the Company, as defined by the IRC, as of the date of change of ownership, multiplied by the long-term tax-exempt rate of 4.98%. (12)Segment Information and Concentration of Credit Risk The Company operates in one reportable segment as it has one family of DSL products and markets its products to network equipment vendors and DSL service providers. In fiscal years 1997 and 1998, the Company also developed and marketed asynchronous transfer mode ("ATM") network products which are no longer actively marketed by the Company. For management purposes, the Company does not disaggregate financial information by product or geographically, other than export sales by region and sales by product. Substantially all of the Company's assets are located within the United States. The Company does not account for, and does not report to management, its assets or capital expenditures by revenue source. All of the Company's products are produced in the United States. The Company grants credit to customers located in several geographical regions in North America, Europe and the Pacific Rim. F-16 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 The following represents sales to customers in each of those geographical regions as a percentage of total revenues, and revenues and gross margins by product line for the years ended June 30, 1997, 1998 and 1999:
Geographic Region 1997 1998 1999 ----------------- ------ ------ ------- United States................................... 65% 48% 59% Europe.......................................... 25% 40% 12% Pacific Rim..................................... 10% 12% 29% Product line (in thousands) 1997 1998 1999 --------------------------- ------ ------ ------- DSL revenues.................................... $ -- $ 84 $12,915 DSL gross margin................................ $ -- $ (19) $ (462) ATM LAN revenues................................ $4,122 $3,286 $ 1,913 ATM LAN gross margin............................ $1,736 $1,229 $ 946
For the year ended June 30, 1997, revenues from an individual customer amounted to 38% of total revenue. For the year ended June 30, 1998, revenues from individual customers amounted to 20% and 13% of total revenues. For the year ended June 30, 1999, revenues from individual customers amounted to 30% and 18% of total revenues, and accounts receivable related to these customers at June 30, 1999 was approximately $2,875,000 and $2,600,000, respectively. The Company performs ongoing evaluations of its customers' financial conditions and generally does not require collateral. (13)Subsequent Event On July 15, 1999, the Company completed the initial public offering of its common stock. The Company issued 4,600,000 shares of common stock in exchange for gross proceeds of $69,000,000, net of underwriters' discount of $4,830,000. Upon the completion of the initial public offering, the Company's subordinated promissory notes converted into 3,082,191 shares of Series H redeemable convertible preferred stock, the convertible promissory note plus accrued interest converted into 497,663 shares of Series I redeemable convertible preferred stock, and all outstanding redeemable convertible preferred stock converted into 28,300,067 shares of common stock. On July 20, 1999, the Company adopted a new stock option plan (the "Stock Plan") and an employee stock purchase plan. The Stock Plan provides for the granting of stock options and stock purchase rights to employees and consultants. A total of 3,500,000 shares of common stock has been reserved for issuance plus annual increases equal to the lesser of: . 1,000,000 shares; . 3% of the outstanding shares on such a date; or . a lesser amount determined by the board on the first day of each fiscal year. The Stock Plan may be administered by the board of directors or a committee of the board. The board or a committee of the board will have the power to determine the terms of the options granted, including the exercise price, the number of shares subject to each option, the vesting provisions, the exercisability thereof and the form of consideration payable upon such exercise. The Stock Plan provides that in the event of a merger of the Company with or into another corporation, or the sale of substantially all of its assets, each outstanding option or stock purchase right will be assumed F-17 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997, 1998 and 1999 or substituted for by the successor corporation. In addition, if the options are not substituted for in the merger, each outstanding option will vest and become exercisable as to all unvested shares and each stock purchase right shall lapse as to all the shares for a period of 15 days after receipt of notice from the Company. On July 20, 1999, the Company also adopted an Employee Stock Purchase Plan ("the Purchase Plan"). A total of 200,000 shares of common stock has been reserved for issuance under the purchase plan, plus annual increases equal to the lesser of: . 100,000 shares; . 1% of the outstanding shares on such a date; or . a lesser amount determined by the board on the first day of each fiscal year. The Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended, contains successive six-month offering periods. The offering periods generally start on the first trading day on or after May 1 and November 1 of each year, except for the first such offering period which commenced on the first trading day after the effective date of the Company's initial public offering and ends on the last trading day on or before October 31. Employees are eligible to participate if they are employed by the Company or any of its participating subsidiaries for at least 20 hours per week and more than five months in any calendar year. However, the following employees may not purchase stock under the Purchase Plan: . any employee who immediately after grant owns stock possessing 5% or more of the total combined voting power or value of all classes of capital stock; or . any employee whose rights to purchase stock under any of the employee stock purchase plans accrue at a rate that exceeds $25,000 worth of stock for each calendar year. Participants may purchase common stock through deductions of up to 10% of the participant's compensation. The maximum number of shares a participant may purchase during a single offering period is 500 shares. Amounts deducted and accumulated by the participant will be used to purchase shares of common stock at the end of each offering period. The price of stock purchased under the Purchase Plan is 85% of the lower of the fair market value of the common stock at the beginning of the offering period and at the end of each offering period. The Purchase Plan provides that, in the event of a merger of the Company with or into another corporation or a sale of substantially all of its assets, outstanding options may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set, which will occur before the proposed sale or merger. The Purchase Plan will terminate in 2009. The board of directors has the authority to amend or terminate the Purchase Plan, except that no such action may adversely affect any outstanding rights to purchase stock. F-18 EFFICIENT NETWORKS, INC. Condensed Consolidated Balance Sheets September 30, 1999 (Unaudited) and June 30, 1999 (In thousands, except share data)
September 30, June 30, 1999 1999 ------------- -------- (unaudited) Assets Current assets: Cash and cash equivalents............................. $ 47,456 $ 3,604 Short-term investments................................ 8,663 -- Accounts receivable, net of allowance for doubtful accounts of $165 and $120 at September 30, 1999 and June 30, 1999, respectively.......................... 13,852 10,316 Other receivables..................................... 7,110 2,018 Inventories........................................... 7,326 5,472 Other assets.......................................... 1,051 241 -------- ------- Total current assets................................ 85,458 21,651 Furniture and equipment, net............................ 3,187 2,285 Other assets, net....................................... 35 29 -------- ------- $ 88,680 $23,965 ======== ======= Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Current liabilities: Accounts payable...................................... $ 11,184 $ 6,122 Accrued liabilities................................... 2,782 2,208 Deferred revenue...................................... 2,441 736 -------- ------- Total current liabilities........................... 16,407 9,066 Long-term debt, net of discount......................... -- 13,396 Other liabilities....................................... 21 22 -------- ------- Total liabilities................................... 16,428 22,484 -------- ------- Redeemable convertible preferred stock.................. -- 40,495 Commitments and contingencies Stockholders' equity (deficit): Common stock, par value $.001 per share, 100,000,000 shares authorized; 37,482,465 and 4,362,221 shares issued and outstanding at September 30, 1999 and June 30, 1999, respectively............................... 37 4 Additional paid-in capital............................ 150,320 29,777 Deferred stock option compensation.................... (16,162) (14,606) Accumulated deficit................................... (61,943) (54,189) -------- ------- Total stockholders' equity (deficit)................ 72,252 (39,014) -------- ------- $ 88,680 $23,965 ======== =======
See accompanying notes to unaudited condensed consolidated financial statements. F-19 EFFICIENT NETWORKS, INC. Condensed Consolidated Statements of Operations Three Months Ended September 30, 1999 and 1998 (Unaudited) (In thousands, except per share data)
Three Months Ended September 30, -------------------- 1999 1998 --------- --------- Net revenues............................................. $ 12,171 $ 1,174 Cost of revenues......................................... 11,706 863 --------- --------- Gross profit......................................... 465 311 --------- --------- Operating expenses: Sales and marketing.................................... 2,652 1,168 Research and development............................... 3,053 1,826 General and administrative............................. 1,048 339 Stock option compensation.............................. 1,389 433 --------- --------- Total operating expenses............................. 8,142 3,766 --------- --------- Loss from operations................................. (7,677) (3,455) Interest income.......................................... 597 87 Interest expense and other, net.......................... (674) (7) --------- --------- Net loss............................................. $ (7,754) $ (3,375) ========= ========= Basic and diluted net loss per share of common stock............................................... $ (0.25) $ (0.93) ========= ========= Weighted-average shares of common stock outstanding.. 30,496 3,713 ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. F-20 EFFICIENT NETWORKS, INC. Condensed Consolidated Statements of Cash Flows Three Months Ended September 30, 1999 and 1998 (Unaudited) (In thousands)
Three Months Ended September 30, -------------------- 1999 1998 --------- --------- Cash flows from operating activities: Net loss................................................ $ (7,754) $ (3,375) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 240 179 Amortization of deferred stock option compensation..... 1,389 433 Accretion of discount on subordinated promissory notes................................................. 604 -- Changes in operating assets and liabilities: Accounts receivable.................................... (3,536) (191) Other receivables...................................... (5,092) -- Inventories............................................ (1,854) (62) Other assets and liabilities........................... (817) 220 Accounts payable and accrued liabilities............... 5,658 125 Deferred revenue....................................... 1,705 -- --------- --------- Net cash used in operating activities................... (9,457) (2,671) --------- --------- Cash flows from investing activities: Purchase of fixed assets................................ (1,142) (596) Purchase of investments................................. (8,663) -- --------- --------- Net cash used for investing activities................. (9,805) (596) --------- --------- Cash flows from financing activities: Principal payments on capital lease obligations......... -- (11) Proceeds from issuance of common stock, net............. 63,114 14 --------- --------- Net cash provided by financing activities............ 63,114 3 --------- --------- Increase in cash and cash equivalents.................... 43,852 (3,264) Cash and cash equivalents at beginning of period......... 3,604 7,607 --------- --------- Cash and cash equivalents at end of period............... $ 47,456 $ 4,343 ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. F-21 EFFICIENT NETWORKS, INC. Notes to Unaudited Condensed Consolidated Financial Statements Three Months Ended September 30, 1999 (1)Basis of Presentation The accompanying unaudited financial data as of and for the quarters ended September 30, 1999 and 1998 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows as of and for the three months ended September 30, 1999 have been made. The results of operations for the quarter ended September 30, 1999 are not necessarily indicative of the operating results for the full year. (2)Completion of Initial Public Offering On July 15, 1999, the Company completed its initial public offering. The Company issued 4.6 million shares of its common stock (the "Common Stock") in exchange for gross proceeds of approximately $69 million, before underwriters' discount of $4.8 million and other related expenses of $1.1 million. Upon the completion of the initial public offering, the Company's subordinated promissory notes converted into 3.1 million shares of Series H redeemable convertible preferred stock, the convertible promissory note plus accrued interest converted into .5 million shares of Series I redeemable convertible preferred stock, and all outstanding redeemable convertible preferred stock converted into 28.3 million shares of Common Stock. (3)Earnings Per Share Basic and diluted earnings (loss) per share has been computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Basic earnings per share is computed by dividing income or loss by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share is determined in the same manners as basic earnings per share except that the number of shares is increased assuming exercise of dilutive stock options and warrants using the treasury stock method and conversion of the Company's redeemable convertible preferred stock ("Preferred Stock"). The diluted earnings per share amount is the same as basic earnings per share because the Company had a net loss in each of the periods presented and the impact of the assumed exercise of the stock options and warrants and the assumed Preferred Stock conversion is antidilutive. Common Stock equivalents of 7.0 million and 27.7 million shares for the three months ended September 30, 1999 and 1998, respectively, were excluded from the calculation of diluted earnings per share because of the anti-dilutive effect. All oustanding Preferred Stock converted into Common Stock upon the completion of the Company's initial public offering. F-22 EFFICIENT NETWORKS, INC. Notes to Unaudited Condensed Consolidated Financial Statements--(continued) Three Months Ended September 30, 1999 The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):
Three Months Ended September 30, -------------------- 1999 1998 --------- --------- Net loss............................................. $ (7,754) $ (3,375) Accretion of issuance costs on redeemable convertible preferred stock..................................... -- (88) --------- --------- Net loss available to common stockholders............ $ (7,754) $ (3,463) ========= ========= Weighted average shares outstanding.................. 30,496 3,713 ========= ========= Basic and diluted net loss per share................. $ (0.25) $ (0.93) ========= =========
(4)Inventories Inventories consisted of the following (in thousands):
September 30, June 30, 1999 1999 ------------- -------- Raw materials......................................... $1,844 $2,265 Finished goods........................................ 5,482 3,207 ------ ------ Total................................................. $7,326 $5,472 ====== ======
(5)Accrued Liabilities Accrued liabilities consisted of the following (in thousands):
September 30, June 30, 1999 1999 ------------- -------- Accrued compensation and benefits..................... $1,041 $1,102 Other................................................. 1,741 1,106 ------ ------ Total................................................. $2,782 $2,208 ====== ======
(6)Deferred revenue Deferred revenue of $2.4 million at September 30, 1999 primarily related to shipments of product to customers where title and risk of ownership passed to the customer, but revenue recognition was deferred for accounting purposes due to certain stock balancing and right of return privileges granted to the customer. The corresponding receivable of $2.4 million was included in the accounts receivable balance at September 30, 1999. (7)Long-term debt In January 1999, the Company issued subordinated promissory notes with detachable warrants in exchange for $7.0 million in cash. On April 8, 1999, the Company issued a subordinated promissory note with a detachable warrant in exchange for $2.0 million in cash. The notes bore interest at 10% per annum with interest payable quarterly. The subordinated promissory notes were issued with detachable warrants to F-23 EFFICIENT NETWORKS, INC. Notes to Unaudited Condensed Consolidated Financial Statements--(continued) Three Months Ended September 30, 1999 purchase an aggregate of 3.1 million shares of the Company's Series H redeemable convertible preferred stock at an exercise price of $2.92 per share. The holders of the subordinated promissory notes had entered into a note repayment and warrant exercise agreement with the Company which stipulated that immediately prior to the closing of an initial public offering, the aggregate $9.0 million principal amount of the notes would be applied toward the aggregate exercise price of the detachable warrants. Accordingly, immediately prior to the closing of the Company's initial public offering on July 15, 1999, the warrants were exercised to purchase the Company's Series H redeemable convertible preferred stock, which shares of preferred stock automatically converted into shares of Common Stock upon completion of the initial public offering. On June 28, 1999, the Company issued a convertible promissory note in exchange for $5.0 million in cash. The note bore interest at 8.0% per annum. In accordance with the conversion feature of the note, immediately prior to the closing of the Company's initial public offering, the note automatically converted into .5 million shares of Series I preferred stock at a conversion price $10.09 per share, and such shares of preferred stock automatically converted into shares of Common Stock upon completion of the initial public offering. (8)Statements of Cash Flows The Company paid cash interest of $.4 million and $0 during the three months ended September 30, 1999 and 1998, respectively. No income taxes were paid during the three months ended September 30, 1999 and 1998. Non- cash financing transactions included the exchange of promissory notes of $13.4 million and related accrued interest for $14.0 million of redeemable convertible preferred stock, and the exchange of redeemable convertible preferred stock of $54.5 million for 28.3 million shares of common stock during the three months ended September 30, 1999. No non-cash financing transactions occurred during the three months ended September 30, 1998. (9)Subsequent Event On November 21, 1999 the Company entered into an agreement with Cabletron Systems, Inc. ("Cabletron") to acquire its wholly-owned subsidiary FlowPoint Corporation from Cabletron. The Company agreed to issue 7.2 million shares of common stock and 6,300 shares of Series A non-voting convertible preferred stock ("the Series A Preferred") as consideration in the transaction. The Series A preferred is convertible into an aggregate of 6.3 million shares of common stock. The acquisition was completed on December 17, 1999, and is being accounted for under the purchase method of accounting. F-24 Independent Auditors' Report The Board of Directors Cabletron Systems, Inc.: We have audited the accompanying balance sheets of FlowPoint Corporation (the "Company") as of February 28, 1999, August 31, 1998, and March 31, 1998 and the related statements of operations, cash flows, and stockholder's equity for the six months ended February 28, 1999, five months ended August 31, 1998, and the years ended March 31, 1998 and 1997 (as defined in note 2a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 28, 1999, August 31, 1998, and March 31, 1998 and the results of its operations and its cash flows for the six months ended February 28, 1999, five months ended August 31, 1998, and the years ended March 31, 1998 and 1997, in conformity with generally accepted accounting principles. As discussed in Note 2(a) to the financial statements, the Company was acquired by Cabletron Systems, Inc. as of September 1, 1998 in a business combination accounted for as a purchase. As a result of the application of purchase accounting, the financial statements of the Company for the six months ended February 28, 1999 are presented on a different cost basis than those for periods prior to September 1, 1998, and accordingly, are not directly comparable. KPMG LLP Boston, Massachusetts November 15, 1999 F-25 FLOWPOINT CORPORATION Balance Sheets
Successor (Note 2(a)) Predecessor (Note 2(a)) --------------------------- ------------------------ September 30, February 28, August 31, March 31, 1999 1999 1998 1998 Assets ------------- ------------ ------------ ----------- (Unaudited) Current assets: Cash and cash equivalents................................................ $ 302,381 1,202,150 457,153 2,566,498 Accounts receivables, net of allowances of $240,788, $136,265, $86,114, and $58,298 respectively................................................ 3,484,467 1,589,130 592,330 528,599 Related party receivable (note 12)....................................... -- -- 575,491 162,428 Inventories.............................................................. 3,172,188 1,577,191 1,325,110 773,859 Prepaid expenses......................................................... 243,247 154,805 93,102 80,182 Deferred income taxes.................................................... 138,734 332,597 -- -- ------------ ----------- ----------- ----------- Total current assets.................................................... 7,341,017 4,855,873 3,043,186 4,111,566 ------------ ----------- ----------- ----------- Property, plant and equipment............................................. 416,224 197,966 402,908 364,903 Accumulated depreciation.................................................. (137,882) (62,831) (250,004) (195,853) ------------ ----------- ----------- ----------- 278,342 135,135 152,904 169,050 ------------ ----------- ----------- ----------- Intangible assets, net.................................................... 12,282,489 13,203,507 -- -- Deferred income taxes..................................................... 8,329 6,810 -- -- Deposits.................................................................. -- 15,147 13,311 15,090 ------------ ----------- ----------- ----------- Total assets............................................................ $ 19,910,177 18,216,472 3,209,401 4,295,706 ============ =========== =========== =========== Liabilities and Stockholder's Equity (Deficit) Current liabilities: Accounts payable......................................................... $ 3,763,984 1,786,727 1,118,634 646,167 Accrued expenses......................................................... 804,427 418,565 488,066 376,295 Related party payable (note 12).......................................... 2,111,073 3,603,329 -- -- Current portion of related party notes payable........................... -- -- 2,307,776 2,307,776 Current portion of obligations under capital leases...................... 22,718 39,616 51,186 53,164 ------------ ----------- ----------- ----------- Total current liabilities............................................... 6,702,202 5,848,237 3,965,662 3,383,402 Non-current portion of obligations under capital leases.................. 3,409 11,988 26,264 31,782 Non-current portion of related party notes payable....................... -- -- 103,224 110,374 ------------ ----------- ----------- ----------- Total liabilities....................................................... 6,705,611 5,860,225 4,095,150 3,525,558 Stockholder's Equity (Deficit) Preferred stock (notes 3 and 13): Series A, no par value. Authorized, issued and outstanding 400,000 shares at August 31, 1998 and March 31, 1998............................ -- -- 200,000 200,000 Series B, no par value. Authorized, issued and outstanding 360,000 shares at August 31, 1998 and March 31, 1998............................ -- -- 367,500 367,500 Series C, no par value. Authorized 1,200,000 shares; issued and outstanding 1,167,667 shares at August 31, 1998 and March 31, 1998...... -- -- 2,800,000 2,800,000 Series D, no par value. Authorized 1,000,000 shares; issued and outstanding 700,000 shares at August 31, 1998 and March 31, 1998........ -- -- 1,995,000 1,995,000 ------------ ----------- ----------- ----------- -- -- 5,362,500 5,362,500 Common stock, $.01 par value. Authorized, issued and outstanding, 10,000 shares at September 30, 1999 and February 28, 1999. Common Stock, no par value. Authorized 6,000,000 shares; issued and outstanding 1,730,430 and 1,721,000 shares at August 31, 1998 and March 31, 1998, respectively.... 100 100 70,619 68,162 Additional paid-in-capital............................................... 25,383,308 25,383,308 -- -- Accumulated deficit...................................................... (12,178,842) (13,027,161) (6,318,868) (4,660,514) ------------ ----------- ----------- ----------- Total stockholder's equity (deficit).................................... 13,204,566 12,356,247 (885,749) 770,148 ------------ ----------- ----------- ----------- Total liabilities and stockholder's equity (deficit).................... $ 19,910,177 18,216,472 3,209,401 4,295,706 - -------------------------------------------------- ============ =========== =========== ===========
See accompanying notes to financial statements F-26 FLOWPOINT CORPORATION Statements of Operations
Successor (Note 2(a)) Predecessor (Note 2(a)) -------------------------- ---------------------------------- Seven Six Five months months months Years ended ended ended ended March 31, September 30, February 28, August 31, ---------------------- 1999 1999 1998 1998 1997 ------------- ------------ ---------- ---------- ---------- (Unaudited) Trade sales.................................................. $14,844,576 3,968,625 940,918 2,138,310 362,331 Related party sales (notes 3 and 10)......................... 5,139,911 809,586 808,555 1,538,859 3,128,202 ----------- ----------- ---------- ---------- ---------- Net sales.................................................. 19,984,487 4,778,211 1,749,473 3,677,169 3,490,533 Cost of sales................................................ 13,147,058 3,251,208 1,660,765 2,994,542 2,901,194 ----------- ----------- ---------- ---------- ---------- Gross profit............................................. 6,837,429 1,527,003 88,708 682,627 589,339 Operating expenses: Selling, general and administrative........................ 3,027,613 1,559,825 1,323,017 1,704,221 1,103,487 Research and engineering................................... 1,218,122 660,727 419,591 1,049,983 984,985 Amortization of intangibles................................ 850,948 727,304 -- -- -- In process research and development charge (note 3)........ -- 11,953,093 -- -- -- ----------- ----------- ---------- ---------- ---------- Income (loss) from operations............................ 1,740,746 (13,373,946) (1,653,900) (2,071,577) (1,499,133) ----------- ----------- ---------- ---------- ---------- Interest (income) expense, net............................... 8,521 (8,178) 4,454 1,542 2,047 ----------- ----------- ---------- ---------- ---------- Income (loss) before income taxes........................ 1,732,225 (13,365,768) (1,658,354) (2,073,119) (1,501,180) Income tax expense (benefit)................................. 883,906 (338,607) -- -- 800 ----------- ----------- ---------- ---------- ---------- Net income (loss)........................................ $ 848,319 (13,027,161) (1,658,354) (2,073,119) (1,501,980) - -------------------------------------------------- =========== =========== ========== ========== ==========
See accompanying notes to financial statements F-27 FLOWPOINT CORPORATION Statements of Cash Flows
Successor (Note 2(a)) Predecessor (Note 2(a)) -------------------------- ---------------------------------- Seven Six Five months months months Years ended ended ended ended March 31, September 30, February 28, August 31, ---------------------- 1999 1999 1998 1998 1997 ------------- ------------ ---------- ---------- ---------- (Unaudited) Cash flows from operating activities: Net income (loss).......................................... $ 848,319 (13,027,161) (1,658,354) (2,073,119) (1,501,980) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation............................................... 75,051 62,831 54,151 112,978 76,231 Amortization of intangibles................................ 850,948 727,304 -- -- -- Purchased research and development from acquisition........ -- 11,953,093 -- -- -- Deferred income taxes...................................... 192,344 (339,407) -- -- -- Accounts receivable........................................ (1,895,337) (321,309) (63,731) (497,074) 57,475 Related party receivable................................... -- -- (413,063) 759,731 (914,631) Inventories................................................ (1,594,997) (52,081) (551,251) (141,747) (420,474) Prepaid expenses........................................... (88,442) (61,703) (12,920) (36,106) (38,095) Deposits................................................... 15,147 (1,836) 1,779 (4,119) (6,724) Accounts payable........................................... 1,977,357 667,993 472,467 307,343 210,422 Accrued expenses........................................... 385,862 (69,501) 126,557 31,646 287,753 ----------- ----------- ---------- ---------- ---------- Net cash provided by (used in) operating activities...... 766,252 (461,777) (2,044,365) (1,540,467) (2,250,023) ----------- ----------- ---------- ---------- ---------- Cash flows from investing activity: Capital expenditures....................................... (218,258) (45,062) (38,005) (80,336) (169,365) ----------- ----------- ---------- ---------- ---------- Net cash used in investing activity...................... (218,258) (45,062) (38,005) (80,336) (169,365) ----------- ----------- ---------- ---------- ---------- Cash flows from financing activities: Proceeds from issuance of related party note payable....... -- -- -- 2,225,000 -- Payments on related party note payable..................... -- (186,000) (7,150) (16,250) (22,625) Payments on capital leases................................. (25,285) (25,846) (22,282) (36,809) (13,133) Proceeds from issuance of common stock..................... -- 100 2,457 6,538 2,063 Proceeds from issuance of preferred stock.................. -- -- -- 997,500 2,555,000 Related party payable...................................... (1,422,478) 1,463,582 -- -- -- ----------- ----------- ---------- ---------- ---------- Net cash provided by (used in) financing................. (1,447,763) 1,251,836 (26,975) 3,175,979 2,521,305 ----------- ----------- ---------- ---------- ---------- Net increase (decrease) increase in cash..................... (899,769) 744,997 (2,109,345) 1,555,176 101,917 Cash and cash equivalents, beginning of period............... 1,202,150 457,153 2,566,498 1,011,322 909,405 ----------- ----------- ---------- ---------- ---------- Cash and cash equivalents, end of period..................... $ 302,381 1,202,150 457,153 2,566,498 1,011,322 =========== =========== ========== ========== ========== Cash paid for interest....................................... $ -- -- -- 10,910 21,531 - -------------------------------------------------- =========== =========== ========== ========== ==========
See accompanying notes to financial statements. F-28 FLOWPOINT CORPORATION Statements of Stockholder's Equity
Total Preferred Preferred Preferred Preferred Additional stockholder's Stock Stock Stock Stock Common paid-in Accumulated equity Series A Series B Series C Series D Stock capital deficit (deficit) --------- --------- ---------- ---------- ---------- ---------- ----------- ------------- Balances at March 31, 1996................... $ 200,000 310,000 1,300,000 -- 59,561 -- (1,085,415) 784,146 Net loss............... -- -- -- -- -- -- (1,501,980) (1,501,980) Issuance of Preferred Stock Series B........ -- 57,500 -- -- -- -- -- 57,500 Issuance of Preferred Stock Series C........ -- -- 1,500,000 -- -- -- -- 1,500,000 Issuance of Preferred Stock Series D........ -- -- -- 997,500 -- -- -- 997,500 Issuance of Common Stock................. -- -- -- -- 2,063 -- -- 2,063 --------- -------- ---------- ---------- ---------- ---------- ----------- ----------- Balances at March 31, 1997................... $ 200,000 367,500 2,800,000 997,500 61,624 -- (2,587,395) 1,839,229 Net loss............... -- -- -- -- -- -- (2,073,119) (2,073,119) Issuance of Preferred Stock Series D........ -- -- -- 997,500 -- -- -- 997,500 Issuance of Common Stock................. -- -- -- -- 6,538 -- -- 6,538 --------- -------- ---------- ---------- ---------- ---------- ----------- ----------- Balances at March 31, 1998................... $ 200,000 367,500 2,800,000 1,995,000 68,162 -- (4,660,514) 770,148 Net loss............... -- -- -- -- -- -- (1,658,354) (1,658,354) Issuance of Common Stock................. -- -- -- -- 2,457 -- -- 2,457 --------- -------- ---------- ---------- ---------- ---------- ----------- ----------- Balances at August 31, 1998................... $ 200,000 367,500 2,800,000 1,995,000 70,619 -- (6,318,868) (885,749) Conversion of preferred stock to common stock................. (200,000) (367,500) (2,800,000) (1,995,000) 5,362,500 -- -- -- --------- -------- ---------- ---------- ---------- ---------- ----------- ----------- -- -- -- -- 5,433,119 -- (6,318,868) (885,749) Cabletron acquisition (notes 2(a) and 3).... -- -- -- -- (5,433,119) -- 6,318,868 885,749 Cabletron acquisition (notes 2(a) and 3).... -- -- -- -- -- 25,383,308 -- 25,383,308 Issuance of Common Stock................. -- -- -- -- 100 -- -- 100 --------- -------- ---------- ---------- ---------- ---------- ----------- ----------- Balances at September 1, 1998................... $ -- -- -- -- 100 25,383,308 -- 25,383,408 Net loss............... -- -- -- -- -- -- (13,027,161) (13,027,161) --------- -------- ---------- ---------- ---------- ---------- ----------- ----------- Balances at February 28, 1999................... $ -- -- -- -- 100 25,383,308 (13,027,161) 12,356,247 Net income (unaudited)........... -- -- -- -- -- -- 848,319 848,319 --------- -------- ---------- ---------- ---------- ---------- ----------- ----------- Balances at September 30, 1999 (unaudited)............ $ -- -- -- -- 100 25,383,308 (12,178,842) 13,204,566 ========= ======== ========== ========== ========== ========== =========== ===========
See accompanying notes to financial statements. F-29 FLOWPOINT CORPORATION Notes to Financial Statements (Information as of and for the seven months ended September 30, 1999 is unaudited) (1) Business Operations FlowPoint Corporation, (the "Company"), develops, manufactures, markets, designs, installs and supports a complete line of broadband remote access, high-speed corporate and internet access modems and routers primarily utilizing digital subscriber line ("DSL") technologies. (2) Summary of Significant Accounting Policies (a) Basis of Presentation The financial statements of the Company are derived from its historic books and records through August 31, 1998. As a result of the acquisition of the Company by Cabletron Systems, Inc. ("Cabletron") effective as of September 1, 1998, the financial statements of the Company after the acquisition date are derived from the historic books and records of Cabletron and reflect the "pushdown" of Cabletron's basis in the assets acquired and liabilities assumed. As a result of the acquisition by Cabletron and the application of purchase accounting, financial information in the accompanying financial statements and notes thereto as of and for the six months ended February 28, 1999 (the "Successor Period") are presented on a different cost basis than the financial information as of August 31, 1998 and March 31, 1998 and for the five months ended August 31, 1998 and the years ended March 31, 1998 and 1997 (the "Predecessor Period"), and therefore, such information is not comparable. The statement of operations includes all revenues and costs directly attributable to the Company including charges for shared facilities, functions and services used by the Company and provided by Cabletron. Certain costs and expenses have been allocated based upon management's estimates of the cost of services provided to the Company by Cabletron. Such costs include sales support, customer service and technical support, and general and administrative expenses (see note 12). Such allocations and charges are based on a percentage of total costs for the services provided based on factors such as headcount or revenues. Management believes that these allocations are based on assumptions that are reasonable under the circumstances. However, these allocations and estimates are not necessarily indicative of the cost and expenses which would have resulted if the Company had been operated as a separate entity. The Company has historically incurred recurring losses from operations. Cabletron has committed to provide the funds required for the conduct of the Company's operations up to the date on which it ceases to be the controlling shareholder. (b) Change in fiscal year Prior to its acquisition by Cabletron, the Company's fiscal year end was March 31. Upon the acquisition the Company adopted Cabletron's February 28 fiscal year end. (c) Inventories Inventories are stated at the lower of cost or market. Costs are determined principally by use of the average-cost method, which approximates the first-in, first-out (FIFO) method. F-30 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) (d) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided on a straight-line method over the estimated useful lives of the assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that the carrying amount of an asset cannot be fully recovered, an impairment loss is recognized. (e) Intangible Assets Intangible assets consist of goodwill and developed technology resulting from the "pushdown" of the fair market value of the intangible assets attributable to the Company as recorded on Cabletron's books as part of Cabletron's acquisition of the Company. Amortization of these intangible assets is provided on a straight-line basis over the respective useful lives which range from five to ten years. Purchased in-process research and development without alternative future use is expensed when acquired. The carrying amount of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The measurement of possible impairment is based primarily on an evaluation of undiscounted projected cash flows through the remaining amortization period. (f) Income Taxes The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. As a result of its acquisition by Cabletron, the Company is included in the consolidated federal income tax return of Cabletron. Income taxes in the Company's financial statements subsequent to the acquisition have been determined on a separate-return basis. (g) Advertising Costs Advertising costs of $17,594, $105,547, $308,061, $297,360 and $67,134 were expensed as incurred during the seven months ended September 30, 1999, the six months ended February 28, 1999, the five months ended August 31, 1998 and the years ended March 31, 1998 and 1997, respectively. No assets were recorded related to advertising costs at the respective balance sheet dates. (h) Statements of Cash Flows Cash and cash equivalents consist of cash in banks and short-term investments with original maturities of three months or less. F-31 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) (i) Revenue Recognition The vast majority of the Company's revenues are related to hardware based routers with revenue recognized based upon shipment of the products. The Company accrues for estimated warranty costs related to product shipments based on historical experience. The Company generates an insignificant portion of its revenues from software products and records such revenue in accordance with (SOP) 97-2, "Software Revenue Recognition". (j) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (k) Research and Engineering Research and engineering costs are charged to expense as incurred. (l) Employee Stock Plan The Company accounts for its stock option plan in accordance with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 provides an alternative to APB 25 and is effective for fiscal years beginning after December 15, 1999. As permitted under SFAS 123, the Company continues to account for its stock option plan in accordance with the provisions of APB 25 and provides the disclosure pro forma net income as if the fair value method under SFAS 123 had been applied. (m) New Accounting Pronouncements In the period ended February 28, 1999, the Company adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income" (SFAS 130) which establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. For the Company, comprehensive income includes net income or loss only. The adoption of SFAS 130 did not have any impact on the Company's financial statements for any of the periods presented. In the period ended February 28, 1999, the Company adopted Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) which establishes standards for the way that public business enterprises report selected information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did not have any impact on the Company's financial statement disclosures for the period ended February 28, 1999. F-32 FLOWPOINT CORPORATION Notes to Financial Statements--(continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) In October 1997, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which provides guidance on applying generally accepted accounting principles in recognizing revenue for licensing, selling, leasing or otherwise marketing computer software and supersedes SOP 91-1. The adoption of SOP 97-2 did not have a material impact on the Company's results of operations for the period ended February 28, 1999. (n) Unaudited Results The financial statements as of and for the seven months ended September 30, 1999 have been prepared using the same accounting principles as were used in preparing the audited financial statements and in the opinion of management reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows. The results for the seven months ended September 30, 1999 are not necessarily indicative of future results. (3) Cabletron Acquisition Effective as of September 1, 1999 Cabletron acquired all of the outstanding common stock of FlowPoint Corporation, a privately held manufacturer of DSL router networking products. Immediately prior to the acquisition each share of FlowPoint preferred stock Series A, B, C, and D was converted into one share of FlowPoint common stock. Cabletron owned 1,866,667 shares of FlowPoint preferred stock (at a cost of approximately $1,700,000), and as a result of the preferred stock conversion owned 42.8% of the outstanding common stock. Pursuant to the acquisition agreement the amount paid for the remaining 57.2% of FlowPoint common stock amounted to approximately $20,600,000 to be paid in four installments, within nine months of the acquisition date. Each installment could be paid in either cash or Cabletron common stock, as determined by Cabletron management at the time of the distribution. In addition, Cabletron assumed approximately 478,000 FlowPoint options, valued at approximately $2,700,000. Cabletron recorded the cost of the acquisition at $25,383,306 including direct costs of approximately $400,000. The acquisition was accounted for under the purchase method of accounting, and, accordingly, the acquired assets and liabilities were recorded at their estimated fair market value. The total purchase price of $25,383,306 was allocated as follows: a $11,953,093 special charge for in process research and development ("IPR&D") projects, $14,136,655 for goodwill and other intangibles and net liabilities of $706,442. The following unaudited pro forma financial information presents a summary of the results of operations as if the acquisition had occurred on March 1, 1998, the first day of the fiscal year ending February 28, 1999.
(Unaudited) Twelve months ended February 28, 1999 ------------------- Net sales................ $ 7,098,515 Operating loss........... $(15,326,163)
In management's opinion, the unaudited pro forma results of operations are not indicative of actual results that would have occurred had the acquisition been consummated on March 1, 1998. F-33 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) The valuation of the IPR&D incorporated the guidance on IPR&D valuation methodologies promulgated by the Securities and Exchange Commission ("SEC"). These methodologies incorporate the notion that cash flows attributable to development efforts, including the effort to be completed on the development effort underway, and development of future versions of the product that have not yet been undertaken, should be excluded in the valuation of IPR&D. This allocation represents risk-adjusted cash flows related to the incomplete products. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. Cabletron used independent third-party appraisers to assess and allocate values to the in-process research and development. The value assigned to these assets were determined by identifying significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of the Company's next-generation router technologies. The nature of the efforts to develop the acquired in-process technology into commercially viable products principally relate to the completion of all planning, designing, prototyping, high-volume verification, and testing activities that are necessary to establish that the proposed technologies meet their design specifications including functional, technical, and economic performance requirements. To date, the Company's results have not differed significantly from the forecast assumptions. The Company's research and development expenditures since the acquisition have not differed materially from expectations. The Company has completed the projects that were underway at the time of the acquisition and began to realize the economic benefits related to these projects during the six months ended February 28, 1999. The value assigned to purchased in-process technology was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development is based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. For purposes of the IPR&D valuation, the total revenues attributable to the Company were projected to exceed $150 million within 5 years, assuming the successful completion and market acceptance of the major research and development efforts. As of the valuation date, the Company had a few existing products, which lack the technological breadth and depth necessary in the evolving networking equipment market. Accordingly, for purposes of the IPR&D valuation, it was estimated that significant revenue growth in the first several years would be primarily related to the in-process technologies. The estimated revenues for the in-process projects were projected to peak in 2004 and then decline as other new products and technologies were expected to enter the market. Cost of sales was estimated based on the Company's internally generated projections and discussions with management regarding anticipated gross margin improvements. Due to the market opportunities in the network equipment arena and the Company's unique technology architecture, substantial gross margins were projected through the forecast period. Cost of sales as a percentage of sales was forecasted to decline until 2003 and then remain constant at 55%. Selling, general and administrative expenses (including depreciation) as a percentage of sales were projected to remain constant at 23%. Research and development expenditures as a percentage of sales were projected to decline significantly from 30% in 1999 to 10% in 2001 and remain constant at 10% thereafter. F-34 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) The rates utilized to discount the net cash flows to their present value were based on venture capital rates of return. Due to the nature of the forecast and the risks associated with the projected growth, profitability and developmental projects, a discount rate of 27.5 percent was determined to be appropriate for the IPR&D. This discount rate was commensurate with the Company's stage of development; the uncertainties in the economic estimates described above; the inherent uncertainty surrounding the successful development of the purchased in-process technology; the useful life of such technology; the profitability levels of such technology; and, the uncertainty of technological advances that were unknown at the time of the acquisition. The forecasts used by Cabletron in valuing in-process research and development were based upon assumptions Cabletron believes to be reasonable but which are inherently uncertain and unpredictable. Cabletron's assumptions may be incomplete or inaccurate, and unanticipated events and circumstances are likely to occur. For these reasons, actual results may vary from the projected results. Cabletron believes that the foregoing assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, actual results may vary from the projected results. The Company's in-process research and development value is comprised of several significant individual on-going projects. Remaining development efforts for these projects include various phases of design, development and testing. Anticipated completion dates for the projects in progress are estimated to occur over the first nine months following the acquisition. The Company estimated it will begin generating the economic benefits from the technologies in the second half of fiscal year 2000. Funding for such projects was estimated to be obtained from internally generated sources. Expenditures to complete these projects were estimated to total approximately $1.0 million over the next six months. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Cabletron management expects to continue their support of these efforts and believes the Company has a reasonable chance of successfully completing the research and development programs. However, there is risk associated with the completion of the projects and there is no assurance that any will meet with either technological or commercial success. (4) Inventories Inventories consist of the following:
Successor Predecessor -------------------------- -------------------- September 30, February 28, August 31, March 31, 1999 1999 1998 1998 ------------- ------------ ---------- --------- Raw materials................... $1,864,122 1,237,660 893,461 666,255 Work-in-process................. 79,344 147,467 214,100 105,854 Finished goods.................. 1,228,722 192,064 217,549 1,750 ---------- --------- --------- ------- Total........................... $3,172,188 1,577,191 1,325,110 773,859 ========== ========= ========= =======
F-35 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) (5) Property, Plant and Equipment Property, plant and equipment consist of the following:
Successor Predecessor -------------------------- ------------------- March Estimated September 30, February 28, August 31, 31, useful 1999 1999 1998 1998 lives ------------- ------------ ---------- -------- --------- Capitalized software.... $ 38,886 27,139 29,186 25,818 3 years Machinery and equipment.............. 357,592 163,967 360,642 326,005 3-5 years Furniture and fixtures.. 19,746 6,860 13,080 13,080 3-5 years -------- ------- -------- -------- 416,224 197,966 402,908 364,903 Less accumulated depreciation and amortization........... (137,882) (62,831) (250,004) (195,853) -------- ------- -------- -------- $278,342 135,135 152,904 169,050 ======== ======= ======== ========
(6) Intangible Assets Intangible assets consist of the following:
September February Estimated 30, 28, useful 1999 1999 lives ----------- ---------- --------- Goodwill.................................. $13,409,105 13,479,175 10 years Acquired patents and technologies......... 451,636 451,636 5 years ----------- ---------- 13,860,741 13,930,811 Less accumulated amortization............. (1,578,252) (727,304) ----------- ---------- $12,282,489 13,203,507 =========== ==========
Goodwill has been reduced by $70,070 and $205,844 at September 30, 1999 and February 28, 1999 respectively. This reduction is a result of acquired tax benefits from stock options exercised. (7) Leases The Company is obligated under various capital leases for certain machinery and equipment. Future minimum lease payments by fiscal year and in the aggregate under capital leases as of February 28, 1999 are as follows:
Fiscal year ending February 28, 2000.............................................................. $41,241 2001.............................................................. 14,237 2002.............................................................. 1,241 ------- Total minimum lease payments...................................... 56,719 Less amounts representing interest (at 12.79%)...................... 5,115 ------- Present value of net minimum capital lease payments............... 51,604 Less current portion of obligations under capital leases............ 39,616 ------- Obligations under capital leases excluding current portion........ $11,988 =======
F-36 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) Included in property plant and equipment are the following assets held under capital leases:
Successor Predecessor -------------------------- -------------------- September 30, February 28, August 31, March 31, 1999 1999 1998 1998 ------------- ------------ ---------- --------- Machinery and equipment...... $72,780 72,780 176,162 157,505 Less accumulated amortization................ 50,277 27,173 103,382 78,804 ------- ------ ------- ------- $22,503 45,607 72,780 78,701 ======= ====== ======= =======
Amortization of assets held under capital leases is included with depreciation expense. Prior to the acquisition by Cabletron, the Company leased a manufacturing and office facility under an operating lease. In June 1999, the Company relocated to a facility leased by Cabletron. Cabletron allocates a portion of its lease cost to the Company. Rent expense, including intercompany allocations for the seven months ended September 30, 1999, the six months ended February 28, 1999, the five months ended August 31, 1998 and the years ended March 31, 1998, and 1997, was $225,819, $100,001, $71,742, $135,018 and $73,912, respectively. (8) Income Taxes Total income tax expense (benefit) was allocated as follows:
Successor Predecessor -------------------------- ----------------------------------- Seven months Six months Five months Fiscal year Fiscal year ended ended ended ended ended September 30, February 28, August 31, March 31, March 31, 1999 1999 1998 1998 1997 ------------- ------------ ----------- ----------- ----------- Income from continuing operations............. $883,906 (338,607) -- -- 800 Reduction in goodwill, for recognition of tax benefits from stock options exercised...... (70,070) (205,844) -- -- -- -------- -------- --- --- --- $813,836 (544,451) -- -- 800 ======== ======== === === ===
Income tax attributable to income from continuing operations consist of:
Successor Predecessor -------------------------- ----------------------------------- Seven months Six months Five months Fiscal year Fiscal year ended ended ended ended ended September 30, February 28, August 31, March 31, March 31, 1999 1999 1998 1998 1997 ------------- ------------ ----------- ----------- ----------- Currently payable: Federal................. $538,238 -- -- -- -- State................... 153,324 800 -- -- 800 Deferred tax expense (benefit).............. 192,344 (339,407) -- -- -- -------- -------- --- --- --- Tax expense (benefit)... $883,906 (338,607) -- -- 800 ======== ======== === === ===
F-37 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) The following is a reconciliation of the effective tax rates to the statutory federal tax rate:
Successor Predecessor -------------------------- ----------------------------------- Seven months Six months Five months Fiscal year Fiscal year ended ended ended ended ended September 30, February 28, August 31, March 31, March 31, 1999 1999 1998 1998 1997 ------------- ------------ ----------- ----------- ----------- Statutory federal income tax (benefit) rate..... 35.0% (35.0)% (35.0)% (35.0)% (35.0)% State income tax, net of federal tax benefit.... 5.8 -- -- -- -- Exempt income of foreign sales corporation, net of tax................. (0.2) -- -- -- -- Research and experimentation credit................. (6.4) (0.7) -- -- -- Unbenefitted net operating loss......... -- -- 35.0 35.0 35.0 Nondeductible amortization of intangible assets...... 16.8 1.9 -- -- -- Nondeductible in-- process research and development charge..... -- 31.3 -- -- -- ---- ----- ----- ----- ----- 51.0% (2.5)% 0.0% 0.0% 0.0% ==== ===== ===== ===== =====
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented below:
Successor Predecessor -------------------------- ------------------------ Seven months Six months Five months Fiscal year ended ended ended ended September 30, February 28, August 31, March 31, 1999 1999 1998 1998 ------------- ------------ ----------- ----------- Deferred tax assets: Accounts receivable....... $ 8,343 8,266 8,266 8,343 Inventories............... 70,000 70,000 -- -- Property, plant and equipment................ 40,478 38,959 30,991 19,531 Other reserves and accruals................. 113,946 (4,815) 35 -- Net operating loss carryforwards............ 2,112,231 2,424,932 2,112,231 1,541,505 ---------- ---------- ---------- ---------- Total gross deferred tax assets................... 2,344,998 2,537,342 2,151,523 1,569,379 Less valuation allowance.. (2,148,806) (2,148,806) (2,148,806) (1,569,067) ---------- ---------- ---------- ---------- Net deferred tax assets... 196,192 388,536 2,717 312 ---------- ---------- ---------- ---------- Deferred tax liabilities: Other reserves and accruals................. (49,129) (49,129) (2,717) (312) ---------- ---------- ---------- ---------- Total gross deferred liabilities.............. (49,129) (49,129) (2,717) (312) ---------- ---------- ---------- ---------- Net deferred tax assets... $ 147,063 339,407 -- -- ========== ========== ========== ==========
At September 30, 1999, February 28, 1999, August 31, 1998 and March 31, 1998, the Company had net operating loss (NOL) carryforwards for tax purposes of $5,695,112, $6,187,662, $5,695,112, and $4,129,836 respectively expiring in fiscal February 2008 through fiscal February 2011. The utilization of these net operating losses may be limited pursuant to Internal Revenue Code section 382 as a result of ownership changes. F-38 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) The valuation allowance was increased by $0, $0, $579,739 and $721,065 during the periods ended September 30, 1999, February 28, 1999, August 31, 1998 and March 31, 1998, respectively. Subsequently reported tax benefits relating to the valuation allowance for deferred tax assets as of September 30, 1999, February 28, 1999 and August 31, 1998 will be recorded as a decrease to goodwill and other non-current intangible assets. In assessing the realizability of net deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at September 30, 1999. (9)Related Party Notes Payable On August 8, 1995, the Company entered into a $250,000 note payable with Soliton Systems, K.K. ("Soliton") with an interest rate of five percent. On August 5, 1997, the note was amended to require variable quarterly repayments of the note over three years with the principle amount outstanding at the end of three years due in full. The Company repaid the note in full on October 8, 1998. Soliton was a preferred stock shareholder of the Company. In anticipation of Cabletron's acquisition of the Company, the two parties entered into a Memorandum of Understanding ("MOU") on February 4, 1998. As part of the MOU, the Company entered into a note payable to Cabletron for $2,225,000 with an interest rate of six percent. The note payable was convertible into shares of Series E Preferred Stock of the Company at $7.50 per share if the acquisition was not consummated. (10)Financial Instruments and Concentration of Credit Risk The carrying amounts of cash and cash equivalents, accounts receivables, and current liabilities approximate fair value because of the short maturity of these financial instruments. The carrying amount of the notes payable to Cabletron, as discussed in note 9, approximated fair value based on the short maturity of the instrument. The carrying amount of the note payable to Soliton also approximated fair value based on estimated discounted cash flows prior to the repayment by the Company. For the seven months ended September 30, 1999 and the six months ended February 28, 1999, the Company had one customer, Covad and a related party, Cabletron, which accounted for 52% and 26% of sales and 70% and 17% of sales, respectively. For the five months ended August 31, 1998, the Company had two customers, Covad and British Telecom that accounted for 28% and 19% of sales, respectively. Additionally for this same period sales to related parties, Cabletron and Soliton, accounted for 25% and 21% of sales, respectively. For the year ended March 31, 1998, the Company had one customer, Diamond Lane, which accounted for 36% of sales. Additionally for this same period sales to related parties, Cabletron and Soliton, accounted for 31% and 11% of sales, respectively. For the year ended March 31, 1997, sales to related parties, Cabletron and Soliton, accounted for 69% and 20% of sales, respectively. (11)Segment and Geographical Information The Company operates in one operating segment. The Company provides a line of broadband remote access, high-speed corporate and internet access modems and routers primarily utilizing DSL technologies. Substantially all revenues result from the sales of hardware products. The vast majority of the Company's sales are generated in the United States. F-39 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) (12)Related Party Subsequent to the acquisition date, the Company maintained a certain level of autonomy. During the six months ended February 28, 1999, Cabletron provided the Company with certain services including cash management, payroll processing, insurance, limited legal and information technology support as well as the ability for Company employees to participate in Cabletron's medical plan beginning in January of 1999. During this period, Cabletron began to allocate expenses primarily related to the medical plan coverage to the Company on a monthly basis as the costs associated with the other services were nominal. The total amount of expenses allocated to the Company by Cabletron during the six months ended February 28, 1999 was $15,026 and is included in the respective categories in the statement of operations including cost of sales, selling general and administrative, and research and engineering expenses. Also beginning in the six month period ending February 28, 1999, Company employees were able to participate in Cabletron's incentive plans. These plans include Cabletron's Equity Incentive Plan and the Employee Stock Purchase Plan. These plans are accounted for by Cabletron as non- compensatory under APB 25 and thus there is no expense allocation. Beginning in the seven month period ending September 30, 1999, Cabletron began to provide the Company with services in addition to those described above. These services included external and inside sales support, customer service and technical support, software licenses, limited software development and assistance with year 2000 remediation processes. The Company also moved into a Cabletron facility in June of 1999 and began to receive a related cost allocation from Cabletron representing rent and other occupancy costs. The total amount of expenses allocated to the Company by Cabletron during the seven months ended September 30, 1999 was $574,151 and is included in the respective categories in the statement of operations including cost of sales, selling general and administrative, and research and engineering expenses. Cabletron was a significant customer of the Company prior to the completion of the acquisition and the Company has generated significant intercompany sales to Cabletron subsequent to the acquisition as outlined in footnote 10 of these financial statements. (13)Stockholders' Equity The Company's preferred stock was convertible into common stock on a one- for-one conversion rate. Each holder of preferred stock was entitled to vote on all matters and was entitled to the number of votes equal to the whole number of shares of common stock into which such preferred shares could be converted. Dividends on the preferred stock were not cumulative and no right to any dividends would accrue to the holders unless declared by the Board of Directors. The preferred stock had liquidation preferences as follows:
Series A..................... $0.50 per share Series B..................... $1.00 per share Series C..................... $2.40 per share Series D..................... $2.85 per share
Prior to the acquisition by Cabletron, the Company maintained a 1994 Stock Option Plan (the "Plan") which provided for up to 400,000 shares of common stock of the Company for purchase by employees, directors or consultants of the Company. The Plan was amended on October 1, 1997 to provide up to F-40 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) 600,000 shares. The Plan provides for issuance of options at their fair market value on the date of the grant. The Plan allowed varying vesting provisions but in each case the options were issued with four year vesting periods. The Plan also includes a provision whereby at least 20% per year of the total number of shares pursuant to a grant would vest. The maximum term for an option was ten years from the date of grant. As part of the acquisition by Cabletron, the options for Company common stock were converted to options for Cabletron common stock. A summary of option transactions follows:
Number Weighted Average of Exercise options Price ------- ---------------- Options outstanding at March 31, 1996.............. -- Granted.......................................... 314,750 $0.14 Exercised........................................ (14,479) $0.15 Forfeited........................................ (60,521) $0.15 ------- Options outstanding at March 31, 1997.............. 239,750 $0.14 Granted.......................................... 222,400 $0.25 Exercised........................................ (47,706) $0.12 Forfeited........................................ (1,615) $0.20 ------- Options outstanding at March 31, 1998.............. 412,829 $0.19 Granted.......................................... 67,100 $0.75 Exercised........................................ (885) $0.20 Forfeited........................................ (1,000) $0.75 ------- Options outstanding at August 31, 1998............. 478,044 $0.27 ======= Options exercisable at: March 31, 1997................................... 73,141 $0.11 March 31, 1998................................... 122,777 $0.16 August 31, 1998.................................. 170,678 $0.27
Subsequent to the acquisition by Cabletron, Company employees were eligible to participate in Cabletron's Equity Incentive Plan ("EIP") which provides shares of common stock for the granting of a variety of incentive awards to eligible employees. As of February 28, 1999, Cabletron had issued Company employees 75,100 stock options under the EIP, which were granted at fair market value at the date of grant, vest over a three to five year period and expire within six to ten years from the date of grant. F-41 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) A summary of option transactions follows:
Weighted Average Number Exercise of options Price ---------- ---------------- Company options outstanding at August 31, 1998 assumed by and converted to Cabletron options at a ratio of 1.033 to 1...................... 493,970 $0.26 Granted........................................ 75,100 $7.63 Exercised...................................... (86,020) $0.16 Forfeited...................................... (1,983) $0.60 ------- Options outstanding at February 28, 1999....... 481,067 $1.42 Granted...................................... -- -- Exercised.................................... (80,835) $0.28 Forfeited.................................... (7,566) $0.60 ------- Options outstanding at September 30, 1999...... 392,666 $1.69 ======= Options exercisable at : February 28, 1999............................ 209,983 $0.75 September 30, 1999........................... 190,608 $0.82
The following table summarizes information concerning currently outstanding and exercisable options as of February 28, 1999:
Options Outstanding Options Exercisable --------------------------------- --------------------- Weighted- Average Remaining Weighted- Weighted- Contractual Average Average Number Life Exercise Number Exercise Range of Exercise Prices Outstanding (years) Price Exercisable Price ------------------------ ----------- ----------- --------- ----------- --------- $0.00 to $0.25.......... 218,592 7.7 $0.17 139,760 $0.15 $0.26 to $0.50.......... 121,443 8.6 $0.27 36,341 $0.26 $0.51 to $0.75.......... 65,932 9.2 $0.64 18,862 $0.63 $0.76 to $14.00......... 75,100 9.6 $7.63 15,020 $7.63 ------- ------- $0.00 to $14.00......... 481,067 8.1 $1.42 209,983 $0.75 ======= === ===== =======
The Company accounts for its stock option plans in accordance with the provisions of APB 25. As such compensation expense is recorded on the date of grant only if the fair value of the underlying stock exceeds the exercise price. Had compensation cost associated with options held by Company employees been determined consistent with SFAS 123, the Company would have reported net losses of $13,078,156, $1,660,426, $2,077,613, and $1,503,479, respectively for the six months ended February 28, 1999, the five months ended August 31, 1998 and the years ended March 31, 1998 and 1997. F-42 FLOWPOINT CORPORATION Notes to Financial Statements--(Continued) (Information as of and for the seven months ended September 30, 1999 is unaudited) The Company estimates the fair value of each option as of the date of grant using a Black-Scholes pricing model with the following weighted average assumptions:
Six Months Five Months Fiscal year Fiscal year ended ended ended ended February 28, August 31, March 31, March 31, 1999 1998 1998 1997 ------------ ----------- ----------- ----------- Expected volatility........ *76.32% -- -- -- Dividend yield............. -- -- -- -- Risk-free interest rate.... 5.1% 4.87% 5.70% 6.57% Expected life, in years.... 3.7 3.8 3.8 3.7
-------- *based on Company employee holdings in Cabletron common stock The weighted average estimated fair values of stock options granted during the six months ended February 28, 1999, the five months ended August 31, 1998 and the fiscal years ended March 31, 1998 and 1997 were $7.63, $.73, $.25 and $.17 per share, respectively. Also subsequent to the acquisition by Cabletron, Company employees were eligible to participate in Cabletron' two Employee Stock Purchase Plans ("ESPPs"), which provide shares of common stock to be purchased by employees who have completed a minimum period of employment. Under the 1989 ESPP, employees must be continuously employed for a period of six months and under the 1995 ESPP employees must be continuously employed for a period of two years. Under these plans, options are granted to eligible employees twice yearly and are exercisable through the accumulation of employee payroll deductions from two to ten percent of employee compensation as defined in the plan, to a maximum of $12,500 annually, for each plan, (adjusted to reflect increases in the consumer price index) which may be used to purchase stock at 85 percent of the fair market value of the common stock at the beginning or end of the option period, whichever amount is lower. In the seven months ended September 30, 1999, 6,932 shares were purchased at a weighted average price of $6.96. (14)Subsequent Event (Unaudited) On November 22, 1999, Cabletron announced that it had reached an agreement for the sale of the Company to Efficient Networks ("Efficient") a leading, independent supplier of DSL access products for the customer premises. Under the terms of the sale, Efficient would pay a combination of 7.2 million common shares and 6,300 convertible preferred shares (convertible into an aggregate of 6.3 million common shares of Efficient) to Cabletron in exchange for all the outstanding common stock of the Company. The sale closed on December 17, 1999. F-43 [LOGO OF EFFICIENT NETWORKS, INC. APPEARS HERE] PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by Efficient in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee. SEC registration fee............................................. $ 98,860 NASD filing fee.................................................. 30,500 Nasdaq National Market listing fee............................... 17,500 Printing and engraving costs..................................... 100,000 Legal fees and expenses.......................................... 350,000 Accounting fees and expenses..................................... 150,000 Blue Sky fees and expenses....................................... 5,000 Miscellaneous expenses........................................... 248,140 ---------- Total.......................................................... $1,000,000 ==========
Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Article IX of the Registrant's Restated Certificate of Incorporation provides that directors and officers may be indemnified to the fullest extent permissible under Delaware law. Article VI of the Registrant's Bylaws provides for the indemnification of officers and directors to the fullest extent permissible under Delaware Law. The Registrant has entered into indemnification agreements with its directors and executive officers, in addition to indemnification provided for in the Registrant's Bylaws, and intends to enter into indemnification agreements with any new directors and executive officers in the future. The Underwriting Agreement, Exhibit 1.1 hereto, provides for indemnification by the Underwriters of the registrant and its executive officers and directors, and by the registrant of the underwriters for certain liabilities, including liabilities arising under the Securities Act, in connection with matters specifically provided in writing by the Underwriters for inclusion in the Registration Statement. Item 15. Recent Sales of Unregistered Securities During the past three years, the Registrant has issued unregistered securities to a limited number of persons as described below. In each case, we relied on the exemption from registration provided by Section 4(2) under the Securities Act. In December 1996, we sold 3,091,430 shares of Series E Preferred Stock to certain accredited investors at a purchase price of $2.41 per share. II-1 In November 1997, we sold 114,068 shares of Common Stock to DSC Telecom, L.P. at a purchase price of $2.63 per share. In February 1998, we sold 2,057,159 shares of Series F Preferred Stock to certain accredited investors at a purchase price of $2.92 per share. In June 1998, we sold 1,866,800 shares of Series G Preferred Stock to Siemens A.G. at a purchase price of $2.92 per share. In June 1998, we issued a warrant to purchase 34,264 shares of Series G Preferred Stock to Hambrecht & Quist LLC at an exercise price of $2.92 per share. In January 1999, we issued Subordinated Promissory Notes for an aggregate principal amount of $7.0 million and warrants to purchase an aggregate of 2,397,261 shares of Series H Preferred Stock to El Dorado Ventures IV, LP and Crosspoint Ventures LS 1997 LP, at an exercise price of $2.92 per share. In March 1999, we sold 1,850,000 shares of Series G Preferred Stock to Siemens A.G. at a purchase price of $2.92 per share. In April 1999, we issued a Subordinated Promissory Note for an aggregate principal amount of $2.0 million and a warrant to purchase 684,932 shares of Series H Preferred Stock to Palomar Ventures L.P., at an exercise price of $2.92 per share. In June 1999, we issued a convertible promissory note to an affiliate of Covad Communications Group, Inc. for an aggregate principal amount of $5.0 million. The note was convertible into 497,663 shares of Series I Preferred Stock at an exercise price of $10.09 per share. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits
Exhibit Number ------- 1.1* Form of Underwriting Agreement. 3.1(1) Restated Certificate of Incorporation of the Registrant. 3.2(2) Restated Bylaws of the Registrant. 3.3 Certificate of Determination defining rights, preferences and privileges of Registrant's Series A non-voting convertible preferred stock. 4.1(1) Specimen Common Stock Certificate. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1(1) Form of Indemnification Agreement between the Registrant and each of its directors and officers. 10.2(1) 1999 Stock Plan and form of agreements thereunder. 10.3(1) 1999 Employee Stock Purchase Plan and form of agreements thereunder. 10.4 1999 Nonstatutory Stock Option Plan and form of agreements thereunder. 10.5(1) Investor's Rights Agreement dated July 30, 1993 executed in connection with the issuance and sale of our Series A Preferred Stock. 10.6(1) Amendment No. 1 to the Investors' Rights Agreement, dated February 9, 1994. 10.7(1) Amendment No. 2 to the Investors' Rights Agreement, dated September 30, 1994. 10.8(1) Amendment No. 3 to the Investors' Rights Agreement, dated September 1, 1995. 10.9(1) Amendment No. 4 to the Investors' Rights Agreement, dated December 31, 1996. 10.10(1) Amendment No. 5 to the Investors' Rights Agreement, dated February 17, 1998 10.11(1) Amendment No. 6 to the Investors' Rights Agreement, dated June 10, 1998. 10.12(1) Amendment No. 7 to the Investors' Rights Agreement, dated January 11, 1999. 10.13(1) Amendment No. 9 to the Investors' Rights Agreement, dated June 28, 1999. 10.14 Amendment No. 10 to the Investors' Rights Agreement, dated November 21, 1999. 10.15(1) Geico Building Office Lease dated August 19, 1993 by and between Government Employees Insurance Company and Efficient. 10.16(1) Modification of Geico Office Lease dated May 8, 1995 by and between Government Employees Insurance Company and Efficient.
II-2
Exhibit Number ------- 10.17(1) Graystone Office Park Lease dated September 8, 1998 by and between Lanny Houillion and Efficient. 10.18 Office Lease Agreement dated November 5, 1999 by and between Jackson- Shaw/Alpha Metro Limited Partnership and Efficient. 10.19(3) Agreement and Plan of Merger and Reorganization dated as of November 21, 1999 by and among Efficient Networks, Inc., Cabletron Systems, Inc., Flowpoint Corporation and Fire Acquisition Corporation (the "Merger Agreement"). 10.20(3) Amendment No. 1 to the Merger Agreement dated December 14, 1999. 10.21(3) Amendment No. 2 to the Merger Agreement dated December 17, 1999. 10.22 Voting Agreement dated November 20, 1999 entered into in connection with the Merger Agreement. 10.23 Reseller Agreement effective as of December 17, 1999 between the Registrant and Cabletron Systems, Inc. 10.24 Standstill and Disposition Agreement dated December 17, 1999 between the Registrant and Cabletron Systems, Inc. 10.25 Cross License Agreement dated December 17, 1999 between the Registrant and Cabletron Systems, Inc. 23.1 Consent of Independent Auditors regarding Efficient Networks, Inc. 23.2 Consent of Independent Auditors regarding FlowPoint Corporation. 23.3* Consent of Counsel (see Exhibit 5.1). 24.1 Power of Attorney--See Page II-5.
- -------- * To be filed by amendment. (1) Incorporated by reference to Registrant's Registration Statement on Form S- 1 declared effective July 14, 1999 (Commission File No. 333-77795). (2) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal 1999, filed September 13, 1999. (3) Incorporated by reference to Registrant's Current Report on Form 8-K filed December 30, 1999. (b) Financial Statement Schedules
Page ---- Independent Auditors' Report on Schedule.............................. S-1 Schedule II--Valuation and Qualifying Accounts........................ S-2
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the Consolidated Financial Statements or Notes thereto. Item 17. Undertakings The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 7th day of January, 2000. EFFICIENT NETWORKS, INC. /s/ Mark A. Floyd By:__________________________________ Mark A. Floyd President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark A. Floyd and Jill S. Manning and each of them severally, as true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign the Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462 and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys- in-fact and agents or any of them, or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated below.
Signature Title Date --------- ----- ---- /s/ Mark A. Floyd President, Chief Executive January 7, 2000 ______________________________________ Officer and Chairman of Mark A. Floyd the Board (Principal Executive Officer) /s/ Jill S. Manning Vice President and Chief January 7, 2000 ______________________________________ Financial Officer Jill S. Manning (Principal Financial Officer) /s/ Bruce W. Brown Director January 7, 2000 ______________________________________ Bruce W. Brown /s/ James P. Gauer Director January 7, 2000 ______________________________________ James P. Gauer
II-5
Signature Title Date --------- ----- ---- Director ______________________________________ Robert Hawk Director ______________________________________ Robert A. Hoff Director ______________________________________ Anthony Maher /s/ William L. Martin III Director January 7, 2000 ______________________________________ William L. Martin III /s/ Thomas H. Peterson Director January 7, 2000 ______________________________________ Thomas H. Peterson
II-6 Independent Auditors' Report on Schedule The Board of Directors Efficient Networks, Inc.: Under date of July 6, 1999, except as to note 13 which is as of July 20, 1999, we reported on the consolidated balance sheets of Efficient Networks, Inc. and subsidiary as of June 30, 1998 and 1999 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended June 30, 1999, which are included in the Company's annual report on form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule included in the annual report on form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Dallas, Texas July 6, 1999 S-1 EFFICIENT NETWORKS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions Additions Balance at charged to charged to Balance at Beginning costs and other end of Description of period expenses accounts Deductions period - ----------- ---------- ---------- ---------- ---------- ---------- FOR THE YEAR ENDED JUNE 30, 1999 Allowances Deducted from Assets Accounts receivable... $ 15 105 -- -- $120 Inventories........... 150 130 -- -- 280 ---- --- --- --- ---- Total Allowances Deducted from Assets.............. $165 235 -- -- $400 ==== === === === ==== FOR THE YEAR ENDED JUNE 30, 1998 Allowances Deducted from Assets Accounts receivable... $ 25 11 -- 21 $ 15 Inventories........... 57 124 -- 31 150 ---- --- --- --- ---- Total Allowances Deducted from Assets.............. $ 82 135 -- 52 $165 ==== === === === ==== FOR THE YEAR ENDED JUNE 30, 1997 Allowances Deducted from Assets Accounts receivable... $ 23 2 -- -- $ 25 Inventories........... -- 57 -- -- 57 ---- --- --- --- ---- Total Allowances Deducted from Assets.............. $ 23 59 -- -- $ 82 ==== === === === ====
S-2 EXHIBIT INDEX
Exhibit Number ------- 1.1* Form of Underwriting Agreement. 3.1(1) Restated Certificate of Incorporation of the Registrant. 3.2(2) Restated Bylaws of the Registrant. 3.3 Certificate of Determination defining rights, preferences and privileges of Registrant's Series A non-voting convertible preferred stock. 4.1(1) Specimen Common Stock Certificate. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1(1) Form of Indemnification Agreement between the Registrant and each of its directors and officers. 10.2(1) 1999 Stock Plan and form of agreements thereunder. 10.3(1) 1999 Employee Stock Purchase Plan and form of agreements thereunder. 10.4 1999 Nonstatutory Stock Option Plan and form of agreements thereunder. 10.5(1) Investor's Rights Agreement dated July 30, 1993 executed in connection with the issuance and sale of our Series A Preferred Stock. 10.6(1) Amendment No. 1 to the Investors' Rights Agreement, dated February 9, 1994. 10.7(1) Amendment No. 2 to the Investors' Rights Agreement, dated September 30, 1994. 10.8(1) Amendment No. 3 to the Investors' Rights Agreement, dated September 1, 1995. 10.9(1) Amendment No. 4 to the Investors' Rights Agreement, dated December 31, 1996. 10.10(1) Amendment No. 5 to the Investors' Rights Agreement, dated February 17, 1998 10.11(1) Amendment No. 6 to the Investors' Rights Agreement, dated June 10, 1998. 10.12(1) Amendment No. 7 to the Investors' Rights Agreement, dated January 11, 1999. 10.13(1) Amendment No. 9 to the Investors' Rights Agreement, dated June 28, 1999. 10.14 Amendment No. 10 to the Investors' Rights Agreement, dated November 21, 1999. 10.15(1) Geico Building Office Lease dated August 19, 1993 by and between Government Employees Insurance Company and Efficient. 10.16(1) Modification of Geico Office Lease dated May 8, 1995 by and between Government Employees Insurance Company and Efficient. 10.17(1) Graystone Office Park Lease dated September 8, 1998 by and between Lanny Houillion and Efficient. 10.18 Office Lease Agreement dated November 5, 1999 by and between Jackson- Shaw/Alpha Metro Limited Partnership and Efficient. 10.19(3) Agreement and Plan of Merger and Reorganization dated as of November 21, 1999 by and among Efficient Networks, Inc., Cabletron Systems, Inc., Flowpoint Corporation and Fire Acquisition Corporation (the "Merger Agreement"). 10.20(3) Amendment No. 1 to the Merger Agreement dated December 14, 1999. 10.21(3) Amendment No. 2 to the Merger Agreement dated December 17, 1999. 10.22 Voting Agreement dated November 20, 1999 entered into in connection with the Merger Agreement. 10.23 Reseller Agreement effective as of December 17, 1999 between the Registrant and Cabletron Systems, Inc. 10.24 Standstill and Disposition Agreement dated December 17, 1999 between the Registrant and Cabletron Systems, Inc. 10.25 Cross License Agreement dated December 17, 1999 between the Registrant and Cabletron Systems, Inc. 23.1 Consent of Independent Auditors regarding Efficient Networks, Inc. 23.2 Consent of Independent Auditors regarding FlowPoint Corporation. 23.3* Consent of Counsel (see Exhibit 5.1). 24.1 Power of Attorney--See Page II-5.
- -------- * To be filed by amendment. (1) Incorporated by reference to Registrant's Registration Statement on Form S- 1 declared effective July 14, 1999 (Commission File No. 333-77795). (2) Incorporated by reference to Registrant's Annual Report on Form 10-K for fiscal 1999, filed September 13, 1999. (3) Incorporated by reference to Registrant's Current Report on Form 8-K filed December 30, 1999. EX-3.3 2 CERTIFICATE OF DETERMINATION EXHIBIT 3.3 CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES AND PRIVILEGES OF SERIES A NON-VOTING CONVERTIBLE PREFERRED STOCK OF EFFICIENT NETWORKS, INC., A DELAWARE CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware, Mark Floyd and Jill Manning hereby certify that: (a) They are the duly elected Chief Executive Officer and Secretary, respectively, of Efficient Networks, Inc., a Delaware corporation (the "Corporation"). ----------- (b) Pursuant to the authority conferred upon the Board of Directors of the Corporation by Article Four of the Corporation's Amended and Restated Certificate of Incorporation (the "Certificate"), the Board of Directors of the ----------- Corporation on November 19, 1999 adopted the following recitals and resolutions creating a new series of preferred stock designated as Series A Non-Voting Convertible Preferred Stock: "WHEREAS, the Certificate provides for a class of shares known as Preferred Stock, issuable from time to time in one or more series; WHEREAS, the Board of Directors of the Corporation is authorized by the Certificate to determine the powers, rights, preferences, limitations and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, to fix the number of shares constituting any such series, and to determine the designation thereof, or any of them; WHEREAS, the Board of Directors of the Corporation desires, pursuant to its authority as aforesaid, to determine and fix the powers, rights preferences, limitations and restrictions relating to a series of Preferred Stock and the number of shares constituting, and the designation of, such series; NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of the Certificate, a new series of Preferred Stock to be designated "Series A Non-Voting Convertible Preferred Stock," is hereby created, and the Board of Directors hereby fixes and determines the designation of, the number of shares constituting, and the rights, preferences, privileges and restrictions relating to, such series of Preferred Stock as follows (all terms used herein which are not otherwise defined shall have the meanings set forth in the Certificate); Section 1. Designation, Amount and Par Value. The series of preferred --------------------------------- stock shall be designated as its Series A Non-Voting Convertible Preferred Stock (the "Series A Preferred") and the number of shares so designated shall be six ------------------ thousand three hundred (6,300) (which shall not be subject to increase without the consent of the holders of the Series A Preferred (each, a "Holder" and ------ collectively, the "Holders")). Each share of Series A Preferred shall have a par ------- value of $.001. Section 2. Voting Rights. Except as otherwise provided herein and as ------------- otherwise required by law, the Series A Preferred shall have no voting rights. However, so long as any shares of Series A Preferred are outstanding, the Corporation shall not, without the affirmative vote of the Holders of 66% of the shares of the Series A Preferred then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Series A Preferred or alter or amend this Certificate of Designation, (b) authorize or create or issue any class of stock ranking as to dividends or distribution of assets upon a Liquidation (as defined in Section 4) or redemption senior to or on parity with the Series A Preferred, (c) amend its certificate of incorporation or other charter documents so as to affect adversely any rights of the Holders, (d) increase or decrease the authorized number of shares of Series A Preferred, or (e) enter into any agreement with respect to the foregoing. Section 3. Dividends. In each fiscal year of the Corporation, the --------- Holders of shares of Series A Preferred shall be entitled to receive, before any cash dividends shall be declared and paid upon or set aside for the Common Stock in such fiscal year, if, when and as declared by the Board of Directors of the Corporation, dividends payable in cash in an amount per share for such fiscal year at least equal to the product of (i) the per share amount, if any, of the cash dividend declared, paid or set aside for the Common Stock during such fiscal year, multiplied by (ii) the number of shares of Common Stock into which each such share of Series A Preferred is then convertible. Section 4. Liquidation. Upon any liquidation, dissolution or winding- ----------- up of the Corporation, whether voluntary or involuntary (a "Liquidation"), the ----------- Holders shall be entitled to receive out of the assets of the Corporation, whether such assets are capital or surplus, for each share of Series A Preferred an amount equal to $0.001 per share before any distribution or payment shall be made to the holders of any Junior Securities, and thereafter an amount equal to the amount per share of Series A Preferred that would be distributable to such Holder if such Holder had converted his or her Series A Preferred into Common Stock immediately prior to such Liquidation. The Corporation shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each record Holder. The merger or consolidation of the Corporation into or with another corporation (other than one in which the holders of the capital stock of the Corporation immediately prior to the merger or consolidation continue to hold, directly or indirectly, more than 50% of the voting power of the capital stock of the surviving corporation), or the sale, lease, exchange, or other conveyance of all or substantially all the assets of the Corporation, shall be deemed to be a liquidation, dissolution, or winding-up of the Corporation for purposes of this Section 4, in which case the Holders of Series A Preferred shall, unless the Series A Preferred is or was to be converted into Common Stock in such transaction or would receive in such transaction consideration equal (on an as converted basis) to that received by the Common Stock in such transaction, be entitled to receive the amount payable to such Holders set forth above, unless the Holders of 66% of the then outstanding shares of Series A Preferred, voting separately as a single class, elect not to treat any of the foregoing events as a liquidation, dissolution or winding up by giving written notice thereof to the Corporation. Section 5. Automatic Conversion. -------------------- (a) Automatic Conversions. All shares of Series A Preferred shall be --------------------- automatically converted into shares of Common Stock, at the Conversion Ratio (as defined in -2- Section (5)(c)), immediately upon the Stockholder Vote. The date upon which such conversion takes place shall be referred to as the "Conversion Date". --------------- (b) Immediately after the Conversion Date, the Corporation will deliver to the Holder a certificate or certificates, subject to the terms of the Standstill and Disposition Agreement, representing the number of shares of Common Stock acquired upon the conversion of shares of Series A Preferred. Notwithstanding the foregoing or anything to the contrary contained herein, the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of any shares of Series A Preferred until after certificates evidencing such shares of Series A Preferred are delivered for conversion to the Corporation, or the Holder of such Series A Preferred notifies the Corporation that such certificates have been lost, stolen or destroyed and provides a bond (or other adequate security) reasonably satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. The Corporation shall, upon request of the Holder, if available, use its best efforts to deliver any certificate or certificates required to be delivered by the Corporation under this Section electronically through the Depositary Trust Corporation or another established clearing corporation performing similar functions. (c)(i) The conversion ratio for each share of Series A Preferred in effect on the Conversion Date (the "Conversion Ratio") shall be equal to one ---------------- thousand shares of Common Stock for one share of Series A Preferred. (ii) If the Corporation, at any time while any shares of Series A Preferred are outstanding, shall (a) pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities payable in shares of Common Stock, (b) subdivide or split outstanding shares of Common Stock into a larger number of shares, or (c) combine or reclassify outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification and exchange of the Common Stock any shares of capital stock of the Corporation, then the Conversion Ratio shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding before such event. Any adjustment made pursuant to this Section 5(c)(ii) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (iii) Whenever the Conversion Ratio is adjusted pursuant to Section 5(c)(ii) the Corporation shall promptly mail to each Holder, a notice setting forth the Conversion Ratio after such adjustment and setting forth a reasonably detailed statement of the facts requiring such adjustment. (iv) In case of any reclassification of the Common Stock, or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the Holders of the Series A Preferred then outstanding shall have the right thereafter to convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holders of the Series A Preferred shall be entitled upon such event to -3- receive such amount of securities, cash or property as a holder of the number of shares of Common Stock of the Corporation into which such shares of Series A Preferred could have been converted immediately prior to such reclassification or share exchange would have been entitled. This provision shall similarly apply to successive reclassifications or share exchanges. (d) Upon a conversion hereunder the Corporation shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Corporation elects not, or is unable, to make such a cash payment, the Holder of a share of Series A Preferred shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (e) The issuance of certificates for Common Stock on conversion of Series A Preferred shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such shares of Series A Preferred so converted. (f) The Corporation will take all such actions as may be requisite to assure that all shares of Common Stock which may be issued upon conversion of Series A Preferred will, upon issuance, be legally and validly issued, fully paid and non-assessable and free from all liens and charges with respect to the issue thereof. (g) Any and all notices or other communications or deliveries to be provided by the Holders of the Series A Preferred hereunder, shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to the attention of the Chief Executive Officer of the Corporation addressed to 4201 Spring Valley Road, Dallas, TX 75244, Attention: Mark Floyd, Chief Executive Officer or to facsimile number 972-991-3887, or to such other address or facsimile number as shall be specified in writing by the Corporation for such purpose. Any and all notices or other communications or deliveries to be provided by the Corporation hereunder shall be in writing and delivered personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Corporation, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 6:30 p.m. (New York City time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) upon receipt, if sent by a nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. -4- Section 6. Redemption. ---------- (a) If the Series A Preferred has not been automatically converted pursuant to Section 5(a) prior to July 21, 2000, then, until such time as such Series A Preferred is converted pursuant to Section 5(a) or otherwise, the Corporation shall redeem one-fifth (20%) of the Series A Preferred, for cash, at the Redemption Price on the following dates: December 31, 2000 December 31, 2001 December 31, 2002 December 31, 2003 December 31, 2004 (b) Notice of redemption will be mailed at least 30 days but not more than 80 days before the redemption date to each Holder of Series A Preferred to be redeemed at his registered address; provided, however, that the Corporation's -------- ------- failure to give such notice of redemption shall in no way affect its obligation to redeem the Series A Preferred as provided in this Section 6. The notice of redemption shall contain the number of shares of Series A Preferred held by the Holder which shall be redeemed, the date on which the redemption shall be effective, the Redemption Price, and the address at which the Holder may surrender to the Corporation its certificates representing shares of Series A Preferred to be redeemed. Series A Preferred in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. (ii) Once notice of redemption is mailed, the Series A Preferred called for redemption become due and payable on the redemption date and at the Redemption Price stated in the notice. Upon surrender of such shares of Series A Preferred to the Corporation, the Corporation shall pay the redemption Price stated in the notice and each surrendered certificate shall be canceled and a new certificate representing the remaining unredeemed shares of Series A Preferred, if any, shall be issued to each Holder, at the expense of the Corporation. Section 7. Definitions. For the purposes hereof, the following terms ----------- shall have the following meanings: "Common Stock" means the Corporation's common stock, par value $.001 per ------------ share, and stock of any other class into which such shares may hereafter have been reclassified or changed. "Junior Securities" means the Common Stock and all other equity securities ----------------- of the Corporation which are explicitly junior in liquidation preference to the Series A Preferred. "Per Share Market Value" means on any particular date (a) the closing price ---------------------- per share of Common Stock on such date on the NASDAQ or on any subsequent market on which the Common Stock is then listed or quoted, or if there is no such price on such date, then the closing bid price on the NASDAQ or on such subsequent market on the date nearest preceding such date, or (b) if the Common Stock is not then listed or quoted on the NASDAQ or on such subsequent market, the closing bid price for a shares of Common Stock in the over-the-counter market, as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its -5- functions of reporting prices) at the close of business on such date, or (c) if the Common Stock is not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the Holder, or (d) if the Common Stock are not then publicly traded the fair market value of a Common Share as determined in good faith by the Board of Directors of the Corporation. "Person" means a corporation, an association, a partnership, organization, ------ a business, an individual, a government or political subdivision thereof or a governmental agency. "Redemption Price" means, with respect to each share of Series A Preferred, ---------------- an amount of cash (rounded to the nearest whole cent), without interest, equal to the product of (A) 1,000 times (B) the average closing price of one share of the Corporation's Common Stock for the five (5) most recent days that the Corporation's Common Stock has traded ending on the trading day immediately prior to the Closing Date (as that term is defined in the Agreement and Plan of Reorganization dated November 21, 1999, as amended), as reported on the Nasdaq National Market System, and any declared but unpaid dividends on the Corporation's Common Stock, subject to proportionate adjustment in the event of any subdivision or split of outstanding shares of Series A Preferred into a larger number of shares or any combination or reclassification of outstanding shares of Series A Preferred into a smaller number of shares. "Stockholder Vote" means the affirmative vote of a stockholders holding a ---------------- majority of the Corporation's Common Stock at a meeting of the Corporation's stockholders in favor of approving the conversion of the Series A Preferred into Common Stock in accordance with the terms hereof. ***** -6- IN WITNESS WHEREOF, Efficient Networks, Inc. has caused this Certificate of Designation of Rights, Preferences and Privileges of Series A Non-Voting Convertible Preferred Stock to be signed by the undersigned this 17th day of December, 1999. /s/ Mark Floyd ------------------------------------ Mark Floyd, Chief Executive Officer -7- EX-10.4 3 1999 NONQUALIFIED STOCK OPTION PLAN Exhibit 10.4 EFFICIENT NETWORKS, INC. 1999 NONSTATUTORY STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this Nonstatutory Stock Option -------------------- Plan are: . to attract and retain the best available personnel for positions of substantial responsibility, . to provide additional incentive to Employees, Directors and Consultants, and . to promote the success of the Company's business. Options granted under the Plan will be Nonstatutory Stock Options. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees as shall ------------- be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the --------------- administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. ----- (d) "Code" means the Internal Revenue Code of 1986, as amended. ---- (e) "Committee" means a committee of Directors appointed by the Board --------- in accordance with Section 4 of the Plan. (f) "Common Stock" means the Common Stock of the Company. ------------ (g) "Company" means Efficient Networks, Inc. ------- (h) "Consultant" means any person, including an advisor, engaged by ---------- the Company or a Parent or Subsidiary to render services to such entity. (i) "Director" means a member of the Board. -------- (j) "Disability" means total and permanent disability as defined in ---------- Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers, employed by the -------- Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (m) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "Notice of Grant" means a written or electronic notice evidencing --------------- certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (o) "Officer" means a person who is an officer of the Company within ------- the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (p) "Option" means a nonstatutory stock option granted pursuant to ------ the Plan, that is not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (q) "Option Agreement" means an agreement between the Company and an ---------------- Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (r) "Option Exchange Program" means a program whereby outstanding ----------------------- options are surrendered in exchange for options with a lower exercise price. -2- (s) "Optioned Stock" means the Common Stock subject to an Option. -------------- (t) "Optionee" means the holder of an outstanding Option granted -------- under the Plan. (u) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (v) "Plan" means this 1999 Nonstatutory Stock Option Plan. ---- (w) "Service Provider" means an Employee including an Officer, ---------------- Consultant or Director. (x) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 12 of the Plan. (y) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of ------------------------- the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is Nine Hundred Fifty Thousand (950,000) Shares. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). 4. Administration of the Plan. -------------------------- (a) Administration. The Plan shall be administered by (i) the Board -------------- or (ii) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the --------------------------- Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock; (ii) to select the Service Providers to whom Options may be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; -3- (iv) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of (ii) to select the Service Providers to whom Options may be granted hereunder; the Plan, of any award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (viii) to institute an Option Exchange Program; (ix) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (x) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (xi) to modify or amend each Option (subject to Section 14(b) of the Plan), including the discretionary authority to extend the post- termination exercisability period of Options longer than is otherwise provided for in the Plan; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xiii) to determine the terms and restrictions applicable to Options; (xiv) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and (xv) to make all other determinations deemed necessary or advisable for administering the Plan. -4- (c) Effect of Administrator's Decision. The Administrator's ---------------------------------- decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 5. Eligibility. Options may be granted to Service Providers; provided, ----------- however, that notwithstanding anything to the contrary contained in the Plan, Options may not be granted to Officers and Directors. 6. Limitation. Neither the Plan nor any Option shall confer upon an ---------- Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. 7. Term of Plan. The Plan shall become effective upon its adoption by the ------------ Board. It shall continue in effect for ten (10) years, unless sooner terminated under Section 14 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option -------------- Agreement. 9. Option Exercise Price and Consideration. --------------------------------------- (a) Exercise Price. The per share exercise price for the Shares to be -------------- issued pursuant to exercise of an Option shall be determined by the Administrator. (b) Waiting Period and Exercise Dates. At the time an Option is --------------------------------- granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the --------------------- acceptable form of consideration for exercising an Option, including the method of payment. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; -5- (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws; or (viii) any combination of the foregoing methods of payment. 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Shareholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ------------------------------------------------- ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option, but only within such period of time as is specified in the Option Agreement, and only to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. -6- (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement, to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, ----------------- the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy ----------------- out for a payment in cash or Shares, an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Non-Transferability of Options. Unless determined otherwise by the ------------------------------ Administrator, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate. 12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or ------------------------------------------------------------------ Asset Sale. - ---------- (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock -7- dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company -------------------- with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock, immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. -8- 13. Date of Grant. The date of grant of an Option shall be, for all ------------- purposes, the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, ------------------------- alter, suspend or terminate the Plan. (b) Effect of Amendment or Termination. No amendment, alteration, ---------------------------------- suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to options granted under the Plan prior to the date of such termination. 15. Conditions Upon Issuance of Shares. ---------------------------------- (a) Legal Compliance. Shares shall not be issued pursuant to the ---------------- exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an -------------------------- Option the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Inability to Obtain Authority. The inability of the Company to obtain ----------------------------- authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Reservation of Shares. The Company, during the term of this Plan, will --------------------- at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. -9- EFFICIENT NETWORKS, INC. 1999 NONSTATUTORY STOCK OPTION PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT ---------------------------- ((OptioneeName)) ((OptioneeAddress1)) ((OptioneeAddress2)) You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number ((GrantNumber))____________________ Date of Grant ((DateofGrant))____________________ Vesting Commencement Date ((VestingCommencement))____________ Exercise Price per Share $((ExercisePrice))_________________ Total Number of Shares Granted ((SharesGranted))__________________ Total Exercise Price $((ExercisePrice))_________________ Type of Option: Nonstatutory Stock Option Term/Expiration Date: ((ExpirationDate))_________________ Note: ---- Stock options are complicated instruments. Please contact your tax advisor for any personal tax issues that may arise with any stock transactions. Vesting Schedule: ---------------- Subject to the Optionee continuing to be a Service Provider on such dates, this Option shall vest and become exercisable in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48th of the Shares subject to the Option shall vest upon the last day of each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates. Termination Period: ------------------ This Option may be exercised for three months after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for such longer period as provided in the Plan. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT --------- 1. Grant of Option. The Plan Administrator of the Company hereby grants --------------- to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(b) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. 2. Exercise of Option. ------------------ (a) Right to Exercise. This Option is exercisable during its term in ----------------- accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an ------------------ exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Company's Chief Financial Officer. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. -2- 3. Method of Payment. Payment of the aggregate Exercise Price shall be ----------------- by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; (c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or (d) surrender of other Shares which (i) in the case of Shares acquired upon (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares. 4. Non-Transferability of Option. This Option may not be transferred ----------------------------- in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set -------------- out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. Tax Consequences. Some of the federal tax consequences relating to ---------------- this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. The Optionee may incur regular federal --------------------- income tax liability upon exercise of an NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (b) Disposition of Shares. If the Optionee holds NSO Shares for at --------------------- least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. -3- 7. Entire Agreement; Governing Law. The Plan is incorporated herein by ------------------------------- reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. 8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES --------------------------------- THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE EFFICIENT NETWORKS, INC. _______________________________ ___________________________________ Signature By _______________________________ ___________________________________ ((OptioneeName)) Title ((OptioneeAddress1)) ((OptioneeAddress2)) -4- EXHIBIT A --------- EFFICIENT NETWORKS, INC. 1999 NONSTATUTORY STOCK OPTION PLAN EXERCISE NOTICE Efficient Networks, Inc. 4201 Spring Valley Road, Suite 1200 Dallas, Texas 75244 Attention: Chief Financial Officer 1. Exercise of Option. Effective as of today, ________________, _____, ------------------ the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of Efficient Networks, Inc. (the "Company") under and pursuant to the 1999 Nonstatutory Stock Option Plan (the "Plan") and the Stock Option Agreement dated, ___________, _____ (the "Option Agreement"). The purchase price for the Shares shall be $__________, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the ------------------- full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser ---------------------------- has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance (as evidenced by the --------------------- appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 12 of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer ---------------- adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 6. Entire Agreement; Governing Law. The Plan and Option Agreement are ------------------------------- incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. Submitted by: Accepted by: PURCHASER EFFICIENT NETWORKS, INC. ____________________________ ______________________________________ Signature By ____________________________ ______________________________________ Print Name Title _____________________________________ Date Received Address: ____________________ Address: 4201 Spring Valley Road, Suite 1200 - ------- ------- ____________________ Dallas, Texas 75244 ____________________ -2- EX-10.14 4 AMD. NO. 10 TO THE INVESTORS' RIGHTS AGREEMENT Exhibit 10.14 Execution Copy -------------- EFFICIENT NETWORKS, INC. AMENDMENT NO. 10 TO THE INVESTORS' RIGHTS AGREEMENT This Amendment No. 10 ("Amendment") to the Investors' Rights Agreement dated July 30, 1993, as previously amended by Amendments No. 1 through 7 and 9 thereof [there is no Amendment No. 8, the eighth Amendment was mistakenly numbered No. 9] (together, as amended the "Agreement"), is made as of this 20th day of November, 1999, by and among Efficient Networks, Inc., a Delaware corporation (the "Company") and each of the entities listed on Exhibit A hereto --------- (the "Existing Investors"). Capitalized terms used herein which are not defined herein shall have the definition ascribed to them in the Agreement. RECITALS -------- A. WHEREAS, the Company intends to enter into an Agreement and Plan of Reorganization by and among the Company, Fire Acquisition Corporation, a California corporation and a wholly-owned subsidiary of the Company, Comet Company, Inc., a Delaware corporation, and Fire Company, Inc., a California corporation and a wholly-owned subsidiary of Comet Company, Inc., whereby the Company shall acquire Fire Company, Inc. by merging Fire Company, Inc. into Fire Acquisition Corporation (the "Merger"). B. WHEREAS, pursuant to the terms of the Merger, the Company shall grant certain registration rights as contained in that certain Standstill & Disposition Agreement set forth as Attachment I hereto (the "Senior & ------------ Controlling Registration Rights"), which Senior & Controlling Registration Rights conflict with or are senior to the the registration rights granted to the Existing Investors in Section 1 of the Agreement (the "Pre-Existing Registration Rights"). C. WHEREAS, in order to induce Comet Company, Inc. and Fire Company, Inc. to enter into the Agreement and Plan of Reorganization and consummate the Merger, the Existing Investors hereby shall agree to New & Controlling Registration Rights and subordinate the Pre-Existing Registration Rights to the New & Controlling Registration Rights. D. WHEREAS, in addition, the Company completed its initial public offering of shares of its Common Stock in July 1999, and consequently, the affairs of the Company should be governed by its charter documents, and therefore the Company and the Existing Investors desire to amend the Agreement in certain other respects, as set forth below. IN CONSIDERATION OF THE FOREGOING, THE PARTIES HERETO AGREE AS FOLLOWS: Pursuant to Section 3.7 of the Agreement, any term of the Agreement may be amended, and the observance of any term may be waived, by the written consent of the Company and a majority of the holders of Registrable Securities then outstanding, (provided that the effect of such amendment or waiver will be that all holders of Registrable Securities are treated equally) and any amendment or waiver effected in accordance therewith shall be binding upon the Company and each holder of any Registrable Securities then outstanding; provided, however, that any amendment to or waiver of any term of the Agreement - -------- ------- that adversely affects the rights of Covad (as defined in Amendment No. 9) shall require the written consent of Covad. 1. AGREEMENT WITH NEW & CONTROLLING REGISTRATION RIGHTS AND SUBORDINATION ---------------------------------------------------------------------- OF PRE-EXISTING REGISTRATION RIGHTS. - ------------------------------------ The Existing Investors and Covad, on behalf of themselves and the other holders of Registrable Securities under the Agreement, hereby (i) consent to the Senior & Controlling Registration Rights, which consent is given pursuant to Section 1.14 of the Agreement, and (ii) agree to the Senior & Controlling Registration Rights, (iii) and, to the extent that the Senior & Controlling Registration Rights may, by any means of construction or interpretation, conflict with the Pre-Existing Registration Rights, agree to subordinate in all respects the Pre-Existing Registration Rights to avoid any conflict whatsoever with the rights to be granted in Attachment I. The consents and agreements set forth in this paragraph are made on behalf of each of the Existing Investors themselves and on behalf of all holders of Registrable Securities (to ensure compliance with the amendment and waiver requirements provisions of Section 3.7 and, with respect to Covad, as required by Section 3 of Amendment No. 9). 2. AMENDMENTS TO AGREEMENT. ----------------------- In order that the Company's charter documents govern the affairs of the Company, the Company and the Existing Investors desire to terminate the following provisions in their entirety and waive any claim relating to any prior non-compliance therewith: Section 2.6 - Management Stock; Section 2.7 - Election of Directors; Board Meeting Expenses; Indemnities; Board Observer Rights; Section 2.9 - Salaries of Officers; Section 2.10 - Payment of Dividends. 3. EFFECT OF AMENDMENT. ------------------- Except as amended and set forth above, the Agreement shall continue in full force and effect. This Amendment No. 10 is binding on all Existing Investors. 4. COUNTERPARTS. ------------ This Amendment may be executed in any number of counterparts, each which will be deemed an original, and all of which together shall constitute one instrument. 5. SEVERABILITY. ------------ If one or more provisions of this Amendment are held to be unenforceable under applicable law, such provision shall be excluded from this Amendment and the balance of the Amendment shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 6. ENTIRE AGREEMENT. ---------------- This Amendment, together with the Agreement and Attachment 1 hereto, constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 7. GOVERNING LAW. ------------- This Amendment shall be governed by and construed under the laws of the State of Delaware. 8. LEGAL REPRESENTATION. EACH OF THE EXISTING INVESTORS ACKNOWLEDGES AND -------------------- UNDERSTANDS THAT (A) THE COMPANY HAS BEEN REPRESENTED BY WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL CORPORATION, (THE "REPRESENTATION") (B) IT OR HE OR SHE HAS READ AND UNDERSTANDS THE AGREEMENT AND THIS AMENDMENT, (C) IT OR HE OR SHE HAS BE REPRESENTED IN THE PREPARATION, NEGOTIATION AND EXECUTION OF THIS AGREEMENT BY OTHER LEGAL COUNSEL OR HAS VOLUNTARILY DECLINED TO SEEK SUCH REPRESENTATION, AND (D) HE, SHE OR IT EXPRESSLY WAIVES ANY CONFLICT BY VIRTUE OF THE REPRESENTATION IN THE EVENT THAT HE, SHE, OR IT HAS BEEN, OR PRESENTLY IS, A CLIENT OF WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL CORPORATION. [Remainder of Page Intentionally Left Blank] This Amendment is hereby executed as of the date first above written. EFFICIENT NETWORKS, INC. a Delaware corporation By: /s/ Mark A. Floyd ----------------------------- Mark A. Floyd, President [Signature Page to Amendment No. 10 to Investors' Rights Agreement] EXISTING INVESTORS COVAD * a Delaware corporation By: /s/ Robert R. Davenport --------------------------------------- Name: Robert R. Davenport ------------------------------------- Title: E.V.P., Corporate Development ------------------------------------ *as defined in Amendment No. 9 [Signature Page to Amendment No. 10 to Investors' Rights Agreement] CROSSPOINT VENTURE PARTNERS 1993 By: /s/ Robert A. Hoff --------------------------------------- Name: Robert A. Hoff ------------------------------------- Title: General Partner ------------------------------------ CROSSPOINT 1993 ENTREPRENEURS FUND By: /s/ Robert A. Hoff --------------------------------------- Name: Robert A. Hoff ------------------------------------- Title: General Partner ------------------------------------ CROSSPOINT VENTURES LS 1997, L.P. By: /s/ Robert A. Hoff --------------------------------------- Name: Robert A. Hoff ------------------------------------- Title: General Partner ------------------------------------ [Signature Page to Amendment No. 10 to Investors' Rights Agreement] ENTERPRISE PARTNERS II L.P. By: Enterprise Management Partners II, L.P., Its General Partner By: /s/ Andrew Senyei --------------------------------------- Name: Andrew Senyei ------------------------------------- Title: General Partner ------------------------------------ ENTERPRISE PARTNERS II ASSOCIATES, L.P. By: Enterprise Management Partners II, L.P., Its General Partner By: /s/ Andrew Senyei --------------------------------------- Name: Andrew Senyei ------------------------------------- Title: General Partner ------------------------------------ [Signature Page to Amendment No. 10 to Investors' Rights Agreement] OCEAN PARK VENTURES, L.P. By: /s/ Jim Gauer --------------------------------------- Name: Jim Gauer ------------------------------------- Title: General Partner ------------------------------------ PALOMAR VENTURES I, L.P. By: /s/ Jim Gauer --------------------------------------- Name: Jim Gauer ------------------------------------- Title: General Partner ------------------------------------ [Signature Page to Amendment No. 10 to Investors' Rights Agreement] EL DORADO VENTURES III, L.P. By: El Dorado Venture Partners III, Its General Partner By: /s/ Thomas H. Peterson --------------------------------------- Name: Thomas H. Peterson ------------------------------------- Title: General Partner ------------------------------------ EL DORADO C & L FUND, L.P. By: El Dorado Venture Partners III, Its General Partner By: /s/ Thomas H. Peterson --------------------------------------- Name: Thomas H. Peterson ------------------------------------- Title: General Partner ------------------------------------ EL DORADO TECHNOLOGY IV, L.P. By: El Dorado Venture Partners III, Its General Partner By: /s/ Thomas H. Peterson --------------------------------------- Name: Thomas H. Peterson ------------------------------------- Title: General Partner ------------------------------------ [Signature Page to Amendment No. 10 to Investors' Rights Agreement] EL DORADO VENTURES IV, L.P. By: El Dorado Venture Partners IV, LLC, Its General Partner By: /s/ Thomas H. Peterson --------------------------------------- Name: Thomas H. Peterson ------------------------------------- Title: Managing Member ------------------------------------ EL DORADO TECHNOLOGY 98, L.P. By: El Dorado Venture Partners IV, LLC, Its General Partner By: /s/ Thomas H. Peterson --------------------------------------- Name: Thomas H. Peterson ------------------------------------- Title: Managing Member ------------------------------------ [Signature Page to Amendment No. 10 to Investors' Rights Agreement] MENLO ENTREPRENEURS FUND VI By: MV Management VI, L.P. Its General Partner By: /s/ General Partner --------------------------------------- Name: ------------------------------------- Title: General Partner ------------------------------------ MENLO VENTURES VI By: MV Management VI, L.P. Its General Partner By: /s/ General Partner --------------------------------------- Name: ------------------------------------- Title: General Partner ------------------------------------ [Signature Page to Amendment No. 10 to Investors' Rights Agreement] ADC TELECOMMUNICATIONS, INC. By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ [Signature Page to Amendment No. 10 to Investors' Rights Agreement] SIEMENS AG By: /s/ Anthony Maher --------------------------------------- Name: Anthony Maher ------------------------------------- Title: Member of the Executive Board ------------------------------------ TEXAS INSTRUMENTS, INC. By: /s/ Thomas J. Gentry --------------------------------------- Name: Thomas J. Gentry ------------------------------------- Title: Vice President, Mgr. Treasury Services ---------------------------------------- [Signature Page to Amendment No. 10 to Investors' Rights Agreement] EXHIBIT "A" ----------- SCHEDULE OF EXISTING INVESTORS Name and Address - ---------------- Covad Communications, Inc. 2330 Central Expressway Santa Clara, CA 95050 Crosspoint Venture Partners 1993 18551 MacArthur Blvd., Suite 400 Irvine, CA 92715 Crosspoint 1993 Entrepreneurs Fund 18551 MacArthur Blvd., Suite 400 Irvine, CA 92715 Crosspoint Ventures LS 1997, L.P. 18551 MacArthur Blvd., Suite 400 Irvine, CA 92715 Enterprise Partners II, L.P. 7979 Ivanhoe Avenue, Suite 550 La Jolla, CA 92037 Enterprise Partners II Associates, L.P. 7979 Ivanhoe Avenue, Suite 550 La Jolla, CA 92037 Ocean Park Ventures, L.P. 100 Wilshire Boulevard, Suite 400 Santa Monica, CA 90401 El Dorado Ventures III, L.P. 2400 Sand Hill Road, Suite 100 Menlo Park, CA 94025 El Dorado Ventures IV, L.P. 2400 Sand Hill Road, Suite 100 Menlo Park, CA 94025 El Dorado C & L Fund, L.P. 2400 Sand Hill Road, Suite 100 Menlo Park, CA 94025 EXHIBIT "A" ----------- (CONT). Name and Address - ---------------- El Dorado Technology IV, L.P. 2400 Sand Hill Road, Suite 100 Menlo Park, CA 94025 Menlo Ventures VI, L.P. 3000 Sand Hill Road Bldg. 4, Suite 100 Menlo Park, CA 94025 Menlo Entrepreneurs Fund VI, L.P. 3000 Sand Hill Road Bldg. 4, Suite 100 Menlo Park, CA 94025 Siemens Aktiengesellschaft Hofmannstrasse 51 81359 Munich Germany Aperture Associates, L.P. 505 Montgomery Street San Francisco, CA 94111 Texas Instruments Incorporated 7839 Churchill Way Attn: Corporate Development Mail Stop 3995 Dallas, Texas 75251 ADC Telecommunications, Inc. 4900 West 78th Street Minneapolis, Minnesota 55435 Palomar Ventures I, L.P. 100 Wilshire Boulevard, Suite 400 Santa Monica, CA 90401 ATTACHMENT I ------------ Standstill & Disposition Agreement ---------------------------------- EX-10.18 5 OFFICE LEASE AGREEMENT EXHIBIT 10.18 OFFICE LEASE AGREEMENT ---------------------- Jackson-Shaw/Alpha Metro Limited Partnership, Landlord and Efficient Networks, Inc. Tenant TABLE OF CONTENTS 1. LANDLORD.............................................................. 1 2. TENANT................................................................ 1 3. LEASED PREMISES....................................................... 1 4. TERM:................................................................. 2 5. BASE RENT; ABATEMENT; SECURITY DEPOSIT................................ 2 6. ADDITIONAL RENT....................................................... 4 7. TENANT REPAIRS AND MAINTENANCE........................................ 8 8. LANDLORD'S REPAIRS AND MAINTENANCE RESPONSIBILITIES................... 9 9. UTILITY SERVICE....................................................... 13 10. SIGNS................................................................. 13 11. USAGE................................................................. 15 12. TENANT'S INSURANCE OBLIGATIONS........................................ 15 13. (INTENTIONALLY DELETED)............................................... 16 14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS........................... 16 15. ASSIGNMENT AND SUBLETTING............................................. 17 16. ALTERATIONS AND IMPROVEMENTS.......................................... 18 17. CONDEMNATION.......................................................... 19 18. FIRE AND CASUALTY..................................................... 20 19. LANDLORD'S INSURANCE OBLIGATION....................................... 21 20. WAIVER OF SUBROGATION................................................. 22 21. HOLD HARMLESS......................................................... 22
22. QUIET ENJOYMENT....................................................... 23 23. LANDLORD'S RIGHT OF ENTRY............................................. 23 24. ASSIGNMENT OF LANDLORD'S INTEREST IN LEASE............................ 23 25. LANDLORD'S LIEN:...................................................... 23 26. DEFAULT BY TENANT..................................................... 24 27. REMEDIES FOR TENANT'S DEFAULT......................................... 24 28. TERMINATION OF OPTIONS................................................ 26 29. WAIVER OF DEFAULT OR REMEDY........................................... 26 30. CHOICE OF LAW; VENUE; ATTORNEY'S FEES................................. 27 31. HOLDING OVER.......................................................... 27 32. RIGHTS OF MORTGAGEE................................................... 27 33. ESTOPPEL CERTIFICATES................................................. 28 34. SUCCESSORS............................................................ 28 35. REAL ESTATE COMMISSION................................................ 28 36. DEFAULT BY LANDLORD................................................... 29 37. MECHANIC'S LIENS...................................................... 29 38. HAZARDOUS MATERIALS................................................... 29 39. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES......................... 31 40. FINANCIAL STATEMENTS.................................................. 32 41. FORCE MAJEURE......................................................... 32 42. ROOF AND OTHER AREAS.................................................. 32 43. MISCELLANEOUS......................................................... 33
44. NOTICE................................................................ 35 45. LANDLORD'S REPRESENTATIONS............................................ 36 46. TENANT FINANCING...................................................... 36 47. TENANT'S CONDUCT...................................................... 36 48. PARKING............................................................... 37 49. (INTENTIONALLY DELETED)............................................... 37 50. ALLOWANCES............................................................ 37 51. IMPROVEMENTS.......................................................... 37 52. RENT ABATEMENT........................................................ 38 53. RENEWAL OPTION........................................................ 39 54. ADDITIONAL SPACE...................................................... 39 55. SPACE PLAN/DESIGN SERVICES ALLOWANCE.................................. 39 56. TENANT'S RIGHT OF FIRST REFUSAL....................................... 40
OFFICE LEASE AGREEMENT THIS LEASE AGREEMENT is entered into this ______ day of ______________, 1999 (the "Execution Date") by and between: -------------- 1. LANDLORD: Jackson-Shaw/Alpha Metro Limited Partnership ("Landlord"), and, -------- 2. TENANT: Efficient Networks, Inc., ("Tenant"). ------ 3. LEASED PREMISES: (a) In consideration of the rents, terms and covenants of this Office Lease Agreement (this "Lease"), Landlord hereby leases to Tenant the "Project" locally ----- known as the Alpha Metro building which includes and is defined as (i) those certain premises (the "Leased Premises" or "Premises") consisting of all of the --------------- -------- "rentable area" (as defined below) within the 125,538 square foot of "rentable area" building (the "Building") located at 4849 Alpha Road, Dallas, Texas, (ii) -------- the land upon which the Building is located as described in the attached Exhibit ------- "A" (of which Exhibit "A-1" is the "Site Plan"), and, (iii) all landscaping, - --- ------------- --------- parking and driveway areas, sidewalks, and other improvements thereon. (b) The rentable area in the Premises and Building has been calculated in accordance with BOMA standards for single occupancy buildings. Such rentable area is hereby stipulated for all purposes hereof to be as stated in Paragraph --------- 3(a) above, whether the same should be more or less as a result of a minor - ---- variation resulting from actual construction and completion of the Premises for occupancy so long as such work is done in substantial accordance with the Work Drawings (hereafter defined). (c) The term "Common Areas" as used herein shall mean and refer to the ------------ areas of the Project the repair and maintenance of which are the responsibility of Landlord under the terms hereof, such as the Building plumbing, elevators, fire protection alarm and sprinkler systems, access and parking areas, service roads, loading facilities, sidewalks, landscaping, and the like. The Common Areas shown on the Site Plan are a material consideration for Tenant entering into this Lease, and Landlord shall not voluntarily allow any change or alteration thereto (except as allowed by the Working Drawings), including but not limited to the parking areas, methods of ingress and egress, direction of traffic, or any change which would materially affect the operation of Tenant's business, without Tenant's prior written consent. Landlord shall not voluntarily permit any public telephones, newspaper machines, vending machines or signage to be affixed by or on behalf of Landlord on the exterior walls of the Building or placed in front, or surrounding, the Leased Premises. OFFICE LEASE AGREEMENT - Page - 1 - ---------------------- 4. TERM: The term of this Lease shall be One Hundred Twenty-Three (123) months (the "Primary Term") commencing on the Commencement Date (hereafter defined), ------------ and terminating on the last day of the 123/rd/ full calendar month following the Commencement Date (the "Termination Date") For purposes of this Lease, a "Lease ---------------- ----- Year" shall be defined as that twelve (12) month period during the Primary Term - ---- or any Extension Term (hereinafter defined) commencing on the Commencement Date or the annual anniversary thereof, as may be applicable; provided, however, that if the Commencement Date is a day other than the first day of a calendar month, then the first Lease Year shall include that period of time from the Commencement Date up to the first day of the next calendar month, and any subsequent Lease Year shall be the twelve (12) month period beginning on the first day of such month. For purposes of this Lease, a "Lease Month" shall be ----------- defined as those successive calendar month periods beginning with the Commencement Date and continuing through the Primary Term or any Extension Term of this Lease; provided, however, if the Commencement Date is a day other than the first day of a calendar month, then the first Lease Month shall include that period of time from the Commencement Date up to the first day of the next calendar month, and each subsequent Lease Month shall be a calendar month period beginning on the first day of such month. The Primary Term and any Extension Terms are sometimes collectively referred to herein as the "Term". For purposes ---- of this Lease, the "Commencement Date" shall be the earlier to occur of (i) ----------------- Substantial Completion (defined along with derivations thereof in Exhibit "B" ---------- attached hereto) or (ii) March 1, 2000; provided, however if Substantial Completion has not occurred by March 1, 2000, and such failure has not been caused by Tenant or Tenant's Representatives (below defined), Base Rent shall be abated until Substantial Completion has occurred (and the Rent Abatement Period, as hereinafter defined, shall likewise be extended), provided further that if Substantial Completion has not occurred by September 30, 2000, and such failure has not been caused by force majeure or Tenant or Tenant's Representatives, then Tenant may terminate this Lease by written notice to Landlord no later than October 15, 2000, such termination to be effective as of the date of said notice, and the Security Deposit (below defined) and any Rent deposit shall be returned to Tenant, and neither party shall have any further liability one to the other. 5. BASE RENT; ABATEMENT; SECURITY DEPOSIT: (a) Tenant's obligation to pay Rent (including Additional Rent (hereafter defined) shall commence on the Commencement Date. Commencing on the Commencement Date, Tenant agrees to pay to Landlord the following rental amounts (sometimes referred to in this Lease as the "Base Rent" or "Base Rental"): --------- ----------- LEASE RENTABLE ANNUAL RENT MONTHLY COST/SQ FT OF ----- -------- ----------- ------- ------------- MONTHS AREA RENT RENTABLE AREA IN ------ ---- ---- ---------------- LEASED PREMISES --------------- 1-9 104,435 sf. $ 2,088,700.00 $ 174,058.33 $ 20.00 10-62 125,538 sf. $ 2,510,760.00 $ 209,230.00 $ 20.00 63-123 125,538 sf. $ 2,855,989.50 $ 237,999.12 $ 22.75 OFFICE LEASE AGREEMENT - Page - 2 - ---------------------- However, no Base Rent shall be due for the Early Occupancy Period (hereafter defined) or for the first two full Lease Months thereafter (collectively, the "Rent Abatement Period"). Payment of Rent is subject to proration for partial --------------------- months and to adjustment for early or delayed occupancy under the terms hereof. If the Commencement Date is a day that is other than the first day of a calendar month, then (i) the Rental Abatement Period shall not include the first Lease Month and shall, instead, include the second, third and fourth full Lease Months, and (ii) the Base Rent for such partial first month (prorated as above provided) shall be due and payable within three (3) days of the Commencement Date and, subject to the credit for which provision is made in the first sentence of Paragraph 5(b) below, the next installment shall be due and payable -------------- on or before expiration of the Rent Abatement Period. If the Commencement Date is the first day of a calendar month, then, subject to the credit for which provision is made in the first sentence of Paragraph 5(b) below, the first -------------- installment of Base Rent shall be due and payable by Tenant on or before expiration of the Rent Abatement Period. All subsequent installments of Base Rent shall be due and payable on or before the first (1st) day of each calendar month during the Lease Term, except as otherwise provided herein. Base Rent shall be payable to Landlord monthly, in advance, without demand, deduction or offset, unless otherwise provided herein, in lawful money of the United States of America at the address stated below. All sums of money, other than Base Rent, which become due under this Lease are deemed to be "Additional Rent" (and are --------------- herein so called). The nonpayment of any Additional Rent shall afford Landlord all the rights and remedies as are herein provided in the case of nonpayment of any Base Rent. (b) On the Execution Date, Base Rent for the first full calendar month for which Base Rent is due under Paragraph 5(a) above shall be deposited with -------------- Landlord, and Landlord shall apply such deposit to the Base Rent for such first full calendar month for which Base Rent is due. Further, on the Execution Date, there shall be due and payable by Tenant a security deposit (the "Security Deposit") in the amount of $174,058.33. Such Security Deposit shall be held by Landlord (without any obligation to pay interest thereon or segregate such money from Landlord's general funds except as may be required by applicable law) as security for the performance of Tenant's obligations under this Lease. Tenant agrees to increase such Security Deposit from time to time so that it is at all times equal to one monthly Base Rental installment plus the average monthly Additional Rentals arising pursuant to Paragraph 6 below. Tenant shall deposit ----------- cash with Landlord in an amount sufficient so to increase the Security Deposit to such amount within ten (10) days after written demand by Landlord. It is expressly understood that the Security Deposit is not an advance payment of rental or a measure of Landlord's damages in the event of Tenant's default under this Lease. Upon the occurrence of any event of default by Tenant under this Lease, Landlord may, from time to time, without prejudice to any other remedy provided herein or provided by law and upon notice to Tenant, use, apply, or retain all or part of the Security Deposit for the payment of (i) Base Rent, (ii) Additional Rent, and (iii) other sums due hereunder, including without limitation any amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any damage, injury, expense or liability caused to Landlord by such default or breach. If any portion of the Security Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the amount required by this Paragraph. Tenant's failure to do so shall be an event of default under this Lease. Unless Tenant receives a timely notice with respect to an event of default OFFICE LEASE AGREEMENT - Page - 3 - ---------------------- (below defined) and fails timely to cure same as herein provided, the balance of the Security Deposit shall be returned by Landlord to Tenant within fifteen (15) days after the termination of this Lease. (c) Other remedies for nonpayment of Rent notwithstanding, if the monthly Base Rental payment is not received by Landlord on or before the tenth (10th) day of the month for which such rent is due, or if any other Rent payment due Landlord by Tenant hereunder is not received by Landlord within ten (10) days of the due date, a service charge of Four hundred ($400.00) dollars shall be additionally due and payable by Tenant as an administrative charge for the extra efforts necessitated by such tardiness in payment. Such service charge shall be cumulative of any other remedies Landlord may have for nonpayment of Rent and other sums payable under this Lease. (d) If three (3) consecutive monthly Base Rental payments or any five (5) (in total, cumulative from the beginning of the Lease Term) monthly Base Rental payments during the Lease Term (or any renewal or extension thereof) are not received by Landlord within ten (10) days of the due date, upon written notice to Tenant the Base Rent hereunder shall thereafter be due and payable by Tenant in advance in quarterly installments equal to three (3) months' Base Rent each. The first of such quarterly Base Rent payments shall be due and payable on the first day of the next succeeding month and on the first day of every third (3rd) month thereafter. This remedy shall be cumulative of any other remedies of Landlord under this Lease for nonpayment of Rent. 6. ADDITIONAL RENT: (a) Operating Costs: (1) Landlord shall pay all Operating Costs (below defined) for the Project except that Tenant shall pay its proportionate share (below defined) of the amount equal to the difference between (x) the actual Operating Costs for the Project for the year in question, and (y) the actual Operating Costs for the calendar year 2000 (the "Base Year"). The Base Year calculation shall be --------- inclusive of a fully assessed building for tax purposes, such difference being referred to herein as the "Operating Costs Increase Expense." If the -------------------------------- Commencement Date is a date later an January 1, 2000, then "the actual Operating Costs for the calendar year 2000" shall be calculated as follows: The days elapsing from the Commencement Date through December 31,2000, shall be the "Actual Days". The actual Operating Costs for the Actual Days shall be the "Base ----------- ---- Operating Costs". Divide the Base Operating Costs by the number of Actual Days, - --------------- and multiply the result by 365. By April 15 of each year from and after the Base Year, Landlord shall deliver to Tenant a good faith estimate of the Operating Costs Increase Expense and any Additional Rent to be paid by Tenant for each calendar year following the Base Year during the Term, and Tenant shall pay to Landlord, along with the Base Rent each month, an amount equal to one-twelfth of its estimated proportionate share for such calendar year or part thereof. From time to time Landlord may estimate and re-estimate the Operating Costs to be due from Tenant and deliver a copy of the estimate or re-estimate to Tenant. Thereafter, the monthly installments of Operating Costs Increase Expense payable by Tenant shall be appropriately adjusted in accordance with the estimation so that, by the end of the calendar year in question, Tenant shall have paid all of its proportionate share of the estimated Operating Costs Increase Expense. Any amounts paid based on such an estimate shall be subject to adjustment as OFFICE LEASE AGREEMENT - Page - 4 - ---------------------- herein provided based on the actual Operating Costs for each calendar year. The Operating Costs Increase Expense shall be "Additional Rent" hereunder. The failure of Landlord to exercise its rights hereunder to estimate the Operating Costs Increase Expense and require payment of same as Additional Rent shall not constitute a waiver of such rights which rights may be exercised from time to time at Landlord's discretion. (2) The term "Operating Costs" shall mean all expenses and --------------- disbursements (subject to the limitations set forth below) that Landlord incurs in connection with the ownership, operation, maintenance and repair of the Project (exclusive of such expenses and disbursements that are paid by Tenant or are Landlord's express responsibility hereunder), determined in accordance with sound accounting principles used in practice by accounting professionals consistently applied, including, but not limited to, the following costs: (A) wages and salaries (including management fees) of all employees engaged in the operation and maintenance of the Project, including taxes, insurance and benefits relating thereto which wages and salaries are prorated according to the percentage of time each employee spends in the operation and maintenance of the Project; (B) all supplies and materials used in the operation, maintenance, repair, and replacement of the Project; (C) costs for improvements made to the Project which, although capital in nature, are expected to reduce the normal operating costs of the Project, as well as capital improvements made in order to comply with any law hereafter promulgated by any governmental authority, as amortized over the useful economic life of such improvements as determined by Landlord in its reasonable discretion; (D) insurance expenses; (E) repairs, replacements, and general maintenance of the Project; (F) service or maintenance contracts with independent contractors for the operation, maintenance, repair, or replacement of the Building (including without limitation, alarm service, card entry system, window cleaning, landscaping service, and elevator maintenance); (G) all provided utilities, other than electricity, telephone and other telecommunications the cost of which are the responsibility of Tenant; (H) janitorial services (subject to Paragraph 8(c)(3) below); and (I) Taxes (defined ----------------- below). Operating Costs shall not include costs for (i) capital improvements made to the Building, other than capital improvements described above and except for items which are generally considered maintenance and repair items, such as painting of common areas, replacement of carpet in elevator lobbies, and the like; (ii) repair, replacements and general maintenance paid by proceeds of insurance or by Tenant or by other third parties; (iii) interest, amortization or other payments on loans to Landlord; (iv) depreciation, (v) leasing commissions; (vi) legal expenses for services in negotiation of this Lease; (viii) federal income taxes imposed on or measured by the income of Landlord from the operation of the Building, (viii) janitorial services paid directly by Tenant if Tenant so elects to provide its own services, (ix) electric, telephone, and other telecommunications costs attributable to the Project, (x) Landlord's obligations under Exhibit "B" hereto, (xi) overhead and profit ----------- increment paid to subsidiaries or affiliates of Landlord or its partners for services on or to the Project, to the extent that the costs of such services exceed competitive costs for such services rendered by persons or entities of similar skill, competence and experience, other than a subsidiary or affiliate of Landlord or its partners; (xii) costs of Landlord's general overhead and general administrative expenses which would not be chargeable to operating expenses of the Project in accordance with sound accounting principles consistently applied; (xiii) rent, if any, incurred in OFFICE LEASE AGREEMENT - Page - 5 - ---------------------- leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature, except equipment which is used in providing janitorial services and which is not affixed to the Project; (xiv) all items and services for which Tenant reimburses Landlord (other than through Tenant paying Operating Costs Increase Expense) or for which Tenant pays third persons; (xv) any expenses relating to the structural integrity of the foundation, exterior walls, or roof of the Project, except as specifically provided for in this Lease; and (xvi) any fines, penalties, legal judgments or settlements of causes of action by or against Landlord unless caused by Tenant or Tenant's Representatives. Tenant acknowledges and agrees that other than Landlord's installation of the door card entry system as part of the Work and maintenance thereof as an Operating Cost, Tenant shall be wholly and solely responsible for all other matters of security for the Project, and Landlord shall have no responsibility or liability of any kind therefor. (3) Landlord shall pay on or before the due dates thereof, including any extensions occasioned by Landlord's lawful rights of contest with respect thereto, all Taxes (other than the personal property taxes of Tenant). The term "Taxes" shall mean taxes, assessments, and governmental charges whether federal, ----- state, county, or municipal, and whether they be by taxing districts or authorities presently taxing or by others, subsequently created or otherwise, and any other taxes and assessments attributable to the Project (or its operation), excluding, however, penalties and interest thereon and federal and state taxes on income (if the present method of taxation changes so that in lieu of the whole or any part of any Taxes, there is levied on Landlord a capital tax directly on the rents received therefrom or a franchise tax, assessment, or charge based, in whole or in part, upon such rents for the Building, then all such taxes, assessments, or charges, or the part thereof so based, shall be deemed to be included within the term "Taxes" for purposes hereof), excluding ----- further any franchise, estate, inheritance, succession, transfer, income or excess profit tax or tax imposed on Landlord due to the change of ownership of the Project as defined in the law during the Term of this Lease under which reassessment or tax increase results from a transfer of all or a portion of Landlord's estate as opposed to an increase in Project valuation. Taxes shall include the reasonable costs of consultants retained by Landlord in an effort to lower taxes and all reasonable costs incurred by Landlord in disputing any taxes or in seeking to lower the tax valuation of the Project. Upon Tenant's written request, Landlord shall deliver to Tenant evidence of Landlord's payment of bills for Taxes. Tenant may, upon the receipt of prior written approval of Landlord, such approval not to be unreasonably withheld, contest any Taxes against the Premises and attempt to obtain a reduction in the assessed valuation of the Premises for the purpose of reducing any such tax assessment. In the event Landlord approves, and upon the request of Tenant, but without expense or liability to Landlord, Landlord shall cooperate with Tenant and execute any document which may be reasonably necessary and proper for any proceeding. In such event Tenant shall be solely responsible for all legal and related expenses relating to such documents; provided however, Tenant shall be authorized to collect from any tax refund received as a result of Tenant's proceedings (i) any Taxes that Tenant has paid which are reduced as a result of such proceedings and (ii) a refund of all costs and expenses incurred in connection with obtaining such refund. If a tax reduction is obtained, there shall be a subsequent reduction in Tenant's total Taxes for such year, and any excess payments by Tenant shall OFFICE LEASE AGREEMENT - Page 6 - ---------------------- be refunded by Landlord, without interest, when all refunds to which Landlord is entitled from the taxing authority with respect to such year have been received by Landlord. In the event Landlord desires to contest any Taxes, Tenant agrees to cooperate with Landlord and execute any document which may be reasonably necessary and proper for any proceeding. During the pendency of any contest by Landlord or Tenant, Tenant shall become and remain obligated to pay or to provide an appropriate bond or security for the payment of all Taxes at least ten (10) days prior to the date due, and otherwise follow the payment and notification obligations set forth in this Paragraph, provided, however, if the taxing authority forwards the tax notification letter to Landlord, Landlord shall forward same to Tenant and Tenant shall be obligated to pay Tenant's Proportionate Share of the increase in the Taxes as provided herein upon the later to occur of (i) thirty (30) days after receipt thereof, or (ii) five (5) days prior to the date such Taxes are due to be paid to the taxing authority. In any event, Tenant shall be responsible for insuring and paying all taxes upon Tenant's furniture, machinery, goods, supplies, fixtures, Alterations (below defined) or other improvements, and other property on the Premises. (b) Operating Costs Statement/Right to Audit: By April 15, 2001, and by April 15 of each calendar year thereafter, or as soon thereafter as practicable, Landlord shall furnish to Tenant a statement of the actual Operating Costs (the "Operating Costs Statement") for the previous year. If the Operating Costs ------------------------- Statement reveals that Tenant paid more for Operating Costs than the actual amount attributable to Tenant pursuant hereto for the year for which such statement was prepared, then Landlord shall promptly credit or reimburse Tenant for such excess; likewise, if Tenant paid less than Tenant's actual proportionate share of the Operating Costs Increase Expense, then Tenant shall promptly pay to Landlord such deficiency. Tenant shall have the right to cause a certified public accountant selected by Tenant to audit the books and records of Landlord, with respect to any cost or item which is passed through to Tenant ("Tenant's Audit"), upon thirty (30) days advance written notice by Tenant to Landlord which notice shall be given, if at all, within sixty (60) days of the date that Tenant receives the Operating Costs Statement. Landlord shall cooperate with Tenant in providing Tenant's accountant reasonable access to its books and records during normal business hours, at Landlord's business address or other place in Dallas, Texas, designated by Landlord, for this purpose. If the results of Tenant's Audit show an overcharge to Tenant of more than the actual amount owed by Tenant, Landlord may cause a certified public accountant to review such audit ("Landlord's Audit"), and the two accountants shall reconcile any differences. If the final result shall show an overpayment by Tenant of the amount owed, Landlord shall credit or refund to Tenant or offset against any Rents becoming due under the Lease any overcharge of such items within thirty (30) days of completion of such audits. In the event such audit discloses an undercharge of such items as billed to Tenant, Tenant shall pay Landlord the amount of such undercharge within thirty (30) days of completion of such audits. Tenant shall pay the costs of Tenant's Audit, and Landlord shall pay the costs of Landlord's Audit. For the calendar year in which this Lease terminates, Tenant's liability for Tenant's Proportionate Share of Operating Costs Increase Expense for such partial calendar year shall be subject to pro rata adjustment based upon the number of days of the Term elapsing during such OFFICE LEASE AGREEMENT - Page - 7 - ---------------------- partial year. If the applicable charges are not available prior to the end of the Term hereof, then the aforesaid adjustment shall be made between Landlord and Tenant after Landlord shall have received the charges for such period, it being specifically agreed that Landlord's and Tenant's obligations under this Paragraph shall survive the expiration of the term of this Lease. (c) Proportionate Share: As used in this Lease, the term "proportionate ------------- share" or "Tenant's Proportionate Share" is defined as follows: As of the - ----- ---------------------------- Commencement Date through and including the last day of the ninth full calendar month of the Term, Tenant's Proportionate Share shall be 83% [104,435 divided by 125,538], and from and after the last day of the ninth full calendar month of the Term, Tenant's Proportionate Share shall be 100%. (d) Cap on Certain Operating Costs: For the purpose of determining Additional Rent, Operating Costs (exclusive of the Non-Capped Operating Costs, as hereinafter defined) for any calendar year shall not be increased over the amount of Operating Costs (exclusive of Non-Capped Operating Costs) during the prior calendar year by more than five percent (5%). For example, if Operating Costs (exclusive of Non-Capped Operating Costs) during the second calendar year after the calendar year in which the term of this Lease commences were $100,000, the cap on Operating Costs (exclusive of Non-Capped Operating Costs) for the third full calendar year would be $105,000.00 ($100,000 times 1.05). It is understood and agreed that there shall be no cap on "Non-Capped Operating -------------------- Costs", which are hereby defined to mean all utilities, all Taxes and all - ----- Insurance Premiums. 7. TENANT REPAIRS AND MAINTENANCE: (a) Tenant, at its own expense, shall maintain all parts of the Leased Premises and their appurtenances (except those for which Landlord is expressly responsible to maintain under this Lease) in good, clean and sanitary condition and shall promptly make all necessary repairs and replacements to the Leased Premises including but not limited to electrical light lamps or tubes (other than lamps in Building standard ceiling mounted fixtures installed by Landlord), interior windows, interior glass and plate glass, interior doors, special office entries, interior walls and finish work, floors and floor coverings, the Generator, the equipment in the UPS Area, Tenant-installed heating and air conditioning systems, Tenant-installed fire sprinkler systems, and Tenant- installed plumbing work and fixtures. Replacement and repair parts, materials and equipment shall be of quality equivalent to those initially installed within the Leased Premises, and repair and maintenance work shall be done in a good and workmanlike manner and in accordance with existing laws, rules, regulations and ordinances. (b) Tenant shall not damage or disturb the structural integrity or support of any wall, roof, or foundation of the Building, without the prior written consent of Landlord pursuant to Paragraph 16. The costs and expenses of repair ------------ of any damage to these areas caused by Tenant or Tenant's Representatives (defined in Paragraph 7(e)) shall be paid within ten (10) days business days -------------- after written notice thereof to Tenant (including a description of the damage and itemized cost of repair of same). OFFICE LEASE AGREEMENT - Page - 8 - ---------------------- (c) Tenant shall at its own expense keep the Leased Premises pest-free and pay all charges for pest control and extermination within the Leased Premises. (d) On the Termination Date, Tenant shall deliver the Leased Premises to Landlord "broom clean" in the same good order and condition as existed at the Commencement Date of this Lease, ordinary wear, natural deterioration beyond the control of Tenant, and damage by fire, tornado or other casualty excepted. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Leased Premises and shall arrange to meet with Landlord for a joint inspection of the Leased Premises prior to vacating. In the event of Tenant's failure to give such notice or arrange such joint inspection, Landlord's inspection at or after Tenant's vacating the Leased Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. (e) Tenant shall be responsible for all costs, expenses and liabilities caused by the willful or negligent acts or omissions of Tenant or Tenant's employees, officers, directors, partners, agents, invitees, guests, patrons, licensees, contractors, representatives, trespassers, or others for whom Tenant is legally responsible (all such persons and entities being herein collectively referred to as "Tenant's Representatives") or caused by Tenant's default ------------------------ hereunder. (f) If Landlord shall give Tenant written notice of defects or need for repairs for which Tenant is responsible under this Lease, and if Tenant shall fail to make same within thirty (30) days of Landlord's notification (subject to the provisions of Paragraph 41 below) or such shorter time as is reasonable if ------------ expedited repair is needed to avoid injury or damage, Landlord shall have the option to cure said defect or repair, and Tenant shall pay to Landlord all costs and expenses incurred within thirty (30) days after written notice to Tenant thereof (including a description of the damage and itemized costs of repair or same). 8. LANDLORD'S REPAIRS AND MAINTENANCE RESPONSIBILITIES: (a) Landlord has agreed, at its expense, to construct the structural and exterior portions of the Building, excluding for purposes of this Paragraph the Leased Premises which are dealt with in Paragraph 51 and Exhibit "B" below, ------------ ----------- ("Landlord's Construction")in accordance with the Landlord's Plans and ----------------------- Specifications more particularly described herein in Exhibit "E" attached hereto ----------- (the "Landlord's Plans and Specifications"). Landlord certifies that it has ----------------------------------- provided Tenant with a complete and accurate set of Landlord's Plans and Specifications and that they have not been materially amended or modified except as reflected in Exhibit "E". The plumbing, electrical, and other utilities ---------- contemplated by Landlord's Plans and Specifications are or will be on the Commencement Date in good working condition and order. As of the Commencement Date, to Landlord's actual knowledge, the Building shall be in compliance with all existing laws, codes, regulations and ordinances of any governmental authorities. Landlord's Construction shall be completed in accordance with all Applicable Laws in a good and workmanlike manner, utilizing first quality, new materials. Tenant has reviewed the Landlord's Plans and Specifications and OFFICE LEASE AGREEMENT - Page - 9 - ---------------------- acknowledges that, to the best of its knowledge, the Building has been constructed substantially in compliance therewith. Landlord agrees to correct or cause to be corrected any original latent defects in Landlord's Construction of which written notice is provided to Landlord within the applicable period of limitations. (b) Landlord shall be responsible, at its expense, for, but only for, the structural integrity of the roof, foundation and exterior walls of the Building and the repair, maintenance, and replacement needed with respect to the structural integrity thereof. The costs of any repair to the roof, foundation or exterior walls occasioned by the act of omission of Tenant or Tenant's Representatives shall be the responsibility of Tenant except to the extent that proceeds of any warranties or insurance shall be received by Landlord. Landlord's liability with respect to any defects, repairs or maintenance for which Landlord is responsible at its expense under this Lease shall be limited to the cost of such repairs or maintenance or the curing of such defect. Tenant shall promptly give Landlord written notice of defects or need for repairs, after which Landlord shall have thirty (30) days to commence to repair or cure such defect. To the extent required by Landlord's Plans and Specifications and the Working Drawings, Landlord, at its expense, has caused or will cause Landlord's Construction and the Work (as defined in Paragraph 51 below) ------------ initially to comply with all laws, orders, ordinances, rules and regulations applicable thereto including, without limitation, the Americans With Disabilities Act. Any changes to the Premises required thereby shall be the sole responsibility and expense of Tenant though, at Tenant's request and expense and in accordance with Paragraph 8(e) below, Landlord will assist in such efforts. -------------- Any subsequent changes in the Project outside the Premises required thereby shall be performed by Landlord as Operating Costs. (c) Landlord shall diligently perform the work which gives rise to Operating Costs in accordance with all Applicable Laws and in a good and workmanlike manner and shall furnish Tenant the following services, all being subject to payment therefor by Tenant pursuant to the provisions of Paragraph --------- 6(b) above. Any services performed by Landlord, to or affecting, the Leased - ---- Premises shall be done in such a manner as to limit as much as is practicable interference with Tenant's use and occupancy of the Premises, and only limited materials and tools used in connection with such services shall be stored in the Premises. The services that Landlord shall furnish include: (1) Air conditioning and heating as provided in Landlord's Plans and Specifications and the Working Drawings. Tenant acknowledges that such service and temperature may be subject to regulation by local, county, state or federal regulation. Whenever machines or equipment that generate abnormal heat are used in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord shall have the right to install supplemental air conditioning in the Premises, and the reasonable cost thereof including the cost of installation, operation, use and maintenance, shall be paid by Tenant to Landlord as Additional Rental upon demand. (2) Water at those points of supply reflected in the Working Drawings for drinking, lavatory and toilet purposes. Landlord shall pay to the appropriate utility company, in time OFFICE LEASE AGREEMENT - Page - 10 - ---------------------- to avoid interruption of service for non payment and to avoid late charges, all charges for water use consumed on the Project during Tenant's occupancy and such costs shall be included in Operating Costs. (3) Janitorial service in and about the Building and the Premises, as may in the judgment of Landlord be reasonably required; however, Tenant shall pay all additional costs attributable to the cleaning of improvements within the Premises. If Tenant elects to provide its own janitorial service (subject to Landlord's reasonable approval of the insurance carried by the contractor), the Base Rent shall be reduced by $0.90 per square foot of rentable area per year. (4) Elevators as shown in Landlord's Plans and Specifications for ingress to the egress from the second floor of the Building - 24 hours per day, 7 days per week. (5) Electricity at those points of supply reflected in the Working Drawings, Tenant shall pay to the appropriate public utility company all charges for electric current consumed on the Project during the Term of this Lease, as extended, and such costs shall not be included in Operating Costs. (6) Replacement of lighting fixture lamps in Building ceiling mounted fixtures. (7) The secured card entry system at all entrances and exits, except for those additional entrances or exits, including overhead doors added by Tenant, as provided in the Working Drawings. Landlord shall allow Tenant access to the Premises seven (7) days a week, twenty-four (24) hours a day. (8) Landlord shall provide a Building directory and the in-ceiling florescent lighting throughout the Building shown in the Working Drawings or Landlord's Plans and Specifications. (9) Maintenance of the Project outside the Leased Premises in good operating condition and repair, clean and free from rubbish and debris, maintenance of the landscaping, and adequate illumination and draining of the Project. (d) Tenant shall promptly give Landlord written notice of defects or need for repairs for which Landlord is responsible hereunder after which Landlord shall have thirty (30) days to commence to repair or cure such defect. If not caused by the interference of Tenant or Tenant's Representatives, if Landlord fails to make repairs that materially interfere with Tenant's use and enjoyment of the Leased Premises after notice of same, Tenant may make such repairs and offset the actual, necessary cost thereof against Base Rent. No interruption or malfunction of any such services shall constitute an eviction or disturbance of Tenant's use and possession of the Premises or the Building or a breach by Landlord or any of Landlord's obligations hereunder or render Landlord liable for damages or entitle Tenant to be relieved from any of Tenant's obligations hereunder (including the obligation to pay rental unless, and to the extent, Landlord receives rental interruption OFFICE LEASE AGREEMENT - Page - 11 - ---------------------- insurance proceeds therefor) or grant Tenant any right of set off or recoupment except as expressly set forth herein. In the event of any such interruption, however, Landlord shall use reasonable diligence during the business hours set forth herein promptly to restore such service or cause same to be restored in any circumstances in which such restoration is within the reasonable control of Landlord and the interruption was not caused solely by Tenant or Tenant's Representatives. (e) Should Tenant desire any additional services (other than Project security which shall be Tenant's exclusive responsibility) beyond those described in this Paragraph 8 or rendition of any services outside the normal ----------- time established by Landlord for providing any services, Landlord may (at Landlord's option), upon reasonable advance notice from Tenant to Landlord, furnish such services, and unless otherwise provided herein, Tenant shall pay directly for such services or shall agree to pay Landlord such reasonable charges as may be agreed upon between Landlord and Tenant, but in no event at a charge less than Landlord's reasonable actual cost plus reasonable overhead for the additional services provided. (f) Landlord shall furnish and install window coverings on all exterior windows to maintain a uniform exterior appearance. Tenant shall not remove or replace such window coverings or install any other window covering which would affect the exterior appearance of the Building or the Premises. Tenant may install lined or unlined over-draperies on the interior side of the Landlord furnished window coverings for interior appearance or to reduce light transmission, provided such over-draperies do not affect the exterior appearance of the Building or the Premises. (g) Tenant acknowledges that, except as expressly set forth in this Lease or any exhibit hereto, no representations or promises regarding construction, repairs, alterations, remodeling, or improvements to the Leased Premises have been made by Landlord, its agents, employees, or other representatives. (h) Landlord has provided Tenant with a true copy of Landlord's Owner Policy of Title Insurance (Policy No. 44 0298 100 9812) issued by Chicago Title Insurance Company, dated November 4, 1998 (the "Title Policy") and a current ------------ survey of the Project. Landlord represents that, except as shown in the Title Policy, to Landlord's current actual knowledge, there are no other restrictions in the deed records affecting the Project. Based upon its review of the Title Policy and the documents referred to therein, Tenant has satisfied itself as to any restrictions of record. Tenant will satisfy itself as to all zoning and other governmental restrictions and regulations with respect to all uses of the Premises prior to commencement of any construction of the Premises. Failure of Tenant to provide written notice of any limitations on such use that are unacceptable to Tenant prior to commencement of construction shall be deemed acceptance by Tenant. Tenant's taking possession of the Leased Premises shall conclusively establish that, subject to any express representation or obligation of Landlord in this Lease, the improvements to be made by Landlord under the terms of this Lease have been completed in accordance with the Working Drawings and Landlord's Plans and Specifications and that the Leased Premises are in good and satisfactory condition as of the date of Tenant's possession subject only to Paragraph 8 of Exhibit "B" to this Lease. In conjunction with, or at any time ----------- after, the Commencement Date, Tenant shall, upon OFFICE LEASE AGREEMENT - Page - 12 - ---------------------- Landlord's request, execute and deliver to Landlord an estoppel certificate (as referred to in Paragraph 33 of this Lease) to acknowledge the Commencement Date. ------------ 9. UTILITY SERVICE: (a) Subject to availability from the utility provider, Landlord shall provide utility services of the type and quality reflected in the Working Drawings and/or Landlord's Plans and Specifications which the parties acknowledge are at least in accordance with standards typical of first-class commercial office/flex buildings in the submarket area of the Project in Dallas, Texas. Such services include water, sewer, telephone and electric current. Subject to availability from the utility provider, such services shall be provided to Tenant on a 24-hour a day, 7 day a week basis. (b) Tenant shall pay the cost of all telephone or other telecommunications service used on the Leased Premises and the cost of electric service attributable to the Project as provided for hereinabove. (c) Tenant shall pay all costs caused by Tenant introducing excessive pollutants into the sanitary or storm sewer system, including permits, fees, assessments, and charges levied by any governmental subdivision, for any pollutants or solids other than ordinary human waste. (d) Landlord acknowledges that there shall be no start-up charge, minimum usage requirements or other surcharges or impositions imposed upon Tenant. (e) Defined holidays shall be: New Year's Day, Labor Day, Memorial Day, Fourth of July, Thanksgiving Day and Christmas Day. 10. SIGNS: (a) Tenant may place signage as desired by Tenant within the interior areas of the Premises. Such signs shall be placed by a contractor reasonably approved by Landlord and paid for by Tenant. Tenant shall remove all such signs at the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Premises, and Tenant, at its sole expense, shall repair any material injury or defacement in removing such signs; provided however, Tenant shall not be responsible for any discoloration caused by ordinary wear and tear. (b) Exterior Signage. Tenant shall not inscribe, paint, affix or display any signs, door plaques, advertisements or notices on or around the exterior of the Building or areas of the Project outside the Building except as provided below: (1) Subject to Paragraph 28 below, Tenant and only Tenant, but no ------------ subtenant or assignee of any rights hereunder, shall have the right, at its sole cost and expense, to install its corporate identification or logo upon the top spandrel panel of the Building between Pod C & W, (the OFFICE LEASE AGREEMENT - Page - 13 - ---------------------- "Building Sign"), provided that (i) Tenant obtains all necessary approvals from ------------- the City of Farmers Branch and all other governmental authorities having jurisdiction over Tenant, the Project and the Building Sign, (ii) the Building Sign conforms to all applicable laws, rules and regulations of any governmental authorities having jurisdiction over the Building Sign or the Project, and (iii) Landlord and Tenant shall mutually agree upon the design, color, character, style, material, installation method and size of the Building Sign, which approval shall not be unreasonably withheld or delayed. (2) Tenant shall also have the right, at Tenant's expense, to install a Building Monument Sign (the "Building Monument Sign") at the center entrance ----------------------- of the Building adjacent to Alpha Road, provided that (i) Tenant obtains all necessary approvals from the City of Farmers Branch and all other governmental authorities having jurisdiction over Tenant, the Project and the Building Monument Sign, (ii) the Building Monument Sign conforms to all applicable laws, rules and regulations of any governmental authorities having jurisdiction over the Building Monument Sign or the Project, and (iii) Landlord and Tenant shall mutually agree upon the location, design and size of such sign, which approval shall not be unreasonably withheld or delayed. (3) Landlord agrees that Tenant's signs shall be displayed in a prominent (or top) position and no other tenant(s)' signs shall be larger than Tenant's without Tenant's consent. Landlord agrees that if Landlord makes available to any other tenant any signage located in the Common Areas or on the Project, including the Building, then such signage shall also include Tenant's identification sign in the top position and at least as large as the largest sign made available to such other tenant(s). Tenant shall have the right, without Landlord's approval, to change its sign from time to time so long as such new signs are no larger than the sign it replaces and complies with Subparagraphs (1) and (2) immediately preceding. At Tenant's sole cost and expense, Landlord will fully cooperate with Tenant in Tenant's filing any required signage application, permit and/or variance for said signage. (c) Prior to commencement of any sign construction, Tenant shall deliver to Landlord certificates of insurance evidencing that Tenant's contractors, agents, workmen, engineers or other persons installing the Building Sign and/or Building Monument Sign have in effect valid workmen's compensation, public liability and builder's risk insurance in amounts, with such companies and in such forms as Landlord may consider reasonably necessary or appropriate for its protection. Except for the gross negligence or wilful misconduct of Landlord or Landlord's Representatives, during the Term of this Lease, Tenant shall indemnify and hold Landlord harmless from and against any and all claims, demands, fines, liabilities, costs, expenses, damages, actions and causes of action accruing from or related to the Building Sign and/or Building Monument Sign. The indemnity set out in the preceding sentence will be limited only by the gross negligence or wilful misconduct of Landlord or anyone acting for Landlord. Tenant agrees that Landlord shall have the right, at its expense, temporarily to remove and replace the Building Sign and/or Building Monument Sign in connection with and during the course of any repairs, changes, alterations. modifications, renovations or additions to the Building in which case Landlord shall replace the signage upon completion of the work. OFFICE LEASE AGREEMENT - Page - 14 - ---------------------- (d) Tenant shall maintain the Building Sign and the Building Monument Sign, at Tenants sole cost and expense. If Tenant is in default under this Lease, Tenant's rights to signage shall terminate and Landlord shall have the option to remove such signage at Tenant's sole cost and expense. Tenant shall, at its sole cost and expense, remove all such signs at the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Project and other improvements. Tenant shall repair any damage or defacement, including, without limitation, any discoloration, caused by the removal of such signs. (e) Landlord shall at all times maintain all pylons, monuments, and spendrals in good order and repair and the cost of maintenance of such pylons, monuments and spendrals, and the cost of any electricity to illuminate them shall be included as an Operating Cost. (f) Landlord may erect a sign or signs on the Leased Premises at a location reasonably acceptable to Tenant indicating that the Project are for lease during the six (6) month period prior to the expiration of this Lease. (g) The right to signage is not assignable by Tenant except in conjunction with the assignment of this Lease as elsewhere herein provided. 11. USAGE: (a) Tenant warrants and represents to Landlord that the Leased Premises shall be used and occupied only for general office uses, which may include product distribution from the Premises as well as research and development of computer related telecommunication products. Tenant shall occupy the Leased Premises and conduct its business, and Tenant's Representatives shall conduct themselves, in compliance with all laws, rules and regulations and in a lawful, quiet, and reputable way and as not to create any nuisance. Tenant shall not commit, or allow to be committed, any waste on the Leased Premises or the Project. Tenant may not use the Leased Premises for the use, storage, or distribution of hazardous or environmentally offensive substances, or for underground storage, or for any unlawful purposes. (b) Tenant shall have the right after written notice to Landlord to contest by appropriate legal proceedings the validity or application of any law, ordinance or other legal requirement affecting Tenant, the Premises, or the operation of Tenant's business on the Premises and to delay compliance therewith pending the prosecution of such proceedings, provided that no civil or criminal penalty is or could be incurred by Landlord and no lien or charge is or could be imposed upon the Premises or any other part of the Project. 12. TENANT'S INSURANCE OBLIGATIONS: (a) Tenant shall not permit the Leased Premises to be used in any way which would violate laws, rules, or regulations governing hazardous substances or which would in any way increase the cost of or render void any insurance on the improvements, and Tenant shall OFFICE LEASE AGREEMENT - Page - 15 - ---------------------- immediately, on demand, cease any use which violates the foregoing or to which Landlord's insurer or any governmental or regulatory authority objects. If at any time during the term of this Lease Tenant's use of the Premises shall cause an increase in premiums, and in particular, but without limitation, if the State Board of Insurance or other insurance authority disallows any of Landlord's sprinkler credits or imposes an additional penalty or surcharge in Landlord's insurance premiums because of any act solely attributable to or arising from the direct acts of Tenant, Tenant agrees to pay as Additional Rent the commercially reasonable increase in Landlord's insurance premiums. (b) Tenant, at its sole cost and expense, shall procure and maintain throughout the term of this Lease a policy or policies of insurance insuring Landlord, Landlord's management company and lender, and Tenant against all claims for property damages, personal injury or death of others occurring on or in connection with: (i) the Leased Premises and all personal property therein; (ii) the condition of the Leased Premises; (iii) Tenant's operations in and maintenance and use of the Leased Premises; (iv) Tenant's and Tenant's Representatives' use of the Common Areas of the Project, and (v) Tenant's liability assumed under this Lease. The limits of such policy or policies shall be not less than $ 2,000,000.00 combined single limit coverage per occurrence for injury to persons (including death) and/or property damage or destruction, including loss of use. (c) All such policies shall be procured by Tenant from insurance companies reasonably satisfactory to Landlord naming the following as co-insureds: (i) Landlord; (ii) Landlord's management company, Jackson-Shaw Company or its successor; and, (iii) Landlord's mortgage holder, as changed from time to time. Certified copies of such policies, together with receipt for payment of premiums, shall be delivered to Landlord prior to the Commencement Date. Not less than fifteen (15) days prior to the expiration date of any such policies, certified copies of renewal policies and evidence of the payment of renewal premiums shall be delivered to Landlord. All such original and renewal policies shall provide for at least thirty (30) days written notice to Landlord before such policy may be canceled or changed to reduce insurance coverage provided thereby. Copies of such policies and duly executed certificates evidencing insurance coverage, together with copies of receipts for payment of premiums, shall be delivered to Landlord prior to the Commencement Date. Not less than fifteen (15) days prior to the expiration date of any such policies, copies of renewal policies and duly executed certificates evidencing insurance coverage and evidence of the payment of renewal premiums shall be delivered to Landlord. If required of Landlord by its insurance carrier, Tenant shall, within fifteen (15) days after request therefor provide reasonable information concerning use of and insurance coverages for the Lease Premises. 13. (INTENTIONALLY DELETED) 14. COMPLIANCE WITH LAWS, RULES AND REGULATIONS: Except as provided in Paragraph 8(b) above and subject to the limitations thereof, and unless - -------------- otherwise herein expressly stated to be the responsibility of Landlord, Tenant shall comply with all applicable laws, ordinances, orders, rules and regulations of state, federal, municipal, or other agencies or bodies relating to the use, condition and occupancy of and business conducted on the Project and the Leased Premises, respectively, including without limitation, the Americans with Disabilities Act, the Resource OFFICE LEASE AGREEMENT - Page - 16 - ---------------------- Conservation and Recovery Act, the Comprehensive Environmental Response Act, and the rules, regulations and directives of the United States Environmental Protection Agency and/or the Texas Natural Resource Conservation Commission. 15. ASSIGNMENT AND SUBLETTING: Tenant agrees not to assign, transfer, or mortgage this Lease or any right or interest therein or sublet the Leased Premises or any part thereof, without the prior written consent of Landlord which shall not be unreasonably withheld or delayed, except that Tenant shall have the right to mortgage its interest in this Lease to a bona fide lender in an arms-length loan transaction and to sublease, assign or otherwise transfer its interest in the Lease, upon assumption of all obligations with respect thereto, to any parent, subsidiary, or affiliate of Tenant, or to a corporation with which Tenant may merge or consolidate, without Landlord's approval. Landlord shall, however, be notified in writing of any such assignment, sublease, transfer or mortgage. No assignment, subletting, transfer, or mortgaging shall relieve Tenant of its obligations hereunder, and Tenant shall continue to be liable as a principal (and not as a guarantor or-surety) to the same extent as though no assignment, subletting, transfer, or mortgaging shall had been made. Consent by Landlord (to the extent such consent is required) to any one assignment, subletting, transfer, or mortgaging shall not be construed to be consent to any additional assignment, subletting, transfer, or mortgaging. Each such successive act shall require similar consent of Landlord. Landlord shall be reimbursed by Tenant for any reasonable costs or expenses actually incurred as a result of Tenant's request for consent to any such assignment, subletting, transfer, or mortgaging, including reasonable legal costs. In the event Tenant subleases the Leased Premises, or any portion thereof, or assigns this Lease with the consent of the Landlord at an annual Base Rental exceeding that stated herein (the "Excess Rent"), such excess shall be retained by and be ----------- the exclusive property of Tenant; however, upon the occurrence of an event of default (defined below), if all or any part of the Leased Premises is then assigned or sublet, Landlord may, in addition to any other remedies provided by this Lease or provided by law, collect directly from the assignee or subtenant all rents due to Tenant, and any Excess Rents shall belong to Landlord, though such Excess Rents actually received by Landlord shall be credited to any sums at any time owed by Tenant hereunder. Any collection directly by Landlord from the assignee or subtenant shall not be construed, however, to constitute a novation or a release of Tenant from the further performance of its obligations under this Lease. Notwithstanding the foregoing, it is expressly agreed that if this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq, as amended (the "Bankruptcy Code"), --------------- any and all monies or other considerations payable or otherwise to be delivered in connection with such assignment, including without limitation Excess Rents, shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and be promptly paid or delivered to Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. OFFICE LEASE AGREEMENT - Page - 17 - ---------------------- 16. ALTERATIONS AND IMPROVEMENTS: (a) Tenant shall not make or perform, or permit the making or performance of, any initial or subsequent tenant finish work or any alterations, installations, decorations, improvements, additions or other physical changes in or about the Leased Premises that are structural in nature or that exceed $6,000.00 in costs (referred to collectively as "Alterations") without ----------- Landlord's prior consent. Landlord may withhold consent in its sole discretion if the Alterations in any way penetrate the roof (except as provided in Paragraph 42(a) below) or outer walls of the Building or impact the structure or - --------------- structural integrity of the Building or any of its systems. Otherwise, such consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing provisions or Landlord's consent to any Alterations, all Alterations shall be made and performed in conformity with and subject to the following provisions: All Alterations shall be made and performed at Tenant's sole cost and expense in a good and workmanlike manner. Alterations shall be made only by contractors or mechanics approved by Landlord, such approval not to be unreasonably withheld or delayed. Tenant shall submit to Landlord detailed plans and specifications (including architectural layout, mechanical and structural drawings) for each proposed Alteration and shall not commence any such Alteration without first obtaining Landlord's written approval of such plans and specifications. Prior to the commencement of each proposed Alteration, Tenant shall furnish to Landlord a certificate evidencing worker's compensation insurance coverage for all persons to be employed in connection with such Alterations, including those to be employed by all contractors and subcontractors, and of comprehensive public liability insurance (including property damage coverage) in which Landlord, Landlord's Representatives, and any mortgagee of the Building shall be named as parties insured, which policies shall be issued by companies and shall be in form and amounts as customarily required and satisfactory to Landlord in its reasonable discretion and shall be maintained by Tenant until the completion of such Alteration. Tenant shall cause its contractor and each subcontractor to provide Landlord with a Certificate of Completion of the Alterations and a Bills Paid Affidavit and full Lien Waiver in form and content as reasonably required by Landlord and as customarily required. Tenant shall, if required by Landlord at the time of Landlord's consent to the Alterations, agree to restore the affected portions of the Project at the termination of this Lease to their condition prior to making such Alterations. All permits, approvals and certificates required by all governmental authorities shall be timely obtained by Tenant and copies shall be submitted to Landlord. Notwithstanding Landlord's approval of plans and specifications for any Alterations, all Alterations shall be made and performed in full compliance with all applicable laws, orders, rules, standards and regulations of Federal, State, County, and Municipal authorities, including, without limitation, all directions, pursuant to law, of all public officers, and with all applicable rules, orders, regulations and requirements of the local Board of Fire Underwriters or any similar body ("Applicable Laws"). Landlord's approval shall --------------- not in any way be considered an indication that the plans and specifications comply with Applicable Laws. All materials and equipment to be incorporated in the Leased Premises as a result of all Alterations shall be new and first quality. No such materials or equipment shall be subject to any lien, encumbrance, chattel mortgage or title retention or security agreement. Whether such Alterations are being performed by Tenant in connection with Tenant's initial occupancy of the Leased Premises or subsequently, Tenant agrees to make proper application for, and obtain, a Building Permit and a Certificate of Occupancy from OFFICE LEASE AGREEMENT - Page - 18 - ---------------------- the city in which the Leased Premises are located. Tenant shall furnish copies of such permit and certificate to Landlord promptly after issuance of same. (b) Except for Tenant's Property (below defined), all appurtenances, fixtures, improvements, and other property attached to or installed in the Leased Premises, whether by Landlord or Tenant or others, and whether at Landlord's expense or Tenant's expense, or the joint expense of Landlord and Tenant, shall be and remain the property of Landlord. Any replacements of any property of Landlord, whether made at Tenant's expense or otherwise, shall be and remain the property of Landlord. Any trade fixtures, business equipment, inventory, trademarked items, signs, decorative soffit, counters, shelving, showcases, mirrors and other removable personal property installed in or on the Premises by Tenant at its sole expense, and the Generator (below defined), the equipment in the UPS Area (below defined) regardless of who paid the cost thereof, shall remain the property of Tenant (the "Tenant's Property"). Landlord ----------------- agrees that, if Tenant is not in default hereunder, Tenant shall have the right, at any time or from time to time, to remove any and all of Tenant's Property, but Tenant shall repair, or at Landlord's option shall pay Landlord the cost of repairing, any damage arising from such removal and shall leave the Premises in a neat, clean, operating condition, free of debris, normal wear and tear excepted. 17. CONDEMNATION: (a) If, during the Term (or extension or renewal) of this Lease, (i) all or a substantial part of the Leased Premises or (ii) a number of the Parking Spaces (which cannot be replaced by other parking spaces reasonably satisfactory to Tenant) which reduces the available parking on the Project to below that required by Applicable Laws, are taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by private purchase in lieu thereof, and the taking would prevent or materially interfere with the authorized use hereunder of the Leased Premises, or make it commercially unreasonable or unfeasible for Tenant to conduct its normal business, in accordance with the uses authorized hereunder, in the Premises, including any such taking by the powers of eminent domain which eliminates access to the Building or the Project, this Lease shall terminate, Tenant's obligation to pay the Base Rent shall cease, and Tenant's obligation to pay the Additional Rent shall cease subject to final reconciliation of the amounts owed under Paragraph 6 above, all effective on the date physical possession is taken ----------- by the condemning authority. (b) If a portion of the Leased Premises or the Parking Spaces is taken and this Lease is not terminated as provided in Paragraph 17(a) above, if --------------- condemnation proceeds are sufficient and if restoration is feasible, Landlord may, at its option restore the Project (other than Alterations) in order to make it reasonably tenantable and suitable for Tenant's approved use. From the date physical possession is taken through the date restoration is completed, Base Rent shall be reduced by a dollar amount in proportion to the proportionate share of the square footage of the Leased Premises taken compared to the original square footage of the Leased Premises. Upon completion of such restoration, the Base Rent from time to time payable under this Lease during the unexpired portion of the term shall be similarly adjusted permanently to reflect the square footage of the Leased OFFICE LEASE AGREEMENT - Page - 19 - ---------------------- Premises not taken. (c) In the event of such taking or private purchase in lieu thereof, Tenant may seek a separate award for any loss of improvements made and paid for by Tenant, its personal property, and its moving expenses (so long as no such claim diminishes Landlord's claim or award), but all other claims of any nature shall belong to Landlord. In the event Tenant does not receive such a separate award, Landlord shall be entitled to receive any and all sums awarded for the taking. (d) Notwithstanding anything herein to the contrary, if the holder (for purposes of this Paragraph 17(d) and Paragraph 18(d) below, "holder" shall not --------------- --------------- include any holder who or which is not an unrelated third party pursuant to an arms-length loan transaction) of any indebtedness secured by a mortgage or deed of trust covering the Building and/or Project requires that the condemnation proceeds be applied to such indebtedness and the proceeds are so applied, unless Landlord, in its sole discretion shall elect to provide the necessary funds for restoration, then either Tenant or Landlord shall have the right to terminate this Lease by delivering written notice of termination to the other within fifteen (15) days after such requirement is imposed. All rights and obligations under this Lease shall then cease. If Landlord does not receive condemnation proceeds sufficient for restoration (such as when its mortgagee does not allow the proceeds to be used for such purposes) and if restoration is economically reasonably feasible, Tenant will have the option of supplementing available proceeds to allow restoration, and Tenant's actual costs will be reimbursed through a monthly prorata credit against Base Rent after all monthly Operating Costs and sums due on or under Landlord's mortgage have been paid in full. 18. FIRE AND CASUALTY: (a) If the Building should be damaged or destroyed by fire, tornado, or other casualty, Tenant shall give immediate verbal and written notice thereof to Landlord. (b) If the Building should be totally destroyed by fire, tornado, or other casualty, or if it should be so damaged thereby that rebuilding or repairs cannot reasonably be completed within one hundred eighty (180) days after the date on which Landlord is notified by Tenant of such damage at the option of either Landlord or Tenant, this Lease shall terminate, and the Rent shall be abated during the unexpired portion of this Lease effective upon the date of occurrence of such damage. (c) If the Building should be damaged by any peril that will be wholly compensated (subject to deductibles) by the insurance maintained by Landlord or if Landlord, in its sole discretion, so chooses notwithstanding a deficiency in such proceeds, and if rebuilding or repairs can reasonably be completed within one hundred eighty (180) days after the date on which Landlord is notified by Tenant of such damage, this Lease shall not terminate, and Landlord shall then proceed with reasonable diligence to rebuild and repair the Building to substantially the same condition in which it existed prior to such damage. Landlord shall not be required, however, to rebuild, repair or replace Tenant's furniture, fixtures, Alterations, inventory or other personal property. If the Leased Premises are untenantable in whole or in part during restoration, the Base Rent payable hereunder OFFICE LEASE AGREEMENT - Page - 20 - ---------------------- during the period in which they are untenantable shall be reduced by a dollar amount in proportion to the proportionate share of the square footage of the Leased Premises damaged to the original square footage of the Leased Premises. If Landlord should fail to complete such repairs and rebuilding within one hundred eighty (180) days after the date on which Landlord is notified by Tenant of such damage, Tenant may terminate this Lease by delivering written notice of termination to Landlord. Such termination shall be Tenant's exclusive remedy and all rights and obligations of the parties under the Lease shall then cease. Notwithstanding the foregoing provisions of this Paragraph 18(c), Tenant --------------- agrees that if the Leased Premises, the Building and/or Project are damaged by fire or other casualty caused by the fault or negligence of Tenant or Tenant's Representatives, Tenant shall have no option to terminate this Lease even if the damage cannot be repaired within one hundred eighty (180) days, and the Rent shall not be abated or reduced before or during the repair period, except to the extent of the amount of business or rent interruption insurance proceeds actually received by Landlord. (d) Notwithstanding anything herein to the contrary, if the holder (as qualified in Paragraph 17(d) above) of any indebtedness secured by a mortgage or --------------- deed of trust covering the Building and/or Project requires that the insurance proceeds be applied to such indebtedness and the proceeds are so applied, unless Landlord, in its sole discretion shall elect to provide the necessary funds for restoration, then either Tenant or Landlord shall have the right to terminate this Lease by delivering written notice of termination to the other within fifteen (15) days after such requirement is imposed. All rights and obligations under this Lease shall then cease. If Landlord does not receive insurance proceeds sufficient for restoration (such as when its mortgagee does not allow the proceeds to be used for such purposes) and if restoration is economically reasonably feasible, Tenant shall have the option of supplementing available proceeds to allow restoration, and Tenant's actual costs will be reimbursed through a monthly prorata credit against Base Rent after all monthly Operating Costs and sums due on or under Landlord's mortgage have been paid in full. 19. LANDLORD'S INSURANCE OBLIGATION: (a) Landlord shall, as Operating Costs, procure and maintain in full force and effect at all times during the Term of this Lease (i) a policy or policies of business or rental interruption insurance, (ii) a policy or policies of general liability insurance insuring Landlord and naming Tenant as an additional insured and providing coverage of not less than $2,000,000 per occurrence combined single limit for bodily injury and for personal injury liability, and (iii) a policy or policies of standard "All Risk" insurance of full replacement cost, covering fire and extended coverage, vandalism and mischief, sprinkler leakage and other perils including, flood, windstorm, sinkholes, demolition, increased cost of construction of building laws coverage, insuring for the full replacement value thereof, the Building and the Project, including worker's compensation insurance coverage for all persons to be employed in construction of the Work and any other work performed by Landlord, including all contractors and subcontractors. Landlord shall provide Tenant with a certificate evidencing such insurance. Tenant shall pay the insurance premiums attributable to the policies required to be obtained above (the "Insurance Premiums") as an ------------------ Operating Cost. OFFICE LEASE AGREEMENT - Page - 21 - ---------------------- (b) Such policies will not insure any personal property (including, but not limited to any furniture, equipment, goods, or supplies) of Tenant or which Tenant may have in the Leased Premises or any fixtures installed by or paid for by Tenant upon or within the Leased Premises or any Alterations or other improvements which Tenant may construct or install on the Leased Premises (other than the Work after the Commencement Date), or any signs identifying Tenant's business located on the exterior of the Building, insurance for all of which shall be Tenant's responsibility. 20. WAIVER OF SUBROGATION: To the extent that Landlord or Tenant receives casualty insurance proceeds and to the extent of such proceeds actually paid, such recipient hereby waives and releases any and all rights, claims, demands and causes of action such recipient may have against the other on account of any loss or damage occasioned to such recipient or its businesses, real and personal properties, the Leased Premises, the Building, the Project, or its contents, arising from any risk or peril covered by any insurance policy carried by either party and for which such proceeds are actually received and Landlord and Tenant hereby waive any right of subrogation which might otherwise exist in, or accrue to, any person on account thereof. Inasmuch as the above mutual waivers will preclude the assignment of any such claim by way of subrogation (or otherwise) to an insurance company (or any other person), each party hereto agrees immediately to give to its respective insurance companies written notice of the terms of such mutual waivers and to have their respective insurance policies properly endorsed, if necessary, to prevent the invalidation of such insurance coverages by reason of such waivers. If such waivers shall invalidate such coverages, then the mutual waivers of this Paragraph 20 shall be void. This ------------ provision shall be cumulative of Paragraph 21 below. ------------ 21. HOLD HARMLESS: Landlord shall not be liable to Tenant, Tenant's Representatives, or any other person for any injury to person or damage to property on or about the Leased Premises or the Project caused by the negligence or misconduct of Tenant, Tenant's Representatives, or any other persons, other than Landlord or Landlord's Representatives, entering upon the Leased Premises or the Project OR ARISING FROM AN OCCURRENCE FOR WHICH LANDLORD IS BY LAW STRICTLY LIABLE unless Landlord or Landlord's Representatives are also liable ------ because of their negligence or misconduct. Tenant agrees to indemnify and hold Landlord and Landlord's employees, officers, directors, partners, agents, invitees, guests, patrons, licensees, contractors, representatives, trespassers, and others for whom Landlord is legally responsible (collectively, "Landlord's ---------- Representatives") harmless from any and all loss, attorney's fees, expenses, or - --------------- claims arising out of any such damage, loss or injury. Tenant shall not be liable to Landlord or Landlord's Representatives or any other person for any injury to person or damage to property on or about the Leased Premises or the Project caused by the negligence or misconduct of Landlord, Landlord's Representatives, or any other persons other than Tenant or Tenant's Representatives, entering upon the Leased Premises or the Project OR ARISING FROM AN OCCURRENCE FOR WHICH TENANT IS BY LAW STRICTLY LIABLE unless Tenant or ------ Tenant's Representatives are also liable because of their negligence or misconduct. Landlord agrees to indemnify and hold Tenant and Tenant's Representatives harmless from any and all loss, attorney's fees, expenses, or claims arising out of any such damage, loss or injury. OFFICE LEASE AGREEMENT - Page - 22 - ---------------------- 22. QUIET ENJOYMENT: Landlord certifies that it has full right to execute and to perform this Lease and to grant the estate demised herein and that Tenant, upon payment of the required Rent and performance of the covenants and agreements contained in this Lease, shall peaceably and quietly have, hold, and enjoy the Leased Premises and the Common Areas during the full term of this Lease, including any extensions or renewals thereof without hindrance or interference from Landlord or any party, claiming through or under Landlord. 23. LANDLORD'S RIGHT OF ENTRY: Landlord shall have the right to enter the Leased Premises during the hours of 8:00 a.m. to 5:00 p.m., or at any time in an emergency situation for the following reasons: inspection, cleaning or making repairs, making such alterations or additions as Landlord may deem necessary or desirable; installation of utility lines servicing the Leased Premises; determining Tenant's use of the Leased Premises; and determining if any event of default under this Lease has occurred, Landlord shall give twenty-four (24) hours written notice to Tenant prior to such entry, except in cases of emergency or when Landlord has reason to believe that an event of default has occurred, in which cases Landlord may enter the Leased Premises at any time and without prior notice. During the period that is six (6) months prior to the end of the Lease term, Landlord and Landlord's agents and representatives shall have the right to enter the Leased Premises at any reasonable time during the business hours stipulated above, upon prior written notice to Tenant, for the purpose of showing the Leased Premises (provided that Landlord shall, in all such cases, be accompanied by an authorized employee or representative of Tenant). 24. ASSIGNMENT OF LANDLORD'S INTEREST IN LEASE: Landlord shall have the right to transfer and assign, in whole or in part, its rights and obligations with respect to the Project, the Leased Premises, and this Lease, including Tenant's Security Deposit. Upon and after such transfer, Landlord shall be released from any further obligation under this Lease and Tenant agrees to look solely to Landlord's successor for the performance of such obligations, provided that such transferee or assignee shall agree in writing to be bound by the terms, covenants, conditions and agreements herein contained and which accrue after the effective date of such assignment and such transferee or assignee shall expressly assume and agree to perform the covenants, conditions and agreements of Landlord set forth in this Lease which accrue after the effective date of such assignment. 25. LANDLORD'S LIEN: In addition to any statutory lien for Rent in Landlord's favor, Landlord shall have, and Tenant hereby grants to Landlord, a continuing security interest for all Rent and other sums of money becoming due under this Lease from Tenant upon all goods, wares, general office equipment (but not any equipment used by Tenant in research, development, or production of its computer related telecommunication products), fixtures, furniture, inventory, accounts, and other personal property of Tenant situated on or arising from the Leased Premises, provided that such security interest shall be subordinate to any security interest granted by Tenant in such property under an arms-length third party loan transaction of which Tenant has given Landlord written notice accompanied by a reasonably detailed description of the terms thereof. Such property shall not be removed without the consent of Landlord which consent may be withheld by Landlord until all of Tenant's duties and obligations have been performed in full. In the event of a default under this OFFICE LEASE AGREEMENT - Page - 23 - ---------------------- Lease, Landlord shall have, in addition to any other remedies provided in this Lease or by law, all rights and remedies under the Texas Uniform Commercial Code, including without limitation the right to sell the property described in this Paragraph at public or private sale upon five (5) days notice to Tenant. Tenant hereby agrees to execute such financing statements and other instruments necessary or desirable in Landlord's discretion to perfect the security interest hereby created, and Landlord may, at any time, file this Lease as a financing statement or may file a financing statement without Tenant's execution so long as complying with all requirements at law. 26. DEFAULT BY TENANT: The following shall be events of default by Tenant under this Lease: (a) Tenant's failure to pay, within five (5) days after written notice that it is due, any installment of Rent or other payment required pursuant to this Lease; provided that after the third such notice during any twelve-month period, no further such written notice shall be required to establish the event of default; (b) Tenant's failure to comply with any term, provision or covenant of this Lease, other than the defaults listed in the other subparagraphs of this Paragraph 26, and the failure is not cured within ten (10) days after written - ------------ notice thereof to Tenant, except that this ten (10) day period shall be extended for a reasonable period of time if such alleged default is not reasonably capable of being cured within said ten (10) day period so long as Tenant commences the cure and diligently pursues same during the ten (10) day period; (c) Tenant's filing of a petition or adjudication as a debtor or bankrupt insolvent under the Bankruptcy Code or any similar law or statute of the United States or any state (unless in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (d) The appointment of a trustee or receiver of the property of Tenant, or the attachment, execution or other judicial seizure of Tenant's property, that is not discharged within thirty (30) days, or Tenant's general assignment for the benefit of creditors, or any transfer of assets by Tenant in fraud of creditors; (e) Tenant doing or permitting to be done any act which results in a lien being filed against the Leased Premises and the same is not removed within sixty (60) days after Landlord's notice thereof to Tenant. 27. REMEDIES FOR TENANT'S DEFAULT: Upon the occurrence of any event of default, Landlord shall have the option to pursue any one or more of the following remedies without any prior notice or demand: (a) Landlord may terminate this Lease, in which event Tenant shall immediately surrender the Leased Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have, enter upon and take possession of the Leased OFFICE LEASE AGREEMENT - Page - 24 - ---------------------- Premises, and expel or remove Tenant and any other person who may be occupying all or any part of the Leased Premises. Landlord shall not be liable for prosecution or any claim for damages as a result of such actions except for damages caused by the gross negligence or wilful misconduct of Landlord or Landlord's Representatives. Tenant agrees to pay on demand the amount of all losses, costs, expenses, deficiencies, and damages, including, without limitation, reasonable reconfiguration expenses, rental concessions and other inducements to new tenants, advertising expenses and broker's commissions, which Landlord may incur or suffer by reason of Tenant's default or the termination of this Lease under this subparagraph, whether through inability to rent the Leased Premises on commercially reasonable terms or otherwise. Tenant acknowledges that its obligation to pay Base Rent and all Additional Rent hereunder is not only compensation for use of the Leased Premises but also compensation for sums already expended and/or being expended by Landlord with respect to its obligations hereunder and with respect to the Leased Premises, and Tenant acknowledges that Tenant's default in timely payment of all sums due hereunder shall constitute significant financial loss to Landlord. In such event, in addition to Landlord's other remedies hereunder, Landlord shall be entitled to accelerate all Base Rental remaining unpaid hereunder, the entirety of which shall at the option of Landlord be immediately due and payable to the extent allowed by law. (b) Without termination of this Lease, Landlord may enter upon and take possession of the Leased Premises and expel or remove Tenant and any other person who may be occupying all or any part of the Leased Premises (without being liable for prosecution or any claim for damages therefor except for damages caused by the gross negligence or wilful misconduct of Landlord's Representatives) and relet the Leased Premises on behalf of Tenant and receive directly the rent from the reletting. Tenant agrees to pay Landlord on demand any deficiency that may arise by reason of any reletting of the Leased Premises and to reimburse Landlord on demand for any losses, cost and expenses, including without limitation, reconfiguration expenses, rental concessions and other inducements to new tenants, advertising costs or broker's commissions, which Landlord may incur or suffer as a result of Tenant's default or in reletting the Leased Premises. In the event Landlord is successful in reletting the Leased Premises at a rental in excess of that agreed to be paid by Tenant pursuant to this Lease, Tenant agrees that Tenant shall not be entitled, under any circumstances, to such excess rental, and Tenant does hereby specifically waive any claim to such excess rental. (c) Without terminating this Lease, Landlord may enter upon the Leased Premises (without being liable for prosecution or any claim for damages therefor except for damages caused by the gross negligence or wilful misconduct of Landlord or Landlord's Representatives) and do whatever Tenant is obligated to do under the terms of this Lease. Tenant agrees to reimburse Landlord on demand for any losses, reasonable costs and expenses which Landlord may reasonably incur in effecting compliance with Tenant's obligations under this Lease. Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from effecting compliance with Tenant's obligations under this subparagraph, unless caused by the gross negligence or wilful misconduct of Landlord or Landlord's Representatives. OFFICE LEASE AGREEMENT - Page - 25 - ---------------------- (d) With respect to Landlord's entry upon the Leased Premises under the provisions of subparagraphs (a), (b), and (c) above, no restriction of, or obligation imposed upon Landlord by, Texas Property Code Section 93.002(f) shall apply, such Section being superseded hereby. (e) Landlord may pursue any remedy provided at law or in equity. (f) Except as otherwise provided by law, Landlord shall have no duty to relet the Premises, and the failure of Landlord to do so shall not release or affect Tenant's liability for Rent and other charges due hereunder or for damages. (g) No re-entry or reletting of the Premises or any filing or service of an unlawful detainer action or similar action shall be construed as an election by Landlord to terminate this Lease unless a written notice of such intention is given by Landlord to Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease and Tenant's right to possession hereunder. 28. TERMINATION OF OPTIONS: All options and special rights granted by Landlord in this Lease to use of the roof, to signage, to extend the Term, to expand into adjoining properties, or to acquire any other interest in the Leased Premises, the Building, or the Project are independent of the leasehold estate hereby granted to Tenant by Landlord. Landlord and Tenant agree and acknowledge that the negotiated consideration for any such options or special rights is Tenant's entry into this Lease and that no portion of any sums due and payable by Tenant to Landlord hereunder is attributable thereto. In addition to, and not in lieu of, the above remedies of Landlord for Tenant's default, any and all such options or special rights shall be automatically terminated upon the occurrence of the following events: (a) Tenant shall have failed to pay when due any installment of Rent or other sums payable under this Lease for any three (3) consecutive months during the Lease term or any renewal or extension thereof, or for any ten (10) months during the Lease term or any renewal or extension thereof, whether or not said defaults are cured by Tenant; or (b) Tenant shall have received two (2) or more notices of default under Paragraph 26 within any one calendar year with respect to any other covenant of - ------------ this Lease, whether or not such default(s) is/are cured; or (c) Tenant shall have committed or suffered to exist any other event of default described under Paragraph 26 above which is not cured within the time ------------ period allowed herein for cure. 29. WAIVER OF DEFAULT OR REMEDY: Failure of Landlord to declare a default immediately upon its occurrence, or delay in taking any action in connection with an event of default, shall not be a waiver of the default. Landlord shall have the right to declare the default at any time and take such action as its lawful or authorized under this Lease. Pursuit of any one or more of the remedies set forth in Paragraphs 27 or 28 above shall not preclude pursuit of ------------------- any one OFFICE LEASE AGREEMENT - Page - 26 - ---------------------- or more of the other remedies provided therein or elsewhere in this Lease or as provided by law, nor shall pursuit of any remedy be a forfeiture or waiver of any Rent or damages accruing to Landlord by reason of the violation of any of the terms of this Lease. Failure by Landlord to enforce one or more of its remedies upon an event of default shall not be construed as a waiver of the default or of any other violation or breach of any of the terms contained in this Lease. 30. CHOICE OF LAW; VENUE; ATTORNEY'S FEES: It is specifically stipulated that this Lease shall be interpreted and construed according to the laws of the State in which the Leased Premises are located, and any suit brought on this Lease shall be maintained in the county in which the Leased Premises are located. Further, the prevailing party in any such litigation between the parties shall be entitled to recover, as a part of its judgment, reasonable attorney's fees and costs and expenses incurred therein. 31. HOLDING OVER: Tenant will, at the termination of this Lease by lapse of time or otherwise, surrender immediate possession to Landlord. If Landlord agrees in writing that Tenant may hold over after the expiration or termination of this Lease and if the parties do not otherwise agree, the hold over tenancy shall be subject to termination by Landlord at any time upon not less than fifteen (15) days advance written notice, or by Tenant at any time upon not less than fifteen (15) days advance written notice. Further, all of the terms and provisions of this Lease shall be applicable during the hold over period, except that Tenant shall pay Landlord from time to time upon demand, as Base Rent for the period of any hold over, an amount equal to one and one-half times (1-1/2) the Base Rent in effect on the date of termination, computed on a daily basis for each day of the hold over period, plus all Additional Rent and other sums due hereunder. If Tenant shall fail immediately to surrender possession of the Leased Premises to Landlord upon termination of this Lease, by lapse of time or otherwise, and Landlord has not agreed to such continued possession, as above provided, then, until Landlord can dispossess Tenant under the terms hereof or otherwise, Tenant shall pay Landlord from time to time upon demand, as Base Rent for the period of any such hold over, an amount equal to twice the Base Rent in effect on the date of termination, computed on a daily basis for each day of the hold over period, plus all additional Rent and other sums due hereunder. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this Lease except as otherwise expressly agreed by the parties. The preceding provisions of this Paragraph shall not be construed as Landlord's consent for Tenant to hold over. 32. RIGHTS OF MORTGAGEE: Landlord represents that Landlord is the current fee simple owner of the Project, and Tenant accepts this Lease subject and subordinate to the liens, interests, mortgages and/or deeds of trust set forth on Exhibit "C-1" attached hereto (the "Existing Mortgages") copies of which have ------------- ------------------ been provided to Tenant prior to the date hereof. Tenant agrees contemporaneously to provide to the holder of any Existing Mortgage, whose name and address are set forth on Exhibit "C-1" and to any future holder of a ------------- mortgagee or deed of trust whose name and address have been provided to Tenant (each a "Mortgagee"), a copy of each notice to Landlord which alleges any act, --------- omission, or condition that might constitute a default by Landlord hereunder or otherwise give rise to any Tenant remedy hereunder or at law, and Mortgagee, in its sole discretion, shall have all rights of Landlord hereunder to cure any such default. Landlord reserves the right to OFFICE LEASE AGREEMENT - Page - 27 - ---------------------- subject and subordinate this Lease at all times to the lien of any other deeds of trust, vendor's liens, or mortgages now or hereafter affecting Landlord's interest in the Project (any one of which shall be referred to herein as the "Deed of Trust"); provided, however, that so long as Tenant is not in default of ------------- its obligations beyond the applicable notice and grace periods provided herein (i) no default by Landlord under any such Deed of Trust shall affect Tenant's rights under this Lease; (ii) Tenant will not be named by the holder or Landlord as a party in any foreclosure or other proceeding with respect to such Deed of Trust unless required by law; (iii) the holder of any such Deed of Trust agrees that the insurance proceeds resulting from any fire or other casualty or from any taking by eminent domain will be available for restoration of the Building and Project under terms and conditions acceptable to the holder; (iv) the holder of the Deed of Trust shall recognize the Lease and any amendments allowed under the Deed of Trust or otherwise approved by the Mortgagee in writing in advance of execution and be bound thereto; and (v) the holder of any such Deed of Trust will execute with Tenant and Landlord a Subordination, Non-Disturbance and Attornment Agreement in the form required by such holder and reasonably Acceptable to Tenant. Attached hereto as Exhibit "C" is the form of such ----------- agreement that the current Mortgagee has agreed to sign with Landlord and Tenant, subject to such Mortgagee's review of this Lease. If Tenant has not received such agreement signed by the Lender, Landlord and Guarantor to be named therein within thirty (30) days after the full execution hereof, Tenant may terminate this Lease by written notice to Landlord within the following five (5) days and receive the return of the Security Deposit and Base Rent deposit, and neither party shall have any further liability hereunder, failing in which timely termination such right shall automatically end. 33. ESTOPPEL CERTIFICATES: If requested by Landlord, Tenant agrees to furnish on the Commencement Date and from time to time within ten (10) days of request by Landlord or Landlord's mortgagee, a statement certifying that, if the same be true and if not true qualifying the statement to make it true, the Tenant is in possession of the Leased Premises; the Leased Premises are acceptable; this Lease is in full force and effect; this Lease is unmodified; Tenant claims no present charge, lien, or claim of offset against Rent; the Rent is paid for the current month but is not paid and will not be paid for more than one month in advance (except estimated Additional Rent under Paragraph 6); there is no ----------- existing default under this Lease; and such other matters as may be reasonably required by Landlord or Landlord's mortgagee. 34. SUCCESSORS: This Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors and assigns. 35. REAL ESTATE COMMISSION: Landlord and Tenant each represents and warrants that except for Landlord's agent, Jean Farris of Jones Lang LaSalle, and Tenant's Agent, Bruce Worth of McCaslin Commercial, Corporate Real Estate Services, with whom Landlord has entered into a separate written agreement, it has dealt with no other broker, agent, or other person in connection with this transaction, and that no other broker, agent, or other person brought about this transaction. Landlord and Tenant each agree to indemnify and hold the other harmless from and against any claims by any broker, agent, or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant or Landlord respectively with regard to this transaction. The provisions of this Paragraph shall survive the termination of this Lease. OFFICE LEASE AGREEMENT - Page - 28 - ---------------------- 36. DEFAULT BY LANDLORD: If Landlord fails to observe or perform any covenants or agreements required to be performed by Landlord hereunder, and if such failure shall have continued uncured or unabated for a period of thirty (30) days following written notice to Landlord, Landlord shall not be in default, and Tenant shall have no right to any remedy at law or in equity, unless the act, omission, or condition allegedly giving rise to such default shall have continued uncured or unabated for a period of thirty (30) days following written notice to Landlord (with a copy to Mortgagee as provided in Paragraph 32 above) ------------ or, if such cure or abatement cannot be accomplished within said 30-day period, then, so long as Landlord or Mortgagee has commenced such cure or abatement within such 30-day period and diligently pursues same, such period shall be extended a reasonable time to allow completion of the cure or abatement. 37. MECHANIC'S LIENS: Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord in the Leased Premises or the Project or to charge the Rent payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Each such claim shall affect, and each such lien shall attach to, if at all, only the leasehold interest granted to Tenant by this Lease. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Leased Premises on which any lien is or can be validly and legally asserted against its leasehold interest in the Leased Premises or the improvements thereon. Tenant further agrees to save and hold Landlord harmless from any and all loss, cost, or expense based on or arising out of claims or liens asserted by parties by virtue of their dealings with Tenant and encumbering the leasehold estate or the right, title and interest of the Landlord in the Leased Premises or the Project. Under no circumstances shall Tenant be or hold itself out to be the agent or representative of Landlord with respect to any Alterations of the Leased Premises whether or not consented to or approved by Landlord hereunder. 38. HAZARDOUS MATERIALS: (a) Attached hereto as Schedule A is a compilation of materials that ---------- culminate in the recorded Voluntary Cleanup Program Final Certificate of Completion with respect to the land of the Project certifying, among other things, that response actions achieved response action levels acceptable for Non-Residential land use. Tenant acknowledges its review and understanding of such materials. (b) Landlord certifies to Tenant that to Landlord's current actual knowledge, no handling, transportation, storage, treatment or usage of hazardous or toxic substances (as defined by any applicable government authority) or petroleum or petroleum products (hereinafter being referred to as "Hazardous --------- Materials") currently exists or has existed with respect to the Project, - --------- including the Premises, that is not currently in compliance with all Applicable Laws. Landlord further certifies to Tenant that Landlord has no current actual knowledge of any current or past leak, spill, discharge, emission or disposal of Hazardous Materials occurring on the Project that is now in violation of Applicable Laws and that Landlord has no current actual knowledge that the soil, groundwater, and OFFICE LEASE AGREEMENT - Page - 29 - ---------------------- soil vapor on or under the Project is not in compliance with Applicable Laws. Landlord certifies to Tenant that to Landlord's current actual knowledge no underground storage tank or asbestos-containing materials exist in, on or under the Project. Landlord certifies to Tenant that to Landlord's current actual knowledge no part of the remediation system addressing the contamination on the property located adjacent to and west of the Project is located in, on or under the Project. If Landlord is given the opportunity to conduct the defense, Landlord agrees to indemnify, defend and hold Tenant and its officers, partners, directors, shareholders, employees and agents harmless from any claims, judgments, damages, fines, penalties, costs (including reasonable attorney, consultant and expert fees), liabilities (including sums necessarily and properly paid in settlement of claims) or loss which arise during or after the Term or any extension thereof, in connection with the presence of Hazardous Materials in, or migrating from, the soil, groundwater, or soil vapor on or under the Project, unless, but only to the extent, such Hazardous Materials were, are, or come to be present as the result of the acts of Tenant or Tenant's Representatives. Without limiting the generality of the foregoing, this indemnification (i) shall survive the expiration of this Lease for four (4) years, (ii) does not cover costs incurred in connection with any investigation of site conditions that are not conducted in response to written governmental allegations or order or bona fide, substantiated, written third party claims, (iii) does cover costs incurred in connection with any investigation of site conditions that are conducted in response to written governmental allegations or orders or bona fide, substantiated, written third party claims, and (iv) does cover cleanup, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of the presence or suspected presence of Hazardous Materials in the soil, groundwater or soil vapor on or under the Project, unless, but only to the extent, the Hazardous Materials are present as the result of the acts of Tenant or Tenant's Representatives. Without limiting the generality of or the qualifications on the foregoing, this indemnification shall also specifically cover costs in connection with: (i) Hazardous Materials present in the soil, ground water or soil vapor on or under the Project unless caused by Tenant or Tenant's Representatives; or (ii) Hazardous Materials that migrate, flow, percolate, diffuse or in any way move onto or under the Project unless caused by Tenant or Tenant's Representatives; or (iii) Hazardous Materials present on or under the Premises as a result of any discharge, dumping, spilling (accidental or otherwise) onto the Project by any person or entity other than Tenant or Tenant's Representatives. Such indemnity shall exclude all claims arising from or related to the release of or exposure to Hazardous Materials which were caused, directly and indirectly, by Tenant or Tenant's Representatives or the use of the Project by Tenant or Tenant's Representatives. (c) If, during the Term of this Lease, any governmental authority requires the investigation, remediation and/or monitoring of Hazardous Materials at the Premises or the Project and such investigation, remediation and/or monitoring materially adversely affects Tenant's business OFFICE LEASE AGREEMENT - Page - 30 - ---------------------- operations or poses a bona fide safety threat to Tenant's employees or customers, then Tenant shall be entitled to an equitable abatement of Rent from the date such interference or safety hazard occurs to the date such interference and safety hazard is no longer present. Notwithstanding anything herein to the contrary, nothing in this Lease shall be construed to obligate Tenant to remediate any Hazardous Materials located in, on, or under the Premises or the Project, unless the acts of Tenant or Tenant's Representatives cause the presence of such Hazardous Materials. If required by law, Landlord shall remove, or cause to be removed, at its sole cost and expense and in Landlord's name, any Hazardous Materials from the Premises or the Project unless such Hazardous Materials are present because of Tenant or Tenant's Representatives in which case Tenant, at its sole cost and expense and in Tenant's name, shall remove same. (d) Tenant hereby agrees that (i) no activity will be conducted on the Project that will produce any Hazardous Materials in violation of Applicable Laws; (ii) the Project will not be used in any manner not in compliance with local, state and federal laws for the storage of any Hazardous Materials; (iii) no portion of the Project will be used as a landfill or a dump; (iv) Tenant will not install any underground tanks of any type; (v) Tenant will not allow any surface or subsurface conditions to exist or come into existence that constitute, or with the passage of time may constitute, a public or private nuisance; and (vi) Tenant will not permit any Hazardous Materials to be brought onto the Project that are not stored and used in compliance with all local, state and federal laws regarding same. Landlord shall have the right but not the obligation to enter the Project after providing reasonable notice (except in the event of emergency when no notice shall be required) for the purpose of ensuring compliance with all Applicable Laws. (e) For purposes of this Paragraph 38, the Project shall not include any ------------ soil beneath the surface of the land, any groundwater, any subsurface structure, object, fixture or device, other than utility lines which are necessary for the use of the Premises by Tenant, any underground storage tanks or associated piping, any buried drums or other containers, or abandoned septic or sewer lines. 39. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES: It is expressly agreed by Tenant, as a material consideration for the execution of this Lease, that this Lease and all Exhibits, Schedules and other attachments to this Lease constitute the entire agreement of the parties and that there are and were no verbal representations, warranties, understandings, stipulations, agreements, or promises pertaining to this Lease not incorporated in this Lease. Except as otherwise expressly provided herein, Tenant expressly agrees that there are and shall be no implied warranties of merchantability, fitness, habitability, or of any other kind. It is likewise agreed that this Lease may not be altered, waived, amended, or extended except by an instrument in writing signed by both Landlord and Tenant. Not in limitation upon the foregoing, Landlord agrees that to the extent assignable, all warranties, if any shall exist, from contractors or suppliers with respect to the improvements to the Leased Premises hereunder are hereby partially assigned to Tenant to the extent necessary to avail Tenant of the benefits thereof with respect to its obligations herein and the leasehold estate and property located at the Leased Premises. OFFICE LEASE AGREEMENT - Page - 31 - ---------------------- 40. FINANCIAL STATEMENTS: From time to time Landlord may need to obtain financing or renew financing on the Project, or perform calculations for various reasons regarding the value of the Project. Tenant hereby agrees to provide to Landlord the most recently published and publicly available financial statements on its business when requested, but not more than once annually. 41. FORCE MAJEURE: (a) Landlord shall not be required to perform any covenant or obligation of this Lease or be liable in damages to Tenant for that time period during which the performance or non-performance of the covenant or obligation is delayed, caused by, or prevented by Tenant or Tenant's Representatives or by an act of God or force majeure. (b) Except with respect to the payment of Rent or any other sum due hereunder for which Tenant does not have an offset or abatement right under the terms of this Lease, Tenant shall not be required to perform any covenant or obligation of this Lease or be liable in damages to Landlord for that time period during which the performance or non-performance of the covenant or obligation is delayed, caused by, or prevented by Landlord or Landlord's Representatives or by an act of God or force majeure. (c) An "act of God" or "force majeure" is defined for purposes of this Lease as strikes, lockouts, sit-downs, material or labor restrictions by any governmental authority, riots, floods, washouts, explosions, earthquakes, fire, storms, acts of the public enemy, wars, insurrections and any other similar cause not caused by or reasonably within the control of the obligated party and which by the exercise of due diligence such party is unable, wholly or in part, to prevent or overcome. 42. ROOF AND OTHER AREAS: (a) Subject to Paragraph 28 above, and subject to Tenant's compliance with ------------ all of the planning, construction, and other requirements of Paragraph 16 above, ------------ Tenant shall have the right to erect and maintain communication devices and equipment, including, without limitation, antenna and a satellite dish and other similar equipment Tenant shall deem necessary or desirable, on the roof of the Building and shall have the right to run wires and cables for such equipment into the Premises. Tenant shall maintain the area where the roof penetrations are made while Tenant's equipment is present and Tenant shall repair any damage to the roof caused by the equipment or roof penetrations, including repairs upon the removal of any such equipment. Any penetrations to the roof must be made either by Landlord or, at Tenant's option, by a contractor approved by Landlord which approval shall not be capriciously withheld or unreasonably delayed. No additional rental or assessments shall be charged by Landlord to Tenant for use of the roof area. Tenant's right to use the roof is to inure to the benefit of Tenant only and is not transferable or assignable to any other entity or for any purpose other than that stated above. OFFICE LEASE AGREEMENT - Page - 32 - ---------------------- (b) Landlord agrees that Tenant shall have access to and be allowed the use of a dock high loading area (the "Dock Area") acceptable to Tenant to be located --------- at the rear of the Building at the location provided in the Working Drawings or, if not so provided, then at a location mutually agreeable to both by Landlord and Tenant. (c) Tenant shall be allowed to install, operate and maintain and use, when necessary, an emergency standby generator (the "Generator") for the exclusive --------- use of the Premises to be located at the location provided in the Working Drawings or, if not so provided, then at a location approved by Landlord (which approval shall not be unreasonably withheld or delayed). (d) Landlord shall allow Tenant to operate, use and maintain for Tenant's exclusive use within the Lease Premises an uninterrupted power source (UPS) room (the "UPS Area") to be located at the location provided in the Working Drawings -------- or, if not so provided, then at a location approved by Landlord, which approval shall not be unreasonably withheld or delayed, and acceptable to Tenant. The location and method of installation of all equipment shall be approved by Landlord. 43. MISCELLANEOUS: (a) Words of any gender used in this Lease shall be held and construed to include any other gender; and words in the singular number shall be held to include the plural, unless the context otherwise requires. (b) Each party agrees to furnish to the other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization and power of such party to enter into this Lease and the empowerment and authority of the individual signing below to bind his or her principal. (c) The captions inserted in this Lease are for convenience only and in no way define, limit, or otherwise describe the scope or intent of this Lease or any provision hereof, or in any way affect the interpretation of this Lease. (d) If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws effective during the term of this Lease, then and in that event, it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby; and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid, or unenforceable there be added as a part of this Lease a clause as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable. (e) All references in this Lease to "the date hereof" or similar references shall be deemed to refer to the Execution Date, but if the blanks defining same are not completed, then the last date, in point of time, on which all parties hereto have executed this Lease. OFFICE LEASE AGREEMENT - Page - 33 - ---------------------- (f) Landlord does not in any way or for any purpose become a partner with Tenant in the conduct of its business or otherwise, nor a member of a joint venture with Tenant. (g) In the event that Tenant shall fail to perform any duty or obligation hereunder (other than maintenance, repair or replacement of the Leased Premises for which provision is made in Paragraph 7(f) above), whether maintenance of -------------- insurance, or otherwise, then Landlord may, but shall in no event be obligated to, without notice of any kind, take such actions as Landlord deems necessary or appropriate to remedy such Tenant failure, and any sums expended by Landlord together with fair and just compensation for the time and effort of Landlord in such efforts shall be deemed additional Rent hereunder due and payable by Tenant on demand. In particular, but without limitation, since Tenant is responsible for all taxes levied or assessed against personal property or fixtures placed by Tenant in the Premises and/or Building, if any such taxes are levied or assessed against Landlord or Landlord's property and if Landlord elects to pay the same or if the assessed value of the Landlord's property is increased by inclusion of personal property or fixtures placed by Tenant in the Premises and/or Building, and Landlord elects to pay the taxes based on such increase, Tenant shall pay to Landlord upon demand that part of such taxes for which Tenant is responsible hereunder. (h) If Tenant shall fail to pay, when the same is due and payable, any Rent or any other sum due from Tenant hereunder, or if Landlord shall fail to pay, when the same is due and payable, any sum due from Landlord hereunder, such unpaid amount shall bear interest from the due date thereof to the date of remittance at the rate of the lesser of 18% per annum and the maximum rate allowed by law. (i) Tenant shall not record this Lease without the prior written consent of Landlord. However, upon the request of either party hereto, the other party shall join in the execution of a memorandum or so-called "short form" of this Lease for the purposes of recordation. If such recordation occurs, then Tenant agrees immediately, on demand, to execute a complete release thereof, in recordable form, upon rightful termination of this Lease for any reason, and if Tenant fails to do so within five (5) days of receipt of such demand, Landlord may execute same for Tenant as Tenant's agent for such limited purpose and, in any event, Tenant shall be liable for all damages, if any, suffered by Landlord resulting therefrom. (j) Time is of the essence in the performance of all the covenants, conditions, and agreements contained in this Lease. (k) Any duty, obligation, or debt and any right or remedy arising hereunder and not otherwise consummated and/or extinguished by the express terms hereof at or as of the time of termination of this Lease, whether at the end of the term hereof or otherwise, shall survive such termination as continuing duties, obligations, and debts of the obligated party to the other or continuing rights and remedies of the benefitted party against the other. OFFICE LEASE AGREEMENT - Page - 34 - ---------------------- (1) This Agreement may be executed in one or more counterparts, each of which counterpart shall for all purposes be deemed to be an original; but all such counterparts together shall constitute but one instrument. (m) Tenant and Tenant's Representatives will comply fully with all requirements of the Rules and Regulations of the Building and related facilities which are attached hereto as Exhibit "D", and made a part hereof as though fully ----------- set forth herein. Tenant shall be responsible for the compliance with such Rules and Regulations by Tenant's Representatives. Landlord will not materially discriminate among tenants in enforcement of the Rules and Regulations. (n) Attached hereto are the following exhibits and one schedule to this Lease all of which are hereby incorporated herein by reference: Exhibit A - Legal Description Exhibit A-1 - Site Plan (with depiction of the Premises and Additional Space) Exhibit B - Tenant Finish Work/Work Letter Exhibit C - Current Mortgagee form SNDA Exhibit C-1 - Existing Mortgages Exhibit D - Rules and Regulations Exhibit E - Landlord's Plans and Specifications Schedule A - Voluntary Cleanup Program documentation 44. NOTICE: (a) All Rent and other payments required to be made by Tenant to Landlord shall be payable to Landlord at the address set forth below or any other address that Landlord may specify from time to time by written notice delivered to Tenant. (b) All payments, if any, required to be made by Landlord to Tenant shall be payable to Tenant at the address set forth below or at any other address that Tenant may specify from time to time by written notice delivered to Landlord. (c) Any notice or document required or permitted to be delivered by this Lease shall be deemed to be delivered (i) (whether or not actually received) three days after deposit in the United States Mail, postage prepaid, certified mail return receipt requested, (ii) upon hand-delivery as evidenced by written confirmation of receipt thereof, (iii) upon facsimile transmission as evidenced by confirmation receipt thereof and further confirmed by delivery by the methods described in (i) or (ii) above, addressed to the parties at the respective addresses and facsimile telephone numbers set forth below or such other addresses and facsimile telephone numbers as hereinafter specified by notice given in accordance with this paragraph. OFFICE LEASE AGREEMENT - Page - 35 - ---------------------- If to Landlord: c/o Jackson-Shaw Company Attn: Property Manager 4890 Alpha Road, Suite 100 Dallas, Texas 75244 Fax: 972/628-7444 If to Tenant: Efficient Networks, Inc. (after the Commencement 4849 Alpha Road, Suite 100 Date) Dallas, Texas 75244 Attention: Ms. Jill Manning Fax: 972/991-3887 (Prior to the Commencement Efficient Networks, Inc. Date) 4201 Spring Valley, Suite 1200 Dallas, Texas 75244 Attention: Ms. Jill Manning Fax: 972/991-3887 45. LANDLORD'S REPRESENTATIONS: Landlord certifies that (i) Landlord is the fee simple owner and record title holder of the Project, including, with limitation, the Premises, (ii) Landlord has not received any written notice, and does not have any current actual knowledge, of any eminent domain or similar proceeding which would affect the Premises subject to the last sentence of Exhibit "A" ----------- hereto which describes a twenty-foot expansion of Alpha Road as reflected on the plat of the land of the Project, (iii) Landlord has the full right, power and authority to make this Lease subject to approval by its current Mortgagee, and (iv) to Landlord's current actual knowledge, no restrictive covenant, easement, lease or other written agreement restricts, prohibits or otherwise affects Tenant's rights set forth in this Lease, including, without limitation, Tenant's parking rights, rights to signage, construction, permitted general office use or ingress and egress to and from the Premises. 46. TENANT FINANCING: Tenant shall have the absolute right from time to time during the Term hereof and without Landlord's further approval, written or otherwise, to grant and assign a mortgage or other security interest in Tenant's interest in this Lease and all of Tenant's Property (subject to the terms hereof) to Tenant's lenders in connection with Tenant's financing arrangements, provided such Tenant Financing is subordinate to the interest of Landlord and its current and future lenders in the Project and Tenant's leasehold interest therein subject to the limitations of this Lease. Landlord agrees to execute such confirmation, certificates and other documents (except amendments to this Lease unless Landlord hereafter consents) as Tenant's lenders may reasonably request in connection with any such financing, all at Tenant's sole expense. 47. TENANT'S CONDUCT: Nothing in this Lease shall be construed as an obligation for Tenant to operate its business in the Premises. Tenant shall have the right to remove Tenant's Property and cease operations in the Premises at any time and at Tenant's sole discretion. Tenant's OFFICE LEASE AGREEMENT - Page - 36 - ---------------------- right to cease to operate its business shall not affect Tenant's obligation to pay all amounts due hereunder and to perform all covenants and obligations hereunder. 48. PARKING: Landlord has made provision for 534 parking spaces on the Project. Tenant has required the Dock Area and space for the Generator which will displace thirteen (13) parking spaces. The resulting parking spaces are herein referenced to as the "Parking Spaces". Landlord shall provide for Tenant's exclusive use, at no cost to Tenant or Tenant's employees or invitees, all of the Parking Spaces to be located at the Project. One hundred (100) spaces of the Parking Spaces shall be covered, carport spaces. Landlord shall not (i) alter or change the Parking Spaces or access thereto, or (ii) materially alter the entrances or exits to the Project, without the prior written consent of Tenant unless required to do so by law. Tenant shall have the right to mark the Parking Spaces "Reserved Parking for Efficient Networks, Inc. Only". Tenant shall have the right, if necessary, to post signs in order to enforce these parking provisions, as well as the right to tow cars subject to compliance with all Applicable Laws. If requested, and subject to the limitations of the site, Landlord shall use its best efforts to assist Tenant, at Tenant's cost, to provide additional parking as shall be necessary, in Tenant's discretion, to accommodate Tenant's needs. 49. (INTENTIONALLY DELETED) 50. ALLOWANCES: Landlord acknowledges and agrees that the Construction Allowance, the Space Plan Allowance and any other allowances provided for herein may be used, at Tenant's sole discretion, until depleted for any other allowance provided for hereunder. 51. IMPROVEMENTS: (a) Landlord agrees to install the improvements to the Leased Premises and perform the work (all together, the "Work") pursuant to the terms of attached ---- Exhibit "B" (the "Work Letter") and in accordance with the Working Drawings (as - ----------- ----------- therein defined). Landlord acknowledges that upon Substantial Completion of the Premises, Tenant shall be entitled to occupy the Premises for thirty (30) days following Substantial Completion for installation of Tenant's furnishings and other items as required by Tenant (the "Early Occupancy Period"). During the ---------------------- Early Occupancy Period, all terms, provisions, covenants and agreements of the Lease shall be in full force and effect provided the payment of the Base Rent shall not commence until the time set forth in this Lease. (b) Landlord shall cause the Work to be performed in good and workmanlike manner using first class materials and shall be free from material defects of workmanship or material and shall comply with the Work Letter and with all applicable building codes or other legal requirements and all Applicable Laws. For a period of one (1) year following the Commencement Date, Landlord, at Landlord's expense, shall cause the Contractor (as defined in the Work Letter) to replace or repair any defects in workmanship or materials in the improvements made to the Premises per the Work Letter. Landlord represents that it has no current actual knowledge of any material defects in the Leased Premises. OFFICE LEASE AGREEMENT - Page - 37 - ---------------------- (c) Notwithstanding anything herein to the contrary, if Substantial Completion of the Work has not occurred by August 31, 2000, Tenant shall have the right, but not the obligation, to incur any expense necessary to perform such incomplete Work. If such delay has not been caused by Tenant or Tenant's Representatives or force majeure, (i) Tenant may deduct such expense from the Rent or other charges next becoming due, (ii) there shall be an abatement of all Rent (in addition to the Rent Abatement Period) and other charges payable as Rent until such time as the Work is substantially completed. Landlord is solely responsible for applying for and obtaining a building permit. Unless caused by Tenant or Tenant's Representatives, if by January 1, 2000, Landlord is unable to secure all required licenses, permits and approvals from the applicable government authority necessary for it to perform the Work, Tenant may terminate this Lease upon written notice to Landlord no later than January 15, 2000, the Security Deposit will be returned to Tenant, and neither party shall have any further liability to the other. After January 15, 2000, Tenant's termination rights under this subparagraph shall expire. With respect to general office use of the Leased Premises, Landlord will satisfy itself as to any restrictions of record and all zoning and other governmental restrictions and regulations prior to commencement of any construction. Tenant agrees that if its occupancy of the Leased Premises is delayed due to an omission or default by Tenant, this Lease shall nonetheless continue in full force and effect. (d) Landlord agrees to cause the Contractor, as part of the Construction Allowance, to obtain and maintain public liability insurance and worker's compensation insurance adequate to protect all parties, as their interests may appear, from and against any and all liability for death or injury to person, or damage to property, caused by the construction of the Work. Tenant agrees, at Tenant's expense, to obtain and maintain public liability insurance and worker's compensation insurance adequate to protect all parties, as their interests may appear, from and against any and all liability for death or injury to person, or damage to property, caused by the construction of Tenant's Work (hereinafter defined). (e) In addition to the Work, subject to the provisions of Paragraph 16 ------------ above Landlord hereby consents to Tenant constructing all work necessary for Tenant's business operations (the "Tenant's Work"). ------------- 52. RENT ABATEMENT: As provided in Paragraph 5(a) above, notwithstanding any -------------- other provisions herein to the contrary, Landlord acknowledges and agrees that no Base Rent shall be due or owing from Tenant for the Early Occupancy Period or for the first two (2) full Lease Months of the Term thereafter (the Early Occupancy Period and the first two full months of the Lease Term thereafter in which Base Rent shall be abated are defined in Paragraph 5(a) above as the "Rent -------------- ---- Abatement Period"). Commencing on the 1/st/ day of the first full month - ---------------- following the Rent Abatement Period, Tenant shall make payments of Base Rent as otherwise required by this Lease. The abatement of Base Rent as provided for herein is in addition and not in derogation of or in lieu of any other provision hereof providing for abatement of rent. Tenant's right to abate Base Rent during the Rent Abatement Period is conditioned upon Tenant's full and timely performance of all of its obligations under the Lease. If at any time during the Term an event of default by Tenant occurs, then Tenant's right to the Rent Abatement Period as provided for herein shall become void OFFICE LEASE AGREEMENT - Page - 38 - ---------------------- and Tenant shall promptly pay to Landlord, in addition to all other amounts owing under the Lease, the full amount of the Base Rent as would otherwise be due. 53. RENEWAL OPTION: Subject to Paragraph 28 above, Tenant is granted the option ------------ to extend the Term of this Lease for two (2) successive terms of five (5) years each (the "Extension Term"), provided that (i) no event of default exists at the -------------- time of exercise of the option, and (ii) Tenant provides Landlord with nine (9) months advance written notice of its intention to renew prior to the expiration of the initial Term or, as the case may be in the second renewal option, at the end of the first Extension Term. The Extension Term(s) shall be upon the same terms and conditions as set forth herein, except (i) Tenant shall have no further right of renewal after the expiration of the initial Term if Tenant does not exercise its option for the first Extension Term and shall have no further right of renewal after the second Extension Term, and (ii) the Base Rental will be equal to the then prevailing rate for comparable space for a comparable term. 54. ADDITIONAL SPACE: (a) The space depicted on Exhibit "A-1" hereto, containing 21,103 rentable ------------- square feet (the "Additional Space"), is part of the Leased Premises on which ---------------- Base Rent commences on the first day of the tenth Lease Month as reflected in Paragraph 5(a) above. - ------------- (b) Tenant may enter the Additional Space prior to Substantial Completion (the "Pre-Occupancy Period") for the purpose of Tenant's installation of its -------------------- modular furniture system, data cabling and other set up, provided that (i) Tenant shall not conduct business in the Additional Space during the Pre-Occupancy Period, (ii) Landlord shall be given prior written notice of any such entry by Tenant, and (iii) Tenant shall deliver to Landlord evidence that the insurance required under this Lease has been obtained. Tenant's early entry into the Additional Space shall be at its risk and expense, and Landlord shall not be liable in any way for any injury, loss or damage (except to the extent caused by Landlord's negligence) to Tenant or Tenant's Representatives or personal property. Any such entry shall be on the terms of this Lease other than the provisions defining the Rent Abatement Period, but no Base Rent shall accrue during the Pre-Occupancy Period. 55. SPACE PLAN/DESIGN SERVICES ALLOWANCE: Landlord agrees to provide, in addition to the Construction Allowance, a space plan/design services allowance (the "Space Plan Allowance") of two dollars and twenty cents ($2.20) per square -------------------- foot of rentable area of the Premises (which includes the Additional Space) for the preparation of space design, space planning, construction documents, and the mechanical, electrical, and plumbing drawings and other work done by Tenant's space planning firm of Haldeman Powell + Partners (the "Space Plan Firm"). This --------------- allowance shall be funded and paid (or reimbursed to Tenant, as the case may be) by the Landlord on or before the date due following presentations by Tenant of Tenant's letter requesting payment accompanied by the Space Plan Firm's Tenant-approved invoices or bills for completed services furnished or rendered to Tenant pursuant to the agreement between Tenant and the Space Plan Firm and further accompanied by such lien waivers as Landlord may reasonably require. If Landlord has not paid such invoices or bills within twenty (20) days of written notice that they have not been paid OFFICE LEASE AGREEMENT - Page - 39 - ---------------------- when due, Tenant shall have the right to pay same and to offset against Rents for any amounts thus paid. Landlord shall have no responsibility or liability for determining whether any services of the Space Plan Firm have been rendered or have been rendered properly. 56. TENANT'S RIGHT OF FIRST REFUSAL: The real property adjacent on the west to the Project is owned by the entity who previously owned the land of the Project. Such property is the subject of ongoing environmental remediation work. Landlord holds no rights of any kind to acquire such property. However, if, in the future, Landlord elects to acquire such property and to develop it with office/flex improvements similar to the Building, then provided that no event of default exists and subject to Paragraph 28 above, and if occurring during the ------------ Term, in conjunction with Landlord initiating its pre-construction marketing of the proposed building for lease, Landlord shall provide Tenant in writing with the leasing parameters for such building. Tenant shall have fifteen (15) days from its receipt of such lease parameters in which to notify Landlord in writing of its intention to lease the entire building based upon the terms of Landlord's written lease parameters failing in which Tenant's rights under this Paragraph --------- 56 shall terminate, which termination Tenant shall, on request, evidence by a - -- written certification to that effect. If Tenant timely elects so to lease the building, except for the terms set forth in the lease parameters, the lease shall be on terms and conditions generally similar to this Lease, modified as appropriate to suit the new project as developed, and mutually, reasonably acceptable to the parties. Executed by Landlord and Tenant as of the below dates. LANDLORD: JACKSON-SHAW/ALPHA METRO LIMITED PARTNERSHIP, a Texas Limited Partnership ------------------------- By: Jackson-Shaw/Texas, Inc. General Partner By: /s/ [ILLEGIBLE] ----------------- Its: AGENT Date: 11-5-99 --------------------- OFFICE LEASE AGREEMENT - Page - 40 - ---------------------- TENANT: EFFICIENT NETWORKS, INC. a Texas corporation 4201 Spring Valley Road, Ste. 1200 Dallas, Texas 75244 By: /s/ Jill Manning ----------------- Signature Its: Chief Financial Officer ----------------------- JILL MANNING ---------------------------- Print Name Date: 11/1/99 ---------------------- OFFICE LEASE AGREEMENT - Page - 41 - ---------------------- EX-10.22 6 VOTING AGREEMENT Exhibit 10.22 EXECUTION COPY -------------- VOTING AGREEMENT THIS VOTING AGREEMENT (this "Agreement") is made and entered into as of November 20, 1999, among Efficient Networks, Inc., a Delaware corporation (the "Purchaser"), Cabletron Systems, Inc., a Delaware corporation ("Parent") and the undersigned stockholder and/or option holder (the "Stockholder") of Purchaser. RECITALS -------- A. The Purchaser, Merger Sub (as defined below), Parent and Flowpoint Corporation, a California corporation and a wholly-owned subsidiary of Parent (the "Company"), concurrently with entering into this Agreement, are entering into an Agreement and Plan of Reorganization (the "Reorganization Agreement"), which provides for the merger (the "Merger") of the Company with and into Fire Acquisition Corporation, a California corporation and a wholly-owned subsidiary of Parent ("Merger Sub"). Pursuant to the Merger, all outstanding capital stock of the Company shall be converted into the right to receive shares of Common Stock of Purchaser and shares of Series A Non-Voting Convertible Preferred Stock having the terms set forth in the Certificate of Designation attached hereto as Exhibit A (the "Preferred Stock" and the "Certificate"), as set forth in the - --------- Reorganization Agreement; B. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such number of shares of the outstanding capital stock of the Purchaser and shares subject to outstanding options and warrants as is indicated on the signature page of this Agreement; C. It is a condition to Parent's willingness to enter into the Reorganization Agreement and consummate the Merger that Stockholder enter into and deliver this Agreement; and D. In order to induce Parent to enter into the Reorganization Agreement, Stockholder (in his or her capacity as such), as a major stockholder of Purchaser, agrees to vote the Shares (as defined below) and other such shares of capital stock of the Purchaser over which Stockholder has voting power so as to facilitate the conversion of the Preferred Stock into shares of Common Stock of the Purchaser on or before the Expiration Date. NOW, THEREFORE, intending to be legally bound, the parties hereto agree as follows: 1. Certain Definitions. Capitalized terms not defined herein shall have ------------------- the meanings ascribed to them in the Reorganization Agreement. For purposes of this Agreement: (a) "Expiration Date" shall mean the earlier of the date and time on which the Preferred Stock shall have been converted into shares of Common Stock or termination of the Reorganization Agreement. (b) "Person" shall mean any (i) individual, (ii) corporation, limited liability company, partnership or other entity, or (iii) governmental authority. (c) "Shares" shall mean: (i) all securities of the Purchaser (including all shares of Purchaser Common Stock and all options, warrants and other rights to acquire shares of Purchaser Common Stock) owned by Stockholder as of the date of this Agreement; and (ii) all additional securities of the Purchaser (including all additional shares of Purchaser Common Stock and all additional options, warrants and other rights to acquire shares of Purchaser Common Stock) of which Stockholder acquires ownership during the period from the date of this Agreement through the Expiration Date. (d) Transfer. A Person shall be deemed to have effected a "Transfer" -------- of a security if such person directly or indirectly: (i) sells, pledges, encumbers, grants an option with respect to, transfers or disposes of such security or any interest in such security; or (ii) enters into an agreement or commitment providing for the sale of, pledge of, encumbrance of, grant of an option with respect to, transfer of or disposition of such security or any interest therein. 2. Transfer of Shares. ------------------ (a) Transferee of Shares to be Bound by this Agreement. Stockholder -------------------------------------------------- agrees that, during the period from the date of this Agreement through the Expiration Date, Stockholder shall not cause or permit any Transfer of any of the Shares to be effected unless each Person to which any of such Shares, or any interest in any of such Shares, is or may be transferred shall have: (a) executed a counterpart of this Agreement and a proxy in the form attached hereto as Exhibit B (with such modifications as Purchaser may reasonably request); and --------- (b) agreed in writing to hold such Shares (or interest in such Shares) subject to all of the terms and provisions of this Agreement. (b) Transfer of Voting Rights. Stockholder agrees that, during the ------------------------- period from the date of this Agreement through the Expiration Date, Stockholder shall not deposit (or permit the deposit of) any Shares in a voting trust or grant any proxy or enter into any voting agreement or similar agreement in contravention of the obligations of Stockholder under this Agreement with respect to any of the Shares. 3. Agreement to Vote Shares. At every meeting of the stockholders of the ------------------------ Purchaser called, and at every adjournment thereof, and on every action or approval by written consent of the stockholders of the Purchaser, Stockholder (in his or her capacity as such) shall cause the Shares to be voted in favor of consummation of any of the matters contemplated by the Reorganization Agreement with respect to which Stockholder may be entitled to vote and conversion of the Preferred Stock into shares of Purchaser Common Stock as contemplated by the Reorganization Agreement and pursuant to the Certificate. 4. Irrevocable Proxy. Concurrently with the execution of this Agreement, ----------------- Stockholder agrees to deliver to Purchaser a proxy in the form attached hereto as Exhibit B (the "Proxy"), which shall be irrevocable to the fullest extent --------- permissible by law, with respect to the Shares. 5. Representations and Warranties of the Stockholder. (a) Stockholder (i) ------------------------------------------------- is the beneficial owner of the shares of Purchaser Common Stock and the options and warrants to purchase shares of Common Stock of the Purchaser indicated on the final page of this Agreement, free and clear of any liens, claims, options, rights of first refusal, co-sale rights, charges or other encumbrances; (ii) does not beneficially own any securities of the Purchaser other than the shares of Purchaser Common Stock and options and warrants to purchase shares of Common Stock of the Purchaser indicated on the final page of this Agreement; and (iii) has full power and authority to make, enter into and carry out the terms of this Agreement and the Proxy. 6. Additional Documents. Stockholder (in his or her capacity as such) -------------------- hereby covenants and agrees to execute and deliver any additional documents, and to take additional actions, necessary or desirable, in the reasonable opinion of Purchaser or Parent, to carry out the intent of this Agreement. 7. Consent and Waiver. Stockholder (not in his capacity as a director or ------------------ officer of the Purchaser) hereby gives any consents or waivers that are reasonably required for the conversion of the Preferred Stock into shares of Purchaser Common Stock as set forth in the Reorganization Agreement under the terms of any agreements to which Stockholder is a party or pursuant to any rights Stockholder may have. 8. Legending of Shares. If so requested by Purchaser, Stockholder agrees ------------------- that the Shares shall bear a legend stating that they are subject to this Agreement and to an irrevocable proxy. Subject to the terms of Section 2 hereof, Stockholder agrees that Stockholder shall not Transfer the Shares without first having the aforementioned legend affixed to the certificates representing the Shares. 9. Termination. This Agreement shall terminate and shall have no further ----------- force or effect as of the Expiration Date. 10. Miscellaneous. ------------- (a) Severability. If any term, provision, covenant or restriction of ------------ this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. (b) Binding Effect and Assignment. This Agreement and all of the ----------------------------- provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but, except as otherwise specifically provided herein, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be assigned by either of the parties without prior written consent of the other. (c) Amendments and Modification. This Agreement may not be modified, --------------------------- amended, altered or supplemented except upon the execution and delivery of a written agreement executed by the parties hereto. (d) Specific Performance; Injunctive Relief. The parties hereto --------------------------------------- acknowledge that Purchaser shall be irreparably harmed and that there shall be no adequate remedy at law for a violation of any of the covenants or agreements of Stockholder set forth herein. Therefore, it is agreed that, in addition to any other remedies that may be available to Purchaser upon any such violation, Purchaser shall have the right to enforce such covenants and agreements by specific performance, injunctive relief or by any other means available to Purchaser at law or in equity. (e) Notices. All notices and other communications pursuant to this ------- Agreement shall be in writing and deemed to be sufficient if contained in a written instrument and shall be deemed given if delivered personally, telecopied, sent by nationally-recognized overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following address (or at such other address for a party as shall be specified by like notice): If to Purchaser: Efficient Networks, Inc. 4201 Spring Valley Road, Suite 1200 Dallas, Texas 75244 Attention: Jill Manning Telecopy No.: (972) 991-8579 With a copy to: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California 94304 Attention: Kenneth M. Siegel, Esq. Michael J. Kennedy, Esq. Telecopy No.: (650) 461-5375 If to Parent: Cabletron Systems, Inc. ___________________________________ ___________________________________ Attention: Telecopy No. With a copy to: Ropes & Gray One International Place Boston, MA 02110 Attention: David A. Fine, Esq. Telephone No.: (617) 951-7000 Telecopy No.: (617) 951-7050 If to Stockholder: To the address for notice set forth on the signature page hereof. (f) Governing Law. This Agreement shall be governed by the laws of ------------- the State of Delaware, without reference to rules of conflicts of law. (g) Entire Agreement. This Agreement and the Proxy contain the entire ---------------- understanding of the parties in respect of the subject matter hereof, and supersede all prior negotiations and understandings between the parties with respect to such subject matter. (h) Effect of Headings. The section headings are for convenience only ------------------- and shall not affect the construction or interpretation of this Agreement. (i) Counterparts. This Agreement may be executed in several ------------ counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. EFFICIENT NETWORKS, INC. STOCKHOLDER By: /s/ Mark Floyd By: ---------------------------------- ----------------------------- Signature of Authorized Signatory Signature Name: Mark Floyd Name: -------------------------------- --------------------------- Title: Chief Executive Officer Title: ------------------------------- -------------------------- -------------------------------- Print Address -------------------------------- Telephone -------------------------------- Facsimile No. Shares beneficially owned: shares of Purchaser Common Stock ---- shares of Purchaser Common Stock ---- issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: --------------------------------- Signature of Authorized Signatory Name: ------------------------------- Title: ------------------------------ [Signature Page to Voting Agreement] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. EFFICIENT NETWORKS, INC. STOCKHOLDER By: By: /s/ Mark Floyd ------------------------------ ----------------------------------- Signature of Authorized Signatory Signature Name: Name: Mark Floyd ---------------------------- --------------------------------- Title: Title: --------------------------- -------------------------------- 4201 Spring Valley Road, Suite 1200 ------------------------------------- Dallas, Texas 75244 ------------------------------------- Print Address 972-991-3884 ------------------------------------- Telephone 972-991-8579 ------------------------------------- Facsimile No. Shares beneficially owned: 1,548,958 shares of Purchaser Common Stock --------- shares of Purchaser Common Stock --------- issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: --------------------------------- Signature of Authorized Signatory Name: ------------------------------- Title: ------------------------------ [Signature Page to Voting Agreement] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. EFFICIENT NETWORKS, INC. STOCKHOLDER By: By: /s/ Robert R. Davenport ------------------------------- ------------------------------------- Signature of Authorized Signatory Signature Name: Name: Robert R. Davenport ----------------------------- ------------------------------------ Title: Title: E.V.P., Corporate Development ---------------------------- ----------------------------------- Covad Communications Group, Inc. ----------------------------------------- 2330 Central Expressway ----------------------------------------- Santa Clara, CA 95050 ----------------------------------------- Print Address (408) 844-7709 ----------------------------------------- Telephone (408) 844-7680 ----------------------------------------- Facsimile No. Shares beneficially owned: 497,663 shares of Purchaser Common Stock -------- shares of Purchaser Common Stock -------- issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: --------------------------------- Signature of Authorized Signatory Name: ------------------------------- Title: ------------------------------ [Signature Page to Voting Agreement] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. EFFICIENT NETWORKS, INC. STOCKHOLDER By: By: /s/ Andrew Sengei --------------------------------- --------------------------------- Signature of Authorized Signatory Signature Name: Name: Andrew Sengei ------------------------------- ------------------------------- Title: Title: General Partner, Enterprise ------------------------------ ------------------------------ Partners ------------------------------ 7979 IvanHoe Ave., Suite 556 ------------------------------------ La Jolla, CA 92037 ------------------------------------ Print Address 858-454-8833 ------------------------------------ Telephone 858-551-1206 ------------------------------------ Facsimile No. Shares beneficially owned: 3,821,374 shares of Purchaser Common --------- Stock shares of Purchaser Common Stock ------- issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: ---------------------------------- Signature of Authorized Signatory Name: -------------------------------- Title: ------------------------------- [Signature Page to Voting Agreement] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. EFFICIENT NETWORKS, INC. STOCKHOLDER MENLO VENTURES VI, L.P. By: By: /s/ General Partner --------------------------------- ----------------------------------- Signature of Authorized Signatory Signature Name: Name: MV Management VI LP ------------------------------- --------------------------------- Title: Title: General Partner, Menlo Ventures ------------------------------ -------------------------------- VI, LP -------------------------------- 3000 Sand Hill Road, #4-100 -------------------------------------- Menlo Park, CA 94025 -------------------------------------- Print Address 650-854-8540 -------------------------------------- Telephone 650-854-7059 -------------------------------------- Facsimile No. Shares beneficially owned: 2,013,011 shares of Purchaser Common ---------- Stock shares of Purchaser Common Stock -------- issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: --------------------------------- Signature of Authorized Signatory Name: ------------------------------- Title: ------------------------------ [Signature Page to Voting Agreement] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. EFFICIENT NETWORKS, INC. STOCKHOLDER MENLO ENTREPRENEURS FUND VI, L.P. By: By: /s/ General Partner --------------------------------- ---------------------------------- Signature of Authorized Signatory Signature Name: Name: MV Management VI, LP ------------------------------- -------------------------------- Title: Title: General Partner ------------------------------ ------------------------------- Menlo Entrepreneurs Fund VI, LP ------------------------------------- 3000 Sand Hill Road, #4-100 ------------------------------------- Menlo Park, CA 94025 ------------------------------------- Print Address 650-854-8540 ------------------------------------- Telephone 650-854-7059 ------------------------------------- Facsimile No. Shares beneficially owned: 30,199 shares of Purchaser Common Stock ------ shares of Purchaser Common Stock ------ issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: ---------------------------------- Signature of Authorized Signatory Name: -------------------------------- Title: ------------------------------- [Signature Page to Voting Agreement] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. EFFICIENT NETWORKS, INC. STOCKHOLDER By: By: /s/ Jim Gauer --------------------------------- ---------------------------------- Signature of Authorized Signatory Signature Name: Name: Jim Gauer/Ocean Park Ventures ------------------------------- -------------------------------- Title: Title: General Partner ------------------------------ ------------------------------- ------------------------------------- ------------------------------------- Print Address ------------------------------------- Telephone ------------------------------------- Facsimile No. Shares beneficially owned: 1,273,803 shares of Purchaser Common --------- Stock shares of Purchaser Common Stock ------- issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: --------------------------------- Signature of Authorized Signatory Name: ------------------------------- Title: ------------------------------ [Signature Page to Voting Agreement] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. EFFICIENT NETWORKS, INC. STOCKHOLDER By: By: /s/ Jim Gauer --------------------------------- ---------------------------------- Signature of Authorized Signatory Signature Name: Name: Jim Gauer/Palomar Ventures ------------------------------- -------------------------------- Title: Title: General Partner ------------------------------ ------------------------------- ------------------------------------- ------------------------------------- Print Address ------------------------------------- Telephone ------------------------------------- Facsimile No. Shares beneficially owned: 684,931 shares of Purchaser Common Stock ------- shares of Purchaser Common Stock ------- issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: ---------------------------------- Signature of Authorized Signatory Name: -------------------------------- Title: ------------------------------- [Signature Page to Voting Agreement] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. EFFICIENT NETWORKS, INC. STOCKHOLDER By: By: /s/ Robert A. Hoff --------------------------------- ---------------------------------- Signature of Authorized Signatory Signature Name: Name: Robert A. Hoff ------------------------------- -------------------------------- Title: Title: General Partner/Crosspoint ------------------------------ ------------------------------- Venture Partners ------------------------------- ------------------------------------- ------------------------------------- Print Address ------------------------------------- Telephone ------------------------------------- Facsimile No. Shares beneficially owned: 5,116,619 shares of Purchaser Common --------- Stock shares of Purchaser Common Stock ------- issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: --------------------------------- Signature of Authorized Signatory Name: ------------------------------- Title: ------------------------------ [Signature Page to Voting Agreement] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. EFFICIENT NETWORKS, INC. STOCKHOLDER By: By: /s/ Anthony Maher --------------------------------- ------------------------------------ Signature of Authorized Signatory Signature Name: Name: Anthony Maher ------------------------------- ---------------------------------- Title: Title: Siemens AG, Member Executive ------------------------------ --------------------------------- Board --------------------------------- Hofmann Str. 51 --------------------------------------- 81359 Munchen, Germany --------------------------------------- Print Address +49 89 722 38158 --------------------------------------- Telephone +49 89 722 46262 --------------------------------------- Facsimile No. Shares beneficially owned: 3,716,800 shares of Purchaser Common ---------- Stock shares of Purchaser Common Stock -------- issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: ----------------------------------- Signature of Authorized Signatory Name: --------------------------------- Title: -------------------------------- [Signature Page to Voting Agreement] IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed on the day and year first above written. EFFICIENT NETWORKS, INC. STOCKHOLDER By: By: /s/ Robert C. Hawk --------------------------------- ------------------------------------ Signature of Authorized Signatory Signature Name: Name: Robert C. Hawk ------------------------------- ---------------------------------- Title: Title: Director ------------------------------ --------------------------------- 7585 S. Biscay Street --------------------------------------- Aurora, CO 80016 --------------------------------------- Print Address 303-699-2602 --------------------------------------- Telephone 303-699-2603 --------------------------------------- Facsimile No. Shares beneficially owned: 150,000 shares of Purchaser Common Stock ------- shares of Purchaser Common Stock ------- issuable upon exercise of outstanding options or warrants CABLETRON SYSTEMS, INC. By: ------------------------------------ Signature of Authorized Signatory Name: ---------------------------------- Title: --------------------------------- [Signature Page to Voting Agreement] IRREVOCABLE PROXY The undersigned stockholder of Efficient Networks, Inc., a Delaware corporation (the "Purchaser"), hereby irrevocably (to the fullest extent permitted by law) appoints Purchaser as the sole and exclusive attorneys and proxies of the undersigned, with full power of substitution and resubstitution, to vote and exercise all voting and related rights (to the full extent that the undersigned is entitled to do so) with respect to all of the shares of capital stock of the Purchaser that now are or hereafter may be beneficially owned by the undersigned, and any and all other shares or securities of the Purchaser issued or issuable in respect thereof on or after the date hereof (collectively, the "Shares") in accordance with the terms of this Proxy. The Shares beneficially owned by the undersigned stockholder of the Purchaser as of the date of this Proxy are listed on the final page of this Proxy. Upon the undersigned's execution of this Proxy, any and all prior proxies given by the undersigned with respect to any Shares are hereby revoked and the undersigned agrees not to grant any subsequent proxies with respect to the Shares until after the Expiration Date (as defined below). This Proxy is irrevocable (to the fullest extent permitted by law), is coupled with an interest and is granted pursuant to that certain voting agreement of even date herewith by and among Purchaser and the undersigned stockholder (the "Voting Agreement"), and is granted in connection with the Purchaser and Parent entering into that certain Agreement and Plan of Reorganization (the "Reorganization Agreement"), among Purchaser, Fire Acquisition Corporation, a California corporation and a wholly-owned subsidiary of Purchaser ("Merger Sub"), Cabletron Systems, Inc., a Delaware corporation ("Parent") and Flowpoint Corporation, a California corporation and a wholly- owned subsidiary of Parent. The Reorganization Agreement provides for the merger of the Company with and into Merger Sub in accordance with its terms (the "Merger"). As used herein, the term "Expiration Date" means the date and time on which the Series A Non-Voting Convertible Preferred Stock (the "Preferred Stock") shall have been converted into shares of Purchaser Common Stock or the Reorganization Agreement shall have been terminated. The attorneys and proxies named above, and each of them, are hereby authorized and empowered by the undersigned, at any time prior to the Expiration Date, to act as the undersigned's attorney and proxy to vote the Shares, and to exercise all voting, consent and similar rights of the undersigned with respect to the Shares (including, without limitation, the power to execute and deliver written consents and call a special meeting of stockholders) at every annual, special or adjourned meeting of stockholders of the Purchaser and in every written consent in lieu of such meeting in favor of approval of the Merger and conversion of the Preferred Stock into Purchaser Common Stock as contemplated by the Reorganization Agreement. The attorneys and proxies named above may not exercise this Proxy on any other matter except as provided above. The undersigned stockholder may vote the Shares on all other matters. Any obligation of the undersigned hereunder shall be binding upon the successors and assigns of the undersigned. This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Date. Dated: November 19, 1999 Signature of Stockholder: /s/ Mark Floyd ------------------------ Print Name of Stockholder: Mark Floyd ------------------------ Shares beneficially owned: 1,548,958 [Signature Page to Irrevocable Proxy] This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Date. Dated: November 19, 1999 Signature of Stockholder: /s/ Robert R. Davenport ---------------------------- Print Name of Stockholder: Covad Communications ---------------------------- Shares beneficially owned: 497,663 shares of the Purchaser Common Stock ----------- shares of the Purchaser Common Stock ----------- issuable upon exercise of outstanding options or warrants [Signature Page to Irrevocable Proxy] This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Date. Dated: November 19, 1999 Signature of Stockholder: /s/ Andrew Sengei ------------------------ Print Name of Stockholder: Enterprise Partners ------------------------ Shares beneficially owned: 3,821,374 shares of the Purchaser Common Stock ----------- shares of the Purchaser Common Stock ----------- issuable upon exercise of outstanding options or warrants [Signature Page to Irrevocable Proxy] This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Date. Dated: November 19, 1999 MENLO ENTREPRENEURS FUND VI, L.P. By: MV Management VI, L.P. It's General Partner By: /s/ General Partner ---------------------- Shares beneficially owned: 30,199 shares of the Purchaser Common Stock --------- shares of the Purchaser Common Stock --------- issuable upon exercise of outstanding options or warrants [Signature Page to Irrevocable Proxy] This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Date. Dated: November 19, 1999 MENLO ENTREPRENEURS FUND VI, L.P. By: MV Management VI, L.P. It's General Partner By: /s/ General Partner ----------------------- Shares beneficially owned: 2,013,011 shares of the Purchaser Common Stock ------------ shares of the Purchaser Common Stock ------------ issuable upon exercise of outstanding options or warrants [Signature Page to Irrevocable Proxy] This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Date. Dated: November 19, 1999 Signature of Stockholder: /s/ Jim Gauer ------------------------- Print Name of Stockholder: Ocean Park Ventures ------------------------- Shares beneficially owned: 1,273,803 shares of the Purchaser Common Stock ------------- shares of the Purchaser Common Stock ------------- issuable upon exercise of outstanding options or warrants [Signature Page to Irrevocable Proxy] This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Date. Dated: November 19, 1999 Signature of Stockholder: /s/ Jim Gauer ----------------------- Print Name of Stockholder: Palomar Ventures ----------------------- Shares beneficially owned: 684,931 shares of the Purchaser Common Stock ----------- shares of the Purchaser Common Stock ----------- issuable upon exercise of outstanding options or warrants [Signature Page to Irrevocable Proxy] This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Date. Dated: November 19, 1999 Signature of Stockholder: /s/ Robert A. Hoff, General Partner --------------------------------------- Print Name of Stockholder: Crosspoint Venture Partners -------------------------------------- Shares beneficially owned: 5,116,619 shares of the Purchaser Common Stock ----------- shares of the Purchaser Common Stock ----------- issuable upon exercise of outstanding options or warrants [Signature Page to Irrevocable Proxy] This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Date. Dated: November 19, 1999 Signature of Stockholder: /s/ Anthony Maher -------------------------- Print Name of Stockholder: Siemens AG -------------------------- Shares beneficially owned: 3,716,800 shares of the Purchaser Common Stock ----------- shares of the Purchaser Common Stock ----------- issuable upon exercise of outstanding options or warrants [Signature Page to Irrevocable Proxy] This Proxy is irrevocable (to the fullest extent permitted by law). This Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Date. Dated: November 19, 1999 Signature of Stockholder: /s/ Robert C. Hawk ------------------------- Print Name of Stockholder: Robert C. Hawk ------------------------- Shares beneficially owned: 150,000 shares of the Purchaser Common Stock ----------- shares of the Purchaser Common Stock ----------- issuable upon exercise of outstanding options or warrants [Signature Page to Irrevocable Proxy] EX-10.23 7 RESELLER AGREEMENT EXHIBIT 10.23 EFFICIENT NETWORKS RESELLER AGREEMENT The terms contained herein, along with the attachments and exhibits constitute an AGREEMENT ("Reseller Agreement" or "Agreement") made this 21st day of November, 1999 between Efficient Networks, Inc., a Delaware corporation with its principal place of business at 4201 Spring Valley Road, Suite 1200, Dallas, Texas, U.S.A., and its subsidiaries (collectively "Efficient") and Cabletron Systems, Inc., a Delaware corporation, with its principle place of business at 35 Industrial Way, Rochester, New Hampshire, U.S.A. ("Reseller" or "Cabletron"), and effective as of the closing of the merger contemplated by the Agreement and Plan of Reorganization made and entered into as of even date herewith, among Efficient, Reseller, Fire Acquisition Corporation, a California corporation and a wholly-owned subsidiary of Efficient and Flowpoint Corporation, Inc., a California corporation and a wholly-owned subsidiary of Reseller ("Flowpoint") (such date referred to herein as the "Effective Date"). 1. DEFINITIONS: 1.1. End User shall mean the ultimate customer that purchases Products for its -------- internal use from Reseller. 1.2. Exhibits to this Agreement are: Exhibit A Products Exhibit B Technical Support Guidelines Exhibit C Limited Exclusivity Exhibit D Marketing Principles 1.3. Intellectual Property Rights shall mean all patents, copyrights, ---------------------------- trademarks, mask works and other intellectual property rights relating to a Product. 1.4. Orders shall mean purchase orders for Products submitted to Efficient by ------ Reseller under the terms of this Agreement. 1.5. Parties shall mean Efficient and Reseller. ------- 1.6. Products shall mean those products set forth in Exhibit A to this -------- Agreement, together with any product introduced by Efficient during the term of this Agreement that enhances the functionality of, or replaces, a product set forth in Exhibit A. 1.7. Product Specifications shall mean Efficient or Flowpoint's published ---------------------- specifications for the Flowpoint product current on date Efficient accepts Reseller's Order and any additional specifications agreed to by the Parties in writing. 1.8. Software shall mean software products and software or firmware -------- incorporated in hardware Products. 1.9. Territory - Unless otherwise specified or agreed by the Parties in --------- writing, the Territory is worldwide. 1.10. Warranty Period - Unless otherwise specified by Efficient or agreed by --------------- the Parties, the Warranty Period shall be the shorter of twelve (12) months from the date the Product is delivered to the End User or fifteen (15) months from the date the Product is shipped to Reseller. 2. RELATIONSHIP: 2.1. Appointment - Efficient appoints Reseller as a non-exclusive reseller of ----------- Products to be sold under Efficient and Reseller brands to End Users within the Territory under the terms of this Agreement. 2.2. Limited Exclusivity - The parties agree that the limited exclusivity ------------------- provisions set forth in Exhibit C shall apply to this Agreement. 2.3. Relationship Reviews - Efficient and Reseller will conduct reviews of -------------------- their relationship and performance under this Agreement at least twice during each year following the Effective Date. These reviews will consider, among other things, new products, Product Specifications and pricing, and Reseller's Product forecasts, purchases and payments under this Agreement. 2.4. Marketing Principles - The parties recognize the need to coordinate their -------------------- efforts with respect to sales opportunities for the products. The parties agree that they shall act in good faith to follow their mutual intentions as set forth in the Marketing Principles attached hereto as Exhibit D, and further agree to abide by the issue resolution mechanisms set forth therein. 3. PRODUCT BRANDING: 3.1 Existing Arrangements - Any Flowpoint product which Reseller, immediately --------------------- prior to the Effective Date, was reselling under a Reseller brand, may, at Page 1 Reseller's request, continue to be resold under such Reseller brand. For purposes of rebranding, upgraded and enhanced versions of Products rebranded prior to the Effective Date shall be deemed to be Products entitled to rebranding. Such Products shall continue to be rebranded substantially similarly to the way they were being rebranded prior to the Effective Date. Any changes to the rebranding specifications shall be agreed in writing by authorized representatives of each Party. 3.2 Rebranding of Additional Products - Provided that the parties agree to --------------------------------- minimum purchase volumes for a particular additional Product, Reseller may request that additional Products be rebranded to carry a Reseller brand. In the event that the parties are unable to agree on minimum purchase volumes, Reseller may require Efficient to rebrand such additional Products provided Reseller pays Efficient's fully-loaded cost to effect such rebranding. 3.3 Other Products - Except as provided in Sections 3.1 and 3.2, Reseller -------------- agrees that all Products sold by Reseller hereunder shall bear the brand marking and other labeling provided by Efficient. Reseller shall not remove any such branding or labeling, nor shall Reseller add any Reseller (or other) branding or labeling to any Product without the prior written consent of Efficient. 4. RESELLER RESPONSIBILITIES: 4.1. Product Forecasts - On or before the Effective Date and during the first ----------------- week of each calendar month after the Effective Date, Reseller shall provide Efficient with a forecast of Reseller's expected demand for each Product to be purchased and delivered during each month of the subsequent twelve (12) month period. 4.2. Firm Orders - With respect to Products rebranded at Reseller's request, ----------- the Product forecasts for the first two (2) months of each twelve (12) month period shall constitute firm Orders for Products under this Agreement that are subject to acceptance by Efficient and will be accompanied by a purchase order by such amount. 5. PRODUCTS AND PRICING: 5.1. New Products - Products which constitute enhancements of or replacements ------------ for products listed on Exhibit A shall be added to Exhibit A by a writing signed by the parties, and shall thereafter be deemed to be "Products" for purposes of this Agreement. The parties acknowledge that the term Products is intended to encompass only those products heretofore manufactured by Flowpoint and any enhancements thereto or replacements therefor. To the extent that the parties later agree to permit Reseller to sell any products which were heretofore manufactured by Efficient (or are hereafter developed by Efficient and do not fall within the definition of Products) the right to resell any such products shall be the subject of a separate written agreement between the parties. 5.2. Withdrawal of Products - Efficient shall have the right to cease ---------------------- production and withdraw any Product from Exhibit A, provided Efficient gives Reseller a written "Product Withdrawal Notice" at least ninety (90) days prior to the effective date of the withdrawal. Reseller may, within forty-five (45) days after receipt of a Product Withdrawal Notice, submit a single, non-cancelable "Last Buy" Order for the affected Product for delivery within the subsequent three (3) months. Efficient shall not be obligated to accept any Last Buy Order which exceeds fifty (50) percent of the Product units that Reseller ordered during the twelve (12) month period prior to the date of the relevant Product Withdrawal Notice. 5.3. Software and Firmware - All Products consisting of Software and Software --------------------- incorporated in any Product shall not be sold but shall be provided to Reseller and its customers subject to a use license. 5.4. Product Modifications - In the event Efficient intends to modify a Product --------------------- Specification affecting its form, fit, interoperability or function, Efficient shall notify Reseller of the modification in writing no later than ninety (90) days prior to the effective date of the modification. Based upon information from Reseller, Efficient will make reasonable efforts to mitigate the impact of any modification on Reseller, including consideration of changes to the modification and allowing Reseller to make a final purchase of the unmodified Products, provided that Efficient shall retain the sole right to make final decisions concerning the design of Products and Product Specifications, and that the Order for any final purchase of unmodified Products shall be placed at least thirty (30) days prior to the effective date of the modification for delivery within sixty (60) days. 5.5. [Intentionally Left Blank] Page 2 5.6. Most Favored Pricing - During the term of this Agreement, Efficient will -------------------- extend to Cabletron the best price it offers to third parties, for the same or lower volume of Products. 5.7. Price Changes - Upon the written request of either Party, made at least ------------- sixty (60) days prior to any anniversary of the Effective Date, Parties shall meet to consider and negotiate in good faith requested changes in Product prices. 5.8. Price Decreases - The Parties agree that Product prices may require --------------- adjustment from time to time to allow Reseller to remain competitive, and Efficient will consider in good faith any request by Reseller for a reduction in the price of any Product. In the event Efficient determines to lower the price of a Product, the price decrease shall apply to all Products on order by Reseller but not shipped as of the effective date of the decrease. 5.9. Price Terms - Prices for all Products are F.O.B. the shipping dock of the ----------- Efficient manufacturing or distribution facility, with Reseller fully responsible for all costs of transportation, insurance, taxes, customs duties, landing, storage and handling fees, and documents or certificates required for exportation or importation. 6. ORDERING & SHIPMENT: 6.1. No Conflicting Terms - No additional or different terms on the face or -------------------- reverse side of any purchase order or other written or oral communications between the Parties shall supercede or amend the terms of this Agreement, unless such terms are agreed upon in advance, set forth in writing and signed by an authorized representative of each Party. 6.2. Issuance and Acceptance - Each Order shall be dated, and shall contain: ----------------------- (i) a complete list of the Products to be purchased specifying quantity, type, description and price; (ii) shipment and delivery instructions; (iii) branding requirements, where applicable; and (iv) any special terms and conditions agreed to in writing by the Parties. Efficient agrees to receive Orders placed by Reseller via electronic document transfer, facsimile, or hard copy only. Verbal or telephone orders must be followed promptly by one of the transmission means described above. All Orders are subject to acceptance by Efficient, and Efficient may reject Orders in its reasonable discretion. 6.3. Right to Reschedule - Reseller may reschedule the date of the shipment of ------------------- any Order once without penalty provided that Efficient receives written notice at least thirty (30) days prior to the scheduled shipment date requesting shipment on a date within ninety (90) days after the original shipment date. 6.4. Delivery Schedule - Efficient will endeavor to deliver all Products in ----------------- accordance with the Product delivery date specified in the Reseller's Order as accepted by Efficient, provided that Efficient reserves the right, at its sole discretion, to make partial shipments. When Products or component parts are in short supply, or on an industry wide allocation, Efficient will allocate its available inventory and make deliveries on a basis Efficient deems equitable, in its sole discretion, and without liability to Reseller on account of the method of allocation chosen or its implementation. 6.5. Quantities - [Intentionally Left Blank] ---------- 6.6. No Right of Return - Reseller shall have no right to return and Efficient ------------------ shall have no obligation to repurchase Products sold under this Agreement. 6.7. Carrier & Risk of Loss - Products will be shipped by the carrier ---------------------- designated in writing by Reseller. In the absence of specific shipping instructions from Reseller, Efficient may designate the carrier. In no event, however, shall Efficient be liable for the shipment, nor shall the carrier be deemed to be an agent or representative of Efficient. Title to Products and risk of loss shall pass to Reseller upon Efficient's delivery to the designated carrier. 6.8. Packing - Products shipped by Efficient will be packed and packaged ------- according to Efficient's then current packaging methods. Special packaging or packing requirements shall be quoted by Efficient and mutually agreed to in advance. 7. SOFTWARE LICENSE TERMS: 7.1. License Grant - Efficient hereby grants Reseller a nontransferable, ------------- nonexclusive license to use and distribute Software solely for use by End Users in and in connection with their use of Products. 7.2. Protection of Software - Reseller agrees not to modify, decompile or ---------------------- disassemble Software except as expressly permitted by applicable law and agrees not to lend, rent, lease, sublicense, or otherwise transfer Software in any form to any Page 3 person except in accordance with this Agreement. Reseller will use its best efforts to protect Software and any copies or portions thereof from unauthorized reproduction, publication, disclosure or distribution. 8. PAYMENT: 8.1. Payment Terms - Efficient's payment terms are net thirty (30) days from ------------- the date of Efficient's invoice. Reseller shall promptly pay all invoices and amounts due and maintain satisfactory credit arrangements with Efficient. All payments shall be made in United States dollars. 8.2. Delinquency - If Reseller is delinquent in payment, Efficient may refuse ---------- to accept any new Orders, or may cancel or delay shipment on existing Orders. Efficient may also rescind Reseller's credit terms and demand payment on either a pre-paid or delivery basis. Unless there is a legitimate dispute concerning an invoice, interest will accrue on delinquent amounts at the lesser of the maximum rate permitted by law or one and one half percent (1 1/2 %) per month from the due date. 9. WARRANTY TERMS: 9.1. Product Warranty - Efficient warrants that Products purchased under this ---------------- Reseller Agreement will conform to the Product Specifications applicable as of the date of Reseller's Order throughout the Warranty Period. 9.2. Repair or Replacement - Efficient shall use commercially reasonable --------------------- efforts to, at its option, repair, replace or issue a credit equal to the purchase price for Products that fail to meet the applicable Product Specifications during the Warranty Period. 9.3. Return, Repair or Replacement Procedures - Reseller shall pay all ---------------------------------------- transportation charges for Products returned to Efficient under these product warranty terms, except that Efficient shall pay the transportation charges for return of any Product that failed within thirty (30) days of its initial use by an End User. Efficient will pay all transportation charges back to the Reseller or End User. In the event that no warranty repair or replacement is required, Efficient reserves the right to charge Reseller for the transportation incurred by Efficient in returning the Product. 9.4. Warranty Disclaimer - EXCEPT AS EXPRESSLY PROVIDED HEREIN, NO OTHER ------------------- WARRANTY, EXPRESS OR IMPLIED SHALL APPLY. EFFICIENT SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. NO REPRESENTATION OR WARRANTY, INCLUDING BUT NOT LIMITED TO STATEMENTS OF CAPACITY, SUITABILITY FOR USE OR PERFORMANCE, WHETHER MADE BY EFFICIENT PERSONNEL OR RESELLER PERSONNEL SHALL BE CONSIDERED A WARRANTY BY EFFICIENT, FOR ANY PURPOSE, OR GIVE RISE TO ANY LIABILITY OF EFFICIENT WHATSOEVER. 9.5. Warranty Notice - All End Users shall be provided with a written notice of --------------- the foregoing Product Warranty and Warranty Disclaimer either in a contract or upon delivery of the Product. In the event that Reseller shall modify or supplement the foregoing Product Warranty, Reseller shall indemnify and hold Efficient harmless from all claims, damages and related expenses, including attorneys' fees, incurred by Efficient during or after the term of this Agreement as a result of any such modification. 10. SERVICE: 10.1. End User Support - Reseller shall provide all first and second level End ---------------- User customer support for Products, as defined below, in the same manner Reseller provides similar support for other products. Efficient will provide third level support, according to the Technical Support Guidelines set forth in Exhibit B to this Agreement, solely to Reseller's designated engineering personnel who are trained in the technical operation of the Product. As used herein: (i) First Level Support shall mean the provision of general product information, configuration support, collection of technical problem identification information and screening of customer support requests; (ii) Second Level Support shall mean First Level Support plus problem isolation, defect determination and module or Product replacement, lab simulation, interoperability testing and action plan definition; and (iii) Third Level Support shall mean back-up technical support by telephone and, where appropriate, the provision of hardware and software "bug fixes" and work-arounds. Page 4 10.2. Reseller's Efforts - Reseller shall use its best effort to resolve End ------------------ User support problem without Efficient's assistance and insure that all Product problems and technical inquiries are reported in a standard format. Reseller shall cooperate with Efficient in identification of "bug fixes" and work-arounds and the provision of Level Three Support. 10.3. Technical Information and Training - Efficient will provide technical ---------------------------------- information and up to ___ days of training for ___ individuals with regard to each Product to allow Reseller to provide Level One and Level Two Support. Unless otherwise agreed by the Parties, all training shall take place at Efficient's facility in Dallas, Texas. All costs and expenses of Reseller's personnel in attending Efficient training shall be borne by the Reseller. 10.4. Additional Support - Efficient may agree to provide Reseller with ------------------- additional maintenance services and support pursuant to a separate agreement between the Parties. 10.5. Non-Warranty Repair - Non-warranty repair services for Products may be ------------------- provided by Efficient at a designated Efficient facility on a time and materials basis under Efficient's then standard prices, terms and conditions. Reseller shall also be responsible for all associated freight and insurance charges. 11. INTELLECTUAL PROPERTY: 11.1. Ownership - Unless expressly stated, nothing in this Agreement shall --------- grant Reseller a license to use or any other right, title or interest in any Efficient Intellectual Property Right, and all such Intellectual Property Rights shall remain the exclusive property of Efficient. Reseller acknowledges that its unauthorized use or assertion of ownership of any Efficient Intellectual Property Right will cause Efficient or its Affiliates immediate and irreparable harm and shall entitle Efficient or its Affiliates to obtain injunctive relief. 12. DURATION AND TERMINATION: 12.1. Term - The initial term of this Reseller Agreement shall be the three (3) ---- year period commencing on the Effective Date and terminating on the date exactly three (3) years after the Effective Date unless earlier terminated pursuant to the terms of this Agreement. This Agreement may be renewed for additional one (1) year periods upon the same terms and conditions as set forth herein upon the mutual written agreement of the parties. 12.2. Termination for Cause - This Agreement may be terminated upon the --------------------- occurrence of any of the following events: (i) by Efficient, upon ten (10) days written notice, should Reseller fail to pay any sums due hereunder within twenty (20) days of the due date thereof; or (ii) by either Party should the other Party commit a material breach of any obligation under this Agreement not specifically set out in this Section or any other Agreement between the parties and fail to cure such material breach within thirty (30) days after written notice to the defaulting party (hereinafter the "Default Notice"); or (iii) by either party, immediately, upon the insolvency of the other party, the appointment of a liquidator, receiver, administrative receiver or administrator. 12.3. Termination on Change of Control - Notwithstanding the provisions of -------------------------------- Section 18.4 (Assignment) of this Agreement, either party may, in its sole discretion, terminate this Agreement immediately upon a change of control of the other party; provided, however, that the election to terminate must be made within thirty (30) days of the time that the terminating party becomes aware of the change of control; and provided further that any such termination shall not be effective for ninety (90) days from the notice and that, during the ninety (90) day notice period, this Agreement will remain in full force and effect. This restriction in Exhibit C and D shall not apply to a person who acquires Reseller in a change of control but shall continue to apply to Reseller and its subsidiaries so long as Reseller and its subsidiaries continue using Reseller's brand name(s) or until they legally cease to exist. 12.4. Effects of Termination - Upon any termination of this Agreement, Reseller ---------------------- shall: (i) refrain from submitting additional Product Orders; (ii) promptly pay for any Products which Reseller has ordered but has not yet paid Efficient; and (iii) allow Efficient, at its discretion, to repurchase at the invoice price all or any portion of the Products in Reseller's inventory. Products to be repurchased must be unused, in new condition, and in Reseller's inventory (or in transit from Efficient) on the day this Reseller Agreement ends. Reseller shall pay all shipping charges for Products returned and for all Products rejected. If Efficient chooses not to repurchase products from Reseller, Reseller may sell such existing inventories to End Users. Page 5 12.5. Limits of Liability for Termination - In the event this Agreement is ----------------------------------- terminated, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR COMPENSATION, REIMBURSEMENT OR DAMAGES ON ACCOUNT OF THE LOSS OF PROSPECTIVE PROFITS OR ANTICIPATED SALES, OR ON ACCOUNT OF EXPENDITURES, INVESTMENTS, LEASES OR COMMITMENTS IN CONNECTION WITH THE BUSINESS OR GOOD WILL OF EFFICIENT OR RESELLER, OR FOR ANY OTHER REASON RELATING TO OR ARISING FROM SUCH TERMINATION. 12.6. Post Termination Support - The termination of this Agreement shall not ------------------------ relieve Efficient of its Warranty obligations under Article 8 of this Agreement with regard to Products sold by Reseller to End Users prior to the date of termination, and Efficient shall continue to provide the technical support described Article 9 of this Agreement for one (1) year following the date of termination. 13. CONFIDENTIAL AND PROPRIETARY INFORMATION: 13.1. Disclosure of Information - It is expected that Efficient and Reseller ------------------------- may each disclose to the other proprietary or confidential information. For purposes of the following, the Party disclosing the Confidential Information is the "Discloser" and the Party receiving the Confidential Information is the "Recipient". 13.2. Confidential Information - "Confidential Information" shall mean any and ------------------------ all information of the Discloser that is not generally known by others with whom it competes or does business, and any and all information, publicly known in whole or in part or not, which, if disclosed would assist in competition against Discloser. Confidential Information includes without limitation such information relating to: (i) the technical specifications of the Products; (ii) the development, research, testing, marketing and financial activities of the Discloser; (iii) the identity and special needs of the customers or suppliers of the Discloser; and (iv) the people and organizations with whom the Discloser has business relationships and those relationships. 13.3. Ownership and Non-Disclosure - All Confidential Information acquired by ---------------------------- Recipient or its employees or agents shall remain Discloser's exclusive property, and Recipient shall use its best efforts (which in any event shall not be less than the efforts Recipient takes to ensure the confidentiality of its own proprietary and other confidential information) to keep, and have its employees and agents keep, any and all such information and data confidential, and shall not copy or publish or disclose it to others, or authorize its employees, or agents or anyone else to copy, publish, or disclose it to others, without Discloser's prior written approval, and shall return such information and data to Discloser at its request. Recipient shall only use any Confidential Information in connection with its performance under this Agreement. 13.4. Exception - The confidentiality provisions in this Section will not apply --------- to information which is or which becomes generally known to the public by publication or by any means other than a breach of duty on the part of the Reseller hereunder or is released by Efficient without restriction or is released pursuant to judicial or governmental decree. 13.5. Post Termination - Except to the extent necessary to fulfill ongoing ---------------- product support obligations or as otherwise provided herein, upon termination or expiration, the Reseller shall deliver to Efficient all material furnished by Efficient and pertaining to Products, which is then in the possession of Reseller, and shall not retain copies of the same. Except as provided herein, upon termination or expiration, Efficient shall deliver to Reseller all material furnished by Reseller, which is deemed confidential hereunder. 14. INTELLECTUAL PROPERTY CLAIMS: 14.1. Indemnification by Efficient - Efficient shall defend, at Efficient's ---------------------------- expense, any claim brought against Reseller or End Users (a "Claim Defendant") alleging that any Efficient Product acquired or licensed under this Agreement infringes a U.S. patent, copyright, or mask work right (hereinafter a "Claim"). Efficient shall pay all costs and damages awarded or agreed to in settlement, provided that the Claim Defendant gave Efficient prompt written notice of the Claim, reasonable assistance and sole authority to defend or settle the Claim. Efficient shall obtain for the Claim Defendant, the right to continue using the Product, replace or modify the Product so it becomes non-infringing. If such remedies are not reasonably available, Efficient shall grant Reseller Page 6 a credit for the Product normally depreciated and have Reseller return the Product to Efficient. Efficient shall not have any liability if the alleged infringement is based upon the use, license or sale of the Product in combination with other products, including software not furnished by Efficient. This is Efficient's entire liability and Reseller's exclusive remedy for intellectual property Claims. 14.2. Representation and Indemnification by Reseller - Reseller represents and ---------------------------------------------- warrants that it is the owner or licensee of all Reseller brands and agrees that Efficient shall have no responsibility for the protection or maintenance of Reseller's rights in Reseller brands. Reseller shall hold Efficient harmless from and defend, at Reseller's expense, any claim brought against Efficient alleging that any Reseller brand infringes the trademark, trade name or any other intellectual property right of a third party (a "Brand Claim"). Reseller shall pay all costs and damages awarded or agreed to in settlement, provided that the Efficient gave Reseller prompt written notice of the Brand Claim, reasonable assistance and sole authority to defend or settle the Brand Claim. 15. LIMITATION OF LIABILITY: 15.1. Limitation of Liability - IN NO EVENT SHALL EITHER PARTY OR ITS ----------------------- RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, AGENTS, OR EMPLOYEES BE LIABLE TO RESELLER OR END USERS FOR ANY INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION, LOSS OF DATA OR PROFITS OR ATTORNEY'S FEES, WHETHER CLAIMED BY REASON OF BREACH OF WARRANTY, IN TORT OR OTHERWISE, AND WITHOUT REGARD TO THE FORM OF ACTION IN WHICH SUCH CLAIM IS MADE. IN ANY EVENT, EACH PARTY'S LIABILITY SHALL BE LIMITED TO ONE MILLION UNITED STATES DOLLARS ($1,000,000) OR THE EQUIVALENT IN FOREIGN CURRENCY; PROVIDED, HOWEVER, THAT THIS LIMITATION SHALL NOT APPLY TO RESELLER'S OBLIGATION TO PAY FOR PRODUCTS PURCHASED HEREUNDER. 16. DISPUTE RESOLUTION: 16.1. Consultation and Review - The Parties shall make good faith efforts to ----------------------- resolve all disputes arising under this Agreement through consultations. If consultations are unsuccessful in resolving any dispute, either Party may request a senior management review. Within ten (10) business days of any such request, designated vice presidents of Efficient and Reseller will meet in a mutually acceptable fashion to exchange relevant information and attempt to resolve the dispute. 17. TRANSACTION RELATED ITEMS: 17.1. Merger Agreement. Reseller and Efficient have entered into an Agreement ----------------- and Plan of Merger and Reorganization, dated as of November 21, 1999 (the "Merger Agreement"). 17.2. Indemnity Obligation. Under the Merger Agreement Reseller has agreed to, -------------------- under certain circumstances, indemnify and hold Efficient harmless from certain claims. Reseller and Efficient agree and acknowledge that nothing express or implied in this Agreement (e.g. Article 14) shall limit or modify any of Reseller's obligations under the Merger Agreement. 18. GENERAL TERMS: 18.1. Commercial Use - Products are manufactured by Efficient for standard -------------- commercial use and are accepted and approved by Efficient following qualified test procedures, processes and programs established by Efficient prior to delivery to Reseller. Special acceptance criteria established by Reseller shall be deemed by Efficient as a request for custom Product and will be quoted on a case by case basis. Efficient shall not be responsible for any damages caused by Products which are not intended for use in critical safety systems or nuclear facilities. 18.2. Import and Export - Certain Products may be subject to export or import ----------------- control laws and regulations of the U.S. government and other governments. Reseller assures that Reseller and Resellers will comply with those regulations at their expense whenever they export or re-export controlled products or technical data obtained from Efficient or any product produced directly from the controlled technical data. Reseller shall hold harmless and indemnify Efficient from any damages, including attorneys' fees, and any government sanctions resulting to Efficient from a breach of this Section. 18.3. United States Government Restricted Rights - All Software shall be ------------------------------------------ licensed to End Users subject to Page 7 the following: "The enclosed Product (a) was developed solely at private expense; (b) contains "restricted computer software" submitted with restricted rights in accordance with section 52.227-19 (a) through (d) of the Commercial Computer Software-Restricted Rights Clause and its successors, and (c) in all respects is proprietary data belonging to Efficient and/or its suppliers. For Department of Defense units, the Product is considered commercial computer software in accordance with DFARS section 227.7202-3 and its successors, and use, duplication, or disclosure by the government is subject to restrictions set forth herein." 18.4. Assignment - This Agreement may not be assigned or transferred in whole ---------- or in part by Reseller without the prior written consent of Efficient. Subject to each party's right to terminate this Agreement as provided in Section 12.3, either party may, however, assign this Agreement without the other party's consent to any person or entity that acquires substantially all of the stock, assets or any major division, unit, or subsidiary of the assigning party. 18.5. Waiver and Severability - A Party's failure to enforce any provision of ----------------------- this Agreement shall not be deemed a waiver of that or any other provision of this Agreement. If any provision of this Agreement has been declared illegal, invalid or unenforceable, the provision shall be construed to be enforceable to the maximum extent permitted and, if not, shall be deemed deleted from this Agreement, provided that if such construction or deletion substantially alters the commercial basis of this Agreement, the Parties shall negotiate in good faith to amend the provisions of this Agreement to give effect to their original intent. 18.6. Force Majeure - Except in the case of Reseller's failure to pay any ------------- amounts due hereunder, neither Party shall be liable for any damages or penalties for delay in delivery nor for failure to give notice when such delay is due to the elements, acts of God, acts of the other Party, acts of civil or military authority, fires, or floods, epidemics, quarantine restrictions, war, riots, strikes, lockouts or other labor disputes, delays in transportation, delays in delivery by vendors, or any other causes, without limitation, which are beyond the reasonable control of the delayed Party. The delivery date shall be considered extended by a period of time equal to the time lost because of any delay that is excusable under this provision. 18.7. Survival - Appropriate provisions of this Agreement, including but not -------- limited to the following, shall survive the expiration or termination of this Agreement: Definitions; Ordering and Shipment; Software Terms; Payment; Warranty Terms; Intellectual Property; Duration and Termination; Confidential and Proprietary Information; Limitation of Liability; Import and Export; Confidentiality of Agreement, Waiver and Severability and Laws. 18.8. Laws -This Reseller Agreement shall be governed by the laws of the State ---- of Texas, U.S.A., regardless of the laws that might otherwise govern under applicable conflicts and choice of laws principles. Any Action under this Agreement must be brought within twelve (12) months after the cause of action arises. 18.9. Relationship of the Parties - Except as expressly provided in this --------------------------- Agreement, Reseller shall not be, and will not hold itself out as, the representative, agent, commission-sales agent, franchisee or employee of Efficient for any purpose. This Agreement creates no relationship of joint venture, franchise or partnership, and neither Party has any right or authority to assume or to create any obligation or responsibility on behalf of the other Party. All agreements relating to the sale of the Products and Services provided by Reseller to its customers are Reseller's exclusive responsibility. Reseller shall indemnify against and hold Efficient harmless from, any and all claims, damages or legal proceedings and associated costs of whatever nature, relating to the performance by Reseller of this Agreement arising out of the acts or omissions of Reseller, its employees, servants, Resellers or agents. 18.10. Entire Agreement - This Reseller Agreement, its Exhibits and ---------------- attachments, including all documents which are incorporated by reference, constitute the entire and only understanding between the Parties with regard to the subject matter hereof and thereof. Unless otherwise provided herein, no modifications to this Agreement shall be binding on either Party unless made in writing and signed by duly authorized representatives of both Parties. In the event of any conflict between this Agreement, and any Addendum, Exhibits, or other attachments, the terms of this Agreement shall govern. 18.11. Third-Party Financing - In the event Reseller obtains financing in any --------------------- form whatsoever for the Page 8 purchase of Products under this Agreement and there is a conflict between the provisions of any such financing agreement and this Agreement, the terms of this Reseller Agreement (other than Payment) shall govern. 18.12. Notices - Where electronic communication is available, Efficient and ------- Reseller may communicate with each other by electronic means. Efficient and Reseller agree that when electronic communications are used, they are the equivalent of written and signed documents except for Notices given under this Agreement which if transmitted electronically, shall also be sent via facsimile transmission (with a copy by U.S. mail or overnight courier (signature required)). Notices shall be deemed effective upon receipt or refusal to accept delivery. Routine business communications shall not be deemed to be Notices. All such notices shall be in English and addressed as follows: If to Efficient: Efficient Networks, Inc. 4201 Spring Valley Road, Suite 1200 Dallas, Texas 75244 Attention: Jill Manning Facsimile Number: 972-991-8579 If to Cabletron: Cabletron Systems, Inc. 35 Industrial Way Rochester, NH Attention: __________________________ Facsimile Number: ____________________ IN WITNESS WHEREOF, the Parties have caused this Reseller Agreement to be executed by their duly authorized representatives. Efficient Networks, Inc. Cabletron Systems, Inc. /s/ JILL MANNING /s/ PIYUSH PATEL By: _______________________________ By: __________________________________ Jill Manning Piyush Patel Name: _____________________________ Name: ________________________________ Chief Financial Officer President Title: ____________________________ Title ________________________________ December 17, 1999 December 17, 1999 Date: _____________________________ Date: ________________________________ EFFICIENT NETWORKS RESELLER AGREEMENT Exhibit A - Products - ------------------------------------------------------------------------- Product No. Description - ------------------------------------------------------------------------- FP128 ISDN Router SSR - 105 SSR - 103 - ------------------------------------------------------------------------- FP144 IDSL Router - ------------------------------------------------------------------------- FP2025 ATM25 Router - ------------------------------------------------------------------------- FP2200 SDSL Router - ------------------------------------------------------------------------- FP2200V SDSL IAD - ------------------------------------------------------------------------- SSR245 Dual Ethernet Router - ------------------------------------------------------------------------- SSR250 ADSL Router - ------------------------------------------------------------------------- SSR255 ADSL Router - ------------------------------------------------------------------------- EFFICIENT NETWORKS RESELLER AGREEMENT Exhibit B - Technical Support Guidelines Nature of Technical Support - During the term of this Agreement, Efficient will assist Reseller in the identification and resolution of Product performance problems and errors. Efficient's technical support shall be Level 3 Support to the Reseller in connection with its support of its Resellers and End Users. Level 1 Support and Level 2 Support shall be the sole and exclusive responsibility of the Reseller and its resellers. Level 3 Support shall be provided by Efficient only to engineering personnel designated by the Reseller who are trained in the technical operation of the Product. Efficient's support will be provided in accordance with the following guidelines: I. Technical Support 1. Availability - Efficient shall provide Level 3 Support via telephone, ------------ facsimile and electronic mail twenty-four hours per day, seven days per week. 2. Response - Reseller shall use reasonable efforts to attempt to resolve -------- End User support requirements for the Products. If Reseller cannot successfully resolve an issue within a reasonable period of time, Efficient's technical support staff will provide assistance. Efficient will provide an initial response to all Reseller support requests within two (2) hours, and Reseller and Efficient will mutually agree, in good faith, what additional information or documentation will be required for resolution of the problem. Efficient will provide a problem report form for Reseller's use in reporting problems. II. Error Correction 1. Error Definitions - "Error" means a reproducible that causes a Product ----------------- not to function substantially in conformance with its specifications. Errors are classified as follows: Category 1: End User's network segment or management application is down or experiencing a consistent, measurable performance impact with no immediate resolution available. Category 2: End User is experiencing intermittent failure, performance degradation, or functionality of network or management applications. Category 3: Issues that do not affect customer's normal network or management application operation or questions concerning Product functionality or usage. 2. Non-Emergency Technical Support - For End User or Reseller problems ------------------------------- not deemed by Reseller to be an emergency, Efficient will use its best efforts to address and resolve the problems as quickly as practicable during normal business hours. If a particular problem is not resolved within two (2) business days following the initial call to Efficient, technical support managers and engineers for each Party, will discuss and work in good faith to devise and implement a satisfactory resolution. Problems regarded as non-emergencies include: (i) installation and operation problems, i.e., routine questions that can be resolved by following documentation; and (ii) deviations from documentation, omissions and known workarounds, i.e. problems that cannot be resolved by following the documentation or result from reasonable misinterpretation of the documentation. 3. Emergency Technical Support - Efficient acknowledges that Category 1 --------------------------- and Category 2 Errors should be resolved quickly. During the applicable Warranty Period, Efficient shall replace any defective Products or correct Errors promptly following receipt of notice from Reseller, not to exceed the following: . Efficient shall provide an initial response to Errors reported by Reseller during normal business hours within four (4) hours and Reseller and Efficient shall promptly agree in good faith to any additional information and documentation that may be required to permit Efficient to resolve such errors. The error correction period begins after Reseller has enough information to profile the error and can recreate the error or has access to a facility where the error can be recreated. . Efficient shall use its best efforts to resolve Category 1 Errors within two (2) working days of receipt of notice of such Error. . Efficient shall use its best efforts to resolve Category 2 Errors within five (5) working days of receipt of notice of such Error. . Efficient shall use its best efforts to resolve Category 3 Errors within fifteen (15) working days of receipt of notice of such Error. The prescribed Error correction periods above may be extended by agreement of the Parties, e.g., if resolution of problem requires hardware certification or test, or if resolution represents significant risk to the primary Product functions. 4. Support Reports and Evaluation - Efficient shall provide a reporting ------------------------------ mechanism by which Reseller will regularly receive a detailed list of the status of all Errors reported and resolved, including a list of workarounds and bug-fixes. At least once during each calendar quarter, the Parties shall hold management-level meetings to discuss improvements in support. III. Technical Support Hotline Reseller shall make all requests for technical support to the following hotline telephone or facsimile number, or via the Internet to the address indicated: Efficient Technical Hotline contacts as follows: Telephone No. __________________________ Facsimile No. ___________________________ Electronic Mail: ___________@______.com Efficient may change contact telephone numbers, facsimile numbers, or Internet addresses on ten day's notice. EFFICIENT NETWORKS RESELLER AGREEMENT Exhibit C - Limited Exclusivity I. Reseller Non Exclusive Reseller - Reseller's appointment by Efficient ------------------------------- as a Reseller under the Reseller Agreement is on a non-exclusive basis. Efficient may appoint additional parties to sell Products and may sell Products itself to all parties throughout the Territory. II. Efficient Exclusive Supplier - Reseller agrees that it shall acquire DSL and ISDN customer premises equipment ("CPE") for resale from Efficient as provided herein. . First Twelve Months - Reseller agrees that, for a period of twelve (12) months from the Effective Date, it shall purchase for resale CPE exclusively from Efficient. Reseller shall be relieved of this obligation, and may purchase CPE for resale from other parties, in the event that: (A) Efficient is unable to meet Reseller's reasonable delivery requirements for CPE; or (B) Efficient CPE does not substantially meet the specifications of Reseller or Reseller's customer for the CPE and, after reasonable notice, Efficient is unable or unwilling to modify its products to meet Reseller or the customer requirements in the required timeframe; or (C) a third party manufacturer of CPE is able to supply comparable CPE to Reseller at prices which are equal to or less than ninety-five percent (95%) of the price at which Efficient is offering comparable CPE to Reseller; or (D) Reseller's customer makes a specific request not solicited by Reseller for CPE manufactured by a third party. Any exception to the general rule of exclusivity will apply to the specific product or order presented by Reseller, but will not result in a general release from the foregoing exclusivity provisions. . Subsequent Periods - Following the initial twelve month period of the Reseller Agreement and for so long as the Reseller Agreement remains in effect, Reseller agrees that Efficient shall be its preferred supplier of CPE for resale and that Reseller shall feature Efficient CPE as its lead CPE products. III. Branding - For so long as the Reseller Agreement remains in effect, -------- Reseller agrees that it will not rebrand any CPE as Reseller CPE, other than (i) CPE so branded by Efficient pursuant to the Reseller Agreement and (ii) CPE purchased from third parties as permitted by paragraph II. To the extent that Reseller acquires a third party which makes or sells CPE that is comparable to the Flowpoint CPE, Reseller will not rebrand any such CPE as Reseller CPE for the longer of (A) twelve (12) months from the date it acquires such third party; or (B) that date on which it otherwise generally ceases to use the branding of the acquired entity. IV. Sales Force Training and Incentives - Reseller agrees that, for so long as the Reseller Agreement remains in effect: . Reseller shall provide Efficient with access to its sales personnel on a regular basis in conjunction with regularly scheduled Reseller sales force training events so that Efficient may provide training on the Flowpoint CPE; . Reseller shall not permit any third party CPE manufacturer to offer similar training to Reseller sales personnel; provided, however, that Reseller may permit third party manufacturers supplying CPE as permitted by paragraph II to conduct limited training as reasonably required; . Reseller shall utilize marketing material provided by Efficient, or jointly developed by Reseller and Efficient, as its exclusive marketing material relating to CPE except with respect to third party CPE permitted by paragraph II above; . To the extent that Reseller elects to feature CPE at trade shows or in general product marketing material, it shall feature Flowpoint CPE substantially more predominantly at such shows or in such material than it features any other third party CPE; . Reseller shall include in Flowpoint CPE its product/commission lists made available to its sales personnel and shall pay customary commissions to its sales personnel on sales of Flowpoint CPE; . Reseller shall not compensate (through commissions, rebates, special incentives or any other means) its sales personnel for the sale of third party CPE at rates more favorable than the rates at which Reseller compensates its sales personnel for sales of Flowpoint CPE; and . Reseller shall not disseminate any press releases or similar announcements relating to any non-Efficient CPE which Reseller may sell nor with respect to any strategic relationship, joint or cooperative marketing or similar arrangement with any third-party supplier of CPE. EFFICIENT NETWORKS RESELLER AGREEMENT Exhibit D - Marketing Principles These Marketing Principles set forth the intentions of the parties as it relates to opportunities which may arise to sell DSL and ISDN customer premises equipment (DSL and ISDN customer premises equipment are referred to herein as "CPE."). In particular, the parties recognize that situations are likely to arise where the sales force of each party may be presented with the same business opportunity, or different opportunities within a single customer enterprise. It is the parties intention that any such conflicts be resolved through good faith discussions between the parties taking into account the guidelines set forth herein. I. General Statement - Efficient is primarily in the business of ----------------- developing and selling CPE. Reseller is not primarily in the business of developing or selling CPE, and intends to sell CPE only in situations which may lead to sales by Reseller of other Reseller products and services. It is the general intention and marketing strategy of the parties that: (1) sales which primarily involve CPE will be handled by Efficient and (2) sales which primarily involve non-CPE Reseller products and services will be handled by Reseller. It is the mutual goal of the parties to increase the level of CPE being sold through all available sales channels and to optimize the use of their respective sales resources. II. Specific Accounts - In furtherance of the General Statement, the ----------------- parties acknowledge that there are certain customers which require a more specific statement of intention. These are as set forth in this Article II. 1. Efficient Key Accounts - Efficient has existing customer ---------------------- relationships with each of the following parties and/or their purchasing affiliates (the "Efficient Key Accounts"): America Online; Concentric Networks; Covad Communications; Northpoint; Rhythms; and SBC. The parties agree that Efficient will be the preferred vendor of CPE into these accounts. Absent unusual circumstances, Reseller will refrain from selling CPE into these accounts, and will refer sales leads to Efficient. 2. Common Key Accounts - Efficient and Reseller each have existing ------------------- customer relationships with the following parties and/or their purchasing affiliates (the "Common Key Accounts"): AT&T; Bell Atlantic; Bell South; Mindspring; and MCI/Worldcom. Both Efficient and Reseller expect to continue to sell their respective products and services into each of the Common Key Accounts. In order to mitigate the potential for the inefficient duplication of sales efforts with respect to the Common Key Accounts, promptly following the Effective Date, representatives of Efficient and Reseller shall meet and (1) inform the other party about the status of current and prospective sales activities in each of the Common Key Accounts; and (2) work in good faith to develop a plan of action to mitigate any duplications of effort or other inefficiencies which may then exist or may arise in the future. Efficient and Reseller further agree that, for so long as the Reseller Agreement remains in effect, they will keep the other party informed of current and prospective sales activities in the Common Key Accounts and will meet periodically to discuss any issues that may have arisen. 3. Other Accounts - Efficient and Reseller recognize that they are -------------- likely to engage in selling activities with respect to customers or potential customers that are not Efficient Key Accounts or Common Key Accounts. As to all such other customers or potential customers, it is the intention that the General Statement shall apply. III. Contacts and Dispute Resolution - The parties agree to appoint primary ------------------------------- contact persons and to attempt to resolve in good faith any issues that may arise under these Marketing Principles. 1. Contacts - The following persons shall be the initial contacts for -------- resolving any issues under these Marketing Principles: for Efficient, David Stefan; for Reseller, Romulus Pereira; for Flowpoint, Dano Ybarra. Although the parties are free to change their contact person in their discretion by notice to the other parties, each party acknowledges and agrees that maintaining continuity of the contacts and relationship will be beneficial to all parties, and will make decisions to keep or change contact persons with this in mind. 2. Dispute Resolution - Each party shall put into place appropriate ------------------ mechanisms such that conflicts that arise among their respective sales forces will be brought to the attention to their contact persons. In the event of any such dispute, the contact persons shall promptly meet (in person or by phone) and shall attempt in good faith to resolve any such controversies following the principles set forth in these Marketing Principles. If, after making reasonable efforts to resolve the controversy, the contact persons are unable to arrive at a mutually satisfactory resolution, the matter shall be elevated to the second level contacts within the organizations. The second level contacts shall be: for Efficient, [Mark Floyd]; for Reseller, [________________]; and for Flowpoint, [Chuck Waggoner]. Each party is free to designate a different second level contact. The second level contacts shall attempt to resolve any controversies in the same manner as the initial contacts act under these Marketing Principles. EX-10.24 8 STANDSTILL AND DISPOSITION AGREEMENT EXHIBIT 10.24 EXECUTION COPY -------------- STANDSTILL AND DISPOSITION AGREEMENT Between EFFICIENT NETWORKS, INC. and CABLETRON SYSTEMS, INC. Dated as of December 17, 1999 TABLE OF CONTENTS Page ---- ARTICLE 1 DEFINITIONS........................................................... 1 1.1 Certain Definitions................................................... 1 ARTICLE 2 STANDSTILL AND RELATED COVENANTS...................................... 5 2.1 Cabletron Ownership of Efficient Securities........................... 5 2.2 Standstill Provisions................................................. 5 2.3 Voting................................................................ 6 2.4 Voting Trust.......................................................... 6 2.5 Solicitation of Proxies............................................... 6 2.6 Acts in Concert with Others........................................... 6 2.7 Termination........................................................... 7 ARTICLE 3 RESTRICTIONS ON TRANSFER OF SECURITIES; COMPLIANCE WITH SECURITIES LAWS............................................................ 7 3.1 Restrictions on Transfer of Voting Securities of Efficient............ 7 3.2 Restrictive Legends................................................... 8 3.3 Procedures for Certain Transfers...................................... 9 3.4 Covenant Regarding Exchange Act Filings............................... 10 3.5 Termination........................................................... 10 ARTICLE 4 REGISTRATION RIGHTS................................................... 11 4.1 Demand Registration................................................... 11 4.2 Shelf Registration.................................................... 11 4.3 Piggyback Registration................................................ 12 4.4 Demand and Shelf Registration Procedures, Rights and Obligations...... 14 4.5 Expenses.............................................................. 18 4.6 Indemnification....................................................... 18 4.7 Issuances by Efficient or Other Holders............................... 19 4.8 Information by Cabletron.............................................. 19 4.9 Market Standoff Agreements............................................ 19 4.10 Additional Registration Rights Covenants.............................. 20 4.11 Termination........................................................... 20 ARTICLE 5 MISCELLANEOUS......................................................... 21 5.1 Governing Law......................................................... 21 5.2 Successors and Assigns................................................ 21 5.3 Entire Agreement; Amendment........................................... 21 5.4 Notices and Dates..................................................... 21 5.5 Language Interpretation............................................... 22 5.6 Table of Contents; Titles; Headings................................... 23 5.7 Counterparts.......................................................... 23 5.8 Severability.......................................................... 23 5.9 Injunctive Relief..................................................... 23 5.10 Automatic Adjustments to Share Numbers................................ 23
-i- STANDSTILL AND DISPOSITION AGREEMENT THIS STANDSTILL AND DISPOSITION AGREEMENT (this "Agreement") is made as of December 17, 1999, between Cabletron Systems, Inc., a Delaware corporation ("Cabletron"), and Efficient Networks, Inc., a Delaware corporation ("Efficient"). RECITALS -------- A. Pursuant to the terms of the Agreement and Plan of Reorganization, dated as of November 21, 1999 (the "Merger Agreement"), by and among Efficient, Cabletron, Fire Acquisition Corporation, a California corporation and Flowpoint Corporation, a California corporation, Cabletron will receive 7,200,000 shares of Efficient's Common Stock, par value $0.01 per share (the "Shares") and 6,300 shares of Efficient's Series A Non-Voting Convertible Stock (the "Preferred Stock"). B. The Merger Agreement provides for the execution and delivery of this Agreement. NOW, THEREFORE, in consideration of the representations, warranties, covenants and conditions herein and in the Merger Agreement, the parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Definitions. As used in this Agreement: ------------------- (a) "Affiliate" shall have the meaning set forth in Section 3.3(c). (b) "Available Shares" shall have the meaning set forth in Section 4.3(c)(ii). (c) "Base Shares" means the number of shares of Efficient equal to ten percent (10%) of Efficient's Voting Securities. (d) "Beneficial ownership" or "beneficial owner" has the meaning provided in Rule 13d-3 promulgated under the Exchange Act. References to ownership of Voting Securities hereunder mean record and/or beneficial ownership. (e) "Change in Control of Efficient" shall mean a merger, consolidation or other business combination or the sale of all or substantially all of the assets of Efficient (other than a transaction pursuant to which the holders of the voting stock of Efficient outstanding immediately prior to such transaction have the entitlement to exercise, directly or indirectly, fifty percent (50%) or more of the Total Voting Power of the continuing, surviving entity or transferee immediately after such transaction). (f) "Cabletron" has the meaning set forth in the recitals hereto and includes any Person controlling Cabletron. (g) "Cabletron Competitor" is any of the top five (5) data networking companies, as measured by revenues from time to time. (h) "Cabletron Conflict of Interest Transaction" means any transaction requiring the approval of Efficient's Stockholders (i) between Efficient and one (or more) Persons in which Cabletron owns or controls a five percent (5%) equity interest or (ii) a Change of Control of Efficient with a Cabletron Competitor. (i) "Cabletron Pooling Transaction Lock-Up" has the meaning set forth in Section 4.9(a). (j) "Cabletron Public Offering Lock-Up" has the meaning set forth in Section 4.9(a). (k) "Controlled Affiliate" means, with respect to any Person, any Person directly or indirectly controlled by such other Person where, for purposes of this definition, "control" or "controlled by" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Securities, by contract or otherwise. (l) "Conversion Stock" shall mean the Efficient Common Stock received upon conversion of the Preferred Stock. (m) "Demand Breathing Period" means (x) 180 days after the closing of the offering related to a prior Demand Request or (y) 90 days after the closing of the last public offering of securities by Efficient for its own account. (n) "Demand Registration Statement" has the meaning set forth in Section 4.1(a). (o) "Demand Request" has the meaning set forth in Section 4.1(a). (p) "Demand Managing Underwriters" has the meaning set forth in Section 4.4(c). (q) "Demand Market Cut-Back" has the meaning set forth in Section 4.4(d). (r) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (s) "Exclusive Demand Period" means the period between the date hereof and December 31, 2000; provided, that, the Exclusive Demand Period shall be extended day per day for the duration of any Suspension Condition in effect prior to December 31, 2000. -2- (t) "Exclusive Demand Period Offering" means a public offering of Voting Securities for cash by Efficient for its own account (excluding the First Offering) during the Exclusive Demand Period. (u) "First Offering" means the first underwritten public offering of Voting Securities for cash by Efficient for its own account following the date hereof. (v) "Group" or "group" shall have the meaning provided in Section 13(d)(3) of the Exchange Act and the rules and regulations promulgated thereunder, but shall exclude any institutional underwriter purchasing Voting Securities of Efficient in connection with an underwritten registered offering for purposes of a distribution of such securities. (w) "Indemnified Party" has the meaning set forth in Section 4.6(c). (x) "Indemnifying Party" has the meaning set forth in Section 4.6(c). (y) "Investors" shall have the meaning set forth in the Investors" Rights Agreement. (z) "Investors" Rights Agreement" shall mean that certain Investors" Rights Agreement of Efficient dated July 30, 1993, as amended (or any successor to such agreement). (aa) "Minimum Demand Portion" shall have the meaning set forth in Section 4.4(d)(i). (bb) "Passive Investor" means a bank, a qualified pension trust or a registered mutual fund which reports its ownership of securities under and utilizing Section 13(G) of the Exchange Act (and Form 13(G) under the Exchange Act) and which has not, within the two (2) year period prior to the time of determination, participated in a solicitation of proxies against a portfolio company or filed a Form 13(d) or converted from a Form 13(G) filer to a Form 13(d) filer with respect to any portfolio company. (cc) "Person" shall mean any person, individual, corporation, partnership, trust, limited liability company or other non-governmental entity or any governmental agency, court, authority or other body (whether foreign, federal, state, local or otherwise). (dd) "Piggyback Market Cut-Back" has the meaning set forth in Section 4.3(c). (ee) "Piggyback Registrable Securities" has the meaning set forth in Section 4.3(a). (ff) "Piggyback Registration Statement" has the meaning set forth in Section 4.3(a). (gg) "Piggyback Request" has the meaning set forth in Section 4.3(a). (hh) "Piggyback Underwriting Agreement" has the meaning set forth in Section 4.3(b). -3- (ii) "Preferred Stock" has the meaning set forth in Section A of the Recitals. (jj) "Proportionately" has the meaning set forth in Section 2.3. (kk) "Register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. (ll) "Registrable Securities" means (i) the Shares, (ii) Conversion Stock and (iii) any securities issued in respect of the foregoing as a result of any stock split, stock dividend, recapitalization, or similar transaction. (mm) "Registration Expenses" shall mean all expenses incurred in connection with a registration hereunder, including, without limitation, all registration and filing fees, listing fees, printing and automated document preparation expenses, custody fees, fees and disbursements of counsel for Efficient, blue sky fees and expenses, and the expenses of Efficient's independent accountants, including any special audits or comfort letters incident to or required by any such registration, but excluding the expenses of regular employees of Efficient, which shall be paid in any event by Efficient. (nn) "Reserved Portion" shall mean (i) with respect to the First Offering, provided the preliminary prospectuses with respect to such offering are printed and distributed prior to May 1, 2000 and such offering closes by June 1, 2000 (the "Criteria"), 35% of the number of shares to be distributed in such offering; (ii) with respect to an Exclusive Demand Period Offering (or the First Offering if the Criteria are not met), the greater of 40% of the shares to be distributed in such offering or 3,000,000 shares. (oo) "Reserved Shares" shall have the meaning set forth in Section 4.4(d)(ii). (pp) "Securities" has the meaning set forth in Section 3.2(a). (qq) "Securities Act" means the Securities Act of 1933, as amended. (rr) "SEC" means the Securities and Exchange Commission or any other federal agency at the agency administering the Securities Act. (ss) "Selling Expenses" shall mean with respect to any registration pursuant to this Agreement, all underwriting discounts and selling commissions applicable to the sale of shares and all fees and disbursements of counsel to any Person other than the Company. (tt) "Shares" has the meaning set forth in Section A of the recitals above; provided, however, if not capitalized, "shares" shall mean shares of Efficient's common stock generally. (uu) "Shelf Registrable Securities" has the meaning set forth in Section 4.2(a). (vv) "Shelf Registration Statement" has the meaning set forth in Section 4.2(a). -4- (ww) "Suspension Condition" has the meaning set forth in Section 4.4(f). (xx) "Total Consideration Shares" shall mean the aggregate of (x) the total number of Shares held by Cabletron and (y) the total number of shares of Efficient Common Stock which the Preferred Stock has been converted into or is convertible into. (yy) "Voting Securities" means all securities of Efficient, entitled, in the ordinary course, to vote in the election of directors of Efficient. Voting Securities shall not include stockholder rights or other comparable securities having Voting Power only upon the happening of a trigger event or comparable contingency and which can only be transferred together with the Voting Securities to which they attach. References herein to meetings of holders of Voting Securities shall include meetings of any class or type thereof. (zz) "Voting Power" or "Total Voting Power" of Efficient (or any other corporation) refer to the votes or total number of votes which at the time of calculation may be cast in the election of directors of Efficient (or such corporation) at any meeting of stockholders of Efficient (or such corporation) if all securities entitled to vote in the election of directors of Efficient (or such corporation) were present and voted at such meeting; provided that for purposes of references herein made to any Person's "Voting Power" or percentage beneficial ownership of "Total Voting Power," any rights (other than rights referred to in any rights plan of Efficient (or any such other corporation) or a successor to such rights plan so long as such rights can only be transferred together with the Voting Securities to which they attach) of such Person to acquire Voting Securities (whether or not the exercise of any such right shall be conditioned upon any contingency) shall be deemed to have been exercised in full. All capitalized terms used and not defined herein shall have the respective meanings assigned to such terms in the Merger Agreement. ARTICLE 2 STANDSTILL AND RELATED COVENANTS 2.1 Cabletron Ownership of Efficient Securities. On the date hereof, and ------------------------------------------- without giving effect to the transactions contemplated by the Merger Agreement, neither Cabletron nor any Controlled Affiliate of Cabletron beneficially owns any Voting Securities of Efficient. 2.2 Standstill Provisions. Cabletron shall not acquire, directly or --------------------- indirectly, and shall not cause or permit any Controlled Affiliate of Cabletron to acquire, directly or indirectly (through market purchases or otherwise), record or beneficial ownership of any Voting Securities of Efficient without the prior written consent of the Board of Directors of Efficient; provided, however, that the prior written consent of the Board of Directors of Efficient shall not be required for the acquisition of any Voting Securities of Efficient directly from Efficient or resulting from a stock split, stock dividend or similar recapitalization by Efficient. Nothing contained in this Section 2.2 shall adversely affect any right of Cabletron or any Controlled Affiliate of Cabletron to acquire record or beneficial ownership of Voting Securities of Efficient pursuant to any rights plan instituted by Efficient. -5- 2.3 Voting. Unless the Board of Directors of Efficient otherwise consents ------ in writing in advance, Cabletron shall take such action (and shall cause each Controlled Affiliate of Cabletron that beneficially owns Voting Securities of Efficient to take such action) as may be required so that all Voting Securities of Efficient beneficially owned by Cabletron (or any such Controlled Affiliate of Cabletron) from time to time, other than the Base Shares, are voted on all matters to be voted on by holders of Voting Securities of Efficient in the same proportion (for, against and abstain, with lost, damaged or disfigured ballots counting as abstentions to the extent that they cannot be counted as for or against under applicable law) as the votes cast by the other holders of Voting Securities of Efficient with respect to such matters ("Proportionately"); provided, however, that on any matter that constitutes, involves or is part of, a Cabletron Conflict of Interest Transaction, Cabletron and any Controlled Affiliate of Cabletron must vote all Voting Securities, including the Base Shares, Proportionately. Cabletron (or any Controlled Affiliate of Cabletron), as the holder of Voting Securities of Efficient, shall be present, in person or by proxy, at all meetings of the stockholders of Efficient so that all Voting Securities of Efficient beneficially owned by Cabletron (or such Controlled Affiliate of Cabletron) from time to time may be counted for the purposes of determining the presence of a quorum at such meetings. The foregoing provision shall also apply to the execution by Cabletron of any written consent in lieu of a meeting of holders of Voting Securities of Efficient or any class thereof. 2.4 Voting Trust. Cabletron shall not, and shall not cause or permit any ------------ Controlled Affiliate of Cabletron to, deposit any Voting Securities of Efficient in a voting trust or, except as otherwise provided herein, subject any Voting Securities of Efficient to any arrangement or agreement with respect to the voting of such Voting Securities of Efficient. 2.5 Solicitation of Proxies. Without the prior written consent of the ----------------------- Board of Directors of Efficient, Cabletron shall not, and shall not cause or permit any Controlled Affiliate of Cabletron to, directly or indirectly (i) initiate, propose or otherwise solicit Efficient stockholders for the approval of one or more stockholder proposals with respect to Efficient or induce or attempt to induce any other Person to initiate any stockholder proposal, (ii) make, or in any way participate in, any "solicitation" of "proxies" (as such terms are defined or used in Regulation 14a-1 under the Exchange Act) with respect to any Voting Securities of Efficient, or become a "participant" in any "election contest" (as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act), with respect to Efficient or (iii) call or seek to have called any meeting of the holders of Voting Securities of Efficient. 2.6 Acts in Concert with Others. Except as contemplated herein, Cabletron --------------------------- shall not, and shall not cause or permit any Controlled Affiliate of Cabletron, to participate in the formation, or encourage the formation, of any Person which owns or seeks to acquire beneficial ownership of, or otherwise acts in concert in respect of the Voting or disposition of, Voting Securities of Efficient. Without limiting the generality of the foregoing, and except as contemplated herein, Cabletron shall not, and shall not cause or permit any Controlled Affiliate of Cabletron to: (i) join a partnership, limited partnership, syndicate or other group, or otherwise act in concert with any third person, for the purpose of acquiring, holding, or disposing of Voting Securities of Efficient; (ii) seek election to or seek to place a representative on the Board of Directors of Efficient; (iii) seek the removal of any member of the Board of Directors of Efficient; (iv) otherwise seek control of the management, Board of Directors or policies of Efficient; (v) solicit, propose, seek to effect or negotiate with any other Person with respect to any form of business combination transaction with Efficient or any Controlled -6- Affiliate thereof, or any restructuring, recapitalization or similar transaction with respect to Efficient or any Controlled Affiliate thereof; (vi) solicit, make or propose or encourage or negotiate with any other Person with respect to, or announce an intent to make, any tender offer or exchange offer for any Voting Securities of Efficient; (vii) disclose an intent, purpose, plan or proposal with respect to Efficient or any Voting Securities of Efficient inconsistent with the provisions of this Agreement, including an intent, purpose, plan or proposal that is conditioned on or would require Efficient to waive the benefit of or amend any provision of this Agreement; or (vii) assist, participation in, facilitate, encourage or solicit any effort or attempt by any Person to do or seek to do any of the foregoing. Cabletron shall not, and shall not cause or permit any Controlled Affiliate of Cabletron to, encourage or render advice to or make any recommendation or proposal to any Person to engage in any of the actions covered by Section 2.5 and this Section 2.6 hereof. 2.7 Termination. The provisions of this Article 2 shall terminate at such ----------- time as (i) Cabletron (together with all Controlled Affiliates of Cabletron) beneficially owns in the aggregate Voting Securities of Efficient representing less than five percent (5%) of the Total Voting Power of Efficient or (ii) upon a Change in Control of Efficient. ARTICLE 3 RESTRICTIONS ON TRANSFER OF SECURITIES; COMPLIANCE WITH SECURITIES LAWS 3.1 Restrictions on Transfer of Voting Securities of Efficient. Cabletron ---------------------------------------------------------- shall not, and shall not cause or permit any Controlled Affiliate of Cabletron to, directly or indirectly, offer to sell, contract to sell, make any short sale of, or otherwise sell, dispose of, loan, gift, pledge or grant any options or rights with respect to, any Securities, now or hereafter acquired, or with respect to which Cabletron or any Controlled Affiliate of Cabletron has or hereafter acquires the power of disposition or enter into any agreement or understanding with respect to the foregoing, except as set forth below (for purposes of the following, the Preferred Stock shall be deemed converted into Conversion Stock): (a) to Efficient, or any Person or group approved in writing in advance by the Board of Directors of Efficient; (b) subject to Section 3.3(a) below, to any Controlled Affiliate of Cabletron, so long as such Controlled Affiliate agrees in writing, in form reasonably acceptable to counsel for Efficient, to hold such Voting Securities or Preferred Stock of Efficient subject to all the provisions of this Agreement, and so agrees to transfer such Voting Securities or Preferred Stock of Efficient to Cabletron or another Controlled Affiliate of Cabletron if it ceases to be a Controlled Affiliate of Cabletron; (c) pursuant to a firm commitment, underwritten public offering of Securities registered under the Securities Act; (d) subject to Section 3.3(b) below, through a sale of Securities pursuant to Rule 144 under the Securities Act or pursuant to the Shelf Registration Statement; provided, however, that any such sale complies with the manner of sale provisions under paragraph (f) of Rule -7- 144 or the plan of distribution set forth in the Shelf Registration Statement, as applicable and is not made to: (A) any Person or group which has theretofore filed a Schedule 13D with the SEC with respect to any class of "equity security" (as defined in Rule 13a11-1 under the Exchange Act) of Efficient and which, at the time of such sale, continues to reflect beneficial ownership in excess of five percent (5%) of the Total Voting Power of Efficient; (B) any Person or group which, after giving effect to the sale and to the actual knowledge of Cabletron (with no duty of investigation), will beneficially own in excess of five percent (5%) of any Voting Securities of Efficient or to be accumulating stock on behalf of or acting in concert with any such Person or group or a Person or group contemplated by clause (A) above, provided however, that this clause (B) shall not apply with respect to transfers less than 100,000 shares; or (C) any Person or group that has announced or commenced an unsolicited offer for any Voting Securities or Preferred Stock of Efficient or publicly initiated, proposed or otherwise solicited Efficient stockholders for the approval of one or more stockholder proposals with respect to Efficient or publicly made, or in any way participated in, any "solicitation" of "proxies" (as such terms are defined or used in Regulation 14A under the Exchange Act) with respect to any Voting Securities or Preferred Stock of Efficient, or become a "participant" in any "election contest" (as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act); (e) (i) subject to Section 3.3(a) below, pursuant to any private sale of Securities exempt from the registration requirements under the Securities Act; provided, however, that (i) no such sale may be made to any Person or group which, to the knowledge of Cabletron after reasonable inquiry and after giving effect to such sale, will beneficially own or have the right to acquire Voting Securities or Preferred Stock of Efficient with aggregate Voting Power of more than five percent (5%) of the Total Voting Power of Efficient or group, except, however, if such Person or group is a Passive Investor, such limitation shall be ten percent (10%) of the Total Voting Power of Efficient; and (ii) in any event any such purchaser shall agree to take and hold such Securities subject to the provisions and upon the conditions specified in Sections 2 and 3 of this Agreement, and it will be a condition precedent to the effectiveness of any such transfer that Cabletron shall have delivered to Efficient a written agreement of such purchaser to that effect in form and substance reasonably satisfactory to Efficient; or (f) in response to an offer to purchase or exchange for cash or other consideration any Voting Securities or Preferred Stock, which in any case is not opposed by the Board of Directors of Efficient within the time such Board is required, pursuant to Regulations under the Exchange Act, to advise the stockholders of Efficient of such Board's position with respect to such offer, or, if no such Regulations are applicable, within ten (10) business days of the commencement of such offer, or pursuant to a merger, consolidation or other business combination involving Efficient approved by the Board of Directors of Efficient. 3.2 Restrictive Legends. ------------------- -8- (a) The certificate or certificates representing the (i) the Shares, (ii) the Preferred Stock, (iii) the Conversion Stock and (iv) any securities issued in respect of the foregoing as a result of any stock split, stock dividend, recapitalization, or similar transaction (collectively, the "Securities") shall be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required under applicable state Securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER AS TO THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION. (b) In addition to the legend provided for in Section 3.2 (a), the certificate or certificates representing the Securities and any other securities of Efficient hereafter acquired (for example, in compliance with Section 2.2) shall be stamped or otherwise imprinted with a legend substantially in the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER, INCLUDING ANY SALE, PLEDGE OR OTHER HYPOTHECATION, WHICH RESTRICTIONS ARE SET FORTH IN AN AGREEMENT BETWEEN THE ISSUER AND CABLETRON SYSTEMS, INC., A COPY OF WHICH MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE ISSUER AT THE ISSUER'S PRINCIPAL EXECUTIVE OFFICES. 3.3 Procedures for Certain Transfers. -------------------------------- (a) Prior to any proposed transfer of any Securities pursuant to Sections 3.1(b) and 3.1(e)(i) hereof, Cabletron shall give written notice to Efficient of Cabletron's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall be accompanied by either: (i) a written opinion of legal counsel (including in-house counsel), who shall be reasonably satisfactory to Efficient, addressed to Efficient and reasonably satisfactory in form and substance to Efficient's counsel, to the effect that the proposed transfer of the Securities may be effected without registration under the Securities Act; or (ii) a "no action" letter from the SEC and a copy of any request by Cabletron (together with all supplements or amendments thereto), which shall have been provided to Efficient at or prior to the time of first delivery to the SEC's staff, to the effect that the transfer of such Securities without registration will not result in a recommendation by the staff of the SEC that action be taken with respect thereto, whereupon Cabletron shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by Cabletron to Efficient. -9- (b) In connection with any proposed transfer of Securities pursuant to Rule 144 as provided in Section 3.1(d) above, Cabletron shall comply with the reasonable requirements of Efficient's transfer agent with respect to sales of restricted securities pursuant to Rule 144. (c) Each certificate evidencing the Securities transferred as herein provided (other than a transfer pursuant to Section 3.1(c) or pursuant to the Shelf Registration Statement) shall bear the appropriate restrictive legend set forth (or described) in Section 3.4(a) above, except that such certificate shall not bear such restrictive legend if: (i) in the opinion of counsel for Efficient, such legend is not required in order to establish compliance with any provisions of the Securities Act; (ii) the Securities have been held by the holder for more than two years, and the holder represents to counsel for Efficient that it has not been an "Affiliate" (as such term is defined for purposes of Rule 144) of Efficient during the three-month period prior to the sale and shall not become an affiliate (as such term is defined for purposes of Rule 144) of Efficient without resubmitting the Securities for reimposition of the legend; or (iii) the Securities have been sold pursuant to Rule 144 and in compliance with Section 3.1(d). In addition, each certificate evidencing the Securities transferred pursuant to this Article 3 (other than transfers pursuant to Sections 3.1(c) or pursuant to the Shelf Registration Statement) shall bear the legend set forth in Section 3.2(b) above. The restrictive legend specified in Section 3.2(a) shall promptly be removed in connection with a sale pursuant to Section 3.1(c) or the Shelf Registration Statement or the satisfaction of subclause (i), (ii) or (iii) above. The restrictive legend specified in Section 3.2(b) shall be removed upon termination of Article 3 as set forth in Section 3.5 below or in connection with a transfer of securities which does not require the transferee to be bound by this Section 3. 3.4 Covenant Regarding Exchange Act Filings. With a view to making --------------------------------------- available to Cabletron the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may any time permit Cabletron to sell securities of Efficient to the public without registration. Efficient agrees to: (i) Make and keep public information available, as those terms are understood and defined in SEC Rule 144; (ii) File with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (iii) Furnish to Cabletron, so long as Cabletron owns any Voting Securities, forthwith upon request (i) a written statement by Efficient that it has complied with the reporting requirements of SEC Rule 144; (ii) a copy of the most recent annual or quarterly report of Efficient and such other reports and documents so filed by Efficient and (iii) such other information as may be reasonably requested in availing Cabletron of any rule or regulation of the SEC which permits the selling of any such securities without registration. 3.5 Termination. The provisions of this Article 3 shall terminate (other ----------- than insofar they relate to general application of securities laws) upon the later to occur of: (i) the tenth anniversary date of this Agreement and (ii) such time as Cabletron (together with all Controlled Affiliates of Cabletron) beneficially owns in the aggregate Voting Securities of Efficient representing less than five percent (5%) of the Total Voting Power of Efficient or upon the closing or other completion of a Change in Control of Efficient. -10- ARTICLE 4 REGISTRATION RIGHTS 4.1 Demand Registration. ------------------- (a) If at any time after July 21, 2000, Efficient shall receive from Cabletron a written request (a "Demand Request") that Efficient register on Form S-1 or Form S-3 under the Securities Act (or if such form is not available, any registration statement form then available to Efficient) Registrable Securities equal to at least 2,000,000 shares of the Voting Securities of Efficient outstanding on the date of such Demand Request, then Efficient shall use commercially reasonable efforts to cause the Registrable Securities specified in such Demand Request (the "Demand Registrable Securities") to be registered as soon as reasonably practicable so as to permit the offering and sale thereof and, in connection therewith, shall prepare and file with the SEC as soon as practicable, and in any event within thirty (30) days, after receipt of such Demand Request, a registration statement (a "Demand Registration Statement") to effect such registration; provided, however, that each such Demand Request shall: (i) specify the number of Demand Registrable Securities intended to be offered and sold by Cabletron pursuant thereto (which number of Demand Registrable Securities shall not be less than 2,000,000 of the Voting Securities of Efficient outstanding on the date of such Demand Request); (ii) express the present intention of Cabletron to offer or cause the offering of such Demand Registrable Securities pursuant to such Demand Registration Statement, (iii) describe the nature or method of distribution of such Demand Registrable Securities pursuant to such Demand Registration Statement (including, in particular, whether Cabletron plans to effect such distribution by means of an underwritten offering); and (iv) contain the undertaking of Cabletron to provide all such information and materials and take all such actions as may be required in order to permit Efficient to comply with all applicable requirements of the Securities Act, the Exchange Act and the rules and Regulations of the SEC thereunder, and to obtain any desired acceleration of the effective date of such Demand Registration Statement. (b) The procedures to be followed by Efficient and Cabletron, and the respective rights and obligations of Efficient and Cabletron, with respect to the preparation, filing and effectiveness of Demand Registration Statements and the distribution of Demand Registrable Securities pursuant to Demand Registration Statements under this Section 4.1 are set forth in Section 4.4 hereof. 4.2 Shelf Registration. ------------------ (a) By July 21, 2000, Efficient shall use its commercially reasonable efforts to register pursuant to Rule 415(a)(1)(i) under the Securities Act (or any successor rule with similar effect) a continuous or delayed offering of Registrable Securities (the "Shelf Registrable Securities") to be registered as soon as reasonably practicable so as to permit the sale thereof and, in connection therewith, shall prepare and file with the SEC a shelf registration statement on Form S-3 relating to the Shelf Registrable Securities, if such Form S-3 is available for use by Efficient (or any successor form of registration statement to such Form S-3), to effect such registration (the "Shelf Registration Statement"), to enable the distribution of the Shelf Registrable Securities. In -11- connection with the Shelf Registration Statement, Cabletron shall undertake to offer or cause the offering of such Shelf Registrable Securities in accordance with the plan of distribution described in the Shelf Registration Statement which shall include, to the extent allowable on such form, exchange transactions or the over-the-counter market transactions; private transactions other than exchange or over-the-counter market transactions; pledge to secure debts and other obligations; writing of non-traded and exchange-traded call options, hedge transactions and in settlement of other transactions in standardized or over-the-counter options, or a combination of the above transactions; and provide all such information and materials and take all such actions as may be required in order to permit Efficient to comply with all applicable requirements of the Securities Act, the Exchange Act and the rules and Regulations of the SEC thereunder, and to obtain any desired acceleration of the effective date of the Shelf Registration Statement. (b) The aggregate number of shares sold by Cabletron pursuant to this Section 4.2 hereof and pursuant to the resale allowances under Rule 144 may not exceed an aggregate of 2,000,000 shares during any calendar quarter. (c) The procedures to be followed by Efficient and Cabletron, and the respective rights and obligations of Efficient and Cabletron, with respect to the preparation, filing and effectiveness of the Shelf Registration Statement and the distribution of Registrable Securities pursuant to the Shelf Registration Statement under this Section 4.2 are set forth in Section 4.4 hereof. 4.3 Piggyback Registration. ---------------------- (a) If at any time after the date of this Agreement, Efficient shall determine to register any of its equity or equity-linked Securities, including registration of shares in a so-called unallocated or universal shelf registration, whether for sale for its own account or for the account of any other Person, other than registration statements relating to (i) employee, consultant or distributor compensation or incentive arrangements, including employee benefit plans, or (ii) acquisitions or any transaction or transactions under Rule 145 under the Securities Act or any successor rule with similar effect, then Efficient will promptly give Cabletron written notice thereof and include in such registration statement (a "Piggyback Registration Statement") and in any underwriting involved therein, all Registrable Securities (the "Piggyback Registrable Securities") specified in a written request made by Cabletron (a "Piggyback Request") within five (5) business days (or such later time as the underwriters may allow in writing) after receipt of such written notice from Efficient. (b) If the Piggyback Registration Statement of which Efficient gives notice is for an underwritten offering or Efficient proposes to do an underwritten take down from an unallocated or universal shelf registration, Efficient shall so advise Cabletron as a part of the written notice given pursuant to Section 4.3(a). In such event, the right of Cabletron to registration pursuant to this Section 4.3 (or participate in an underwritten take down in the case of an unallocated or universal shelf registration) shall be conditioned upon the agreement of Cabletron to participate in such underwriting and in the inclusion of such Piggyback Registrable Securities in the underwriting to the extent provided herein. Cabletron shall (together with Efficient and any other holders distributing Securities in such Piggyback Registration Statement, if any) enter into an underwriting agreement (the "Piggyback Underwriting Agreement") in customary form with the underwriter or underwriters selected for such underwriting by Efficient. If Cabletron disapproves of the terms of -12- any such underwriting, it may elect to withdraw therefrom by written notice to Efficient and the managing underwriters. Any Piggyback Registrable Securities excluded or excluded from such underwriting shall be excluded from such Piggyback Registration Statement. (c) Notwithstanding any other provision of this Agreement, if the managing underwriters of any underwritten offering pursuant to a Piggyback Request determine, in their sole discretion that, after including all the shares proposed to be offered by Efficient and all the shares of any other Persons entitled to registration rights with respect to such Piggyback Registration Statement (pursuant to other agreements with Efficient), marketing factors require a limitation of the number of Piggyback Registrable Securities to be underwritten, Efficient may exclude Piggyback Registrable Securities (a "Piggyback Market Cut-Back"), subject to the following: (i) Cabletron shall, in any event, have the right to include in the First Offering or an Exclusive Demand Period Offering, as the case may be, a number of shares of Piggyback Registrable Securities equal to the Reserved Portion, (to the exclusion of shares to be included by Efficient or any other Person); and (ii) With respect to shares in excess of the Reserve Portion in the case of the First Offering or an Exclusive Demand Period Offering, or in other offerings, the Piggyback Market Cut-Back shall be made among Cabletron and the Investors pro-rata relative to the shares to be included in the offering other than (a) any shares to be issued and sold by Efficient, or (b) any Reserved Portion (the "Available Shares"); provided that other than in connection with the First Offering or an Exclusive Demand Period Offering, the Available Shares shall not be less than thirty percent (30%) of the shares to be sold in the offering. An Investor's pro-rata portion of the Available Shares shall be a fraction, the numerator of which is (a) the total number of shares of Efficient common stock held by such Investor, and the denominator of which is (b) the aggregate number of shares of common stock beneficially owned by all Investors and the Total Consideration Shares then beneficially owned by Cabletron (excluding the Reserved Portion). Cabletron's pro-rata portion of the Available Shares shall be a fraction, the numerator of which is (a) the number of Total Consideration Shares then beneficially owned by Cabletron (excluding the Reserved Portion), and the denominator of which is (b) the aggregate number of shares of common stock beneficially owned by all Investors and the number of Total Consideration Shares then beneficially owned by Cabletron (excluding the Reserved Portion). (d) Except to the extent specifically provided in this Section 4.3 hereof, the procedures to be followed by Efficient and Cabletron, and the respective rights and obligations of Efficient and Cabletron, with respect to the distribution of any Piggyback Registrable Securities by Cabletron pursuant to any Piggyback Registration Statement filed by Efficient shall be as set forth in the Piggyback Underwriting Agreement, or any other agreement or agreements governing the distribution of such Piggyback Registrable Securities pursuant to such Piggyback Registration Statement. (e) Notwithstanding the foregoing, however, nothing in this Section 4.3, or any other provision of this Agreement, shall be construed to limit the absolute right of Efficient, for any reason and in its sole discretion: (i) to delay, suspend or terminate the filing of any Piggyback Registration Statement; (ii) to delay the effectiveness of any Piggyback Registration Statement; (iii) reduce the number of securities to be distributed pursuant to any Piggyback Registration -13- Statement (except below the 3,000,000 share minimum of the Reserve Portion in either (a) an Exclusive Demand Period Offering or (b) if the First Offering has not met the Criteria, then the First Offering, as the case may be); or (iv) to withdraw such Piggyback Registration Statement. 4.4 Demand and Shelf Registration Procedures, Rights and Obligations. The ---------------------------------------------------------------- procedures to be followed by Efficient and Cabletron, and the respective rights and obligations of Efficient and Cabletron, with respect to the preparation, filing and effectiveness of Demand Registration Statements and the Shelf Registration Statement, respectively, and the distribution of Demand Registrable Securities and Registrable Securities, respectively, pursuant thereto, are as follows: (i) Cabletron shall not be entitled to make a Demand Request until expiration of the Demand Breathing Period, and shall not be entitled to make more than two (2) Demand Requests; provided, however, that any Demand Request that: (A) does not result in the corresponding Demand Registration Statement being declared effective by the SEC; (B) is withdrawn by Cabletron following the imposition of an order by the SEC with respect to the corresponding Demand Registration Statement; (C) is withdrawn by Cabletron as a result of the exercise by Efficient of its suspension rights pursuant to Sections 4.4(e) or (f) hereof; (D) is withdrawn by Cabletron as a result of a Demand Market Cut-Back in violation of Section 4.4(d)(i) below, (E) is withdrawn if Cabletron shall have learned of a material adverse change in the condition, business or prospects of Efficient different than that known to Cabletron at the time of Cabletron shall have initiated the Demand Request (other than a decline in Efficient's stock price since such time unless, however, Cabletron agrees to pay, or otherwise reimburse Efficient, for all Registration Expenses) that makes the proposed offering unreasonable in the good faith judgment of Cabletron; or (F) is withdrawn because the terms of the underwriting agreement, as contemplated by Section 4.4(c) below, are not reasonably customary, such Demand Request in the event of any of (A) through (F) shall not count as one of the two (2) Demand Requests. Any Demand Request that is withdrawn by Cabletron for any reason other than as set forth in the previous sentence shall count as a Demand Request. (b) Efficient shall use commercially reasonable efforts to cause each Demand Registration Statement and the Shelf Registration Statement to be declared effective promptly and to keep such Demand Registration Statement and the Shelf Registration Statement continuously effective until the earlier to occur of: (i) the sale or other disposition of the Registrable Securities so registered; (ii) in the case of Demand Registration Statements, one hundred twenty (120) days after the effective date of any such Demand Registration Statement; (iii) in the case of the Shelf Registration Statement, until September 30, 2002; and (iv) the termination of Cabletron's registration rights pursuant to Section 4.10 hereof. Efficient shall prepare and file with the SEC such amendments and supplements to each Demand Registration Statement and the Shelf Registration Statement and each prospectus used in connection therewith as may be necessary to make and to keep such Demand Registration Statement and the Shelf Registration Statement effective and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Securities proposed to be distributed pursuant to such Demand Registration Statement and the Shelf Registration Statement until the earlier to occur of: (i) the sale or other disposition of such Registrable Securities so registered; (ii) in the case of Demand Registration Statements, one hundred twenty (120) days after the effective date of any such Demand Registration Statement; (iii) in the case of the Shelf Registration Statement, until September 30, 2002; and (iv) the termination of Cabletron's registration rights pursuant to Section 4.10 hereof. -14- (c) In connection with any underwritten offering pursuant to a Demand Registration Statement or the Shelf Registration Statement, Efficient shall select and Cabletron shall approve, which approval shall not be unreasonably withheld, one investment banking firm to serve as manager of such offering. The manager is hereinafter referred to as the "Demand Managing Underwriter." Efficient shall, together with Cabletron, enter into an underwriting agreement with the Demand Managing Underwriter, which agreement shall contain representations, warranties, indemnities and agreements then customarily included by an issuer in underwriting agreements with respect to secondary distributions under demand registration statements or shelf registration statements, as the case may be, and shall stipulate that the Demand Managing Underwriter will receive commissions and fees and other remuneration in connection with the distribution of any Demand Registrable Securities or Registrable Securities thereunder. (d) Notwithstanding any other provision of this Agreement, the number of shares proposed to be distributed by Cabletron pursuant to any underwritten offering may be limited by and at the discretion of the Demand Managing Underwriter (a "Demand Market Cut-Back"), subject to the following: (i) The number of shares to be distributed by Cabletron may not be limited to less than the greater of (x) 50% of the total number of shares proposed to be distributed in the offering, (y) 4,000,000 shares, or (z) the total number of shares proposed to be offered if such total proposed offering size is less than 4,000,000 shares (the "Minimum Demand Portion"); and (ii) With respect to shares in excess of the Minimum Demand Portion, the Demand Market Cut-Back shall be made among Cabletron and the Investors pro-rata relative to the shares to be included in the offering other than (a) any shares to be issued and sold by Efficient or (b) any Minimum Demand Portion (the "Remaining Shares"). An Investor's pro-rata portion shall be a fraction, the numerator of which is (a) the total number of shares of Efficient Common Stock held by such Investor, and the denominator of which is (b) the aggregate number of shares of common stock beneficially owned by all Investors and the Total Consideration Shares then beneficially owned by Cabletron (excluding the Minimum Demand Portion). Cabletron's pro-rata portion of the Remaining Shares shall be a fraction, the numerator of which is (a) the Total Consideration Shares then beneficially owned by Cabletron (excluding the Minimum Demand Portion) and the denominator of which is (b) the aggregate number of shares of common stock beneficially owned by all Investors and the Total Consideration Shares then beneficially owned by Cabletron (excluding the Minimum Demand Portion). (e) Notwithstanding any other provisions of this Agreement, in the event that Efficient receives a Demand Request, or Cabletron proposes an underwritten offering utilizing the Shelf Registration Statement at a time when Efficient (i) shall have filed, or has a bona fide intention to file, a registration statement with respect to a proposed public offering of equity or equity-linked Securities or (ii) has commenced, or has a bona fide intention to commence, a public offering of equity or equity-linked Securities pursuant to an existing effective shelf or other registration statement, then Efficient shall be entitled to suspend, for a period of up to ninety (90) days after the receipt by Efficient of such Demand Request or Cabletron proposal, the filing of any Demand Registration Statement or the implementation of such proposal under the Shelf Registration Statement; provided that if Efficient does not file and make effective a primary registration statement with respect to such offering within such 90 day period, Cabletron shall have a period of at least 90 -15- consecutive days during the twelve (12) month period commencing with the expiration of such 90 day period to effect a Cabletron Demand Request without preemption or suspension. (f) Notwithstanding any other provision of this Agreement, in the event that Efficient determines that: (i) non-public material information regarding Efficient exists, the immediate disclosure of which would be significantly disadvantageous to Efficient; (ii) the prospectus constituting a part of any Demand Registration Statement or the Shelf Registration Statement covering the distribution of any Demand Registrable Securities or Registrable Securities contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) an offering of Demand Registrable Securities or Registrable Securities would materially interfere with any proposed material acquisition, disposition or other similar corporate transaction or event involving Efficient (each of the events or conditions referred to in clauses (i), (ii) and (iii) of this sentence is hereinafter referred to as a "Suspension Condition"), then Efficient shall have the right to suspend the filing or effectiveness of any Demand Registration Statement or to suspend any distribution of Demand Registrable Securities or Registrable Securities pursuant to any effective Demand Registration Statement or the Shelf Registration Statement for so long as such Suspension Condition exists; provided that Efficient shall have suspended the filing or effectiveness of all other registration statements registering securities for the account of Efficient or any other Person or suspended the distribution of any securities under such registration statements and; provided further, that in the case of (ii) above, Efficient shall be obligated to use best efforts to amend such registration statement to correct such material misstatement or omission in the Registration Statement and related prospectus. Efficient will as promptly as practicable provide written notice to Cabletron when a Suspension Condition arises and when it ceases to exist. Upon receipt of notice from Efficient of the existence of any Suspension Condition, Cabletron shall forthwith discontinue efforts to: (i) file or cause any Demand Registration Statement or the Shelf Registration Statement to be declared effective by the SEC (in the event that such Demand Registration Statement or the Shelf Registration Statement has not been filed, or has been filed but not declared effective, at the time Cabletron receives notice that a Suspension Condition has arisen); or (ii) offer or sell Demand Registrable Securities or Registrable Securities (in the event that such Demand Registration Statement or the Shelf Registration Statement has been declared effective at the time Cabletron receives notice that a Suspension Condition has arisen). In the event that Cabletron had previously commenced or was about to commence the distribution of Demand Registrable Securities or Registrable Securities pursuant to a prospectus under an effective Demand Registration Statement or the Shelf Registration Statement, then Efficient shall, as promptly as practicable after the Suspension Condition ceases to exist, make available to Cabletron (and to each underwriter, if any, participating in such distribution) an amendment or supplement to such prospectus. If so directed by Efficient, Cabletron shall deliver to Efficient all copies, other than permanent file copies then in Cabletron's possession, of the most recent prospectus covering such Demand Registrable Securities or Registrable Securities at the time of receipt of such notice. (g) Notwithstanding any other provision of this Agreement, Efficient shall not be permitted to postpone (i) the filing or effectiveness of any Demand Registration Statement or the Shelf Registration Statement or (ii) the distribution of any Demand Registrable Securities or Registrable Securities pursuant to an effective Demand Registration Statement or the Shelf Registration Statement pursuant to Sections 4.4(e) or 4.4(f) hereof more than four (4) times in any 360 day period provided that the aggregate of such suspensions may not exceed a total of sixty (60) -16- days in any 360 day period (excluding any market standoff periods applicable to Cabletron pursuant to Section 4.9(a) hereof). (h) Efficient shall promptly notify Cabletron of any stop order issued or, to Efficient's knowledge, threatened, to be issued by the SEC with respect to any Demand Registration Statement or the Shelf Registration Statement, and will use its best efforts to prevent the entry of such stop order or to remove it if entered at the earliest possible date. (i) Efficient shall furnish to Cabletron (and any underwriter in connection with any underwritten offering) such number of copies of any prospectus (including any preliminary prospectus and any amended or supplemented prospectus), in conformity with the requirements of the Securities Act, as Cabletron (and such underwriters) shall reasonably request in order to effect the offering and sale of any Demand Registrable Securities or the Registrable Securities to be offered and sold, but only while Efficient shall be required under the provisions hereof to cause the Demand Registration Statement or the Shelf Registration Statement pursuant to which such Demand Registrable Securities or Registrable Securities are intended to be distributed to remain current. (j) Efficient shall use commercially reasonable efforts to register or qualify the Demand Registrable Securities and Registrable Securities covered by each Demand Registration Statement and the Shelf Registration Statement, respectively, under the state Securities or "blue sky" laws of such states as Cabletron shall reasonably request, maintain any such registration or qualification current, until the earlier to occur of: (i) the sale of such Demand Registrable Securities or Registrable Securities so registered; (ii) in the case of Demand Registration Statements, one hundred twenty (120) days after the effective date of any such Demand Registration Statement; (iii) in the case of the Shelf Registration Statement, until September 30, 2002; and (iv) the termination of Cabletron's registration rights pursuant to Section 4.10 hereof; provided, however, that Efficient shall not be required to take any action that would subject it to the general jurisdiction of the courts of any jurisdiction in which it is not so subject or to qualify as a foreign corporation in any jurisdiction where Efficient is not so qualified. (k) Efficient shall furnish to Cabletron and to each underwriter engaged in an underwritten offering of Demand Registrable Securities or Registrable Securities, a signed counterpart, addressed to Cabletron or such underwriter, of (i) an opinion or opinions of counsel to Efficient (with respect to Efficient and Securities law compliance by Efficient) and (ii) a comfort letter or comfort letters from Efficient's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as Cabletron or the managing underwriters may reasonably request. (l) Efficient shall use commercially reasonable efforts to make appropriate members of its management reasonably available for due diligence purposes, "road show" presentations and analyst presentations in connection with any distributions of Demand Registrable Securities pursuant to a Demand Registration Statement. (m) Efficient shall use commercially reasonable efforts to cause all Demand Registrable Securities and Registrable Securities to be listed on each Securities exchange on which similar Securities of Efficient are then listed, or, if Efficient does not have a class of equity securities listed on a national securities exchange, apply for qualification and use commercially reasonable -17- efforts to qualify the Demand Registrable Securities and Registrable Securities being registered for inclusion on the Nasdaq Stock Market. (n) Efficient shall take all such other actions either reasonably necessary or desirable to permit the Registrable Securities held by Cabletron to be registered and disposed of in accordance with the methods of disposition described herein. 4.5 Expenses. Subject to Section 4.6, Cabletron, Efficient and any other -------- Person whose securities are included in any registration statements that are initiated pursuant to Sections 4.1, 4.2 or 4.3 of this Agreement shall pay their respective Selling Expenses, and, in the case of Sections 4.1 and 4.2, shall pay the proportion of all Registration Expenses incurred in connection with any such registration that the aggregate number of securities included in such registration on behalf of such Cabletron or such Person bears to the aggregate of number of all securities included in such registration. Efficient shall pay all Registration Expenses incurred in connection with any registration statement that is initiated pursuant to Section 4.3 of this Agreement. 4.6 Indemnification. --------------- (a) In the case of any offering registered pursuant to this Section 4, Efficient hereby indemnifies and agrees to hold harmless Cabletron (and its officers and directors), any underwriter (as defined in the Securities Act) of Registrable Securities offered by Cabletron, and each Person, if any, who controls Cabletron or any such underwriter within the meaning of Section 15 of the Securities Act against any losses, claims, damages or liabilities, joint or several, to which any such Persons may be subject, under the Securities Act or otherwise, and to reimburse any of such Persons for any legal or other expenses reasonably incurred by them in connection with investigating any claims or defending against any actions, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement under which such Registrable Securities were registered under the Securities Act pursuant to this Section 4, the prospectus contained therein (during the period that Efficient is required to keep such prospectus current), or any amendment or supplement thereto, or the omission or alleged omission to state therein (if so used) a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading, except insofar as such losses, claims, damages or liabilities arise out of or are (i) based upon any such untrue statement or omission or alleged untrue statement or omission made in reliance upon information furnished to Efficient in writing by Cabletron or any underwriter for Cabletron specifically for use therein, or (ii) made in any preliminary prospectus, and the prospectus contained in the registration statement as declared effective or in the form filed by Efficient with the SEC pursuant to Rule 424 under the Securities Act shall have corrected such statement or omission and a copy of such prospectus shall not have been sent or otherwise delivered to such Person at or prior to the confirmation of such sale to such Person. (b) By requesting registration under this Section 4, Cabletron agrees, if Registrable Securities held by Cabletron are included in the Securities as to which such registration is being effected, and each underwriter shall agree, in the same manner and to the same extent as set forth in the preceding paragraph, to indemnify and to hold harmless Efficient and its directors and officers and each Person, if any, who controls Efficient within the meaning of the Securities Act against any losses, claims, damages or liabilities, joint or several, to which any of such Persons may -18- be subject under the Securities Act or otherwise, and to reimburse any of such Persons for any legal or other expenses incurred in connection with investigating or defending against any such losses, claims, damages or liabilities, but only to the extent it arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission of a material fact in any registration statement under which the Registrable Securities were registered under the Securities Act pursuant to this Section 4, any prospectus contained therein, or any amendment or supplement thereto, which was based upon and made in conformity with information furnished to Efficient in writing by Cabletron or such underwriter expressly for use therein. (c) Each party entitled to indemnification under this Section 4.6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at its own expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 4 unless such failure resulted in actual detriment to the Indemnifying Party. No Indemnifying Party, (i) in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, which consent shall not be unreasonably withheld, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation, or (ii) shall be liable for amounts paid in any settlement if such settlement is effected without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld. 4.7 Issuances by Efficient or Other Holders. As to each registration or --------------------------------------- distribution referred to in Section 4.1, additional shares of the Common Stock to be sold for the account of Efficient or the Investors may be included therein, provided that the inclusion of such Securities in such registration or distribution shall be subject to and governed by the provisions of Sections 4.3(c) and 4.4(d). 4.8 Information by Cabletron. Cabletron shall furnish to Efficient such ------------------------ information regarding Cabletron in the distribution of Registrable Securities proposed by Cabletron as Efficient may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Article 4. 4.9 Market Standoff Agreements. In connection with the underwritten public -------------------------- offering by Efficient of at least 1,000,000 shares for its own account or $50,000,000, whichever is lesser, Cabletron agrees that, upon the request of Efficient or the underwriters managing any underwritten offering of Efficient's Securities, Cabletron shall agree in writing (the "Cabletron Public Offering Lock-Up") that neither Cabletron (nor any director, executive officer or Controlled Affiliate of Cabletron) will, directly or indirectly, offer to sell, contract to sell, make any short sale of, or otherwise sell, dispose of, loan, gift, pledge or grant any options or rights with respect to, any Securities of Efficient (other than those included in such registration statement, if any) now or hereafter acquired by Cabletron (or any director, executive officer or Controlled Affiliate of -19- Cabletron) or with respect to which Cabletron (or any director, executive officer or Controlled Affiliate of Cabletron) has or hereafter acquires the power of disposition without the prior written consent of Efficient and such underwriters for such period of time (not to exceed fourteen (14) days prior to the date such offering is expected to commence and ninety (90) days after the date of the final prospectus delivered to the underwriters for use in confirming sales in such offering) as may be requested by Efficient and the underwriters provided that (i) the directors, executive officers (ii) all holders of more than five percent (5%) of Efficient's Voting Securities which are an "affiliate" of Efficient for purposes of the accounting rules governing pooling of interest transactions and (iii) any Investor or other Person participating in such offering enter into a public offering lock-up containing the same terms as the Cabletron Public Offering Lock-Up; provided, however, that neither Cabletron (nor any director, executive officer or Controlled Affiliate of Cabletron) shall be bound by such Cabletron Public Offering Lock-Up more than once during any twelve month period. Furthermore, Cabletron agrees that, at the request of Efficient, Cabletron shall agree in writing (the "Cabletron Pooling Transaction Lock-Up") that neither Cabletron (nor any director, executive officer or Controlled Affiliate of Cabletron) shall, directly or indirectly, offer to sell, contract to sell, make any short sale of, or otherwise sell, dispose of, loan, pledge or grant any options or rights with respect to, any Securities of Efficient now or hereafter acquired directly by Cabletron (or any director, executive officer or Controlled Affiliate of Cabletron) or with respect to which Cabletron (or any director, executive officer or Controlled Affiliate of Cabletron) has or hereafter acquires the power of disposition without the prior written consent of Efficient for such period of time as shall be necessary for Efficient to complete any business combination transaction in the form of a pooling of interests; provided that Efficient's independent accountants shall have reasonably concluded, after reasonable inquiry, that, at the relevant time with respect to such proposed pooling of interests transaction, Cabletron is or was an "affiliate" of Efficient for purposes of the accounting rules governing pooling of interests transactions. Cabletron agrees that Efficient may instruct its transfer agent to place stop-transfer notations in its records to enforce the provisions of the Cabletron Public Offering Lock-Up and the Cabletron Pooling Transaction Lock-Up contained in this Section 4.9(a). 4.10 Additional Registration Rights Covenants. ---------------------------------------- (a) First Offering. Efficient shall use its commercially reasonable -------------- efforts to conduct and close the First Offering as promptly as is practicable after the date hereof with a target date for completion of such First Offering of no later than March 31, 2000; provided, however, Efficient shall have no obligation to so conduct and close such First Offering if the Efficient Board of Directors concludes in good faith that so doing would be materially detrimental to Efficient or its shareholders. (b) Exclusive Demand Period. Without Cabletron's consent, during the ----------------------- Exclusive Demand Period and any other period during which Cabletron is prohibited from effecting a Demand Registration or distributing securities under the Shelf Registration Statement, Efficient will not file or cause or allow to become effective a registration statement pursuant to Section 1.2 of the Investors' Rights Agreement. 4.11 Termination. The provisions of this Article 4 shall terminate upon the ----------- earlier to occur of: (i) five years after the date of the closing of transactions contemplated by the Merger Agreement; and (ii) such time as Cabletron and any Affiliates of Cabletron beneficially own, in the aggregate, less than 5% of the Total Voting Power of Efficient. -20- ARTICLE 5 MISCELLANEOUS 5.1 Governing Law. This Agreement shall be governed in all respects by the ------------- laws of the State of Delaware as applied to contracts entered into solely between residents of, and to be performed entirely within, such state. 5.2 Successors and Assigns. This Agreement shall be binding upon and shall ---------------------- inure to the benefit of the parties hereto and their respective successors and assigns. This Agreement may not be assigned by a party without the prior written consent of the other party; provided that, without the consent of Efficient, Cabletron may assign this Agreement (and the rights and obligations hereunder) to any wholly-owned subsidiary in connection with a transfer of Voting Securities of Efficient to such Affiliate of Cabletron pursuant to Section 3.1(b), and without the consent of Cabletron, Efficient may assign all or part of this Agreement (and the rights and obligations hereunder) to the successor or an assignee of all or substantially all of Efficient's business; provided that, in each case, such assignee expressly assumes the relevant obligations of this Agreement (by a written instrument delivered to the other party, in form and substance reasonably acceptable to it) and, notwithstanding such assignment, the parties hereto shall each continue to be bound by all of their respective obligations hereunder. This Agreement is not intended and shall not be construed to create any rights or remedies in any parties other than Cabletron and Efficient and no Person shall assert any rights as third party beneficiary hereunder. 5.3 Entire Agreement; Amendment. This Agreement contains the entire --------------------------- understanding and agreement between the parties with regard to the subject matter hereof and thereof and supersedes all prior agreements and understandings among the parties relating to the subject matter hereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 5.4 Notices and Dates. ----------------- (a) All notices, requests, demands, and other communications under this Agreement shall be in writing and shall be delivered personally (including by courier) or given by facsimile transmission to the parties at the following addresses (or to such other address as a party may have specified by notice given to the other pursuant to this provision) and shall be deemed given when so received: -21- (i) if to Efficient, to: Efficient Networks, Inc. 4201 Spring Valley Road, Suite 1200 Dallas, Texas 75244 Attention: Jill Manning, CFO Telephone: 972-991-3884 Facsimile: 972-991-3887 with a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attention: Kenneth Siegel, Esq. Telephone: (650) 493-9300 Facsimile: (650) 493-6811 if to Cabletron, to: Cabletron Systems Inc. 35 Industrial Way Rochester, NH 03867 Attention: General Counsel Telephone: 630-332-9400 Facsimile: with a copy to: Ropes & Gray One International Place Boston, MA 02110 Attention: David A. Fine, Esq. Telephone No.: (617) 951-7000 Telecopy No.: (617) 951-7050 All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding business day in the place of receipt. (b) In the event that any date provided for in this Agreement falls on a Saturday, Sunday or legal holiday, such date shall be deemed extended to the next business day. 5.5 Language Interpretation. In the interpretation of this Agreement, ----------------------- unless the context otherwise requires, (a) words importing the singular shall be deemed to import the plural and vice versa, (b) words denoting gender shall include all genders, (c) references to persons shall include corporations or other entities and vice versa, and (d) references to parties, Sections, schedules, paragraphs and exhibits shall mean the parties, Sections, schedules, paragraphs and exhibits of and to this Agreement, unless otherwise indicated by the context. -22- 5.6 Table of Contents; Titles; Headings. The table of contents and ----------------------------------- Section headings of this Agreement are for reference purposes only and are to be given no effect in the construction or interpretation of this Agreement. All references herein to Articles and Sections, unless otherwise identified, are to Articles and Sections of this Agreement. 5.7 Counterparts. This Agreement may be executed in one or more ------------ counterparts, all of which shall be considered one and the same agreement, and shall become a binding agreement when one or more counterparts have been signed by each party and delivered to the other party. 5.8 Severability. If any provision of this Agreement or portion thereof is ------------ held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 5.9 Injunctive Relief. Cabletron, on the one hand, and Efficient, on the ----------------- other, acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specific performance of the terms and provisions hereof in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which they may be entitled at law or equity. 5.10 Automatic Adjustments to Share Numbers. All numbers regarding the -------------------------------------- number of shares of Efficient (e.g., 2,000,000) shall be appropriately and automatically adjusted to take into account any stock splits occurring after the date hereof. [Signature page follows] -23- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective authorized officers as of the date set forth in the introduction to this Agreement. EFFICIENT NETWORKS, INC., CABLETRON SYSTEMS, INC., a Delaware corporation a Delaware corporation /s/ JILL MANNING /s/ PIYUSH PATEL By: _______________________________ By: _______________________________ Jill Manning Piyush Patel Name: _______________________________ Name: _______________________________ Chief Financial Officer President Title: _______________________________ Title: _______________________________ EX-10.25 9 CROSS LICENSE AGREEMENT EXHIBIT 10.25 ================================================================================ CROSS LICENSE AGREEMENT by and between Efficient Networks, Inc. and Cabletron Systems, Inc. ================================================================================ TABLE OF CONTENTS
Page ---- 1. CONSTRUCTION AND DEFINITIONS......................................... 1 1.1 Definitions..................................................... 1 1.2 Construction.................................................... 3 2. LICENSE GRANTS........................................................ 3 2.1 License to Efficient............................................ 3 2.2 License to Cabletron............................................ 3 2.3 Reservation of Rights........................................... 4 2.4 Delivery and Assistance......................................... 4 2.5 Further Assurances.............................................. 4 3. CONFIDENTIAL INFORMATION.............................................. 4 3.1 Confidential Information........................................ 4 3.2 Confidential Information Exclusions............................. 4 3.3 Confidentiality Obligation...................................... 5 3.4 Confidentiality of Cross License Agreement...................... 5 3.5 No Confidential Information of Other Parties.................... 5 3.6 Required Disclosure............................................. 5 4. REPRESENTATIONS AND WARRANTIES........................................ 6 4.1 Efficient Warranties............................................ 6 4.2 Cabletron Warranties............................................ 6 4.3 Warranty Disclaimers............................................ 6 5. LIMITATIONS OF LIABILITY.............................................. 6 5.1 Exclusion of Damages............................................ 6 5.2 Failure of Essential Purpose.................................... 7 6. GENERAL............................................................... 7 6.1 Term............................................................ 7 6.2 Notices......................................................... 7 6.3 Amendments and Waivers.......................................... 8 6.4 Successors and Assigns.......................................... 8 6.5 Governing Law/Dispute Resolution................................ 8 6.6 Counterparts; Third Party Beneficiaries......................... 8 6.7 Entire Agreement; Severability.................................. 8 6.8 Captions........................................................ 9 6.9 Representation by Counsel; Interpretation....................... 9 6.10 Injunctive Relief............................................... 9
Exhibits: - --------- Exhibit A - Efficient Licensed Technology Exhibit B - Cabletron Licensed Technology -ii- CROSS LICENSE AGREEMENT This Cross License Agreement (this "Cross License Agreement" or ----------------------- "Agreement") is made and entered into by and between Efficient Networks, Inc., a --------- Delaware corporation with its principal place of business at 4201 Spring Valley Road, Suite 1200, Dallas, Texas, U.S.A., and its Affiliates (collectively, "Efficient") and Cabletron Systems, Inc., a Delaware corporation, with its --------- principle place of business at 35 Industrial Way, Rochester, New Hampshire, U.S.A., and its Affiliates (collectively, "Cabletron"), (each, a "Party"; --------- ----- together, the "Parties"), and effective as of the closing of the merger ------- contemplated by the Agreement and Plan of Reorganization (the "Merger ------ Agreement") dated November 21, 1999, as amended, among Efficient, Cabletron, - --------- Flowpoint Acquisition Corporation, a California corporation and a wholly-owned subsidiary of Efficient, and Flowpoint Corporation, a California corporation and a wholly-owned subsidiary of Cabletron ("Flowpoint") (such date referred to --------- herein as the "Effective Date"). -------------- RECITAL ------- WHEREAS, in connection with the merger transaction contemplated in the Merger Agreement, each Party desires to obtain from the other Party a license to certain technology and intellectual property rights that shall be licensable by the other Party as of the close of such merger transaction, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and of the mutual promises contained in this Cross License Agreement, the Parties hereby agree as follows: 1. CONSTRUCTION AND DEFINITIONS 1.1 Definitions. The following capitalized terms have the meanings ----------- set forth below: (a) "Affiliate" means any entity which controls, is controlled --------- by or is under common control with another entity. For purposes of this definition, "control" shall mean beneficial ownership of more than fifty percent (50%) of the shares of the subject entity entitled to vote in the election of directors (or, in the case of an entity that is not a corporation, for the election of the corresponding managing authority). (b) "Derivative Work" has the meaning ascribed to it under the --------------- United States Copyright Law, Title 17 U.S.C. Sec. 101 et. seq., as the same may be amended from time to time. (c) "Improvement" means any adaptation, improvement, upgrade, ----------- update, enhancement, new version, bug-fix, patch, extension, Derivative Work, or add-on of or to any Technology. Without limiting the foregoing, any invention (whether patented or not) that would infringe another patented invention will be considered an "Improvement" to such first patented invention. (d) "Intellectual Property Rights" means any or all of the ---------------------------- following, in any and all jurisdictions throughout the world, and all rights in, arising out of, or associated with: (i) all patents and applications therefor, including provisional applications, and all reissues, divisionals, renewals, extensions, continuations and continuations-in-part thereof ("Patents"); (ii) ------- all rights (other than Patents) in inventions (whether patentable or not), invention disclosures, trade secrets, proprietary information, know-how, technology and technical data ("Trade Secrets"); (iii) all copyrights, copyright ------------- registrations and applications therefor and all other rights corresponding thereto ("Copyrights"); (iv) all mask works, mask work registrations and ---------- applications therefor; (v) all industrial designs and any registrations and applications therefor; (vi) any other rights in databases and data collections; (vii) any other rights in computer software including all source code, object code, firmware, development tools, files, records and data, and all media on which any of the foregoing is recorded; (viii) all know-how and show-how, whether or not protectible by Patents, Copyrights or Trade Secrets; and (ix) any similar, corresponding or equivalent rights to any of the foregoing and any other intellectual property or proprietary rights, whether or not registrable; provided that all of the foregoing shall expressly exclude any and all ------- trademarks, trade names, logos and service marks and any similar indications of origin or branding. (e) "Technology" means all technology, including all know-how, ---------- show-how, techniques, design rules, inventions (whether or not patented or patentable), ideas, concepts, methods, algorithms, routines, software, files, databases, works of authorship, processes, prototypes, devices and hardware, and including all Intellectual Property Rights therein or thereto. (f) "Efficient Licensed Technology" means all Technology set ----------------------------- forth in Exhibit A and any Improvements to such Technology owned by, or developed and licensable by Flowpoint within one (1) year after the Effective Date. (g) "Cabletron Licensed Technology" means all Technology set ----------------------------- forth in Exhibit B and any Improvements to such Technology owned by, or otherwise developed and licensable by Cabletron within one (1) year after the Effective Date. (h) "CPE" means customer premises equipment; i.e., equipment --- residing at the site of an end user of a communications network, rather than at the central office, headend or other central distribution point. (i) "Cable Modem" means CPE computer peripheral devices for ----------- bidirectional data communications with the headend of a cable television distribution network, over the coaxial or HFC (hybrid fiber-coax) cables of the cable television distribution network, including cable modem routers. (j) "DSL" means digital subscriber line, a technology for --- delivering digital data over twisted-pair copper wire telephone lines. For purposes of this Agreement, "DSL" shall include ADSL, CDSL, DSL Lite, HDSL, IDSL, RADSL, SDSL, UDSL, VDSL and ISDN. -2- (k) "Efficient Field of Use" means all CPE products, software, ---------------------- services and applications. (l) "Cabletron Field of Use" means all Cable Modem products, ---------------------- software, services and applications. 1.2 Construction. ------------ (a) For purposes of this Cross License Agreement, whenever the context requires: the singular number will include the plural, and vice versa; the masculine gender will include the feminine and neuter genders; the feminine gender will include the masculine and neuter genders; and the neuter gender will include the masculine and feminine genders. (b) The Parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting Party will not be applied in the construction or interpretation of this Cross License Agreement. (c) As used in this Cross License Agreement, the words "include" and "including," and variations thereof, will not be deemed to be terms of limitation, but rather will be deemed to be followed by the words "without limitation." (d) Except as otherwise indicated, all references in this Cross License Agreement to "Sections" and "Schedules" are intended to refer to Sections of this Cross License Agreement and Schedules to this Cross License Agreement. (e) The headings in this Cross License Agreement are for convenience of reference only, will not be deemed to be a part of this Cross License Agreement, and will not be referred to in connection with the construction or interpretation of this Cross License Agreement. 2. LICENSE GRANTS 2.1 License to Efficient. Subject to the terms and conditions of -------------------- this Cross License Agreement, Cabletron hereby grants to Efficient, under the Cabletron Licensed Technology, a worldwide, non-exclusive, perpetual, irrevocable, non-terminable, non-transferable, non-sublicensable, paid-up and royalty-free license, solely for the Efficient Field of Use, to make, have made, use, sell, reproduce, create derivative works of and distribute products, provide services, practice processes or methods, and exercise all other rights under the Cabletron Licensed Technology. 2.2 License to Cabletron. Subject to the terms and conditions of -------------------- this Cross License Agreement, Efficient hereby grants to Cabletron, under the Efficient Licensed Technology, a worldwide, non-exclusive, perpetual, irrevocable, non-terminable, non-transferable, non-sublicensable, paid-up and royalty-free license, solely for the Cabletron Field of Use, to make, have made, use, sell, reproduce, create derivative works of and distribute -3- products, provide services, practice processes or methods, and exercise all other rights under the Efficient Licensed Technology. In addition, upon request by Cabletron, Efficient and Cabletron shall negotiate in good faith to determine reasonable royalty rates under which Efficient would license the Efficient Licensed Technology to Cabletron for use in other Cabletron non-DSL CPE router products and, subject to reaching agreement on such royalty rates, Efficient will license the Efficient Licensed Technology for such other uses. 2.3 Reservation of Rights. Each Party hereby reserves all rights --------------------- in and to such Party's Technology not expressly granted hereunder, and no other licenses are granted by either Party hereunder, whether by implication, estoppel or otherwise. 2.4 Delivery and Assistance. Within ____ days after the ----------------------- Effective Date: (i) Efficient shall deliver to Cabletron at least one copy of each tangible item of Efficient Licensed Technology set forth in Exhibit A; and (ii) Cabletron shall deliver to Efficient at least one copy of each tangible item of Cabletron Licensed Technology set forth in Exhibit B. Upon the request by either Party, the other Party shall provide reasonable additional information or assistance in connection with such Party's use of the Technology licensed to such Party hereunder. 2.5 Further Assurances. Subject to the terms and conditions of ------------------ this Cross License Agreement, each Party will, at the other Party's request and expense, take all reasonable actions and do all things reasonably necessary, proper, or advisable in order to consummate and make effective the ownership, license grants and other transactions contemplated by this Cross License Agreement, including without limitation appropriately documenting such transactions and assisting the other Party in every proper way to secure and maintain the other Party's Intellectual Property Rights in any and all jurisdictions. 3. CONFIDENTIAL INFORMATION 3.1 Confidential Information. "Confidential Information" means ------------------------ ------------------------ any information: (i) disclosed by one Party (the "Disclosing Party") to the ---------------- other (the "Receiving Party"), which, if written, graphic, machine-readable or --------------- other tangible form is marked as "Confidential" or "Proprietary," or which, if disclosed orally or by demonstration, is identified at the time of initial disclosure as confidential or proprietary, and is summarized in writing and similarly marked and delivered to the Receiving Party within thirty (30) days of initial disclosure; (ii) which at the time it is disclosed is or should reasonably be known by the Receiving Party to be proprietary or confidential information of the Disclosing Party, or (iii) which is embodied in or learned from the Disclosing Party's Technology licensed or disclosed hereunder, whether or not so marked. 3.2 Confidential Information Exclusions. Confidential ----------------------------------- Information will exclude information that the Receiving Party can demonstrate is: (i) now or hereafter, through no unauthorized act or failure to act on Receiving Party's part, in the public domain; (ii) known to the Receiving Party from a source other than the Disclosing Party (including former employees of the Disclosing Party) without an obligation of confidentiality at the time Receiving Party receives the same from the Disclosing Party, as evidenced by written records; (iii) hereafter furnished to the Receiving Party by a third party as a matter of right and without restriction on -4- disclosure; (iv) furnished to others by the Disclosing Party without restriction on disclosure; or (v) independently developed by the Receiving Party without use of the Disclosing Party's Confidential Information. Nothing in this Cross License Agreement shall prevent the Receiving Party from disclosing Confidential Information to the extent the Receiving Party is legally compelled to do so by any governmental investigative or judicial agency pursuant to proceedings over which such agency has jurisdiction; provided, however, that prior to any such disclosure, the Receiving Party shall (a) assert the confidential nature of the Confidential Information to the agency; (b) immediately notify the Disclosing Party in writing of the agency's order or request to disclose; and (c) cooperate fully with the Disclosing Party in protecting against any such disclosure and/or obtaining a protective order narrowing the scope of the compelled disclosure and protecting its confidentiality. 3.3 Confidentiality Obligation. The Receiving Party shall treat as -------------------------- confidential all of the Disclosing Party's Confidential Information and shall not use such Confidential Information except for the purposes of exercising its rights and performing its obligations under this Cross License Agreement. Without limiting the foregoing, the Receiving Party shall use the same degree of care and means that it utilizes to protect its own information of a similar nature, but in any event not less than reasonable care and means, to prevent the unauthorized use or the disclosure of such Confidential Information to third parties. The Receiving Party shall have appropriate written agreements with employees or contractors with access to the Confidential Information sufficient to comply with the provisions of this Cross License Agreement. 3.4 Confidentiality of Cross License Agreement. Each Party agrees ------------------------------------------ that the terms and conditions of this Cross License Agreement will be treated as the other Party's Confidential Information and that no reference to this Cross License Agreement or to activities pertaining thereto may be made in any form of press release or public statement without first consulting with the other Party; provided, however, that each Party may disclose the terms and conditions of this - -------- ------- Cross License Agreement: (i) as may be required by law or in connection with any governmental filing; (ii) to legal counsel of the Parties; (iii) in connection with the requirements of an initial public offering or securities filing; (iv) in confidence, to accountants, banks, and financing sources and their advisors; (v) in confidence, in connection with the enforcement of this Cross License Agreement or rights under this Cross License Agreement; or (vi) in confidence, in connection with a merger or acquisition or proposed merger or acquisition, or the like. 3.5 No Confidential Information of Other Parties. Each Party -------------------------------------------- represents and warrants to the other that it has not used and shall not use in the course of its performance hereunder, and shall not disclose to the other, any confidential information of any third party, unless it is expressly authorized in writing by such third party to do so. 3.6 Required Disclosure. In the event the Receiving Party is ------------------- required to disclose the Disclosing Party's Confidential Information pursuant to the order or requirement of a court, administrative agency, or other governmental body, the Receiving Party shall provide prompt notice thereof to the Disclosing Party and shall use its reasonable efforts to obtain a protective order or otherwise prevent public disclosure of such information. -5- 4. REPRESENTATIONS AND WARRANTIES 4.1 Efficient Warranties. Efficient represents, warrants and -------------------- covenants to Cabletron that (i) it has the full right and authority to enter into this Cross License Agreement and grant the rights and licenses granted herein; and (ii) it has not previously granted and will not grant any rights in conflict with the rights and licenses granted herein. 4.2 Cabletron Warranties. Cabletron represents, warrants and -------------------- covenants to Efficient that (i) it has the full right and authority to enter into this Cross License Agreement and grant the rights and licenses granted herein; and (ii) it has not previously granted and will not grant any rights in conflict with the rights and licenses granted herein. 4.3 Warranty Disclaimers. Nothing set forth in this Cross License -------------------- Agreement will be construed to be: (a) a warranty, representation or admission by either Party as to the validity, enforceability or scope of any Technology licensed hereunder; (b) a warranty or representation by either Party that the use of such Party's Technology for the manufacture, use, licensing, sale, importation or other exploitation of the Technology or the exercise of any license granted to the other Party hereunder will be free from infringement of any Intellectual Property Right of any third party; or (c) an obligation on either Party to file any Patent application or to secure any Patent or to maintain any Patent through the payment of patent maintenance fees or otherwise. (d) EXCEPT AS EXPRESSLY SET FORTH IN THIS CROSS LICENSE AGREEMENT, (1) ALL TECHNOLOGY AND INTELLECTUAL PROPERTY RIGHTS, AND ALL OTHER ITEMS OR RIGHTS PROVIDED, SOLD, TRANSFERRED OR LICENSED HEREUNDER ARE PROVIDED "AS IS" AND WITHOUT WARRANTY OF ANY KIND, AND (2) EACH PARTY MAKES NO, AND HEREBY DISCLAIMS ALL OTHER WARRANTIES, WHETHER EXPRESS, STATUTORY, OR IMPLIED, INCLUDING WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT THERETO. 5. LIMITATIONS OF LIABILITY 5.1 Exclusion of Damages. EXCEPT FOR A BREACH OF SECTION 3, IN NO -------------------- EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR LOST PROFITS, COST OF PROCUREMENT OF SUBSTITUTE GOODS, OR FOR ANY OTHER INDIRECT, SPECIAL, RELIANCE, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR RELATED TO THIS CROSS LICENSE AGREEMENT, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY, OR OTHERWISE, AND WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. -6- 5.2 Failure of Essential Purpose. The limitations specified in this ---------------------------- Section 5 shall survive and apply even if any limited remedy specified in this Cross License Agreement is found to have failed of its essential purpose. 6. GENERAL 6.1 Term. The term of this Cross License Agreement shall commence on ---- the Effective Date and shall continue in perpetuity thereafter. 6.2 Notices. All notices, requests and other communications to any ------- Party hereunder shall be in writing (including facsimile transmission) and shall be given, if to Efficient, to: Efficient Networks, Inc. 4201 Spring Valley Road, Suite 1200 Dallas, TX 75244 Attention: Jill Manning Telecopy: 972-991-3887 Telephone: 972-991-3884 with a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304 Attention: Kenneth Siegel, Esq. Michael Kennedy, Esq. Telecopy: 650-493-6811 Telephone 650-493-9300 if to Cabletron, to: Cabletron Systems, Inc. 35 Industrial Way Rochester, NH Attention: General Counsel Telecopy: ________________ Telephone: 630-332-9400 with a copy to: Ropes & Gray One International Place Boston, MA 02110 Attention: David A. Fine, Esq. Telecopy: 617-951-7000 Telephone: 617-951-7050 -7- All such notices, requests and other communications shall be deemed received on the date of receipt by the Receiving Party thereof if received prior to 5 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding business day in the place of receipt. 6.3 Amendments and Waivers. ---------------------- (a) Any provision of this Cross License Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment by each Party to this Cross License Agreement, or in the case of a waiver by the Party against whom the waiver is to be effective. (b) No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any or other further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 6.4 Successors and Assigns. The provisions of this Cross License ---------------------- Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and assigns; provided that neither Party may assign, delegate or otherwise transfer any of its rights or obligations under this Cross License Agreement without the consent of the other Party hereto, except that either Party may assign this Cross License Agreement in connection with a merger or acquisition of such Party or the sale or transfer of all or substantially all of the business, stock or assets of such Party. 6.5 Governing Law/Dispute Resolution. This Cross License Agreement -------------------------------- shall be governed by and construed in accordance with the law of the State of Texas, without regard to its conflicts of law rules. All disputes arising out of this Agreement shall be subject to the exclusive jurisdiction and venue of the Texas state courts in Dallas, Texas (or, if there is exclusive federal jurisdiction, the United Stated District Court for the Northern District of Texas), and the parties consent to the personal and exclusive jurisdiction of these courts. 6.6 Counterparts; Third Party Beneficiaries. This Cross License --------------------------------------- Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Cross License Agreement shall become effective when each Party hereto shall have received a counterpart hereof signed by the other Party hereto. No provision of this Cross License Agreement is intended to confer upon any Person other than the Parties hereto any rights or remedies hereunder. 6.7 Entire Agreement; Severability. This Cross License Agreement ------------------------------ constitutes the entire agreement between the Parties with respect to the subject matter of this Cross License Agreement and supersedes all prior agreements and understandings, both oral and written, between the Parties with respect to the subject matter of this Cross License Agreement. If at any time subsequent to the date hereof any term or provision of this Cross License -8- Agreement shall be determined to be partially or wholly illegal, void or unenforceable, such provision shall be of no force and effect to the extent so determined, but the illegality or unenforceability of such term or provision shall have no effect upon and shall not impair the legality or enforceability of any other term or provision of this Cross License Agreement. 6.8 Captions. The captions herein are included for convenience of -------- reference only and shall be ignored in the construction or interpretation hereof. 6.9 Representation by Counsel; Interpretation. The Parties ----------------------------------------- acknowledge that each Party to this Cross License Agreement has been represented by counsel in connection with this Cross License Agreement and the transactions contemplated by this Cross License Agreement. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Cross License Agreement against the Party that drafted it has no application and is expressly waived. The provisions of this Cross License Agreement shall be interpreted in a reasonable manner to effect the intent of the Parties. 6.10 Injunctive Relief. It is understood and agreed that, ----------------- notwithstanding any other provision of this Cross License Agreement, either Party's breach of confidentiality obligations or provisions relating to proprietary rights may cause irreparable damage for which recovery of money damages would be inadequate, and that the other Party will therefore be entitled to seek timely, injunctive relief to protect such Party's rights under this Cross License Agreement in addition to any and all remedies available at law. Each Party further agrees that no bond or other security shall be required in obtaining such equitable relief, nor will proof of actual damages be required for such equitable relief. Each Party hereby expressly consents to the issuance of such injunction and to the ordering of such specific performance. IN WITNESS WHEREOF, the Parties, by their duly authorized representatives, have executed this Cross License Agreement as of the Effective Date. Efficient Networks, Inc. Cabletron Systems, Inc. /s/ JILL MANNING /s/ PIYUSH PATEL By:________________________________ By:________________________________ Jill Manning Piyush Patel Name:______________________________ Name:______________________________ Chief Financial Officer President Title:_____________________________ Title:_____________________________ -9- EXHIBIT A EFFICIENT LICENSED TECHNOLOGY All Flowpoint software source code for making and implementing routing decisions for data packets. EXHIBIT B CABLETRON LICENSED TECHNOLOGY All software source code and related documentation for: . IPSEC . DES . TripleDES . IKE . L2TP . Diffie-Hellman Key Exchange . IP Flowointwall technology . Virtual Private Network technology In each case, that is incorporated in or is currently planned to be incorporated in Flowpoint products. EX-23.1 10 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 Consent of Independent Auditors The Board of Directors Efficient Networks, Inc. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP KPMG LLP Dallas, Texas January 7, 2000 EX-23.2 11 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.2 Consent of Independent Auditors The Board of Directors Efficient Networks, Inc.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP KPMG LLP Boston, Massachusetts January 7, 2000 -----END PRIVACY-ENHANCED MESSAGE-----