-----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, CuzvPjE/hz5Y2W8aVi01Ami+oaB2No7J6RNTin+Thrh9AAJJ8zbe9qHke3XibBSV uiZzzc9uS7aa+TGPUJ+/ZA== 0000930661-99-001421.txt : 19990610 0000930661-99-001421.hdr.sgml : 19990610 ACCESSION NUMBER: 0000930661-99-001421 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19990609 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/A SEC ACT: SEC FILE NUMBER: 333-77795 FILM NUMBER: 99642481 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/A 1 FORM S-1 AMENDMENT NO. 1 As filed with the Securities and Exchange Commission on June 9, 1999 Registration No. 333-77795 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- AMENDMENT NO. 1 to 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 PETER F. STEWART Brobeck, Phleger & Harrison LLP HELEN E. QUINN 301 Congress Avenue, Suite 1200 Wilson Sonsini Goodrich & Rosati Austin, Texas 78701 Professional Corporation (512) 477-5495 650 Page Mill Road 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. [_] 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The 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 JUNE 9, 1999 4,000,000 Shares [EFFICIENT NETWORKS LOGO] Common Stock -------- Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $10.00 and $12.00 per share. We have applied to list the shares on The Nasdaq Stock Market's National Market under the symbol "EFNT." The underwriters have an option to purchase a maximum of 600,000 additional shares to cover over-allotments of shares. Investing in our common stock involves risks. See "Risk Factors" on page 6.
Underwriting Price to Discounts and Proceeds to Public Commissions Efficient -------------- -------------- -------------- Per Share.......................... $ $ $ Total.............................. $ $ $
Delivery of the shares of common stock will be made on or about , 1999. 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 BancBoston Robertson Stephens Volpe Brown Whelan & Company The date of this prospectus is , 1999. [INSIDE FRONT COVER OF PROSPECTUS] [Graphic of network: Internet and corporate local area networks, over a DSL provider's network to four types of users; small business Internet users; consumer Internet users; branch office remote access users; and telecommuters] ------------ TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 3 Risk Factors........................ 6 Special Note Regarding Forward- Looking Statements................. 17 Use Of Proceeds..................... 18 Dividend Policy..................... 18 Capitalization...................... 19 Dilution............................ 20 Selected Consolidated Financial Data............................... 21 Management's Discussion And Analysis Of Financial Condition And Results Of Operations...................... 22
Page ---- Business.......................... 32 Management........................ 50 Certain Transactions.............. 57 Principal Stockholders............ 59 Description Of Capital Stock...... 62 Shares Eligible For Future Sale... 65 Underwriting...................... 67 Notice To Canadian Residents...... 69 Legal Matters..................... 70 Experts........................... 70 Additional Efficient Information.. 70 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. Dealer Prospectus Delivery Obligation Until , 1999 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. 2 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 leading worldwide independent 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" or "CPE." 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, supply chain management, Web browsing and remote access 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 exploit 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. . Ensure End-To-End Interoperability. Our technology expertise and relationships with network equipment vendors, such as ADC Telecommunications, Advanced Fibre Communications, Alcatel, Diamond Lane Communications, DSC Communications, 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. Our ProfileBuilder software tool 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. . 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. 3 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. 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 March 31, 1999, our products have been deployed by Ameritech, BellSouth, Covad Communications, Hong Kong Telecom, Singapore Telecom and six other network service providers, and purchased by eight network equipment vendors. An additional 39 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. 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. The Offering Common stock offered.............. 4,000,000 shares Common stock to be outstanding after this offering.............. 36,067,124 shares Use of proceeds................... For general corporate purposes, principally working capital, additional sales and marketing efforts, and potential acquisitions. Proposed Nasdaq National Market symbol........................... EFNT
- -------- The above table is based on shares outstanding as of May 31, 1999. However, this table also includes 3,082,191 shares that will be issued prior to the closing of this offering upon exercise of presently outstanding warrants for redeemable convertible preferred stock. These warrants will terminate if not exercised prior to the closing of this offering. See "Capitalization" and "Certain Transactions." This table excludes: . 6,240,850 shares subject to options outstanding as of May 31, 1999 under our stock option plans; . 3,700,000 shares reserved for future issuance under our stock option and employee stock purchase plans; and . 167,746 shares issuable upon exercise of outstanding warrants. ------------ You should be aware that our fiscal year ends on June 30; thus, a reference to "fiscal 1998," for example, is to the fiscal year ended June 30, 1998. In addition, except as otherwise indicated, information in this prospectus is based on the following assumptions: . that all note holders will convert an aggregate of $9.0 million owed to them by Efficient into an aggregate of 3,082,191 shares of redeemable convertible preferred stock through the exercise of outstanding warrants; . that each outstanding share of redeemable convertible preferred stock will convert into one share of common stock immediately prior to the closing of this offering; . that the underwriters' over-allotment option will not be exercised; and . that we will file our amended and restated certificate of incorporation. 4 Summary Consolidated Financial Information (in thousands, except per share data)
Nine Months Ended Fiscal Year Ended June 30, March 31, ---------------------------- ------------------ 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- Statement of Operations Data: Net revenues................ $ 3,687 $ 4,122 $ 3,370 $ 2,703 $ 7,139 Cost of revenues............ 2,209 2,386 2,160 1,553 6,699 -------- -------- -------- -------- -------- Gross profit................ 1,478 1,736 1,210 1,150 440 Loss from operations........ (5,823) (6,174) (8,070) (5,158) (11,016) Net loss.................... $ (5,646) $ (6,049) $ (7,940) $ (5,077) $(12,996) ======== ======== ======== ======== ======== Net loss per share: Basic and diluted......... $ (1.99) $ (2.00) $ (2.44) $ (1.59) $ (3.48) ======== ======== ======== ======== ======== Weighted average shares... 2,838 3,027 3,254 3,193 3,807 ======== ======== ======== ======== ======== Pro forma net loss per share: Basic and diluted......... $ (0.35) $ (0.64) ======== ======== Weighted average shares... 22,886 27,077 ======== ========
March 31, 1999 ---------------------------------- Pro Forma Actual Pro Forma As Adjusted ---------- ----------- ----------- Balance Sheet Data: Cash and cash equivalents................... $ 4,596 $6,596 $46,516 Working capital............................. 9,473 9,473 49,393 Total assets................................ 17,234 19,234 59,154 Long-term debt, net of discount............. 4,253 -- -- Redeemable convertible preferred stock...... 40,408 -- -- Total stockholders' equity (deficit)........ (33,036) 13,625 53,545
------------ 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 pro forma numbers reflect: . the conversion of $9.0 million in long-term debt into an aggregate of 3,082,191 shares of redeemable convertible preferred stock through the exercise of certain warrants; and . the conversion into common stock of all redeemable convertible preferred stock immediately prior to the closing of this offering. The pro forma as adjusted numbers give effect to our receipt of the estimated net proceeds from the sale of the 4,000,000 shares of common stock offered hereby at an assumed initial public offering price of $11.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. See "Use of Proceeds" and "Capitalization." 5 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 service does not develop, then our results of operations and financial condition would be adversely affected. Our business would be harmed, and our results of operations and financial condition would be adversely affected, if the use of broadband access services does not increase as anticipated, or if our customers' broadband access services are not well received in the marketplace. Certain critical factors will likely continue to affect the development of the broadband access services market. These factors include: . inconsistent quality and reliability of service; . lack of availability of cost-effective, high-speed service; . inability to integrate business applications on the Internet; . lack of interoperability among multiple vendors' network equipment; . congestion in service providers' networks; . 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. 6 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 We Face Within the DSL Industry Competition within the DSL market is intense and includes numerous established competitors, and if we are unable to compete effectively, our business would be harmed. Competition in the DSL customer premises equipment market is intense, and we expect competition to increase. Many of our competitors and potential competitors have substantially greater name recognition and technical, financial and marketing resources than we have. If we are unable to compete successfully, our business will be harmed and our results of operations and financial condition would be adversely affected. We cannot assure you that we will have the financial resources, technical expertise or marketing, distribution and support capabilities to compete successfully. 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; . develop and maintain competitive products that meet changing customer demands; 7 . 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. Solectron Corporation is currently the sole manufacturer of many of our products. 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; . manufacturing yields and costs; . the potential lack of adequate capacity during periods of excess demand; 8 . 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 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. 9 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 $6.4 million in fiscal 1999 and $14.1 million for the first nine months of fiscal 1999. As of March 31, 1999, we had an accumulated deficit of approximately $38.6 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 achieve or sustain profitability. We have a short operating history and, as a result, it is difficult to predict our future results of operations. We have a short operating history upon which to base your investment decision. We first commenced product shipments in August 1994 and did not introduce DSL products until March 1998. Due to our limited operating history, it is difficult or impossible for us to predict future results of operations and you should not expect future revenue growth to be comparable to our recent revenue growth. In addition, we believe that comparing different periods of our operating results is not meaningful, and you should not rely on the results for any period as an indication of our future performance. Investors in our common stock must consider our business and prospects in light of the risks and difficulties typically encountered by companies in their early stages of development, particularly those in rapidly evolving markets such as ours. 10 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; . 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; 11 . the average selling prices of our products; and . the effectiveness of our product cost reduction efforts. The amount and timing of our operating expenses generally will vary from quarter to quarter depending on the level of actual and anticipated business activities. Research and development expenses will vary as we develop new products. Due to competitive factors in our market, in the past we have experienced, and we anticipate that we will continue to experience, decreases in the average selling prices of our products. Due to these and other factors, our quarterly revenues, expenses and results of operations could vary significantly in the future, and you should not rely upon period-to-period comparisons as indications of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our customer base is concentrated, and the loss of one or more of our customers could harm our business. Because DSL service relies upon existing telephone lines to reach end users, a substantial majority of potential DSL end-user accounts in the U.S. and in other countries are controlled by a relatively small number of network service providers. If we are not successful in maintaining relationships with these few network service providers and the network equipment vendors that supply them, our business will be harmed. 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 nine months ended March 31, 1999, Covad Communications Group, Inc. represented 19.6% of our net revenues, and Lucent Technologies Inc. represented 10.2% 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. Our top ten customers for the nine months ended March 31, 1999 accounted for 80.5% 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 United States represented 52% of our revenues in fiscal 1998 and 35% of our revenues for the first nine months of fiscal 1999. 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; . changes in regulatory requirements; . costs and risks of deploying systems in foreign countries; . licenses, tariffs and other trade barriers; . political and economic instability; . potentially adverse tax consequences; . difficulties obtaining governmental approvals for products; . compliance with a wide variety of complex foreign laws and treaties; and . delays or difficulties collecting accounts receivable. 12 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 We rely on indirect distribution channels and strategic relationships to sell and manufacture our products, and if we are not able to maintain existing and develop additional strategic relationships and indirect distribution channels, our business would be harmed. Our business strategy relies on our strategic relationships with network equipment vendors, network service providers, and suppliers of DSL technology. If our existing relationships are not successful or our competitors are better able to develop these relationships, our business would be harmed. End users typically purchase DSL customer premises equipment from network service providers, and network service providers may purchase DSL customer premises equipment from independent network equipment vendors and distributors. We typically work closely with our potential customers and suppliers to ensure interoperability of products with customer networks and of components with our DSL customer premises equipment. In addition, we rely on our strategic relationships with telephone company-aligned distributors in order to broaden our distribution network. Also, larger vendors of DSL customer premises equipment may be able to leverage their size and established distribution channels to gain a significant competitive advantage over us. We cannot assure you that we will be able to maintain or expand our existing strategic relationships or that we will be able to establish new relationships in the future. 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 13 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 1998, we added 36 employees to our total work force, representing an increase of approximately 61% from December 31, 1997. We expect to add 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. Although we currently maintain key person life insurance on our key personnel, we will not continue to maintain it after the offering. The loss of the services of one or more of our executive officers or key employees could harm our business. Our executive officers and certain key sales, engineering and management personnel may not remain with us in the future. Our executive officers and key personnel and in particular Mark A. Floyd, our Chief Executive Officer and Patricia W. Hosek, our Vice President of Engineering, are critical to our business and its future success. If we lost the services of one or more of our executive officers or key employees, we would need to devote substantial resources to finding replacements, and until replacements were found, Efficient would be operating without the skills or leadership of such personnel, either of which could have a significant adverse effect on our business. None of our officers or key employees is bound by agreements for any specific employment term or covenants not to compete. Our future success will depend in part on our ability to protect our proprietary rights and the technologies used in our principal products, and if we do not enforce and protect our intellectual property or if others bring infringement claims against us, our business would be harmed. We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights. However, these measures afford only limited protection. Our failure to adequately protect our proprietary rights may adversely affect us. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use trade secrets or other information that we regard as proprietary. Our means of protecting our proprietary rights in the U.S. or abroad may not be adequate, and competitors may independently develop similar technologies. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the U.S. Issued patents may not preserve our proprietary position. Even if they do, competitors or others may develop technologies similar to or superior to our own. We may become involved in litigation over proprietary rights. In the event of an adverse result in any future litigation with third parties relating to proprietary rights, we could be required: . to pay substantial damages, including treble damages if we are held to have willfully infringed; . to halt the manufacture, use and sale of infringing products; . to expend significant resources to develop non-infringing technology; or . to obtain licenses to the infringing technology. Licenses may not be available from any third party that asserts intellectual property claims against us, on commercially reasonable terms, or at all. In addition, litigation frequently involves substantial expenditures and 14 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. 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. 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 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. As a result, beginning on January 1, 2000, computer systems and software used by many companies and organizations in a wide variety of industries, including technology, transportation, utilities, finance and telecommunications, will produce erroneous results or fail unless they have been modified or upgraded to process date information correctly. Although we cannot predict with any certainty what adverse effects we may suffer from Year 2000 compliance issues, possible effects include: . disruptions in basic services such as water, electricity and telephone, any of which could require us to close or substantially reduce the level of activity at our facilities until service returns to normal; . disruptions in the supply of components and manufactured goods from our component suppliers and contract manufacturers if they experience disruptions in the delivery of basic services; . disruptions in our ability to ship and receive goods if third-party transportation and delivery providers experience disruptions in their operations; and . delays in receiving accurate management information from our internal accounting and management systems. We currently have no contingency plan to address potential interruptions in the operation of our internal systems or those of third parties upon whom we depend as a result of Year 2000 noncompliance. We may face claims based on Year 2000 issues arising from the integration of multiple products within an overall network. We may also experience reduced sales of our products as potential customers reduce their budgets for network equipment and network services due to increased expenditures on their own Year 2000 compliance efforts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Issues." 15 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 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 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. In addition, we expect from time to time to review potential acquisitions that would complement our existing product offerings or enhance our technical capabilities. While we have no current agreements or negotiations underway with respect to any potential acquisition, any future transaction of this nature could require potentially significant amounts of capital. Funds may not be available at the time or times needed, or available on terms acceptable to us. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our securities have no prior market, and our stock price may decline after the offering. Before this offering, there has not been a public market for our common stock and an active public market for our common stock may not develop or be sustained after this offering. If an active public market for our common stock does not develop, the liquidity of your investment may be limited, and our stock price may fluctuate or decline below our initial public offering price. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. 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 36,067,124 shares of common stock. The 4,000,000 shares sold in this offering will be freely tradeable. The remaining shares of common stock outstanding after this offering will be available for sale, assuming the effectiveness of certain lock-up arrangements under which the stockholders have agreed not to sell or otherwise dispose of their shares of common stock, in the public market as follows:
Number of Shares Date of Availability for Sale --------- ----------------------------- 76,250 , 1999 (date of this prospectus) , 1999 (90 days after the date of this 140,938 prospectus) 26,559,412 , 1999 (after 180 days following the date of this prospectus); and the remaining shares at various times thereafter upon the expiration of 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." 16 The net tangible book value of shares purchased in this offering will be substantially lower than the initial public offering price. Investors purchasing stock in this offering will incur substantial and immediate dilution in net tangible book value of $9.50 per share assuming an initial public offering price of $11.00. To the extent that currently outstanding options and warrants are exercised, there will be further dilution in net tangible book value. See "Dilution" for a definition of the term "net tangible book value" and further explanation of this risk. Our principal stockholders and management have the ability to control stockholder votes regarding changes in control and other actions, and such control could adversely affect our stock price or lessen any premium over market price that an acquiror might otherwise pay. Our executive officers and directors and their affiliates will own approximately 51.9% of the outstanding common stock after this offering, or 51.1% if the underwriters' option is fully exercised. These stockholders may therefore determine the composition of the board of directors, approve all matters that require stockholder approval and influence management affairs. This concentration of ownership may delay or prevent a beneficial merger or discourage a potential acquiror. This level of control could adversely affect our stock's market price or lessen any premium over market price that an acquiror might otherwise pay. See "Management" and "Principal Stockholders." 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 10,000,000 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. 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. 17 USE OF PROCEEDS The net proceeds to us from the sale of the 4,000,000 shares of common stock offered by us are estimated to be $39,920,000, or approximately $46,058,000 if the underwriters' over-allotment option is exercised in full, at the assumed initial public offering price of $11.00 per share, after deducting underwriting discounts and commissions and the estimated offering expenses. 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; however, we currently have no commitments or agreements and are not involved in any negotiations to do so. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, investment-grade securities. 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. 18 CAPITALIZATION The table below sets forth the following information: . the actual capitalization of Efficient as of March 31, 1999; . the pro forma capitalization of Efficient after giving effect to (1) the conversion of $9.0 million of long-term debt into 3,082,191 shares of redeemable convertible preferred stock through the exercise of certain outstanding warrants and (2) the conversion of all outstanding shares of redeemable convertible preferred stock into presently outstanding shares of common stock; and . the pro forma capitalization as adjusted to give effect to the sale of 4,000,000 shares of common stock at the assumed initial public offering price of $11.00 per share in this offering, less underwriting discounts and commissions and the estimated offering expenses payable by Efficient.
March 31, 1999 --------------------------------- Pro Forma As Actual Pro Forma Adjusted ------------ ----------- -------- (in thousands, except share and per share data) Long-term debt, net of discount............ $ 4,253 $ -- $ -- Redeemable convertible preferred stock; issuable in series, $0.001 par value, 31,136,913 shares authorized, 24,720,213 shares issued and outstanding, actual; none issued and outstanding, pro forma and pro forma as adjusted..................... 40,408 -- -- Stockholders' equity (deficit): Common stock, $0.001 par value; 100,000,000 shares authorized; 3,918,765 shares issued and outstanding, actual; 31,721,169 shares issued and outstanding, pro forma and shares outstanding, pro forma as adjusted.................................. 4 32 36 Additional paid-in capital................. 18,041 68,865 108,781 Deferred stock option compensation......... (12,436) (12,436) (12,436) Accumulated deficit........................ (38,645) (42,836) (42,836) -------- -------- -------- Total stockholders' equity (deficit)....... (33,036) 13,625 53,545 -------- -------- -------- Total capitalization....................... $ 11,625 $ 13,625 $ 53,545 ======== ======== ========
This table excludes the following shares: . 6,470,575 shares subject to options outstanding as of March 31, 1999 under our stock option plans; . 3,700,000 shares reserved for future issuance under our stock option and employee stock purchase plans; and . 167,746 shares issuable upon exercise of certain outstanding warrants. See "Management--Benefit Plans," "Description of Capital Stock" and Notes 8, 9 and 10 of Notes to Consolidated Financial Statements. 19 DILUTION The pro forma net tangible book value of our common stock on March 31, 1999 was $13.6 million, or approximately $0.43 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after giving pro forma effect to (1) the conversion of $9.0 million of long- term debt into an aggregate of 3,082,191 shares of redeemable convertible preferred stock through the exercise of certain warrants and (2) the conversion of all outstanding shares of redeemable convertible preferred stock into 24,720,213 shares of common stock, each as if they had occurred at March 31, 1999. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately afterwards. After giving effect to our sale of 4,000,000 shares of common stock offered by this prospectus at the assumed initial public offering price of $11.00 per share and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, our pro forma net tangible book value would have been $53.5 million, or approximately $1.50 per share. This represents an immediate increase in pro forma net tangible book value of $1.07 per share to existing stockholders and an immediate dilution in net tangible book value of $9.50 per share to new investors. Assumed public offering price per share.......................... $11.00 Pro forma net tangible book value per share as of March 31, 1999.......................................................... $0.43 Increase per share attributable to new investors............... 1.07 ----- Pro forma net tangible book value per share after the offering... 1.50 Dilution in pro forma net tangible book value per share to new investors....................................................... $ 9.50 ======
This table excludes all options and warrants outstanding as of March 31, 1999, other than the warrants to purchase 3,082,191 shares of redeemable convertible preferred stock that will be exercised immediately prior to the completion of this offering. See Notes 6 and 7 of Notes to Consolidated Financial Statements. The exercise of outstanding options and warrants having an exercise price less than the offering price would increase the dilutive effect to new investors. The following table sets forth, as of March 31, 1999, the differences between the number of shares of common stock purchased from us, the total consideration and average price per share paid by existing stockholders and by the new investors, before deducting the underwriting discounts and commissions and estimated expenses payable by us, assuming an initial public offering price of $11.00 per share.
Shares Purchased Total Consideration --------------------- ---------------------- Average Price Number Percentage Amount Percentage Per Share ---------- ---------- ----------- ---------- ------------- Existing stockholders... 31,721,169 88.8% $55,785,000 55.9% $1.76 New investors........... 4,000,000 11.2 44,000,000 44.1 11.00 ---------- ----- ----------- ----- Total................. 35,721,169 100.0% $99,785,000 100.0% ========== ===== =========== =====
The existing stockholder information includes warrants to purchase 3,082,191 shares of redeemable convertible preferred stock that will be exercised prior to the completion of this offering. See "Capitalization" and "Certain Transactions." If the underwriters' over-allotment option is exercised in full, the number of shares held by new public investors will be increased to 4,600,000 or approximately 12.7% of the total number of shares of our common stock outstanding after this offering. 20 SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are qualified by reference to the Consolidated Financial Statements and Notes thereto appearing elsewhere in this prospectus. The statement of operations data set forth below for the years ended June 30, 1996, 1997 and 1998, and the nine months ended March 31, 1999 and the balance sheet data at June 30, 1997, 1998 and March 31, 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, 1994 and 1995 and the balance sheet data at June 30, 1995 and 1996 are derived from audited Consolidated Financial Statements of Efficient not included in this prospectus. The balance sheet data at June 30, 1994 is derived from unaudited financial statements not included in this prospectus. The statement of operations data for the nine months ended March 31, 1998 and balance sheet data at the end of that period are derived from unaudited interim consolidated financial statements of Efficient. In the opinion of management, such unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements referred to above and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of Efficient's financial results and position for the indicated periods and dates. The historical results are not necessarily indicative of results to be expected for any future period.
Nine Months Ended Fiscal Year Ended June 30, March 31, ------------------------------------------------ ------------------ 1994 1995 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- -------- -------- (in thousands, except per share data) Consolidated Statement of Operations Data: Net revenues............ $ 500 $ 2,314 $ 3,687 $ 4,122 $ 3,370 $ 2,703 $ 7,139 Cost of revenues........ -- 1,125 2,209 2,386 2,160 1,553 6,699 -------- -------- -------- -------- -------- -------- -------- Gross profit............ 500 1,189 1,478 1,736 1,210 1,150 440 -------- -------- -------- -------- -------- -------- -------- Operating expenses: Sales and marketing... 238 1,505 2,366 2,409 3,436 2,232 3,856 Research and development.......... 1,341 3,405 3,853 4,183 4,157 2,845 5,546 General and administrative....... 692 822 1,082 1,245 1,641 1,197 1,234 Stock option compensation......... -- -- -- 73 46 34 820 -------- -------- -------- -------- -------- -------- -------- Total operating expenses............ 2,271 5,732 7,301 7,910 9,280 6,308 11,456 -------- -------- -------- -------- -------- -------- -------- Loss from operations.... (1,771) (4,543) (5,823) (6,174) (8,070) (5,158) (11,016) Interest and other income (expense), net.. 67 248 177 125 130 81 (1,980) -------- -------- -------- -------- -------- -------- -------- Net loss................ $ (1,704) $ (4,295) $ (5,646) $ (6,049) $ (7,940) $ (5,077) $(12,996) ======== ======== ======== ======== ======== ======== ======== Basic and diluted net loss per share(1)...... $ (0.68) $ (1.56) $ (1.99) $ (2.00) $ (2.44) $ (1.59) $ (3.48) ======== ======== ======== ======== ======== ======== ======== Weighted average shares(1).............. 2,521 2,750 2,838 3,027 3,254 3,193 3,807 ======== ======== ======== ======== ======== ======== ======== Unaudited pro forma basic and diluted net loss per share(1)...... $ (0.35) $ (0.64) ======== ======== Weighted average shares used to compute unaudited pro forma basic and diluted net loss per share(1)...... 22,886 27,077 ======== ======== Consolidated Balance Sheet Data: Cash and cash equivalents............ $ 1,617 $ 2,711 $ 1,363 $ 3,413 $ 7,607 $ 4,617 $ 4,596 Working capital......... 1,565 3,400 2,619 4,370 7,870 5,457 9,473 Total assets............ 2,710 6,357 5,150 6,454 10,667 7,919 17,234 Redeemable convertible preferred stock........ 4,125 11,155 16,155 23,635 34,743 25,142 40,408 Total stockholders' deficit................ (1,716) (6,008) (11,644) (17,610) (25,374) (22,671) (33,036)
- -------- (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. 21 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 leading 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 three percent of net revenues in fiscal 1998, represented 87.3% of our net revenues in the third quarter of fiscal 1999. 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 nine months ended March 31, 1999, Covad Communications represented 19.6% of our net revenues, and Lucent Technologies represented 10.2% 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 nine months ended March 31, 1999 accounted for 80.5% 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 and 35% of our net revenues for the nine months ended March 31, 1999. We currently maintain a European sales office in Amsterdam and are opening an Asian sales office in Singapore in May 1999. We believe that in order to continue growing and attain profitability, we must continue to penetrate international markets. Accordingly, we will need to expand our international operations and to hire qualified personnel for these operations. To date, international sales have been denominated solely in U.S. dollars and, accordingly, we have not been exposed to fluctuations in non-U.S. currency exchange rates. In the future, a portion of our international sales may be denominated in currencies other than U.S. dollars, which would then expose us to gains and losses based upon exchange rate fluctuations. 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. While we believe that our gross margins 22 will improve in the near term as a result of manufacturing and component cost reductions, we do not expect to attain gross margins comparable to those we historically achieved until at least the second half of fiscal 2000. 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 March 31, 1999, we had an accumulated deficit of $38.6 million. Although our net revenues have grown in recent quarters, we cannot be certain that our net revenues will increase at a rate sufficient to achieve and maintain profitability. For the fiscal years 1997 and 1998 and for the nine months ended March 31, 1999, we accrued an aggregate of $13.4 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, generally four years. We amortized deferred stock option compensation in the amounts of $73,000, $46,000 and $820,000 in fiscal years 1997 and 1998 and the nine months ended March 31, 1999, respectively. We expect to amortize the deferred stock option compensation at the rate of approximately $830,000 per quarter until fully amortized. 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.
Nine Months Fiscal Year Ended Ended March June 30, 31, ------------------------ --------------- 1996 1997 1998 1998 1999 ------ ------ ------ ------ ------ Net revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues................. 59.9 57.9 64.1 57.5 93.8 ------ ------ ------ ------ ------ Gross profit..................... 40.1 42.1 35.9 42.5 6.2 ------ ------ ------ ------ ------ Operating expenses: Sales and marketing............ 64.2 58.4 102.0 82.6 54.0 Research and development....... 104.5 101.5 123.3 105.2 77.7 General and administrative..... 29.3 30.2 48.7 44.3 17.3 Stock option compensation...... -- 1.8 1.4 1.2 11.5 ------ ------ ------ ------ ------ Total operating expenses..... 198.0 191.9 275.4 233.3 160.5 ------ ------ ------ ------ ------ Loss from operations............. (157.9) (149.8) (239.5) (190.8) (154.3) Interest and other income (expense), net.................. 4.8 3.1 3.9 3.0 (27.7) ------ ------ ------ ------ ------ Net loss......................... (153.1)% (146.7)% (235.6)% (187.8)% (182.0)% ====== ====== ====== ====== ======
23 Results of Operations Nine Months Ended March 31, 1998 and 1999 Net Revenues Net revenues consist of product sales, net of allowances for returns. Net revenues increased 164.1%, from $2.7 million for the nine months ended March 31, 1998 to $7.1 million for the nine months ended March 31, 1999. DSL product revenues increased from $5,000 for the nine months ended March 31, 1998 to $5.6 million for the nine months ended March 31, 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. The increase in DSL product revenues was partially offset by a decrease in revenues from our ATM LAN products. ATM LAN product revenues decreased 42%, from $2.7 million for the nine months ended March 31, 1998 to $1.6 million for the nine months ended March 31, 1999. The period-over-period decreases in ATM LAN product revenues reflect the limited focus that we are placing on our ATM LAN products as we continue our shift toward DSL 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 331.4% from $1.6 million for the nine months ended March 31, 1998 to $6.7 million for the nine months ended March 31, 1999, reflecting the substantial increase in DSL product sales. Gross margin represented 42.5% of net revenues for the nine months ended March 31, 1998, compared to 6.2% for the nine months ended March 31, 1999. Gross margin on our DSL products declined from 20.0% of the related revenues for the nine months ended March 31, 1998 to a gross loss of 5.9% of the related revenues for the nine months ended March 31, 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 markets to product 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 42.6% of related revenues for the nine months ended March 31, 1998, compared to 49.0% for the 1999 period. 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 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. We expect our gross margins to continue to remain below our historical levels through at least the first half of fiscal 2000 as we continue to focus on quickly bringing our DSL products to market. 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 72.8% from $2.2 million for the nine months ended March 31, 1998 to $3.9 million for the nine months ended March 31, 1999. As a percentage of net revenues, sales and marketing expenses decreased from 82.6% for the nine months ended March 31, 1998 to 54.0% for the nine months ended March 31, 1999. The substantial increase in sales and marketing expenses in absolute amounts was attributable to our aggressive efforts to launch our DSL products. The decrease in such expenses as a percentage of net revenues was a result of the 24 rapid increase in DSL revenues. We expect sales and marketing expenses to increase in dollar amount in future periods as we continue to expand our domestic and international sales and marketing organization. Research and Development Expenses Research and development expenses consist primarily of personnel and related costs associated with our product development efforts, including third-party consulting and prototyping costs. Research and development expenses increased 94.9% from $2.8 million for the nine months ended March 31, 1998 to $5.5 million for the nine months ended March 31, 1999. As a percentage of net revenues, research and development expenses decreased from 105.2% for the nine months ended March 31, 1998 to 77.7% for the nine months ended March 31, 1999. 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 $1.1 million of nonrecurring engineering expenses reimbursed by third parties. These amounts are treated as an offset to the related research and development spending. We received no such reimbursements in the fiscal 1999 period. The decrease in such expenses as a percentage of net revenues was a result of the rapid increase in DSL revenues. We expect research and development expenses to increase in dollar amount in future periods as we continue to expand our research and development organization to develop new products and technologies. General and Administrative Expenses General and administrative expenses consist primarily of employee salaries and related expenses for executive, administrative and accounting personnel, facility costs, insurance costs and professional fees. General and administrative expenses remained consistent at $1.2 million for the nine months ended March 31, 1998 and March 31, 1999. As a percentage of net revenues, general and administrative expenses decreased from 44.3% for the nine months ended March 31, 1998 to 17.3% for the nine months ended March 31, 1999. The decrease in such expenses as a percentage of net revenues was a result of the increase in DSL revenues. We expect general and administrative expenses to increase in dollar amount in future periods as we continue to build our infrastructure and as a result of operating as a publicly-held company. Stock Option Compensation During the nine months ended March 31, 1998, stock option compensation totaled $34,000. For the nine months ended March 31, 1999, this expense totaled $820,000. See Note 8 of Notes to Consolidated Financial Statements for a discussion of our stock option compensation. 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 $81,000 for the nine months ended March 31, 1998 to an expense of $2.0 million for the nine months ended March 31, 1999. In the quarter ended March 31, 1999, we borrowed $7.0 million from our existing investors. These notes bear interest at 10% per year, and are 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 2,397,260 shares of Series H preferred stock at an exercise price of $2.92 per share. The principal amount of the outstanding debt will be canceled through the exercise of these warrants. The proceeds were allocated between the notes and the warrants based on their pro rata fair values resulting in a discount. As the notes will be canceled in connection with this offering, the discount is being amortized as interest expense over six months. Accordingly, we expect the interest related to these notes to be an expense of approximately $4.1 million for the quarter ending June 30, 1999. Thereafter, 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. 25 Income Taxes From inception through March 31, 1999, we incurred net losses for federal and state tax purposes and have not recognized any tax provision or benefit. As of March 31, 1999, we had approximately $36.0 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 from Efficient's redeemable convertible preferred stock financings, note financings 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. See Note 11 of Notes to Consolidated Financial Statements. Fiscal Years Ended June 30, 1996, 1997 and 1998 Net Revenues Net revenues increased 11.8%, from $3.7 million in fiscal 1996 to $4.1 million in fiscal 1997. Net revenues decreased 18.2% to $3.4 million in fiscal 1998. Our DSL products, first introduced in late fiscal 1998, represented less than 3% of net revenues in that year. Accordingly, for fiscal 1998 and earlier, sales of DSL products were not a material portion of our business. ATM LAN product revenues increased from fiscal 1996 to 1997 primarily as a result of increased sales of higher-priced 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 fiscal 1997 to 1998. This decrease was only slightly offset by sales of prototype DSL products that began in the second half of fiscal 1998. Cost of Revenues Cost of revenues increased from $2.2 million in fiscal 1996 to $2.4 million in fiscal 1997, and then decreased to $2.2 million in fiscal 1998, reflecting the increase in net revenues from fiscal 1996 to 1997 and the subsequent decrease in net revenues from fiscal 1997 to 1998. Gross margins were 40.1% in fiscal 1996, 42.1% in fiscal 1997 and 35.9% in fiscal 1998. The improvement in gross margins from fiscal 1996 to 1997 reflected better pricing that we were able to obtain from our component suppliers and contract manufacturers, as well as increased sales of higher margin ATM LAN products. Gross margins decreased from fiscal 1997 to 1998 as we began to incur manufacturing start-up costs associated with our DSL products. Sales and Marketing Expenses Sales and marketing expenses remained relatively consistent at $2.4 million in fiscal 1996 and 1997. The expenses increased 42.6% to $3.4 million in fiscal 1998. The increases in sales and marketing expenses in absolute amount from fiscal 1997 to 1998 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 64.2% of net revenues in fiscal 1996, 58.4% in fiscal 1997 and 102.0% in fiscal 1998. The decrease in sales and marketing expenses as a percentage of net revenues from fiscal 1996 to 1997 reflected the growth in net revenues from period to period. The increases in sales and marketing expenses as a percentage of net revenues from fiscal 1997 to 1998 were 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. 26 Research and Development Expenses Research and development expenses increased 8.6%, from $3.9 million in fiscal 1996 to $4.2 million in fiscal 1997. These expenses remained consistent in fiscal 1998 at $4.2 million. The increase in research and development expenses in absolute amount from fiscal 1996 to 1997 reflected the beginning of our DSL product development efforts. In fiscal 1998, we received $1.1 million from third parties for nonrecurring engineering expenses related to certain DSL product development activity, which was used to offset research and development spending. Accordingly, while the net amount of research and development spending in fiscal 1998 was consistent with the fiscal 1997 level, our gross research and development spending increased 25.7% from fiscal 1997 to 1998. Research and development expenses represented 104.5% of net revenues in fiscal 1996, 101.5% in fiscal 1997 and 123.3% in fiscal 1998. The slight decreases in research and development expenses as a percentage of net revenues from fiscal 1996 to 1997 primarily reflected the higher rate of revenue growth in fiscal 1997. 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. General and Administrative Expenses General and administrative expenses increased 15.1%, from $1.1 million in fiscal 1996 to $1.2 million in fiscal 1997, and 31.8% to $1.6 million in fiscal 1998. The increases in absolute amount of general and administrative spending from period to period were primarily a result of increases in headcount associated with building our infrastructure. General and administrative expenses represented 29.3% of net revenues in fiscal 1996, 30.2% in fiscal 1997 and 48.7% in fiscal 1998. The substantial increase in general and administrative expenses as a percentage of net revenues in fiscal 1998 primarily reflected lower revenues in that year. Stock Option Compensation For the year ended June 30, 1997, we recorded aggregate deferred stock option compensation totaling $256,000 in connection with certain stock option grants. Amortization of deferred stock option compensation was $73,000 for that year and $46,000 for fiscal 1998. Efficient did not record deferred stock option compensation for periods prior to fiscal 1997. See Note 8 of Notes to Consolidated Financial Statements for a discussion of our deferred stock option compensation. Interest and Other Income (Expense), Net Interest and other income (expense), net decreased from $177,000 in fiscal 1996 to $125,000 in fiscal 1997, and increased to $130,000 in fiscal 1998. Interest and other income (expense), net fluctuated during these periods primarily due to changes in the amount and mix of interest-bearing investments outstanding during each period. 27 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 management's opinion, 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 ------------------------------------------------------------------------------------- September 30, December 31, March 31, June 30, September 30, December 31, March 31, 1997 1997 1998 1998 1998 1998 1999 ------------- ------------ --------- -------- ------------- ------------ --------- (in thousands) Statement of Operations Data: Net revenues............ $ 676 $ 833 $ 1,194 $ 667 $ 1,174 $ 1,850 $ 4,115 Cost of revenues........ 396 413 744 607 863 1,647 4,189 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 280 420 450 60 311 203 (74) Operating expenses: Sales and marketing.... 643 694 895 1,204 1,168 1,303 1,385 Research and development........... 1,044 737 1,064 1,312 1,826 1,790 1,930 General and administrative........ 305 346 546 444 339 411 484 Stock option compensation.......... 11 11 12 12 24 67 729 ------- ------- ------- ------- ------- ------- ------- Total operating expenses.............. 2,003 1,788 2,517 2,972 3,357 3,571 4,528 ------- ------- ------- ------- ------- ------- ------- Loss from operations.... (1,723) (1,368) (2,067) (2,912) (3,046) (3,368) (4,602) Interest and other income (expense), net.. 34 12 35 49 80 30 (2,090) ------- ------- ------- ------- ------- ------- ------- Net loss................ $(1,689) $(1,356) $(2,032) $(2,863) $(2,966) $(3,338) $(6,692) ======= ======= ======= ======= ======= ======= ======= As a Percentage of Net Revenues: Net revenues............ 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 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 41.4 50.4 37.7 9.0 26.5 11.0 (1.8) Operating expenses: Sales and marketing.... 95.1 83.3 75.0 180.5 99.5 70.4 33.6 Research and development........... 154.5 88.5 89.1 196.7 155.5 96.8 46.9 General and administrative........ 45.1 41.5 45.7 66.6 28.9 22.2 11.8 Stock option compensation.......... 1.6 1.3 1.0 1.8 2.0 3.6 17.7 ------- ------- ------- ------- ------- ------- ------- Total operating expenses.............. 296.3 214.6 210.8 445.6 285.9 193.0 110.0 ------- ------- ------- ------- ------- ------- ------- Loss from operations.... (254.9) (164.2) (173.1) (436.6) (259.4) (182.0) (111.8) Interest and other income (expense), net.. 5.0 1.4 2.9 7.3 6.8 1.6 (50.8) ------- ------- ------- ------- ------- ------- ------- Net loss................ (249.9)% (162.8)% (170.2)% (429.2)% (252.6)% (180.4)% (162.6)% ======= ======= ======= ======= ======= ======= =======
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 seven quarters in the period ended March 31, 1999. 28 Net Revenues Net revenues increased each quarter beginning in the quarter ended June 30, 1998 due to increased sales of our new DSL products, partially offset in two quarters by decreased revenues from our ATM LAN products. Sales of our DSL products have increased significantly quarter to quarter since we introduced them in the third quarter of fiscal 1998. Net revenues increased in the first three quarters of fiscal 1998 as demand for our ATM LAN products was increasing. With the decision to focus on DSL products, we greatly reduced our sales, marketing and development efforts for our ATM LAN products. As a result, sales of these products began to decline in the fourth quarter of fiscal 1998, and have fluctuated during the first three quarters of fiscal 1999. 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 somewhat 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 March 31, 1999, interest and other income (expense), net was an expense of $2.1 million. 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 quarter ended March 31, 1999, through borrowings from our investors. We have raised an aggregate of $40.2 million (net of transaction expenses) from the sale of equity securities and an additional $7.0 million through the recent loan transactions. In addition, we raised an additional $2.0 million through a loan transaction completed in April 1999. At March 31, 1999, we had cash and cash equivalents of $4.6 million. At March 31, 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 nine months ended March 31, 1999 was $14.1 million. Cash used in operating activities was $6.4 million in fiscal 1998, $4.6 million in fiscal 1997 and $5.4 million in fiscal 1996. Cash used in operating activities has primarily represented funding of our net losses, partially offset by accounts payable and accrued expenses. Cash used in investing activities for the nine months ended March 31, 1999 was $1.3 million. Cash used for investing activities was $572,000 in fiscal 1998, $525,000 in fiscal 1997 and $800,000 in fiscal 1996. In each period, these amounts related primarily to the purchase of computers and other equipment used in our development activities and other equipment and furniture used in our operations. 29 Cash provided by financing activities for the nine months ended March 31, 1999 was $12.4 million, consisting of funds raised from issuances of redeemable convertible preferred stock and borrowings from our investors. See "Certain Transactions" and Notes 6 and 7 of Notes to Consolidated Financial Statements for a description of the loan and equity transactions. Cash provided by financing activities was $11.2 million in fiscal 1998, $7.3 million in fiscal 1997 and $4.8 million in fiscal 1996. In each year, financing activities consisted primarily of the private placement of redeemable convertible preferred stock. Our future capital requirements will depend upon a number of factors, including the timing and level of research and development activities and sales and marketing campaigns. We believe that our cash and cash equivalent balances and the proceeds from this offering 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 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 year 2000 and beyond. We have designed our products to be year 2000 compliant. However, there can be no assurance that our current products do not contain undetected errors or defects associated with year 2000 date functions. If such errors or defects do exist, 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 an internal systems and processes review for year 2000 compliance. We have completed our assessment of the year 2000 risks we may encounter, and all identified instances of noncompliance have been repaired and tested. Any application or system scheduled for replacement by September 1999 has not been tested. We anticipate completion of final test and repair procedures on our internal systems and expect to be substantially year 2000 compliant by the end of September 1999. 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 we use are 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 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. There can be no assurance, however, that we will be able to modify our products, services and systems in a timely and successful manner to comply with year 2000 requirements, which could have a material adverse effect on our business. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS No. 131") which establishes standards for reporting information about operating segments in interim and annual financial reporting. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 did not have a material effect on our consolidated financial statements. 30 In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." Statement of Position 98-1 is effective for consolidated financial statements for years beginning after December 15, 1998. Statement of Position 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. We have adopted the provisions of Statement of Position 98-1 for our year ending June 30, 1999. 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") which establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The adoption of Statement of Financial Accounting Standards No. 133 is not expected to have a material effect on our results of operations, financial position or cash flows as we do not currently hold derivative instruments or engage in hedging activities. Disclosures About Market Risk The following discusses our exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in the Risk Factors section. As of March 31, 1999, we had short-term investments of $4.6 million. Substantially 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 percent from the March 31, 1999 rates would cause the fair value of these short-term investments to decline 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. We do not own any equity investments. Therefore, we do not currently have any direct equity price risk. Substantially all of our revenues are realized currently in U.S. dollars. In addition, we do not maintain significant asset or cash account balances in currencies other than the United States dollar. Therefore, we do not believe that we currently have any significant direct foreign currency exchange rate risk. 31 BUSINESS Efficient Networks is a leading worldwide independent 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. 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. 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 32 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, commonly known as ILECs, 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 ILECs' 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 ILECs 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 ILECs to lease portions of their networks, including the last mile, to competitive local exchange carriers, commonly known as CLECs. As a result, many new companies, long distance telephone companies and Internet service providers have applied for and been granted regulatory approval for CLEC status. Leading CLECs, including Covad Communications, MCI WorldCom, NorthPoint Communications, Rhythms NetConnections and Sprint, are now deploying high-speed services over the copper infrastructure owned by the ILECs. In response to these competitive pressures and in an effort to increase revenues and maintain their existing customer base, ILECs 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, or PTTs, to commit similar resources to broadband access deployment. ILEC, CLEC and PTT 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. A typical implementation of a DSL solution is shown below: [Graphic showing a DSL network including routers, switches, servers, DSLAMs and DSL CPE.] 33 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. Several ILECs and CLECs have begun to offer DSL services to their customers directly and through Internet service providers. In April 1998, GTE Network Services announced plans to offer DSL service in approximately 300 central offices across 16 states. In May 1998, Pacific Bell announced plans to deploy DSL service to 87 central offices which would provide service to approximately 650,000 business customers and 4.4 million homes across California. In January 1999, Pacific Bell further announced it would spend more than $100 million in 1999 to upgrade its DSL technology and equip 255 central offices. Also in January 1999, Southwestern Bell announced a rollout to 271 central offices allowing DSL service to reach over 440,000 businesses and 3.2 million homes. Covad Communications, a CLEC, 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 April 1999, Covad had deployed DSL capability to over 11.2 million homes and businesses in nine 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. 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. Ensure End-To-End Interoperability. Efficient's DSL solutions offer seamless interoperability from the customer's computer through the service providers' network. To ensure this interoperability, Efficient leverages our core technology expertise in combination with our relationships with network service providers, such as Ameritech, BellSouth and Covad Communications, and network equipment vendors, such as ADC Telecommunications, Advanced Fibre Communications, Alcatel, Diamond Lane Communications, DSC 34 Communications, 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 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 USB modems are supported by Efficient's ProfileBuilder 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, BellSouth, Covad Communications, Hong Kong Telecom, Singapore Telecom, and six other network service providers. An additional 39 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, Diamond Lane Communications, DSC Communications, Ericsson, 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. 35 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 ILECs 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 CLECs, PTTs and Internet service providers as well. Moreover, we are developing alternative distribution channels such as telephone company-aligned distributors, traditional two-tier distribution partners, third-party integrators, and retail partners. 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. 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 operating systems, 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 user, and up to 800 Kpbs in the upstream direction. Our symmetric DSL, or SDSL, products provide equal upstream and downstream speeds of up to 1.1 Mbps. Our SpeedStream products are separated into three different product series: . 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 USB port . 5000 Series -- Designed to provide routing and/or bridging capabilities and allow multiple users to connect through an Ethernet port Although SpeedStream products currently account for most of our revenues, we continue to generate a small portion of our revenues from the sale of our high- speed ATM local area network products which were originally introduced in 1994. These ATM products are specifically designed for use in private data communications networks within office or home environments which are commonly known as local area networks, or LANs. Efficient also provides a full suite of pre-configuration and diagnostic software tools. Our pre-configuration software, ProfileBuilder, 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. 36 The SpeedStream 3000 Series The SpeedStream 3000 Series consists of internal modems which provide high- speed ADSL connectivity for a personal computer. . Installs into any PCI bus slot . Configures using Efficient ProfileBuilder software for easy setup . Includes Efficient Advanced Status diagnostic software tools for rapid error diagnosis and correction . Supports the four most 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 [Picture of SpeedStream 3000 Series]
SpeedStream 3000 Series -------------------------------------------------------------------------- 3010 3020/3021 3041 3060 -------------------------------------------------------------------------- Relies on external ADC, AFC, Siemens Alcatel, DSC DSL modem Diamond Lane, Communications DSLAM Interoperability Ericsson, Lucent, Newbridge, Nokia, Nortel - ----------------------------------------------------------------------------------------------- Calendar Year of First First half of 1998 First half of 1998/ Expected second Second half Commercial Availability Expected second half of 1999 of 1998 half of 1999 - ----------------------------------------------------------------------------------------------- Suggested Retail Price $129 $269 $269 $269
- -------------------------------------------------------------------------------- 37 The SpeedStream 4000 Series The SpeedStream 4000 Series consists of external modems which provide high- speed ADSL connectivity through a personal computer's USB port. . Attaches externally via a personal computer's USB port . Configures using Efficient ProfileBuilder software for easy setup . Includes Efficient Advanced Status diagnostic software tools for rapid error diagnosis and correction . Supports the four most 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 [Picture of SpeedStream 4000 Series] ----------------------------------------------------------
SpeedStream 4000 Series ---------------------------------------------------------- 4020/4021 4041 4060 ADC, AFC, Siemens Alcatel, DSC Diamond Lane, Communications DSLAM Ericsson, Lucent, Interoperability Newbridge, Nokia, Nortel - ------------------------------------------------------------------------------- Calendar Year of First half of 1999/ Expected second First half of 1999 First Commercial Expected second half of 1999 Availability half of 1999 - ------------------------------------------------------------------------------- Suggested Retail Price $299 $299 $299
38 The SpeedStream 5000 Series The SpeedStream 5000 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. . Facilitates DSL connectivity for multiple users via a standard Ethernet port . Provides routing and bridging capabilities (except 5250, designed for bridging only) . Pre-configures for rapid network deployment . Supports the four most 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 [Picture of SpeedStream 5000 Series] ---------------------------------------------------------- -----------------------------------------------------------
SpeedStream 5000 Series -------------------------------------------------------------------------- 5010/5621 5250 5650 5660 ADC, AFC, Diamond Lane Diamond Lane Alcatel, DSC DSLAM Diamond Lane, Communications Interoperability Ericsson, Lucent, Newbridge, Nokia, Nortel - ----------------------------------------------------------------------------------------------- ADSL or SDSL ADSL SDSL SDSL ADSL - ----------------------------------------------------------------------------------------------- Calendar Year of First half of 1998/ Second half of 1998 Expected second Expected second First Commercial Expected second half of 1999 half of 1999 Availability half of 1999 - ----------------------------------------------------------------------------------------------- Suggested Retail Price $595 $499 $595 $595
39 ProfileBuilder Software Our ProfileBuilder software tool supports all SpeedStream DSL products for single personal computer environments. ProfileBuilder allows a network system 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. ATM LAN Products Prior to developing our SpeedStream product families, Efficient developed and produced products that were used to provide high-speed connections between various components on asynchronous transfer mode-based local area networks. We introduced ATM LAN products in 1994 that were capable of data rates of up to 155 Mbps and introduced 25 Mbps products in 1996 for less demanding applications. These products utilize the same technology relating to application specific integrated circuits as our SpeedStream product family and are geared toward business customers. Also, these products support Windows 95, Windows NT, Sun OS, and Sun Solaris operating systems. Furthermore, development of our ATM LAN products required expertise in networking, ATM and personal computer environments. This expertise provided the foundation for development and commercialization of our DSL products. 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. 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. 40 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 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 ASICs 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 41 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. Application Specific Integrated Circuit Design Expertise Efficient has developed custom application specific integrated circuits that enable high-speed ATM networking using PCI or USB bus attachments. Our ASICs 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 ASICs 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 IP addresses. Efficient's routing products forward Internet Protocol, or IP, 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 IP 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. 42 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 Historically, 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. To date, Efficient has sold products to eight network equipment vendors and 11 network service providers. An additional 39 network service providers have begun to test our CPE solutions. 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. The following table sets forth the top 20 customers for our DSL products in the current fiscal year, categorized by customer type. These customers accounted for an aggregate of 24.4% of our total revenues in fiscal 1998 and 76.4% of our total revenues for the first nine months of fiscal 1999.
Network Equipment Vendors Network Service Providers Telephone Company-Aligned and Other Distributors - -------------------------------------------------------------------------------------------- ADC Telecommunications Ameritech Global Technology Integrator Alcatel Covad Communications* Innotrac for BellSouth's network Diamond Lane Communications Flashcom Semitron Ericsson Hong Kong Telecom Telecom Equipment for Singapore Lucent Technologies* Panhandle Telecommunications Telecom's network* Nokia Services Universe Computers Nortel Networks SourceNet Siemens Southwestern Bell
* The customers indicated accounted for 10% or more of our total revenues in fiscal 1998 or the first nine months of fiscal 1999. The following case studies illustrate how certain network service providers have deployed our products: BellSouth. BellSouth Telecommunications is the predominant telephone network service provider in nine southeastern states with 23 million local phone lines. BellSouth provides wholesale ADSL service to Internet service providers, including its own Internet service provider, BellSouth.net. BellSouth's FastAccess ADSL service is currently available in Atlanta, Birmingham, Charlotte, Fort Lauderdale, Jacksonville, New Orleans and Raleigh. BellSouth has announced that FastAccess ADSL service will be extended to 23 new cities during 1999 with over five million ADSL capable phone lines becoming available during this rollout. As a DSL service provider, BellSouth relies on its partner Internet service providers to generate demand for DSL- based Internet access and to manage the installation and support of CPE. BellSouth has chosen to work with Efficient on a promotional program intended to encourage Internet service providers to generate customer demand for DSL. We believe that BellSouth chose to work with us because of the breadth of our product line and our products' ease of use features, as well as our responsive support of its DSL lab testing. 43 Covad Communications. Covad Communications Company is a leading high-speed Internet and network access provider offering DSL services through Internet service providers to small- and medium-size businesses and consumers and sold directly to large enterprise customers. Covad's service is on-line in 11 regions, currently encompassing 26 metropolitan statistical areas. Covad has announced plans to deploy its networks in a total of 22 regions, encompassing 51 metropolitan statistical areas nationwide. We worked closely with Covad to develop the feature set of a product intended to enable Covad to deploy DSL service rapidly and cost effectively. Our SpeedStream 5250 is interoperable with the primary DSLAM used by Covad and requires no user configuration during or after its installation. This provides for a rapid installation, with minimal chance for mis-configuration. We continue to work with Covad on the definition of future products and feature sets. Singapore Telecom. Singapore Telecom is the incumbent telecommunications provider in Singapore with 1.7 million local phone lines. SingTel launched its ADSL Magix service in November 1997 as the world's first commercial deployment of DSL service. SingTel's Magix service is offered to all residents of Singapore through 27 central offices. We have worked closely with SingTel since 1997 to help match our CPE to SingTel's network, and have provided customized software with our CPE that is unique to SingTel's DSL service. Based on our ability to provide reliable, easy-to-install CPE, we were chosen by SingTel as one of two suppliers for SingTel's Magix network. The Magix service comprises both Internet access and delivery of television shows, music videos and video conferencing over DSL. SingTel felt that our expertise in ATM products and networks was crucial in offering these disparate services simultaneously over SingTel's network. SingTel has recently purchased our SpeedStream 3060 internal DSL modem, which obviates the need for both an ATM LAN adapter and an external modem, resulting in cost savings for SingTel. The foregoing customer case studies, which have been prepared by Efficient, are descriptions of the relationships between Efficient and selected customers. These customer case studies are not to be construed as having been prepared or certified by such persons as "experts" with respect to such matters within the meaning of the federal securities laws, or any rule or regulation promulgated thereunder. 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. 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 SDSL 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 as well. 44 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 ADC Telecommunications. ADC is an investor in Efficient and was the first company with whom we developed a partnership for DSL CPE. ADC has actively promoted our products to network service providers in conjunction with ADC's Cellworx central office platform. William L. Martin III, Senior Vice President of ADC and President of the Business Broadband Group of ADC, is a member of our board of directors. Alcatel. Efficient and Alcatel have established a joint development and marketing agreement for CPE that is interoperable with Alcatel's DSLAM. We are working together to develop two successive generations of DSL CPE based around our USB, 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. DSC Communications. DSC Communications was recently purchased by Alcatel. Aside from our relationship with Alcatel and prior to its acquisition, we had entered into a partnership with DSC for CPE. DSC manufactures the Lightspan digital loop carrier system. Digital loop carriers enable telecommunications service providers to extend digital services to locations connected to the network by analog equipment and typically are employed in DSL service offerings to extend the number of customers to whom DSL service can be offered. We believe that our continuing relationship with DSC can increase the exposure of our CPE into network service providers. Ericsson. Efficient and Ericsson have entered into a long term agreement whereby we supply our SpeedStream 3000 PCI and 4000 USB products. Under the provisions of this agreement, we are the exclusive supplier to Ericsson of USB DSL CPE through the end of 1999. After 1999, we will provide these products on a non-exclusive basis. 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 the SpeedLink DSLAM of Diamond Lane. Nokia recently acquired Diamond Lane Communications. 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 has been an investor in Efficient since June 1998. Following its most recent investment in March 1999, Siemens holds an aggregate of 3,716,800 shares or approximately 11.6% of our outstanding capital stock. 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 ADSL 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. 45 Texas Instruments Incorporated. Texas Instruments is an investor in Efficient. Some SpeedStream products under development use ADSL 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' ADSL components. Texas Instruments has provided us with access to its ADSL components at most favored prices. Texas Instruments also fabricates one of our ATM ASICs and has provided introductions for Efficient to personal computer manufacturers who are searching for sources of DSL CPE. Telephone Company-Aligned Distributors Sprint North Supply. Sprint North Supply is a primary supplier of telecommunications equipment to Sprint. Many other network service providers also 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 ILECs, including BellSouth. Efficient, Innotrac and BellSouth jointly promote BellSouth's DSL services with Efficient's SpeedStream CPE. We believe that we can leverage Innotrac's relationship with several ILECs, as well as Innotrac's experience in distributing products in high volume. Manufacturing Efficient outsources the assembly and testing of products and printed circuit boards to turnkey contract manufacturers. Currently, Solectron Corp. manufactures the majority of Efficient's products at its facility in Austin, Texas. Efficient also contracts with Xetel, Inc. for the manufacturing of its ATM LAN products and a portion of its DSL products in Dallas, Texas. Both 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 ASICs that are incorporated into the majority of our products. Efficient contracts with silicon manufacturers to fabricate the ASICs 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 ASICs in volume on a turnkey basis. We purchase only packaged and tested ASICs. Other than our ASICs, 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. 46 Sales and Marketing Since 1996, Efficient has worked closely with network equipment vendors that supply DSL-based central office equipment. These vendors offer our SpeedStream products to network service providers as part of a complete, interoperable DSL solution. We engage in joint sales activities with our partners and regularly provide them with collateral materials to enable their sales forces to promote our products. Our relationships with network equipment vendors result in introductions to large network service providers. In many cases, with DSL interoperability assured by Efficient and our partners, network service providers choose to purchase CPE directly from Efficient. Efficient also works closely with network service providers to ensure that our CPE is matched to their DSL service offerings. Initial discussions with network service providers generally involve our sales, marketing and business development personnel who work to communicate the strengths of our company and our products. Detailed responses to request for purchase documents are submitted to network service providers, often by both Efficient and one or more network equipment vendors. 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. 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. 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 ASIC development, analog and mixed signal hardware design, ATM architecture and bus architectures, such as PCI and USB. 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. 47 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 ASICs 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. ADSL supports high frequency digital data transmission simultaneously with analog voice signals on a single copper phone line. 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, Alcatel, Cisco Systems, FlowPoint and Netopia, 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, Orckit Communications, PairGain Technologies and Westell Technology. In addition, a number of potential competitors, such as Intel Corporation, Matsushita which markets its products under the Panasonic name, Sony Corporation, SGS-Thomson and Toshiba America, may enter the DSL CPE market. 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; 48 . product availability; . price; . ability to distribute products; . ease of installation and use; . technical support and customer service; and . brand recognition. We believe we are successfully addressing each of these competitive factors. Nonetheless, we expect to face increasing competitive pressures from both current and future competitors in the markets we serve. Intellectual Property We rely on a combination of copyright, patent, trademark, trade secret and other intellectual property laws, nondisclosure agreements and other protective measures to protect our proprietary rights. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect our trade secrets and know-how. To date, we have been granted one U.S. patent with counterpart patents pending in three international jurisdictions and have an additional nine 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. Employees As of March 31, 1999, we employed approximately 104 full-time employees, including 27 in sales and marketing, 12 in manufacturing, 54 in engineering, nine in finance and administration and two in customer service. Most of our employees are located in the United States with six sales and sales engineering employees located in The Netherlands. 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. We also lease an approximately 11,000 square foot facility in Dallas, Texas for manufacturing, shipping and receiving of product. This lease also expires in 2001. Additionally, we lease an approximately 2,500 square foot facility in Amsterdam, The Netherlands for our European operations. This lease expires in 2004. Legal Proceedings Efficient is not a party to any material legal proceedings. 49 MANAGEMENT Executive Officers and Directors The following table sets forth certain information with respect to the executive officers, directors and a director nominee of Efficient as of April 30, 1999.
Name Age Position ---- --- -------- Mark A. Floyd............ 43 Chairman of the Board, Chief Executive Officer and President Paul E. Couturier........ 37 Vice President of International Operations Patricia W. Hosek........ 37 Vice President of Engineering Gregory L. Langdon....... 38 Vice President of Marketing Jill S. Manning.......... 36 Vice President and Chief Financial Officer David B. Stefan.......... 36 Vice President of Sales Bruce W. Brown........... 49 Director James P. Gauer........... 47 Director Robert A. Hoff........... 46 Director Anthony T. Maher......... 53 Director William L. Martin III.... 51 Director Thomas H. Peterson....... 42 Director Robert Hawk.............. 59 Director Nominee
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. 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. 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 Marketing of Efficient since February 1997. 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. 50 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, a computer networking products company. Mr. Stefan holds an M.S.E.E. from George Washington University and a B.S. in Electrical Engineering from Michigan 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 from December 1992 to November 1997, he was a General Partner of Enterprise Partners, both 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 A. Hoff has served as a director of Efficient since July 1993. Since 1983, he has been a General Partner of Crosspoint Venture Partners, a venture capital firm and investor in Efficient. Mr. Hoff also serves as a director of Com21, Inc., PairGain Technologies, Inc., Onyx Acceptance Corp. 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. Since September 1994, Mr. Martin has been 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. Thomas H. Peterson has served as a director of Efficient since July 1993. Since July 1994, Mr. Peterson has served as director of Rogue Wave Software, Inc., a provider of software solutions for creating and managing enterprise systems. 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. Robert Hawk has been nominated to serve as a member of Efficient's Board of Directors. Mr. Hawk is President of Hawk Communications and recently retired as President and Chief Executive Officer of U S 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 U S West 51 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 Xylan Corporation, PairGain Technologies, Inc., Premisys Communications, Concord Communications and Radcom. Classified Board Our board of directors is currently composed of seven members. Upon completion of this offering, our certificate of incorporation will provide 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 the offering, two of our directors will be elected to one-year terms, two will be elected to two-year terms and three will be elected to three-year terms. Thereafter, directors will be elected for three- year terms. Messrs. Maher and Martin have been designated Class I directors whose term expires at the 1999 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. 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. Directors are eligible to receive option grants under our 1999 Stock Plan. For a description of this plan, see "--Benefit Plans." 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 Mr. Maher and Robert Hawk, who is expected to join the board after this offering, options to purchase 15,000 and 150,000 shares of common stock, respectively, with an exercise price of $10.50 per share. 52 Executive Compensation Summary Compensation Table The table below sets forth the compensation earned for services rendered to Efficient in all capacities for the fiscal year ended June 30, 1998 by our Chief Executive Officer and our next four most highly compensated executive officers who earned more than $100,000 during fiscal 1998. These executives are referred to as the "named executive officers" elsewhere in this prospectus.
Long-Term Compensation Awards ------------ Annual Securities Compensation Underlying ---------------- ------------ All Other Name and Principal Position Salary Bonus Options (#) Compensation --------------------------- -------- ------- ------------ ------------ Mark A. Floyd....................... $178,127 $20,000 350,000 $16,667(1) President and Chief Executive Officer David B. Stefan..................... 93,391 37,500 125,000 23,140(2) Vice President of Sales Patricia W. Hosek................... 107,625 21,313 50,000 -- Vice President of Engineering Gregory L. Langdon.................. 103,290 21,051 50,000 -- Vice President of Marketing Paul E. Couturier................... 85,399 48,739 37,500 28,332(3) Vice President of International Operations
- -------- (1) Represents amount paid in lieu of accrued sabbatical benefit. (2) Represents a moving allowance. (3) Represents an annual car and vacation allowance. 53 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 1998, including the potential realizable value over the ten-year term of the options, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. 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 1998, we granted options to purchase up to an aggregate of 1,631,000 shares to employees, directors and consultants. All options were granted at exercise prices equal to the fair market value of our common stock on the date of grant, as determined in good faith by our board of directors. 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.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term ------------------------------------------ ----------------- Percent of Total Number of Options Securities Granted to Underlying Employees Options In Last Exercise Expiration Name Granted Fiscal Year Price Date 5% 10% ---- ---------- ----------- -------- ---------- -------- -------- Mark A. Floyd........... 350,000 21.46% $0.60 2/16/08 $132,067 $334,685 David B. Stefan......... 75,000 4.60 0.50 11/17/07 23,583 59,765 50,000 3.07 0.60 3/11/08 18,866 47,812 Patricia W. Hosek....... 50,000 3.07 0.60 3/11/08 18,866 47,812 Gregory L. Langdon...... 50,000 3.07 0.60 3/11/08 18,866 47,812 Paul E. Couturier....... 37,500 2.30 0.50 11/17/07 11,791 29,882
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 their option exercises in fiscal 1998, and exercisable and unexercisable options held as of June 30, 1998. The "Value of Unexercised In-the-Money Options at June 30, 1998" is based on a value of $0.60 per share, the fair market value of our common stock as of June 30, 1998 as determined by the board of directors, 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 In-the-Money Options at Shares Year-End Fiscal Year-End Acquired Value ------------------------- ------------------------- Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------- ----------- ------------- ----------- ------------- Mark A. Floyd........... -- -- 93,750 506,250 $32,812 $54,688 David B. Stefan......... -- -- -- 125,000 -- 7,500 Patricia W. Hosek....... 32,292 $14,531 18,750 98,958 6,563 10,938 Gregory L. Langdon...... -- -- 44,791 105,209 18,385 21,615 Paul E. Couturier....... -- -- 54,844 57,656 21,828 13,172
The value realized by Ms. Hosek upon the exercise of her options represents the aggregate amount of the difference between the fair market value for a share of common stock on the date of exercise, which was $0.60 per share, and the exercise price of such options, $0.15. 54 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 . 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 June 1 and December 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 November 30. 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. 55 The purchase plan provides that, in the event of a merger of Efficient with or into another corporation or a sale of substantially all of our assets, outstanding options may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set, which will occur before the proposed sale or merger. The purchase plan will terminate in 2009. The board of directors has the authority to amend or terminate the purchase plan, except that no such action may adversely affect any outstanding rights to purchase stock. 401(k) Plan We maintain a tax-qualified employee savings and retirement plan, a 401(k) plan, that covers all of our eligible employees. Pursuant to the 401(k) plan, participants may elect to reduce their current compensation, on a pre-tax basis, up to 15% or the statutorily prescribed annual limit, whichever is lower, and have the amount of such reduction contributed to the 401(k) plan. Participants' salary reduction contributions are fully vested at all times. Efficient, in its sole discretion, may make additional employer contributions to the 401(k) plan. Participants' interests in their additional employer contributions, if any, vest in accordance with a four-year graduated vesting schedule. To date, Efficient has not made any employer contributions. Participants generally are eligible for a distribution from the 401(k) plan upon their reaching age 59 1/2, age 65, death, disability or separation from service with Efficient. The 401(k) plan is intended to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended, and its accompanying trust is intended to be a tax-exempt trust under Section 501(a) of the Internal Revenue Code of 1986, as amended. Contributions made on behalf of participants, on a pre-tax basis, to the 401(k) plan, and income earned on such contributions, are not currently taxable to participants. All such contributions are tax deductible by Efficient. 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; . 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. 56 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 September 1995, we sold 2,473,644 shares of Series D preferred stock in a private placement at a purchase price of $2.02 per share; . In December 1996, we sold 3,091,430 shares of Series E preferred stock in a private placement at a purchase price of $2.41 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; and . 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. 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.......... -- 144,332 44,381 -- -- -- Siemens................. -- -- -- 3,716,800 -- -- Palomar Ventures........ -- -- -- -- $2,000,000 684,931
Mr. Martin, a member of our board of directors, is 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. 57 Note Repayment and Warrant Exercise Agreement Each holder of a 10% subordinated promissory note has entered into a note repayment and warrant exercise agreement with Efficient. Pursuant to the terms of the agreement, immediately prior to the closing of this offering, the aggregate $9.0 million principal amount of the notes will be 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 granted Robert Hawk an option to purchase 150,000 shares of common stock at an exercise price of $10.50 per share. In connection with this option, Efficient loaned Mr. Hawk $1,575,000 with which to exercise the option. The loan bears interest at the rate of 6.0% per year, and is due and payable upon demand but not later than June 30, 1999. 58 PRINCIPAL STOCKHOLDERS The table on the following page sets forth information regarding the beneficial ownership of our common stock as of May 31, 1999, 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 and a director nominee; (c) each of the named executive officers; and (d) all directors and executive officers as a group.
Percentage of Percentage of Shares Shares Number of Shares Beneficially Owned Beneficially Owned Name and Address Beneficially Owned Prior to Offering After the Offering - ---------------- ------------------ ------------------ ------------------ Crosspoint Venture Partners(1)............ 5,116,619 16.0% 14.2% 18552 MacArthur Blvd., Suite 400 Irvine, CA 92612 Texas Instruments Incorporated........... 4,185,973 13.1 11.6 P.O. Box 660199, M.S. 8650 Dallas, TX 75266-0199 El Dorado Ventures(2)... 4,081,800 12.7 11.3 2400 Sand Hill Road, Suite 100 Menlo Park, CA 94025 Enterprise Partners(3).. 3,821,374 11.9 10.6 5000 Birch Street, Suite 6200 Newport Beach, CA 92600 Siemens AG.............. 3,716,800 11.6 10.3 Hofmannstrasse 51 81359 Munchen, Germany ADC Telecommunications, Inc.................... 2,144,113 6.7 5.9 2240 Campbell Creek Road Richardson, TX 75082 Menlo Ventures(4)....... 2,043,210 6.4 5.7 3000 Sand Hill Road, Bldg. 4, Suite 100 Menlo Park, CA 94025 Chase Bailey............ 1,650,000 5.1 4.6 258 Main Street #D Los Gatos, CA 95030 Mark A. Floyd(5)........ 1,460,417 4.5 4.0 Bruce W. Brown(6)....... 75,000 * * Robert A. Hoff(7)....... 5,129,119 16.0 14.2 Thomas H. Peterson(8)... 4,094,300 12.8 11.3 James P. Gauer(9)....... 1,971,234 6.1 5.5 Anthony T. Maher(10).... 3,720,550 11.6 10.3 William L. Martin III(11)................ 2,156,613 6.7 6.0 Robert Hawk(12)......... 150,000 * * David B. Stefan(13)..... 50,521 * * Patricia W. Hosek(14)... 97,917 * * Gregory L. Langdon(15).. 91,667 * * Paul E. Couturier(16)... 81,823 * * All directors and officers as a group (12 persons)(17)........... 19,181,869 58.6% 52.2%
- -------- 59 Applicable percentage ownership in the above table is based on 31,994,808 shares of common stock outstanding as of April 30, 1999, as adjusted to reflect: . the conversion of $9.0 million in debt into an aggregate of 3,082,191 shares of preferred stock through the exercise of certain outstanding warrants; . 167,746 shares of redeemable convertible preferred stock issuable upon the exercise of certain outstanding warrants; . the issuance of 105,893 shares of common stock pursuant to the exercise of options between March 31, 1999 and April 30, 1999; and . the conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering. 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 3,301,480 shares held by Crosspoint Venture Partners III, 102,810 shares held by Crosspoint 1993 Entrepreneurs Fund and a warrant held by Crosspoint Ventures LS 1997 L.P. for the purchase of 1,712,329 shares of Series H preferred stock exercisable prior to the consummation of this offering. (2) 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., a warrant held by El Dorado Ventures IV, L.P. for the purchase of 632,626 shares of Series H preferred stock and a warrant held by El Dorado Technology '98, L.P. for the purchase of 52,305 shares of Series H preferred stock, each exercisable prior to the consummation of this offering. (3) Represents 3,502,945 shares held by Enterprise Partners II, L.P., and 318,429 shares held by Enterprise Partners Associates, L.P. (4) Represents 2,013,011 shares held by Menlo Ventures VI, L.P. and 30,199 shares held by Menlo Entrepreneurs Fund VI, L.P. (5) Includes 360,417 shares issuable upon exercise of stock options exercisable within 60 days of June 30, 1999. (6) Includes 75,000 shares issuable upon exercise of stock options exercisable within 60 days of June 30, 1999. (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) 12,500 shares held by Mr. Hoff issuable upon exercise of stock options within 60 days of June 30, 1999. Mr. Hoff disclaims beneficial ownership of the shares held by Crosspoint Venture Partners, except to the extent of his pecuniary interest therein. (8) Mr. Peterson is a general partner of El Dorado Ventures. The shares listed represent (a) 4,081,800 shares held by El Dorado Ventures and (b) 12,500 shares held by Mr. Peterson issuable upon exercise of stock options within 60 days of June 30, 1999. 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) a warrant held by Palomar Ventures for the purchase of 684,931 shares of Series H preferred stock exercisable prior to the consummation of this offering, (b) 1,273,803 shares held by Ocean Park Ventures and (c) 12,500 shares held by Mr. Gauer issuable upon exercise of stock options within 60 days of June 30, 1999. Mr. Gauer disclaims beneficial ownership of the shares held by Palomar Ventures and Ocean Park Ventures, except to the extent of his pecuniary interest therein. (10) Includes 3,716,800 shares beneficially owned by Siemens AG. Mr. Maher is a member of the board of Siemens AG Information and Communication Networks. Mr. Maher disclaims beneficial ownership of the shares held by Siemens. 60 (11) Includes 2,144,113 shares beneficially owned by ADC Telecommunications, Inc. Mr. Martin is a Senior Vice President of ADC Telecommunications, Inc. and President of the Business Broadband Group of ADC Telecommunications, Inc. The shares listed represent 12,500 shares held by Mr. Martin issuable upon exercise of stock options within 60 days of June 30, 1999. Mr. Martin disclaims beneficial ownership of the shares held by ADC Telecommunications, Inc. (12) Includes 150,000 shares issued upon exercise of a stock option. All of such shares are currently subject to a right of repurchase by Efficient. (13) Includes 50,521 shares issuable upon exercise of stock options exercisable within 60 days of June 30, 1999. (14) Includes 65,625 shares issuable upon exercise of stock options exercisable within 60 days of June 30, 1999. (15) Includes 91,667 shares issuable upon exercise of stock options exercisable within 60 days of June 30, 1999. (16) Includes 81,823 shares issuable upon exercise of stock options exercisable within 60 days of June 30, 1999. (17) Includes an aggregate of 853,304 shares issuable upon exercise of stock options exercisable within 60 days of June 30, 1999. 61 DESCRIPTION OF CAPITAL STOCK General Upon the completion of this offering, we will be 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, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Delaware law. Common Stock As of May 31, 1999, there were 32,067,124 shares of common stock outstanding after giving pro forma effect to (1) the conversion of $9.0 million in debt of Efficient into an aggregate of 3,082,191 shares of redeemable convertible preferred stock, and (2) the conversion of all outstanding shares of redeemable convertible preferred stock into common stock upon the closing of this offering. These shares were held of record by approximately 60 stockholders including 24,720,213 shares of common stock to be issued upon the closing of this offering upon conversion of all outstanding shares of redeemable convertible preferred stock. 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. Upon the closing of this offering no shares of preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock. Warrants At March 31, 1999, there were warrants outstanding to purchase 96,000 shares of Series A preferred stock, 37,500 shares of Series C preferred stock and 34,246 shares of Series G preferred stock. Upon completion of 62 this offering, these warrants will become exercisable to purchase an aggregate of 167,746 shares of common stock. These numbers exclude warrants to purchase 3,082,191 shares of Series H preferred stock. It is anticipated that the Series H warrants will be exercised prior to completion of this offering and will convert into 3,082,191 shares of common stock upon completion of this offering. Registration Rights The holders of 24,720,213 shares of redeemable convertible preferred stock, and the holders of warrants to purchase 3,082,191 shares of redeemable convertible preferred stock are entitled to certain rights with respect to the registration of shares of common stock that are issuable upon the conversion of such preferred stock under the Securities Act. Certain of these rights are provided under the terms of an agreement between Efficient and the holders of the registrable securities. Beginning 180 days following the date of this prospectus, 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. Also, holders of registrable securities may require 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. We may defer a registration on Form S-3 for 60 days in view of market conditions. Furthermore, in the event we elect to register any of our shares of common stock for purposes of effecting any public offering, the holders of registrable securities are entitled to include their shares of common stock in the registration, but we may reduce the number of shares proposed to be registered in view of market conditions. These registration rights have been waived with respect to this offering. All expenses incurred in connection with any registration, other than underwriting discounts and commissions attributable to registrable securities, will be borne by us. All registration rights will terminate six years following the consummation of this offering, 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. The holder of a warrant to purchase 96,000 shares of preferred stock convertible into 96,000 shares of common stock is also entitled to certain rights with respect to registration of such shares under the Securities Act. Beginning 180 days following the date of this prospectus, the holder may require us to register the holder's shares for public resale on Form S-3 or similar short-form registration; however, we may defer such registration for 90 days in view of market conditions. In addition to Form S-3 registration rights, the holder also has rights to include its shares in any registration of our shares of common stock for purposes of effecting a public offering, but we may reduce the number of shares proposed to registered in view of market condition. These registration rights have been waived with respect to this offering. 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 63 "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. 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 Company of California. Nasdaq National Market Listing We have applied for the listing of our shares on The Nasdaq National Market under the symbol "EFNT." 64 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock, and there can be no assurance that a significant public market for the common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock, including shares issued upon exercise of outstanding options and warrants, in the public market following this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. Sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering and based on shares outstanding at May 31, 1999, we will have outstanding 36,067,124 shares of common stock. Of these shares, all the shares sold in this offering, plus any shares issued upon exercise of the underwriters' over-allotment option, will be freely tradable without restriction under the Securities Act, unless purchased by our "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 32,067,124 shares of common stock outstanding are "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, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Our directors, officers and stockholders have entered into lock-up agreements with the underwriters of this offering generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of our shares of common stock or any securities exercisable for or convertible into our common stock owned by them prior to this offering for a period of 180 days after the effective date of the registration statement filed pursuant to this offering 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 180 day lock-up period, the following shares will be eligible for sale in the public market at the following times: . beginning on the effective date of the registration statement, the 4,000,000 shares sold in this offering, and 76,250 additional shares, will be immediately available for sale in the public market; . beginning 90 days after the effective date, 140,938 additional shares will be available for sale in the public market; . after 180 days following the date of this prospectus, 26,559,412 additional shares will become eligible for sale under Rule 144 subject to volume restrictions as described below; and . the remainder of the restricted securities will be eligible for sale from time to time thereafter, subject in some cases to compliance with Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, 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 360,000 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 65 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. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling such shares. However, 730,931 Rule 701 shares are subject to lock-up agreements and will only become eligible for sale at the earlier of the expiration of the 180-day lock-up agreements or no sooner than 90 days after the offering upon obtaining the prior written consent of Credit Suisse First Boston Corporation. Within 90 days following the effectiveness of this offering, we will file a registration statement on Form S-8 registering 10,170,575 shares of common stock subject to outstanding options or reserved for future issuance under our stock plans. As of March 31, 1999, options to purchase a total of 6,470,575 shares were outstanding and 3,700,000 shares were reserved for future issuance under our stock plans. Upon the filing of the registration statement on Form S- 8, common stock issued upon exercise of outstanding vested options or issued under our purchase plan, other than common stock issued to our affiliates, will be available for immediate resale in the open market. Also beginning six months after the date of this offering, holders of 27,802,404 restricted shares and certain holders of warrants to purchase 96,000 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. 66 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 1999, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson Stephens, Inc. and Volpe Brown Whelan & Company, LLC are acting as representatives, the following respective numbers of shares of common stock:
Number of Underwriters Shares ------------ ------ Credit Suisse First Boston Corporation............................. BancBoston Robertson Stephens, Inc................................. Volpe Brown Whelan & Company, LLC.................................. ---- Total............................................................ ====
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 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 dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay:
Total ----------------------------- Per Without With Share Over-allotment Over-allotment ----- -------------- -------------- Underwriting Discounts and Commissions paid by us............................... $ $ $ Expenses payable by us.................... $ $ $
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. We, our officers and directors and other stockholders holding an aggregate of 31,567,221 shares have agreed that we and they will not offer, sell, contract to sell, announce our intention to 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 of our common stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 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. The underwriters have reserved for sale, at the initial public offering price, up to 200,000 shares of the common stock for some of our vendors, customers and other people and entities with whom we maintain business relationships who have expressed an interest in purchasing common stock in the offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares. 67 We 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. We have applied to list the shares of common stock on The Nasdaq National Market under the symbol "EFNT." Prior to this offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiation between us and the representatives. The principal factors to be considered in determining the public offering price will include: the information set forth in this prospectus and otherwise available to the representatives; the history and the prospects for the industry in which we will compete; the ability of our management; the prospects for our future earnings; the present state of our development and our current financial condition; the general condition of the securities markets at the time of this offering; and the recent market prices of, and the demand for, publicly-traded common stock of generally comparable companies. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934, as amended. 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 syndicate member when the common stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. 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. 68 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 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 and the dealer from whom such purchase confirmation is received that (1) 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, (2) where required by law, that the purchaser is purchasing as principal and not as agent, and (3) 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 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. 69 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. 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, 1997, June 30, 1998 and March 31, 1999, and for each of the years in the three-year period ended June 30, 1998 and the nine months ended March 31, 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. 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. 70 EFFICIENT NETWORKS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report............................................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Operations...................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit).................. F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7
F-1 Independent Auditors' Report The Board of Directors Efficient Networks, Inc.: We have audited the accompanying consolidated balance sheets of Efficient Networks, Inc. and subsidiary as of June 30, 1997 and 1998 and March 31, 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, 1998 and for the nine months ended March 31, 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 subsidiary as of June 30, 1997 and 1998 and March 31, 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998 and for the nine months ended March 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Dallas, Texas April 26, 1999 F-2 EFFICIENT NETWORKS, INC. Consolidated Balance Sheets June 30, 1997 and 1998 and March 31, 1999 (in thousands, except share data)
June 30 March 31, 1999 ----------------- -------------------- Pro forma 1997 1998 Actual (unaudited) Assets -------- ------- ------- ----------- Current assets: (note 2(l)) Cash and cash equivalents............... $ 3,413 $ 7,607 $ 4,596 $ 6,596 Accounts receivable, net of allowance for doubtful accounts of $25 in 1997, $15 in 1998 and $70 in 1999............ 779 461 6,499 6,499 Inventories............................. 594 898 3,917 3,917 Other assets............................ -- 202 48 48 -------- ------- ------- ----------- Total current assets.................. 4,786 9,168 15,060 17,060 Furniture and equipment, net.............. 1,559 1,404 2,130 2,130 Other assets, net......................... 109 95 44 44 -------- ------- ------- ----------- $ 6,454 $10,667 $17,234 $ 19,234 ======== ======= ======= =========== Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Current liabilities: Accounts payable........................ $ 184 $ 547 $ 3,995 $ 3,995 Accrued liabilities..................... 232 751 967 967 Deferred revenue........................ -- -- 625 625 -------- ------- ------- ----------- Total current liabilities............. 416 1,298 5,587 5,587 Long-term debt, net of discount........... -- -- 4,253 -- Other liabilities......................... 13 -- 22 22 -------- ------- ------- ----------- Total liabilities..................... 429 1,298 9,862 5,609 -------- ------- ------- ----------- Redeemable convertible preferred stock (note 7) 23,635 34,743 40,408 -- Commitments and contingencies Stockholders' equity (deficit): Common stock, par value $.001 per share, 100,000,000 shares authorized; 3,054,771, 3,616,964 and 3,918,765 shares issued and outstanding in 1997, 1998 and 1999, respectively; pro forma--31,721,169 shares issued and outstanding............................ 3 4 4 32 Additional paid-in capital.............. 279 408 18,041 68,865 Deferred stock option compensation...... (183) (137) (12,436) (12,436) Accumulated deficit..................... (17,709) (25,649) (38,645) (42,836) -------- ------- ------- ----------- Total stockholders' equity (deficit).. (17,610) (25,374) (33,036) 13,625 -------- ------- ------- ----------- $ 6,454 $10,667 $17,234 $ 19,234 ======== ======= ======= ===========
See accompanying notes to consolidated financial statements. F-3 EFFICIENT NETWORKS, INC. Consolidated Statements of Operations Years ended June 30, 1996, 1997 and 1998, and the nine months ended March 31, 1998 and 1999 (in thousands, except per share data)
Nine months ended --------------------- March 31, 1998 March 31, 1996 1997 1998 (unaudited) 1999 -------- ------- ------- ----------- --------- Net revenues................. $ 3,687 $ 4,122 $ 3,370 $ 2,703 $ 7,139 Cost of revenues............. 2,209 2,386 2,160 1,553 6,699 -------- ------- ------- ------- -------- Gross profit............. 1,478 1,736 1,210 1,150 440 -------- ------- ------- ------- -------- Operating expenses: Sales and marketing........ 2,366 2,409 3,436 2,232 3,856 Research and development... 3,853 4,183 4,157 2,845 5,546 General and administrative............ 1,082 1,245 1,641 1,197 1,234 Stock option compensation.. -- 73 46 34 820 -------- ------- ------- ------- -------- Total operating expenses................ 7,301 7,910 9,280 6,308 11,456 -------- ------- ------- ------- -------- Loss from operations..... (5,823) (6,174) (8,070) (5,158) (11,016) Interest expense............. -- -- (10) -- (2,130) Interest income.............. 177 144 146 87 154 Other, net................... -- (19) (6) (6) (4) -------- ------- ------- ------- -------- Net loss................. $ (5,646) $(6,049) $(7,940) $(5,077) $(12,996) ======== ======= ======= ======= ======== Basic and diluted net loss per share of common stock................... $ (1.99) $ (2.00) $ (2.44) $ (1.59) $ (3.48) ======== ======= ======= ======= ======== Weighted-average shares of common stock outstanding............. 2,838 3,027 3,254 3,193 3,807 ======== ======= ======= ======= ======== Unaudited pro forma basic and diluted net loss per share................... $ (0.35) $ (0.64) ======= ======== Weighted average shares used to compute unaudited pro forma basic and diluted net loss per share.......... 22,886 27,077 ======= ========
See accompanying notes to consolidated financial statements. F-4 EFFICIENT NETWORKS, INC. Consolidated Statements of Stockholders Equity (Deficit) Years ended June 30, 1996, 1997 and 1998, and the nine months ended March 31, 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, 1995................... 2,811,875 $ 3 $ 3 $ -- $ (6,014) $(6,008) Issuance of common stock under stock option plan.......... 180,396 -- 11 -- -- 11 Net loss.............. -- -- -- -- (5,646) (5,646) ---------- --- ------- -------- -------- ------- Balance at June 30, 1996................... 2,992,271 3 14 -- (11,660) (11,643) Issuance of common stock under stock option plan.......... 62,500 -- 9 -- -- 9 Deferred stock option compensation......... -- -- 256 (256) -- -- Amortization of deferred stock option compensation......... -- -- -- 73 -- 73 Net loss.............. -- -- -- -- (6,049) (6,049) ---------- --- ------- -------- -------- ------- Balance at June 30, 1997................... 3,054,771 3 279 (183) (17,709) (17,610) Issuance of common stock under stock option plan.......... 448,125 1 61 -- -- 62 Issuance of common stock................ 114,068 -- 68 -- -- 68 Amortization of deferred stock option compensation......... -- -- -- 46 -- 46 Net loss.............. -- -- -- -- (7,940) (7,940) ---------- --- ------- -------- -------- ------- Balance at June 30, 1998................... 3,616,964 4 408 (137) (25,649) (25,374) Issuance of common stock under stock option plan.......... 301,801 -- 48 -- -- 48 Issuance of warrants.. -- -- 4,729 -- -- 4,729 Deferred stock option compensation......... -- -- 13,119 (13,119) -- -- Amortization of deferred stock option compensation......... -- -- -- 820 -- 820 Accretion of issuance costs on redeemable convertible preferred stock................ -- -- (263) -- -- (263) Net loss.............. -- -- -- -- (12,996) (12,996) ---------- --- ------- -------- -------- ------- Balance at March 31, 1999................... 3,918,765 4 18,041 (12,436) (38,645) (33,036) 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 accretion of issuance costs on redeemable convertible preferred stock................ -- -- (87) -- -- (87) Unaudited pro forma net loss related to accretion of remaining discount on long term debt....... -- -- -- -- (4,191) (4,191) Unaudited pro forma issuance of common stock upon exercise of warrants.......... 3,082,191 3 10,441 -- -- 10,444 ---------- --- ------- -------- -------- ------- Unaudited pro forma balance at March 31, 1999................... 31,721,169 $32 $68,865 $(12,436) $(42,836) $13,625 ========== === ======= ======== ======== =======
See accompanying notes to consolidated financial statements. F-5 EFFICIENT NETWORKS, INC. Consolidated Statements of Cash Flows Years ended June 30, 1996, 1997 and 1998, and the nine months ended March 31, 1998 and 1999 (in thousands)
Nine months ended --------------------- March 31, 1998 March 31, 1996 1997 1998 (unaudited) 1999 ------- ------- ------- ----------- --------- Cash flows from operating activities: Net loss..................... $(5,646) $(6,049) $(7,940) $(5,077) $(12,996) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............... 800 861 727 544 588 Amortization of deferred stock option compensation.. -- 73 46 34 820 Accretion of discount on subordinated promissory notes...................... -- -- -- -- 1,982 Changes in operating assets and liabilities: Accounts receivable........ (84) (12) 318 (473) (6,038) Inventories................ (76) 443 (304) (50) (3,019) Other assets and liabilities............... 19 59 (201) 74 230 Accounts payable and accrued liabilities....... (386) (18) 967 539 3,672 Deferred revenue........... -- -- -- -- 625 ------- ------- ------- ------- -------- Net cash used in operating activities............... (5,373) (4,643) (6,387) (4,409) (14,136) ------- ------- ------- ------- -------- Cash flows used in investing activities--purchase of furniture and equipment...... (800) (525) (572) (356) (1,314) ------- ------- ------- ------- -------- Cash flows from financing activities: Principal payments on capital lease obligations........... (185) (192) (78) (60) (11) Proceeds from issuance of promissory notes and warrants.................... -- 1,500 1,000 1,000 7,000 Proceeds from issuance of common stock................ 11 9 130 29 48 Proceeds from issuance of preferred stock............. 5,000 5,961 10,101 5,000 5,402 ------- ------- ------- ------- -------- Net cash provided by financing activities..... 4,826 7,278 11,153 5,969 12,439 ------- ------- ------- ------- -------- Increase (decrease) in cash and cash equivalents......... (1,347) 2,110 4,194 1,204 (3,011) Cash and cash equivalents at beginning of year............ 2,650 1,303 3,413 3,413 7,607 ------- ------- ------- ------- -------- Cash and cash equivalents at end of year.................. $ 1,303 $ 3,413 $ 7,607 $ 4,617 $ 4,596 ======= ======= ======= ======= ======== Supplemental disclosure--cash paid during the year for: Interest..................... $ 36 $ 6 $ 4 $ 3 $ -- ======= ======= ======= ======= ======== Non-cash financing transaction-- Exchange of promissory notes and related interest for redeemable convertible preferred stock............. $ -- $ 1,519 $ 1,007 $ 1,007 $ -- ======= ======= ======= ======= ========
See accompanying notes to consolidated financial statements. F-6 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements June 30, 1997 and 1998 and March 31, 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 designs, develops, manufactures and sells Digital Subscriber Line ("DSL") customer premise equipment ("CPE") for the 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 sales subsidiary located in The Netherlands. 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................. 5
(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 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-7 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997 and 1998 and March 31, 1999 (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 would be recorded on the date of grant only if the current market price of the underlying stock exceeded 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):
Nine-month Year ended June 30, period ended -------------------------- --------------------- March 31, 1998 March 31, 1996 1997 1998 (unaudited) 1999 ------- ------- -------- ----------- --------- Numerator: Net loss.............. $(5,646) $(6,049) $ (7,940) $(5,077) $(12,996) Accretion of redeemable convertible preferred stock................ -- -- -- -- (263) ------- ------- -------- ------- -------- Numerator for basic and diluted net loss per share............ $(5,646) $(6,049) $ (7,940) $(5,077) $(13,259) ======= ======= ======== ======= ======== Denominator for basic and diluted net loss per share--weighted average common shares outstanding............ 2,838 3,027 3,254 3,193 3,807 ======= ======= ======== ======= ========
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, 1998 and March 31, 1999, as if the F-8 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997 and 1998 and March 31, 1999 redeemable convertible preferred stock had converted immediately upon its issuance, resulting in 19,631,974 and 22,870,213 additional shares of common stock outstanding, respectively; (b) the warrants issued in January 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 399,544 additional shares of common stock outstanding and a charge of $2,747,000 against earnings for the accretion of the discount recorded on the notes; and (c) the warrants issued in April 1999 in connection with the issuance of a subordinated promissory note were exercised at March 31, 1999 using the principal amount of the note to satisfy the exercise price, resulting in no incremental weighted average shares outstanding and a charge of $1,443,810 against earnings for the accretion of the discount recorded on the note. (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 subordinated promissory notes and 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 ($10.25 at March 31, 1999); and exercise price of the detachable warrants. The estimated fair values of the January 1999 subordinated promissory notes and warrants as of March 31, 1999 are approximately $7.0 million and $18.7 million, 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 March 31, 1999 (see notes 6 and 7): . the April 8, 1999 issuance of subordinated promissory notes with detachable warrants in exchange for $2 million, . the conversion of $9 million 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, 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 the financial F-9 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997 and 1998 and March 31, 1999 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, ------------- March 31, 1997 1998 1999 ------ ------ --------- Raw materials........................................ $ 171 $ 354 $1,634 Finished goods....................................... 423 544 2,283 ------ ------ ------ Total................................................ $ 594 $ 898 $3,917 ====== ====== ======
(4)Furniture and Equipment Furniture and equipment consisted of the following (in thousands):
June 30, --------------- March 31, 1997 1998 1999 ------- ------ --------- Computers........................................ $ 1,766 $1,941 $2,606 Purchased software............................... 1,411 611 855 Equipment........................................ 303 241 513 Furniture and fixtures........................... 62 66 120 Leasehold improvements........................... 97 121 191 ------- ------ ------ Total furniture and equipment.................... 3,639 2,980 4,285 Less accumulated depreciation and amortization... (2,080) (1,576) (2,155) ------- ------ ------ Furniture and equipment, net..................... $ 1,559 $1,404 $2,130 ======= ====== ======
The Company leases certain equipment under capital lease arrangements. At June 30, 1997 and 1998, and March 31, 1999, the cost of assets under such leases aggregated $456,665, $152,183, and $152,183, respectively, and related accumulated amortization was $354,046, $134,065, and $152,183, respectively. 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, -------------- March 31, 1997 1998 1999 ------ ------- --------- Accrued compensation and benefits................... $ 37 $ 247 $ 562 Accrued professional fees........................... 53 320 3 Accrued interest.................................... -- -- 145 Deferred rent....................................... 39 39 38 Current portion of capital lease obligation......... 78 11 -- Other............................................... 25 134 219 ------ ------- ------ Total............................................... $ 232 $ 751 $ 967 ====== ======= ======
F-10 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997 and 1998 and March 31, 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. On April 8, 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 annum 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 notes issued in January and April 1999 were issued with detachable warrants to purchase 2,397,260 shares and 684,931 shares, respectively, 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 issued in January and April were valued at $4,728,889 and $1,443,810, respectively. 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. (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 will be 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 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. 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 March 31, 1999. Series for which preferred stock has been issued and remains outstanding are stated at the redemption F-11 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997 and 1998 and March 31, 1999 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 ---------------- March 31, Per Share 1997 1998 1999 --------- -------- ------- --------- Series A--7,096,000 shares authorized; 7,000,000 shares issued and outstanding.......................... $0.03 $ 3,500 $ 3,500 $ 3,500 Series B--522,848 shares authorized, issued and outstanding............... $0.07 625 625 625 Series C--5,895,832 shares authorized; 5,858,332 shares issued and outstanding.......................... $0.07 7,030 7,030 7,030 Series D--2,473,644 shares authorized, issued and outstanding............... $0.12 5,000 5,000 5,000 Series E--3,091,430 shares authorized, issued and outstanding............... $0.15 7,480 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 Issuance costs, net of accretion...... -- (350) (87) -------- ------- ------- $ 23,635 $34,743 $40,408 ======== ======= =======
Series H--4,000,000 shares authorized, none issued or outstanding........... $0.18 -- -- -- The Company issued promissory notes in exchange for cash of $1,000,000 and $500,000 on September 17, 1996 and December 12, 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 on January 7, 1998. The promissory notes bore interest at 6% and were due on demand. On February 17, 1998, the Company issued 2,057,159 shares of 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. (8)Stock Option Plan 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. F-12 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997 and 1998 and March 31, 1999 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 March 31, 1999, there were options to purchase 75,000 shares available for grant under the Directors' Plan. At March 31, 1999, there were options to purchase 2,404,728 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, 1996, 1997 and 1998 and the nine months ended March 31, 1999 was $0.10, $0.16, $0.19 and $5.37, 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 $256,000 and $13,119,000 of deferred stock option compensation during the year ended June 30, 1997 and the nine months ended March 31, 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 $73,000, $46,000 and $820,000 was recognized in the years ended June 30, 1997 and 1998, and the nine months ended March 31, 1999, respectively. F-13 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997 and 1998 and March 31, 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 to the pro forma amounts indicated below:
Nine months Year ended June 30, ended ------------------------- March 31, 1996 1997 1998 1999 ------- ------- ------- ----------- Net loss: As reported....................... $(5,646) $(6,049) $(7,940) $(12,996) Pro forma......................... $(5,652) $(6,067) $(7,951) $(13,154) Basic and diluted net loss per share of common stock: As reported....................... $ (1.99) $ (2.00) $ (2.44) $ (3.48) Pro forma......................... $ (1.99) $ (2.00) $ (2.44) $ (3.52)
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 $0.33 Granted............................................. 2,473,500 2.37 Exercised........................................... (301,801) 0.14 Forfeited........................................... (135,541) 0.87 --------- Balance at March 31, 1999............................. 6,470,575 $1.11 =========
Options granted during the year ended June 30, 1997 and the nine-month period ended March 31, 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 $0.45 and $7.79, respectively. All options granted during the year ended June 30, 1998 had an exercise price equal to the estimated fair value of the Company's common stock on the date of grant. F-14 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997 and 1998 and March 31, 1999 The following presents certain information about outstanding stock options at March 31, 1999:
Options Options outstanding exercisable ------------------------------- ------------------ Weighted average Weighted -------------------- average Number Exercise Contractual Number of exercise Range of exercise price of options price life options price ----------------------- ---------- -------- ----------- --------- -------- $0.05-0.25.............. 2,497,075 $0.19 6.9 years 1,728,443 $0.17 $0.50-0.60.............. 1,547,500 $0.58 9.0 years 402,458 $0.57 $1.50-2.50.............. 2,346,000 $2.23 9.5 years -- -- $7.50................... 75,000 $7.50 9.8 years -- --
At June 30, 1996, 1997 and 1998, and at March 31, 1999, the number of options exercisable was 672,946, 1,227,480, 1,634,901 and 2,130,901, respectively, and the weighted-average exercise price of those options was $0.10, $0.15, $0.30 and $0.25, respectively. (9)Research and Development Arrangements On October 31, 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. On November 11, 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. The Company has fulfilled its development obligations and the remainder of the purchase price, $231,559, was offset against research and development expense during the year ended June 30, 1998. (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, 1996, 1997 and 1998 and for the nine months ended March 31, 1999 was $270,122, $367,308, $380,794 and $267,388, respectively. Minimum lease payments for the three months ended June 30, 1999 are $103,652. 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 nine months ended March 31, 1999. Future minimum lease payments under noncancelable operating leases as of March 31, 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 and 1998 and March 31, 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, 1997 and 1998 and March 31, 1999 are as follows (in thousands):
1997 1998 1999 ------ ------ ------- Deferred tax assets: Operating loss carryforwards................... $6,241 $8,943 $13,083 Stock compensation............................. 26 17 295 Receivables and inventory reserves............. 30 59 123 Accrued liabilities............................ -- 87 142 ------ ------ ------- Deferred tax assets.......................... 6,297 9,106 13,643 Valuation allowance.......................... (6,027) (8,909) (13,587) ------ ------ ------- 270 197 56 Deferred tax liability - furniture and equipment................................. (270) (197) (56) Net deferred tax assets...................... $ -- $ -- $ -- ====== ====== =======
The net change in the valuation allowance for the years ended June 30, 1997 and 1998 and for the nine months ended March 31, 1999 was $2,059,164, $2,882,756 and $4,677,553, respectively. As of March 31, 1999, the Company has net operating loss carryforwards of approximately $36 million which begin to expire in 2008 and are available to reduce future regular federal income taxes, if any. F-16 EFFICIENT NETWORKS, INC. Notes to Consolidated Financial Statements--(continued) June 30, 1997 and 1998 and March 31, 1999 (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 1996, 1997 and 1998 the Company also developed and marketed asynchronous transfer mode ("ATM") network products which are no longer actively marketed by the Company. The Company does not disaggregate financial information by product or geographically, other than export sales by region and sales by product, for management purposes. Substantially all of the Company's assets are located within the United States. The Company does not account for, and does not report to management, its assets or capital expenditures by revenue source. All of the Company's products are produced in the United States. The Company grants credit to customers located in several geographical regions in North America, Europe and the Pacific Rim. The following represents sales to customers in each of those geographical regions as a percentage of total revenues and revenues and gross margins by product line:
March 31, Geographic Region 1996 1997 1998 1999 ----------------- ------ ------ ------ --------- North America........................... 71% 65% 48% 65% Europe.................................. 13% 25% 40% 15% Pacific Rim............................. 16% 10% 12% 20% March 31, Product line 1996 1997 1998 1999 ------------ ------ ------ ------ --------- DSL revenues............................ $ -- $ -- $ 84 $5,573 DSL gross margin........................ $ -- $ -- $ (19) $ (327) ATM revenues............................ $3,687 $4,122 $3,286 $1,566 ATM gross margin........................ $1,478 $1,736 $1,229 $ 767
For the years ended June 30, 1996 and 1997, revenues from individual customers amounted to 13% and 38% of total revenue, respectively. For the year ended June 30, 1998, revenues from individual customers amounted to 20% and 13% of total revenues. As of and for the nine months ended March 31, 1999, revenues from individual customers amounted to 20% and 10% of total revenues, and accounts receivable related to these customers was approximately $1,120,000 and $702,000, respectively. The Company performs ongoing evaluations of its customers' financial conditions and generally does not require collateral. F-17 INSIDE BACK COVER PAGE [Product pictures: Speedstream 3000, 4000 and 5000 Series with product packaging]. OUTSIDE BACK COVER PAGE [Efficient Networks Logo] 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............................................. $ 16,680 NASD filing fee.................................................. 6,500 Nasdaq National Market listing fee............................... 150,000 Printing and engraving costs..................................... 250,000 Legal fees and expenses.......................................... 300,000 Accounting fees and expenses..................................... 175,000 Blue Sky fees and expenses....................................... 10,000 Transfer Agent and Registrar fees................................ 10,000 Miscellaneous expenses........................................... 81,820 ---------- 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) of the Securities Act. In September 1995, we sold 2,473,644 shares of Series D Preferred Stock to Texas Instruments Incorporated at a purchase price of $2.02 per share. In December 1996, we sold 3,091,430 shares of Series E Preferred Stock to accredited investors, including ADC Telecommunications, Inc., Aperture Associates and funds affiliated with Crosspoint Venture Partners, El Dorado Venture Partners, Enterprise Venture Partners, Menlo Ventures and Ocean Ventures, 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 accredited investors, including ADC Telecommunications, Inc., Texas Instruments and funds affiliated with Crosspoint Venture Partners, El Dorado Venture Partners, Enterprise Venture Partners, Menlo Ventures and Ocean Park Ventures, 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 at an exercise price of $2.92 per share to Hambrecht & Quist LLC. In January 1999, we issued Subordinated Promissory Notes for an aggregate principal amount of $7.0 million and warrants to purchase an aggregate of 2,397,260 shares of Series H Preferred Stock at an exercise price of $2.92 per share to El Dorado Ventures IV, LP and Crosspoint Ventures LS 1997 LP. 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 684,931 shares of Series H Preferred Stock at an exercise price of $2.92 per share to Palomar Ventures L.P. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits
Exhibit Number ------- 1.1 Form of Underwriting Agreement. 3.1* Amended and Restated Certificate of Incorporation of the Registrant to be in effect immediately following the closing of the offering made under this Registration Statement. 3.2* Amended and Restated Bylaws of the Registrant to be in effect immediately following the closing of the offering made under this Registration Statement. 4.1 Specimen Common Stock Certificate (standard form, not filed). 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1* Form of Indemnification Agreement between the Registrant and each of its directors and officers. 10.2* 1999 Stock Plan and form of agreements thereunder. 10.3* 1999 Employee Stock Purchase Plan and form of agreements thereunder. 10.4* Investors' Rights Agreement dated July 30, 1993 executed in connection with the issuance and sale of our Series A Preferred Stock. 10.5* Amendment No. 1 to the Investors' Rights Agreement dated February 9, 1994, executed in connection with the issuance and sale of our Series B Preferred Stock. 10.6* Amendment No. 2 to the Investors' Rights Agreement dated September 30, 1994, executed in connection with the issuance and sale of our Series C Preferred Stock. 10.7* Amendment No. 3 to the Investors' Rights Agreement dated September 1, 1995, executed in connection with the issuance and sale of our Series D Preferred Stock. 10.8* Amendment No. 4 to the Investors' Rights Agreement dated December 31, 1996, executed in connection with the issuance and sale of our Series E Preferred Stock.
II-2
Exhibit Number ------- 10.9* Amendment No. 5 to the Investors' Rights Agreement dated February 17, 1998, executed in connection with the issuance and sale of our Series F Preferred Stock. 10.10* Amendment No. 6 to the Investors' Rights Agreement dated June 10, 1998, executed in connection with the issuance and sale of our Series G Preferred Stock. 10.11* Amendment No. 7 to the Investors' Rights Agreement dated January 11, 1999, executed in connection with the issuance and sale of our Series H Preferred Stock. 10.12 Geico Building Office Lease dated August 19, 1993 by and between Government Employees Insurance Company and Efficient. 10.13 Modification of Geico Office Lease dated May 8, 1995 by and between Government Employees Insurance Company and Efficient. 10.14* Graystone Office Park Lease dated September 8, 1998 by and between Lanny Houillion and Efficient. 10.15 Form of Agreement Regarding Conditional Exercise of Warrant between the Registrant, Warrant Holder and Wilson Sonsini Goodrich & Rosati, Professional Corporation 23.1 Consent of Independent Auditors. 23.2 Consent of Counsel (see Exhibit 5.1). 24.1* Power of Attorney (included on page II-4). 27.1* Financial Data Schedules. 99.1 Consent of Robert Hawk
- -------- * Previously filed. (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. 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 II-3 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 8th day of June, 1999. EFFICIENT NETWORKS, INC. * By:__________________________________ Mark A. Floyd President and Chief Executive Officer 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 * President, Chief Executive June 8, 1999 - ----------------------------------- Officer and Chairman of the Mark A. Floyd Board (Principal Executive Officer) /s/ Jill S. Manning Vice President and Chief June 8, 1999 - ----------------------------------- Financial Officer (Principal Jill S. Manning Financial and Accounting Officer) * Director June 8, 1999 - ----------------------------------- Bruce W. Brown * Director June 8, 1999 - ----------------------------------- James P. Gauer * Director June 8, 1999 - ----------------------------------- Robert A. Hoff * Director June 8, 1999 - ----------------------------------- William L. Martin III * Director June 8, 1999 - ----------------------------------- Thomas H. Peterson Director - ----------------------------------- Anthony T. Maher */s/ Jill S. Manning - ----------------------------------- Attorney-In-Fact II-5 Independent Auditors' Report on Schedule The Board of Directors Efficient Networks, Inc.: Under date of April 26, 1999, we reported on the consolidated balance sheets of Efficient Networks, Inc. and subsidiary as of June 30, 1997 and 1998 and March 31, 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, 1998 and for the nine months ended March 31, 1999, which are included in the prospectus. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule included in the registration statement. 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 April 26, 1999 S-1 EFFICIENT NETWORKS, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Additions Additions Balance at charged to charged to beginning costs and other Balance at Description of period expenses accounts Deductions end of period - ----------- ---------- ---------- ---------- ---------- ------------- FOR THE NINE MONTHS ENDED MARCH 31, 1999 Allowances Deducted from Assets Accounts receivable... $ 15 55 -- -- $ 70 Inventories........... 150 130 -- -- 280 ---- --- --- --- ---- Total Allowances Deducted from Assets.............. $165 185 -- -- $350 ==== === === === ==== 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 ==== === === === ==== FOR THE YEAR ENDED JUNE 30, 1996 Allowances Deducted from Assets Accounts receivable... $-- 26 -- 3 $ 23 Inventories........... -- -- -- -- -- ---- --- --- --- ---- Total Allowances Deducted from Assets.............. $-- 26 -- 3 $ 23 ==== === === === ====
S-2 EXHIBIT INDEX
Exhibit Number ------- 1.1 Form of Underwriting Agreement. 3.1* Amended and Restated Certificate of Incorporation of the Registrant to be in effect immediately following the closing of the offering made under this Registration Statement. 3.2* Amended and Restated Bylaws of the Registrant to be in effect immediately following the closing of the offering made under this Registration Statement. 4.1 Specimen Common Stock Certificate (standard form, not filed). 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1* Form of Indemnification Agreement between the Registrant and each of its directors and officers. 10.2* 1999 Stock Plan and form of agreements thereunder. 10.3* 1999 Employee Stock Purchase Plan and form of agreements thereunder. 10.4* Investors' Rights Agreement dated July 30, 1993 executed in connection with the issuance and sale of our Series A Preferred Stock. 10.5* Amendment No. 1 to the Investors' Rights Agreement dated February 9, 1994, executed in connection with the issuance and sale of our Series B Preferred Stock. 10.6* Amendment No. 2 to the Investors' Rights Agreement dated September 30, 1994, executed in connection with the issuance and sale of our Series C Preferred Stock. 10.7* Amendment No. 3 to the Investors' Rights Agreement dated September 1, 1995, executed in connection with the issuance and sale of our Series D Preferred Stock. 10.8* Amendment No. 4 to the Investors' Rights Agreement dated December 31, 1996, executed in connection with the issuance and sale of our Series E Preferred Stock. 10.9* Amendment No. 5 to the Investors' Rights Agreement dated February 17, 1998, executed in connection with the issuance and sale of our Series F Preferred Stock. 10.10* Amendment No. 6 to the Investors' Rights Agreement dated June 10, 1998, executed in connection with the issuance and sale of our Series G Preferred Stock. 10.11* Amendment No. 7 to the Investors' Rights Agreement dated January 11, 1999, executed in connection with the issuance and sale of our Series H Preferred Stock. 10.12 Geico Building Office Lease dated August 19, 1993 by and between Government Employees Insurance Company and Efficient. 10.13 Modification of Geico Office Lease dated May 8, 1995 by and between Government Employees Insurance Company and Efficient. 10.14* Graystone Office Park Lease dated September 8, 1998 by and between Lanny Houillion and Efficient. 10.15 Form of Agreement Regarding Conditional Exercise of Warrant between the Registrant, Warrant Holder and Wilson Sonsini Goodrich & Rosati, Professional Corporation 23.1 Consent of Independent Auditors. 23.2 Consent of Counsel (see Exhibit 5.1). 24.1* Power of Attorney (included on page II-4). 27.1* Financial Data Schedules. 99.1 Consent of Robert Hawk.
- -------- * Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 4,000,000 Shares EFFICIENT NETWORKS, INC. Common Stock UNDERWRITING AGREEMENT ---------------------- _______________, 1999 Credit Suisse First Boston Corporation BancBoston Robertson Stephens Volpe Brown Whelan & Company, As Representatives of the Several Underwriters, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629 Dear Sirs: 1. Introductory. Efficient Networks, Inc., a Delaware corporation ("Company"), proposes to issue and sell shares ("Firm Securities") of its common stock, par value $0.001 per share ("Securities"), and also proposes to issue and sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than additional shares ("Optional Securities") of its Securities as set forth below. The Firm Securities and the Optional Securities are herein collectively called the "Offered Securities". The Company hereby agrees with the several Underwriters named in Schedule A hereto ("Underwriters") as follows: 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters that: (a) A registration statement (No. 333- ) relating to the Offered Securities, including a form of prospectus, has been filed with the Securities and Exchange Commission ("Commission") and either (i) has been declared effective under the Securities Act of 1933 ("Act") and is not proposed to be amended or (ii) is proposed to be amended by amendment or post-effective amendment. If such registration statement ("initial registration statement") has been declared effective, either (i) an additional registration statement ("additional registration statement") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (ii) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to such Rule and upon such filing the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "Effective Time" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement means (i) if the Company has advised the Representatives that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, "Effective Time" with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "Effective Date" with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter referred to as the "Initial Registration Statement". The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "Additional Registration Statement". The Initial Registration Statement and the Additional Registration Statement are herein referred to collectively as the "Registration Statements" and individually as a "Registration Statement". The form of prospectus relating to the Offered Securities, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in a Registration Statement, is hereinafter referred to as the "Prospectus". No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. (b) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (i) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all respects to the requirements of the Act and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus based upon written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(b) hereof. (c) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification. 2 (d) Each subsidiary of the Company has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and each subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; all of the issued and outstanding capital stock of each subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; and the capital stock of each subsidiary owned by the Company, directly or through subsidiaries, is owned free from liens, encumbrances and defects. (e) The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized; all outstanding shares of capital stock of the Company are, and, when the Offered Securities have been delivered and paid for in accordance with this Agreement on each Closing Date (as defined below), such Offered Securities will have been, validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Securities. (f) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with this offering. (g) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (h) The Offered Securities have been approved for listing on The Nasdaq Stock Market's National Market subject to notice of issuance. (i) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance and sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws. (j) The execution, delivery and performance of this Agreement, and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (k) This Agreement has been duly authorized, executed and delivered by the Company. (l) Except as disclosed in the Prospectus, the Company and its subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or to be made thereof by them; and except as disclosed in the Prospectus, the Company and its subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them. 3 (m) The Company and its subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole ("Material Adverse Effect"). (n) No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent that might have a Material Adverse Effect. (o) The Company and its subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "intellectual property rights") necessary to conduct the business now operated by them, or presently or proposed to be employed by them in connection with their business as described in the Prospectus, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect and, except as disclosed in the Prospectus, the discoveries, inventions, products or processes of the Company and its subsidiaries referred to in the Prospectus do not, to the best knowledge of the Company or any of its subsidiaries, infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party, known to the Company or any of its subsidiaries, which could have a material adverse effect on the Company and its subsidiaries, taken as a whole; and no third party, including any academic or governmental organization, possesses rights to the Company's patents, copyrights, trademarks, service marks, trade names, technology or know-how which, if exercised, could enable such third party to develop products competitive to those of the Company or could have a material adverse effect on the ability of the Company to conduct its business in the manner described in the Prospectus. (p) Except as disclosed in the Prospectus, neither the Company nor any of its subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "environmental laws"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to such a claim. (q) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company, any of its subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are threatened or, to the Company's knowledge, contemplated. (r) The financial statements included in each Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis; the schedules included in each Registration Statement present fairly the information required to be stated therein [If pro forma financial statements are included, insert--; and the assumptions used in preparing the pro forma financial statements included in each Registration Statement and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those 4 assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts]. (s) KPMG LLP, who have certified certain financial statements of the Company and its subsidiaries, are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder. (t) Except as disclosed in the Prospectus, since the date of the latest audited financial statements included in the Prospectus there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (u) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940. (v) Except for the Offered Securities, the holders of all outstanding shares of capital stock of the Company, and all securities convertible into or exercisable or exchangeable for capital stock of the Company, have delivered agreements (collectively, the "Lock-up Agreements") that restrict the holders thereof from, among other things, selling, granting any option for the purchase of, pledging, or otherwise transferring or disposing of, any of such shares of stock, or any such securities convertible into or exercisable or exchangeable for capital stock of the Company, for a period of 180 days after the date of the Prospectus without the prior written consent of Credit Suisse First Boston Corporation ("CSFBC"); and the Company has no reason to believe any Lock-up Agreement is not a valid and binding obligation of each party thereto other than the Underwriters; (w) The Company has imposed a stop-transfer instruction with the Company's transfer agent in order to enforce the Lock-up Agreements; (x) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes and the Company agrees to comply with such Section if prior to the completion of the distribution of the Offered Securities it commences doing such business. 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase from the Company, at a purchase price of $ per share, the respective numbers of shares of Firm Securities set forth opposite the names of the Underwriters in Schedule A hereto. The Company will deliver the Firm Securities to the Representatives for the accounts of the Underwriters, against payment of the purchase price in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to the order of at the office of , at A.M., New York time, on , or at such other time not later than seven full business days thereafter as CSFBC and the Company determine, such time being herein referred to as the "First Closing Date". For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the offering. The certificates for the Firm Securities so to be delivered will be in definitive form, in such denominations and registered in such names as CSFBC requests and will be made available for checking and packaging at the above office at least 24 hours prior to the First Closing Date. In addition, upon written notice from CSFBC given to the Company from time to time not more than 30 days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all of the Optional 5 Securities at the purchase price per Security to be paid for the Firm Securities. The Company agrees to sell to the Underwriters the number of shares of Optional Securities specified in such notice and the Underwriters agree, severally and not jointly, to purchase such Optional Securities. Such Optional Securities shall be purchased for the account of each Underwriter in the same proportion as the number of shares of Firm Securities set forth opposite such Underwriter's name bears to the total number of shares of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CSFBC to the Company. Each time for the delivery of and payment for the Optional Securities, being herein referred to as an "Optional Closing Date", which may be the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by CSFBC but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Company will deliver the Optional Securities being purchased on each Optional Closing Date to the Representatives for the accounts of the several Underwriters, against payment of the purchase price therefor in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to the order of , at the office of . The certificates for the Optional Securities being purchased on each Optional Closing Date will be in definitive form, in such denominations and registered in such names as CSFBC requests upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at the above office at a reasonable time in advance of such Optional Closing Date. [If the Underwriters purchase the securities at the public offering price and compensation to the Underwriters is payable separately, insert: As compensation for the Underwriters' commitments, the Company will pay to the Representatives for the Underwriters' proportionate accounts the sum of $ per share times the total number of Offered Securities purchased by the Underwriters on each Closing Date. Such payment will be made on each Closing Date with respect to the Offered Securities purchased on such Closing Date.] 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus. 5. Certain Agreements of the Company. The Company agrees with the several Underwriters that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise CSFBC promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to any Underwriter, or will make such filing at such later date as shall have been consented to by CSFBC. (b) The Company will advise CSFBC promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, the Additional Registration Statement (if any) or the Prospectus and will not effect such amendment or supplementation without CSFBC's consent; and the Company will also advise CSFBC promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration 6 Statement or the Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will promptly notify CSFBC of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earnings statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Representatives copies of each Registration Statement (four of which will be signed and will include all exhibits), each related preliminary prospectus, and, so long as a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Underwriters all such documents. (f) The Company will arrange for the qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates and will continue such qualifications in effect so long as required for the distribution. (g) During the period of five years hereafter, the Company will furnish to the Representatives and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representatives (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CSFBC may reasonably request. (h) The Company will pay all expenses incident to the performance of its obligations under this Agreement, for any filing fees and other expenses (including fees and disbursements of counsel) incurred in connection with qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates and the printing of memoranda relating thereto, for the filing fee incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. of the Offered Securities, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities and for expenses incurred in distributing preliminary prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters. 7 (i) For a period of 180 days after the date of the initial public offering of the Offered Securities, the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of CSFBC, except issuances of Securities pursuant to the conversion of convertible securities or the exercise of warrants or options, in each case outstanding on the date hereof, or grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, issuances of Securities pursuant to the exercise of such options. 6. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company herein, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (a) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), KPMG LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that: (i) in their opinion the financial statements and schedules examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements included in the Registration Statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of such letter, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; or (C) for the period from the closing date of the latest income statement included in the Prospectus to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the 8 previous year, in consolidated net sales, net operating income, the total or per share amounts of consolidated income before extraordinary items or net income, except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, "Registration Statements" shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration is subsequent to such execution and delivery, "Registration Statements" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "Prospectus" shall mean the prospectus included in the Registration Statements. (b) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by CSFBC. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by CSFBC. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission. (c) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as one enterprise which, in the judgment of a majority in interest of the Underwriters including the Representatives, is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any material suspension or material limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (iv) any banking moratorium declared by U.S. Federal or New York authorities; or (v) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the 9 judgment of a majority in interest of the Underwriters including the Representatives, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities. (d) The Representatives shall have received an opinion, dated such Closing Date, of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; (ii) The Offered Securities delivered on such Closing Date and all other outstanding shares of the Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Securities; (iii) There are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act; (iv) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940; (v) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance or sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws; (vi) The execution, delivery and performance of this Agreement and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement; (vii) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Initial Registration Statement or the Additional Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and each Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the 10 Act and the Rules and Regulations; such counsel have no reason to believe that any part of a Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; the descriptions in the Registration Statements and Prospectus of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; and such counsel do not know of any legal or governmental proceedings required to be described in a Registration Statement or the Prospectus which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or the Prospectus or to be filed as exhibits to a Registration Statement which are not described and filed as required; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained in the Registration Statements or the Prospectus; and (viii) This Agreement has been duly authorized, executed and delivered by the Company. (e) The Representatives shall have received an opinion, dated such Closing Date, of __________, special counsel for the Company, to the effect that: the statements set forth under the headings "Risk Factors -- 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, Our Business Will be Harmed" and "Business -- Proprietary Rights" in the Registration Statement and the Prospectus (the "Statements"), insofar as such Statements constitute a summary of legal matters in which counsel has represented the Company or a summary of documents reviewed by counsel in the course of such representation, have been reviewed by such counsel and fairly summarize such legal matters and documents in all material respects, and such counsel has no reason to believe that such Statements, (i) as of the effective date of the Registration Statement, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make such Statements not misleading and (ii) as of the date of such opinion, included or includes any untrue statement of material fact or omitted or omits to state a material fact necessary in order to make such Statements, in light of the circumstances in which they were made, not misleading. (f) The Representatives shall have received from Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Representatives may require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (g) The Representatives shall have received a certificate, dated such Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed and distributed to any Underwriter; and, subsequent to the date of the most recent financial statements in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of 11 operations of the Company and its subsidiaries taken as a whole except as set forth in or contemplated by the Prospectus or as described in such certificate. (h) The Representatives shall have received a letter, dated such Closing Date, of KPMG LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three days prior to such Closing Date for the purposes of this subsection. The Company will furnish the Representatives with such conformed copies of such opinions, certificates, letters and documents as the Representatives reasonably request. CSFBC may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter, its partners, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (b) below. (b) Each Underwriter will severally and not jointly indemnify and hold harmless the Company, its directors and officers and each person, if any who controls the Company within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: the concession and reallowance figures appearing in the paragraph under the caption "Underwriting". [If paragraphs regarding sales to discretionary accounts and/or passive market making are included, insert-and the information contained in the [and ] paragraphs[s] under the caption "Underwriting"]. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above, notify the indemnifying party of the 12 commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement (i) includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an indemnified party. (d) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate number of 13 shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, CSFBC may make arrangements satisfactory to the Company for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to CSFBC and the Company for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company, except as provided in Section 9 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 9. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the Offered Securities by the Underwriters is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company and the Underwriters pursuant to Section 7 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 10. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department--Transactions Advisory Group, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 4201 Spring Valley Road, Suite 1200, Dallas, Texas 75244, Attention: [Mark A. Floyd, President and Chief Executive Officer]; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Underwriter. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 12. Representation of Underwriters. The Representatives will act for the several Underwriters in connection with this financing, and any action under this Agreement taken by the Representatives jointly or by CSFBC will be binding upon all the Underwriters. 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of laws. 14 The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If the foregoing is in accordance with the Representatives' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, Efficient Networks, Inc. By /s/ MARK A. FLOYD --------------------------------- Mark A. Floyd President and Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. Credit Suisse First Boston Corporation BancBoston Robertson Stephens Volpe Brown Whelan & Company Acting on behalf of themselves and as the Representative of the several Underwriters. Credit Suisse First Boston Corporation By ------------------------------------------ [Insert title] 15 SCHEDULE A Underwriter Number of ------------ Firm Securities ---------------- Credit Suisse First Boston Corporation................ BancBoston Robertson Stephens......................... Volpe Brown Whelan & Company.......................... ----------------- Total.............................................. ================= 16 EX-5.1 3 OPINION OF WILSON SONSINI EXHIBIT 5.1 Efficient Networks, Inc. 4201 Spring Valley Road, Suite 1200 Dallas, TX 75244 RE: REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 filed by you with the Securities and Exchange Commission (the "SEC") on or about May __, 1999 (the "Registration Statement"), in connection with registration under the Securities Act of 1933, as amended, of up to 4,000,000 shares of your Common Stock, par value $_____ and an over-allotment option granted to the underwriters of the offering to purchase up to 600,000 shares from you (collectively, the "Shares"). We understand that the Shares are to be sold to the underwriters of the offering for resale to the public as described in the Registration Statement. As your legal counsel, we have examined the proceedings taken, and are familiar with the proceedings proposed to be taken, by you in connection with the sale and issuance of the Shares. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, including the proceedings being taken in order to permit such transaction to be carried out in accordance with applicable state securities laws, the Shares, when issued and sold in the manner described in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of the Company, will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part therof, and any amendments thereto. Very truly yours, WILSON SONSINI GOODRICH & ROSATI Professional Corporation EX-10.12 4 GEICO BUILDING OFFICE LEASE EXHIBIT 10.12 OFFICE LEASE AGREEMENT STATE OF TEXAS COUNTY OF Dallas ------ THIS LEASE AGREEMENT, made and entered into as of the ____ day of ____, 19____, by and between the Landlord and Tenant hereinafter named. WITNESSETH: 1. DEFINITIONS AND BASIC PROVISIONS. The following definitions and basic provisions shall be used in conjunction with and limited by the reference thereto in the provisions of this Lease: (a) "Landlord": Government Employees Insurance Company -------------------------------------- (b) "Tenant": Efficient Network Technology Inc. --------------------------------- (c) "Building": The GEICO Building ------------------ (d) "Premises": 4201 Spring Valley Road, Suite 1200, Dallas, Texas -------------------------------------------------- 75244 ----- --------------------------------------------------------------------------- as generally outlined in the plan attached hereto as Exhibit "A". On each floor of the Building on which the entire space rentable to tenants is or will be leased to one (1) tenant, the term "Rentable Area" for such floor shall be computed by measuring to the inside face of the glass in the permanent outer walls of the Building and adding a pro rata portion of the area located within the lobby on the ground floor of the Building. No deductions shall be made for elevator lobbies, corridors, restrooms, mechanical rooms, electric rooms, telephone closets, all vertical penetrations of the floor that are included for the special use of Tenant, columns, projections and other structural portions of the Building, and other similar facilities for the use of all tenants (hereinafter sometimes called "Common Areas"). On each floor of the Building on which the entire space rentable to tenants is or will be leased to more than one (1) tenant, the term "rentable area" shall be the sum of (i) the entire area included within the leased premises, being the area bounded by the interior of the exterior wall or walls of the Building, the exterior of all walls separating the leased premises from any public corridors or other public areas, and the centerline of all walls separating the leased premises from other areas leased or to be leased to other tenants, (ii) a pro rata portion of the area covered by the elevator lobbies, corridors, restrooms, mechanical rooms, electric rooms, columns and telephone closets situated on such floor, and (iii) a pro rata portion of the area located within the lobby on the ground floor of the Building. The Rentable Area within the leased premises shall be the number of square feet set forth below. The Rentable Area in the Premises has been calculated on the basis of the foregoing definition and is hereby stipulated for all purposes hereof to be 10,348 square feet, which includes Tenant's occupied ------ space plus Tenant's portion of Common areas. Such stipulation of the rentable square feet comprising the Premises shall govern the Lease for all purposes, notwithstanding that the same should be more or less as a result of a minor variations resulting from actual construction and completion of the Premises for occupancy so long as such work is done in accordance with the terms and provisions hereof. Notwithstanding the inclusion of Common Areas in the calculation of rentable square feet, it is understood that certain areas, such as mechanical rooms and janitor closets, may be intended solely for use by Landlord and the building manager in the operation of (See Rider) the Building. The total rentable area of the Building shall be 244,585 square feet. ------- (e) "Lease term": A period of 61 months, commencing on Sept 1, 1993, -- ---- - -- (the "Commencement Date") and ending on Sept 30, 1998. (See Rider) -------- -- (f) "Basic Annual Rental": $*, subject to escalation as described in - Paragraph 3 hereinbelow. (g) "Monthly Rental Installment": $**. -- (h) "Operating Expense Adjustment": $1994 Base, subject to escalation --------- as described in Paragraph 4 hereinbelow. (i) "Security Deposit": $10,434.23, deposited with Landlord on the date --------- hereof. (j) "Permitted use": The Premises are to be used and occupied by Tenant solely for Office/Research and for no other purpose or use without the --------------- prior written consent of Landlord. 2. LEASE GRANT. Landlord, in consideration of the rent to be paid and the other covenants and agreements to be performed by Tenant and upon the terms and conditions hereinafter stated, does hereby lease, demise and let unto Tenant the Premises (as defined in paragraph 1(d) hereof) commencing on the Commencement Data (as defined in paragraph 1(e) hereof or as adjusted as hereinafter provided) and ending on the last day of the lease term, unless sooner terminated as herein provided. In the event the Premises are occupied by Tenant prior to the stated date, the Commencement Date shall be the date such occupancy commenced if this Lease is executed before the Premises become vacant, or otherwise available and ready for occupancy, or if any present tenant or occupant of the premises holds over, and Landlord cannot acquire possession of the Premises prior to the Commencement Date of the Lease, Landlord shall not be deemed to be in default hereunder, the Tenant agrees to accept possession of the Premises at such time as Landlord is able to tender the same and such date shall be deemed to be the Commencement Date and this Lease shall continue for the lease term described in paragraph 1(e) hereof. By occupying the Premises, Tenant shall be deemed to have accepted the same as suitable for the purpose herein intended and to have acknowledged that the same comply fully with Landlord's covenants and obligations. 3. RENT. In consideration of this Lease, Tenant promises and agrees to pay Landlord, as an independent covenant, the Basic Annual Rental (as defined in paragraph 1(f) hereof) and which is subject to escalation as hereinafter described, without *Basic Annual Rental **Basic Monthly Rental -------------------- ---------------------- *** Year 1 $119,002.00 $9,916.83 Year 2 $124,176.00 $10,348.00 Year 3 $124,176.00 $10,348.00 Year 4 $129,350.00 $10,779.17 Year 5 $129,350.00 $10,779.17 *** Month two (2) shall be free. 1-R deduction or set off, including the Operating Expense Adjustment as described in Paragraph 1(g) hereinabove. It is agreed that, notwithstanding anything to the contrary the Premises herein are leased for the Basic Annual Rental for the lease term hereof, payable at the time of the making of this Lease and that the provisions herein contained for the payment of such rent in Monthly Rental Installments (as defined in paragraph 1(g) hereof) are for the convenience of the Tenant only, and that, upon default in the payment of any such Monthly Rental Installment as herein allowed, the whole of the rent hereby reserved for the whole of the lease term herein provided for and then remaining unpaid shall, at the option of the Landlord, become due and payable without any notice or demand. One such Monthly Rental Installment, together with the Security Deposit (as defined in paragraph 1(i) hereof), shall be payable by Tenant to Landlord contemporaneously with the execution hereof, and a like Monthly Rental Installment shall be due and payable to Landlord at Landlord's address provided herein (or such other address as may be designated by Landlord in writing from time to time) without demand on or before the first day of each succeeding calendar month during the term hereof. A Monthly Rental Installment for any fractional month at the beginning or the end of the lease term shall be promised. Without impairing any of Landlord's rights or remedies herein for the late payments of rent, if any Monthly Rental Installment is not received by the Landlord on or before the 5th day of the month for which said Monthly Rental Installment is due, a service charge of 10% of the Monthly Rental Installment owed shall become due and payable in addition to the monthly rental installment owed. Said service charge is for the purpose of reimbursing Landlord for the extra costs and expenses incurred in connection with the handling and processing of late Monthly Rental Installment payments. 4. OPERATING EXPENSE ADJUSTMENT. The Basic Annual Rental payable under paragraph 1(f) hereof is based, in part, on operating expenses existing during the calendar year in which the lease commences ("Base Year"). For the purposes of rental escalations under the terms of this Lease. said operating expenses are defined as and limited to: (i) ad valorem taxes, for which Landlord is liable, assessed against the land, Building and Improvements and in and upon which the Premises are located together with any special assessments and other real estate costs in the nature of taxes or assessments for which Landlord is responsible; (ii) expenses of operation, maintenance and repair of the land, Building, sidewalks and curbs adjacent thereto in a manner deemed reasonable and appropriate and for the best interest of the occupants; (iii) actual expenses incurred for employees, such as wages, fringe benefits, taxes, unemployment and disability insurance, workmen's compensation insurance, social security benefits and any other expenses incurred in connection with such employees. The term "employees" includes employees such as superintendents, engineers, electricians, clerks, mechanics, helpers, security officers, porters, cleaners, and window washers, as well as contract laborers performing services for the Building and other persons, firms or corporations providing contract services for the benefit of the Building; (iv) actual cost of materials and supplies used and consumed for the benefit of the Building and the occupants; (v) full contract cost of third-party contractors for all of the foregoing, including rubbish removal, elevator maintenance, maintenance of air conditioning, heating and ventilation equipment, management services, uniform supply, past control and security service; (vi) all utility services; and (vii) actual cost of insurance, including fire and extended coverage and general liability insurance, but no change for insurance is included that reflects premiums due to any act or omission of any tenant of the Building for which Landlord would be entitled to reimbursement from such tenant. Said operating expenses shall not include administrative salaries and wages of persons not involved in the day-to-day operations of the Building, state or federal income taxes or periodic alterations of improvements to the construction of the Building, and in no case shall Tenant be charged additional rent for any operating expense such as painting, repainting, redecorating, special cleaning service of special security service which can be directly related to the sole advantage of Landlord or any other particular occupant of the Building other than Tenant. Operating expenses shall not include cost of any repair or replacement which is or should be capitalized on Landlord's books under generally accepted accounting principles. In the event that during the lease term said operating expenses for 1995 or any succeeding calendar year exceed the 1994 expenses per square foot per year ("base expense rate") for the total Rentable Area of the Building (as defined in Paragraph 1(d) hereof), Tenant, within thirty (30) days after written notification of the foregoing by Landlord, shall: (a) Pay to the Landlord Tenant's proportionate share (4.23 %) of such increase for the year in question, said proportionate share being defined to mean a fraction, the numerator of which is the square footage of the Premises set out in Paragraph 1(d), and the denominator of which is the total rentable area of the Building set out in Paragraph 1(d). The product resulting from the application of such fraction to the increases shall constitute the amount of additional rent Tenant shall pay. (See Rider) (b) Additionally, Tenant shall pay to Landlord with the payment of Monthly Rental installments for the months following the month during which a notice of escalated rents is given, a monthly escalation reserve on the first day of each month for the remainder of the calendar year. The monthly escalation reserve shall be equal to the total of Tenant's proportionate share of such operating expense increase for the previous calendar year divided by the number of months remaining in the then current calendar year subsequent to the month in which the notice of escalated rent is given. Landlord shall apply the total of the monthly escalation reserves paid by the Tenant to any increase over the base expense rate for the calendar year in which the monthly escalation reserves are paid. After the end of every calendar year Landlord will deliver to Tenant a statement which sets forth (i) the previous year's operating expenses (ii) Tenant's proportionate share of any increases, (iii) the adjustment, if any, reflecting the monthly escalation reserves paid, and (iv) the net amount due Landlord or due to be reimbursed to Tenant, provided, however, in no event shall the basic rent or the monthly rental installments ever be less than the amounts specified in Paragraphs 1(f) and 1(g), respectively. Notwithstanding any expiration or termination of this Lease prior to the lease expiration date (except in the case of a cancellation by mutual agreement) Tenant's obligation to pay any and all additional rent under this Lease shall continue and shall cover all periods up to the lease expiration date. Tenant's obligation to pay any and all additional rent under this Lease and Landlord's and Tenant's obligation to make the adjustments referred to in this Lease shall survive any expiration or termination of this Lease. If any amounts which become due by reason of escalation of rent are not paid by the fifth day following the day on which they are due a service charge of 10% of such rental escalation amount shall become due and payable in addition to such rental escalation. Said service charge is for the purpose of reimbursing Landlord for the extra costs and expenses incurred in connection with the handling and processing of late rental escalation payments. 5. SERVICES: (a) Landlord agrees to furnish Tenant while occupying the Premises, at Landlord's sold cost and expense: (i) hot and cold water at those points of supply provided for general use to tenantry; (ii) electrical current for Tenant's use and occupancy of the Premises to the extent reasonably deemed to be standard by the Landlord, provided however, that all costs for extraordinary or unusual demand for electrical service shall be borne by Tenant; (iii) heating and air Note: (ii) Not to exceed 8 watts per sq. ft. 2-R conditioning at such times as Landlord normally furnishes such services to all tenants of the Project and at such temperatures and in such amounts as are reasonably considered by Landlord to be standard; (iv) periodic janitor service; and (v) replacement of proper standard light bulbs and tubes. (b) Landlord does not warrant that any of said specified services will be free from interruption or stoppage, but nevertheless Landlord shall use reasonable diligence to resume any such interrupted or stopped service. Anything to the contrary notwithstanding, no failure, to any indent, to furnish such services or any stoppage or interruption of these defined services shall render Landlord liable in any respect for damages to either person, property or business, nor shall any such failure, interruption or stoppage of such services be deemed or construed as an eviction, actual or constructive, of Tenant nor work an abatement of rent nor relieve Tenant from the obligation to fulfill any covenant or agreement contained in this Lease. 6. LEASEHOLD IMPROVEMENTS. Landlord agrees to install at Landlord's cost and expense, except as otherwise stated herein, the improvements described in Exhibit "B" attached hereto. Landlord has made no representations as to the condition of the Premises or the Building or to remodel, repair or decorate, except as expressly set forth herein. 7. USE. Tenant shall use the Premises only for the permitted use (as defined in paragraph 10 hereof). Tenant will not occupy or use the Premises, or permit any portion of the Premises to be occupied or used for any business or purpose other than the permitted use or for any use or purpose which is unlawful in part or in whole or deemed to be disreputable in any manner or extrahazardous on account of fire, nor permit anything to be done which will in any way increase the rate of fire insurance on the Building or contents; and in the event that, by reason of acts of Tenant, there shall be any increase in the rate of fire insurance on the Building or contents; and in the event that, by reason of acts of Tenant, there shall be any increase in the rate of the insurance on the Building or contents created by Tenant's acts or conduct of business then such acts of Tenant shall be deemed to be an event of default hereunder and Tenant hereby agrees to pay to Landlord the amount of such increases on demand and acceptance of such payment shall not constitute a waiver of any of Landlord's other rights provided herein. Tenant will conduct its business and control its agents, employees and invites in such a manner as not to create any nuisance, nor interfere with, annoy or disturb other tenants or Landlord in management of the Building, or carry on or permit any operation which might omit offensive odors or conditions into other portions of the Building or use any apparatus which might make undue noise or set up vibrations in the Building. Tenant will maintain the Premises in a clean, healthful and safe condition and will comply with all law, ordinances, orders, rules and regulations (state, federal, municipal and other agencies or bodies having any jurisdiction thereof) with reference to use, condition or occupancy of premises. Tenant will not, without the prior written consent of Landlord, paint, install lighting, window coverings or decoration, or install any signs, window or door lettering or advertising media of any type on or about the Premises or any part thereof. Should Landlord agree in writing to any of the foregoing items in the preceding sentence. Tenant will maintain such permitted items in good condition and repair at all times. 8. ENVIRONMENTAL OBLIGATIONS. (A) The Tenant covenants that no hazardous or toxic materials shall be brought onto, stored, or used at the Premises by the Tenant or any of its employees, agents, independent contractors, licensees, subtenants or invitees, except such materials as are typically found at first-class suburban office complexes similar to the Premises, and that no substances shall be placed into the plumbing and waste treatment systems of the Premises other than substances such systems are designed to treat and discharge appropriately under the Laws. The Tenant shall hold harmless, indemnify and defend the Landlord, to the extent that the Landlord shall have any liability to any of the following: its respective directors, officers, shareholders or partners, employees, successors and assigns, (collectively, the indemnified Persons) from and against any direct (but not indirect or consequential) Environmental Damages, resulting from events occurring during the Term, except for Environmental Damages arising from the acts or omissions of the Indemnified Persons. (B) "Environmental Damages" shall mean all claims, judgments, damages (including punitive damages), losses, penalties, fines, liabilities (including strict liability), encumbrances, liens, costs and expenses of investigation and defense of any claim, or any directive of any governmental or quasi-governmental agency, department, commission, board, or bureau, whether or not such is ultimately defeated, and of any settlement or judgment, for which the Tenant or an Indemnified Person is liable under Environmental Laws and which are required to be incurred under the Laws applicable to Hazardous Material, including reasonable attorney's fees and disbursements and consultants' fees, any of which are incurred as a result of the existence or release of Hazardous Material upon, about or beneath the Premises or migrating from the Premises, or the existence of a violation of such Laws pertaining to the Premises. (C) "Hazardous Material" shall mean any hazardous or toxic substance, material or waste (including constituents thereof) which is or becomes regulated by one or more Governmental Authorities (hereinafter defined). The words "Hazardous Material" include any material or substance which is (a) listed or defined as a "hazardous waste," "extremely hazardous waste," "restricted hazardous waste," "hazardous substance" or "toxic substance" under any Laws, (b) petroleum and its byproducts, (c) asbestos, (d) polychlorinated biphenyl, (e) designated as a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. 1317), (f) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, (42 U.S.C. 6903), (g) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, (42 U.S.C. 9601 et seq.), or (h) defined as a toxic substance in the Toxic Substance Control Act (15 U.S.C. 2601 et seq.). 9. REPAIRS AND MAINTENANCE. (a) BY LANDLORD: Landlord shall at its expense maintain only the roof, foundation, heating and air conditioning systems, common areas, plumbing, elevators, the structural soundness of the exterior walls, the paving outside the Buildings, and the landscaping in good repair and condition, except for reasonable wear and tear. Landlord shall be responsible for pest eradication. Tenant shall give immediate written notice to Landlord of the need for repairs or corrections and Landlord shall proceed promptly to make such repairs or corrections. Landlord's liability hereunder shall be limited to the cost of such repairs or corrections. (b) BY TENANT: Tenant shall at its expense and risk maintain the Premises and related facilities in good repair and condition, including but not limited to repairs (including all necessary replacements, to the windows, window glass, plate glass, doors and the interior of the Premises in general. Tenant will not in any manner deface or injure the Building, the Premises or related facilities and will pay the cost of repairing any damage or injury done by Tenant or Tenant's agents, employees or invitees. Tenant shall throughout the term of this Lease take good care of the Premises and related facilities and keep them free from waste and nuisance of any kind. If Tenant shall fail to make any repair required hereunder (including all necessary replacements) within fifteen (15) days after written notification to do so. Landlord may at its option make such repair, and Tenant shall, upon demand therefor, pay Landlord for the cost thereof together 3-R with Interest on any such cost which remains unpaid following such demand at the rate of ten percent (10%) per annum until paid. 10. ALTERATIONS AND IMPROVEMENTS. At the end or other termination of this Lease. Tenant shall deliver up the Premises with all improvements located thereon (except as otherwise herein provided) in good repair and condition, reasonable wear and tear excepted, and shall deliver to Landlord all keys to the Premises. The cost and expense of any repairs necessary to restore the condition of the Premises to said condition in which they are to be delivered to Landlord shall be borne by Tenant. Tenant will not make or allow to be made any alterations or physical additions in or to the Premises without the prior written consent of the Landlord. All alterations, additions or improvements (whether temporary or permanent in character) made in or upon the Premises, either by Landlord or Tenant, shall be Landlord's property on termination of this Lease and shall remain on the Premises, without compensation to the Tenant. All furniture, movable trade fixtures and equipment installed by Tenant may be removed by Tenant at the termination of this Lease if Tenant so elects, and shall be so removed if required by Landlord, or if not so removed shall, at the option of the Landlord, become the property of Landlord. All such installations, removals and restoration shall be accomplished in good workmanlike manner so as not to damage the Premises or the primary structure or structural qualities of the Building or the plumbing, electrical lines or other utilities. 11. COMMON AREAS. The use and occupation by Tenant of the Premises shall include the use in common with others entitled thereto of the Common Areas, parking areas, service roads, loading facilities, sidewalks, and other facilities as may be designated from time to time by Landlord, subject, however, to the terms and conditions of this agreement and to reasonable rules and regulations for the use thereof as prescribed from time to time by Landlord. All common areas described above shall at all times be subject to the exclusive control and management of Landlord, and Landlord shall have the right from time to time to establish, modify and enforce reasonable rules and regulations with respect to all facilities and areas mentioned in this Article. Landlord shall have the right to construct, maintain, and operate lighting facilities on all said areas and improvements; to police same; from time to time to change the area, level, location and arrangement of parking areas and other facilities hereinabove referred to; and to restrict parking by tenants, their officers, agents and employees to employee parking areas. All common areas and facilities not within the Premises, which Tenant may be permitted to use and occupy, are to be used and occupied under a revocable license, and if the amount of such areas to be diminished, Landlord shall not be subject to liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such diminution of such areas be deemed constructive or actual eviction. 12. ASSIGNMENT AND SUBLETTING. (A) Except as specified herein, Tenant shall not, without the prior written consent of Landlord, such consent shall not be unreasonable witheld or delayed which may be withheld in Landlord's sole and absolute discretion, (a) assign or in any manner transfer this Lease or any estate or interest therein, (b) permit any assignment of this Lease or any estate or interest therein by operation of law, (c) sublease the Premises or any part thereof, (d) grant any license, concession or other right of occupancy of any portion of the Premises, or (e) permit the use of the Premises by any parties other than Tenant, its agents and employees. Any such consent, transfer, sublease, grant or permit made without Landlord's prior written consent shall be absolutely void. Consent by Landlord to one or more assignments or subleases shall not operate as a waiver of Landlord's right to any subsequent assignments and subleases. Notwithstanding any assignment or subleasing. Tenant and any guarantor of Tenant's obligations under this Lease shall, at all times, remain fully responsible and liable for the payment of the rent herein specified and for compliance with all of Tenant's other obligations under this Lease. Moreover, in the event that the rental due and payable under any sublease (or a combination of the rental payable under any sublease plus any bonus or other consideration therefor or incident thereto) exceeds the rental payable under this Lease, or if with respect to a permitted assignment, permitted license or other transfer by Tenant permitted by Landlord, the consideration payable to Tenant exceeds the rental payable under this Lease, then Tenant shall be bound and obligated to pay Landlord all such excess rental and other excess consideration within ten (10) days following receipt thereof by Tenant from such sublessee, assignee, licensee or other transferee, as the case may be. Subleases to any parent companies, subsidiaries, or affiliates of Tenant shall not require Landlord's consent. However, any subsidiary or affiliate type of business must be similar to Tenant's. (B) If Tenant is a general partnership or joint venture and there shall be any change in the membership of such partnership or joint venture subsequent to the execution of this Lease, such change in membership shall be deemed an assignment of this Lease for purposes of Section 11(A) hereof. If Tenant is a limited partnership and there shall be any change in the general partner subsequent to the execution of this Lease, such change in the general partner shall be deemed an assignment of this Lease for purposes of Section 11(A) hereof. If Tenant is a corporation and there shall be any change in the control of the corporation subsequent to the execution of this Lease, such change in control shall be deemed an assignment of this Lease, for purposes of Section 11(A) hereof. This Section 11(B) shall not apply, however, if Tenant is a corporation which has its outstanding voting trust listed on a recognized security exchange. 13. INDEMNITY. Landlord shall not be liable for and Tenant will indemnify and save harmless Landlord of and from all fines, suits, claims, demands, losses and actions (including attorney's fees) for any injury to person or damage to or loss of property on or about the Premises caused by any actual or alleged act, omission, negligence or misconduct from any cause, including Landlord's negligence, or breach of this Lease by Tenant, Its agents, employees, subtenants, invitees or by any other person entering the Building, the Premises, or related facilities. Landlord shall not be liable or responsible for any loss or damage to any property or death or injury to any person occasioned by theft, fire, act of God, public enemy, criminal conduct of third parties, injunction, riot, strike, insurrection, war, court order, requisition or order of any governmental body or authority, by other tenants of the Building or related facilities or any other matter, or for any injury or damage or inconvenience which may arise through repair or alteration of any part of the Building, the Premises or related facilities, or failure to make repairs or from any cause whatsoever. 14. MORTGAGES. Tenant accepts this Lease subject to any deeds of trust, security interests or mortgages which might now or hereafter constitute a lien upon the Building or improvements therein, the Premises, or related facilities, and to zoning ordinances and other building and fire ordinances and governmental regulations relating to the use of the property. Tenant shall at any time hereafter, on demand, execute any instruments or releases or other documents that may be required by any mortgagee for the purpose of subjecting and subordinating this Lease of any such deed of trust, security interest of mortgage. With respect to any deed of trust, security interest or mortgage hereafter constituting a lien on the Building or improvements therein, the Premises, or related facilities, Landlord, at its sole options, shall have the right to waive the applicability of this paragraph 13 so that this Lease will not be subject and subordinate to any such deed of trust, security interest or mortgage. 4-R 15. CASUALTY INSURANCE (A) Landlord shall, at all times during the term of this Lease maintain a policy or policies of insurance with the premiums thereon fully paid in advance, issued by and binding upon some solvent insurance company, insuring the Building against loss or damage by fire, explosion, or other hazards and contingencies for the full insurable value thereof; provided that Landlord shall not be obligated to insure any furniture, equipment, machinery, goods or supplies not covered by this Lease which Tenant may bring or obtain upon the Premises, or any additional improvements which Tenant may construct thereon. (B) Tenant shall maintain, at its sole expense, fire and extended coverage insurance in an amount nor less than eighty percent (80%) of the full insurable value of all of its personal property, including removable trade fixtures located in the Premises and on all additions and improvements thereto made by Tenant. Tenant shall maintain, at its sole cost and expense, bodily injury liability insurance in an amount of $500,000.00 bodily injury or death per person, $1,000,000.00 bodily injury or death in the aggregate and property damage liability insurance in an amount of $500,000.00. Such insurance shall specifically make reference to the indemnity provision of Section 12 of this Lease and shall name Landlord as an additional insured. (C) All policies of insurance provided for herein to be carried by Tenant shall be issued by insurance companies reasonably acceptable to Landlord and certified to do business by the State of Texas and its insurance regulatory bodies and shall be issued in the names of both Landlord and Tenant as named insureds (without any liability on the part of Landlord for premiums). Executed copies of such policies of insurance or certificates thereof shall be delivered to Landlord within ten (10) days before delivery of possession of the Premises, and thereafter, within thirty (30) days prior to the expiration of such policy. As often as any such policy shall expire or terminate, renewal or additional policies shall be procured and maintained by Tenant in like manner and to like extent. All policies of insurance delivered to Landlord must contain a provision that the company writing said policy will give to Landlord twenty (20) days' notice in writing in advance of any cancellation or lapse or the effective date of any reduction in the amounts of insurance. All public liability and property damage policies shall be written as primary policies, not contributing with, and not in excess of, coverage which Landlord may carry, if any. If Tenant fails to provide Landlord with such evidence of insurance, Landlord may, at its option, obtain insurance coverage, as provided above, and charge Tenant for the cost of the same, plus a 15% administrative fee. 16. INSPECTION. Landlord or representatives shall have the right to enter into and upon any and all parts of the Premises if accompanied by Tenant at reasonable hours with prior notice to (i) inspect same or clean or make repairs or alterations or additions as Landlord may deem necessary (but without any obligation to do so, except as expressly provided for herein), or (ii) show the Premises to prospective tenants, purchasers of lenders in the last ninety (90) days of this Lease, and Tenant shall not be entitled to any abatement or reduction of rent by reason thereof, nor shall such be deemed to be an actual or constructive eviction. 17. CONDEMNATION. If, during the term of this Lease, or any extension or renewal thereof, all of the Premises should be 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, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective on the date physical possession is taken by the condemning authority, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease. In the event a portion but not all of the Premises shall be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by private sale in lieu thereof and the partial taking or condemnation shall render the Premises unsuitable for Tenant's business, then Landlord shall have the option, in its sole discretion, of terminating this Lease, or, at Landlord's sole risk and expense, restoring and reconstructing the Premises to the extent necessary to make some reasonably tenantable. Should Landlord elect to restore, the Lease shall continue in full force and effect with the rent payable during the unexpired portion of this Lease adjusted to such an extent as may be fair and reasonable under the circumstances, and Tenant shall have no claim against Landlord for the value of any interrupted portion of this Lease. In the event of any condemnation or taking, total or partial. Tenant shall not be entitled to any part of the award or price paid in lieu thereof, and Landlord shall receive the full amount of such award or price, Tenant hereby expressly waiving any right or claim to any part thereof. 18. FIRE OR OTHER CASUALTY. If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. In case the Building shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Building shall, in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty), or in the event any mortgagee under a first mortgage or first deed of trust covering the Building should require that the insurance proceeds payable as a result of said fire or other casualty be used to retire the mortgage debt, Landlord may, at its opinion, terminate this Lease and the term and estate hereby granted by notifying Tenant in writing of such termination within sixty (60) days after the date of such damage or determination by such Landlord does not thus elect to terminate this Lease, Landlord shall within sixty (60) days after the date of such damage commence to repair and restore the Building and shall proceed with reasonable diligence to restore the Building (except that Landlord shall not be responsible for delays outside its control and the time period within which Landlord is obligated to commence and/or complete such repairs shall be extended by a period equal to such delay) to substantially the same condition in which it was immediately prior to the happening of the fire or other casualty, except that Landlord shall not be required to rebuild, repair, or replace any part of Tenant's furniture or furnishings or fixtures and equipment removable by Tenant under the provisions of this Lease or any additions or improvements to the Demised Premises made by Tenant at Tenant's expense, but such work shall not exceed the scope of the work done by Landlord at Landlord's expense in originally improving the Building nor shall Landlord in any event be required to spend for such work an amount in excess of the insurance proceeds actually received by Landlord as a result of the fire or other casualty plus any deductible amounts thereunder. In addition, in the event of the occurrence of a casualty which is not insured under the casualty insurance requirements to be carried by Landlord pursuant to the terms hereof, Landlord shall have the option to terminate this Lease. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof, except that, subject to the provisions of the next sentence, Landlord shall allow Tenant a fair diminution of rent during the time and to the extent the Premises are unfit for occupancy. If the Premises or any other portion of the Building be damaged by fire or other casualty resulting from the fault or negligence of Tenant or any of Tenant's agents, servants, employees, licensees, or invitees, the rent hereunder shall not be diminished during the repair of such damage, and Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds. Any insurance which may be carried by Landlord or Tenant against loss or damage to the Building or the Premises shall be for the sole benefit of the party carrying such insurance and under its sole control. 19. HOLDING OVER. Should Tenant, or any of its successors in interest, hold over the Premises, or any pat thereof, after the expiration of the term of this Lease or of any renewal or extension thereof, unless otherwise agreed in writing, such holding over may constitute and may be construed, at Landlord's sole option, as a tenancy from month to month only at a rental equal to the 5-R Monthly Rental Installment, and the Operating Expense Adjustment as described in paragraph hereof, plus fifty percent (50%) of such amount. The inclusion of the preceding sentence shall not be construed as Landlord's consent for the Tenant to hold over. 20. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Tenant in the Premises. If any such taxes for which Tenant is liable are levied or assessed against 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, furniture or fixtures placed by Tenant in the Premises, and Landlord elects to pay the taxes based on such increases, the Tenant shall pay to Landlord upon demand that part of such taxes for which Tenant is primarily liable hereunder. 21. EVENTS OF DEFAULT. The following events shall be deemed to be events of default by Tenant under this Lease: (a) Tenant shall fail to pay any Monthly Rental Installment, or any portion of the Basic Rental hereby reserved, any portion of the Operating Expense Adjustment, or any other sum owing under the terms of this Lease when due; (b) Tenant shall fail to comply with any term, provision or covenant of this Lease, other than the payment of rent, and shall not cure such failure within ten (10) days after written notice thereof to Tenant; (c) Tenant shall make an assignment for the benefit of creditors; (d) Tenant shall file a petition under any section or chapter of the National Bankruptcy Act, as amended, or under any similar law or statute of the United States or any State thereof, or Tenant shall be adjudged bankruptcy or insolvent in any proceeding filed against Tenant thereunder and such adjudication shall not be vacated or set aside within thirty (30) days; (e) A receiver or Trustee shall be appointed for all or substantially all of the assets of Tenant and such receivership shall not be terminated or stayed within thirty (30) days; (f) Tenant shall desert or vacate any substantial portion of the Premises for a period of thirty (30) or more days; with non-payment of rent or (g) Tenant makes an assignment or enters into a sublease in violation of Paragraph 11 hereof. 22. REMEDIES. Upon the occurrence of any event of default specified in paragraph 20 hereof, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever; (a) Terminate this Lease in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and peaceably take possession and expel or remove Tenant and any other person who may be occupying said Premises or any part thereof without being liable for prosecution or any claim of damages thereof. Tenant agrees to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises on satisfactory terms or otherwise, including the loss of the basic rental then remaining unpaid. (b) Enter upon and peaceably take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof without being liable for prosecution or any claim for damages therefor, and if Landlord so elects, relet the Premises on such terms as Landlord shall deem advisable and receive the rent thereof. Tenant agrees to pay to Landlord on demand any deficiency in basic rental that may arise by reason of such relating; and (c) Enter upon the Premises, without being liable for prosecution or any claim for damage therefor, and do whatever Tenant is obligated to do under the terms of this Lease, and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action. No re-entry or taking possession of the Premises by Landlord shall be construed as an election on its part to terminate this Lease, unless a written notice of such intention be given to Tenant. Notwithstanding any such relating or re-entry or taking possession, Landlord may at any time thereafter elect to terminate this Lease for a previous default. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any rent due to Landlord hereunder or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants herein contained. Landlord's acceptance of rent following an event of default hereunder shall not be construed as Landlord's waiver of such event of default. No waiver by Landlord of any violation or breach of any of the terms, provisions and covenants herein contained shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions and covenants herein contained. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of any other violation or default. The loss or damage that Landlord may suffer by reason of termination of this Lease or the deficiency from any reletting as provided for above shall include the expense of repossession and any repairs or remodeling undertaken by Landlord following possession. Should Landlord at any time terminate this Lease for any default, in addition to any other remedy Landlord may have, Landlord may recover from Tenant all damages Landlord may incur by reason of such default, including the cost of recovering the premises and the loss of the basic rental then remaining unpaid. 23. SURRENDER OF PREMISES. No act or thing done by the Landlord or its agents during the term hereby granted shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless the same be made in writing and subscribed by the Landlord. 24. ATTORNEY'S FEES. In case it should be necessary or proper for Landlord to bring any action under the Lease or to consult or place said Lease, or any amount payable by Tenant thereunder, with an attorney concerning or for the enforcement of any of Landlord's rights hereunder, then Tenant agrees in each and any such case to pay to Landlord on demand a reasonable attorney's fee. 6-R 25. LANDLORD'S LIEN. In addition to the statutory Landlord's lien, Landlord shall have at all times, a valid security interest to secure payment of all rentals and other sums of money becoming due hereunder from Tenant, and to secure payment of any damages or loss which Landlord may suffer by reason of the breach by Tenant of any covenant, agreement or condition contained herein, upon all goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant presently or which may hereafter be situated on the Premises and all proceeds therefrom, and such property shall not be removed therefrom without the consent of Landlord until all arrearages in rent, as well as any and all other sums of money than due to Landlord hereunder, shall first have been paid and discharged and all the covenants, agreements and conditions hereof have been fully complied with and performed by Tenant. Upon the occurrence of an event of default by Tenant, Landlord may, in addition to any other remedies provided herein, enter upon the Premises and take possession of any and all goods, wares, equipment, fixtures, furniture, improvements and other personal property of Tenant situated on the Premises, without liability for trespass or conversion, and sell the same at public or private sale, without having such property at the sale, after giving Tenant reasonable notice of the time and place of any public sale or of the time after which any private sale is to be made, at which sales the Landlord or its assigns may purchase unless otherwise prohibited by law. Unless otherwise provided by law, and without intending to exclude any other manner of giving Tenant reasonable notice, the requirement of reasonable notice shall be met if such notice is given in the manner prescribed in paragraph 27 of this Lease at least five (5) days before the time of sale. The proceeds from any such disposition, less any and all expenses connected with the taking of possession, holding and selling of the property (including reasonable attorney's fees and other expenses), shall be applied as a credit against the indebtedness secured by the security interest granted in this paragraph 24. Any surplus shall be paid to Tenant or as otherwise required by law; and the Tenant shall pay any deficiencies forthwith. Upon request by Landlord, Tenant agrees to execute and deliver to Landlord a financing statement in form sufficient to perfect the security interest of Landlord in the aforementioned property and proceeds thereof under the provisions of the Uniform Commercial Code in force in the State of Texas. The statutory lien for rent is not hereby waived, the security interest herein granted being in addition and supplementary thereto. 26. MECHANIC'S LIEN. Tenant will not permit any mechanic's lien or liens to be placed upon the Premises or the Building or improvements thereon during the term hereof caused by resulting from any work performed, materials furnished or obligation incurred by or at the request of Tenant, and in the case of the filling of any such lien Tenant will promptly pay same. If default in payment thereof shall continue for twenty (20) days after written notice thereof from Landlord to Tenant, the Landlord shall have the right and privilege at Landlord's option of paying the same or any portion thereof without inquiry as to the validity thereof, and any amounts so paid, including expenses and interest, shall be so much additional indebtedness hereunder due from Tenant to Landlord and shall be repaid to Landlord immediately on rendition of bill therefor, together with interest at ten percent (10%) per annum until repaid. 27. WAIVER OF SUBROGATION. Anything in this Lease to the contrary notwithstanding, the parties hereto hereby waive any and all rights of recovery, claim, action or cause of action against each other, their agents, officers, and employees, for any loss or damage that may occur to the Premises hereby demised, or any improvements thereto, or said Building of which the Premises are a part, any improvements thereto, or related facilities, by reason of fire, the elements, or any other cause which could be insured against under the terms of standard fire and extended coverage insurance policies, regardless of cause or origin, including negligence of the parties hereto, their agents, officers and employees. 28. NOTICES. Each provision of this Agreement, or of any applicable governmental laws, ordinances, regulations, and other requirements with reference to the sending, mailing or delivery of any notice, or with reference to the making of any payment by Tenant to Landlord, shall be deemed to be complied with when and if the following steps are taken: (a) All rent and other payment required to be made by Tenant to Landlord hereunder shall be payable to Landlord in Dallas County, Texas, at the address hereinbelow set forth, or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith: (b) Any notice or document required to be delivered hereunder shall be deemed to be delivered if actually received and whether or not received when deposited in the United States mail, postage prepaid, certified or registered mail (with or without return receipt requested) addressed to the parties hereto at the respective addresses set out opposite their names below, or at such other address as they have heretofore specified by written notice delivered in accordance herewith; LANDLORD: Government Employees Insurance Co. --------------------------------- 4201 Spring Valley Road, #200 ----------------------------- Dallas, Texas 75244 ------------------- TENANT: Efficient Network Technology Inc. --------------------------------- 4201 Spring Valley Road, #1200 ------------------------------ Dallas, Texas 75244 ------------------- 29. FORCE MAJEURE. Whenever a period of time is herein prescribed for action to be taken by Landlord, the Landlord shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, Acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the control of Landlord. 30. SEPARABILITY. 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 or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. 31. ENTIRE AGREEMENT; AMENDMENTS; BINDING EFFECT. This Lease contains the entire agreement between parties and may not be altered, changed or amended, except by instrument in writing signed by both parties hereto. No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by Landlord and addressed to Tenant, nor shall any custom or practice which may grow up between the parties in the administration of the terms hereof be construed to waive or lessen the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms 7-R hereof. The terms, provisions, covenants and conditions contained in this Lease shall apply to, inure to the benefit of, and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise expressly provided. 32. QUIET ENJOYMENT. Provided Tenant has performed all of the terms, covenants, agreements and conditions of this Lease, including the payment of rent, to be performed by Tenant, Tenant shall peaceably and quietly hold and enjoy the Premises for the term hereof, without hindrance from Landlord, subject to the terms and conditions of this Lease. 33. RULES AND REGULATIONS. Tenant and Tenant's agents, employees, and invitees will comply fully with all requirements of the rules and regulations of the Project and related facilities which are attached hereto as Exhibit "C", and made a part hereof as though fully set out herein. Landlord shall at all times have the right to change such rules and regulations or to promulgate other rules and regulations in such reasonable manner as may be deemed advisable for safety, care, or cleanliness of the Building, the Premises, or related facilities, and for preservation of good order therein, all of which rules and regulations, changes and amendments will be forwarded to Tenant in writing and shall be carried out and observed by Tenant. Tenant shall further be responsible for the compliance with such rules and regulations by the employees, servants, agents, visitors and invitees of Tenant. 34. BROKER'S OR AGENT'S COMMISSION. Tenant represents and warrants that there are no claims for brokerage commissions or finder's fees in connection with the execution of this Lease, except as listed below, and Tenant agrees to indemnity and hold harmless Landlord against all liabilities and costs arising from such claims, including without limitation attorney's fees in connection therewith. 35. GENDER. 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. 36. GUARANTY, JOINT AND SEVERAL LIABILITY. If there be more than one Tenant, the obligations hereunder Imposed upon Tenant shall be joint and several. If there be a guarantor of Tenant's obligations hereunder and obligations hereunder Imposed upon Tenant shall be the joint and several obligations of Tenant and such guarantor and Landlord need not first proceed against the Tenant hereunder before proceeding against such guarantor, nor shall any such guarantor be released from its guaranty for any reasons whatsoever, including without limitation, in case of any amendments hereto, waivers hereof or failure to give such guarantor any notices hereunder. 37. TRANSFER OF LANDLORD'S RIGHTS. Landlord shall have the right to transfer and assign, in whole or in part, all and every feature of its rights and obligations hereunder, and in the Building and other property referred to herein. Tenant agrees that, in the event of such assignment, Landlord will be relieved of all obligations and liability under this Lease as to such assignment. 38. SECURITY DEPOSIT. Upon the occurrence of any event of default by Tenant, Landlord may, from time to time without prejudice to any other remedy, use the security deposit paid to landlord by Tenant as herein provided to the extent necessary to make good any arrears of rent and any other damages, injury, expense or liability caused to Landlord by such event of default, any remaining balance of such security deposit to be returned by Landlord to Tenant upon termination of the Lease. Such security deposit shall not be considered an advance payment of rent or a measure of Landlord's damages in case of default by Tenant. In the event Landlord so uses the security deposit. Tenant shall, upon demand, restore the same. 39. LANDLORD'S RIGHT OF INSPECTION. Tenant agrees to permit Landlord and the authorized representative of Landlord to enter the Premises at all reasonable hours for the purpose of inspecting the same and making any necessary repairs to the Premises with reasonable notice or to the Building and performing any work therein that may be necessary to comply with any laws, ordinances, rules, regulations or requirements of any public authority or of the Board of Fire Underwriters or any similar body. Nothing herein shall imply any duty upon the part of Landlord to do any such work which, under any provision of this Lease Tenant may be required to perform and the performance thereof by landlord shall not constitute a waiver of Tenant's default in failing to perform the same. Landlord may, during the progress of any work in the Premises, keep and store upon the Premises all necessary materials, tools and equipment. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business or other damage of Tenant by reason of making repairs or the performance of any work on the Premises, or on account of bringing materials, supplies and equipment into or through the Premises during the course thereof, and the obligations of Tenant under this Lease shall not thereby be affected in any manner whatsoever. Tenant agrees to permit Landlord and the authorized representatives of Landlord to enter the Premises at all times during usual business hours during the final year of the Term for purposes of showing the Premises to prospective tenants or purchases. 40. ESTOPPEL CERTIFICATE. Tenant will, at any time and from time to time, upon request by Landlord, execute, acknowledge, and deliver to Landlord a statement in writing executed by Tenant certifying that Tenant is in possession of the Demised Premises under the terms of this Lease, that this Lease is unmodified and in full effect (or, if there have been modifications, that this Lease is in full effect as modified, and setting forth such modifications), stating the dates to which the rent has been paid, and either stating that to the knowledge of Tenant no default exists hereunder, or specifying each such default of which Tenant may have knowledge, and such other matters as may be reasonably requested by Landlord, it being intended that any such statement by Tenant may be relied upon by prospective purchaser or mortgagee of the Building. 41. CAPTIONS. The captions contained in this Lease are for convenience of reference only, and in no way limit or enlarge the terms and conditions of this Lease. 42. PLACE OF PERFORMANCE. Tenant shall perform all covenants, conditions and agreements contained herein, including but not limited to payment of rent, in Dallas County, Texas. Any suit arising from or relating to this agreement shall be brought in Dallas County, Texas. 43. SPECIAL PROVISIONS. 8-R EXECUTED as of the date first written above. LANDLORD: GOVERNMENT EMPLOYEES INSURANCE COMPANY By: ____________________________________ Title: _________________________________ TENANT: EFFICIENT NETWORK TECHNOLOGY INC -------------------------------- By: /s/ Mark A. Floyd Title: President & CEO ATTEST: - ----------------------------- 9-R EXHIBIT "A" Final space plan to be inserted upon completion. EXHIBIT "B" ATTACHED TO AND MADE A PART OF LEASE AGREEMENT BY AND BETWEEN GOVERNMENT EMPLOYEES INSURANCE COMPANY (LANDLORD) AND EFFICIENT NETWORK TECHNOLOGY INC. --------------------------------- (TENANT) DATED _________, 19__. Landlord shall provide an Improvement Allowance equal to $13.50 per rentable square foot of the premises. This allowance is to be paid to a mutually acceptable contractor elected through a bidding process (three contractors) to finish-out the premises per the attached space plan. This allowance shall be used for all hard and soft cost associated with construction as well as all kitchen appliances and all co-axial wiring of tenants CRT's. If the allowance is inadequate to finish-out per the plan attached, Landlord will provide additional finish dollars to complete the premises. However, Tenant shall be responsible for repaying Landlord for such additional cost which shall be amortized over the term of the Lease in addition to base rental plus six percent (6%) interest. If the entire allowance is not utilized, tenant shall have the option to: 1. Place the funds in reserve with Landlord for future finish-out use. Such fund must be used within the first twenty-four (24) months of occupancy. 2. Receive a one time rent credit in the form of free rent based on a $.75 on the dollar ratio. Example: Finish allowance $13.50 Allowance used $12.50 ------ Unused allowance $1.00 Rent credit $.75 x 10,348 sq.ft. = $7,761.00 Space Planning. Landlord will assume all cost associated with space planning - -------------- including preliminary plan with one revision and construction documents. The cost for providing MEP's, if required, will be paid for out of the Improvement Allowance discussed above. EXHIBIT "C" RULES AND REGULATIONS 1. Landlord shall provide all locks for doors in each Tenant's leased premises, at the cost of such Tenant, and no Tenant shall place any additional lock or locks on any door in its leased area without Landlord's prior written consent. A reasonable number of keys to the locks on the doors in each Tenant's leased premises shall be furnished by Landlord to each Tenant, at the cost of such Tenant, and the Tenants shall not have any duplicate keys made. 2. Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by Tenant of any merchandise or materials which requires use of elevators or stairways, or movement through Building entrances or lobby shall be restricted to hours designated by Landlord. All such movement shall be under supervision of Landlord and in the manner agreed between Tenant and Landlord by prearrangement before performance. Such prearrangements initiated by Tenant will include determination by Landlord and be subject to its decision and control of the time, method and routing of movement, and limitations imposed by safety or other concerns which may prohibit any article, equipment or any other item from being brought into the Building. Tenant is to assume all risk as to damage to articles moved and injury to persons or public engaged or not engaged in such movement, including equipment, property and personnel of Landlord If damaged or injured as a result of acts in connection with carrying out this service for Tenant from time of entering the Land on which the Building stands to completion of work, and Landlord shall not be liable for acts of any person engaged in, or any damage or loss to any of said property or persons resulting from any acts in connection with such service performed by Tenant. 3. No signs will be allowed in any form on the exterior of the Building or on the inside or outside of the windows of the Building and no signs except in uniform location and uniform styles fixed by Landlord will be permitted in the public corridors or on corridor doors or entrances to Tenant's space. All signs will be contracted for by Landlord for Tenant at the rate fixed by Landlord from time to time, and Tenant will be billed and shall pay for such service accordingly. 4. No draperies, shutters, or other window coverings shall be installed on exterior windows or walls or windows and doors facing public corridors without Landlord's prior written approval. 5. No portion of the Premises or any other part of Building shall at any time be used or occupied as sleeping or lodging quarters. 6. Tenant shall not place, install or operate on the Premises or in any part of the Building, any engine, stove, or machinery, or conduct mechanical operations or cook thereon or therein, or place or use in or about the Premises any explosives, gasoline, kerosene, oil, acids, caustics, or any other inflammable explosive, or hazardous materials without written consent of Landlord. 7. Landlord will not be responsible for lost or stolen personal property, equipment, money, or jewelry from the Premises or public rooms regardless of whether such loss occurs when the Building and/or the Premises are locked against entry or not. 8. No birds or animals shall be brought into or kept in or about the Building. 9. Employees of Landlord shall not receive or carry messages for or to Tenant or other persons, nor contract with or tender free or paid services to Tenant or Tenant's agents, employees, or invitees. 10. Landlord will not permit entrance to the Premises by use of pass keys controlled by Landlord, to any person at any time without written permission by Tenant, except employees, contractors, or service personnel directly supervised by Landlord and employees of the United States Postal Service. 11. None of the entries, passages, doors, elevator doors, hallways, or stairways shall be blocked or obstructed, or any rubbish, litter, trash, or material of any nature placed, empties or thrown into these areas, nor shall such areas be used at any time except for ingress by Tenant, Tenant's agents, employees, or invitees. 12. Tenant and its employees, agents and invitees, shall observe and comply with the driving and parking signs and markers on the Premises surrounding the Building. Landlord shall not be responsible for any damage to any vehicle towed because of non-compliance with parking regulations. 13. Landlord shall have the right to prescribe the weight and position of safes, computers and other heavy equipment which shall, in all cases, in order to distribute their weight, stand on supporting devices approved by Landlord. 14. To insure orderly operation of the Building no ice, mineral water or other beverages, food, towels, newspapers, etc., shall be delivered to the Premises except by persons and at times approved by Landlord in writing. 15. Should a Tenant require telegraphic, telephonic, annunciator or other communication service, Landlord will direct an electrician where and how wires are to be introduced and placed and none shall be introduced or placed except as Landlord shall direct. Electric current shall not be used for power or heating without Landlord's prior written permission. 16. Without Landlord's prior approval, Tenant shall not install any radio or television antenna, loudspeaker, music system or other device on the roof or exterior walls of the Building or on common walls with adjacent tenants. 17. No hand trucks or other vehicles of any kind shall be used in or brought into the Building or the Premises by Tenant or others unless such vehicle shall have been inspected and approved in writing by Landlord. 18. Tenant shall store all its trash and garbage within its Premises. No material shall be placed in the trash boxes or receptacles If such material is of such nature that it may not be disposed of in the customary manner of removing and disposing of trash and garbage and without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways and elevators provided for such purposes and at such times as Landlord shall designate. 19. These Rules and Regulations are in addition to, and shall not be construed to in any way modify, alter or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease covering premises in the Building. 20. Landlord reserves the right o make such other reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building, and for the preservation of good order therein. 21. Corridor doors, when not in use, shall be kept closed. 22. Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning the premises unless otherwise agreed to by Landlord. Except with the written consent of Landlord no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of clearing the same. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall not be responsible to any Tenant for any loss of Property on the premises, however occurring, or for any damage done to the effects of any Tenant by the janitor or any employee or any other person. Janitor service shall include ordinary dusting and cleaning by the janitor assigned to such work and shall not include beating of carpets or rugs or moving of service will not be furnished to areas which are occupied after 9:30 P.M. Window cleaning shall be done only by Landlord, and only between 6:00 A.M. and 5:00 P.M. 23. Tenants shall not make or permit any Improper, objectionable or unpleasant noises or odors in the Building or otherwise interfere in any way with other Tenants or persons having business with them. 24. No vending machine or machines of any description shall be installed, maintained or operated upon the Premises without the written consent of the Landlord. 25. On Saturdays, Sundays and legal holidays, and on other days between the hours of 6:00 P.M. and 8:00 A.M. the following day, access to the building, or to the halls, corridors, elevators or stairways in the building, or to the Premises may be refused unless the person seeking access is known to the person or employee of the building charge and has a pass or is properly identified. The Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the building of any person. Landlord further, in case of invasion, mob, riot, public excitement, or other commotion, reserves the right to prevent access to the Building during the continuance of the same by closing the doors or otherwise, for the safety of the Tenants and protection of property in the Building and the Building. Landlord further reserves the right to close and keep locked all entrances and exit doors of the building on Saturdays, Sundays, and legal holidays and on other days between the hours of 6:00 P.M. and 8:00 A.M. of the following day, and during such further hours as Landlord may deem advisable for the adequate protection of said Building and the property of its Tenants. Landlord agrees to be reasonable when regulating and inforcing all rules and regulations. EXHIBIT "D" ATTACHED TO AND MADE A PART OF LEASE AGREEMENT BY AND BETWEEN GOVERNMENT EMPLOYEES INSURANCE COMPANY (LANDLORD) AND EFFICIENT NETWORK TECHNOLOGY Inc. --------------------------------- (TENANT) DATED __________, 19__. Parking. Landlord will provide sixteen (16) covered parking spaces in the - -------- building garage at a ratio of one (1) space per six hundred (600) square feet at no charge for the term of the Lease. At least three (3) of these spaces shall be reserved for the Lease term. The remaining spaces required by Tenant shall be surface parking on a first come, first serve basis. There are no open; un-numbered parking spaces in the garage. RIDER TO OFFICE LEASE AGREEMENT ------------------------------- THIS RIDER TO OFFICE LEASE AGREEMENT (this "Rider") is incorporated into and made a part of that certain Office Lease Agreement (the "Lease") by and between Government Employees Insurance Company as Landlord and Efficient Network Technology, Inc. as Tenant. The following additional terms are incorporated into the Lease: A. Measurement of Months. Whenever the Lease or this Rider refers to a --------------------- period of months, or an event which is to take place a period of months following the Commencement Date, a month shall be deemed to begin on the day of the month that this Lease commenced, and shall be deemed to end on the preceding day of the following month. For example, if the Commencement Date is September 15, then the first month of the Lease shall be from September 15 through October 14. B. Supplementary Language. The following language shall be added to ---------------------- supplement language set forth in existing sections of the Lease: (1) Section 1(d). The following language shall be added to the end of ------------ Section 1(d): The 10.348 rentable square feet constituting the Premises (i) shall be architecturally verified by Landlord prior to the Commencement Date, (ii) shall include elevator frontage exposure, (iii) shall be designated Suite Number 1200 of the Building, and (iv) shall be based upon a maximum common area factor of 15% as determined by Landlord, provided that if such area factor is ever reduced to a lower percentage, rentable square feet shall be recalculated and the Tenant shall be entitled to an equitable reduction in the Basic Annual Rental. (2) Section 1(e). Notwithstanding the language set forth in the Lease, ------------ the "Lease term" shall be a period of 61 months, commencing on the third business day or weekend following the third business day following written notice from Landlord to Tenant that the Premises are ready for occupancy (the "Commencement Date") and ending at the end of the 61st month following the Commencement Date. (3) Section 3. The word "5th" in the fifteenth printed line of Section --------- 3 shall be changed to "10th". (4) Section 5(b). The words "(except for a failure due to Landlord's ------------ gross negligence or intentional acts)" should be added after the word "failure" in the third line of Section 5(b). (5) Section 9(b). The words "ordinary wear and tear excepted" should ------------ be added to the end of the first sentence of Section 9(b). (6) Section 13. The words "including Landlord's negligence" should be ---------- deleted from the third and fourth lines of Section 13. The following words should be added to the end of the last sentence of Section 13: "except to the extent such injury or damage results from Landlord's gross negligence or intentional misconduct." (7) Section 21(a). The words "when due" should be deleted from the end ------------- of Section 21(a) and replaced with "on or before the tenth (10th) day following the due date." Rider - Page 1 - ----- (8) Section 21(b). The following language should be added at the end of ------------- Section 21(b): "or within thirty (30) days if such default cannot be cured within ten (10) days and Tenant is actively attempting to cure such default." (9) Section 22. The words "and continuously uncured" should be added after ---------- the word "previous" in the third line of the last paragraph of Section 22. (10) Section 24. The following sentence shall be added to the end of ---------- Section 24: In case it should be necessary or proper for Tenant to bring any action under the Lease, the losing party in such action shall pay the prevailing party on demand a reasonable attorney's fee. (11) Section 29. The following sentence should be added to the end of ---------- Section 29: Whenever a period of time is hereindescribed for action to be taken by Tenant, except for the period of time given for payment of any amount of money hereunder, the Tenant shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the control of Tenant. (12) Section 34. The language in Section 34 shall be deleted and replaced ---------- with the following: Landlord and Tenant represent and warrant that there are no claims for brokerage commissions or finders fees in connection with this lease other than those due to The Staubach Company and to Landlord's representative, and Landlord and Tenant each agree to indemnify and hold harmless the other against all liabilities and costs arising from claims against the other for brokerage commissions or finders' fees, including without limitation attorneys' fees in connection therewith. (13) Exhibit "B". The following language should be inserted following the ----------- second sentence of the first full paragraph of Exhibit "B": Tenant requires that McCaslin - Hill, Inc. be one of the contractors allowed to bid. All construction bids and line item detail will be provided to Tenant (or its representative) prior to the awarding of the Contract, for Tenant's review and approval. If the second lowest acceptable construction bid is within $1,000 of the lowest acceptable bid, Tenant shall have the right to choose either contractor. There should be no specified subcontractors unless the additional cost of such subcontractor is borne by Landlord. No construction management fee will be charged to the allowance by Landlord. The portion of Exhibit "B" captioned "Space Planning" shall be deleted and replaced with the following language: Rider - Page 2 - ----- Landlord will assume all costs associated with space planning, including all preliminary plans with revisions (up to August 12, 1993) and construction documents. The costs for providing the required MEP's will be paid for by Landlord out of the Improvement Allowance discussed above, the preparer of MEP's to be approved by Tenant. C. Termination Option. Notwithstanding the Lease term set forth in ------------------ Paragraph (1)(e), and in the event and only in the event that Tenant has made a bona fide request to Landlord to expand Tenant's leased Premises by a minimum of 1500 square feet and Landlord is not able to make available sufficient expansion space on a floor then occupied by Tenant by the end of the 37th month following the Commencement Date, then Tenant shall have the right and option to terminate the Lease effective at the end of the 37th month following the Commencement Date, upon six (6) months' prior written notice to Landlord (given in accordance with the requirements of Paragraph 28) and upon payment of the Termination Fee hereinafter described. As used herein, the Termination Fee shall be the sum of $70,000, plus the total of all unamortized costs incurred by Landlord in connection with Tenant's occupancy of any expansion space or additional improvements, including but not limited to (1) that portion of any and all broker commissions for such expansion space earned but not yet paid and (2) the unamortized portion of the Tenant Improvement Allowance (as hereinafter defined). As used herein, the Tenant Improvement Allowance shall include construction costs, space planning costs, and construction oversight expenses for any expansion space or additional improvements. D. Payment of Rent and Letter of Credit. Notwithstanding anything set ------------------------------------ forth in the Lease, on the Commencement Date, Tenant shall pay in advance all Basic Monthly Rental which will become due and payable from the Commencement Date through the end of the seventh (7th) month following the Commencement Date. In addition, as additional security for the performance of its obligations under this Lease, Tenant, upon execution of this Lease, shall deliver to Landlord a letter of credit (the "Letter of Credit") in form acceptable to Landlord, (such form being attached hereto as Exhibit "X" to this Rider) issued by a financial institution acceptable to Landlord. The Letter of Credit will be in the amount of Sixty Thousand and No/100 Dollars ($60,000.00) and shall be transferrable. The Letter of Credit may be drawn on after the end of the seventh (7th) month following the Commencement Date and shall expire at the end of the 25th month following the Commencement Date. In the event of an event of default under this Lease, Landlord may draw on the Letter of Credit and retain the proceeds thereof as an additional Security Deposit, to be held and/or applied in accordance with Paragraph 38. If Landlord transfers its interest in the Premises during the term of this Lease, Landlord may assign its rights under the Letter of Credit to the transferee. E. Ongoing Right of First Offer. Provided Tenant is not in default under ---------------------------- the terms and provisions of this Lease, Tenant shall have an ongoing right of first offer (the "Ongoing Right of First Offer"), to lease space on the 11th and 12th floor of the Building on the same terms and conditions as offered to other prospective tenants of the space. Landlord shall notify Tenant in writing when such space is available for lease and the terms under which the space may be leased, which notice shall provide Tenant (i) three (3) business days in which to exercise the Ongoing Right of First Offer with respect to space on the 11th floor, and (ii) ten (10) calendar days in which to exercise the Ongoing Right of First Offer with respect to space on the 12th floor. In connection therewith, if Tenant elects to lease such space, then this Lease shall be modified with respect to the lease of the additional premises. The Ongoing Right of First Offer to lease additional space is expressly nonassignable and nontransferable by Tenant. Rider - Page 3 - ----- F. Expansion. If Tenant expands into additional adjacent space on the --------- 12th floor, either due to the exercise of the Ongoing Right of First Offer or otherwise, between the beginning of the eighth (8th) month of this Lease and the last day of the tenth (10th) month of this Lease, and such expansion is for not less than 2500 square feet, then the Basic Annual Rental shall be at the same rate per rentable square foot as the original Premises. With respect to any expansion space described in this paragraph, Landlord shall also provide Tenant with a Tenant Improvement Allowance of 22 1/2 cents per rentable square foot of expansion space for each remaining month of the primary Lease term. Said allowance shall only be used for the purpose of making improvements to the expansion space. G. Renewal Option. -------------- (1) Grant of Option. Provided that, at the time in question, this --------------- Lease is then in full force and effect and there is no uncured Event of Default hereunder, Landlord hereby grants to Tenant two (2) successive options (each a "Renewal Option") to renew this Lease for an additional three (3) year term each. The first such Renewal Option shall be for the three (3) year period beginning on the day following the final day of the initial Lease term and continuing thereafter until three (3) years after such date; and the second Renewal Option shall be for a three (3) year period beginning on the day following the final day of the first renewal term and continuing thereafter until three (3) years after such date unless this Lease shall sooner terminate as provided herein. Each Renewal Option is granted to Tenant upon the terms and conditions hereinafter set forth. (2) Exercise of Option. Tenant may, by notifying Landlord in writing ------------------ not less than ninety (90) days nor more than one hundred eighty (180) days prior to the final day of the initial Lease term or the final day of the first renewal term, as appropriate, renew this Lease for an additional three (3) year term as stated above. Landlord shall provide to Tenant a written estimate of Fair Market Rental Value (as defined below) not less than six (6) months or more than twelve (12) months prior to the final day of the initial Lease term or the final day of the first renewal term, as appropriate, so that Tenant may meaningfully evaluate the renewal rental rate. (3) Terms of Lease. (a) Each renewal of this Lease shall be upon the -------------- same terms, covenants and conditions applicable to the original Lease term, except that the Basic Annual Rental payable during such extended term shall be an amount equal to ninety-five percent (95%) of the Fair Market Rental Value (as hereinafter defined) of the Premises as of the commencement of the lease term covered by the applicable Renewal Option. As used herein, "Fair Market Rental Value" of the Premises shall mean the price that a ready and willing tenant would pay as of the commencement of the extended lease term as rent to a ready and willing landlord of property comparable to the Premises if such property were exposed for lease on the open market for a reasonable period of time and taking into account all of the purposes for which such property may be used and not just the use proposed to be made of the premises by Tenant. (b) (i) If Landlord and Tenant have not been able to agree on the Fair Market Rental Value by the forty-fifth (45th) day prior to the commencement date of the renewal term, the Basic Annual Rental for the extended term shall be determined as follows: For a period of ten (10) days, Landlord and Tenant shall endeavor in good faith to agree upon a single appraiser and the single appraiser shall determine the Fair Market Rental Value. If Landlord and Tenant are unable to agree upon a single appraiser within said ten (10) day period, each shall then, by written notice to the other, given within five (5) days after said ten (10) day period, appoint one appraiser. Within five (5) days after the two appraisers are appointed, they shall appoint a third appraiser. If either Landlord or Tenant fails to appoint its appraiser within the Rider - Page 4 - ----- prescribed time period, the single appraiser appointed shall determine the Fair Market Rental Value of the Premises. If the two appointed appraisers fail to agree on the third appraiser, he or she shall be appointed by the then president of the Greater Dallas Association of Realtors. Each party shall bear the cost of the appraiser appointed by it and the parties shall share equally the cost of the third appraiser. Each of the three selected appraisers shall then determine the Fair Market Rental Value of the Premises for the first year of the extension term, and the Fair Market Rental Value for purposes of determining the Basic Annual Rental shall be the average of the three. (ii) If the procedure set forth herein is implemented and if for any reason whatsoever (including, without limitation, the institution of any judicial or other legal proceedings), the Fair Market Rental Value for any extended lease term has not been finally determined prior to the first day of said extended term, then Tenant shall initially pay as rental an amount equal to the Basic Annual Rental for the final year of the prior term; when the Fair Market Rental Value is finally determined as set forth above, Landlord and Tenant shall by appropriate payments to the other, correct any overpayment or underpayment which may have been made prior to such final determination. F. Non-Disturbance, Subordination and Attornment. In the event Landlord's --------------------------------------------- lender or its successors or assigns (collectively, "Lender") succeed to the interest of Landlord in and to the Property, or under this Lease, then Tenant will, upon request of Lender, automatically become the lessee of Lender or any one claiming interest through Lender without change in the terms or other provisions of this Lease; provided, however, that said successor in interest shall not be bound by (i) any payment of rent or additional rent for more than one (1) month in advance, except prepayments in the nature or security for the performance by the Tenant of its obligations under the Lease, or (ii) any amendment or modification of the Lease made without the consent of Lender or successor in interest. In the event Lender or any purchaser at foreclosure shall succeed to Landlord's interest in the Premises, this Lease will remain in full force and effect and be binding upon Lender or such purchaser and Tenant as though each were the original parties thereto. Upon the request of Lender or anyone claiming through Lender, Tenant shall execute and deliver an instrument or instruments confirming the subordination described in Paragraph 4 and agreeing to attorn to the rights of Lender or anyone claiming interest through Lender. Lender has agreed, subject to the conditions specified in this paragraph, upon Landlord's request, to execute a nondisturbance and attornment agreement with Tenant, in Lender's then standard form. G. Commencement Date. The Lease term shall commence on the third business day or weekend following the third business day following written notice by Landlord to Tenant that the premises are ready for occupancy. Landlord will provide approximately 1,500 square feet of temporary space adjacent to the premises (with customary office amenities, such as phone hookups)at no charge until the Premises are ready for occupancy. Occupancy of the temporary space may begin upon full execution of this lease but must be arranged as specified by Landlord. Lights should stay on (without timer) until 12:00 am. H. Building Hours. The Building Hours are: -------------- 7:00 a.m. to 8:00 p.m. M-F 8:00 a.m. to 2:00 p.m. Sat Landlord will provide HVAC Monday thru Friday from 7:00 until 12:00 a.m. and Saturday from 8:00 until 6:00 p.m. at no additional charge to Tenant. Any above standard electrical usage will be separately metered and paid for by Tenant on a direct bill basis. If such additional meter is required, which shall be determined by Landlord, the cost of materials and installation shall be borne by Tenant. Note: Not to exceed 8 watts per sq. ft. Rider - Page 5 - ----- I. Building Signage. Landlord will provide, at Landlord's expense, ---------------- building directory signage and suite signage. Such signage shall be the building standard. J. Consent. In all cases in this Lease where the consent of either ------- Landlord or Tenant shall be required, including sublease and assignment of all or any portion of the Premises, such consent shall not be unreasonably withheld or delayed. K. Confidentiality. Each of Landlord and Tenant agree not to disclose to --------------- any third party (other than the lender, auditors or attorneys of either and the issuing bank and any confirming bank with respect to the letters of credit) the terms of this Lease or the identities of the principals and agents of the other party, except as otherwise mutually agreed to in writing by Landlord and Tenant; provided, however, that in the event of a default by Tenant under the terms of this Lease, Landlord may pursue whatever collection and enforcement efforts as it deems appropriate and are permissible under Texas law and the terms of this Lease. EXECUTED as of the _____ day of _______________, 1993. Government Employees Insurance Company By:______________________ Printed Name:_____________________ Title:____________________________ Efficient Network Technology, Inc. By: /s/ Mark A. Floyd -------------------------- Printed Name: MARK A FLOYD Title: PRESIDENT & CEO Rider - Page 6 - ----- EXHIBIT "X" ----------- IRREVOCABLE LETTER OF CREDIT ---------------------------- Beneficiary: GOVERNMENT EMPLOYEES INSURANCE COMPANY 4201 SPRING VALLEY ROAD, #200 DALLAS, TEXAS 75244 We hereby authorize you to draw on the (Bank) by order of: and for the account of: Efficient Network Technology, Inc. 4201 Spring Valley Road, #1200 Dallas, Texas 75244 up to an aggregate amount of Sixty Thousand and No/100 Dollars ($60,000.00) available by your drafts at sight accompanied by the original of this Letter of Credit and statement signed by a representative on behalf of Government Employees Insurance Company, stating that: "Efficient Network Technology, Inc. or its successor and assigns, Tenant, under a lease agreement dated _______________, 1993, by and between Government Employees Insurance Company and Efficient Network Technology, Inc. for certain premises located at 4201 Spring Valley Road, Dallas, Texas, is in default of the Lease." This Irrevocable Letter of Credit will be duly honored by us at sight upon delivery of the statement set forth above without inquiry as to the accuracy of such statement and regardless of whether Efficient Network Technology disputes the content of such statement. This Letter of Credit shall expire on [a date which is the end of the 25th month following the Commencement Date], and is irrevocable and transferrable. Drafts must be drawn and presented at _______________, not later than [a date which is the end of the 25th month following the Commencement Date]. Drafts drawn hereunder must be marked: "Drafts are drawn under_______________ Letter of Credit No. _____" and indicate the date hereof. We hereby agree with the drawers, endorsers and bonafide holders of all drafts drawn under and in compliance with the terms of the Credit, that such drafts will be duly honored upon presentation to the Drawee. In view of the fact that this Letter of Credit is issued in transferrable form, if it is your intention to transfer your interest hereunder, you must return this Letter of Credit to us for endorsement reflecting the new Beneficiary. This Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1983 Revision) International Chamber of Commerce Publication No. 400. Very truly yours, __________________________________ EXHIBIT "X" TO RIDER - Solo Page - -------------------- EX-10.13 5 MODIFICATION OF GEICO OFFICE LEASE EXHIBIT 10.13 MODIFICATION AND RATIFICATION This Modification and Ratification of Lease Agreement is made and entered between Government Employees Insurance Company (Landlord) and Efficient Networks, Inc., (Tenant) for and in consideration of One Dollar ($1.00) and other good and valuable consideration, receipt of which is hereby acknowledged. WITNESSETH: 1. Landlord and Tenant hereby confirm and ratify, except as modified below, all of the terms, conditions and covenants in that certain written Lease Agreement dated August 19, 1993, between Landlord and Tenant ("The Lease"), for the rental of the following described property: Approximately 10,348 rentable square feet (Primary Space) of office space located at 4201 Spring Valley Road, Suite 1200, Dallas, Texas, 75244. 2. Effective July 1, 1995, or substantial completion, Landlord and Tenant hereby agree to expand the premises to include the remainder of the twelfth (12) floor which includes 8,322 rentable square feet (Expansion space). Therefore, Tenant's total rentable square footage under Lease shall be 18,670. 3. The term of the Lease shall be extended an additional thirty-seven (37) months (Lease Extension) to run coterminous with the expansion space. Therefore, the new expiration date shall be October 31, 2001. 4. The following shall be the new base rental structure:
Months Expansion Space Total Base Rental ------ --------------- ---------------- Aug 95 - Dec 95 1 - 5 $ 8.00 psf or $5,548.00 per month $15,896.00 per month Jan 96 - Oct 96 6 - 15 $12.60 psf or $8,738.10 per month $19,086.10 per month Nov 96 - Oct 97 16 - 27 $13.45 psf or $9,327.58 per month $20,106.75 per month Nov 97 - Oct 98 28 - 39 $13.60 psf or $9,431.60 per month $20,210.77 per month *Nov 98 - Oct 99 40 - 51 $13.60 psf $21,159.33 per month *Nov 99 - Oct 00 52 - 63 $13.80 psf $21,470.50 per month *Nov 00 - Oct 01 64 - 76 $14.20 psf $22,092.83 per month
* Extension of current Lease which includes Expansion space. 5. Tenant's Base Year on the Expansion space shall be 1995. 6. Landlord shall provide a Tenant improvement allowance of up to $12.25 per rentable square foot ($101,944.50) for improvements to the expansion or primary space. If Tenant improvements exceed such amount, Landlord shall amortize up to $2.00 per rentable square foot ($16,644.00) at 10% interest through-out the Lease term, beginning the amortization at month twelve (12). 7. Landlord shall pay its space planner, or other required design disciplines up to $1.00 per rentable square foot ($8,322.00) to prepare the appropriate construction documents and MEP's for the expansion space. Tenant will be responsible for any cost overages for such services, which must be paid to Landlord within thirty (30) days of receiving notice of such overage or may be charged to the Tenant Improvement Allowance unless such allowance is exhausted. 8. Landlord shall be responsible for ADA compliance in the twelfth (12) floor restrooms. Such alterations, if required, will be performed in a design and at a time determined by Landlord the cost of such alterations shall be at Landlord's expense. 9. The option to terminate the Lease as shown in Section C of the "Rider to Office Lease Agreement" (Rider) shall be changed: Tenant shall have the right to terminate the Lease per the procedure and terms contained in Section C after it's thirty-sixth (36) month of occupancy under this Modification and Ratification. This is a one (1) time option. The termination option date contained in Section C is eliminated. 10. Tenant shall have the right to have installed, up to 22 letter characters on the existing building monument sign located on the corner of Spring Valley and Midway. Landlord shall purchase the selected building standard lettering and have such signage installed in a location determined by Landlord. Tenant shall be responsible for the cost of all materials required for such installation, including, but not limited to, the letters. Landlord will pay for installation labor only. Tenant must give Landlord written notice of its desire to have such signage installed. Landlord reserves the right to approve the name installed, such approval shall not be unreasonably withheld. 11. Tenant's ongoing right of first offer as shown in Section E of the Rider shall be expanded to include the ninth (9) floor. However, such right is subordinate to any and all space that may be required for the Landlord's or its affiliates use. 12. Tenant shall receive an additional fourteen (14) covered parking spaces at no charge for the term of this Modification and Ratification. 13. All other terms and conditions shall be per the original Lease document. Executed this 8th day of May 1995. --- --- Agreed and Accepted: Agreed and Accepted: Tenant: Landlord: Efficient Networks, Inc. Government Employees Insurance Company By: /s/ Mark A. Floyd By: /s/ Signature Illegible ---------------------- ------------------------ It's: President It's: asst. V.P. 2 EX-10.15 6 AGMNT REGARDING CONDITIONAL EXERCISE OF WARRANTS EXHIBIT 10.15 AGREEMENT REGARDING CONDITIONAL EXERCISE OF WARRANT This Agreement Regarding Conditional Exercise of Warrants (the "Agreement") is entered into this ____ day of May, 1999 by and among Efficient Networks, Inc. ("Efficient" or the "Company") and___________________ (the "Investor"), and Wilson Sonsini Goodrich & Rosati, Professional Corporation as escrow agent (the "Escrow Agent"). Pursuant to a Securities Purchase Agreement dated _________ ___, 1999 (the "Purchase Agreement"), the Company borrowed $___________ from the Investor and, in connection with such loan, issued to the Investor (1) a 10% Subordinated Note due January ___, 2002 (the "Note") and (2) a warrant to purchase ____________ shares of the Company's Series H Preferred Stock at an exercise price of $2.92 per share (the "Warrant"). Payment of the principal amount and all accrued interest on the Note is due, and the Warrant expires, upon completion by the Company of a public offering of shares of the Company's Common Stock pursuant to a registration statement declared effective under the Securities Act of 1933, as amended in which the price per share is at least $5.00 and the aggregate offering proceeds are at least $10 million. A public offering meeting those requirements is referred to as a "Qualified Public Offering." The Company has filed a registration statement with the Securities and Exchange Commission for a Qualified Public Offering. In connection with the public offering, the Company and the Investor wish to ensure that the Notes are repaid and that the Warrant is exercised. The Investor understands that, upon completion of a Qualified Public Offering, the Series H Preferred Stock that would be issuable upon exercise of the Warrant will automatically convert to Common Stock. Based upon and in consideration of the foregoing, the parties hereby agree as follows: 1. Conditional Exercise of Warrant. The Investor hereby elects to exercise the Warrant in full, conditioned upon completion of a Qualified Public Offering. The Investor hereby tenders the Warrant along with this Agreement. This election to exercise shall become automatically effective immediately prior to the closing of the Qualified Public Offering. 2. Tender of Exercise Price. In payment of the aggregate exercise price under the Warrant, the Investor hereby tenders the Note for cancellation. The Note shall be cancelled concurrently with the automatic exercise of the Warrant as provided in Section 1. 3. Issuance of Common Stock. Promptly following completion of the Qualified Public Offering, the Company will cause a certificate representing that number of shares of Common Stock as would have been issued had the Warrant been exercised to purchase an aggregate of __________ shares of Series H Preferred Stock. The certificate representing the Common Stock will bear the legends referred to in the Purchase Agreement. 4. Payment of Interest. Promptly following cancellation of the Note, the Company will pay to the Investor any interest accrued on the Note up to the date of cancellation. 5. Escrow of Note and Warrant. In order to ensure faithful exercise of the Warrant and cancellation of the Note as provided herein, the Investor agrees to tender the Note and Warrant to the Escrow Agent. Immediately prior to completion of a Qualified Public Offering and without further instruction or authorization from any party, the Escrow Agent shall (1) take appropriate actions to record the full exercise of the Warrant and (2) mark the Note cancelled. Notwithstanding that the Escrow Agent is holding the Note, any interest payments, notices or the like relating thereto shall continue to be sent directly to the Investor as provided in the Purchase Agreement. 6. Right to Exercise Not Limited. Nothing in this Agreement is intended to limit the Investor's right to exercise the Warrant. In the event that Investor wishes to exercise the Warrant outside of this Agreement, Investor should so notify the Company and Wilson Sonsini Goodrich & Rosati, P.C., and arrangements will be made to effect such exercise. 7. Expiration of Agreement. This Agreement will become void if a Qualified Public Offering has not been consummated on or before December 31, 1999. In the event that this Agreement expires, Wilson Sonsini Goodrich & Rosati, P.C. will promptly return the original Note and Warrant to the Investor. 8. Notices. Notices shall be sent to a party at the address set forth below their signature below, or at such other address as a party may indicate to the other parties in writing. The parties have executed this Agreement as of the date set forth above. Company Investor Efficient Networks, Inc. --------------------------------------- By: By: --------------------------------- ----------------------------------- 4201 Spring Valley Road, Ste. 1200 Address: Dallas, Texas 75244 ------------------------------ ------------------------------ Attn: President Attn: ------------------------------ Escrow Agent Wilson Sonsini Goodrich & Rosati, P.C. By: --------------------------------- 650 Page Mill Road Palo Alto, CA 94304 Attn: Kenneth M. Siegel -2- EX-23.1 7 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. KPMG LLP Dallas, Texas June 8, 1999 EX-99.1 8 CONSENT OF ROBERT HAWK Exhibit 99.1 CONSENT I hereby consent to the use of my name and the description of my intention to join the Board of Directors of Efficient Networks, Inc. ("Efficient") in Amendment No. 1 to Efficient's Registration Statement on Form S-1 (Registration No. 333-77795) to be filed with the Securities and Exchange Commission on or about June 8, 1999 and any further amendments thereto (including any filing under Rule 462 promulgated under the Securities Act of 1933, as amended). /s/ ROBERT HAWK - ------------------------------ Robert Hawk June 8, 1999 -----END PRIVACY-ENHANCED MESSAGE-----