<PAGE>
As filed with the Securities and Exchange Commission on March 11, 1999
Registration No. 333-71921
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
AMENDMENT NO. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EXTREME NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 3576 77-0430270
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Number)
organization)
10460 Bandley Drive
Cupertino, California 95014-1972
(408) 342-0999
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
Gordon L. Stitt
President
Extreme Networks, Inc.
10460 Bandley Drive
Cupertino, California 95014-1972
(408) 342-0999
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Gregory M. Gallo, Esq. Jeffrey D. Saper, Esq.
Jay M. Spitzen, Esq. J. Robert Suffoletta, Esq.
J. Howard Clowes, Esq. Robert G. Day, Esq.
Gray Cary Ware & Freidenrich LLP Wilson Sonsini Goodrich & Rosati
400 Hamilton Avenue Professional Corporation
Palo Alto, California 94301-1825 650 Page Mill Road
(650) 328-6561 Palo Alto, California 94304-1050
(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 being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") 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, please check the following
box and list the Securities Act registration 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 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 thereafter become effective in accordance with
Section 8(a) of the Securities Act or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued March 11, 1999
5,000,000 Shares
[EXTREME NETWORKS LOGO]
COMMON STOCK
-----------
Extreme is offering 5,000,000 shares of its common stock. This is our initial
public offering and no public market currently exists for our shares.
We anticipate that the initial public offering price will be
between $9 and $11 per share.
-----------
We have applied to list the common stock
on the Nasdaq National Market under the
symbol "EXTR."
-----------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 6.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Extreme
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.................... $ $ $
Total........................ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Extreme has granted the underwriters the right to purchase up to 750,000
additional shares to cover any over-allotments. Morgan Stanley & Co.
Incorporated expects to deliver the shares of common stock to purchasers on
, 1999.
-----------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
, 1999
<PAGE>
[Inside front cover]
The following statements appear on this page
Internet technologies have enabled a new generation of computing applications
that are burdening today's enterprise LANs. However, the performance of
yesterday's legacy routers is being taxed by the high volume of traffic created
by these applications.
This has opened up an opportunity to improve the state of the art of enterprise
networking...
Leveraging Ethernet and the Internet protocol - today's most dominant and stable
LAN technologies - and combining them with wire-speed Layer 3 switching, the
Extreme Networks solution enables the enterprise LAN to deliver more information
faster, while allowing businesses to accommodate future growth.
The Extreme Networks solution uses the same hardware, software and management
architecture for end-to-end simplicity across the enterprise LAN - to desktops,
segments, servers and the network core. This makes it easier to manage and
scale enterprise LANs, while reducing network ownership costs.
<PAGE>
[text to accompany inside spread, next to diagram]
Depicted on this page is an enterprise LAN architecture with Extreme Networks'
products.
High Performance
Wire-speed Layer 3 switching
Non-blocking architecture
10/100/1000 Mbps Ethernet
Easy to Use and Implement
Consistent architecture
Consistent product feature set
Web-based management
Scaleable
Speed, bandwidth, network size, QoS
Support future applications
Upgrade from layer 2 to Layer 3
Quality of Service
Policy-based QoS from Layer 1-4
Prioritize applications
Allocate bandwidth
Lower Cost of Ownership
Less expensive, yet faster than legacy routers
Leverages existing knowledge and resources
Reduces enterprise LAN complexity
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Prospectus Summary.................. 4
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
Operating Results.................. 22
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Business......................... 31
Management....................... 46
Certain Transactions............. 52
Principal Stockholders........... 53
Description of Capital Stock..... 55
Shares Eligible for Future Sale.. 58
Underwriters..................... 60
Legal Matters.................... 62
Experts.......................... 62
Where You Can Find More
Information..................... 62
Index to Consolidated Financial
Statements...................... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
We are a California corporation and will reincorporate in Delaware prior to
the consummation of this offering. Unless otherwise indicated, all information
in this prospectus (1) gives effect to the conversion of all outstanding
shares of preferred stock into shares of common stock effective upon the
closing of the offering, (2) assumes no exercise of the underwriters' over-
allotment option and (3) assumes no exercise of outstanding warrants to
purchase 337,398 shares of our common stock. In this prospectus, unless the
context indicates otherwise, "Extreme," "we," "us," and "our" refer to Extreme
Networks, Inc. and all of its subsidiaries.
Until , 1999, 25 days after commencement of the offering, all dealers
effecting transactions in Extreme common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing elsewhere in this prospectus.
The Company
Extreme Networks is a leading provider of a next generation of switching
solutions for local area networks, or LANs, that meet the increasing needs of
enterprise LANs. The key advantages of our LAN solutions are increased
performance, the ability to easily grow, or "scale," in size as customer needs
change, flexible allocation of LAN resources, ease of use and lower cost of
ownership. These advantages are obtained through the use of custom
semiconductors, known as ASICs, in our products and through hardware and
software designs that are common and uniform across our product line. The
routing of network traffic, a function referred to as Layer 3 switching, is
done primarily with ASICs in our products, and consequently, is faster than the
software implementations used in many competing products. Traditional Layer 3
products rely primarily on software which can slow traffic speeds below those
which could otherwise be achieved and result in message packets being lost when
LAN traffic is high. Our products incorporate an ASIC-based, wire-speed
architecture and are designed to avoid the loss of message packets in the
switch, or "non-blocking." As a result, our products are less expensive than
software-based routers, yet offer improved performance throughout the
enterprise LAN from the network core to the desktop. The Dell'Oro Group, a
research and consulting firm, estimates in an independently prepared market
report dated February 1999, that the market for Layer 3 switching totaled $637
million in 1998 and is expected to increase to approximately $3.4 billion in
2001.
The increased use of data-intensive, mission-critical applications, the
widespread implementation of various kinds of enterprise-wide networks, and the
ubiquity of Internet technologies have burdened the LAN infrastructure with
unpredictable traffic patterns and unpredictable traffic loads. To address the
need to improve LAN performance, new and faster technologies employing multiple
hardware and software protocols were developed. These multiple protocols caused
enterprise LANs to become more complex, expensive and difficult to manage in
part because of the need for multiple-protocol routers that are based on
software and expensive CPUs. With the wide acceptance of Ethernet and the
Internet Protocol, the need to support a multi-protocol environment has
diminished. Extreme has developed Layer 3 switches based on our custom ASICs
which function as less expensive and significantly faster routers. Our Layer 3
switches support connections operating at Gigabit speeds, 1 billion bits per
second. They can support large networks, have a sophisticated ability to assign
different priorities to different kinds of network traffic and, unlike most
Layer 3 products, do not drop message packets even if network LAN traffic is
high.
Our Summit stackable and BlackDiamond modular product families provide end-
to-end LAN solutions that meet the requirements of today's enterprise LANs. Our
products offer the following benefits:
. High performance: Our products provide Gigabit Ethernet and Fast
Ethernet together with the non-blocking, wire-speed routing of Layer 3
switching.
. Ease of use and implementation: Our products offer a common architecture
and are compatible with existing LAN devices, making them easy to
install and manage.
. Scalability: Our solutions offer customers the speed and bandwidth they
need with the capability to scale their LANs to support demanding
applications in the future.
. Quality of service: Our policy-based quality of service enables
customers to prioritize mission-critical applications by providing
industry-leading tools for allocating resources to specific
applications.
. Lower cost of ownership: Our products are less expensive than software-
based routers, yet offer higher routing performance throughout the
enterprise LAN.
We sell our products through domestic and international resellers, OEMs and
field sales. We have entered into agreements with more than 100 resellers in 39
countries, and we have established four key OEM relationships with leaders in
the telecommunications, personal computer and computer networking industries.
Our field sales organization supports and develops leads for our resellers and
establishes and maintains a limited number of key accounts and strategic
customers. Our products have been deployed in a broad range of organizations,
ranging from companies in the telecommunications, manufacturing, medical,
computer services, media and finance industries to educational industries and
federal agencies. We are incorporated in California and will reincorporate in
Delaware prior to the consummation of the offering. Our executive offices are
located at 10460 Bandley Drive, Cupertino, California 95014-1972 and our
telephone number is (408) 342-0999.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered....................... 5,000,000 shares
Common stock to be outstanding after this
offering.................................. 45,852,510 shares
Use of proceeds............................ We intend to use the proceeds for
general corporate purposes,
including working capital and
capital expenditures. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol..... EXTR
</TABLE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The foregoing information is based upon shares outstanding as of December
31, 1998 and excludes shares which may be issued upon the exercise of options.
The "as adjusted" column below reflects the issuance and sale of 5,000,000
shares of our common stock at an assumed initial public offering price of
$10.00 per share, and the application of the net proceeds from the offering,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, as set forth under "Use of Proceeds."
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, December 31,
------------------ ------------------
1997 1998 1997 1998
------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Consolidated statement of operations
data:
Net revenue............................ $ 256 $ 23,579 $ 6,104 $ 30,851
Gross profit (loss).................... (132) 8,682 2,547 15,246
Total operating expenses............... 7,928 22,641 9,038 19,483
Operating loss......................... (8,060) (13,959) (6,491) (4,237)
Net loss............................... (7,923) (13,868) (6,465) (4,843)
Basic and diluted net loss per share... $(4.51) $ (3.17) $ (1.84) $ (.71)
Weighted average shares outstanding
used in computing basic and diluted
net per share......................... 1,758 4,379 3,510 6,867
Pro forma basic and diluted net loss
per share............................. $ (.44) $ (.13)
Shares used in computing pro forma
basic and diluted net loss per share.. 31,701 35,929
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------
Actual As Adjusted
---------- ------------
(unaudited)
<S> <C> <C>
Consolidated balance sheet data:
Cash and cash equivalents.............................. $ 5,792 $ 51,092
Working capital........................................ 9,284 54,584
Total assets........................................... 27,622 72,922
Long-term debt and capital lease obligations due after
one year.............................................. 2,719 2,719
Total stockholders' equity............................. 11,740 57,040
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus, before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or operating results could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
Extreme Has a History of Losses, Expects Future Losses and Cannot Assure You
that It Will Achieve Profitability
We have not achieved profitability and although our revenue has grown in
recent quarters, we cannot be certain that we will realize sufficient revenue
to achieve profitability. Extreme has incurred net losses of $7.9 million from
inception through June 30, 1997, $13.9 million for fiscal year 1998 and $4.8
million for the six-months ended December 31, 1998. As of December 31, 1998,
we had an accumulated deficit of $26.6 million. We have not achieved
profitability and expect to continue to incur net losses. We anticipate
continuing to incur significant sales and marketing, product development and
general and administrative expenses and, as a result, we will need to generate
significantly higher revenue to achieve and sustain profitability.
A Number of Factors Could Cause Extreme's Quarterly Financial Results to Be
Worse Than Expected Resulting in a Decline in Its Stock Price
We plan to significantly increase our operating expenses to expand our
sales and marketing activities, broaden our customer support capabilities,
develop new distribution channels, fund increased levels of research and
development and build our operational infrastructure. We base our operating
expenses on anticipated revenue trends and a high percentage of our expenses
are fixed in the short term. As a result, any delay in generating or
recognizing revenue could cause our quarterly operating results to be below
the expectations of public market analysts or investors, which could cause the
price of our common stock to fall.
We may experience a delay in generating or recognizing revenue because of a
number of reasons. Orders at the beginning of each quarter typically do not
equal expected revenue for that quarter and are generally cancelable at any
time. Accordingly, we are dependent upon obtaining orders in a quarter for
shipment in that quarter to achieve our revenue objectives. In addition, the
timing of product releases, purchase orders and product availability could
result in significant product shipments at the end of a quarter. Failure to
ship theses products by the end of a quarter may adversely affect our
operating results. Furthermore, our customer agreements typically provide that
the customer may delay scheduled delivery dates and cancel orders within
specified time frames without significant penalty.
Our quarterly revenue and operating results have varied significantly in
the past and may vary significantly in the future due to a number of factors,
including:
. fluctuations in demand for our products and services, including
seasonality, particularly in Asia;
. unexpected product returns or the cancellation or rescheduling of
significant orders;
. our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
. announcements and new product introductions by our competitors;
. our ability to achieve required cost reductions;
. our ability to obtain sufficient supplies of sole or limited sourced
components for our products;
. unfavorable changes in the prices of the components we purchase;
. our ability to attain and maintain production volumes and quality levels
for our products;
6
<PAGE>
. the mix of products sold and the mix of distribution channels through
which they are sold; and
. costs relating to possible acquisitions and integration of technologies
or businesses.
Due to the foregoing factors, we believe that period-to-period comparisons
of our operating results should not be relied upon as an indicator of our
future performance.
Intense Competition in the Market for Enterprise LAN Equipment Could Prevent
Extreme From Increasing Revenue and Prevent Extreme From Achieving or
Sustaining Profitability
The market for enterprise LAN switches is intensely competitive. Our
principal competitors include Alcatel, Bay Networks, Cabletron Systems, Cisco
Systems, Ericsson, FORE Systems, Lucent Technologies, Nokia, Nortel Networks,
Siemens, 3Com and Xylan. Many of our current and potential competitors have
longer operating histories and substantially greater financial, technical,
sales, marketing and other resources, as well as greater name recognition and
larger installed customer bases, than we do. These competitors may have
developed or could in the future develop new technologies that compete with
our products or even render our products obsolete.
To remain competitive, we believe we must, among other things, invest
significant resources in developing new products and enhancing our current
products and maintaining customer satisfaction. If we fail to do so, our
products may not compete favorably with those of our competitors and our
revenue and future profitability could be materially adversely affected. For
more information about competitive risks to Extreme, see "Business--
Competition."
Extreme Expects the Average Selling Prices of Its Products to Decrease Rapidly
Which May Reduce Gross Margins or Revenue
The enterprise LAN equipment industry has experienced rapid erosion of
average selling prices due to a number of factors, including competitive
pricing pressures and rapid technological change. We may experience
substantial period-to-period fluctuations in future operating results due to
the erosion of our average selling prices. We anticipate that the average
selling prices of our products will decrease in the future in response to
competitive pricing pressures, increased sales discounts, new product
introductions by us or our competitors or other factors. Therefore, to
maintain our gross margins, we must develop and introduce on a timely basis
new products and product enhancements and continually reduce our product
costs. Our failure to do so would cause our revenue and gross margins to
decline, which could materially adversely affect our operating results and
cause the price of our common stock to decline.
Extreme's Market is Subject to Rapid Technological Change and to Compete
Extreme Must Continually Introduce New Products that Achieve Broad Market
Acceptance
The enterprise LAN equipment market is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements
and evolving industry standards. If we do not address these changes by
regularly introducing new products, our product line will become obsolete.
Developments in routers and routing software could also significantly reduce
demand for our product. Alternative technologies, including asynchronous
transfer mode, or ATM, could achieve widespread market acceptance and displace
Ethernet technology on which our product lines and architecture are based. We
cannot assure you that our technological approach will achieve broad market
acceptance or that other technologies or devices will not supplant our
approach.
When we announce new products or product enhancements that have the
potential to replace or shorten the life cycle of our existing products,
customers may defer purchasing our existing products. These actions could
materially adversely affect our operating results by unexpectedly decreasing
sales, increasing our inventory levels of older products and exposing us to
greater risk of product obsolescence. The market for enterprise LAN
7
<PAGE>
switching products is evolving and we believe our ability to compete
successfully in this market is dependent upon the continued compatibility and
interoperability of our products with products and architectures offered by
other vendors. In particular, the networking industry has been characterized
by the successive introduction of new technologies or standards that have
dramatically reduced the price and increased the performance of enterprise LAN
equipment. To remain competitive we need to introduce products in a timely
manner that incorporate or are compatible with these new technologies as they
emerge. We have experienced delays in releasing new products and product
enhancements in the past which delayed sales and resulted in lower quarterly
revenue than anticipated. We may experience similar delays in product
development in the future and any delay in product introduction could
adversely affect our ability to compete and cause our operating results to be
below our expectations or the expectations of public market analysts or
investors.
Continued Rapid Growth Will Strain Extreme's Operations
Since the introduction of our product line, we have experienced a period of
rapid growth and expansion which has placed, and continues to place, a
significant strain on our resources. Unless we manage such growth effectively,
we may make mistakes in operating our business such as inaccurate sales
forecasting, incorrect material planning or inaccurate financial reporting.
Our net revenue increased significantly during the last year, and from
December 31, 1997 to December 31, 1998, the number of our employees increased
from 80 to 159. We expect our anticipated growth and expansion to strain our
management, operational and financial resources. Our management team has had
limited experience managing such rapidly growing companies on a public or
private basis. In January 1999, we hired a new Chief Financial Officer. To
accommodate this anticipated growth, we will be required to:
. improve existing and implement new operational and financial systems,
procedures and controls;
. hire, train and manage additional qualified personnel, including in the
near future sales and marketing personnel; and
. effectively manage multiple relationships with our customers, suppliers
and other third parties.
We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned personnel systems, procedures and
controls may not be adequate to support our future operations. For example, in
the quarter ended June 30, 1998, our operating results were adversely impacted
due to a provision of approximately $900,000 that we recorded for purchase
order commitments for certain components that exceeded our estimated
requirements at the end of that quarter. This was due primarily to an
engineering change in certain of our Summit family of products and a reduced
demand forecast from one of our customers. In August 1998, we installed a new
management information system, but we have not fully implemented its
functionality. The difficulties associated with installing and implementing
these new systems, procedures and controls may place a significant burden on
our management and our internal resources. In addition, if we grow
internationally, we will have to expand our worldwide operations and enhance
our communications infrastructure. Any delay in the implementation of such new
or enhanced systems, procedures or controls, or any disruption in the
transition to such new or enhanced systems, procedures or controls, could
adversely affect our ability to accurately forecast sales demand, manage our
supply chain and record and report financial and management information on a
timely and accurate basis.
As a result of our rapid growth, we expect to move our entire operations in
March 1999 to an approximately 77,000 square foot facility located in Santa
Clara, California. This move may disrupt our business and materially adversely
affect our operating results.
Extreme Heavily Depends on Its Indirect Distribution Channels to Sell Most of
Its Products
Our distribution strategy focuses primarily on developing and expanding
indirect distribution channels through resellers and, to a lesser extent,
OEMs, as well as expanding our field sales organization. If we fail to
8
<PAGE>
develop and cultivate relationships with significant resellers, or if these
resellers are not successful in their sales efforts, sales of our products may
decrease and our operating results would suffer. Many of our resellers also
sell products that compete with our products. We are developing a two-tier
distribution structure which would require us to enter into agreements with a
small number of stocking distributors. We cannot assure you that we will be
able to enter into such agreements or successfully develop a two-tier
distribution structure. Our failure to do so could limit our ability to grow
or sustain revenue. In addition, our operating results will likely fluctuate
significantly depending on the timing and amount of orders from our resellers.
We cannot assure you that our resellers will market our products effectively
or continue to devote the resources necessary to provide us with effective
sales, marketing and technical support.
In order to support and develop leads for our indirect distribution
channels, we plan to expand our field sales and support staff significantly.
We cannot assure you that this internal expansion will be successfully
completed, that the cost of this expansion will not exceed the revenues
generated or that our expanded sales and support staff will be able to compete
successfully against the significantly more extensive and well-funded sales
and marketing operations of many of our current or potential competitors. Our
inability to effectively establish our distribution channels or manage the
expansion of our sales and support staff would materially adversely affect our
business, operating results and financial condition.
Because Substantially All of Extreme's Revenue is Derived From Sales of Two
Product Families, Extreme is Dependent on Widespread Market Acceptance of
These Products
We currently derive substantially all of our revenue from sales of our
Summit and BlackDiamond product families. We expect that revenue from these
product families will account for a substantial portion of our revenue for the
foreseeable future. Accordingly, widespread market acceptance of our product
families is critical to our future success. Factors that may affect the market
acceptance of our products include market acceptance of enterprise LAN
switching products, and Gigabit Ethernet and Layer 3 switching technologies in
particular, the performance, price and total cost of ownership of our
products, the availability and price of competing products and technologies,
and the success and development of our resellers, OEMs and field sales
channels. Many of these factors are beyond our control. Our future performance
will also depend on the successful development, introduction and market
acceptance of new and enhanced products that address customer requirements in
a cost-effective manner. The introduction of new and enhanced products may
cause certain customers to defer or cancel orders for existing products. We
have in the past experienced delays in product development and such delays may
occur in the future. Therefore, to the extent customers defer or cancel orders
in the expectation of any new product release, any delay in development or
introduction could cause our operating results to suffer. Failure of our
existing or future products to maintain and achieve widespread levels of
market acceptance would materially adversely affect our business, operating
results and financial condition.
The Loss of One or More Large Orders From Extreme's Key Resellers, OEMs and
Other Significant Customers Would Significantly Hurt Extreme's Operating
Results
To date, a limited number of resellers, OEMs and other customers have
accounted for a significant portion of our revenue. If any of our large
customers stop or delay purchases, our revenue and profitability would be
adversely affected. For fiscal 1998, 3Com and Compaq accounted for 25% and 21%
of our net revenue, respectively, and for the six-month period ended December
31, 1998, Compaq and Hitachi Cable accounted for 17% and 11% of our net
revenue, respectively. Compaq is both an OEM and an end-user customer. Because
our expense levels are based on our expectations as to future revenue and to a
large extent are fixed in the short term, a substantial reduction or delay in
sales of our products to, or the loss of any significant reseller, OEM or
other customer, or unexpected returns from resellers could materially
adversely affect our business, operating results and financial condition.
Although our largest customers may vary from period-to-period, we anticipate
that our operating results for any given period will continue to depend to a
significant extent on large orders from a small number of customers,
particularly in light of the high sales price per unit of our products and the
length of our sales cycles.
9
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While our financial performance depends on large orders from a few key
resellers, OEMs and other significant customers, we do not have binding
commitments from any of them. For example:
. our customers can stop purchasing and our resellers and OEMs can stop
marketing our products at any time;
. our reseller agreements generally are not exclusive and are for one year
terms, with no obligation of the resellers to renew the agreements;
. our reseller agreements provide for discounts based on expected or
actual volumes of products purchased or resold by the reseller in a
given period; and
. our reseller and OEM agreements generally do not require minimum
purchases.
We have established a program which, under specified conditions, enables
some third party resellers to return products to us. The amount of potential
product returns is estimated and provided for in the period of the sale. Some
of our OEM agreements also provide manufacturing rights and access to our
source code upon the occurrence of specified conditions of default. If we were
to default on these agreements, our OEMs could use our source code to develop
and manufacture competing products, which would materially adversely affect
our performance and ability to compete.
The Sales Cycle for Extreme's Products is Long and Extreme May Incur
Substantial Non-Recoverable Expenses or Devote Significant Resources to Sales
that Do Not Occur When Anticipated
The timing of our sales revenue is difficult to predict because of our
reliance on indirect sales channels and the length and variability of our
sales cycle. Our products have a relatively high sales price per unit, and
often represent a significant and strategic decision by an enterprise
regarding its communications infrastructure. Accordingly, the purchase of our
products typically involves significant internal procedures associated with
the evaluation, testing, implementation and acceptance of new technologies.
This evaluation process frequently results in a lengthy sales process,
typically ranging from three months to longer than a year, and subjects the
sales cycle associated with the purchase of our products to a number of
significant risks, including budgetary constraints and internal acceptance
reviews. The length of our sales cycle also may vary substantially from
customer to customer. While our customers are evaluating our products and
before they may place an order with us, we may incur substantial sales and
marketing expenses and expend significant management effort. Consequently, if
sales forecasted from a specific customer for a particular quarter are not
realized in that quarter, we may be unable to compensate for the shortfall,
which could materially adversely affect our operating results.
Extreme Purchases Several Key Components for Products From Single or Limited
Sources and Could Lose Sales if Such Sources Fail to Fill Its Needs
We currently purchase several key components used in the manufacture of our
products from single or limited sources and are dependent upon supply from
these sources to meet our needs. We are likely to encounter shortages and
delays in obtaining components in the future which could materially adversely
affect our ability to meet customer orders. Our principal sole sourced
components include:
. ASICs;
. microprocessors;
. programmable integrated circuits;
. selected other integrated circuits;
. cables; and
. custom-tooled sheet metal.
10
<PAGE>
Our principal limited sourced components include:
. flash memories;
. dynamic and static random access memories, commonly known as DRAMs and
SRAMs, respectively; and
. printed circuit boards.
For more information about our single and limited sources, see "Business--
Manufacturing."
We use a rolling six-month forecast based on anticipated product orders to
determine our material requirements. Lead times for materials and components
we order vary significantly, and depend on factors such as the specific
supplier, contract terms and demand for a component at a given time. If orders
do not match forecasts, we may have excess or inadequate inventory of certain
materials and components, which could materially adversely affect our
operating results and financial condition. From time to time we have
experienced shortages and allocations of certain components, resulting in
delays in filling orders. In addition, during the development of our products
we have experienced delays in the prototyping of our ASICs, which in turn has
led to delays in product introductions.
Extreme Needs to Expand Its Manufacturing Operations and Depends on Contract
Manufacturers for Substantially All of Its Manufacturing Requirements
If the demand for our products grows, we will need to increase our material
purchases, contract manufacturing capacity and internal test and quality
functions. Any disruptions in product flow could limit our revenue, adversely
affect our competitive position and reputation and result in additional costs
or cancellation of orders under agreements with our customers.
We rely on third party manufacturing vendors to manufacture our products.
We currently subcontract substantially all of our manufacturing to two
companies--Flextronics International, Ltd., located in San Jose, California,
which manufactures our Summit1, Summit2 and Summit4 and BlackDiamond products,
and MCMS, Inc., located in Boise, Idaho, which manufactures our Summit24 and
Summit48 products. We have experienced a delay in product shipments from a
contract manufacturer in the past, which in turn delayed product shipments to
our customers. We may in the future experience similar or other problems, such
as inferior quality and insufficient quantity of product, any of which could
materially adversely affect our business and operating results. There can be
no assurance that we will effectively manage our contract manufacturers or
that these manufacturers will meet our future requirements for timely delivery
of products of sufficient quality and quantity. We intend to regularly
introduce new products and product enhancements, which will require that we
rapidly achieve volume production by coordinating our efforts with those of
our suppliers and contract manufacturers. The inability of our contract
manufacturers to provide us with adequate supplies of high-quality products or
the loss of either of our contract manufacturers would cause a delay in our
ability to fulfill orders while we obtain a replacement manufacturer and would
have a material adverse effect on our business, operating results and
financial condition.
As part of our cost-reduction efforts, we will need to realize lower per
unit product costs from our contract manufacturers as a result of volume
efficiencies. However, we cannot be certain when or if such price reductions
will occur. The failure to obtain such price reductions would adversely affect
our gross margins and operating results.
If Extreme Loses Certain Key Personnel or is Unable to Hire Additional
Qualified Personnel as Necessary, It May Not Be Able to Successfully Manage
Its Business or Achieve Its Objectives
Our success depends to a significant degree upon the continued
contributions of our key management, engineering, sales and marketing and
manufacturing personnel, many of whom would be difficult to replace. In
particular, we believe that our future success is highly dependent on Gordon
Stitt, Chairman, President and Chief Executive Officer, Stephen Haddock, Vice
President and Chief Technical Officer, and Herb Schneider, Vice
11
<PAGE>
President of Engineering. We neither have employment contracts with nor key
person life insurance on any of our key personnel.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales
and marketing, finance and manufacturing personnel. Competition for such
personnel is intense, especially in the San Francisco Bay Area, and we have
had difficulty hiring employees in the timeframe we desire, particularly
software engineers. There can be no assurance that we will be successful in
attracting and retaining such 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 and
sales personnel, could make it difficult for us to manage our business and
meet key objectives, such as product introductions, on time. In addition,
companies in the networking industry whose employees accept positions with
competitors frequently claim that competitors have engaged in unfair hiring
practices. We have from time to time received claims like this from other
companies and, although to date they have not resulted in material litigation,
we cannot assure you that we will not receive additional claims in the future
as we seek to hire qualified personnel or that such claims will not result in
material litigation. We could incur substantial costs in defending ourselves
against any such claims, regardless of the merits of such claims.
Extreme's Products Must Comply With Evolving Industry Standards and Complex
Government Regulations
The market for enterprise LAN equipment products is characterized by the
need to support industry standards as different standards emerge, evolve and
achieve acceptance. We will not be competitive unless we continually introduce
new products and product enhancements that meet these emerging standards. In
the past, we have introduced new products that were not compatible with
certain technological changes, and in the future we may not be able to
effectively address the compatibility and interoperability issues that arise
as a result of technological changes and evolving industry standards. In
addition, in the United States, our products must comply with various
regulations and standards defined by the Federal Communications Commission and
Underwriters Laboratories. Internationally, products that we develop may be
required to comply with standards established by telecommunications
authorities in various countries as well as with recommendations of the
International Telecommunication Union. If we do not comply with existing or
evolving industry standards or if we fail to obtain timely domestic or foreign
regulatory approvals or certificates we would not be able to sell our products
where these standards or regulations apply and our business, operating results
and financial condition could be materially adversely affected.
Extreme Needs to Expand Its Sales and Support Organizations to Increase Market
Acceptance of Its Products
Our products and services require a sophisticated sales effort targeted at
several levels within a prospective customer's organization. Unless we expand
our sales force we will not be able to increase revenues. We have recently
expanded our sales force and plan to hire additional sales personnel. However,
competition for qualified sales personnel is intense, and we might not be able
to hire the kind and number of sales personnel we are targeting.
We currently have a small customer service and support organization and
will need to increase our staff to support new customers and the expanding
needs of existing customers. The design and installation of networking
products can be complex; accordingly, we need highly-trained customer service
and support personnel. Hiring customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of our products.
Extreme Depends Upon International Sales for Much of Its Revenue and Extreme's
Ability to Sustain and Increase Its International Sales Depends on
Successfully Expanding Its International Operations
Our ability to grow will depend in part on the expansion of international
sales and operations which have and are expected to constitute a significant
portion of our sales. Sales to customers outside of North America
12
<PAGE>
accounted for approximately 59% and 50% of our net revenue in fiscal 1998 and
the six-months ended December 31, 1998, respectively. Our international sales
primarily depend on our resellers and OEMs. The failure of our resellers and
OEMs to sell our products internationally would limit our ability to sustain
and grow our revenue. In addition, there are a number of risks arising from
our international business, including:
. longer accounts receivable collection cycles;
. difficulties in managing operations across disparate geographic areas;
. difficulties associated with enforcing agreements through foreign legal
systems;
. import or export licensing requirements;
. potential adverse tax consequences; and
. unexpected changes in regulatory requirements.
Our international sales currently are U.S. dollar-denominated. As a result,
an increase in the value of the U.S. dollar relative to foreign currencies
could make our products less competitive in international markets. In the
future, we may elect to invoice some of our international customers in local
currency. Doing so will subject us to fluctuations in exchange rates between
the U.S. dollar and the particular local currency. Because we currently
denominate sales in U.S. dollars, we do not anticipate that the adoption of
the Euro as a functional legal currency of certain European countries will
materially affect our business.
Extreme May Engage in Future Acquisitions that Dilute the Ownership Interests
of Our Stockholders, Cause Us to Incur Debt and Assume Contingent Liabilities
As part of our business strategy, we expect to review acquisition prospects
that would complement our current product offerings, augment our market
coverage or enhance our technical capabilities, or that may otherwise offer
growth opportunities. While we have no current agreements or negotiations
underway with respect to any such acquisitions, we may acquire businesses,
products or technologies in the future. In the event of such future
acquisitions, we could:
. issue equity securities which would dilute current stockholders'
percentage ownership;
. incur substantial debt; or
. assume contingent liabilities.
Such actions by us could materially adversely affect our operating results
and/or the price of our common stock. Acquisitions also entail numerous risks,
including:
. difficulties in the assimilation of acquired operations, technologies or
products;
. unanticipated costs associated with the acquisition;
. diversion of management's attention from other business concerns;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have no or limited
prior experience; and
. potential loss of key employees of acquired organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, and our failure to do so could materially adversely affect our
business, operating results and financial condition.
13
<PAGE>
Extreme May Need Additional Capital to Fund Its Future Operations Which May
Not Be Available When Needed
We believe that our existing working capital proceeds from this offering
and cash available from credit facilities and future operations will enable us
to meet our working capital requirements for at least the next 12 months.
However, if cash from future operations is insufficient, or if cash is used
for acquisitions or other currently unanticipated uses, we may need additional
capital. The development and marketing of new products and the expansion of
reseller channels and associated support personnel is expected to require a
significant commitment of resources. In addition, if the market for enterprise
Layer 3 LAN switches were to develop more slowly than anticipated or if we
fail to establish significant market share and achieve a meaningful level of
revenues, we may continue to incur significant operating losses and utilize
significant amounts of capital. As a result, we could be required to raise
substantial additional capital. To the extent that we raise additional capital
through the sale of equity or convertible debt securities, the issuance of
such securities could result in dilution to existing stockholders. If
additional funds are raised through the issuance of debt securities, such
securities would have certain rights, preferences and privileges senior to
holders of common stock and the term of such debt could impose restrictions on
our operations. We cannot assure you that such additional capital, if
required, will be available on acceptable terms, or at all. If we are unable
to obtain such additional capital, we may be required to reduce the scope of
our planned product development and marketing efforts, which would materially
adversely affect our business, financial condition and operating results.
If Extreme's Products Contain Undetected Software or Hardware Errors, Extreme
Could Incur Significant Unexpected Expenses and Lost Sales
Network products frequently contain undetected software or hardware errors
when first introduced or as new versions are released. We have experienced
such errors in the past in connection with new products and product upgrades.
We expect that such errors will be found from time to time in new or enhanced
products after commencement of commercial shipments. These problems may
materially adversely affect our business by causing us to incur significant
warranty and repair costs, diverting the attention of our engineering
personnel from our product development efforts and causing significant
customer relations problems.
Our products must successfully interoperate with products from other
vendors. As a result, when problems occur in a network, it may be difficult to
identify the source of the problem. The occurrence of hardware and software
errors, whether caused by our products or another vendor's products, could
result in the delay or loss of market acceptance of our products and any
necessary revisions may result in the incurrence of significant expenses. The
occurrence of any such problems would likely have a material adverse effect on
our business, operating results and financial condition.
Extreme's Limited Ability to Protect Its Intellectual Property May Adversely
Affect Its Ability to Compete
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. However, we cannot assure you that the actions we have taken will
adequately protect our intellectual property rights.
We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain and use our products or technology.
See "Business--Intellectual Property" for more information regarding risks
relating to protecting our intellectual property rights and risks relating to
claims of infringement of other intellectual property rights.
14
<PAGE>
Extreme's Failure and the Failure of Its Key Suppliers and Customers to Be
Year 2000 Compliant Could Negatively Impact Extreme's Business
The year 2000 computer issue creates a risk for us. If systems do not
correctly recognize date information when the year changes to 2000, there
could be an adverse impact on our operations. The risk exists in four areas:
. potential warranty or other claims from our customers;
. systems we use to run our business;
. systems used by our suppliers; and
. the potential reduced spending by other companies on networking
solutions as a result of significant information systems spending on
year 2000 remediation.
We are currently evaluating our exposure in all of these areas.
We are in the process of conducting a comprehensive inventory and
evaluation of the information systems used to run our business. Systems which
are identified as non-compliant will be upgraded or replaced. For the year
2000 non-compliance issues identified to date, the cost of remediation is not
expected to be material to our operating results. However, if implementation
of replacement systems is delayed, or if significant new non-compliance issues
are identified, our operating results or financial condition could be
materially adversely affected.
We intend to contact our critical suppliers to determine that the
suppliers' operations and the products and services they provide are year 2000
compliant. Where practicable, we will attempt to mitigate our risks with
respect to the failure of suppliers to be year 2000 ready. However, such
failures remain a possibility and could have an adverse impact on our
operating results or financial condition.
Since all customer situations cannot be anticipated, we may see an increase
in warranty and other claims as a result of the year 2000 transition. In
addition, litigation regarding year 2000 compliance issues is expected to
escalate. For these reasons, the impact of customer claims could have a
material adverse impact on our operating results or financial condition.
Businesses that face year 2000 compliance issues may require significant
hardware and software upgrades or modifications to their computer systems and
applications. These companies may plan to devote a substantial portion of
their information systems' spending to fund such upgrades and modifications
and divert spending away from networking solutions. This change in customers'
spending patterns could materially adversely impact our business, operating
results or financial condition.
Extreme's Management Has Broad Discretion Over How the Proceeds of This
Offering Are Used
Our management may spend the net proceeds from this offering in ways with
which the stockholders may not agree. We cannot assure you that our investment
of the net proceeds of this offering will yield a favorable return.
Executive Officers and Directors of Extreme Will Control 59.6% of Its Common
Stock and Be Able to Significantly Influence Matters Requiring Stockholder
Approval
Executive officers, directors and entities affiliated with them will, in
the aggregate, beneficially own approximately 59.6% of our outstanding common
stock following the completion of this offering. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions.
15
<PAGE>
Provisions in Extreme's Charter or Agreements May Delay or Prevent a Change of
Control
Provisions in our certificate of incorporation and bylaws may delay or
prevent a change of control or changes in our management. These provisions
include:
. the division of the board of directors into three separate classes;
. the right of the board of directors to elect a director to fill a
vacancy created by the expansion of the board of directors;
. the ability of the board of directors to alter our bylaws without
getting stockholder approval; and
. the requirement that at least 10% of the outstanding shares are needed
to call a special meeting of stockholders.
Furthermore, we are subject to the provisions of section 203 of the
Delaware General Corporation Law. These provisions prohibit certain large
stockholders, in particular those owning 15% or more of the outstanding voting
stock, from consummating a merger or combination with a corporation unless
this stockholder receives board approval for the transaction or 66 2/3% of the
shares of voting stock not owned by the stockholder approve the merger or
combination. Further, we have investor agreements with Compaq, Siemens and
3Com which require us to give these companies notice if we receive an
acquisition offer or if we intend to pursue one.
Substantial Future Sales of Extreme's Common Stock in the Public Market Could
Cause Its Stock Price to Fall
The market price of our common stock could drop as a result of sales of a
large number of shares in the market after this offering or in response to the
perception that these sales could occur. All of the 5,000,000 shares sold in
this offering will be freely tradeable, with the 40,852,510 other shares
outstanding, based on the number of shares outstanding as of December 31,
1998, being "restricted securities" as defined in Rule 144 of the Securities
Act of 1933, and tradable in the near future. For more information, see
"Shares Eligible for Future Sale."
The Purchasers in the Offering Will Immediately Experience Substantial
Dilution in Net Tangible Book Value
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding common stock immediately
after the offering. Accordingly, purchasers of shares will experience
immediate and substantial dilution of approximately $8.76 in net tangible book
value per share, or approximately 87.6% of the offering price of $10.00 per
share. In contrast, existing stockholders paid an average price of $.94 per
share.
Extreme's Stock Price May Be Extremely Volatile and You May Not Be Able to
Resell Your Shares at or Above the Offering Price
There was no public market for Extreme shares prior to this offering. The
offering price for the shares will be determined through negotiations between
the representatives of the underwriters and us. You may not be able to resell
your shares at or above the initial public offering price due to a number of
factors, including:
. actual or anticipated fluctuations in our operating results;
. changes in expectations as to our future financial performance or
changes in financial estimates of securities analysts;
. announcements of technological innovations; and
. the operating and stock price performance of other comparable companies.
16
<PAGE>
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect
the trading price of our common stock, regardless of our actual operating
performance.
You should read the "Underwriters" section for a more complete discussion
of the factors to be considered in determining the initial public offering
price.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus, including the above risk
factors section, contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future
financial performance. In many cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or
"continue," or the negative of such terms and other comparable terminology.
These statements are only predictions. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks faced by us described below and
elsewhere in this prospectus.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors listed
above, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that
the occurrence of the events described in these risk factors and elsewhere in
this prospectus could have a material adverse effect on our business,
operating results and financial condition.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by Extreme from the sale of 5,000,000
shares of common stock in this offering are estimated to be $45.3 million, or
$52.3 million if the underwriters exercise their over-allotment option in
full, at an assumed initial public offering price of $10.00 and after
deducting underwriting discounts and commissions and estimated offering
expenses of $1.2 million payable by Extreme.
Extreme will use the net proceeds for general corporate purposes, including
capital expenditures and working capital. We may use some of the net proceeds
to pay down outstanding equipment balances under our capital equipment line of
credit and subordinated loan agreements, although we have no specific plans to
do so. A portion of the net proceeds may also be used to acquire or invest in
complementary businesses, technologies, product lines or products. We have no
current plans, agreements or commitments with respect to any such acquisition,
and we are not currently engaged in any negotiations with respect to any such
transaction. Our management will have broad discretion concerning the
allocation and use of all the net proceeds of the offering to be received by
us. Pending such uses, the net proceeds of the offering will be invested in
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends. We do not anticipate paying cash
dividends in the near future. Under the terms of our line of credit
facilities, we may not declare or pay any cash dividends without the prior
consent of the lenders under each of the credit facilities.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998:
. on an actual basis;
. on a pro forma basis to reflect the conversion upon the closing of the
offering of all outstanding shares of preferred stock into 29,061,315
shares of common stock; and
. on a pro forma basis as adjusted to reflect the sale of the common stock
offered in this offering at an assumed initial public offering price of
$10.00 per share and the receipt of the net proceeds from the sale of
the common stock, after deducting the estimated expenses and
underwriting discounts and commissions payable by Extreme.
This information should be read in conjunction with the consolidated
financial statements and related notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------
Pro Forma
Actual Pro Forma as Adjusted
-------- --------- -----------
(in thousands except share
data)
(unaudited)
<S> <C> <C> <C>
Long-term debt, less current portion(1)........ $ 2,719 $ 2,719 $ 2,719
-------- -------- --------
Stockholders' equity:
Convertible preferred stock, $.001 par value,
issuable in series: 24,000,000 shares
authorized at June 30, 1997; 29,900,000
shares authorized at actual, (2,000,000
shares pro forma); 29,061,315 shares issued
and outstanding actual, (none pro forma);
aggregate liquidation preference of $38,046
actual, (none pro forma).................... 29 -- --
Common stock, $.001 par value; 50,000,000
shares authorized (150,000,000 pro forma);
11,791,195 shares outstanding actual;
40,852,510 issued and outstanding, pro forma
and 45,852,510 pro forma as adjusted(2)..... 12 41 46
Additional paid-in capital................... 38,333 38,333 83,628
Accumulated deficit.......................... (26,634) (26,634) (26,634)
-------- -------- --------
Total stockholders' equity................. 11,740 11,740 57,040
-------- -------- --------
Total capitalization..................... $ 14,459 $ 14,459 $ 59,759
======== ======== ========
</TABLE>
- --------
(1) See notes 4 and 5 of Notes to Consolidated Financial Statements.
(2) Excludes 3,710,328 shares of common stock issuable upon exercise of
outstanding options at December 31, 1998 at a weighted average exercise
price of $2.55 per share and 337,398 shares of common stock issuable upon
exercise of outstanding warrants at a weighted average exercise price of
$1.00 per share. See "Management--Amended 1996 Stock Option Plan."
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1998 was
approximately $11,740,000 or $.29 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible
assets reduced by the amount of our total liabilities divided by the total
number of shares of common stock outstanding, assuming the conversion of all
outstanding shares of preferred stock into shares of common stock. After
giving effect to the sale by Extreme of the 5,000,000 shares of common stock
offered by this prospectus at an assumed initial public offering price of
$10.00 per share and receipt of the estimated net proceeds from this offering,
our adjusted net tangible book value as of December 31, 1998 would have been
approximately $57,040,000 or $1.24 per share. This represents an immediate
increase in such net tangible book value of $.95 per share to existing
stockholders and an immediate dilution of $8.76 per share to new investors.
Dilution is determined by subtracting pro forma net tangible book value per
share after the offering from the assumed initial public offering price per
share. If the initial public offering price is higher or lower, the dilution
to new investors will be, respectively, greater or less. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $10.00
Pro forma net tangible book value per share as of December 31,
1998............................................................ $.29
Increase in pro forma net tangible book value per share
attributable to new investors................................... .95
----
Pro forma net tangible book value per share after this offering.... 1.24
------
Dilution per share to new investors................................ $ 8.76
======
</TABLE>
The following table sets forth, on a pro forma basis, as of December 31,
1998, the number of shares of common stock purchased from Extreme, the total
consideration paid or to be paid, and the average price per share paid or to
be paid by existing stockholders and by new investors at the assumed initial
public offering price of $10.00 per share, before deducting estimated
underwriting discounts and commissions and offering expenses payable by
Extreme:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 40,852,510 89.1% $38,822,000 43.7% $ .94
New investors.................. 5,000,000 10.9 50,000,000 56.3 10.00
---------- ----- ----------- -----
Total......................... 45,852,510 100.0% $88,822,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option. See "Underwriters." The foregoing table also assumes that no options
have been or are exercised after December 31, 1998. As of December 31, 1998,
there were outstanding options to purchase 3,710,328 shares of common stock at
a weighted average exercise price of $2.55 per share and warrants to purchase
337,398 shares of common stock at a weighted average exercise price of $1.00
per share. If all of these options and warrants had been exercised on
December 31, 1998, our net tangible book value as of December 31, 1998 would
have been $66,839,000 or $1.34 per share, the increase in pro forma net
tangible book value attributable to new investors would have been $1.05 per
share and the dilution in net tangible book value to new investors would have
been $8.66 per share. See "Management--Amended 1996 Stock Option Plan" and
note 6 of Notes to Consolidated Financial Statements.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition
and Operating Results and Extreme's Consolidated Financial Statements and the
Notes to Consolidated Financial Statements included elsewhere in this
prospectus. The table below sets forth selected consolidated financial data
for Extreme for, and as of the end of, each of the years in the two year
period ended June 30, 1998 and the six-month periods ended December 31, 1997
and 1998. The selected consolidated financial data for fiscal 1997 and 1998,
are derived from the consolidated financial statements of Extreme which were
audited by Ernst & Young LLP. The financial data for the six-month periods
ended December 31, 1997 and 1998 are derived from unaudited financial
statements included elsewhere in this prospectus. In the opinion of
management, such unaudited financial statements have been prepared on the same
basis as the audited financial statements referred to above and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of Extreme's operating results for the indicated periods.
Operating results for the six months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the full fiscal
year.
<TABLE>
<CAPTION>
Six Months
Year Ended June 30, Ended December 31,
--------------------- --------------------
1997 1998 1997 1998
--------- ---------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated statement of
operations data:
Net revenue....................... $ 256 $ 23,579 $ 6,104 $ 30,851
Cost of revenue................... 388 14,897 3,557 15,605
--------- ---------- --------- ---------
Gross profit (loss)............... (132) 8,682 2,547 15,246
Operating expenses:
Research and development........ 5,351 10,668 4,548 6,580
Selling and marketing........... 1,554 9,601 3,450 10,203
General and administrative...... 1,023 2,372 1,040 2,700
--------- ---------- --------- ---------
Total operating expenses...... 7,928 22,641 9,038 19,483
--------- ---------- --------- ---------
Operating loss.................... (8,060) (13,959) (6,491) (4,237)
Interest expense.................. (79) (326) (83) (201)
Interest and other income......... 216 417 109 295
--------- ---------- --------- ---------
Loss before income taxes.......... (7,923) (13,868) (6,465) (4,143)
Provision for income taxes........ -- -- -- (700)
--------- ---------- --------- ---------
Net loss.......................... $ (7,923) $ (13,868) $ (6,465) $ (4,843)
========= ========== ========= =========
Basic and diluted net loss per
common share..................... $ (4.51) $ (3.17) $ (1.84) $ (.71)
========= ========== ========= =========
Weighted average shares
outstanding used in computing
basic and diluted net loss per
share(1)......................... 1,758 4,379 3,510 6,867
========= ========== ========= =========
Pro forma basic and diluted net
loss per share(1)................ -- $ (.44) -- $ (.13)
========= ========== ========= =========
Shares used in computing pro forma
basic and diluted net loss per
share(1)......................... -- 31,701 -- 35,929
========= ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
As of June 30, As of
--------------- December 31,
1997 1998 1998
------- ------- ------------
(in thousands)
<S> <C> <C> <C>
Consolidated balance sheet data:
Cash and cash equivalents........................ $10,047 $ 9,510 $ 5,792
Working capital.................................. 8,251 13,796 9,284
Total assets..................................... 11,942 33,731 27,622
Long-term debt and capital lease obligations due
after one year.................................. 502 2,634 2,719
Total stockholders' equity....................... 9,305 15,869 11,740
</TABLE>
- --------
(1) See note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used to compute
basic and diluted net loss per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING
RESULTS
The following commentary should be read in conjunction with the
Consolidated Financial Statements and the related notes contained elsewhere in
this prospectus.
Overview
From our inception in May 1996 through September 1997, our operating
activities related primarily to developing a research and development
organization, testing prototype designs, building an ASIC design
infrastructure, commencing the staffing of our marketing, sales and field
service and technical support organizations, and establishing relationships
with resellers and OEMs. We commenced volume shipments of our Summit1 and
Summit2, the initial products in our Summit stackable product family, in
October 1997, and we began shipping our BlackDiamond modular product family in
September 1998. Since inception, we have incurred significant losses and as of
December 31, 1998, we had an accumulated deficit of $26.6 million. See "Risk
Factors--Extreme Has a History of Losses, Expects Future Losses and Cannot
Assure You that It Will Achieve Profitability."
Our revenue is derived primarily from sales of our Summit and BlackDiamond
product families and fees for services relating to our products, including
maintenance and training. In fiscal 1998, sales to 3Com and Compaq accounted
for 25% and 21% of our net revenue, respectively, and in the six-month period
ended December 31, 1998, Compaq and Hitachi Cable accounted for 17% and 11% of
our net revenue, respectively. Compaq is an OEM and an end-user customer. The
level of sales to any customer may vary from period to period; however, we
expect that significant customer concentration will continue for the
foreseeable future. See "Risk Factors--The Loss of One or More Large Orders
From Extreme's Key Resellers, OEMs and Other Significant Customers Would
Significantly Hurt Extreme's Operating Results."
We market and sell our products primarily through resellers and, to a
lesser extent, OEMs and our field sales organization. We sell our products
through more than 100 resellers in 39 countries. In the six-month period ended
December 31, 1998, sales to customers outside of North America accounted for
approximately 50% of our net revenue. Currently, all of our international
sales are denominated in U.S. dollars. We generally recognize product revenue
at the time of shipment, unless we have future obligations for installation or
have to obtain customer acceptance, in which case revenue is deferred until
such obligations have been satisfied. We have established a program which,
under specified conditions, enables third party resellers to return products
to us. The amount of potential product returns is estimated and provided for
in the period of the sale. Service revenue is recognized ratably over the term
of the contract period, which is typically 12 months.
We expect to experience rapid erosion of average selling prices of our
products due to a number of factors, including competitive pricing pressures
and rapid technological change. Our gross margins will be affected by such
declines and by fluctuations in manufacturing volumes, component costs and the
mix of product configurations sold. In addition, our gross margins may
fluctuate due to the mix of distribution channels through which our products
are sold, including the potential effects of our development of a two-tier
distribution channel. We generally realize higher gross margins on sales to
resellers than on sales through our OEMs. Any significant decline in sales to
our OEMs or resellers, or the loss of any of our OEMs or resellers could
materially adversely affect our business, operating results and financial
condition. In addition, the introduction of new products can cause product
transitions and result in excess or obsolete inventories. Any excess or
obsolete inventories may also reduce our gross margins.
We outsource the majority of our manufacturing and supply chain management
operations, and we conduct quality assurance, manufacturing engineering,
documentation control and repairs at our facility in Cupertino, California.
Accordingly, a significant portion of our cost of revenue consists of payments
to our contract manufacturers, Flextronics and MCMS. We expect to realize
lower per unit product costs as a result of volume efficiencies. However, we
cannot assure you when or if such price reductions will occur. The failure to
obtain such price reductions could materially adversely affect our gross
margins and operating results.
22
<PAGE>
Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development, testing and enhancement of our ASICs and software. We
expense all research and development expenses as incurred. We believe that
continued investment in research and development is critical to attaining our
strategic product and cost-reduction objectives and, as a result, we expect
these expenses to increase in absolute dollars in the future.
Selling and marketing expenses consist of salaries, commissions and related
expenses for personnel engaged in marketing, sales and field service support
functions, as well as trade shows and promotional expenses. We intend to
pursue selling and marketing campaigns aggressively and therefore expect these
expenses to increase significantly in absolute dollars in the future. In
addition, we expect to substantially expand our field sales operations to
support and develop leads for our resellers, which would also result in an
increase in selling and marketing expenses.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and administrative personnel,
recruiting expenses, professional fees and other general corporate expenses.
We expect general and administrative expenses to increase in absolute dollars
as we add personnel and incur additional costs related to the growth of our
business and operation as a public company.
Despite growing revenues, we have not been profitable and expect to
continue to incur net losses. Our net losses have not decreased
proportionately with the increase in our revenue primarily because of
increased expenses relating to our growth in operations. Because of the
lengthy sales cycle of our products, there is often a significant delay
between the time we incur expenses and the time we realize the related
revenue. See "Risk Factors--The Sales Cycle for Extreme's Products is Long and
Extreme May Incur Substantial Non-Recoverable Expenses or Devote Significant
Resources to Sales that Do Not Occur When Anticipated." In addition, we expect
to move to a 77,000 square foot facility located in Santa Clara, California in
March 1999. The rent for this new facility will be significantly greater than
our rent obligations for our current facility. To the extent that future
revenues do not increase significantly in the same periods in which operating
expenses increase, our operating results would be adversely affected. See
"Risk Factors--A Number of Factors Could Cause Extreme's Quarterly Financial
Results to Be Worse Than Expected Resulting in a Decline in Its Stock Price."
23
<PAGE>
Quarterly Results of Operations
The following tables present unaudited quarterly results, in dollars and as
a percentage of net revenue, for the six quarters ended December 31, 1998. We
believe this information reflects all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
such information in accordance with generally accepted accounting principles.
The results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1998 1998 1998 1998
--------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $ 593 $ 5,511 $ 7,335 $10,140 $12,892 $17,959
Cost of revenue......... 545 3,012 5,490 5,850 6,536 9,069
------- ------- ------- ------- ------- -------
Gross profit............ 48 2,499 1,845 4,290 6,356 8,890
Operating expenses:
Research and develop-
ment................. 2,877 1,671 2,752 3,368 3,537 3,043
Selling and market-
ing.................. 1,475 1,975 2,457 3,694 4,762 5,441
General and adminis-
trative.............. 465 575 655 677 1,166 1,534
------- ------- ------- ------- ------- -------
Total operating
expenses........... 4,817 4,221 5,864 7,739 9,465 10,018
------- ------- ------- ------- ------- -------
Operating loss.......... (4,769) (1,722) (4,019) (3,449) (3,109) (1,128)
Interest expense........ (32) (51) (111) (132) (105) (96)
Interest and other in-
come................... 77 32 136 172 280 15
------- ------- ------- ------- ------- -------
Loss before income tax-
es..................... (4,724) (1,741) (3,994) (3,409) (2,934) (1,209)
Provision for income
taxes.................. -- -- -- -- -- (700)
------- ------- ------- ------- ------- -------
Net loss................ $(4,724) $(1,741) $(3,994) $(3,409) $(2,934) $(1,909)
======= ======= ======= ======= ======= =======
<CAPTION>
As a Percentage of Net Revenue
---------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1998 1998 1998 1998
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 91.9 54.7 74.8 57.7 50.7 50.5
------- ------- ------- ------- ------- -------
Gross profit............ 8.1 45.3 25.2 42.3 49.3 49.5
Operating expenses:
Research and develop-
ment................. 485.2 30.3 37.5 33.2 27.4 16.9
Selling and market-
ing.................. 248.7 35.9 33.5 36.4 36.9 30.3
General and adminis-
trative.............. 78.4 10.4 8.9 6.7 9.0 8.5
------- ------- ------- ------- ------- -------
Total operating
expenses........... 812.3 76.6 79.9 76.3 73.4 55.8
------- ------- ------- ------- ------- -------
Operating loss.......... (804.2) (31.3) (54.8) (34.0) (24.1) (6.3)
Interest expense........ (5.4) (.9) (1.5) (1.3) (.8) (.5)
Interest and other in-
come................... 13.0 .6 1.9 1.7 2.2 .1
Loss before income tax-
es..................... -- -- -- -- -- (6.7)
Provision for income
taxes.................. -- -- -- -- -- (3.9)
------- ------- ------- ------- ------- -------
Net loss................ (796.6)% (31.6)% (54.5)% (33.6)% (22.8)% (10.6)%
======= ======= ======= ======= ======= =======
</TABLE>
Six Quarters Ended December 31, 1998
Net revenue. Our net revenue increased in each of the six quarters ended
December 31, 1998. The increase in net revenue in these periods reflected the
introduction of our Summit stackable product family in October 1997, our
introduction of additions to that product family, the introduction of our
BlackDiamond modular product family in September 1998, significant growth of
the enterprise LAN switching market, and the benefits of increased investment
in our sales and marketing operations.
24
<PAGE>
Gross profit. Our gross profit increased in each of the six quarters ended
December 31, 1998, except in the quarter ended March 31, 1998. The increases
were primarily due to decreased unit manufacturing costs resulting from higher
volumes, offset in part by mix fluctuations and competitive market pricing.
The decrease in the March 31, 1998 quarter was primarily due to an increase in
our warranty reserve in connection with the repair and replacement of certain
products. In addition, the gross profit and gross margins were adversely
impacted in the June 30, 1998 quarter due to a provision of approximately
$900,000 that we recorded for purchase order commitments for certain
components that exceeded our estimated requirements at the end of that
quarter. This was due primarily to an engineering change in certain of our
Summit family of products and a reduced demand forecast from one of our
customers. Management believes that historical trends are not necessarily
indicative of future results.
Research and development expenses. Our research and development expenses
increased in absolute dollars in each of the six quarters ended December 31,
1998, except for the quarters ended December 31, 1997 and 1998. Personnel
costs increased in each of the six quarters; however, prototype material
expenses fluctuated from quarter to quarter primarily due to the timing of
product and technology development and on the reimbursement by OEMs of non-
recurring engineering costs, which was used to offset the related OEM product
development costs. We believe that fluctuations due to changes in prototyping
and materials costs will not be as significant as we introduce future products
and product enhancements. Research and development expenses as a percentage of
net revenue declined in each of our last three fiscal quarters due to
substantial increases in our net revenue in each such quarter.
Selling and marketing expenses. Selling and marketing expenses increased in
each of the six quarters ended December 31, 1998. The increases were primarily
due to expenses related to our product launches, the addition of sales
personnel and increased commission expenses resulting from higher sales.
General and administrative expenses. General and administrative expenses
increased in each of the six quarters ended December 31, 1998, except for the
quarter ended June 30, 1998 for which expenses remained flat compared to the
preceding quarter. The increases primarily reflected the addition of finance,
information technology, legal and administrative personnel.
Provision for income taxes. We recorded a tax provision of $700,000 for the
period ending December 31, 1998. The provision for income taxes consists
primarily of foreign taxes, state income taxes and federal alternative minimum
taxes. FASB Statement No. 109 provides for the recognition of deferred tax
assets if realization of such assets is more likely than not. Based upon the
weight of available evidence, which includes our historical operating
performance and the reported cumulative net losses in all prior years, we have
provided a full valuation allowance against our net deferred tax assets. We
intend to evaluate the realizability of the deferred tax assets on a quarterly
basis.
A Number of Factors Could Cause Extreme's Quarterly Financial Results to Be
Worse Than Expected Resulting in a Decline in Its Stock Price
We plan to significantly increase our operating expenses to expand our
sales and marketing activities, broaden our customer support capabilities,
develop new distribution channels, fund increased levels of research and
development and build our operational infrastructure. We base our operating
expenses on anticipated revenue trends and a high percentage of our expenses
are fixed in the short term. As a result, any delay in generating or
recognizing revenue could cause our quarterly operating results to be below
the expectations of public market analysts or investors, which could cause the
price of our common stock to fall.
We may experience a delay in generating or recognizing revenue because of a
number of reasons. Orders at the beginning of each quarter typically do not
equal expected revenue for that quarter and are generally cancelable at any
time. Accordingly, we are dependent upon obtaining orders in a quarter for
shipment in that quarter to achieve our revenue objectives. In addition, the
timing of product releases, purchase orders and product
25
<PAGE>
availability could result in significant product shipments at the end of a
quarter. Failure to ship theses products by the end of a quarter may adversely
affect our operating results. Furthermore, our customer agreements typically
provide that the customer may delay scheduled delivery dates and cancel orders
within specified time frames without significant penalty.
Our quarterly revenue and operating results have varied significantly in
the past and may vary significantly in the future due to a number of factors,
including:
. fluctuations in demand for our products and services, including
seasonality, particularly in Asia;
. unexpected product returns or the cancellation or rescheduling of
significant orders;
. our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
. announcements and new product introductions by our competitors;
. our ability to achieve required cost reductions;
. our ability to obtain sufficient supplies of sole or limited sourced
components for our products;
. unfavorable changes in the prices of the components we purchase;
. our ability to attain and maintain production volumes and quality levels
for our products;
. the mix of products sold and the mix of distribution channels through
which they are sold; and
. costs relating to possible acquisitions and integration of technologies
or businesses.
Due to the foregoing factors, we believe that period-to-period comparisons
of our operating results should not be relied upon as an indicator of our
future performance.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net revenue represented by certain items reflected in our Consolidated
Financial Statements:
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended June 30, December 31,
---------------------- --------------
1997 1998 1997 1998
---------- --------- ------ -----
<S> <C> <C> <C> <C>
Net revenue................ 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue............ 151.6 63.2 58.3 50.6
---------- -------- ------ -----
Gross profit (loss)........ (51.6) 36.8 41.7 49.4
Operating expenses:
Research and develop-
ment.................... 2090.2 45.2 74.5 21.3
Selling and marketing.... 607.0 40.7 56.5 33.1
General and administra-
tive.................... 399.6 10.1 17.0 8.7
---------- -------- ------ -----
Total operating
expenses............... 3096.8 96.0 148.0 63.1
---------- -------- ------ -----
Operating loss............. (3148.4) (59.2) (106.3) (13.7)
Interest expense........... (30.9) (1.4) (1.4) (.7)
Interest and other income.. 84.4 1.8 1.8 1.0
Loss before income taxes... (3094.9)% (58.8)% (105.9)% (13.4)%
---------- -------- ------ -----
Provision for income tax-
es........................ -- -- -- (2.3)
---------- -------- ------ -----
Net loss................... (3094.9)% (58.8)% (105.9)% (15.7)%
========== ======== ====== =====
</TABLE>
26
<PAGE>
Six Months Ended December 31, 1997 and 1998
Net revenue. Net revenue increased from $6.1 million for the six-month
period ended December 31, 1997 to $30.9 million for the six-month period ended
December 31, 1998, an increase of $24.8 million. This increase resulted
primarily from increased sales of our Summit stackable products and the
introduction of our BlackDiamond modular product family in September 1998.
North America sales increased from $1.2 million for the six-month period
ended December 31, 1997 to $15.9 million for the six-month period ended
December 31, 1998, an increase of $14.7 million. Sales outside North America
increased from $4.9 million for the six-month period ended December 31, 1997
to $15.0 million for the six-month period ended December 31, 1998, an increase
of $10.1 million. The overall increase in sales outside North America
reflected the growth in demand for our Summit and BlackDiamond products and an
increase in the number of resellers, offset in part by a decrease in OEM
sales.
Gross profit (loss). Gross profit increased from $2.5 million for the six-
month period ended December 31, 1997 to $15.2 million for the six-month period
ended December 31, 1998, an increase of $12.7 million. Gross margins increased
from 41.7% for the six-month period ended December 31, 1997 to 49.4% for the
six-month period ended December 31, 1998. The increase in gross margins
resulted primarily from a shift in our channel mix from OEMs to resellers,
reductions in component costs and improved manufacturing efficiencies, which
were offset in part by lower average selling prices due to increased
competition.
Research and development expenses. Research and development expenses
increased from $4.5 million for the six-month period ended December 31, 1997
to $6.6 million for the six-month period ended December 31, 1998, an increase
of $2.1 million. The increase was primarily due to the hiring of additional
engineers and an increase in depreciation charges due to increases in capital
spending on design and simulation software and test equipment. For the six-
month periods ended December 31, 1997 and 1998, research and development costs
decreased as a percentage of net revenue from 74.5% to 21.3%. This percentage
decrease was primarily the result of an increase in our net revenue.
Selling and marketing expenses. Selling and marketing expenses increased
from $3.5 million for the six-month period ended December 31, 1997 to $10.2
million for the six-month period ended December 31, 1998, an increase of $6.7
million. This increase was primarily due to the hiring of additional sales and
customer support personnel, advertising and promotional campaigns in support
of the introduction of our BlackDiamond modular product family in September
1998 and the establishment of new sales offices. For the six-month periods
ended December 31, 1997 and 1998, selling and marketing expenses decreased as
a percentage of net revenue from 56.5% to 33.1%. This percentage decrease was
primarily the result of an increase in our net revenue.
General and administrative expenses. General and administrative expenses
increased from $1.0 million for the six-month period ended December 31, 1997
to $2.7 million for the six-month period ended December 31, 1998, an increase
of $1.7 million. This increase was due primarily to the hiring of additional
finance, information technology and legal and administrative personnel, and
increased spending on information systems. For the six-month periods ended
December 31, 1997 and 1998, general and administrative expenses decreased as a
percentage of net revenue from 17.0% to 8.8%. This percentage decrease was
primarily the result of an increase in our net revenue.
Provision for income taxes. We incurred significant operating losses for
all periods from inception through December 31, 1998. We have recorded a
valuation allowance for the full amount of our net deferred tax assets as the
future realization of the tax benefit is not sufficiently assured.
Fiscal 1997 Compared with Fiscal 1998
Net revenue. Net revenue increased from $256,000 for fiscal 1997 to $23.6
million for fiscal 1998, an increase of $23.3 million. The increase in net
revenue for fiscal 1998 reflected the commencement of shipments by our OEMs in
the quarter ending September 30, 1997 and the introduction of our Summit
stackable product
27
<PAGE>
family in the quarter ending December 31, 1997. Net revenue for fiscal 1997
was negligible as we were in the start-up stage of development.
Gross profit (loss). Gross profit increased from a loss of ($132,000) for
fiscal 1997 to a profit of $8.7 million for fiscal 1998, an increase of $8.6
million. Gross margins increased from (51.6%) for fiscal 1997 to 36.8% for
fiscal 1998. The increase resulted from a shift from primarily research and
development activities to production and sales of our products.
Research and development expenses. Research and development expenses
increased from $5.4 million for fiscal 1997 to $10.7 million for fiscal 1998,
an increase of $5.3 million. The increase resulted primarily from the hiring
of additional engineers and an increase in prototype material expenses for new
product development. For fiscal 1997 and 1998, research and development
expenses decreased as a percentage of net revenue from 2090.2% to 45.2%. This
percentage decrease was primarily the result of an increase in our net
revenue.
Selling and marketing expenses. Selling and marketing expenses increased
from $1.6 million for fiscal 1997 to $9.6 million for fiscal 1998, an increase
of $8.0 million. This increase was primarily due to the hiring of additional
sales and customer support personnel, advertising and promotional campaigns in
support of the introduction of our Summit stackable product family and the
establishment of new sales offices. For fiscal 1997 and 1998, selling and
marketing expenses decreased as a percentage of net revenue from 607.0% to
40.7%. This percentage decrease was primarily the result of an increase in our
net revenue.
General and administrative expenses. General and administrative expenses
increased from $1.0 million for fiscal 1997 to $2.4 million for fiscal 1998,
an increase of $1.4 million. This increase reflected primarily additional
finance, information technology and legal and administrative personnel, and
increased spending on our information systems. For fiscal 1997 and 1998,
general and administrative expenses decreased as a percentage of net revenue
from 399.6% to 10.1%. This percentage decrease was primarily the result of an
increase in our net revenue.
Liquidity and Capital Resources
Since inception, we have financed our operations and capital expenditures
primarily through the sale of preferred stock and capital lease and other debt
financing. Cash used in operations for the six-month periods ended December
31, 1997 and 1998 were $8.6 million and $6.6 million, respectively. As of
December 31, 1998, we had $12.6 million in cash, cash equivalents and short-
term investments. We expect that accounts receivable will continue to increase
to the extent our revenues continue to rise. Any such increase can be expected
to reduce cash, cash equivalents and short-term investments.
We have a revolving line of credit for $5.0 million with Silicon Valley
Bank. Borrowings under this line of credit bear interest at the bank's prime
rate. As of December 31, 1998, there were no outstanding borrowings under this
line of credit. We also have a capital equipment line with Silicon Valley Bank
for $4.0 million. Borrowings under this capital equipment line bear interest
at the bank's prime rate. This agreement requires that we maintain certain
financial ratios and levels of tangible net worth, profitability and
liquidity. As of December 31, 1998, borrowings under this capital equipment
line were approximately $783,000. In addition, we have a $5.0 million
subordinated loan and security agreement with Comdisco, Inc. Borrowings under
this loan bear interest at a rate of 9.75% per annum and are secured by all of
our tangible assets. As of December 31, 1998, borrowings under this loan were
$2.0 million.
Capital expenditures were $2.3 million for the six months ended December
31, 1998 and $922,000 for the six months ended December 31, 1997. We expect
capital expenditures to increase in the second half of fiscal 1999 primarily
due to costs of moving to a new facility and capital expenditures for
information systems and manufacturing test fixtures.
In February 1999, we agreed to lease a 77,000 square foot facility in Santa
Clara, California. The related cost of this lease is expected to be
approximately $120,000 per month. The lease has a term of 47 months.
28
<PAGE>
We require substantial capital to fund our business, particularly to
finance inventories and accounts receivable and for capital expenditures. In
order to build a sustainable business in the LAN switching market, the trend
of using cash in our operations is expected to continue over the next several
quarters. We are working toward a business model that will allow us to achieve
profitability, which is necessary to generate cash from operations. Achieving
this model will depend on many factors, including the rate of revenue growth,
the timing and extent of spending to support product development efforts and
expansion of sales and marketing, the timing of introductions of new products
and enhancements to existing products, and market acceptance of our products.
As a result, we could be required to raise substantial additional capital. To
the extent that we raise additional capital through the sale of equity or
convertible debt securities, the issuance of such securities could result in
dilution to existing stockholders. If additional funds are raised through the
issuance of debt securities, such securities would have certain rights,
preferences and privileges senior to holders of common stock and the term of
such debt could impose restrictions on our operations. We cannot assure you
that such additional capital, if required, will be available on acceptable
terms, or at all. If we are unable to obtain such additional capital, we may
be required to reduce the scope of our planned product development and
marketing efforts, which would materially adversely affect our business,
financial condition and operating results.
We believe that the proceeds from this offering, our cash balances, and
cash available from credit facilities and future operations will enable us to
meet our working capital requirements for at least the next 12 months.
Year 2000 Readiness Disclosure
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as
the year 2000 approaches, and are commonly referred to as the "year 2000
problem."
Assessment. The year 2000 problem affects the computers, software and other
equipment that we use, operate or maintain for our operations. Accordingly, we
have organized a program team responsible for monitoring the assessment and
remediation status of our year 2000 projects and reporting such status to our
board of directors. This project team is currently assessing the potential
effect and costs of remediating the year 2000 problem for our internal
systems. To date, we have not obtained verification or validation from any
independent third parties of our processes to assess and correct any of our
year 2000 problems or the costs associated with these activities.
Internal infrastructure. We believe that we have identified approximately
250 personal computers and servers, six software applications, including
Microsoft Windows 95, Microsoft Office 97 and Outlook 98 and Microsoft Mail
Server, and our enterprise resource planning system, and related equipment
used in connection with our internal operations that will need to be evaluated
to determine if they must be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business. Upon completion of such
evaluation, which we expect to occur by the end of March 1999, we expect to
commence the process of modifying, upgrading, and replacing major systems that
have been assessed as adversely affected, and expect to complete this process
before the occurrence of any material disruption of our business.
Systems other than information technology systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems, and other common devices,
of which there are approximately 15, may be affected by the year 2000 problem.
We are currently assessing the potential effect and costs of remediating the
year 2000 problem on our office, equipment and our new facilities in Santa
Clara, California.
Products and software programs. We have tested and intend to continue to
test all of our products and software programs for year 2000 problems. To
date, we have been able to correct any problems with our products and software
programs relating to year 2000 prior to releasing them to our customers. We
currently do not expect any significant problems to arise with our products
and software programs relating to the year 2000.
29
<PAGE>
We estimate the total cost to us of completing any required modifications,
upgrades or replacements of our internal systems will not exceed $200,000,
almost all of which we believe will be incurred during calendar 1999. This
estimate is being monitored and we will revise it as additional information
becomes available.
Based on the activities described above, we do not believe that the year
2000 problem will have a material adverse effect on our business or operating
results. In addition, we have not deferred any material information technology
projects as a result of our year 2000 problem activities.
Suppliers. We are checking the web sites of third-party suppliers of
components used in the manufacture of our products to determine if these
suppliers are certifying that the components they provide us are year 2000
compliant. To date, we believe all critical components that we obtain from
third party suppliers are year 2000 compliant, except that Microsoft has not
indicated that Windows 95 and its office mail programs are year 2000
compliant. We expect that we will be able to resolve any significant year 2000
problems with Microsoft and any other third-party suppliers of components;
however, there can be no assurance that these suppliers will resolve any or
all year 2000 problems before the occurrence of a material disruption to the
operation of our business. Any failure of these third parties to timely
resolve year 2000 problems with their systems could have a material adverse
effect on our business, operating results and financial condition.
Most likely consequences of year 2000 problems. We expect to identify and
resolve all year 2000 problems that could materially adversely affect our
business operations. However, we believe that it is not possible to determine
with complete certainty that all year 2000 problems affecting us have been
identified or corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, no one
can accurately predict how many year 2000 problem-related failures will occur
or the severity, duration, or financial consequences of these perhaps
inevitable failures. As a result, we believe that the following consequences
are possible:
. a significant number of operational inconveniences and inefficiencies
for us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;
. several business disputes and claims for pricing adjustments or
penalties due to year 2000 problems by our customers, which we believe
will be resolved in the ordinary course of business; and
. a few serious business disputes alleging that we failed to comply with
the terms of contracts or industry standards of performance, some of
which could result in litigation or contract termination.
Contingency plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct year 2000 problems
affecting our internal systems are not effective. We expect to complete our
contingency plans by the end of June 1999. Depending on the systems affected,
these plans could include:
. accelerated replacement of affected equipment or software;
. short to medium-term use of backup equipment and software;
. increased work hours for our personnel; and
. use of contract personnel to correct on an accelerated schedule any year
2000 problems that arise or to provide manual workarounds for
information systems.
Our implementation of any of these contingency plans could have a material
adverse effect on our business, operating results and financial condition.
Disclaimer. The discussion of our efforts and expectations relating to year
2000 compliance are forward-looking statements. Our ability to achieve year
2000 compliance and the level of incremental costs associated therewith, could
be adversely affected by, among other things, the availability and cost of
programming and testing resources, third party suppliers' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
30
<PAGE>
BUSINESS
Overview
Extreme Networks is a leading provider of a next generation of switching
solutions for local area networks, or LANs, that meet the increasing needs of
enterprise LANs. The key advantages of our LAN solutions are increased
performance, the ability to easily grow, or "scale," in size as customer needs
change, flexible allocation of LAN resources, ease of use and lower cost of
ownership. These advantages are obtained through the use of custom
semiconductors, known as ASICs, in our products and through hardware and
software designs that are common and uniform across our product line. The
routing of network traffic, a function referred to as Layer 3 switching, is
done primarily with ASICs in our products, and consequently, is faster than
the software implementations used in many competing products. Traditional
Layer 3 products rely primarily on software which can slow traffic speeds
below those which could otherwise be achieved and result in message packets
being lost when LAN traffic is high. Our products incorporate an ASIC-based,
wire-speed architecture and are designed to avoid the loss of message packets
in the switch, or "non-blocking." As a result, our products are less expensive
than software-based routers, yet offer improved performance throughout the
enterprise LAN from the network core to the desktop. The Dell'Oro Group, a
research and consulting firm, estimates in an independently prepared market
report dated February 1999, that the market for Layer 3 switching totaled $637
million in 1998 and is expected to increase to approximately $3.4 billion in
2001.
Industry Background
Businesses and other organizations have become increasingly dependent on
LANs as their central communications infrastructure to provide connectivity
for internal and external communications. New mission-critical computing
applications, such as enterprise resource planning, large enterprise databases
and sophisticated on-line connections with vendors, as well as the increased
use of traditional applications, such as e-mail, require significant
information technology resources. The emergence of the desktop browser as a
user interface has enabled bandwidth-intensive applications that contain
voice, video and graphics to be used extensively through intranets and
externally through extranets. These new applications, combined with the growth
in business-to-business e-commerce and other on-line transactions are further
burdening the enterprise LAN infrastructure.
LANs have traditionally been designed for client/server applications, where
network traffic patterns were predictable and traffic loads are relatively
stable. In this environment, the majority of traffic remained within a given
workgroup, with only a small percentage traveling across the high traffic
portion of a LAN which interconnects all or a large part of the LAN. The
increased use of data-intensive, mission-critical applications, the widespread
implementations of intranets and extranets, and the ubiquity of Internet
technologies have created unpredictable traffic patterns, and unpredictable
traffic loads within the LAN. In addition, as users utilize the desktop
browser and Internet technologies to access significant amounts of information
from servers located inside and outside of the organization, a much higher
percentage of traffic crosses the enterprise LAN backbone. For example, an
employee can make a simple request that may require data to be downloaded and
analyzed from multiple data warehouses outside his or her local workgroup,
resulting in increased traffic across the LAN. Similarly, multiple users could
request a multimedia presentation from a company intranet or from the Internet
consuming tremendous amounts of network capacity. Either of these situations
could result in users overwhelming a company's enterprise LAN unknowingly. As
a result, the increased traffic, bandwidth-intensive applications and
unpredictable traffic patterns are straining traditional LAN environments and
reducing the performance of mission-critical applications.
Today's LAN Environment
Early LANs supported limited numbers of users and used a variety of
protocols to organize the transmission of data, including Ethernet, Token Ring
or AppleTalk technologies. As the number of users and the amount of traffic on
a network grew, network performance began to decline. In this shared
environment, each desktop received and was burdened by the communication of
every other desktop. The need to improve network performance was initially
addressed by adding network devices known as bridges or hubs that separated
the entire LAN into smaller workgroups. This arrangement was effective in
supporting the traditional client/server environment where the majority of
traffic remained within the workgroup. As applications became more
31
<PAGE>
bandwidth-intensive and users increasingly communicated outside of their
workgroup, bridges and hubs were unable to process this traffic effectively.
To mitigate this problem, Layer 2 switches were developed to provide a
dedicated link for each desktop and eliminate the unnecessary flow of
information to every desktop. In addition to the evolution of new devices, the
need for increased backbone speeds led to the development of new and faster
technologies such as FDDI, Fast Ethernet and ATM. However, each of these
technologies employs different protocols, further complicating the LAN by
requiring software-based routers that use expensive CPUs and software tables
to route this multi-protocol traffic. Today, it is not uncommon to find
multiple protocols and devices across the four basic areas of the network:
. the desktop, which connects end users;
. the segment, which interconnects networking devices;
. the server, which connects servers to the network; and
. the network core, which consists of the enterprise backbone that
interconnects LAN segments.
The following diagram illustrates an example of the architecture of today's
LAN:
[Diagram of today's LAN architecture]
As the diagram illustrates, today's enterprise LAN architecture consists of
a complex patchwork of solutions based on different technologies and devices.
Incorporating devices with different hardware, software and management
architectures that utilize multiple technologies can limit performance and
scalability. Such complex networks cannot effectively scale with traffic
growth and require frequent upgrades which are cumbersome and expensive to
implement. All of these factors require significant IT resources and personnel
to keep enterprise networks functioning properly. To be effective in this
demanding environment, today's LANs must be scalable in order to handle
increases in traffic, new bandwidth-intensive applications and overall growth
of networks without major changes or deterioration of performance. An
enterprise LAN must be scalable in the following four dimensions:
Speed. Speed refers to the number of bits per second that can be
transmitted across the network. Today's LAN applications increasingly require
speeds of up to 100 Mbps to the desktop. Hence, the backbone and server
connections that aggregate traffic from desktops require speeds well in excess
of 100 Mbps. Wire speed refers to the ability of a network device to process
an incoming data stream at the highest possible rate without loss of packets.
Wire speed routing refers to the ability to perform Layer 3 routing at the
maximum possible rate.
Bandwidth. Bandwidth refers to the volume of traffic that a network or a
network device can handle before traffic is "blocked," or unable to get
through without interruption. When traffic was more predictable, the amount of
traffic across a network link or through a network device grew basically in
line with the number of
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<PAGE>
users on the LAN. With today's data-intensive applications accessed in random
patterns from within and outside of the LAN, users can spike traffic
unpredictably, consuming significant bandwidth to the detriment of other
users.
Network size. Network size refers to the number of users and servers that
are connected to a LAN. Today's enterprise LANs must be capable of connecting
and supporting up to thousands, and even tens of thousands, of users and
servers while providing performance and reliable connectivity.
Quality of service. Quality of service refers to the ability to control the
delivery of traffic based upon its level of importance. Mission-critical
enterprise and delay-sensitive multimedia applications require certain
performance minimums, while traffic such as general e-mail and Internet
surfing may not be as critical. In addition to basic standards-based
prioritization of traffic according to importance, true end-to-end quality of
service would allocate bandwidth to certain applications.
Opportunity for Next Generation Switching Solutions
The emergence of several technology trends is enabling a new generation of
networking equipment that can meet the four scalability dimensions of today's
enterprise LANs by accommodating new unpredictable traffic patterns and
bandwidth-intensive, mission-critical applications. First, while many new and
different technologies have been deployed in existing LANs, Ethernet has
become the predominant LAN technology, with over 95% of the market in 1998 and
total shipments of over 350 million ports from 1991 to 1998, according to the
Dell'Oro Group. Ethernet has evolved from the original 10 Mbps Ethernet to 100
Mbps Fast Ethernet and, in 1998, to 1,000 Mbps Gigabit Ethernet. Gigabit
Ethernet represents a viable enterprise LAN backbone protocol, enabling
100 Mbps Fast Ethernet connections to the desktop to be aggregated for LAN
backbone transport across the network core. Second, growth of the Internet and
the subsequent development of applications based on Internet technologies have
increased the use of the Internet Protocol. Dataquest, a private research
firm, forecasts in an independently prepared 1997 market report that the
Internet Protocol will be the dominant protocol in 83% of enterprise LANs in
1999.
With the wide acceptance of Ethernet and Internet Protocol-based
technologies, the need to support a multi-protocol environment is diminished.
As a result, the simplified routing functionality can be embedded in
application specific integrated circuits, or ASICs, instead of in the software
and CPUs used in multi-protocol software-based routers. The resulting device,
called a Layer 3 switch, functions as a less expensive and significantly
faster hardware-based router. The Dell'Oro Group, a research and consulting
firm, estimates in an independently prepared February 1999 market report, that
the market for Layer 3 switching totaled $637 million in 1998 and is expected
to increase to approximately $3.4 billion in 2001. Layer 3 switches can
operate at gigabit speeds and, as hardware routers, can support large
networks. However, most Layer 3 switches still block traffic in high
utilization scenarios and can only support standards-based traffic
prioritization quality of service. While Layer 3 switching dramatically
increases LAN performance, many of today's offerings fail to realize the
potential of this technology because of the use of inconsistent hardware,
software and management architectures.
To effectively address the needs of today's enterprise LANs, enterprises
need a solution that is easy to use and implement and can scale in terms of
speed, bandwidth, network size and quality of service. Layer 3 switching
represents the next critical step in addressing these requirements. However,
enterprises need a Layer 3 solution that provides sufficient bandwidth to
support unpredictable traffic spikes without impacting all other users
connected to the LAN. In addition, enterprises require a quality of service
solution that supports industry-standard prioritization and enables network
administrators to offer quality of service that maps business processes and
network policies. Finally, to simplify their LANs, enterprises need a family
of interoperable devices that utilize a consistent hardware, software and
management architecture. Through an integrated family of products, network
managers can effectively deploy the solution at any point in the network and
follow a migration path to a network implemented with a consistent
architecture from end-to-end.
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<PAGE>
The Extreme Networks Solution
Extreme provides end-to-end LAN switching solutions that meet the
requirements of enterprise LANs by providing increased performance,
scalability, policy-based quality of service, ease of use and lower cost of
ownership. Our products share a common ASIC, software and network management
architecture that enables both Layer 2 switching and Layer 3 routing at wire
speed in each of the desktop, segment, server and core areas of the LAN.
Because our products are based on industry standard routing and network
management protocols, they are interoperable with existing LAN
infrastructures. We offer policy-based quality of service that controls the
delivery of network traffic according to pre-set policies that specify
priority and bandwidth limits. All of our switches include integrated web
server software that allows the switch to be managed from any browser-equipped
desktop. In addition, our Java-based enterprise management software utilizes
integrated web server software that allows simplified management from any
locally connected computer, or remotely over the Internet.
The key benefits of Extreme's solutions are:
High performance. Our products provide 1,000 Mbps Gigabit Ethernet to the
network core and Fast Ethernet to the desktops, segments and servers, together
with the non-blocking, wire-speed routing of our ASIC-based Layer 3 switching.
Using our products, customers can achieve forwarding rates that are up to 100
times faster than with software-based routers.
Ease of use and implementation. Our products share a common ASIC, software
and network management architecture and offer consistent features for each of
the key areas of the LAN. Our standard-based products can be integrated into
and installed within existing networks. Customers can upgrade any area of
their LANs with Extreme products without needing additional training.
ExtremeWare software simplifies the management of LANs by enabling customers
to manage any of our products remotely through a browser interface.
Scalability. Our solutions offer customers the speed and bandwidth they
need today with the capability to scale their LANs to support demanding
applications in the future without the burden of additional training or
software or system complexity. Customers who purchase our products for Layer 2
applications can upgrade them at any time to Layer 3 because Layer 3
capability is built into our ASICs. ExtremeWare Enterprise Manager software
simplifies software upgrades by allowing the network manager to upgrade all
Extreme switches simultaneously.
Quality of service. Extreme's policy-based quality of service enables
customers to prioritize mission-critical applications by providing industry-
leading tools for allocating network resources to specific applications. With
our policy-based quality of service, customers can use a web-based interface
to identify and control the delivery of traffic from specific applications in
accordance with specific policies that are set by the customer. The quality of
service functionality of our ASICs allows our policy-based quality of service
to be performed at wire speed. In addition to providing priority, customers
can allocate specified amounts of bandwidth to specific applications or users.
Lower cost of ownership. Our products are less expensive than software-
based routers, yet offer higher routing performance throughout the enterprise
LAN. Because they share a common hardware, software and management
architecture--whether deployed at the desktop, segment, server or core areas
of the LAN--we believe our products can substantially reduce the cost and
complexity of network management and administration. This uniform architecture
creates a simpler LAN infrastructure which leverages the knowledge and
resources businesses have invested in Ethernet and the Internet Protocol,
thereby requiring fewer resources and less time to maintain.
The Extreme Networks Strategy
Extreme's objective is to be the leading supplier of end-to-end enterprise
LAN solutions. The key elements of our strategy include:
Provide easy to use, high-performance, cost-effective LAN solutions. We
offer customers easy to use, powerful, cost-effective LAN solutions that meet
the specific demands of desktop, segment, server and core
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switching environments. Our products provide customers with 1,000 Mbps Gigabit
Ethernet and the wire speed, non-blocking routing capabilities of ASIC-based
Layer 3 switching. We intend to capitalize on our expertise in Ethernet, IP
and switching technologies to develop new products based on our common
architecture that meet the future requirements of the enterprise LAN. These
products will offer higher performance with more advanced functionality and
features while continuing to reduce total cost of ownership for our customers.
Expand penetration of enterprise LANs. We are focused on product sales to
new customers and on extending our product penetration within existing
customers' LANs. We have designed our products to be the best-of-breed in each
of desktop, segment, server and core areas of the enterprise LAN. Once a
customer buys our products for one area of the LAN, our strategy is to then
offer that customer products for other areas. As additional products are
purchased, a customer obtains the increased benefits of our end-to-end
solution by simplifying their networks, extending policy-based quality of
service and reducing costs of ownership while increasing performance.
Extend switching technology leadership. Our technological leadership is
based on our custom ASICs and software and includes our wire-speed, Layer 3
switching, policy-based quality of service, routing protocols and ExtremeWare
software. We intend to invest our engineering resources in ASIC and software
development and provide leading edge technologies to increase the performance
and functionality of our products. We also intend to maintain our active role
in industry standards committees such as IEEE and IETF.
Leverage and expand multiple distribution channels. We distribute our
products primarily through resellers and selected OEMs and through our field
sales team. To quickly reach a broad, worldwide audience, we have more than
100 resellers in 39 countries, including regional networking system resellers,
network integrators and wholesale distributors, and have established
relationships with select OEMs. We maintain a field sales force primarily to
support our resellers and to focus on select strategic and large accounts such
as Compaq, NTT and MSNBC. We intend to increase the size of our reseller
programs and are developing two tier distribution channels in some regions. To
complement and support our domestic and international reseller and OEM
channels, we expect to increase our worldwide field sales force.
Provide high-quality customer service and support. We seek to enhance
customer satisfaction and build customer loyalty through the quality of our
service and support. We offer a wide range of standard support programs that
include emergency telephone support 24 hours a day, seven days a week and
advanced replacement of products. In addition, we have designed our products
to allow easy service and administration. For example, we can access all of
our switches remotely through a standard web browser to configure,
troubleshoot and help maintain our products. We intend to continue to enhance
the ease of use of our products and invest in additional support services by
increasing staffing and adding new programs for our OEMs and resellers. In
addition, we also are committed to providing customer-driven product
functionality through feedback from key prospects, consultants, channel and
OEM partners and customer surveys.
Products
Extreme provides end-to-end LAN switching solutions that meet the
requirements of enterprise LANs by providing increased performance,
scalability, policy-based quality of service, ease of use and lower cost of
ownership. Our Summit and BlackDiamond switches share a common ASIC, software
and management architecture that facilitates a relatively short product design
and development cycle, thereby reducing the time-to-market for new products
and features. This common architecture enables customers to build an end-to-
end enterprise LAN switching solution that has consistent functionality,
performance and management to each of the desktop, segment, server and core
areas of the LAN. The common architecture and end-to-end functionality of our
products also reduces the cost and complexity of network administration and
management.
Our products include two browser-based software application suites,
ExtremeWare and ExtremeWare Enterprise Manager, that enable simple and
efficient switch management and configuration. ExtremeWare is a standards-
based software suite that delivers policy-based quality of service and enables
interoperability with legacy switches and routers. ExtremeWare Enterprise
Manager is an application suite that enables remote configuration and
management of multiple switches from a single network station.
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Our product families address switching in the desktop, segment, server and
core areas of the LAN. The following table identifies our principal hardware
products:
<TABLE>
<CAPTION>
Product name
and date of Area of the Forwarding speed Per port
first shipment Enterprise LAN Configuration (packets per second) list price range
- -------------------------------------------------------------------------------------------------
The Summit Stackable product family
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summit1 core 8 Gigabit Ethernet ports 11.9 million $2,250 to $3,750
October 1997
- -------------------------------------------------------------------------------------------------
Summit4 server 16 10/100 Mbps 11.3 million Ethernet:
March 1998 Ethernet ports $625
Gigabit Ethernet:
6 Gigabit Ethernet ports $2,500
- -------------------------------------------------------------------------------------------------
Summit48 desktop 48 10/100 Mbps 10.1 million Ethernet:
April 1998 Ethernet ports $115 to $146
Gigabit Ethernet:
2 Gigabit Ethernet ports $1,250 to $2,500
- -------------------------------------------------------------------------------------------------
Summit24 desktop 24 10/100 Mbps 5.1 million Ethernet:
November 1998 Ethernet ports $177 to $292
Gigabit Ethernet:
1 Gigabit Ethernet port $1,250 to $2,500
- -------------------------------------------------------------------------------------------------
Summit Virtual core Up to 64 Gbps of up to 48.0 million $1,125
Chassis bandwidth
November 1997
8 SummitLink Channels
- -------------------------------------------------------------------------------------------------
<CAPTION>
The BlackDiamond Modular Chassis
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BlackDiamond core Up to 256 10/100 Mbps 48.0 million Ethernet:
Chassis segment Ethernet ports or 48 $402 to
September server Gigabit Ethernet ports in $1,333
1998 desktop one chassis Gigabit Ethernet:
$2,475 to
10 slots to accommodate $11,245
a variety of connectivity
and up to 2 management
modules
</TABLE>
Desktop Switches
The enterprise desktop is the portion of the network where individual end-
user workstations are connected to a hub or switch. Traditionally, a discrete
group of desktop users, or a workgroup, shared a single hub, which connected
their workgroup to the rest of the network. In this shared environment, each
desktop in the workgroup receives and is burdened by the communication of
every other desktop in the workgroup. This topology is
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effective so long as the majority of traffic remains within the workgroup. As
applications have become more bandwidth intensive and as user traffic has
migrated outside the workgroup via the Internet or an intranet or extranet,
however, the hubs are unable to effectively process this traffic, resulting in
diminished desktop performance. Replacing the hub with a Layer 3 switch
alleviates this problem by providing a dedicated link for each desktop and
eliminating unnecessary broadcasts of information to every desktop in the
workgroup. Enterprise desktop switching provides the desktop with features
typically found only at the network core, such as redundancy, greater speed
and the ability to aggregate multiple switch ports into a single high-
bandwidth connection.
We became an industry leader in Layer 3 switching for the desktop with the
introduction of our Summit48 and Summit24 desktop switching products. The
Summit48 addresses high-density enterprise desktop connections. This switch
features a non-blocking architecture to avoid the loss of data packets. The
Summit24, with half the number of ports of the Summit48, is targeted at local
wiring closets with moderately dense desktop connections.
Segment Switches
Enterprise segment switching involves the switching among workgroups of
multiple network desktops. While enterprise segment switching faces the same
challenges as desktop switching, it must also address increased congestion
from traffic generated by hubs and other devices that enterprises use to
connect multiple desktop computers. Our primary product for enterprise segment
switching is the chassis-based BlackDiamond. The BlackDiamond chassis
addresses the needs of enterprises that interconnect high-density 10/100 Mbps
segments. It can also be equipped with switched Gigabit Ethernet connectivity
modules to provide high-speed uplinks to servers and switches in the network
core.
Server Switches
Servers run the applications and store the data needed by all network end-
users. In a traditional LAN, most of the network resources needed by any given
desktop user, such as printer servers, file servers or database servers, are
on the same workgroup segment as the desktop user. The traditional network
architecture has been shifting toward more centralized server clusters, or
server farms, which require the physical deployment of multiple servers in a
single central data center. This new architecture is easier to manage and can
be configured in a redundant fashion, thereby reducing the risk of system
failure. Additionally, remote offices and telecommuters can access the same
server-based data as desktop users, increasing the flexibility of the network
to support users wherever they may be located.
As more people access the network and as server requests increasingly
involve more bandwidth-intensive applications, network traffic to and from
servers has increased dramatically, causing bandwidth to be consumed by
traffic. Servers also communicate with each other, creating a high volume of
server-to-server traffic within the server farm. Recent technology
developments allow enterprises to install network interface cards that enable
connections using Gigabit Ethernet or the aggregation of multiple 100 Mbps
ports on a single card. This development increases the communication speed of
the servers. In turn, these servers have created the need for switches that
can support their higher server-to-server and server-to-end-user
communications speeds. Our Summit4 product addresses server switching
constraints by providing switched Gigabit Ethernet and multiple 100 Mbps links
to the servers, thereby delivering sufficient bandwidth between servers and to
clients on attached segments. The BlackDiamond may also be configured to
address the needs of a server switching environment that requires higher port
density and modular configuration flexibility.
Core Switches
The network core is the most critical point in the network, as it is where
the majority of network traffic, including desktop, segment and server
traffic, converges. Network core switching involves switching traffic from the
desktops, segments and servers within the network. Because of the high-traffic
nature of the network core,
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wire-speed Layer 3 switching, scalability, a non-blocking hardware
architecture, fault-tolerant mission-critical features, redundancy, link
aggregation, the ability to support a variety of high-density "speeds and
feeds" and the ability to accommodate an increasing number of high-capacity
backbone connections are critical in core switching. Our network core products
satisfy these criteria and include the BlackDiamond, the Summit1 and the
Summit Virtual Chassis.
The BlackDiamond switch includes the fault-tolerant features associated
with mission-critical enterprise-class Layer 3 switching, including redundant
system management and switch fabric modules, hot-swappable modules and chassis
components, load-sharing power supplies and management modules, up to four 10
Mbps, 100 Mbps, or 1,000 Mbps aggregated links, dual software images and
system configurations, spanning tree and multipath routing, and redundant
router protocols for enhanced system reliability. In addition, our Summit1
switch, which interconnects multiple Gigabit Ethernet backbones from various
parts of the enterprise LAN, is well-suited for network core applications that
require lower density backbone connections. The Summit Virtual Chassis is a
high-speed external backplane that interconnects multiple Summit or
BlackDiamond switches. The Summit Virtual Chassis enables network flexibility
by interconnecting geographically dispersed or co-located Summit and
BlackDiamond switches, thereby creating a distributed core.
ExtremeWare
Our ExtremeWare software suite is pre-installed on every Summit and
BlackDiamond switch. For Extreme switches that are Layer 3 enabled,
ExtremeWare delivers policy-based quality of service capabilities and supports
a range of routing protocols that enable interoperability with legacy switches
and routers. Our policy-based quality of service also enables network managers
to define numerous levels of control, or policies, that determine the amount
of bandwidth available to a group of users or network devices at a given time.
The policies can describe traffic based on port number, protocol type, VLAN,
or Layer 2, Layer 3 or Layer 4 information. Using 802.1p and 802.1Q for VLAN
tagging, policy-based quality of service is passively signaled across the
network to enable standards-based interoperability. For Extreme switches that
are Layer 2 enabled, ExtremeWare provides policy-based quality of service and
supports a range of standards-based management and Layer 2 protocols. In
addition, the Layer 2 version of ExtremeWare can be upgraded to Layer 3 via
software that may be downloaded from the web.
ExtremeWare Enterprise Manager
ExtremeWare Enterprise Manager simplifies the task of managing and
configuring groups of our switches. With ExtremeWare Enterprise Manager, an
entire network of our switches can be managed from a single management console
using a standard web browser. This enterprise-wide management enables VLANs
and policy-based quality of service to be established and managed for the
entire enterprise LAN. ExtremeWare Enterprise Manager can also manage
centralized and distributed stacks of Summit switches and the Summit Virtual
Chassis as aggregated entities. ExtremeWare Enterprise Manager can be accessed
using any Java-enabled browser. The ExtremeWare Enterprise Manager application
and database support both Microsoft Windows NT and Sun Microsystems' Solaris.
The ExtremeWare Enterprise Manager client can be launched from within the HP
OpenView Network Node Manager application.
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Customers
The following table lists certain of our end user customers that have
purchased in excess of $100,000 of our products since January 1, 1998:
<TABLE>
<S> <C> <C>
Advanta Mortgage Honeywell Osaka Prefecture University
Amoco Houston NW Medical Center Pennzoil
AT&T Imperial College Playboy
Barnes and Noble Institute of Nuclear Power Raytheon
British Telecom Interwest Bank Real Networks
Cable & Wireless (UK) IXNet Reuters
Chiba Kougyou University Juno Online Saudi Aramco Oil Company
Compaq Leo Burnett Advertising Schlumberger
Danish Post Lockheed Martin Shell Oil
Dell Computer Los Alamos Labs Sun Microsystems
Digital Domain MAN (Denmark) Swedish Library Service
Enron Corporation Microsoft Tandem Computers
First Technology Credit MIT Lincoln Labs UC Riverside
Union MSNBC University of Stuttgart
Harbor-UCLA Medical Center Navistar U.S. Air Force
Hewlett-Packard Company NVIDIA Worldvision
</TABLE>
In fiscal 1998, 3Com and Compaq accounted for 25% and 21%, respectively, of
our net revenue, and for the six-month period ended December 31, 1998, Compaq
and Hitachi Cable accounted for 17% and 11% of our net revenue, respectively.
Compaq is both an OEM and an end-user customer. In fiscal 1998, approximately
72% of our net revenue was derived from ten customers. End-user sales to
Compaq include sales to its subsidiaries, Tandem and Digital. In the six-month
period ended December 31, 1998, approximately 58% of our net revenue was
derived from ten customers.
Representative examples of the manner in which Extreme's products have been
used by our customers are set forth below:
Heavy equipment manufacturer. This Japan-based customer is one of the
world's largest manufacturers of marine vessels, construction machinery and
environmental systems. The customer was attempting to run numerous office
automation and bandwidth-intensive engineering applications on its expanding
3,000-node computer network. As the organization took on additional nodes and
applications, it needed a more scalable LAN infrastructure to keep up with
increased speed and bandwidth demands, while providing quality of service for
traffic prioritization and bandwidth control. When the customer relocated its
headquarters to a larger facility, it considered ATM and Gigabit Ethernet as
alternative LAN solutions. The customer ultimately chose Extreme's Gigabit
Ethernet solution due to its lower total cost of ownership and ability to
scale speed, bandwidth, network size and quality of service. The customer
installed Extreme's Summit1 LAN switches in the network core with high-speed
Gigabit Ethernet uplinks to several Summit2 LAN switches that perform segment
switching. This new all-Gigabit Ethernet LAN infrastructure provides enough
bandwidth for present and future applications that this global manufacturer
may adopt, is easy to manage and offers the customer a high degree of
efficiency.
Computer manufacturer. This leading global personal computer manufacturer
had a 30,000-node enterprise network consisting of an FDDI-based core with
Ethernet to segments, servers and desktops. The network relied on software-
based multi-protocol routers to handle mission-critical enterprise resource
planning systems and emerging electronic commerce applications that support
web-based purchasing of their computer equipment. The network infrastructure
did not scale well and as the computer manufacturer increased users and
applications, the cost of efficiently running and managing the network
increased significantly. As a result, the customer looked for a new reliable,
efficient and scalable LAN infrastructure. Extreme enabled the computer
manufacturer to cost-effectively migrate its existing network core, composed
of 5 FDDI rings and over 100 software-based routers, to an all-Ethernet
infrastructure with Layer 3 IP switching from core to desktop.
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BlackDiamond chassis switches and stackable Summit switches were deployed to
simplify management, significantly reduce network ownership costs, and
accommodate future growth of customers and applications.
On-line interactive news service. A leading provider of on-line interactive
news needed to reduce bottlenecks and increase control on its 400-node
mission-critical production network. An existing FDDI backbone was unable to
scale in capacity to handle increased flow of bandwidth-intensive content such
as video, audio, graphics and text. After considering many alternative
solutions including those offered by leading network companies, the customer
decided to replace its FDDI backbone with a Gigabit Ethernet LAN
infrastructure using Layer 3 switches from Extreme. Compared to ATM and other
Gigabit Ethernet solutions, the Extreme solution offered more scalable
capacity and similar quality of service features but with far less complexity
and cost. The ability of Extreme's solution to reduce network ownership costs
also played a key role in the customer's decision. Today, the network uses a
mix of Summit1 switches in the core, Summit2 switches in the segment and
Summit48 switches to the desktop. The customer's satisfaction with our
solution has led to follow-up sales.
Sales and Marketing
Extreme's sales and marketing strategy is focused on domestic and
international resellers, OEMs and field sales.
Resellers. We have entered into agreements to sell our products through
more than 100 resellers in 39 countries. Our resellers include regional
networking system resellers, resellers who focus on specific vertical markets,
network integrators and wholesale distributors. We provide training and
support to our resellers and our resellers generally provide the first level
of support to end users of our products. We intend to increase the number of
our reseller relationships, to target certain vertical markets and support a
two-tier distribution channel. Resellers accounted for approximately 57% and
67% of our net revenue for fiscal 1998 and the six-months ended December 31,
1998, respectively.
OEMs. We have established four key OEM relationships with leaders in the
telecommunications, personal computer and computer networking industries. For
fiscal 1998 and the six-months ended December 31, 1998, sales to our OEMs
accounted for 43% and 33% of our net revenue, respectively. Compaq, which is
both an OEM and an end-user customer, accounted for 21% and 17% of our net
revenue in fiscal 1998 and the six-months ended December 31, 1998,
respectively. We intend to maintain a limited number of relationships with key
strategic OEMs who may offer products or distribution channels that compliment
ours. Each of our OEMs resells our products under its own name. We believe
that our OEM relationships enhance our ability to sell and provide support to
large organizations because certain end-user organizations may prefer to do
business with very large suppliers. We anticipate that OEM sales will decline
as a percentage of net revenue as we expand our reseller and fields sales
efforts.
Field sales. We have designed and established our field sales organization
to support and develop leads for our resellers and to establish and maintain a
limited number of key accounts and strategic customers. To support these
objectives, our field sales force:
. assists end-user customers in finding solutions to complex network
system and architecture problems;
. differentiates the features and capabilities of our products from
competitive offerings;
. continually monitors and understands the evolving networking needs of
enterprise customers;
. promotes our products and ensures direct contact with current and
potential customers; and
. monitors the changing requirements of our customers.
As of December 31, 1998, Extreme's worldwide sales and marketing
organization included 67 individuals, including managers, sales
representatives, and technical and administrative support personnel. We have
domestic sales offices located in major metropolitan areas, including Atlanta,
Boston, Chicago, Dallas, Houston, Los Angeles, New York, San Jose, Seattle and
Washington DC. In addition, we have international sales offices located in the
United Kingdom, France, Germany, Hong Kong, Italy, Japan, Mexico, the
Netherlands and Sweden.
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International sales
We believe that there is a strong international market for our switching
products. Our international sales are conducted primarily through our overseas
offices and foreign resellers. Sales to customers outside of North America
accounted for approximately 59% and 50% of our net revenue in fiscal 1998 and
the six-month period ended December 31, 1998, respectively.
Marketing
We have a number of marketing programs to support the sale and distribution
of our products and to inform existing and potential enterprise customers and
our resellers and OEMs about the capabilities and benefits of our products.
Our marketing efforts include participation in industry tradeshows, technical
conferences and technology seminars, preparation of competitive analyses,
sales training, publication of technical and educational articles in industry
journals, maintenance of our web site, advertising and public relations. In
addition, we have begun to develop an e-commerce business directed at
resellers. We also participate in third-party, independent product tests.
Customer Service and Support
Our customer service and support organization maintains and supports
products sold by our field sales force to end users, and provides technical
support to our resellers and OEMs. Generally, our resellers and OEMs provide
installation, maintenance and support services to their customers and we
assist our resellers and OEMs in providing such support.
In addition to designing custom maintenance programs to satisfy specific
customer requirements, we also offer several standard maintenance programs to
our resellers and customers, including ExtremeAssist1 and ExtremeAssist2.
ExtremeAssist1. This program is designed for customers which have strong
technical networking skills and are interested in keeping service and support
costs to a minimum. With ExtremeAssist1, the customers' information technology
organizations provide first-level support for configuration, hardware and
trouble shooting, while our technical assistance center provides advanced
second-level support on an essential need basis. The ExtremeAssist1 program
includes 2 hour telephone response time, 10 e-mail inquiries per month and
responses within 24 hours, rapid-response emergency telephone support 24 hours
a day, seven days a week and 72-hour advanced replacement of hardware.
ExtremeAssist2. This program is designed for mission-critical environments
that require the highest degree of network availability, data integrity and
end-user productivity. The ExtremeAssist2 program includes 1 hour telephone
response time, unlimited e-mail inquiries and next business-day responses,
rapid-response emergency/ network down telephone support 24 hours a day, seven
days a week and next business-day advance replacement of hardware.
With the ExtremeAssist1 and ExtremeAssist2 programs, our customers are able
to access our web-based database to immediately obtain software updates, bug
lists, technical support alerts and on-line documentation. We typically
provide end users with a one-year hardware and 90-day software warranty. We
also offer various training courses for their third-party resellers or end-
user customers.
Manufacturing
We outsource the majority of our manufacturing and supply chain management
operations, and we conduct quality assurance, manufacturing engineering,
documentation control and repairs at our facility in Cupertino, California.
This approach enables us to reduce fixed costs and to provide flexibility in
meeting market demand. Where cost-effective, we may begin to perform certain
of our non-manufacturing outsourced operations in-house.
Currently, we use two contract manufacturers--Flextronics, located in San
Jose, California, to manufacture our Summit1, Summit2 and Summit4 and
BlackDiamond products and MCMS, located in Boise, Idaho, to
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<PAGE>
manufacture our Summit24 and Summit48 products. Each of these manufacturing
processes and procedures is ISO 9002 certified. We design and develop the key
components of our products, including ASICs, printed circuit boards and
software. In addition, we determine the components that are incorporated in
our products and select the appropriate suppliers of such components. Product
testing and burn-in is performed by our contract manufacturers using tests we
specify and automated testing equipment. We also use comprehensive inspection
testing and statistical process controls to assure the quality and reliability
of our products. We intend to regularly introduce new products and product
enhancements, which will require that we rapidly achieve volume production by
coordinating our efforts with those of our suppliers and contract
manufacturers. See "Risk Factors--Extreme Needs to Expand Its Manufacturing
Operations and Depends on Contract Manufacturers for Substantially All of Its
Manufacturing Requirements."
Although we use standard parts and components for our products where
possible, we currently purchase several key components used in the manufacture
of our products from single or limited sources. Our principal single-sourced
components include:
. ASICs;
. microprocessors;
. programmable integrated circuits;
. selected other integrated circuits;
. cables; and
. custom-tooled sheet metal.
Our principal limited-source components include:
. flash memories;
. DRAMs;
. SRAMs; and
. printed circuit boards.
Generally, purchase commitments with our single or limited source suppliers
are on a purchase order basis. LSI Logic manufacturers all of our ASICs which
are used in all of our switches. Any interruption or delay in the supply of
any of these components, or the inability to procure these components from
alternate sources at acceptable prices and within a reasonable time, would
materially adversely affect our business, operating results and financial
condition. In addition, qualifying additional suppliers can be time-consuming
and expensive and may increase the likelihood of errors.
We use a rolling six-month forecast based on anticipated product orders to
determine our material requirements. Lead times for materials and components
we order vary significantly, and depend on factors such as the specific
supplier, contract terms and demand for a component at a given time. See "Risk
Factors--Extreme Purchases Several Key Components for Products From Single or
Limited Sources and Could Lose Sales if Such Sources Fail to Fill Its Needs "
and "--Extreme Needs To Expand Its Manufacturing Operations and Depends on
Contract Manufacturers for Substantially All of Its Manufacturing
Requirements."
Research and Development
We believe that our future success depends on our ability to continue to
enhance our existing products and to develop new products that maintain
technological competitiveness. We focus our product development activities on
solving the needs of users of enterprise LANs. We monitor changing customer
needs and work closely with users of enterprise LANs, value-added resellers
and distributors, and market research organizations to monitor changes in the
marketplace. We design our products around current industry standards and will
continue to support emerging standards that are consistent with our product
strategy.
Our products have been designed to incorporate the same core ASICs and
software and system architecture, facilitating a relatively short product
design and development cycle and reducing the time to market for new products
and features. We have utilized this architectural design to develop and
introduce other product models and enhancements since the introduction of our
first products in 1997. We intend to continue to utilize this architectural
design to develop and introduce additional products and enhancements in the
future.
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We are currently undertaking development efforts for our family of products
with emphasis on increasing reliability, performance and scalability and
reducing the overall LAN operating costs to end users. We are also focusing on
cost reduction engineering to reduce the cost of our products. There can be no
assurance that our product development efforts will result in commercially
successful products, or that our products will not be rendered obsolete by
changing technology or new product announcements by other companies. See "Risk
Factors--Extreme's Market is Subject to Rapid Technological Change and to
Compete Extreme Must Continually Introduce New Products that Achieve Broad
Market Acceptance."
Competition
The market for enterprise LAN switches is part of the broader market for
enterprise LAN equipment, which is dominated by a few large companies,
particularly Bay Networks, Cabletron Systems, Cisco Systems and 3Com. Each of
these companies has introduced, or has announced its intention to develop,
enterprise LAN switches that are or may be competitive with our products. For
example, in January 1999, Cisco announced its Catalyst 6000 family of chassis-
based switches. In addition, there are a number of large telecommunications
equipment providers, including Alcatel, Ericsson, Lucent Technologies, Nokia,
Nortel Networks and Siemens, which have entered the market for enterprise LAN
equipment, particularly through acquisitions of public and privately held
companies. For example, in January 1998, Lucent acquired Prominet, a private
switching company, and in August 1998, Northern Telecom acquired Bay Networks.
We expect to face increased competition, particularly price competition, from
these and other telecommunications equipment providers. We also expect to
compete with other public companies that offer enterprise LAN switching
products, such as FORE Systems and Xylan, and with private companies. These
vendors may develop products with functionality similar to our products or
provide alternative network solutions. Our OEMs may compete with us with their
current products or products they may develop, and with the products they
purchase from us. Current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
develop and offer competitive products. Furthermore, we compete with numerous
companies that offer routers and other technologies and devices that
traditionally have managed the flow of traffic on the enterprise LAN.
Many of our current and potential competitors have longer operating
histories and substantially greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and a larger installed
customer base, than we do. As a result, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. In addition, competitors with a large installed customer base may
have a significant competitive advantage over us. We have encountered, and
expect to continue to encounter, many potential customers who are extremely
confident in and committed to the product offerings of our principal
competitors, including Cisco Systems, Nortel Networks and 3Com. Accordingly,
such potential customers may not consider or evaluate our products. When such
potential customers have considered or evaluated our products, we have in the
past lost, and expect in the future to lose, sales to some of these customers
as certain large competitors have offered significant price discounts to
secure such sales.
We believe the principal competitive factors in the LAN switching market
are:
. expertise and familiarity with LAN protocols, LAN switching and network
management;
. product performance, features, functionality and reliability;
. price/performance characteristics;
. timeliness of new product introductions;
. adoption of emerging industry standards;
. customer service and support;
. size and scope of distribution network;
. brand name;
. access to customers; and
. size of installed customer base.
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We believe we compete favorably with our competitors with respect to each
of the foregoing factors. However, because many of our existing and potential
competitors have longer operating histories, greater name recognition, larger
customer bases and substantially greater financial, technical, sales,
marketing and other resources, they may have larger distribution channels,
stronger brand names, access to more customers and a larger installed customer
base than we do. Such competitors may, among other things, be able to
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and make more attractive offers to distribution partners than we can.
To remain competitive, we believe we must, among other things, invest
significant resources in developing new products and enhancing our current
products and maintain customer satisfaction worldwide. If we fail to do so,
our products will not compete favorably with those of our competitors which
will materially adversely affect our business. See "Risk Factors--Intense
Competition in the Market for Enterprise LAN Equipment Could Prevent Extreme
From Increasing Revenue and Prevent Extreme From Achieving or Sustaining
Profitability."
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We have filed eight U.S. patent applications relating to the
architecture of our network switches and quality of service features. There
can be no assurance that these applications will be approved, that any issued
patents will protect our intellectual property or that they will not be
challenged by third parties. Furthermore, there can be no assurance that
others will not independently develop similar or competing technology or
design around any patents that may be issued. We also have six pending
trademark applications in the U.S.
We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
In addition, we provide our software products to end-users primarily under
"shrink-wrap" license agreements included within the packaged software. These
agreements are not negotiated with or signed by the licensee, and thus these
agreements may not be enforceable in some jurisdictions. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. There can be no assurance
that these precautions will prevent misappropriation or infringement of our
intellectual property. Monitoring unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as in the
United States.
The networking industry is characterized by the existence of a large number
of patents and frequent claims and related litigation regarding patent and
other intellectual property rights. From time to time, third parties have
asserted and may assert exclusive patent, copyright, trademark and other
intellectual property rights to technologies and related standards that are
important to us. Although we have not been a party to any litigation asserting
claims that allege infringement of intellectual property rights, we cannot
assure you that we will not be a party to litigation in the future. In
addition, there can be no assurance that third parties will not assert
additional claims or initiate litigation against us or our manufacturers,
suppliers or customers alleging infringement of their proprietary rights with
respect to existing or future products. We may in the future initiate claims
or litigation against third parties for infringement of our proprietary rights
to determine the scope and validity of our proprietary rights. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel or require us
to develop non-infringing technology or enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on acceptable terms, if at all. In the event of a successful claim
of infringement and our failure or inability to develop non-infringing
technology or license the proprietary rights on a timely basis, our business,
operating results and financial condition could be materially adversely
affected.
Employees
As of December 31, 1998, we employed 159 persons, including 67 in sales and
marketing, 52 in research and development, 20 in operations and 20 in finance
and administration. We have never had a work stoppage and no
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personnel are represented under collective bargaining agreements. We consider
our employee relations to be good.
We believe that our future success will depend on our continued ability to
attract, integrate, retain, train and motivate highly qualified personnel, and
upon the continued service of our senior management and key personnel. None of
our personnel is bound by an employment agreement. Competition for qualified
personnel is intense, particularly in the San Francisco Bay Area, where our
headquarters is located. At times we have experienced difficulties in
attracting new personnel. There can be no assurance that we will successfully
attract, integrate, retain and motivate a sufficient number of qualified
personnel to conduct our business in the future. See "Risk Factors--If Extreme
Loses Certain Key Personnel or is Unable to Hire Additional Qualified
Personnel as Necessary, It May Not Be Able to Successfully Manage Its Business
or Achieve Its Objectives."
Facilities
Our principal administrative, sales, marketing and research development
facilities are located in approximately 28,400 square feet of office space in
Cupertino, California. Our lease expires in April 1999. We expect to be moving
to a new 77,000 square feet facility located in Santa Clara, California in
March 1999. Assuming we complete this move, we believe that our facilities
will be adequate to meet our needs for the foreseeable future. We also lease
office space in Connecticut, Georgia, Illinois, Texas, Maryland,
Massachusetts, New Jersey, Washington and Wisconsin and in Hong Kong and the
Netherlands.
Legal Proceedings
We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, operating results or financial condition. We may in the future be
party to litigation arising in the course of our business, including claims
that we allegedly infringe third-party trademarks and other intellectual
property rights. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the executive
officers and directors of Extreme as of January 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gordon L. Stitt...... 42 President, Chief Executive Officer and Chairman
Stephen Haddock...... 40 Vice President and Chief Technical Officer
Herb Schneider....... 39 Vice President of Engineering
William Kelly........ 47 Vice President of Corporate Development
Vito E. Palermo...... 35 Vice President, Chief Financial Officer and Secretary
George Prodan........ 46 Vice President of Marketing
Paul Romeo........... 49 Vice President of Operations
Harry Silverglide.... 52 Vice President of Sales
Charles
Carinalli(1)........ 50 Director
Promod Haque(2)...... 50 Director
Lawrence K. Orr(2)... 42 Director
Peter Wolken(1)...... 64 Director
</TABLE>
- --------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Gordon L. Stitt. Mr. Stitt co-founded Extreme in May 1996 and has served as
President, Chief Executive Officer and a director of Extreme since its
inception. From 1989 to 1996, Mr. Stitt worked at another company he co-
founded, Network Peripherals, a designer and manufacturer of high-speed
networking technology. He served first as its Vice President of Marketing,
then as Vice President and General Manager of the OEM Business Unit. Mr. Stitt
holds an MBA from the Haas School of Business of the University of California,
Berkeley and a BSEE/CS from Santa Clara University.
Stephen Haddock. Mr. Haddock co-founded Extreme in May 1996 and has served
as Vice President and Chief Technical Officer of Extreme since its inception.
From 1989 to 1996, Mr. Haddock worked as Chief Engineer at Network
Peripherals. Mr. Haddock is a member of IEEE, an editor of the Gigabit
Ethernet Standard and Chairman of the IEEE 802.3ad link aggregation committee.
Mr. Haddock holds an MSEE and a BSME from Stanford University.
Herb Schneider. Mr. Schneider co-founded Extreme in May 1996 and has served
as Vice President of Engineering of Extreme since its inception. From 1990 to
1996, Mr. Schneider worked as Engineering Manager at Network Peripherals and
was responsible for the development of LAN switches. From 1981 to 1990,
Mr. Schneider held various positions at National Semiconductor, a developer
and manufacturer of semiconductor products, where he was involved in the
development of early Ethernet chipsets and FDDI chipsets. Mr. Schneider holds
a BSEE from the University of California, Davis.
William Kelly. Mr. Kelly has served as Vice President of Corporate
Development of Extreme since January 1999. From October 1996 to January 1999,
he served as Vice President of Finance and Chief Financial Officer of Extreme.
From August 1995 to October 1996, he served as Vice President of Worldwide
Finance and Chief Financial Officer at SCM Microsystems, a manufacturer of
personal computer smart-card technology. From March 1991 to June 1995, Mr.
Kelly served in various positions at Network Peripherals, most recently as
Vice President, Controller and Treasurer. Mr. Kelly holds a BBA in accounting
from Loyola University, Chicago and is a Certified Public Accountant.
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<PAGE>
Vito E. Palermo. Mr. Palermo has served as Vice President, Chief Financial
Officer and Secretary of Extreme since January 1999. From January 1997 to
January 1999, he served as Senior Vice President, Chief Financial Officer and
Secretary of Metawave Communications, a wireless communications company. From
1992 to 1996, Mr. Palermo served in various financial management positions at
Bay Networks, a networking communications company, most recently serving as
Vice President and Corporate Controller and previously serving as Director of
Technology Finance, Corporate Financial and Planning Manager, and
Manufacturing and Customer Service Controller. Mr. Palermo holds an MBA from
St. Mary's College and a BS in Business Administration from California State
University.
George Prodan. Mr. Prodan has served as Vice President of Marketing of
Extreme since February 1997. From January 1994 to January 1997, he served as
Director of Marketing and Senior Director of Worldwide Channels at FORE
Systems, a networking equipment company. From April 1991 to December 1993, he
served as a product line manager for a division of 3Com, a networking company.
He holds an MS in Instructional Communications from Shippensburg State
University and a BS in Industrial Arts Education from California State
University.
Paul Romeo. Mr. Romeo has served as Vice President of Operations of Extreme
since April 1997. From 1989 to 1997, he served as Vice President of Operations
at Compression Labs, a videoconferencing company. Mr. Romeo holds an MBA from
Santa Clara University and a BS in Engineering/Production Management from the
University of Illinois.
Harry Silverglide. Mr. Silverglide has served as Vice President of Sales of
Extreme since January 1997. From May 1995 to January 1997, he served as Vice
President of Western Region Sales for Bay Networks. From July 1994 to May
1995, he served as Vice President of Sales for Centillion Networks, a provider
of LAN switching products which was acquired by Bay Networks in 1995. From
April 1984 to July 1994, he worked in sales and senior sales management
positions at Ungermann Bass, a network communications company.
Charles Carinalli. Mr. Carinalli has served as a director of Extreme since
October 1996. Since December 1996, Mr. Carinalli has been President, Chief
Executive Officer and a director of Wavespan, a developer of wireless
broadband access systems. From 1970 to 1996, Mr. Carinalli served in various
positions and most recently served as Senior Vice President and Chief
Technical Officer for National Semiconductor. Mr. Carinalli holds an MSEE from
Santa Clara University and a BSEE from the University of California, Berkeley.
Promod Haque. Mr. Haque has served as a director of Extreme since May 1996.
Mr. Haque joined Norwest Venture Partners in November 1990 and is currently
Managing General Partner of Norwest Venture Partners VII, General Partner of
Norwest Venture Partners VI and General Partner of Norwest Equity Partners V
and IV. Mr. Haque currently serves as a director of Information Advantage,
Prism Solutions, Raster Graphics, Connect, Transaction Systems Architects and
several privately held companies. Mr. Haque holds a PhDEE and a MSEE from
Northwestern University, an MM from the J.L. Kellogg Graduate School of
Management, Northwestern University and a BSEE from the University of Delhi,
India.
Lawrence K. Orr. Mr. Orr has served as a director of Extreme since May
1996. Since January 1991, he has been General Partner of Trinity Ventures, the
general partner of a privately held group of venture capital partnerships, and
he was an employee of Trinity Ventures from 1989 to 1991. Mr. Orr currently
serves as a director of several privately held companies. Mr. Orr holds an MBA
from Stanford University and a BA in Mathematics from Harvard University.
Peter Wolken. Mr. Wolken has served as a director of Extreme since May
1996. He currently serves as General Partner of AVI Management Partners, which
manages various private venture capital limited partnerships. He co-founded
AVI Management Partners in 1981. He serves as a director of Full Time Software
and several privately held technology companies in Silicon Valley. Mr. Wolken
holds a BFT in International Marketing from the American Graduate School for
International Management and a BS in Mechanical Engineering from the
University of California, Berkeley.
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Board Committees
The audit committee is primarily responsible for reviewing audited
financial statements and accounting practices of Extreme, and for considering
and recommending the employment of, and approving the fee arrangements with,
independent accountants for both audit functions and for advisory and other
consulting services. The audit committee is currently comprised of Messrs. Orr
and Haque. The compensation committee is primarily responsible for reviewing
and approving the compensation and benefits for our key executive officers,
administering our employee benefit plans and making recommendations to the
board regarding such matters. The compensation committee is currently
comprised of Messrs. Wolken and Carinalli.
Director Compensation
Directors are entitled to reimbursement of all reasonable out-of-pocket
expenses incurred in connection with their attendance at board and board
committee meetings.
Compensation Committee Interlocks and Insider Participation
The compensation committee is composed of Messrs. Wolken and Carinalli. No
interlocking relationship exists between the board or compensation committee
and the board of directors or compensation committee of any other company, nor
has any such interlocking relationship existed in the past. The compensation
committee reviews and approves the compensation and benefits for our key
executive officers, administers our employee benefit plans and makes
recommendations to the board regarding such matters.
Change of Control Arrangements
Shares subject to options granted under our Amended 1996 Stock Option Plan
will generally vest over four years, with 25% of the shares vesting after one
year and the remaining shares vesting in equal monthly increments over the
following 36 months. The options and stock purchase agreements granted to our
executive officers and our outside director provide for accelerated vesting of
the shares in the event of a "transfer of control," as defined in the option
or stock purchase agreement, of Extreme.
This form of agreement provides that if, as of the date of the transfer of
control, less than 75% of the total option shares are vested, the number of
vested shares will be increased, as of the date of the transfer of control, to
the lesser of 75% of the total option shares, or the sum of the number of
vested shares, which are determined under the standard vesting schedule, plus
50% of the unvested shares, which are determined under the standard vesting
schedule. After the transfer of control, the remaining unvested shares will
vest in equal monthly increments over the longer of 50% of the period
beginning on the date of the transfer of control and ending on the date four
years after the option grant date or 12 months.
48
<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation paid
to Extreme's Chief Executive Officer and each of Extreme's five other most
highly compensated executive officers (collectively, the "Named Executive
Officers") during fiscal 1998:
Summary Compensation Table
<TABLE>
<CAPTION>
All Other
Name and Principal Position Salary ($) Bonus ($) Compensation ($)
- --------------------------- ---------- --------- ----------------
<S> <C> <C> <C>
Gordon L. Stitt.......................... $129,167 $ -- $ --
President and Chief Executive Officer
Stephen Haddock.......................... 117,500 -- --
Vice President and Chief Technical
Officer
George Prodan............................ 125,000 -- --
Vice President of Marketing
Paul Romeo............................... 135,000 -- --
Vice President of Operations
Herb Schneider........................... 117,500 -- --
Vice President of Engineering
Harry Silverglide(1)..................... 100,000 20,000 72,600
Vice President of Sales
</TABLE>
- --------
(1) Other annual compensation amount relates to commissions paid to Mr.
Silverglide based on total sales and account wins during the fiscal year.
Option Grants
No stock options were granted during fiscal 1998 to the Named Executive
Officers. In October 1998, we granted options to purchase 200,000, 135,000,
90,000, 50,000, 135,000 and 80,000 shares of common stock at an exercise price
of $5.75 per share to Messrs. Stitt, Haddock, Prodan, Romeo, Schneider and
Silverglide, respectively, under the Amended 1996 Stock Option Plan. See "--
Amended 1996 Stock Option Plan."
Option Exercises and Holdings
No options were exercised during fiscal 1998 by the Named Executive
Officers. The following table provides certain information with respect to
unexercised options held as of June 30, 1998 by the Named Executive Officers:
Fiscal Year-End Options
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at June 30, 1998 Options at June 30, 1998
-------------------------- -------------------------
Name Vested Unvested Vested Unvested
- ---- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gordon L. Stitt............. -- -- -- --
Stephen Haddock............. -- -- -- --
George Prodan............... 210,000 420,000 $ 783,300 $ 1,566,600
Paul Romeo.................. -- -- -- --
Herb Schneider.............. -- -- -- --
Harry Silverglide........... -- -- -- --
</TABLE>
The options described in the above table were granted under Extreme's
Amended 1996 Stock Option Plan. Options granted under this plan are
immediately exercisable but vest over a four-year period with 25% vesting at
the first anniversary date of the vesting date and 6.25% each quarter
thereafter. In addition, the options are subject to a repurchase right in
favor of Extreme which lapses ratably over four years and entitles Extreme to
repurchase unvested shares at their original issuance price. The value of
unexercised in-the-money options at June 30, 1998 were calculated on the basis
of the fair market value of the underlying securities as of June 30, 1998 of
$3.75 per share, minus the per share exercise price, multiplied by the number
of shares underlying the option.
49
<PAGE>
Amended 1996 Stock Option Plan
Our Amended 1996 Stock Option Plan was adopted by the board of directors in
September 1996 and subsequently approved by the stockholders. This plan
provides for the grant of incentive stock options as defined in Section 422 of
the Code, to employees and for the grant of nonstatutory stock options to
employees, non-employee directors and consultants.
As of December 31, 1998, 12,014,309 shares are reserved for issuance under
the Amended 1996 Stock Option Plan, of which 6,391,195 shares of common stock
have been issued upon the exercise of options, options to purchase a total of
3,710,328 shares at a weighted average exercise price of $2.55 per share were
outstanding, and 1,912,786 shares were available for future option grants.
The Amended 1996 Stock Option Plan is administered by the board of
directors or a committee thereof. Subject to the provisions of this plan, the
board, or a committee of the board, has the authority to select the persons to
whom options are granted and determine the terms of each option, including:
. the number of shares of common stock covered by the option;
. when the option becomes exercisable;
. the per share option exercise price, which, in the case of incentive
stock options, must be at least 100% of the fair market value of a share
of common stock as of the date of grant, in the case of options granted
to persons who own 10% or more of the total combined voting power of
Extreme or any parent or subsidiary of Extreme, must be at least 110% of
the fair market value of a share of common stock as of the date of
grant, and, in the case of nonstatutory stock options, must be at least
85% of the fair market value of a share of common stock as of the date
of grant; and
. the duration of the option, which may not exceed ten years, or 5 years
for incentive stock options granted to a person who owns 10% or more of
the total combined voting power of Extreme.
Generally, options granted under the Amended 1996 Stock Option Plan vest
over four years, and are non-transferable other than by will or the laws of
descent and distribution. In the event of certain changes in control of
Extreme, the acquiring or successor corporation may assume or substitute for
options outstanding under the Amended 1996 Stock Option Plan, or such options
shall terminate. Certain options granted to officers of Extreme provide for
partial acceleration upon a change in control of Extreme.
1999 Employee Stock Purchase Plan
A total of 1,000,000 shares of common stock have been reserved for issuance
under our 1999 Employee Stock Purchase Plan, none of which have been issued as
of the effective date of this offering. This stock purchase plan, which is
intended to qualify under Section 423 of the Code, is administered by the
board or by a committee thereof. Employees, including officers and directors
of Extreme who are also employees, of Extreme or any subsidiary designated by
the board for participation in this stock purchase plan are eligible to
participate in the stock purchase plan if such persons are customarily
employed for more than 20 hours per week and more than five months per year.
The stock purchase plan will be implemented by consecutive offering periods
generally 12 months in duration. However, the first offering period under the
stock purchase plan will commence on the effective date of this offering and
terminate on April 30, 2000. Each offering period under the stock purchase
plan will generally be comprised of four three-month purchase periods, with
shares purchased on the last day of each purchase period. The board may change
the dates or duration of one or more offering periods, but no offering period
may exceed 27 months.
The 1999 Employee Stock Purchase Plan permits eligible employees to
purchase shares of common stock through payroll deductions at a price no less
than 85% of the lower of the fair market value of the common stock on the
first or the last day of the offering period. Participants generally may not
purchase more than 625 shares on the last day of each purchase period or stock
having a value, measured at the beginning of the offering period, greater than
$25,000 in any calendar year. In addition, no more than 100,000 shares may be
purchased
50
<PAGE>
by all participants on the last day of each purchase period. In the event of a
change in control of Extreme, the board may accelerate the date on which
common stock may be purchased in the then current purchase period to a date
prior to the change in control, or the acquiring corporation may assume or
replace the outstanding purchase rights under the stock purchase plan.
401(k) Plan
Extreme provides a tax-qualified employee savings and retirement plan,
commonly known as a 401(k) plan, which covers our eligible employees. Pursuant
to the 401(k) plan, employees may elect to reduce their current annual
compensation up to the lesser of 20% or the statutorily prescribed limit,
which is $10,000 in calendar year 1999, and have the amount of the reduction
contributed to the 401(k) plan. The 401(k) plan is intended to qualify under
Sections 401(a) and 401(k) of the Code, so that contributions by Extreme or
our employees to the 401(k) plan, and income earned on plan contributions, are
not taxable to employees until withdrawn from the 401(k) plan, and so that
contributions will be deductible by Extreme when made. The trustee of the
401(k) plan invests the assets of the 401(k) plan in the various investment
options as directed by the participants.
Limitation of Liability and Indemnification
Pursuant to the provisions of the Delaware General Corporation Law, Extreme
has adopted provisions in its certificate of incorporation which eliminate the
personal liability of its directors for a breach of fiduciary duty as a
director, except for liability:
. for any breach of the director's duty of loyalty to Extreme or its
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful stock repurchase and dividend payment; or
. for any transaction from which the director derived an improper personal
benefit.
Extreme's certificate of incorporation also allows Extreme to indemnify its
officers, directors and other agents to the full extent permitted by Delaware
law. Extreme intends to enter into indemnification agreements with each of its
directors and officers which will give them additional contractual
reassurances regarding the scope of indemnification and which may provide
additional procedural protection. The indemnification agreements may require
actions such as:
. indemnifying officers and directors against certain liabilities that may
arise because of their status as officers or directors;
. advancing expenses, as incurred, to officers and directors in connection
with a legal proceeding, subject to certain very limited exceptions; or
. obtaining directors' and officers' insurance.
At present, there is no pending litigation or proceeding involving any of
Extreme's directors, officers or employees regarding which indemnification is
sought, nor is Extreme aware of any threatened litigation that may result in
claims for indemnification.
51
<PAGE>
CERTAIN TRANSACTIONS
Sales of Stock to Insiders
On May 17, 1996, we issued for cash the following shares of common stock at
a price of $.00333 per share to Extreme's founders:
<TABLE>
<CAPTION>
Purchaser Shares of Common Stock
- --------- ----------------------
<S> <C>
Gordon L. Stitt.......................................... 2,025,000
Stephen Haddock.......................................... 1,350,000
Herb Schneider........................................... 1,350,000
</TABLE>
On May 28, 1996, we sold 14,579,999 shares of Series A preferred stock at a
price of $.333 per share. On May 7, 1997 and June 17, 1997, we sold 8,886,228
shares of Series B preferred stock at a price of $1.38 per share. On January
12, 1998, March 24, 1998 and March 31, 1998, we sold 5,595,088 shares of
Series C preferred stock at a price of $3.67 per share. Upon the consummation
of this offering, all outstanding shares of Series A preferred stock, Series B
preferred stock and Series C preferred stock will automatically convert into
shares of common stock on a one-for-one basis. The following directors,
executive officers, holders of more than 5% of a class of voting securities
and members of such person's immediate families purchased shares of Series A
preferred stock, Series B preferred stock and Series C preferred stock:
<TABLE>
<CAPTION>
Shares of Series Shares of Series Shares of Series
A Preferred B Preferred C Preferred
Purchaser Stock Stock Stock
- --------- ---------------- ---------------- ----------------
Named Executive Officers
and directors
<S> <C> <C> <C>
Gordon L. Stitt............ 240,000 8,250 3,000
Stephen Haddock............ 75,000 8,250 --
William Kelly.............. 75,000 7,245 --
George Prodan.............. -- 8,250 --
Herb Schneider............. 63,000 8,250 --
Harry Silverglide.......... -- 8,250 --
Charles Carinalli.......... 75,000 48,300 13,623
5% Stockholders
Entities affiliated with
AVI Capital Management.... 4,500,000 1,268,116 272,478
Entities affiliated with
Norwest Venture Partners.. 4,500,000 2,717,392 544,959
Entities affiliated with
Trinity Ventures.......... 4,499,999 1,268,116 272,480
Entities affiliated with
Kleiner Perkins Caufield &
Byers..................... -- 2,355,073 136,238
</TABLE>
See the notes to table of beneficial ownership in "Principal Stockholders"
for information relating to the beneficial ownership of such shares.
Other Agreements with Insiders
In January 1999, the board of directors approved a loan to Vito E. Palermo,
our Chief Financial Officer, of $75,000 at an interest rate of 4.51% per
annum. The loan is due in January 2003 but we may forgive this loan upon our
attainment of certain objectives to be determined by Extreme's Chief Executive
Officer. In addition, in connection with Mr. Palermo's employment, we have
agreed to pay him nine months of severance if we terminate him without cause
within the first twelve months of his employment.
We intend to enter into indemnification agreements with each of our
directors and officers. These indemnification agreements will require Extreme
to indemnify such individuals to the fullest extent permitted by Delaware law.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Extreme's common
stock as of December 31, 1998 and as adjusted to reflect the sale of the
shares of common stock offered hereby by:
. each person who is known by Extreme to beneficially own more than 5% of
Extreme's common stock;
. the Named Executive Officers;
. each of Extreme's directors; and
. all officers and directors as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of Shares ------------------------
Name and Address of Beneficial Beneficially Before After
Owner Owned Offering Offering
- ------------------------------ ---------------- ---------- ----------
<S> <C> <C> <C>
Named Executive Officers and
Directors
Gordon L. Stitt(1).............. 2,476,250 6.0% 5.4%
Stephen Haddock(2).............. 1,568,250 3.8 3.4
George Prodan(3)................ 728,250 1.8 1.6
Paul Romeo(4)................... 410,000 1.0 *
Herb Schneider(5)............... 1,556,250 3.8 3.4
Harry Silverglide(6)............ 650,750 1.6 1.4
Charles Carinalli(7)............ 286,923 * *
Wavespan Corporation
500 N. Bernardo Avenue
Mountain View, CA 94043
Promod Haque(8)................. 7,762,351 19.0 16.9
245 Lytton Avenue, Suite 250
Palo Alto, CA 94025
Lawrence K. Orr(9).............. 6,040,595 14.8 13.2
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Peter Wolken(10)................ 6,040,594 14.8 13.2
One First Street, #12
Los Altos, CA 94022
5% Stockholders
AVI Capital Management(10)...... 6,040,594 14.8 13.2
One First Street, #12
Los Altos, CA 94022
Kleiner Perkins Caufield &
Byers(11)...................... 2,491,311 6.1 5.4
2750 Sand Hill Road
Menlo Park, CA 94025
Norwest Venture Partners(8)..... 7,762,351 19.0 16.9
245 Lytton Avenue, Suite 250
Palo Alto, CA 94025
Trinity Ventures(9)............. 6,040,595 14.8 13.2
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
All executive officers and
directors
as a group (11 persons)...... 28,262,458 66.7 59.6
</TABLE>
- --------
* Less than 1%
53
<PAGE>
Unless otherwise indicated, the address of each of the named individuals
is: c/o Extreme Networks, 10460 Bandley Drive, Cupertino, California 95014-
1972. Percentage of ownership prior to the offering is based on 40,852,510
shares outstanding on December 31, 1998 and after the offering is based on
45,852,510 shares outstanding, and assuming no exercise of the underwriters'
over-allotment option. The number and percentage of shares beneficially owned
are determined in accordance with SEC rules and regulations. Shares of common
stock subject to options currently exercisable or exercisable within 60 days
after December 31, 1998 are deemed outstanding for the purpose of computing
the number of shares beneficially owned and the percentage ownership of the
person holding these options but are not deemed outstanding for computing the
percentage ownership of any other person. Unless otherwise indicated below,
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.
(1) Includes 506,256 shares subject to a right of repurchase in favor of
Extreme which lapses over time. Includes 240,000 shares held by Gordon
and Valori Stitt. Also includes 200,000 shares issuable upon exercise of
options, of which 183,334 shares are subject to a right of repurchase in
favor of Extreme which lapses over time.
(2) Includes 337,500 shares subject to a right of repurchase in favor of
Extreme which lapses over time. Also includes 135,000 shares issuable
upon exercise of options, of which 123,750 shares are subject to a right
of repurchase in favor of Extreme which lapses over time.
(3) Includes 720,000 shares issuable upon exercise of options, of which
397,500 shares are subject to a right of repurchase in favor of Extreme
which lapses over time.
(4) Includes 195,000 shares subject to a right of repurchase in favor of
Extreme which lapses over time. Also includes 50,000 shares issuable upon
exercise of options, of which 45,834 shares are subject to a right of
repurchase in favor of Extreme which lapses over time.
(5) Includes 337,500 shares subject to a right of repurchase in favor of
Extreme which lapses over time. Also includes 135,000 shares issuable
upon exercise of options, of which 123,750 shares are subject to a right
of repurchase in favor of Extreme which lapses over time.
(6) Includes 281,250 shares subject to right of repurchase in favor of
Extreme which lapses over time. Also includes 80,000 shares issuable upon
exercise of options, of which 73,334 shares are subject to a right of
repurchase in favor of Extreme which lapses over time.
(7) Includes 136,923 shares held by Charles Peter Carinalli and/or Connie Sue
Carinalli, Trustees of the Carinalli 1996 Living Trust dated April 24,
1996. Also includes 150,000 shares issuable upon exercise of options, of
which 56,250 shares are subject to a right of repurchase in favor of
Extreme which lapses over time.
(8) Promod Haque is a partner of Norwest Venture Partners. All shares listed
are held by Norwest Equity Partners, V.
(9) Lawrence K. Orr is a partner of Trinity Ventures. The shares listed
represent 5,707,084 shares held by Trinity Ventures V, L.P. and 333,511
shares held by Trinity V Side by Side Fund, L.P.
(10) Peter Wolken is a partner of AVI Management Partners. The shares listed
represent 809,698 shares held by Associated Venture Investors III, L.P.;
55,705 shares held by AVI Silicon Valley Partners, L.P.; 5,026,642 shares
held by AVI Capital, L.P.; and 148,549 shares held by AVI Partners Growth
Fund II, L.P.
(11) The shares listed represent 2,296,139 shares held by Kleiner Perkins
Caufield & Byers VIII; 127,115 shares held by Kleiner Perkins Caufield &
Byers VIII Founders Fund; 62,281 shares held by KPCB Information Sciences
Zaibatsu Fund II; and 5,776 shares held by KPCB VIII Founders, L.P.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, Extreme's authorized capital stock will
consist of 150,000,000 shares of common stock and 2,000,000 shares of
preferred stock.
Common Stock
As of December 31, 1998, there were 11,791,195 shares of common stock
outstanding held of record by 78 stockholders. Subject to preferences that may
be applicable to any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled to the following:
Dividends. Holders of common stock are entitled to receive dividends out of
assets legally available for the payment of dividends at the times and in the
amounts as the board of directors from time to time may determine.
Voting. Holders of common stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders. Cumulative voting for
the election of directors is not authorized by Extreme's certificate of
incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election.
Preemptive rights, conversion and redemption. The common stock is not
entitled to preemptive rights and is not subject to conversion or redemption.
Liquidation, dissolution and winding-up. Upon liquidation, dissolution or
winding-up of Extreme, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation of any preferred stock.
Each outstanding share of common stock is, and all shares of common stock
to be outstanding upon completion of this offering will be, upon payment
therefor, duly and validly issued, fully paid and nonassessable.
Preferred Stock
The board of directors is authorized, without action by the stockholders,
to designate and issue preferred stock in one or more series. The board of
directors can fix the rights, preferences and privileges of the shares of each
series and any qualifications, limitations or restrictions on these shares.
The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes could, among other things, under certain circumstances,
have the effect of delaying, deferring or preventing a change in control of
Extreme. We have no current plans to issue any shares of preferred stock.
Warrants
In November 1996, Extreme issued warrants to a lease financing company to
purchase 210,000 shares of Series A preferred stock with an exercise price of
$.333 per share, in consideration for equipment leases and a loan. In July
1997, Extreme issued warrants to the same lease financing company to purchase
48,347 shares of Series B preferred stock with an exercise price of $1.38 per
share, in consideration for equipment leases. Upon completion of this
offering, these warrants will convert into the right to purchase equivalent
number of shares of our common stock at the same exercise price per share. The
warrants may be exercised at any time within a period of 10 years or 5 years
from the effective date of an initial public offering completed by Extreme,
whichever is longer.
In November 1997, Extreme issued warrants to a lease financing company to
purchase 79,051 shares of Series C preferred stock with an exercise price of
$2.53, in consideration for a loan. Upon completion of this offering, these
warrants will convert into the right to purchase equivalent number of shares
of our common stock at the same exercise price per share. The warrants may be
exercised at any time within a period which expires the sooner of 10 years or
3 years from the effective date of an initial public offering.
55
<PAGE>
Registration Rights of Certain Holders
Following the consummation of this offering, the holders of approximately
33,786,315 shares of common stock will have certain rights to register those
shares under the Securities Act of 1933 pursuant to the Second Amended and
Restated Rights Agreement. Subject to limitations in this Rights Agreement,
the holders of at least 50% of these shares may require, on two occasions,
that Extreme use its best efforts to register these shares for public resale.
If Extreme registers any of its common stock for its own account or for the
account of other security holders, the holders of these shares are entitled to
include their shares of common stock in the registration, subject to the
ability of the underwriters to limit the number of shares included in the
offering. The holders of at least 50% of these shares may also require Extreme
to register all or a portion of their registrable securities on Form S-3 when
Extreme is eligible to use this form, provided, among other limitations, that
the proposed aggregate price to the public is at least $1,000,000. Extreme
will bear all fees, costs and expenses of such registration, other than
underwriting discounts and commissions.
Delaware Law and Certain Provisions of Extreme's Certificate of Incorporation
and Bylaws
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make more difficult the acquisition of Extreme by means of a
tender offer, a proxy contest, or otherwise, and the removal of incumbent
officers and directors. These provisions are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of Extreme to first negotiate
with us. We believe that the benefits of increased protection of Extreme's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure Extreme outweighs the
disadvantages of discouraging these proposals, including proposals that are
priced above the then current market value of our common stock, because, among
other things, negotiation of these proposals could result in an improvement of
their terms.
We are subject to section 203 of the Delaware General Corporation Law. This
provision generally prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the date the stockholder became an interested stockholder,
unless:
. prior to that date the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to that date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
56
<PAGE>
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by that entity or person.
Our certificate of incorporation requires that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of the stockholders and may not be effected by a
consent in writing. In addition, special meetings of our stockholders may be
called only by the board of directors or holders of not less than 10% of all
of the shares entitled to cast votes at these special meetings. The
certificate of incorporation also provides that, beginning upon the closing of
the offering, the board of directors will be divided into three classes, with
each class serving staggered three-year terms and that certain amendments of
the certificate of incorporation, and all amendments by the stockholders of
the bylaws, require the approval of holders of at least 66 2/3% of the voting
power of all outstanding stock. These provisions may have the effect of
deferring hostile takeovers or delaying changes in control or management of
Extreme.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C. Its address is 235 Montgomery Street, 23rd Floor,
San Francisco, California 94104, and its telephone number at this location is
(415) 743-1444.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for
Extreme's common stock. Future sales of substantial amounts of common stock in
the public market could adversely affect the market price of the common stock.
Upon completion of this offering, Extreme will have outstanding 45,852,510
shares of common stock, assuming the issuance of 5,000,000 shares of common
stock offered hereby and no exercise of options after December 31, 1998. Of
these shares, the 5,000,000 shares sold in the offering will be freely
tradable without restriction or further registration under the Securities Act;
provided, however, that if shares are purchased by "affiliates," as that term
is defined in Rule 144 under the Securities Act, their sales of shares would
be subject to certain limitations and restrictions that are described below.
The remaining 40,852,510 shares of common stock held by existing
stockholders were issued and sold by Extreme in reliance on exemptions from
the registration requirements of the Securities Act. Of these shares,
40,279,487 shares will be subject to "lock-up" agreements described below on
the effective date of the offering. On the effective date of the offering,
194,000 shares not subject to the lock-up agreements described below will be
eligible for sale pursuant to Rule 144(k). Upon expiration of the lock-up
agreements 180 days after the effective date of the offering, 37,072,550
shares will become eligible for sale, subject in most cases to the limitations
of Rule 144. In addition, holders of stock options could exercise such options
and sell certain of the shares issued upon exercise as described below.
<TABLE>
<CAPTION>
Days After Date of Shares Eligible
this Prospectus for Sale Comment
- ------------------ --------------- ---------------------------------------------------------
<S> <C> <C>
Upon effectiveness 5,000,000 Shares sold in the offering
Upon effectiveness 194,000 Freely tradable shares salable under Rule 144(k) that are
not subject to the lock-up
180 days 37,072,550 Lock-up released; shares salable under Rules 144 and 701
</TABLE>
As of December 31, 1998, there were a total of 3,710,328 shares of common
stock subject to outstanding options under our Amended 1996 Stock Option Plan,
729,765 of which were vested. However, all of these shares are subject to
lock-up agreements. Immediately after the completion of the offering, Extreme
intends to file registration statements on Form S-8 under the Securities Act
to register all of the shares of common stock issued or reserved for future
issuance under our Amended 1996 Stock Option Plan and 1999 Employee Stock
Purchase Plan. On the date 180 days after the effective date of the offering,
a total of 1,396,811 shares of common stock subject to outstanding options
will be vested. After the effective dates of the registration statements on
Form S-8, shares purchased upon exercise of options granted pursuant to the
Amended 1996 Stock Option Plan and 1999 Employee Stock Purchase Plan generally
would be available for resale in the public market.
The officers, directors and stockholders of Extreme have agreed not to sell
or otherwise dispose of any of their shares for a period of 180 days after the
date of the offering. Morgan Stanley & Co. Incorporated, however, may in its
sole discretion, at any time without notice, release all or any portion of the
shares subject to lock-up agreements.
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 shares of
Extreme's common stock for at least one year 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 shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
58
<PAGE>
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about Extreme.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of Extreme's
"affiliates" at any time during the 90 days 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 other than an "affiliate," is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
Rule 701
In general, under Rule 701, any Extreme employee, director, officer,
consultant or advisor who purchases shares from Extreme in connection with a
compensatory stock or option plan or other written agreement before the
effective date of the offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements
of the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than "affiliates" subject only to the manner of sale provisions of Rule
144 and by "affiliates" under Rule 144 without compliance with its one year
minimum holding period requirement.
59
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, BancBoston Robertson Stephens Inc. and
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are acting as
representatives, have severally agreed to purchase, and Extreme has agreed to
sell to them, severally, the respective number of shares of common stock set
forth opposite the names of the underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated.................................
BancBoston Robertson Stephens Inc.................................
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated...
---------
Total......................................................... 5,000,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from Extreme and subject to prior sale. The underwriting agreement
provides that the obligations of the several underwriters to pay for and
accept delivery of the shares of common stock offered hereby are subject to
the approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus, other than those covered by
the over-allotment option described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public offering
price. Any underwriter may allow, and the dealers may reallow, a concession
not in excess of $ a share to other underwriters or to certain other dealers.
After the initial offering of the shares of common stock, the offering price
and other selling terms may from time to time be varied by the representatives
of the underwriters.
Extreme has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to 750,000 additional shares
of common stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The underwriters may
exercise this option solely for the purpose of covering over-allotments, if
any, made in connection with this offering of common stock. To the extent this
over-allotment option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage
of additional shares of common stock as the number set forth next to each
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of all underwriters in the
preceding table.
At the request of Extreme, the underwriters have reserved up to five
percent of the shares of common stock to be issued by Extreme and offered
hereby for sale, at the initial public offering price, to directors, officers,
employees, business associates and related persons of Extreme. The number of
shares of common stock available for sale to the general public will be
reduced to the extent these individuals purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered by this
prospectus.
Each of Extreme and the officers, directors and stockholders of Extreme has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, or otherwise during the period
ending 180 days after the date of this prospectus, it will not: (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly,
any shares of common stock or any
60
<PAGE>
securities convertible into or exercisable or exchangeable for common stock,
or (2) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the common
stock, whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or otherwise. The
foregoing restrictions shall not apply to: (1) the sale of any shares to the
underwriters, or (2) transactions relating to shares of common stock or other
securities acquired in open market transactions after the date of this
prospectus.
The underwriters have informed Extreme that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
Approval of the common stock has been sought for quotation on the Nasdaq
National Market under the symbol "EXTR."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
Extreme and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
Morgan Stanley & Co. Incorporated acted as the placement agent of a private
placement of our Series C preferred stock and, in connection with that
placement, received a customary fee for their services.
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price for the shares
of common stock will be determined by negotiations between Extreme and the
representatives of the underwriters. Among the factors to be considered in
determining the initial public offering price will be Extreme's record of
operations, Extreme's current financial position and future prospects, the
experience of its management, the economics of the networking industry in
general, the general condition of the equity securities markets, sales,
earnings and certain other financial and operating information of Extreme in
recent periods, the price-earnings ratios, price-sales ratios, market prices
of securities and certain financial and operating information of companies
engaged in activities similar to those of Extreme. The estimated initial
public offering price range set forth on the cover page of this preliminary
prospectus is subject to change as a result of market conditions and other
factors.
61
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. As of
December 31, 1998, an investment partnership of Gray Cary Ware & Freidenrich
owned 75,000 shares of Extreme's common stock. In addition, in March 1997, a
partner of Gray Cary Ware & Freidenrich was granted an option to purchase
7,500 shares of Extreme's common stock. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements of Extreme at June 30, 1997 and 1998
and for the period from inception, May 8, 1996 to June 30, 1997 and for the
year ended June 30, 1998, appearing in this prospectus and the registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report, given upon the authority of such firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to Extreme and
its common stock, see the registration statement and the exhibits and
schedules thereto. Any document Extreme files may be read and copied at the
Commission's public reference rooms in Washington, D.C., New York, New York
and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for
further information about the public reference rooms. Extreme's filings with
the Commission are also available to the public from the Commission's Web site
at http://www.sec.gov.
Upon completion of this offering, Extreme 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 Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the
Commission's public reference rooms, and the Web site of the Commission
referred to above.
Our principal executive offices are located at 10460 Bandley Drive,
Cupertino, California 95014-1972 and our telephone number is (408) 342-0999.
Our fiscal year ends on June 30. We maintain a worldwide web site at
http://www.extremenetworks.com. The reference to our worldwide web address
does not constitute incorporation by reference of the information contained at
this site.
BLACKDIAMOND, EXTREME ETHERNET, EXTREME NETWORKS, EXTREMESWITCHING,
EXTREMEWARE and SUMMIT are trademarks of Extreme which may be registered or
pending registration in certain jurisdictions. All other brand names and
trademarks appearing in this prospectus are the property of their respective
holders.
62
<PAGE>
EXTREME NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statement of Stockholders' Equity.............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Extreme Networks, Inc.
We have audited the accompanying consolidated balance sheets of Extreme
Networks, Inc. as of June 30, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from inception, May 8, 1996 to June 30, 1997 and for the year ended June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Extreme
Networks, Inc. at June 30, 1998 and 1997, and the consolidated results of its
operations and its cash flows for the period from inception, May 8, 1996 to
June 30, 1997 and for the year ended June 30, 1998, in conformity with
generally accepted accounting principles.
Palo Alto, California
October 22, 1998, except for Note 8, as to which the date is February , 1999
- -------------------------------------------------------------------------------
The foregoing report is in the form that we will sign upon the completion of
the restatement of capital accounts described in Note 8 to the consolidated
financial statements.
/s/ Ernst & Young LLP
Palo Alto, California
February 3, 1999
F-2
<PAGE>
EXTREME NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
June 30, Equity at
---------------- December 31, December 31,
1997 1998 1998 1998
------- ------- ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........ $10,047 $ 9,510 $ 5,792
Short-term investments........... -- 10,995 6,821
Accounts receivable, net of
allowance for doubtful accounts
of $0, $433 and $892 at June 30,
1997 and 1998 and December 31,
1998, respectively.............. 262 7,808 8,418
Inventories...................... 37 123 359
Other current assets............. 40 588 1,057
------- ------- -------
Total current assets.............. 10,386 29,024 22,447
Property and equipment, net....... 1,355 4,469 5,172
Other assets...................... 201 238 3
------- ------- -------
$11,942 $33,731 $27,622
======= ======= =======
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................. $ 749 $ 9,993 $ 4,859
Accrued compensation............. 189 935 1,334
Accrued warranty................. -- 1,073 1,024
Accrued purchase commitments..... -- 893 893
Other accrued liabilities........ 464 984 2,774
Income tax liability............. -- -- 700
Due to shareholders.............. 109 -- --
Notes payable, current portion... 525 834 991
Capital lease obligations,
current portion................. 99 516 588
------- ------- -------
Total current liabilities......... 2,135 15,228 13,163
Notes payable, net of current
portion.......................... 111 1,167 1,368
Capital lease obligations, net of
current portion.................. 391 1,467 1,351
Commitments
Stockholders' equity:
Convertible preferred stock,
$.001 par value, issuable in
series: 24,000,000 shares
authorized at June 30, 1997;
29,900,000 shares authorized at
June 30, 1998 and December 31,
1998 (2,000,000 shares pro
forma); 23,466,485, 29,061,315
and 29,061,315 shares issued and
outstanding at June 30, 1997 and
1998 and December 31, 1998 (none
pro forma); aggregate
liquidation preference of
$38,046 at December 31, 1998
(none pro forma)................ 23 29 29 $ --
Common stock, $.001 par value,
50,000,000 shares authorized,
(150,000,000 pro forma),
10,809,750, 11,534,525, and
11,791,195 shares issued and
outstanding at June 30, 1997 and
1998 and December 31, 1998,
(40,852,510 pro forma).......... 11 12 12 41
Additional paid-in capital....... 17,194 37,619 38,333 38,333
Accumulated deficit.............. (7,923) (21,791) (26,634) (26,634)
------- ------- ------- --------
Total stockholders' equity........ 9,305 15,869 11,740 $ 11,740
------- ------- ------- --------
$11,942 $33,731 $27,622
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Period
from May 8, Six Months
1996 (Date of Year Ended
Inception) Ended December 31,
through June 30, ----------------
June 30, 1997 1998 1997 1998
-------------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C>
Net revenue........................ $ 256 $ 23,579 $ 6,104 $30,851
Cost of revenue.................... 388 14,897 3,557 15,605
------- -------- ------- -------
Gross profit (loss)................ (132) 8,682 2,547 15,246
Operating expenses:
Research and development......... 5,351 10,668 4,548 6,580
Selling and marketing............ 1,554 9,601 3,450 10,203
General and administrative....... 1,023 2,372 1,040 2,700
------- -------- ------- -------
Total operating expenses....... 7,928 22,641 9,038 19,483
------- -------- ------- -------
Operating loss..................... (8,060) (13,959) (6,491) (4,237)
Interest expense................... (79) (326) (83) (201)
Interest and other income.......... 216 417 109 295
------- -------- ------- -------
Loss before income taxes........... (7,923) (13,868) (6,465) (4,143)
Provision for income taxes......... -- -- -- (700)
------- -------- ------- -------
Net loss........................... $(7,923) $(13,868) $(6,465) $(4,843)
======= ======== ======= =======
Basic and diluted net loss per
common share...................... $ (4.51) $ (3.17) $ (1.84) $ (.71)
======= ======== ======= =======
Weighted average shares outstanding
used in computing basic and
diluted net loss per share........ 1,758 4,379 3,510 6,867
======= ======== ======= =======
Pro forma basic and diluted net
loss per share (unaudited)........ $ (.44) $ (.13)
======== =======
Shares used in computing pro forma
basic and diluted net loss per
share (unaudited)................. 31,701 35,929
======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock Common Stock Additional Total
------------- ------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders and others
for cash and assets.... -- $-- 5,400 $ 5 $ 24 $ -- $ 29
Issuance of Series A
convertible preferred
stock to investors for
cash (less issuance
costs of $5)........... 14,580 14 -- -- 4,841 -- 4,855
Issuance of Series B
convertible preferred
stock to investors for
cash (less issuance
costs of $27).......... 8,886 9 -- -- 12,227 -- 12,236
Exercise of options to
purchase common stock.. -- -- 5,410 6 102 -- 108
Net loss................ -- -- -- -- -- (7,923) (7,923)
------ --- ------ --- ------- -------- --------
Balances at June 30,
1997................... 23,466 23 10,810 11 17,194 (7,923) 9,305
Issuance of warrant for
48,347 shares of Series
B convertible preferred
stock.................. -- -- -- -- 28 -- 28
Issuance of Series C
convertible preferred
stock to investors for
cash (less issuance
costs of $416)......... 5,595 6 -- -- 20,111 -- 20,117
Issuance of warrant for
70,176 shares of Series
C convertible preferred
stock.................. -- -- -- -- 140 -- 140
Exercise of options to
purchase common stock.. -- -- 725 1 146 -- 147
Net loss................ -- -- -- -- -- (13,868) (13,868)
------ --- ------ --- ------- -------- --------
Balances at June 30,
1998................... 29,061 29 11,535 12 37,619 (21,791) 15,869
Exercise of options to
purchase common stock
(unaudited)............ -- -- 256 -- 714 -- 714
Net loss (unaudited).... -- -- -- -- -- (4,843) (4,843)
------ --- ------ --- ------- -------- --------
Balances at December 31,
1998 (unaudited)....... 29,061 $29 11,791 $12 $38,333 $(26,634) $ 11,740
====== === ====== === ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Period
from May 8, Six Months
1996 (Date of Ended December
Inception) Year Ended 31,
through June 30, ----------------
June 30, 1997 1998 1997 1998
-------------- ---------- ------- -------
(unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss.......................... $(7,923) $(13,868) $(6,465) $(4,843)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization..... 315 1,453 137 1,622
Changes in operating assets and
liabilities:
Accounts receivable............... (262) (7,545) (4,064) (610)
Inventories....................... (37) (86) (663) (236)
Other current and noncurrent
assets........................... (241) (585) (459) (234)
Accounts payable.................. 749 9,244 (435) (5,134)
Accrued compensation.............. 189 745 (55) 399
Accrued warranty.................. -- 1,073 1,006 (49)
Accrued purchase commitments...... -- 893 -- --
Other accrued liabilities......... 464 520 2,507 1,790
Income tax liability ............. -- -- -- 700
Due to shareholder................ 109 (109) (109) --
------- -------- ------- -------
Net cash used in operating
activities....................... (6,637) (8,265) (8,600) (6,595)
------- -------- ------- -------
Investing activities
Capital expenditures.............. (1,151) (2,511) (922) (2,325)
Purchases of short-term
investments...................... -- (10,996) -- --
Maturities of short-term
investments...................... -- -- -- 4,174
------- -------- ------- -------
Net cash provided by (used in)
investing activities............. (1,151) (13,507) (922) 1,849
------- -------- ------- -------
Financing activities
Proceeds from issuance of
convertible preferred stock...... 17,091 20,285 -- --
Proceeds from issuance of common
stock............................ 124 147 268 714
Proceeds from notes payable....... 700 1,606 1,712 505
Principal payments on notes
payable.......................... (64) (241) -- (147)
Principal payments of capital
lease obligations................ (16) (562) 482 (44)
------- -------- ------- -------
Net cash provided by financing
activities....................... 17,835 21,235 2,462 1,028
------- -------- ------- -------
Net increase (decrease) in cash
and cash equivalents............. 10,047 (537) (7,060) (3,718)
Cash and cash equivalents at
beginning of period.............. -- 10,047 10,047 9,510
------- -------- ------- -------
Cash and cash equivalents at end
of period........................ $10,047 $ 9,510 $ 2,987 $ 5,792
======= ======== ======= =======
Supplemental disclosure of cash
flow information:
Cash paid for interest............ $ 73 $ 326 $ 89 $ 201
======= ======== ======= =======
Supplemental schedule of noncash
investing and financing
activities:
Property and equipment acquired
under capital lease obligations.. $ 505 $ 1,588 $ 407 $ --
======= ======== ======= =======
Common stock issued for assets.... $ 14 $ -- $ -- $ --
======= ======== ======= =======
Warrants issued in connection with
capital lease.................... $ -- $ 168 $ -- $ --
======= ======== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
1. Summary of Significant Accounting Policies
Nature of Operations
Extreme Networks, Inc. ("Extreme" or the "Company") was incorporated in the
state of California on May 8, 1996 and is engaged in the design, development,
manufacture, and sale of high performance networking products based on Gigabit
Ethernet technology. The financial operations for the period ended June 30,
1996 were insignificant (generating a net loss of approximately $94,000) and
have been combined with Extreme's results for the year ended June 30, 1997.
Through June 30, 1997, Extreme was in the development stage. Extreme has
incurred operating losses to date and has an accumulated deficit of $26.6
million at December 31, 1998. Extreme anticipates additional debt or equity
funding may be needed to finance expected future operations. If such
additional funding is not available, management believes, based on anticipated
obligations, that available resources will be sufficient to enable Extreme to
meet its obligations. If anticipated results are not achieved, management has
the intent and believes it has the ability to delay or reduce expenditures so
as not to require significant additional financial resources if such resources
were not available.
Interim Financial Information
The financial information as of December 31, 1998 and for the six months
ended December 31, 1997 and 1998 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that Extreme considers
necessary for a fair presentation of its financial position at such date and
the operating results and cash flows for such period. Results for the six
months ended December 31, 1998 are not necessarily indicative of results in
the future periods.
Principles of Consolidation
The consolidated financial statements include the accounts of Extreme and
its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that materially affect the amounts reported in the financial
statements. Actual results could differ materially from these estimates.
Cash Equivalents and Short-Term Investments
Extreme considers all highly liquid investment securities with maturity
from date of purchase of three months or less to be cash equivalents and
investment securities with maturity from date of purchase of more than three
months but less than one year, to be short-term investments.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. To date, all marketable securities have been classified as
available-for-sale and are carried at fair value, with unrealized gains and
losses, when material, reported net-of-tax as a separate component of
stockholders' equity. Realized gains and losses on available-for-sale
securities are included in interest income. The cost of securities sold is
based on specific identification. Premiums and discounts are amortized over
the period from acquisition to maturity and are included in investment income,
along with interest and dividends.
F-7
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
Fair Value of Financial Instruments
The fair value for marketable debt securities is based on quoted market
prices. The carrying value of those securities approximates their fair value.
The fair value of notes is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
The carrying values of these obligations approximate their respective fair
values.
The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to Extreme for debt
instruments with similar terms, degrees of risk and remaining maturities. The
carrying values of these obligations approximate their respective fair values.
Inventories
Inventories are stated at the lower of cost or market (on a first-in,
first-out basis) and are comprised substantially of finished goods at December
31, 1998.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject Extreme to concentration of
credit risk consist principally of marketable investments and accounts
receivable. Extreme has placed its investments with six high-credit quality
issuers with no more than $2 million due from any one issuer. Extreme sells
its products primarily to United States corporations in the technology
marketplace. Extreme performs ongoing credit evaluations of its customers and
generally does not require collateral. Credit losses have been immaterial and
within management's expectations. During the years ended June 30, 1997 and
1998 and the six months ended December 31, 1998, Extreme added approximately
$0, $383,000 and $546,000 to its bad debt reserves. Total write-offs of
uncollectible amounts were $0, $37,000 and $0 in these periods, respectively.
Two customers accounted for 25% and 21%, and 17% and 11% of the Company's net
revenue for the year ended June 30, 1998 and the six months ended December 31,
1998, respectively. No other customer accounts for more than 10% of Extreme's
net revenues. Extreme operates solely within one business segment, the
development and marketing of end-to-end LAN switching solutions.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets of approximately three
years or the applicable lease term, if shorter. Equipment acquired under
capital lease obligations is amortized over the shorter of the lease term or
the estimated useful lives of the related assets.
Revenue Recognition
Extreme generally recognizes product revenue at the time of shipment,
unless Extreme has future obligations for installation or has to obtain
customer acceptance in which case revenue is deferred until these obligations
are met. Revenue from service obligations is deferred and recognized on a
straight-line basis over the contractual period. Amounts billed in excess of
revenue recognized are included as deferred revenue in the accompanying
consolidated balance sheets. Extreme has established a program which enables
third party resellers to return up to 15% of their previous month's purchases
in exchange for a purchase order of equal or greater dollar value. The amount
of estimated product returns is provided for in the period of the sale.
Upon shipment to its customers, Extreme provides for the estimated cost to
repair or replace products to be returned under warranty. Extreme's warranty
period is typically 12 months from the date of shipment to the end user.
F-8
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
Foreign Operations
Extreme's foreign offices consist of sales, marketing, and support
activities through its foreign subsidiaries and an overseas reseller network.
Operating income generated by the foreign operations of Extreme and their
corresponding identifiable assets were not material in any period presented.
Extreme's export sales represented 59% and 50% of net revenue in fiscal
1998 and the six-month period ended December 31, 1998. All of the export sales
to date have been denominated in U.S. dollars and were derived from sales to
Europe and Asia. Extreme recorded export sales over 10% (as a percentage of
total net revenue) to the following countries:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, 1998 December 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
United Kingdom............................. 30% --
Japan...................................... 19% 29%
All other export sales to countries
totaling less than 10% each............... 12% 27%
</TABLE>
Net Loss Per Share
Basic net loss per share and diluted net loss per share are presented in
conformity with Financial Accounting Standards Board's ("FASB") Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," for all
periods presented. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock
issued or granted for nominal consideration prior to the anticipated effective
date of the initial public offering must be included in the calculation of
basic and diluted net loss per common share as if they had been outstanding
for all periods presented. To date, Extreme has not had any issuances or
grants for nominal consideration.
In accordance with SFAS No. 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, less shares subject to repurchase. Basic and diluted pro forma net
loss per share, as presented in the consolidated statements of operations, has
been computed as described above and also gives effect, under Securities and
Exchange Commission guidance, to the conversion of the convertible preferred
stock (using the if-converted method) from the original date of issuance.
F-9
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per common share (in thousands, except per
share data):
<TABLE>
<CAPTION>
Years Ended Six Months
June 30, Ended December 31,
----------------- --------------------
1997 1998 1997 1998
------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Net loss.......................... $(7,923) $(13,868) $ (6,465) $ (4,843)
======= ======== ========= =========
Basic and diluted:
Weighted-average shares of
common stock outstanding....... 6,468 11,192 10,920 11,599
Less: Weighted-average shares
subject to repurchase.......... (4,710) (6,813) (7,410) (4,732)
------- -------- --------- ---------
Weighted-average shares used in
computing basic and diluted net
loss per common share............ 1,758 4,379 3,510 6,867
======= ======== ========= =========
Basic and diluted net loss per
common share..................... $ (4.51) $ (3.17) $ (1.84) $ (.71)
======= ======== ========= =========
Pro forma:
Net loss........................ $(13,868) $ (4,843)
======== =========
Shares used above............... 4,379 6,867
Pro forma adjustment to reflect
weighted effect of assumed
conversion of convertible
preferred stock................ 27,322 29,062
-------- ---------
Shares used in computing pro
forma basic and diluted net
loss per common share (unau-
dited)......................... 31,701 35,929
======== =========
Pro forma basic and diluted net
loss per common share
(unaudited).................... $ (.44) $ (.13)
======== =========
</TABLE>
Extreme has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted loss per common share because all
such securities are anti-dilutive for all periods presented. The total numbers
of shares excluded from the calculations of diluted net loss per share was
30,834,912, 36,082,561, 30,818,069 and 36,514,805 for the years ended June 30,
1997 and 1998 and the six months ended December 31, 1997 and 1998. See Note 6
for further information on these securities.
Accounting for Stock-Based Compensation
Extreme's grants of stock options are for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. As permitted under SFAS Statement No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"), Extreme accounts for stock option
grants to employees and directors in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and, accordingly,
recognizes no compensation expense for stock option grants with an exercise
price equal to the fair value of the shares at the date of grant.
Comprehensive Loss
Extreme adopted Statement of Financial Accounting Standards (SFAS) 130,
"Reporting Comprehensive Income," at December 31, 1998. Under SFAS 130,
Extreme is required to display comprehensive income and
F-10
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
its components as part of the financial statements. Other comprehensive income
includes certain changes in equity that are excluded from net income.
Specifically, SFAS 130 requires unrealized holding gains and losses on
available-for-sale securities, to be included in accumulated other
comprehensive income. Comprehensive loss for the years ended June 30, 1998 and
1997 and the six month period ended December 31, 1998 approximated net loss.
Recently Issued Accounting Standard
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way that public business enterprises report financial and descriptive
information about reportable operating segments in annual financial statements
and interim financial reports issued to shareholders. SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," but
retains the requirement to report information about major customers. Extreme
will adopt SFAS No. 131 effective June 30, 1999. Extreme expects that the
implementation of this standard will not have a material effect on its
financial statement disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Extreme is required to adopt SFAS No. 133
for the year ending June 30, 2002. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because Extreme
currently holds no derivative financial instruments and does not currently
engage in hedging activities, adoption of SFAS No. 133 is expected to have no
material impact on Extreme's financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," SOP 98-1 requires that entities capitalize certain
costs related to internal use software once certain criteria have been met.
Extreme is required to implement SOP 98-1 for the year ending June 30, 2000.
Adoption of SOP 98-1 is expected to have no material impact on Extreme's
financial condition or results of operations.
2. Investment Securities
The following is a summary of available-for-sale securities (in thousands).
As of June 30, 1998 and December 31, 1998 at cost which approximates fair
market value:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1998
-------- ------------
(unaudited)
<S> <C> <C>
Money market fund...................................... $ 99 $ 78
U.S. corporate debt securities......................... 12,410 6,821
Foreign corporate debt securities...................... 6,938 --
------- ------
$19,447 $6,899
======= ======
Classified as:
Cash equivalents..................................... $ 8,452 $ 78
Short-term investments............................... 10,995 6,821
------- ------
$19,447 $6,899
======= ======
</TABLE>
F-11
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
At June 30, 1998 and December 31, 1998, all of the available-for-sale
securities are due in one year or less by contractual maturity.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------- December 31,
1997 1998 1998
------ ------ ------------
(unaudited)
<S> <C> <C> <C>
Computer and other related equipment.......... $ 745 $3,465 $3,799
Office equipment, furniture, and fixtures..... 199 522 1,927
Software...................................... 638 2,106 2,692
Leasehold improvements........................ 88 145 145
------ ------ ------
1,670 6,238 8,563
Less accumulated depreciation and
amortization................................. (315) (1,769) (3,391)
------ ------ ------
Property and equipment, net................... $1,355 $4,469 $5,172
====== ====== ======
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with a cost and related accumulated amortization of approximately
$2,093,000 and $490,000, respectively, at June 30, 1998, and approximately
$2,093,000 and $870,000, respectively, at December 31, 1998.
4. Notes Payable
In October 1996, Extreme entered into a note payable with a bank that
allowed the Company to borrow up to $400,000. Interest is payable monthly
based on an annual rate of 11%. Principal outstanding was $49,909 at December
31, 1998. Payments of approximately $18,000 are due monthly through April 16,
1999. The note is secured by Extreme's assets.
In November 1996, Extreme entered into a $300,000 note payable agreement
with a leasing company. The note accrues interest monthly based on an annual
rate of 9%. Payments of approximately $11,000 are due monthly with a final
$30,000 payment due May 1, 1999. The note is secured by all of Extreme's fixed
assets.
In November 1997, Extreme entered into a $2,000,000 note payable with a
leasing company. The note accrues interest monthly based on an annual rate of
9.75%. Payments of approximately $56,000 are due monthly through May 1, 2001.
The note is secured by all of Extreme's fixed assets.
5. Commitments
Extreme has outstanding purchase order commitments for materials of
approximately $4,400,000 and $12,300,000 at June 30, 1998 and December 31,
1998, respectively. Extreme expects these purchase orders to be fulfilled and
the related invoices to be paid in fiscal year 1999. Of this amount, the
Company has accrued and expensed approximately $893,000 of the outstanding
purchase order commitments for materials due to obligations to suppliers as of
June 30, 1998. This expense is included within cost of revenue in the year
ended June 30, 1998.
The Company has entered into equipment lease lines of credit for a total of
$4,000,000, of which approximately $3.1 million remains available at December
31, 1998. These arrangements are secured by the
F-12
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
property and equipment subject to the leases. Under the terms of these lines
of credit, Extreme may not declare or pay any dividends without prior consent
of the lenders.
Extreme has entered into a revolving line of credit for $5.0 million.
Borrowings under this line of credit bear interest at the bank's prime rate.
At December 31, 1998, there were no outstanding borrowings under this line of
credit.
Extreme leases its primary facilities under operating leases, all of which
expire during 1999. Rent expense was approximately $220,000 and $712,000 for
the years ended June 30, 1997 and 1998, respectively, and approximately
$385,000 for the six months ended December 31, 1998.
Future payments under all noncancelable leases at December 31, 1998 are as
follows (in thousands) (unaudited):
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
Years ending June 30:
1999....................................... $ 360 $225
2000....................................... 721 42
2001....................................... 708 25
2002....................................... 409 --
------ ----
Total minimum payments....................... 2,198 $292
====
Less amount representing interest............ (259)
------
Present value of minimum payments............ 1,939
Less current portion......................... (588)
------
Long-term portion............................ $1,351
======
</TABLE>
See Note 8 for subsequent events regarding lease of new facility.
6. Shareholders' Equity
Convertible Preferred Stock
A summary of convertible stock is as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------
1997 1998 December 31, 1998
---------------------------------- ---------------------------------- ----------------------------------
Issued and Liquidation Issued and Liquidation Issued and Liquidation
Authorized Outstanding Preference Authorized Outstanding Preference Authorized Outstanding Preference
---------- ----------- ----------- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Series A........ 15,000 14,580 $ 5,249 15,000 14,580 $ 5,249 15,000 14,580 $ 5,249
Series B........ 9,000 8,886 12,263 9,000 8,886 12,263 9,000 8,886 12,263
Series C........ -- -- -- 5,900 5,595 20,534 5,900 5,595 20,534
------ ------ ------- ------ ------ ------- ------ ------ -------
24,000 23,466 $17,512 29,900 29,061 $38,046 29,900 29,061 $38,046
====== ====== ======= ====== ====== ======= ====== ====== =======
</TABLE>
In May 1996, under a stock purchase agreement, Extreme issued 14,579,999
Series A convertible preferred shares at a price of $.333 per share. In May
and June 1997, under a stock purchase agreement, Extreme issued 8,886,228
Series B convertible preferred shares at a price of $1.38 per share. In
January and March of 1998, under a stock purchase agreement, Extreme issued
5,595,088 Series C convertible preferred shares at a price of $3.67 per share.
F-13
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
Each share of Series A, B, and C convertible preferred stock is
convertible, at the option of the holder, into one share of common stock,
subject to certain provisions. The outstanding shares of convertible preferred
stock automatically convert into common stock either upon the close of
business on the day immediately preceding the closing of an underwritten
public offering of common stock under the Securities Act of 1933 in which
Extreme receives at least $10,000,000 in gross proceeds and the price per
share is at least $5.00, or at the election of the holders of at least a
majority of each series of the outstanding shares of preferred stock.
Series A, B, and C convertible preferred stockholders are entitled to
annual noncumulative dividends of $.0267, $.1104, and $.2936, respectively,
per share if and when declared by the board of directors. No dividends have
been declared as of December 31, 1998.
The Series A, B, and C convertible preferred stockholders are entitled to
receive, upon liquidation, the sum of (i) an amount per share equal to the
issuance price; (ii) $.0267 per share of Series A preferred stock, $.1104 per
share of Series B preferred stock, and $.2936 per share of Series C preferred
stock per annum accruing annually on the anniversary date of issuance of the
Series A, B, and C preferred stock, respectively; and (iii) all declared but
unpaid dividends. Thereafter, the remaining assets and funds, if any, shall be
distributed pro rata among the common stockholders. If the assets or property
were not sufficient to allow full payment to the Series A, B, and C
stockholders, the available assets shall be distributed ratably among the
Series A, B, and C shareholders.
The Series A, B, and C convertible preferred stockholders have voting
rights equal to the common shares issuable upon conversion.
Warrants
In November 1996, Extreme issued warrants to a lease financing company to
purchase 210,000 shares of Series A convertible preferred stock with an
exercise price of $.33 per share, in consideration for equipment leases and a
loan. In July 1997, Extreme issued warrants to the same lease financing
company to purchase 48,347 shares of Series B convertible preferred stock with
an exercise price of $1.38 per share, in consideration for equipment leases.
The warrants may be exercised at any time within a period of (i) 10 years or
(ii) 5 years from the effective date of an initial public offering completed
by Extreme, whichever is longer.
In November 1997, the Company issued warrants to a lease financing company
to purchase 79,051 shares of Series C convertible preferred stock with an
exercise price of $2.53, in consideration for a loan. The warrants may be
exercised at any time within a period which expires the sooner of (i) 10 years
or (ii) 3 years from the effective date of an initial public offering.
Common Stock
In May 1996, Extreme issued 4,725,000 shares of common stock to founders
for cash. The common stock is subject to repurchase until vested; vesting with
respect to 25% occurs on the first anniversary of the issuance date, with the
balance vesting ratably over a period of three years as specified in the
purchase agreements. At June 30, 1998 and December 31, 1998, approximately
1,771,875 and 1,181,250 shares, respectively, were subject to repurchase at
their original issuance price.
Extreme has reserved 15,000,000, 9,000,000, and 5,900,000 shares of its
common stock for issuance upon conversion of its Series A, B, and C
convertible preferred stock, respectively. Extreme has also reserved
12,014,309 common shares for issuance under the 1996 Stock Option Plan, of
which 92,349 and 1,912,786 shares remain available at June 30, 1998 and
December 31, 1998, respectively.
F-14
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
Stock-Based Compensation
Under the 1996 Stock Option Plan (the "Plan"), which was adopted in
September 1996, options may be granted for common stock, pursuant to actions
by the board of directors, to eligible participants. A total of 12,014,309
shares have been reserved under the Plan. Options granted are exercisable as
determined by the board of directors. Options vest over a period of time as
determined by the board of directors, generally four years. The term of the
Plan is 10 years. Options to purchase approximately 4,297,346 and 2,990,009
shares of common stock have been exercised as of June 30, 1998 and December
31, 1998, respectively, but are subject to repurchase until vested.
The Company has elected to continue to follow APB 25 and related
interpretations in accounting for its employee and director stock-based
compensation plans. Because the exercise price of Extreme's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense was recognized.
Pro forma information regarding net income has been determined as if
Extreme had accounted for its employee stock options under the fair value
method prescribed by FAS 123. The resulting effect on pro forma net income
disclosed is not likely to be representative of the effects on net income on a
pro forma basis in future years, due to subsequent years including additional
grants and years of vesting.
The fair value of each option granted through December 31, 1998 was
estimated on the date of grant using the minimum value method with the
following weighted-average assumptions: no dividends; an expected life of six
years in the years ended June 30, 1997 and 1998, and four years in the six
months ended December 31, 1998; and risk-free interest rate of 6.7%, 6.0% and
5.7% in the years ended June 30, 1997 and 1998, and the six months ended
December 31, 1998, respectively. The weighted average fair value of options
granted in the years ended June 30, 1997 and 1998 and the six months ended
December 31, 1998 are $.01, $.37 and $1.17, respectively. For purposes of pro
forma disclosures, the estimated fair value of options is amortized to pro
forma expense over the options' vesting period. Pro forma information follows
(in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
Years Ended Six Months
June 30, Ended
----------------- December 31,
1997 1998 1998
------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Net Loss:
As reported................................. $(7,923) $(13,868) $(4,843)
Pro forma................................... $(7,935) $(13,985) $(5,004)
Basic and diluted net loss per share:
As reported................................. $ (3.17) $ (.71)
Pro forma................................... $ (3.19) $ (.73)
</TABLE>
F-15
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
The following table summarizes stock options activity:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise Price
Shares Per Share
---------- --------------
<S> <C> <C>
Granted........................................ 7,150,500 $ .03
Exercised...................................... (5,409,750) $ .02
Canceled....................................... (165,000) $ .03
---------- -----
Options outstanding at June 30, 1997............ 1,575,750 $ .05
Granted........................................ 1,771,460 $1.29
Exercised...................................... (724,775) $ .21
Canceled....................................... (18,500) $ .35
---------- -----
Options outstanding at June 30, 1998............ 2,603,935 $ .84
Granted (unaudited)............................ 1,399,397 $5.83
Exercised (unaudited).......................... (256,670) $1.82
Canceled (unaudited)........................... (36,334) $2.59
---------- -----
Options outstanding at December 31, 1998
(unaudited).................................... 3,710,328 $2.55
========== =====
</TABLE>
The options outstanding at December 31, 1998 have been segregated by
exercise price as follows (unaudited):
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------------------------------------------------------------
Options Weighted-
Range of Outstanding Weighted-Average Average
Exercise and Remaining Exercise
Prices Exercisable Contractual Life Price
-------- ----------- ---------------- ---------
(In years)
<S> <C> <C> <C>
$ .02 988,000 7.94 $ .02
$ .14-1.00 660,279 8.62 $ .46
$1.25-1.75 618,950 9.19 $1.70
$3.00-5.50 342,599 9.54 $4.13
$5.75 831,500 9.79 $5.75
$6.50-8.50 269,000 9.91 $7.04
----------
--------- ---------
$ .02-8.50 3,710,328 8.98 $2.55
========== =========
</TABLE>
7. Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1998
------------
(unaudited)
<S> <C>
Current provision:
Federal..................................................... $100
State....................................................... 100
Foreign..................................................... 500
----
Total current provision....................................... $700
====
</TABLE>
F-16
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
The difference between the provision for income taxes and the amount
computed by applying the Federal statutory income tax rate (35 percent) to
income before taxes is explained below:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
-------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Tax at federal statutory rate............... $(2,773) $(4,854) $(1,450)
State income tax............................ -- -- 100
Unutilized net operating losses............. 2,773 4,854 1,450
Federal alternative minimum taxes........... -- -- 100
Foreign tax................................. -- -- 500
------- ------- -------
Total..................................... $ -- $ -- $ 700
======= ======= =======
</TABLE>
Significant components of Extreme's deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
-------- -------- ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........ $ 3,120 $ 7,448 $ 6,586
Tax credit carryforwards................ 209 1,139 1,350
Accruals and reserves not currently
deductible............................. -- 984 1,700
------- ------- -------
Total deferred tax assets................. 3,329 9,571 9,636
Valuation allowance....................... (3,329) (9,571) (9,636)
------- ------- -------
Net deferred tax assets................... $ -- $ -- $ --
======= ======= =======
</TABLE>
FASB Statement No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based upon the weight
of available evidence, which includes Extreme's historical operating
performance and the reported cumulative net losses in all prior years, Extreme
has provided a full valuation allowance against its net deferred tax assets.
The net valuation allowance increased by $3,329,000, $6,242,000, and
$65,000 during the periods ended June 30, 1997, June 30, 1998, and December
31, 1998, respectively.
As of December 31, 1998, Extreme had federal and state net operating loss
carryforwards of approximately $16.6 million and $16.0 million, respectively.
Extreme also had federal and state research and development tax credit
carryforwards of approximately $850,000 and $750,000, respectively. The net
operating loss and tax credit carryforwards will expire at various dates
beginning in 2004 through 2019, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state
provisions. The annual limitation may result in the expiration of the net
operating loss and credit carryforwards before utilization.
F-17
<PAGE>
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of December 31, 1998 and for the six months ended
December 31, 1997 and 1998 is unaudited)
8. Subsequent Events (unaudited)
1999 Employee Stock Purchase Plan
In January 1999, the Board of Directors approved the adoption of Extreme's
1999 Employee Stock Purchase Plan (the "1999 Purchase Plan"), subject to
stockholder approval. A total of 1,000,000 shares of common stock has been
reserved for issuance under the 1999 Purchase Plan. The 1999 Purchase Plan
permits eligible employees to acquire shares of Extreme's common stock through
periodic payroll deductions of up to 15% of total compensation. No more than
625 shares may be purchased on any purchase date per employee. Each offering
period will have a maximum duration of 12 months. The price at which the
common stock may be purchased is 85% of the lesser of the fair market value of
Extreme's common stock on the first day of the applicable offering period or
on the last day of the respective purchase period. The initial offering period
will commence on the effectiveness of the initial public offering and will end
on April 30, 2000.
Reincorporation, Amendment to the Articles of Incorporation
During January 1999, Extreme's Board of directors authorized the
reincorporation of the Company in the State of Delaware. This reincorporation
is to be effective prior to Extreme's initial public offering. Upon
reincorporation, Extreme will be authorized to issue 150,000,000 shares of
Common Stock, $.001 par value and 2,000,000 shares of undesignated Preferred
Stock, $.001 par value.
Facility Lease
In February 1999, Extreme agreed to lease 77,000 square feet for the
purpose of being its primary facility in Santa Clara, California. The related
cost of this lease is approximately $120,000 per month. The lease expires in
December 2002. Extreme expects to commence occupancy by March 1999.
Amended 1996 Stock Option Plan
In January 1999, the Board of Directors approved an amendment to the 1996
Stock Option Plan to (i) increase the share reserve by 5,000,000 shares, (ii)
to remove certain provisions which are required to be in option plans
maintained by California privately-held companies and (iii) to rename the Plan
as the "Amended 1996 Stock Option Plan."
F-18
<PAGE>
Extreme Networks, Inc.
Common Stock
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses to be paid by the Registrant,
other than underwriting discounts and commissions, in connection with this
offering. All amounts shown are estimates except for the registration fee and
the NASD filing fee.
<TABLE>
<CAPTION>
Amount to be
Paid
------------
<S> <C>
Registration fee............................................. $ 14,387
NASD filing fee.............................................. 5,675
Nasdaq National Market....................................... 63,725
Blue sky qualification fees and expenses..................... 5,000
Printing and engraving expenses.............................. 200,000
Legal fees and expenses...................................... 425,000
Accounting fees and expenses................................. 300,000
Director and Officer liability insurance..................... 100,000
Transfer agent and registrar fees............................ 10,000
Miscellaneous expenses....................................... 76,213
----------
$1,200,000
==========
</TABLE>
Item 14. Indemnification of Officers and Directors.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to officers,
directors and other corporate agents under certain circumstances and subject
to certain limitations. The Registrant's Certificate of Incorporation and
Bylaws provide that the Registrant shall indemnify its directors, officers,
employees and agents to the full extent permitted by Delaware General
Corporation Law, including in circumstances in which indemnification is
otherwise discretionary under Delaware law. In addition, the Registrant
intends to enter into separate indemnification agreements with its directors,
officers and certain employees which would require the Registrant, among other
things, to indemnify them against certain liabilities which may arise by
reason of their status as directors, officers or certain other employees. The
Registrant also intends to maintain director and officer liability insurance,
if available on reasonable terms.
These indemnification provisions and the indemnification agreement to be
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities, including reimbursement of expenses incurred,
arising under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act, or otherwise.
Item 15. Recent Sales of Unregistered Securities.
Since May 1996, the Registrant has sold and issued the following
unregistered securities:
(1) On May 17, 1996, the Registrant issued and sold an aggregate of
4,725,000 shares of common stock to three executive officers of Extreme at
a price of $.0033 per share for a total offering price of $23,625.
II-1
<PAGE>
(2) From June 1996 to December 31, 1998, the Registrant granted options
to purchase 10,321,357 shares of common stock pursuant to its Amended 1996
Stock Option Plan at exercise prices ranging from $.02 per share to $8.50
per share for a total offering price of $10,266,871.
(3) On May 28, 1996, the Registrant sold 14,579,999 shares of Series A
preferred stock to a group of thirty-five private investors at a price of
$.333 per share for a total offering price of $4,860,000.
(4) In September 1996, the Registrant entered into a Stock Purchase
Agreement with Mammoth Technology, Inc. pursuant to which the Registrant
issued 675,000 shares of its Common Stock to the three former shareholders
of Mammoth Technology, Inc.
(5) On November 7, 1996, in connection with an equipment lease, the
Registrant issued a warrant to an equipment lessor to purchase 147,000
shares of Series A preferred stock at an exercise price of $.333 per share.
(6) On November 7, 1996, in connection with an equipment lease, the
Registrant issued a warrant to an equipment lessor to purchase 63,000
shares of Series A preferred stock at an exercise price of $.333 per share.
(7) On May 7, 1997 and June 17, 1997, the Registrant sold an aggregate
of 8,886,228 shares of Series B preferred stock to a group of forty-eight
private investors at a price of $1.38 per share for a total offering price
of $12,263,359.
(8) On July 30, 1997, in connection with the extension of a line of
credit, the Registrant issued a warrant to a bank to purchase 48,347 shares
of Series B preferred stock at an exercise price of $1.38 per share.
(9) On January 12, 1998, March 23, 1998 and March 31, 1998, the
Registrant sold an aggregate of 5,595,088 shares of Series C preferred
stock to a group of thirty-seven private investors at a price of $3.67 per
share for a total offering price of $20,533,973. In connection with this
sale, Morgan Stanley & Co. Incorporated acted as placement agent and was
paid a customary fee for its services.
(10) On November 17, 1997, in connection with the extension of a line of
credit, the Registrant issued a warrant to a bank to purchase 79,051 shares
of Series C preferred stock at an exercise price of $2.53 per share in the
event such extension is drawn down. As of December 31, 1998, the Registrant
had not drawn down on this extension.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein.
The issuances of securities describe in Items 15(a)(2) were deemed to be
exempt from registration under the Securities Act in reliance on Rule 701
promulgated thereunder as transactions pursuant to a compensatory benefit plan
or a written contract relating to compensation. The issuance of securities
describe in item 15(a)(1) and 15(a)(3) through 15(a)(10) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving any public
offering. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either received
adequate information about Extreme or had access, through employment or other
relationships, to such information.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1** Form of Underwriting Agreement.
2.1 Form of Agreement and Plan of Merger between Extreme Networks, a
California corporation, and Extreme Networks, Inc., a Delaware
corporation.
3.1** Certificate of Incorporation of Extreme Networks, Inc., a Delaware
corporation.
3.2** Form of Amended and Restated Bylaws of Extreme Networks, Inc., a
Delaware corporation.
4.1** Second Amended and Restated Rights Agreement dated January 12, 1998
between Extreme Network and certain stockholders.
5.1* Opinion of Gray Cary Ware & Freidenrich, LLP.
10.1** Form of Indemnification Agreement for directors and officers.
10.2** Amended 1996 Stock Option Plan and forms of agreements thereunder.
10.3** 1999 Employee Stock Purchase Plan.
10.4** Sublease, dated June 5, 1997, between NetManage, Inc. and Extreme
Networks, Inc., a California corporation, to Master Lease, dated
September 30, 1994, between Cupertino Industrial Associates and
NetManage, Inc.
10.5 Sublease, dated January 1, 1999, between Apple Computer, Inc., a
California corporation, and Extreme Networks, Inc., a California
corporation, to Lease Agreement, as amended.
21.1** List of subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule (available in EDGAR format only).
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
(b) Financial Statement Schedules.
All schedules 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 described in Item 14
above 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 such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Cupertino, County of Santa Clara, State of California, on the 10th day
of March 1999.
Extreme Networks, Inc.
/s/ Gordon L. Stitt
By: _________________________________
Gordon L. Stitt
President, Chief Executive
Officer and Chairman
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gordon L. Stitt President, Chief Executive March 10, 1999
______________________________________ Officer and Chairman
Gordon L. Stitt (Principal Executive
Officer)
Vito E. Palermo* Vice President and Chief March 10, 1999
______________________________________ Financial Officer
Vito E. Palermo (Principal Financial and
Accounting Officer)
Charles Carinalli* Director March 10, 1999
______________________________________
Charles Carinalli
Promod Haque* Director March 10, 1999
______________________________________
Promod Haque
Lawrence K. Orr* Director March 10, 1999
______________________________________
Lawrence K. Orr
Peter Wolken* Director March 10, 1999
______________________________________
Peter Wolken
/s/ Gordon L. Stitt March 10, 1999
*By __________________________________
Gordon L. Stitt
(Attorney-in-fact)
</TABLE>
II-5
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1** Form of Underwriting Agreement.
2.1 Form of Agreement and Plan of Merger between Extreme Networks, a
California corporation, and Extreme Networks, Inc., a Delaware
corporation.
3.1** Certificate of Incorporation of Extreme Networks, Inc., a Delaware
corporation.
3.2** Form of Amended and Restated Bylaws of Extreme Networks, Inc., a
Delaware corporation.
4.1** Second Amended and Restated Rights Agreement dated January 12, 1998
between Extreme Network and certain stockholders.
5.1* Opinion of Gray Cary Ware & Freidenrich, LLP.
10.1** Form of Indemnification Agreement for directors and officers.
10.2** Amended 1996 Stock Option Plan and forms of agreements thereunder.
10.3** 1999 Employee Stock Purchase Plan.
10.4** Sublease, dated June 5, 1997, between NetManage, Inc. and Extreme
Networks, Inc., a California corporation, to Master Lease, dated
September 30, 1994, between Cupertino Industrial Associates and
NetManage, Inc.
10.5 Sublease, dated January 1, 1999, between Apple Computer, Inc., a
California corporation, and Extreme Networks, Inc., a California
corporation, to Lease Agreement, as amended.
21.1** List of subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule (available in EDGAR format only).
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is entered into
as of February __, 1999 by and between Extreme Networks, a California
corporation ("Extreme California"), and Extreme Networks, Inc., a Delaware
corporation ("Extreme Delaware").
WITNESSETH:
----------
WHEREAS, Extreme Delaware is a corporation duly organized and existing
under the laws of the State of Delaware;
WHEREAS, Extreme California is a corporation duly organized and existing
under the laws of the State of California;
WHEREAS, on the date of this Merger Agreement, Extreme Delaware has
authority to issue One Thousand (1,000) shares of Common Stock, par value $0.001
per share (the "Extreme Delaware Common Stock"), of which One Thousand (1,000)
shares are issued and outstanding and owned by Extreme California;
WHEREAS, on the date of this Merger Agreement, Extreme California has
authority to issue 50,000,000 shares of Common Stock (the "Extreme California
Common Stock"), of which 11,862,995 shares are issued and outstanding, and
29,900,000 shares of Preferred Stock (the "Extreme California Preferred Stock"),
of which 15,000,000 shares are designated as Series A Preferred Stock, 9,000,000
shares are designated as Series B Preferred Stock and 5,900,000 shares are
designated as Series C Preferred Stock and 14,579,999 shares of Series A
Preferred Stock are issued and outstanding, 8,886,228 shares of Series B
Preferred Stock are issued and outstanding and 5,595,088 shares of Series C
Preferred Stock are issued and outstanding;
WHEREAS, the respective Boards of Directors for Extreme Delaware and
Extreme California have determined that, for the purpose of effecting the
reincorporation of Extreme California in the State of Delaware, it is advisable
and to the advantage of said two corporations and their shareholders and
stockholder, respectively, that Extreme California merge with and into Extreme
Delaware upon the terms and conditions herein provided; and
WHEREAS, the respective Boards of Directors of Extreme Delaware and Extreme
California, the shareholders of Extreme California, and the sole stockholder of
Extreme Delaware have adopted and approved this Merger Agreement.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, Extreme California and Extreme Delaware hereby agree to merge as
follows:
1. Merger. Extreme California shall be merged with and into Extreme
------
Delaware, and Extreme Delaware shall survive the merger ("Merger"), effective
upon the date when this Merger Agreement is made effective in accordance with
applicable law (the "Effective Date").
1
<PAGE>
2. Governing Documents. The Certificate of Incorporation of Extreme
-------------------
Delaware shall be amended to read in full as follows:
"FIRST: The name of the corporation is Extreme Networks, Inc.
-----
(hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in
------
the State of Delaware is Incorporating Services, Ltd., 15 East North
Street, in the City of Dover, County of Kent. The name of the registered
agent at that address is Incorporating Services, Ltd.
THIRD: The purpose of the Corporation is to engage in any lawful
-----
act or activity for which a corporation may be organized under the General
Corporation Law of Delaware.
FOURTH: The Corporation is authorized to issue two classes of stock
------
to be designated, respectively, "Preferred Stock" and "Common Stock." The
total number of shares of Preferred Stock the Corporation shall have
authority to issue is 31,061,315, $0.001 par value per share, and the total
number of shares of Common Stock the Corporation shall have authority to
issue is 150,000,000, $0.001 par value per share. Of the authorized shares
of Preferred Stock, 14,579,999 shares shall be designated as "Series A
Preferred Stock," 8,886,228 shares shall be designated as "Series B
Preferred Stock,"and 5,595,088 shall be designated as "Series C Preferred
Stock." The remaining 2,000,000 authorized shares of Preferred Stock shall
initially be undesignated and may be issued from time to time in one or
more additional series.
The Board of Directors is authorized within the limitations and
restrictions stated in this amended Certificate of Incorporation to (i)
determine and alter the rights, preferences, privileges, and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock
other than the Series A Preferred Stock, the Series B Preferred Stock and
the Series C Preferred Stock and the number of shares constituting any such
series and the designation thereof, or any of them; and (ii) increase or
decrease (but not below the number of shares of such series then
outstanding) the number of shares of any such series subsequent to the
issue of shares of that series. If the number of shares of any such series
of Preferred Stock shall be so decreased, the shares constituting such
decrease shall be retired and shall not be reissued by the Corporation.
This Corporation shall from time to time in accordance with the laws of the
State of Delaware increase the authorized amount of its Common Stock if at
any time the number of shares of Common Stock remaining unissued and
available for issuance shall not be sufficient to permit conversion of the
Preferred Stock in accordance with the applicable conversion provisions.
References hereafter to "Preferred Stock" shall mean the Series A Preferred
Stock, the Series B Preferred Stock and the Series C Preferred Stock
collectively.
The relative rights, preferences, privileges and restrictions granted
to or imposed upon the Common Stock and the Preferred Stock are as follows:
2
<PAGE>
1. Dividends.
---------
(a) The holders of outstanding Preferred Stock shall be entitled to
receive in any fiscal year, when, as and if declared by the Board of
Directors, out of any assets at the time legally available therefor, non
cumulative dividends in cash at the rate of $0.0267 per share of Series A
Preferred Stock, $0.1104 per share of Series B Preferred Stock and $0.2936
per share of Series C Preferred Stock, as adjusted for any consolidations,
combinations, stock distributions, stock dividends, stock splits or similar
events (collectively a "Recapitalization Event") per annum. Dividends may
be declared and paid upon Common Stock in any fiscal year of the
Corporation only if dividends in the total amount of $0.0267 per share,
$0.1104 per share, and $0.2936 per share (as adjusted for any
Recapitalization Event) shall have been paid or declared and set apart upon
all shares of Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock, respectively, during that fiscal year, and no dividends
shall be paid on any share of Common Stock unless a dividend (including the
amount of any dividends paid pursuant to the above provisions of this
Section 1(a)) is paid with respect to all outstanding shares of Preferred
Stock in an amount for each such share of Preferred Stock equal to or
greater than the aggregate amount of such dividends for all shares of
Common Stock into which each such share of Preferred Stock could then be
converted. The right to dividends on Preferred Stock shall not be
cumulative, and no right shall accrue to holders of Preferred Stock by
reason of the fact that distributions on said shares are not declared in
any prior year, nor shall any undeclared or unpaid distribution bear or
accrue interest.
(i) Each holder of shares of Preferred Stock shall be deemed to
have consented to distributions made by the Corporation in connection
with the repurchase of shares of Common Stock issued to or held by
employees, directors or consultants upon termination of their
employment or services pursuant to agreements providing for such
repurchase.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution, or winding up of
the Corporation, either voluntary or involuntary, distributions to the
stockholders of the Corporation shall be made in the following manner:
(i) The holders of Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Common Stock or
any other class or series of stock of the Corporation by reason of
their ownership of such stock, an amount for each share of Preferred
Stock then held by them equal to the sum of (i) $0.333 per share of
Series A Preferred Stock (hereinafter such amount shall be referred to
as the "Original Series A Issue Price"), $1.38 per share of Series B
Preferred Stock (hereinafter such amount shall be referred to as the
"Original Series B Issue Price"), and $3.67 per share of Series C
Preferred Stock (hereinafter such amount shall be referred to as
"Original Series C Issue Price"), appropriately adjusted for any
Recapitalization Event with respect to such shares; (ii) $0.0267 per
share of Series A Preferred Stock, $0.1104 per share of Series B
Preferred Stock, and
3
<PAGE>
$0.2936 per share of Series C Preferred Stock per annum accruing
annually on the anniversary of the date of issuance of the Series A
Preferred Stock, Series B Preferred Stock, or Series C Preferred
Stock, respectively, and (iii) all declared and unpaid dividends
thereon of the Series A Preferred Stock, the Series B Preferred Stock,
and the Series C Preferred Stock, respectively. If upon occurrence of
such event of liquidation, dissolution or winding up, the assets and
property legally available to be distributed among the holders of the
Preferred Stock shall be insufficient to permit the payment to such
holders of the liquidation preferences set forth in this section
2(a)(i), then the entire assets and property of the Corporation
legally available for distribution shall be distributed ratably among
the holders of Preferred Stock.
(ii) After payment has been made to the holders of the Preferred
Stock of the full amounts to which they shall be entitled pursuant to
Section 2(a)(i) above, all remaining assets available for
distribution, if any, shall be distributed, (x) first, ratably among
the holders of the Common Stock and the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock based upon the
number of shares of Common Stock then held (assuming for such purpose
the conversion of Preferred Stock unto Common Stock) until the holders
of the Series C Preferred Stock have received under this Section
2(a)(ii) an amount (in addition to any amounts received under Section
2(a)(i)) of $1.23 per share of Common Stock then held (assuming for
such purpose the conversion of Preferred Stock into Common Stock, and
(y) thereafter, ratable among the holders of the Common Stock and the
Series A Preferred Stock and Series B Preferred Stock based upon the
number of shares of Common Stock then held (assuming for such purposes
the conversion of Preferred Stock into Common Stock).
(b) For purposes of this Section 2, a merger or consolidation of the
Corporation with or into any other corporation or corporations, or the
merger or consolidation of any other corporation or corporations into the
Corporation, shall be treated as a liquidation, dissolution or winding up
of the Corporation if as a result of such consolidation or merger, or a
sale of all or substantially all of the assets of the Corporation holders
of capital stock of the Corporation (but without taking into account the
shares of Series C Preferred Stock) would receive distributions in cash or
securities of another corporation or corporations of less than $3.33 per
share of capital stock of the Corporation, on an as converted basis and
appropriately adjusted for any Recapitalization Event; provided further,
that any such transaction which is not treated as a liquidation,
dissolution or winding up under this Section 2(b), the Series C Preferred
Stock shall be entitled to receive the liquidation amount to which its
would otherwise be entitled to under Section 2(a)(i) and (ii) and the
Series A Preferred Stock and Series B Preferred Stock shall be entitled to
receive the liquidation amount to which they would otherwise be entitled
under Section 2(a)(i) above. The valuation of any securities or other
property other than cash received by the Corporation in any transaction
covered by this Section 2(b) shall be computed at the fair value thereof at
the time of receipt as determined in good faith by the Board of Directors.
4
<PAGE>
(c) The holders of Preferred Stock shall have no priority or
preference with respect to distributions made by the Corporation in
connection with the repurchase of shares of Common Stock issued to or held
by employees, directors or consultants upon termination of their employment
or services pursuant to agreements providing for the right of said
repurchase between the Corporation and such persons.
3. Conversion. The holders of the Preferred Stock shall have
----------
conversion rights (the "Conversion Rights") as follows:
(a) Each share of Preferred Stock shall be convertible, at the option
of the holder thereof, at any time after the date of issuance of such
share, at the office of the Corporation or any transfer agent for the
Preferred Stock, into Common Stock as more fully described below. The
number of shares of fully paid and nonassessable Common Stock into which
each share of Series A Preferred Stock, Series B Preferred Stock, and
Series C Preferred Stock may be converted shall be determined,
respectively, by dividing $0.333 by the Series A Conversion Price (as
hereinafter defined), $1.38 by the Series B Conversion Price (as
hereinafter defined), and $3.67 by the Series C Conversion Price (as
hereinafter defined) in effect at the time of conversion. The Series A
Conversion Price, Series B Conversion Price, and Series C Conversion Price
shall initially be $0.333, $1.38, and $3.67, respectively, subject to
adjustment as provided in Section 4 below.
(b) Each share of Preferred Stock shall automatically be converted
into shares of Common Stock utilizing the then effective Conversion Price
for each such share upon the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common
Stock for the account of the Corporation to the public at a price to the
public of not less than $5.00 per share (subject to adjustment in the event
of any recapitalization, stock split, stock dividend or other similar
event) and an aggregate offering price to the public of not less than
$10,000,000. In the event of such an offering, the person(s) entitled to
receive the Common Stock issuable upon such automatic conversion of
Preferred Stock shall not be deemed to have converted such Preferred Stock
until immediately prior to the closing of such sale of securities.
(c) Each share of Series A Preferred Stock, Series B Preferred Stock,
and Series C Preferred Stock shall automatically be converted into shares
of Common Stock utilizing the then effective respective Conversion Price
for each such share upon the written consent of holders of at least a
majority of each series voting separately of the then outstanding shares of
Preferred Stock voting on an as-converted basis.
(d) No fractional shares of Common Stock shall be issued upon
conversion of Preferred Stock. In lieu of any fractional shares to which
the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the fair market value of the Common
Stock on the Conversion Date, as determined by the Corporation's board of
directors. Before any holder of Preferred Stock shall be entitled to
convert the same into full shares of Common Stock, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Preferred Stock, and shall
give written notice to the Corporation at such
5
<PAGE>
office that he elects to convert the same; provided, however, that in the
event of an automatic conversion pursuant to subparagraph 3(b) or
subparagraph 3(c), the outstanding shares of all Preferred Stock shall be
converted automatically without any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent; and provided further,
that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such automatic
conversion unless either the certificates evidencing such shares of
Preferred Stock are delivered to the Corporation or its transfer agent as
provided above, or the holder notifies the Corporation or its transfer
agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such
certificates.
(e) The Corporation shall, as soon as practicable after such
delivery, or after such agreement and indemnification, issue and deliver at
such office to such holder of Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid and a check payable to the holder, or order, in the
amount of any cash amounts payable as the result of a conversion into
fractional shares of Common Stock, plus any declared and unpaid dividends
on the converted Preferred Stock, and a certificate for any shares of
Preferred Stock not so converted. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such
surrender of the shares of Preferred Stock to be converted, or in the case
of automatic conversion on the date of the closing of the offering or the
receipt of the written consent (as the case may be), and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
(f) In the event of any taking by the Corporation of a record of the
holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities
or property, or to receive any other right, the Corporation shall mail to
each holder of Preferred Stock, at least 20 days prior to the date
specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and
the amount and character of such dividend, distribution or right.
4. Adjustments to Conversion Price.
-------------------------------
(a) In the event the Corporation at any time or from time to time
effects a subdivision or combination of its outstanding Common Stock into a
greater or lesser number of shares without a proportionate and
corresponding subdivision or combination of its outstanding Preferred
Stock, then and in each such event the respective Conversion Price of each
outstanding series of Preferred Stock shall be decreased or increased
proportionately.
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(b) In the event the Corporation at any time or from time to time
shall make or issue, or fix a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
(hereinafter referred to as "Common Stock Equivalents") convertible into or
entitling the holder thereof to receive additional shares of Common Stock
without payment of any consideration by such holder for such Common Stock
Equivalents or the additional shares of Common Stock, then and in each such
event the maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable in payment of such
dividend or distribution or upon conversion or exercise of such Common
Stock Equivalents shall be deemed to be issued and outstanding as of the
time of such issuance or, in the event such a record date shall have been
fixed, as of the close of business on such record date. In each such
event, the Conversion Price shall be proportionately decreased as of the
time of such issuance or, in the event such a record date shall have been
fixed, as of the close of business on such record date.
(c) If at any time after the first date on which a share of Series A
Preferred Stock is first issued ("Series A Original Issue Date"), Series B
Preferred Stock is first issued ("Series B Original Issue Date"), or Series
C Preferred Stock is first issued ("Series C Original Issue Date"), the
Corporation shall issue or sell Equity Securities, as defined in subsection
(A) below, at a consideration per share (the "Lower Price") less than the
Series A Preferred Stock, Series B Preferred Stock, or Series C Preferred
Stock Conversion Price, as applicable, in effect immediately prior to the
time of such issue or sale, then forthwith upon such issue or sale, the
Conversion Price of each share of Series A Preferred Stock, Series B
Preferred Stock, and Series C Preferred Stock, as applicable, shall be
adjusted to a price (calculated to the nearest cent) determined by:
(i) an amount equal to the sum of (x) the number of shares of
Common Stock outstanding immediately prior to such issue or sale
multiplied by the then existing Series A Preferred Stock, Series B
Preferred Stock, or Series C Preferred Stock Conversion Price, as
applicable, (y) the number of shares of Common Stock issuable upon
conversion or exchange of any obligations or of any shares of stock of
the Corporation outstanding immediately prior to such issue or sale
multiplied by the then existing Series A Preferred Stock, Series B
Preferred Stock, or Series C Preferred Stock Conversion Price, as
applicable, and (z) an amount equal to the aggregate "consideration
actually received" by the Corporation upon such issue or sale, divided
by
(ii) an amount equal to the sum of the number of shares of Common
Stock outstanding immediately after such issue or sale and the number
of shares of Common Stock issuable upon conversion or exchange of any
obligations or of any shares of stock of the Corporation outstanding
immediately prior to such issue or sale and the additional shares of
Common Stock issued and/or issuable upon conversion or exchange of the
Equity Securities issued in such issuance or sale.
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For purposes hereof the following provisions shall be applicable:
(A) The term "Equity Securities" shall mean any shares of
Common Stock, or any other security of the Corporation
convertible into or exchangeable for Common Stock, except for (1)
up to 9,014,309 shares of Common Stock issued or issuable, after
the Series A Original Issue Date, to officers, directors, full
time employees or consultants of the Corporation pursuant to
stock grant, stock purchase and/or stock option plans or any
other stock incentive program, agreement or arrangement approved
by the Board of Directors, (2) securities issued pursuant to the
acquisition of all or part of another company by the Corporation
by merger or other reorganization, or by the purchase of all or
part of the assets of another company, pursuant to a plan,
agreement or arrangement approved by the Board of Directors, (3)
shares issued pursuant to subsection 4(a) or 4(b) of this Article
III, (4) Common Stock and/or Preferred Stock issuable upon
exercise, conversion or exchange of warrants to purchase Common
Stock or Preferred Stock issued in connection with a bank line or
equipment financing approved by the Board of Directors, (5)
shares of Common Stock and/or Preferred Stock reissued by the
Corporation following repurchase of such shares pursuant to any
restricted stock purchase agreement, and (6) shares of Common
Stock issued upon conversion of the Preferred Stock.
(B) In the case of an issue or sale for cash of shares of
Common Stock, the "consideration actually received" by the
Corporation therefor shall be deemed to be the amount of cash
received, before deducting therefrom any commissions or expenses
paid by the Corporation.
(C) In case of the issuance (otherwise than upon conversion
or exchange of obligations or shares of stock of the Corporation)
of additional shares of Common Stock for consideration other than
cash or consideration partly other than cash, the amount of the
consideration other than cash received by the Corporation for
such shares shall be deemed to be the fair value of such
consideration as determined in good faith by the Board of
Directors.
(D) In case of the issuance by the Corporation in any
manner of any rights to subscribe for or to purchase shares of
Common Stock , or any options for the purchase of shares of
Common Stock or stock convertible into Common Stock, all shares
of Common Stock or stock convertible into Common Stock to which
the holders of such rights or options shall be entitled to
subscribe for or purchase pursuant to such rights or options
shall be deemed "outstanding" as of the date of the offering of
such rights or the granting of such options, as the case may be,
and the minimum aggregate consideration named in such rights or
options for the shares of Common Stock or stock convertible into
Common Stock covered thereby,
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plus the consideration, if any, received by the Corporation for
such rights or options, shall be deemed to be the "consideration
actually received" by the Corporation (as of the date of the
offering of such rights or the granting of such options, as the
case may be) for the issuance of such shares.
(E) In case of the issuance or issuances by the Corporation
in any manner of any obligations or of any shares of stock of the
Corporation that shall be convertible into or exchangeable for
Common Stock, all shares of Common Stock issuable upon the
conversion or exchange of such obligations or shares shall be
deemed issued as of the date such obligations or shares are
issued, and the amount of the "consideration actually received"
by the Corporation for such additional shares of Common Stock
shall be deemed to be the total of (1) the amount of
consideration received by the Corporation upon the issuance of
such obligations or shares, as the case may be, plus (2) the
minimum aggregate consideration, if any, other than such
obligations or shares, receivable by the Corporation upon such
conversion or exchange, except in adjustment of dividends.
(F) The amount of the "consideration actually received" by
the Corporation upon the issuance of any rights or options
referred to in subsection (D) above or upon the issuance of any
obligations or shares which are convertible or exchangeable as
described in subsection (E) above, and the amount of the
consideration, if any, other than such obligations or shares so
convertible or exchangeable, receivable by the Corporation upon
the exercise, conversion or exchange thereof shall be determined
in the same manner provided in subsections (B) and (C) above with
respect to the consideration received by the Corporation in case
of the issuance of additional shares of Common Stock; provided,
however, that if such obligations or shares of stock so
convertible or exchangeable are issued in payment or satisfaction
of any dividend upon any stock of the Corporation other than
Common Stock, the amount of the "consideration actually received"
by the Corporation upon the original issuance of such obligations
or shares of stock so convertible or exchangeable shall be deemed
to be the fair value of such obligations or shares of stock, as
of the date of the adoption of the resolution declaring such
dividend, as determined by the Board of Directors at or as of
that date. On the expiration of any rights or options referred
to in subsection (D), or the termination of any right of
conversion or exchange referred to in subsection (E), or any
change in the number of shares of Common Stock deliverable upon
exercise of such options or rights or upon conversion of or
exchange of such convertible or exchangeable securities, the
Series A, Series B, and Series C Conversion Prices then in effect
shall forthwith be readjusted to such Conversion Prices as would
have been obtained had the adjustments made upon the issuance of
such option, right or convertible or
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<PAGE>
exchangeable securities been made upon the basis of the delivery
of only the number of shares of Common Stock actually delivered
or to be delivered upon the exercise of such rights or options or
upon the conversion or exchange of such securities.
(G) In the event this Corporation shall declare a
distribution payable in securities of other persons, evidences of
indebtedness issued by this Corporation or other persons or
options or rights not referred to in this subsection (c), then,
in each such case, the holders of Preferred Stock shall be
entitled to the distributions provided for in Section 1 of this
Article III above, and no adjustment to the Conversion Prices
provided for in this subsection (c) shall be applicable.
(d) Without the consent of the holders of a majority in interest of
the outstanding Preferred Stock, the Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the Corporation but will at all times in good faith assist in the carrying
out of all the provisions of this Section 4 and in the taking of all such
action as may be necessary or appropriate in order to protect the
conversion rights of the holders of the Preferred Stock against impairment.
(e) Upon the occurrence of each adjustment or readjustment of the
Series A Preferred Stock, Series B Preferred Stock, or Series C Preferred
Stock Conversion Price pursuant to this Section 4, the Corporation at its
expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to each holder of shares of
the respective series of Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth (i)
such adjustments and readjustments, (ii) the Series A, Series B, or Series
C Conversion Price at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of Series A, Series B, or Series C
Preferred Stock.
(f) This Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock solely for the
purpose of effecting the conversion of the shares of the Series A Preferred
Stock, Series B Preferred Stock, and Series C Preferred Stock such number
of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A Preferred
Stock, Series B Preferred Stock, and Series C Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares
of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, in addition to such other remedies as shall be available
to the holder of such shares, this Corporation will take such
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<PAGE>
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number
of shares as shall be sufficient for such purposes.
5. Voting Rights.
-------------
(a) Each share of Common Stock issued and outstanding shall have one
vote, and each share of Preferred Stock issued and outstanding shall have
the number of votes equal to the number of Common Stock shares into which
such share of Preferred Stock could be converted at the record date for
determination of the stockholders entitled to vote on such matters, or, if
no such record date is established, at the date such vote is taken or any
written consent of stockholders is solicited, such votes to be counted
together with all other shares of stock of the Corporation having general
voting power and not separately as a class. The Preferred Stock and the
Common Stock shall vote as a single class on all matters except as
otherwise required by this Certificate or by law.
(b) Three (3) members of the Board of Directors shall be subject to
election and removal by the holders of the Preferred Stock voting as a
separate class. All remaining members of the Board of Directors shall be
subject to election and removal by the holders of Common Stock voting as a
separate class.
6. Protective Provisions.
---------------------
(a) So long as shares of Preferred Stock are outstanding, the consent
of the majority in interest of the holders of each of the Series A
Preferred Stock , Series B Preferred Stock and Series C Preferred Stock
then outstanding, voting as separate series, shall be required for any
action which:
(i) amends or repeals any provision of the Corporation's
Certificate of Incorporation or Bylaws, if such action would alter or
change the designations, preferences and relative, participating,
optional and other special rights, or the restrictions provided for
the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock;
(ii) authorizes or issues shares of any class of stock having
any preference or priority as to dividends or liquidation preference
superior to any such preference or priority of any series of the
Series A Preferred Stock, Series B Preferred Stock, or Series C
Preferred Stock;
(b) So long as shares of the Preferred Stock are outstanding, the
consent of the majority in interest of the holders of the Preferred Stock
then outstanding shall be required for any action which:
(i) authorizes or issues shares of any class of stock having
any preference or priority as to dividends or liquidation preference
on parity with any such preference or priority of any series of the
Series A Preferred Stock, Series B Preferred Stock, or Series C
Preferred Stock;
(ii) pays or declares any dividend on any junior securities;
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<PAGE>
(iii) authorizes a merger, sale of all or substantially all its
assets, consolidation, recapitulation, or reorganization of the
Corporation; or
(iv) involves any repurchase or other acquisition by the
Corporation of its own shares other than pursuant to the Certificate
of Incorporation or employee stock purchase agreements which provided
for the right of repurchase by the Corporation upon termination.
7. Status of Converted Stock. In case any shares of Series A
--------------------------
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall
be converted pursuant to Section 3 hereof, all certificates of the shares
so converted shall be appropriately canceled on the books of the
Corporation and the shares so converted shall not be reissued by the
Corporation.
FIFTH: The following provisions are inserted for the management of
-----
the business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:
1. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to the
powers and authority expressly conferred upon them by statute or by this
Certificate of Incorporation or the Bylaws of the Corporation, the
directors are hereby empowered to exercise all such powers and do all such
acts and things as may be exercised or done by the Corporation.
2. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
3. On and after the closing date of the first sale of the
Corporation's Common Stock pursuant to a firmly underwritten registered
public offering which results in the automatic conversion of the
Corporation's Preferred Stock (the "IPO"), any action required or permitted
to be taken by the stockholders of the Corporation must be effected at a
duly called annual or special meeting of stockholders of the Corporation
and may not be effected by any consent in writing by such stockholders.
Prior to such sale, unless otherwise provided by law, any action which may
otherwise be taken at any meeting of the stockholders may be taken without
a meeting and without prior notice, if a written consent describing such
actions is signed by the holders of outstanding shares having not less than
the minimum number of votes which would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
4. Special meetings of stockholders of the Corporation may be called
only (1) by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at the time any
such resolution is presented to the Board for adoption) or (2) by the
holders of not less than ten percent (10%) of all of the shares entitled to
cast votes at the meeting.
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<PAGE>
SIXTH:
-----
1. The number of directors shall initially be set at five (5) and,
thereafter, shall be fixed from time to time exclusively by the Board of
Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is
presented to the Board for adoption). Upon the closing of the IPO, the
directors shall be divided into three classes with the term of office of
the first class (Class I) to expire at the first annual meeting of the
stockholders following the IPO; the term of office of the second class
(Class II) to expire at the second annual meeting of stockholders held
following the IPO; the term of office of the third class (Class III) to
expire at the third annual meeting of stockholders; and thereafter for each
such term to expire at each third succeeding annual meeting of stockholders
after such election. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, a vacancy resulting from the removal of a
director by the stockholders as provided in Section 3 below may be filled
at a special meeting of the stockholders held for that purpose. All
directors shall hold office until the expiration of the term for which
elected, and until their respective successors are elected, except in the
case of the death, resignation, or removal of any director.
2. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the
Board of Directors resulting from death, resignation or other cause (other
than removal from office by a vote of the stockholders) may be filled only
by a majority vote of the directors then in office, though less than a
quorum, and directors so chosen shall hold office for a term expiring at
the next annual meeting of stockholders at which the term of office of the
class to which they have been elected expires, and until their respective
successors are elected, except in the case of the death, resignation, or
removal of any director. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of Directors,
may be removed from office at any time, with or without cause, but only by
the affirmative vote of the holders of at least a majority of the voting
power of all of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class. Vacancies in the Board of Directors resulting
from such removal may be filled by a majority of the directors then in
office, though less than a quorum, or by the stockholders as provided in
Section 1 above. Directors so chosen shall hold office for a term expiring
at the next annual meeting of stockholders at which the term of office of
the class to which they have been elected expires, and until their
respective successors are elected, except in the case of the death,
resignation, or removal of any director.
SEVENTH: The Board of Directors is expressly empowered to adopt,
-------
amend or repeal Bylaws of the Corporation. Any adoption, amendment or
repeal of Bylaws of the Corporation by the Board of Directors shall require
the approval of a majority of the total
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<PAGE>
number of authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any resolution providing
for adoption, amendment or repeal is presented to the Board). The
stockholders shall also have power to adopt, amend or repeal the Bylaws of
the Corporation. Any adoption, amendment or repeal of Bylaws of the
Corporation by the stockholders shall require, in addition to any vote of
the holders of any class or series of stock of the Corporation required by
law or by this Certificate of Incorporation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of directors,
voting together as a single class.
EIGHTH: A director of the Corporation shall not be personally liable
------
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involved intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability of a
director, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing provisions of this Article
EIGHTH by the stockholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing at the
time of such repeal or modification.
NINTH: The Corporation reserves the right to amend or repeal any
-----
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred
upon stockholders are granted subject to this reservation; provided,
--------
however, that, notwithstanding any other provision of this Certificate of
-------
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any vote of the holders of any class or
series of the stock of this Corporation required by law or by this
Certificate of Incorporation, the affirmative vote of the holders of at
least 66-2/3% of the voting power of all of the then outstanding shares of
the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required
to amend or repeal this Article NINTH, Article FIFTH, Article SIXTH,
Article SEVENTH or Article EIGHTH.
The Certificate of Incorporation of Extreme Delaware, as amended
herein, shall continue to be the Certificate of Incorporation of Extreme
Delaware as the surviving Corporation without change or amendment until
further amended in accordance with the provisions thereof and applicable
laws. The Bylaws of Extreme Delaware, in effect on the Effective Date,
shall continue to be the Bylaws of Extreme Delaware as the surviving
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<PAGE>
Corporation without change or amendment until further amended in accordance
with the provisions thereof and applicable laws."
3. Directors and Officers. The directors and officers of Extreme
----------------------
California shall become the directors and officers of Extreme Delaware upon the
Effective Date and any committee of the Board of Directors of Extreme California
shall become the members of such committees for Extreme Delaware.
4. Succession. On the Effective Date, Extreme Delaware shall succeed to
----------
Extreme California in the manner of and as more fully set forth in Section 259
of the General Corporation Law of the State of Delaware.
5. Further Assurances. From time to time, as and when required by
------------------
Extreme Delaware or by its successors and assigns, there shall be executed and
delivered on behalf of Extreme California such deeds and other instruments, and
there shall be taken or caused to be taken by it such further and other action,
as shall be appropriate or necessary in order to vest, perfect or confirm, of
record or otherwise, in Extreme Delaware the title to and possession of all the
property, interests, assets, rights, privileges, immunities, powers, franchises
and authority of Extreme California, and otherwise to carry out the purposes of
this Merger Agreement and the officers and directors of Extreme Delaware are
fully authorized in the name and on behalf of Extreme California or otherwise to
take any and all such action and to execute and deliver any and all such deeds
and other instruments.
6. Stock of Extreme California.
---------------------------
a. Common Stock. Upon the Effective Date, by virtue of the Merger
------------
and without any action on the part of the holder thereof, each share of Extreme
California Common Stock outstanding immediately prior thereto shall be changed
and converted into one fully paid and nonassessable share of Extreme Delaware
Common Stock.
b. Preferred Stock. Upon the Effective Date, by virtue of the Merger
---------------
and without any action on the part of the holder thereof, each share of each
series of Extreme California Preferred Stock outstanding immediately prior
thereto shall be changed and converted into one fully paid and nonassessable
share of Extreme Delaware Preferred Stock of an equivalent series.
7. Stock Certificates. On and after the Effective Date, all of the
------------------
outstanding certificates which prior to that time represented shares of Extreme
California stock shall be deemed for all purposes to evidence ownership of and
to represent the shares of Extreme Delaware stock into which the shares of
Extreme California stock represented by such certificates have been converted as
herein provided. The registered owner on the books and records of Extreme
Delaware or its transfer agent of any such outstanding stock certificate shall,
until such certificate shall have been surrendered for transfer or otherwise
accounted for to Extreme Delaware or its transfer agent, have and be entitled to
exercise any voting and other
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<PAGE>
rights with respect to and to receive any dividend and other distributions upon
the shares of Extreme Delaware stock evidenced by such outstanding certificate
as above provided.
8. Options, Warrants and All Other Rights to Purchse Stock. Upon the
-------------------------------------------------------
Effective Date, each outstanding option, warrant or other right to purchase
shares of Extreme California stock, including those options granted under the
Amended 1996 Stock Option Plan (the "Option Plan") of Extreme California, shall
be converted into and become an option, warrant or right to purchase the
identical number of shares of Extreme Delaware stock at a price per share equal
to the exercise price of the option, warrant or right to purchase Extreme
California stock, and upon the same terms and subject to the same conditions as
set forth in the Option Plan and other agreements entered into by Extreme
California pertaining to such options, warrants or rights. A number of shares
of Extreme Delaware stock shall be reserved for purposes of such options,
warrants and rights equal to the number of shares of Extreme California stock so
reserved as of the Effective Date. As of the Effective Date, Extreme Delaware
shall assume all obligations of Extreme California under agreements pertaining
to such options, warrants and rights, including the Option Plan, and the
outstanding options, warrants or other rights, or portions thereof, granted
pursuant thereto.
9. Other Employee Benefit Plans. As of the Effective Date, Extreme
----------------------------
Delaware hereby assumes all obligations of Extreme California under any and all
employee benefit plans in effect as of said date or with respect to which
employee rights or accrued benefits are outstanding as of said date, including
but not limited to the Option Plan and the 1999 Employee Stock Purchase Plan. A
number of shares of Extreme Delaware stock shall be reserved for purposes of
such plans equal to the number of shares of Extreme California stock so reserved
as of the Effective Date. As of the Effective Date, Extreme Delaware shall
assume all obligations of Extreme California under agreements pertaining to such
plans, and the outstanding rights granted pursuant thereto.
10. Outstanding Common Stock of Extreme Delaware. Forthwith upon the
--------------------------------------------
Effective Date, the One Thousand (1,000) shares of Extreme Delaware Common Stock
currently issued and outstanding in the name of Extreme California shall be
canceled and retired and resume the status of authorized and unissued shares of
Extreme Delaware Common Stock, and no shares of Extreme Delaware Common Stock or
other securities of Extreme Delaware shall be issued in respect thereof.
11. Covenants of Extreme Delaware. Extreme Delaware covenants and agrees
-----------------------------
that it will, on or before the Effective Date:
a. Qualify to do business as a foreign corporation in the State of
California, and in all other states in which Extreme California is so qualified
and in which the failure to so qualify would have a material adverse impact on
the business or financial condition of Extreme Delaware. In connection
therewith, Extreme Delaware shall irrevocably appoint an agent for service of
process as required under the provisions of Section 2105 of the California
Corporations Code and under applicable provisions of state law in other states
in which qualification is required hereunder.
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b. File any and all documents with the California Franchise Tax Board
necessary to the assumption by Extreme Delaware of all of the franchise tax
liabilities of Extreme California.
12. Amendment. At any time before or after approval and adoption by the
---------
shareholders of Extreme California, this Merger Agreement may be amended in any
manner as may be determined in the judgment of the respective Boards of
Directors of Extreme Delaware and Extreme California to be necessary, desirable
or expedient in order to clarify the intention of the parties hereto or to
effect or facilitate the purposes and intent of this Merger Agreement.
13. Abandonment. At any time before the Effective Date, this Merger
-----------
Agreement may be terminated and the Merger may be abandoned by the Board of
Directors of either Extreme California or Extreme Delaware or both,
notwithstanding approval of this Merger Agreement by the sole stockholder of
Extreme Delaware and the shareholders of Extreme California.
14. Counterparts. In order to facilitate the filing and recording of
------------
this Merger Agreement, the same may be executed in any number of counterparts,
each of which shall be deemed to be an original.
17
<PAGE>
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by resolution of the Board of Directors of Extreme California and Extreme
Delaware, is hereby executed on behalf of each of said two corporations by their
respective officers thereunto duly authorized.
EXTREME NETWORKS, INC.,
a Delaware corporation
By:_______________________
Gordon L. Stitt,
President and Chief Executive Officer
EXTREME NETWORKS,
a California corporation
By:_______________________
Gordon L. Stitt,
President and Chief Executive Officer
18
<PAGE>
CERTIFICATE OF SECRETARY
OF
EXTREME NETWORKS, INC.
(a Delaware corporation)
I, Vito Palermo, the Secretary of Extreme Networks, Inc., a Delaware
corporation (the "Corporation"), hereby certify that the Agreement and Plan of
Merger to which this Certificate is attached was duly signed on behalf of the
Corporation by its President under the corporate seal of the Corporation and was
duly approved and adopted by a unanimous vote of the outstanding stock entitled
to vote thereon by written consent of the sole stockholder of the Corporation
dated February ____, 1999.
Executed effective on the ____ day of February, 1999.
By: ___________________________________
Vito Palermo, Secretary
19
<PAGE>
CERTIFICATE OF APPROVAL OF
AGREEMENT AND PLAN OF MERGER OF
EXTREME NETWORKS
(a California corporation)
Gordon L. Stitt and Vito Palermo certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Extreme Networks, a California corporation (the "Corporation").
2. This Certificate is attached to the Agreement and Plan of Merger dated
as of February ___, 1999, providing for the merger of the Corporation with and
into Extreme Networks, Inc., a Delaware corporation.
3. The Agreement and Plan of Merger in the form attached hereto (the
"Merger Agreement") was approved by the Board of Directors of the Corporation at
a meeting duly noticed and held on January 22, 1999.
4. The total number of outstanding shares of the Corporation entitled to
vote on the merger was 11,791,195 shares of Common Stock, 14,579,999 shares of
Series A Preferred Stock, 8,886,228 shares of Series B Preferred Stock and
5,595,088 shares of Series C Preferred Stock.
5. The principal terms of the Merger Agreement were approved by an
affirmative vote which exceeded the vote required, such vote being a majority of
the total number of outstanding shares of Common Stock and a majority of the
outstanding shares of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock, each voting separately as a class.
Dated: February ___, 1999.
_________________________________
Gordon L. Stitt, President
_________________________________
Vito Palermo, Secretary
20
<PAGE>
The undersigned, Gordon L. Stitt and Vito Palermo, President and Secretary,
respectively, of Extreme Networks, a California corporation, declare under
penalty of perjury under the laws of the State of California that the matters
set forth in this Certificate are true and correct of their own knowledge.
Executed at Palo Alto, California, on February ____, 1999.
_________________________________
Gordon L. Stitt, President
_________________________________
Vito Palermo, Secretary
21
<PAGE>
EXHIBIT 10.5
SUBLEASE
This Sublease, dated January 1, 1999 for reference purposes only, is made
by and between Apple Computer, Inc., a California corporation ("Sublessor"),
whose address is 1 Infinite Loop, Cupertino, California 95014 and Extreme
Networks, Inc. a California corporation ("Sublessee"), whose address is 10460
Bandley Drive, Cupertino, California, with respect to the following facts:
Recitals
--------
A. Sublessor is the tenant under that certain Lease Agreement (the "Master
Lease") dated June 1, 1988, amended by that certain Memorandum of Lease dated
June 1, 1988, First Amendment to Lease dated May 31, 1989, that certain Second
Amendment to Lease dated November 9, 1989, that certain Third Amendment to Lease
dated February 8, 1995, that certain Fourth Amendment to Lease dated March 29,
1995, that certain Fifth Amendment to Lease dated June 20, 1995, and that
certain Sixth Amendment to Lease dated December 22, 1995, of approximately
218,816 square feet of space located at 3515, 3535 and 3585 Monroe Street, Santa
Clara, Santa Clara County, State of California (the "Premises"), which Master
Lease was executed by MPJ, a California general partnership, as Landlord (the
"Master Lessor"), and Sublessor as Tenant. A copy of the Master Lease is
attached hereto as Exhibit A and, subject to the terms hereof, is incorporated
herein.
B. Sublessor desires to sublease to Sublessee, and Sublessee desires to
sublease from Sublessor, a portion of the Premises, consisting of approximately
Seventy-Seven Thousand Four Hundred Sixteen (77,416) square feet, commonly known
as 3585 Monroe Drive, Santa Clara, California, as shown on the floor plan
attached hereto as Exhibit B (the "Sublease Premises"), on the terms and
conditions set forth below.
NOW, THEREFORE, for good and valuable consideration, the parties agree as
follows:
1. Premises. Sublessor hereby subleases the Sublease Premises to Sublessee,
--------
and Sublessee hereby subleases the Sublease Premises from Sublessor, for
the term, at the rental and upon all the conditions set forth herein.
2. Term.
----
2.1 Term. The term of this Sublease shall be for a period commencing on the
----
later of (a) February 9, 1999 or (b) the date the written consent of Master
Lessor to this executed Sublease has been obtained (the "Commencement
Date"). Subject to the terms hereof, this Sublease shall expire on
December 31, 2002 (the "Expiration Date"), unless the Master Lease is
sooner terminated, which termination shall occur without liability on the
part of Sublessor unless such termination resulted solely from a default of
Sublessor thereunder.
<PAGE>
2.2 Delay in Commencement.
---------------------
A. Notwithstanding the provisions of Paragraph 2.1, above, if for any reason
Sublessor cannot deliver possession of the Sublease Premises to Sublessee
on the Commencement Date, Sublessor shall not be subject to any liability
on account of said failure to deliver, nor shall such failure affect the
validity of this Sublease or the obligations of Sublessee hereunder or
extend the term hereof. In such event, Sublessee shall not be obligated to
pay rent for the Sublease Premises until possession of the Sublease
Premises is tendered to Sublessee, provided the delay is not attributable
to Sublessee. If the Commencement Date is delayed as a result of any act
or omission of Sublessee, its agents, employees or contractors, the
Commencement Date shall be deemed to be the date the Commencement Date
would have occurred if no Sublessee delay or delays had occurred.
B. Notwithstanding the provisions of Subparagraph 2.2.A, above, if Sublessor
has not delivered the Sublease Premises to Sublessee in the condition
required hereunder, free of occupants and tenants, on or before March 1,
1999, Sublessee shall have the right thereafter, until such possession is
delivered to Sublessee to cancel this Sublease on not less than ten (10)
days prior written notice to Sublessor; if Sublessor delivers the Premises
to Sublessee within such period, Sublessee shall accept possession of the
Premises. Upon any such cancellation, Sublessor shall return to Sublessee
all sums theretofore deposited by Sublessee with Sublessor and neither
party shall have any further liability or obligation to the other under
this Sublease.
C. Sublessor and Sublessee agree to execute a Confirmation of Commencement
Date Agreement in the form attached to this Sublease as Exhibit C,
confirming the date this Sublease commenced.
3. Rent.
----
3.1 Base Monthly Rent.
-----------------
A. No Base Monthly Rent and Additional Rent shall be due for the months of
February, March and April 1999. Beginning on May 1, 1999, Sublessee shall
pay to Sublessor during the entire remaining term of this Sublease the
following amounts as "Base Monthly Rent":
<TABLE>
<CAPTION>
Months Rent/ SF / Mo Rent / Mo
------ ------------- ---------
<S> <C> <C>
May 1, 1999 - April 30, 2000 $ 1.25 NNN $ 96,770.00
May 1, 2000 - April 30, 2001 $ 1.50 NNN $116,124.00
May 1, 2001 - April 30, 2002 $ 1.75 NNN $135,478.00
May 1, 2002 - December 31, 2002 $ 1.85 NNN $143,219.60
</TABLE>
B. Full Base Monthly Rent and Additional Rent are due and shall be paid in
advance in equal installments on or before the first day of each calendar
month in lawful money of
2
<PAGE>
the United States without notice or demand and without any set off,
deduction, abatement or offset whatsoever except as otherwise provided
herein. Base Monthly Rent and Additional Rent for any partial month during
the Sublease term shall be prorated based on the actual number of days in
the partial month. If the Base Monthly Rent and Additional Rent are not
received by Sublessor by the fifth (5th) day of each calendar month a late
charge of six percent (6%) of the overdue amount shall automatically be due
and payable, without any prior written notice. The parties agree this late
charge represents a fair and reasonable estimate of the costs Sublessor
will incur by reason of late payment by Sublessee. Acceptance of such late
charge by Sublessor shall in no event constitute a waiver of Sublessee's
default with respect to such overdue amount, not prevent Sublessor from
exercising any of its other rights and remedies granted under this
Sublease.
C. All payments of Rent shall be made payable to Apple Computer, Inc. and
mailed to Sublessor at the following address: Apple Computer, Inc., File
#72435, Post Office Box 60000, San Francisco, California 94160, or to such
other address as may be designated in writing by Sublessor.
Notwithstanding the foregoing, Sublessor shall have the right to direct
Sublessee to pay Rent directly to Master Lessor, and Master Lessor shall
credit such amounts to the Rent due for the Sublease Premises pursuant to
the Master Lease.
3.2 Payment of First Month's Base Monthly Rent. Concurrently with Sublessee's
------------------------------------------
execution of this Sublease, Sublessee shall deposit with Sublessor the sum
of Ninety-Six Thousand Seven Hundred Seventy and 00/100 Dollars
($96,770.00) as payment of the Base Monthly Rent due for the month of May
1999.
3.3 Additional Rent. All moneys other than Base Monthly Rent required to be
---------------
paid by Sublessee under this Sublease, including, without limitation, all
operating expenses, taxes, insurance, maintenance and other expenses and
charges of every kind and nature arising in connection with the Sublease
Premises, this Sublease or the Master Lease (including, without limitation,
all amounts payable under the Master Lease as described in Sections 3.4, 4,
6, 7, and 11 hereof) shall be deemed "Additional Rent". Base Monthly Rent
and Additional Rent shall be referred to collectively herein as "Rent".
For purposes of this Sublease, Sublessee's Pro Rata Share, as defined in
Section 3.4 of the Master Lease, shall be Twenty-Eight and Twelve
Hundredths Percent (28.12%). Sublessee shall not be required to reimburse
Sublessor for Additional Rent items which are passed through from the
Master Landlord until May 1, 1999.
3.4 No Rental Adjustment. The parties agree that any statement of square
--------------------
footage set forth in the Sublease is an approximation which Sublessor and
Sublessee agree is reasonable and the rental based thereon and Tenant's Pro
Rata Share as set forth in paragraph 3.3 is not subject to revisions if the
actual square footage is more or less.
4. Security Deposit. Concurrently with Sublessee's execution of this
----------------
Sublease, Sublessee shall deposit with Sublessor the sum of One Hundred
Fifty Thousand Dollars ($150,000.00). Such deposit which shall be held by
Sublessor as security for Sublessee's faithful performance of all of the
terms of this Sublease. If Sublessee fails to pay Rent or
3
<PAGE>
otherwise defaults with respect to any provision of this Sublease, then
Sublessor may draw upon, use, apply or retain all or any portion of the
security deposit after applicable notice and cure periods for the payment
of any Rent or other charge in default, for the payment of any other sum
which Sublessor has become obligated to pay by reason of Sublessee's
default, or to compensate Sublessor for any loss or damage which Sublessor
has suffered thereby. If Sublessor so uses or applies all or any portion of
the security deposit then Sublessee, within fifteen (15) days after written
demand therefor, shall deposit cash with Sublessor in the amount required
to restore the security deposit to the full amount stated above. Within
twenty-one (21) days following the expiration of this Sublease, if
Sublessee is not then in default, Sublessor shall return to Sublessee so
much of the security deposit as has not been applied by Sublessor pursuant
to this Section 4, or which is not otherwise required to cure Sublessee's
defaults with any deductions itemized in writing.
5. Letter of Credit.
----------------
5.1 Irrevocable Standby Letter of Credit.
------------------------------------
A. Concurrently with Sublessee's execution of this Sublease, Sublessee shall
deliver to Sublessor an irrevocable and unconditional standby letter of
credit (the "Letter of Credit") issued by Silicon Valley Bank or a
financial institution satisfactory to Sublessor in its reasonable
discretion, in the amount of One Hundred Fifty Thousand Dollars ($150,000),
renewable on an annual basis for the full term of the Sublease plus ninety
(90) days in the form attached hereto as Exhibit "F". Such Letter of
Credit shall serve as additional security for the obligations of Sublessee
hereunder.
B. The Letter of Credit may be drawn upon by Sublessor under any of the
following circumstances: (i) after written notice to Sublessee that an
Event of Default has occurred and Sublessee's failure to cure such default
within the applicable grace period, upon presentation to the issuer of the
Letter of Credit written notice certified under penalty of perjury by an
officer of Sublessor stating that an uncured event of default has occurred
and any applicable cure period has expired; and/or (ii) if for any reason
whatsoever the Letter of Credit is not renewed by Sublessee for an
additional year or a substitute Letter of Credit meeting the requirements
set forth herein is not delivered to Sublessor at least thirty (30) days
prior to expiration of the then expiring original, renewed or substitute
Letter of Credit, as applicable. Sublessor shall accept a substitute
letter of credit so long as it meets the criteria set forth in Subparagraph
5.A, above; provided, however, that the issuer of any substitute letter of
credit shall be subject to Sublessor's approval, in Sublessor's reasonable
discretion. Pursuant to this paragraph 5.1.B, Sublessor shall be entitled
to partial draws under the Letter of Credit only in such amount as may be
necessary to cure any such default by Sublessee, provided the Security
Deposit is first exhausted.
C. If Sublessee fails to obtain a replacement Letter of Credit prior to thirty
(30) days before the expiration date of the then-effective Letter of
Credit, Sublessor may draw upon the
4
<PAGE>
Letter of Credit for which replacement has been requested without further
notice to Sublessee or any other party. If Sublessee subsequently presents
a Letter of Credit meeting the requirements hereof, then Sublessor shall
accept such Letter of Credit and shall return any funds Sublessor obtained
by drawing down on the prior Letter of Credit.
5.2 Reduction of Letter of Credit. If Sublessee is required to make
-----------------------------
improvements to the Sublease Premises to comply with ADA, then Sublessee,
upon prior written notice to Sublessor, shall have the right to reduce the
Letter of Credit by the amount needed to complete such work; provided,
however, that in no event shall the Letter of Credit be reduced by more
than Fifty Thousand Dollars ($50,000). Sublessee shall provide Sublessor
with a complete description of costs for completing the ADA work. This
provision is only applicable to the extent ADA compliance is triggered by
Sublessee's Improvements; otherwise, Sublessor and Sublessee shall each
bear one-half (1/2) of the costs for such compliance.
6. Use of Premises. The Sublease Premises shall be used and occupied solely
---------------
for the purposes set forth in Section 5.1 of the Master Lease.
6.1. Condition of Demised Premises; Repairs. Subject to the provisions of
--------------------------------------
Paragraph 6.2 below, Sublessor has not agreed to make, and shall not be
required to make, any alterations, repairs or improvements to the Sublease
Premises. By taking possession of the Sublease Premises, Sublessee shall
be conclusively deemed to have accepted the Sublease Premises in their "as-
is" condition existing on the Commencement Date, excluding latent defects,
and subject to all applicable zoning, municipal, county and state laws,
ordinances and regulations governing or regulating the use or occupancy of
the Sublease Premises. Sublessee acknowledges that neither Sublessor nor
its agents has made any representations or warranties with respect to the
condition of the Sublease Premises or as to the suitability of the Sublease
Premises for the conduct of Sublessee's business. In particular, Sublessor
makes no representation with respect to compliance of the Sublease Premises
or the Complex with the Americans With Disabilities Act of 1990 (the
"ADA"), compliance with which shall be the sole responsibility of Sublessee
as to the Sublease Premises, to the extent such compliance is triggered by
Sublessee's Improvements, and subject to the provisions of Section 5.2
(which provides, inter alia, that Sublessor shall pay fifty percent (50%)
of such costs), except to the extent such compliance is Master Lessor's
obligation under the Master Lease. Sublessor represents and warrants that
(i) the Sublease Premises are in good working condition; (ii) the
mechanical, electrical and plumbing systems and all roll-up doors are in
good working and operating condition; (iii) it has delivered to Sublessee
all reports, if any, with respect to the HVAC and electrical systems, (iv)
the HVAC systems are in good condition and repair; (v) the roof was
installed by Master Landlord in approximately February-March 1985; and (vi)
the parking lot was resealed and restriped on September 25-28, 1998.
6.2 Repairs. Sublessor shall have no obligation whatsoever to make or to pay
-------
the cost of any alterations, improvements or repairs to the Sublease
Premises including without
5
<PAGE>
limitation any improvement or repair required to comply with any law,
regulation, building code or ordinance (including the ADA), to the extent
such compliance is triggered by Sublessee's Improvements, and subject to
the provisions of Section 5.2 (which provides, inter alia, that Sublessor
shall pay fifty percent (50%) of such costs), except to the extent such
compliance is Master Lessor's obligation under the Master Lease.
Notwithstanding the foregoing, if Master Lessor fails to perform its
obligations in accordance with the terms of the Master Lease with regard to
repairs to or maintenance of the Sublease Premises, then Sublessor, upon
receipt of written notice from Sublessee of any such failure, shall make
commercially reasonable efforts to have Master Lessor perform its
obligations of under the Master Lease with respect to repairs and
maintenance of the Sublease Premises; provided, however, that Sublessor
shall not be required to spend more than a nominal sum in connection with
any such efforts. Such nominal sum shall be limited to all costs associated
with the preparation of and transmittal to Master Lessor of documentation
from Sublessor or Sublessor's attorneys detailing the obligations to be
performed by Master Lessor under the Master Lease). If, after receipt of
written request from Sublessee, Sublessor fails or refuses to take such
action ("Action"), and provided that the rights of Sublessor as tenant
under the Master Lease are conferred upon and assigned to Sublessee, then
Sublessee shall be subrogated to such rights to the extent that the same
shall apply to the Sublease Premises. If any such Action against Master
Lessor by Sublessee in its own name is barred by reason of lack of privity,
nonassignability or otherwise, then Sublessee may take such Action in
Sublessor's name, provided that Sublessee has obtained Sublessor's prior
written consent (which consent shall not be unreasonably withheld) and
provided further that Sublessee shall indemnify, protect, defend (by
counsel reasonably satisfactory to Sublessor) and hold Sublessor harmless
from and against any and all liability, loss, claims, demands, suits,
penalties or damages (including without limitation reasonable attorneys'
fees and expenses).which Sublessor may incur or suffer by reason of such
Action, except to the extent due to Sublessor's negligent acts or
omissions.
6.3 Alterations. Sublessee's right to make alterations to the Sublease
-----------
Premises is subject to the provisions of Section 7.3 of the Master Lease.
Unless otherwise agreed to in writing by Master Lessor at the time
Sublessee first requests consent to any alterations, at the expiration or,
earlier termination of this Sublease, Sublessee shall: (i) remove all
alterations, additions and improvements to the Sublease Premises made by
Sublessee, (ii) restore the Sublease Premises to their condition prior to
making such alterations, additions and improvements; and (iii) repair all
damage caused in removing such alterations, additions and improvements.
Sublessee agrees that the indemnification provisions of Section 10 of the
Master Lease shall be deemed to include all claims, damages, costs and
expenses arising out of any alterations, additions or other improvements to
the Sublease Premises made by Sublessee. In no event shall Sublessee
commence construction of any improvements in the Subleased Premises prior
to Master Lessor's consent to this Sublease, and the approval of Sublessor
and Master Lessor to any such proposed alterations or improvements.
Provided, however, Sublessee shall have the right to make interior
nonstructural alterations to the Sublease Premises which do not exceed
Twenty-Five Thousand Dollars ($25,000) in cost annually, without obtaining
6
<PAGE>
Sublessor's prior consent; and, provided further, if Master Lessor requires
removal of any such alterations at the end of the term of the Sublease
and/or the Master Lease pursuant to the terms of the Master Lease,
Sublessee shall perform or shall bear the cost of performing any such
removal and associated restoration, and shall indemnify and hold Sublessor
harmless of all costs, expenses, claims and liabilities arising out of or
in connection with any such removal and/or restoration.
7. Maintenance.
-----------
A. Sublessee shall maintain the Subleased Premises in good order, condition
and repair, at its sole cost and expense. Sublessee shall have the right
to use contractors of its choice, provided that all such contractors shall
be subject to Sublessor's reasonable approval. If such maintenance is not
performed to the reasonable satisfaction of Sublessor, then Sublessor shall
notify Sublessee of such failure, setting forth, in reasonable detail, the
nature of such failure. Sublessee shall have a reasonable period (such
period to be determined with reference to the impact of such nonperformance
on the equipment, or life and safety of any person, but in no event in
excess of thirty (30) days) within which to remedy such failure. If such
maintenance is not thereafter performed to the reasonable satisfaction of
Sublessor, then Sublessee, at the direction of Sublessor, shall terminate
any contractor not performing to Sublessor's satisfaction as required by
this Section 7. If Sublessee fails to terminate such contract as directed
by Sublessor, then Sublessor shall have the right to terminate such
contract as Sublessee's attorney-in-fact. Sublessee hereby appoints
Sublessor its attorney-in-fact for the sole purpose of terminating any such
contract, subject to the conditions herein above set forth, provided
however that any such termination must be done in accordance in with the
terms of the agreement between Subtenant and such contractor, including
mitigation or payment of any costs associated with any such termination.
B. Sublessee's right to maintain the Sublease Premises may be terminated by
Sublessor upon the occurrence of a default by Sublessee under Paragraph 7
of this Sublease and such default is not cured within any applicable cure
period.
C. Sublessor shall have the right at all times during the term of this
Sublease to monitor Sublessee's performance of any maintenance obligations.
For such purpose, (i) Sublessor and its agents, employees and contractors
shall have the right to inspect such maintenance work during normal
business hours and upon at least one (1) business day's prior notice to
Sublessee, and (ii) Sublessee shall provide Sublessor with monthly reports
(until such time, if any, as Sublessor may deem it appropriate to change
said monthly reporting to quarterly reporting) describing all such
maintenance work, such reports to include (without limitation), a
reasonably complete description of the nature of any maintenance work
performed by or on behalf of Sublessee during such calendar month, copies
of any reasonable invoices for payment, and evidence of payment (if paid).
If Sublessee is in default under any terms or conditions of this Sublease
beyond any applicable cure period, then any direct costs actually and
reasonably incurred by Sublessor to monitor
7
<PAGE>
Sublessee's maintenance work shall be reimbursed to Sublessor by Sublessee
as Additional Rent.
D. Sublessee agrees to perform minimum inspection on all of the HVAC
mechanical equipment every sixty (60) days with the exception of the
chiller (model number CVHE020FAE and serial number L84H21840) (hereinafter
referred to as the "Chiller"). Sublessor shall at Sublessor's sole cost
and expense, shall maintain such Chiller for a one (1) year period
effective as of the Commencement Date or until such later time as Sublessor
deems appropriate. Thereafter, Sublessor shall bill Sublessee for all
reasonable costs necessary to maintain and repair said Chiller. Sublessee
shall provide reasonable access for inspections and repairs as needed with
at least one business day's prior notice.
8. Master Lease Provisions.
-----------------------
8.1 Performance of Master Lease Provisions. Sublessee acknowledges and agrees
--------------------------------------
that this Sublease shall be subject and subordinate to the Master Lease,
and neither Sublessee nor Sublessor shall cause or permit any violation of
any term thereof. Sublessee hereby expressly assumes and agrees to perform
and comply with, for the benefit of Sublessor and Master Lessor, each and
every obligation of Sublessor as Tenant under the Master Lease which
relates to the Sublease Premises to the extent incorporated herein.
Sublessor agrees that it shall perform all of its obligations under the
Master Lease which have not been assumed by Sublessee, such that the Master
Lease shall not be terminated due to default by Sublessor during the term
of this Sublease. Sublessor shall indemnify, defend and hold Sublessee
harmless from and against any liability, less, damages, actions,
proceedings or expenses (including but not limited to reasonable attorneys'
fees and costs) arising or resulting from or in connection with a breach of
this obligation or any default by Sublessor under this Sublease.
8.2 Incorporation By Reference. The terms and conditions of this Sublease
--------------------------
shall include all of the provisions of the Master Lease, which are
incorporated into this Sublease as if fully set forth, except that:
(i) Each reference in such incorporated Sections to "Lease" shall be
deemed a reference to this "Sublease".
(ii) Each reference to "Landlord" and "Tenant" shall be deemed a reference
to "Sublessor" and "Sublessee", respectively, except as otherwise
provided herein.
(iii) With respect to work, services, repairs, provision of insurance,
restoration, or the performance of any other obligation of Master
Lessor under the Master Lease including, without limitation, Section
7.1 (Maintenance and Repairs); Section 7.2G and Section 7.3D (Capital
Improvements); Section 10.1 (Landlord's Indemnification); Section
11.2 (Landlord's Insurance); Section 12 (Damage or Destruction);
Section 13 (Condemnation); Section 18.1 (Outside Area); and Section
18.2 (Outside Area Expenses), the sole obligation of Sublessor shall
be as
8
<PAGE>
set forth in Paragraph 5.2 of this Sublease above. Sublessor shall
provide Sublessee with copies of all notices given to Sublessor by
Master Lessor which are relevant to this Sublease within three (3)
business days following receipt thereof, including but not limited to
any notice of Sublessor's default or breach of its obligations under
the Master Lease.
(iv) Except as expressly provided herein, with respect to any obligation
of Sublessee to be performed under this Sublease, wherever the Master
Lease grants to Sublessee a specified number of days to perform its
obligations under the Master Lease, Sublessee shall have one-half of
the number of days granted in the Master Lease (rounded up) to
perform the obligation, including, without limitation, curing any
defaults. In addition, the reference in Section 4.1(b) to ten days
shall be twenty (20) days; the reference in Section 4.2(b) to ten
(10) days shall be twenty (20) days; the reference in Section 4.4 to
ten (10) days shall be twenty (20) days; the reference in Section
7.3A to five (5) days shall be ten (10) days, the reference to thirty
(30) days shall be forty (40) days, the reference to one hundred
twenty (120) days shall be one hundred thirty (130) days, and the
reference to ten (10 business days shall be twenty (20) business
days; the reference in Section 9 to ten (10) business days shall be
twenty (20) business days; the references in Sections 14.1B and 14.1C
to fifteen (15) days shall be twenty-five (25) days; and the
references in Section 16.3 to thirty (30) days shall be forty (40)
days.
(v) With respect to any approval or consent required to be obtained from
the "Landlord" under the Master Lease, such approval or consent must
be obtained from both Master Lessor and Sublessor, and the approval
or consent of Sublessor may be withheld if Master Lessor's approval
or consent is not obtained.
(vi) The following provisions of the Master Lease are not incorporated
into this Sublease, or are incorporated as modified herein: Sections
1, 2, 3.1, 3.2, 3.3; the last full paragraph of Section 3.4; the
second paragraph of Section 5.1; the second sentence of Section
7.2.F; the proviso in the first sentence of Section 7.3.A; the
reference to "Landlord" in the first sentence of Section 6.3 shall
apply only to the Master Lessor; the word "negligence" in the last
sentence of Section 10.2 is replaced with the phrase "gross
negligence"; the termination rights of Tenant set forth in Section 12
shall apply only with respect to the Sublease Premises; the proviso
in the first sentence of Section 15.1; Section 17; the first sentence
of the second paragraph of Section 18.1; the reference to "Landlord"
in the third sentence of Section 18.2 shall apply only to the Master
Lessor; Section 19; the fourth sentence in Section 20.3C; the proviso
in the second sentence of Section 20.11; the addresses set forth in
Section 20.16 are replaced with the addresses set forth below in
Paragraph 13.4 of this Sublease; Section 20.18; Section 21; Sections
22B through 22F; Exhibits A and B; and all amendments to the Master
Lease described in Recital A above.
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9. Right to Cure. If Sublessee fails to pay any sum of money to Sublessor or
-------------
to Master Lessor or fails within any applicable grace periods to perform
any other act on its part to be performed hereunder, then Sublessor may but
shall not be obligated to make such payment or perform such act. All such
sums paid and all costs and expenses of performing any such act shall be
deemed Additional Rent payable by Sublessee to Sublessor upon demand,
together with interest thereon at the interest rate provided in Section
20.14 of the Master Lease.
10. Insurance. Sublessee shall obtain and maintain in full force and effect
---------
during the entire term of this Sublease the insurance coverage described in
Section 11.1 of the Master Lease. Sublessee shall name Sublessor as an
additional insured under the required insurance policies. Prior to
occupancy of the Sublease Premises, Sublessee shall deliver to Sublessor
and to Master Lessor certificate of insurance evidencing the required
coverage. The waivers of rights of recovery and subordination set forth in
Paragraph 11.3 of the Master Lease shall be deemed a three party agreement
binding among and inuring to the benefit of Sublessor, Sublessee and Master
Lessor.
11. Assignment and Subletting.
-------------------------
11.1 Restriction on Assignment and Subletting. Sublessee shall not assign,
----------------------------------------
sublease, transfer or encumber this Sublease or any interest therein or
grant any license, concession or other right of occupancy of the Sublease
Premises or any portion thereof or otherwise permit the use of the Sublease
Premises or any portion thereof by any party other than Sublessee (any of
which events is hereinafter called a "Transfer") without the prior written
consent of the Master Lessor pursuant to Section 14 of the Master Lease and
the Sublessor, which consent of Sublessor shall not be unreasonably
withheld or delayed. Sublessor's consent shall be considered reasonably
withheld if (i) the proposed transferee is determined by Sublessor to not
be financially sound applying generally accepted accounting principles in
making such determination; (ii) Sublessee is, either at the time of the
request or as of the effective date of the proposed Transfer, in default
hereunder; or (iii) any portion of the Sublease Premises would become
subject to additional or different governmental laws or regulations as a
consequence of the proposed Transfer and/or the proposed transferee's use
and occupancy of the Sublease Premises and/or which impose significant
financial burden on Sublessor as a result thereof. Sublessee acknowledges
that the foregoing is not intended to be an exclusive list of the reasons
for which Sublessor may reasonably withhold its consent to a proposed
Transfer.
11.2 Permitted Transfers. Notwithstanding the provisions of Subparagraph 11.1,
-------------------
above, Sublessee shall be permitted the rights of assignment or subletting
described in Section 14.1E of the Master Lease (the "Permitted Transfers")
provided that (i) Sublessee gives written notice to Sublessor at least ten
(10) business days prior to such proposed Transfer, together with
substantiation that the proposed Transfer qualifies for the exemption set
forth in Section 14.1E of the Master Lease; (ii) the proposed transferee
delivers to Sublessor concurrent with any such assignment or subletting an
assumption agreement whereby the proposed transferee assumes and agrees to
perform, observe and
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abide by the terms, conditions, obligations and provisions of the Sublease;
and (iii) in the case of a proposed Transfer to an affiliate, the entity
status is not established as a subterfuge in an attempt to avoid the
provisions of this Sublease respecting assignment and subletting.
11.3 Required Notice. If Sublessee requests Sublessor's consent to a Transfer,
---------------
Sublease shall, together with such request, provide Sublessor with the name
of the proposed transferee and the nature of the business of the proposed
transferee, the term, use, rental rate and all other material terms and
conditions of the proposed Transfer, including, without limitation, a copy
of the proposed assignment, sublease or other contractual documents, and
evidence satisfactory to Sublessor that the proposed transferee is
financially sound. Sublessor shall, within ten (10) business days after
its receipt of all information and documentation required herein, by
written notice to Sublessee, consent to or refuse to consent to such
Transfer. If Sublessor consents to any such Transfer, the Transfer and
consent thereto shall be in a form reasonably approved by Sublessor, and
Sublessee shall reimburse Sublessor for all actual costs and expenses
incurred by Sublessor in connection with the review and approval of such
assignment or sublease documentation, including reasonable legal fees for
review of Sublessee's proposed Transfer documents not to exceed One
Thousand Dollars ($1,000).
11.4 Bonus Rent. If Sublessor consents to any Transfer pursuant to this
----------
Section 11, then Sublessee may, within one hundred twenty (120) days
thereafter, enter into such Transfer, upon the terms and conditions set
forth in the notice furnished to Sublessee pursuant to Subparagraph 11.3
above. Fifty percent (50%) of any rent or other consideration realized by
Sublessee under any such Transfer (the "Transfer Consideration") in excess
of the Rent payable hereunder (or the amount thereof proportionate to the
portion of the Sublease Premises subject to such sublease or assignment)
shall be paid to Sublessor, after deducting therefrom all actual costs and
reasonable expenses incurred by Sublessee to effect the Transfer including
but not limited to rent concessions, tenant improvements (amortized over
the sub-sublease term) advertising costs, any customary broker's
commissions and reasonable attorneys' fees, amortized on a straight line
basis (without interest) over the term of the Transfer. Sublessee hereby
covenants and agrees to pay the Transfer Consideration to Sublessor
promptly upon receipt thereof by Sublessee, but in no event more than ten
(10) days after receipt thereof.
11.5 Effect of Transfer. Any Transfer consented to by Sublessor in accordance
------------------
with this Section 11 shall be only for the use permitted by Section 5.1 of
the Master Lease and for no other purpose. In no event shall any Transfer
release or relieve Sublessee or any Guarantor from any obligations under
this Sublease. Any attempted Transfer in violation of the terms of this
Paragraph 9 shall, at Sublessor's option, be void. Consent by Sublessor to
one or more Transfers shall not operate as a waiver of Sublessor's rights
as to any subsequent Transfers.
12. Sublessor's Representations, Warranties and Covenants. Sublessor hereby
-----------------------------------------------------
represents and warrants to Sublessee that, as of the Commencement Date, (i)
the document attached as
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Exhibit "A," hereto is a true, correct and complete copy of the Master
Lease, and that the Master Lease represents the entire agreement between
Sublessor and Master Lessor with respect to the Sublease Premises, (ii) to
the best knowledge of Sublessor, there is no default or any condition which
with the passage of time or the giving of notice or both would constitute a
default on the part of either party to the Master Lease, (iii) Sublessor
has not assigned, encumbered or otherwise transferred any of its interest
under the Master Lease with respect to the Sublease Premises, (iv) the
Expiration Date of the Master Lease is December 31, 2002, (v) there are no
third party consents required with respect to this Sublease other than the
consent of Master Lessor, and (vi) Sublessor has duly authorized this
Sublease.
13. Amendments to Master Lease. Sublessor agrees that it shall not, without
--------------------------
the prior written consent of Sublessee, which consent shall not be
unreasonably withheld or delayed, enter into any amendment to the Master
Lease which prevents or materially adversely affects the use by Sublessee
of the Sublease Premises in accordance with the terms of this Sublease,
materially increases the obligations of Sublessee under this Sublease, or
materially decreases Sublessee's rights under this Sublease.
14. Miscellaneous.
-------------
14.1 Attorneys' Fees. If either Sublessor or Sublessee brings any action or
---------------
proceeding, whether legal, equitable or administrative, to enforce rights
and obligations under this Sublease, or to declare rights hereunder, the
prevailing party in any such action or proceeding shall be entitled to
recover from the other party reasonable attorneys' fees and costs of suit,
in addition to any other relief allowed by the court.
14.2 Brokers. The parties agree that they have dealt with no real estate
-------
broker in connection with this Sublease other than Cornish and Carey, and
they agree to indemnify and hold each other harmless from and against any
damage or expense incurred by reason of any other broker claiming a right
to any commission or compensation as a result of its dealings with the
indemnifying party. Sublessor shall pay all brokerage commissions in
connection with this Sublease.
14.3 Authority to Execute. Sublessee and Sublessor each represent and warrant
--------------------
to the other that the person(s) executing this Sublease on behalf of each
party is (are) duly authorized to execute and deliver this Sublease on that
party's behalf.
14.4 Notices. Any notice required or permitted to be given under this
-------
Sublease, including any change of address for purpose of giving notice,
shall be in writing, and shall be given as provided in Section 20.16 of the
Master Lease.
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For purposes of this Sublease, the addresses of the parties are set forth
below:
If to Sublessor:
---------------
Apple Computer, Inc.
1 Infinite Loop
Mail Stop 35-AOK
Cupertino, CA 95014
Attention: Real Estate Department
With copies of default notices only to:
--------------------------------------
Apple Computer, Inc.
1 Infinite Loop
Cupertino, CA 95014
Attention: General Counsel/esm
If to Sublessee:
---------------
Extreme Networks, Inc.
3585 Monroe Street
Santa Clara, CA 95051
Attention: Chief Financial Officer
14.5 Incorporation of Prior Agreements. This Sublease incorporates all
---------------------------------
agreements of the parties with respect to the subject matter hereof, and
supersedes all prior agreements and understandings of the parties, whether
oral or written.
14.6 Modifications, This Sublease may be modified or amended only by an
-------------
instrument in writing, executed by both parties in interest hereunder.
14.7 Governing Law; Severability. This Sublease shall be governed by and
---------------------------
construed in accordance with the laws of the State of California. If any
term or provision of this Sublease is found by a court of competent
jurisdiction to be void or unenforceable, such term or provision shall be
deemed severed from the remainder of the terms and provisions of this
Sublease, and said remainder shall remain in full force and effect,
according to its terms, to the extent permitted by law.
14.8 Parking. Subject to the provisions of Section 18.1 of the Master Lease,
-------
Sublessee shall have the non-exclusive right, at no additional cost, to use
all parking spaces located in the Outside Area as shown on Exhibit "D"
attached hereto. Sublessor has counted Two Hundred and Fifty (250) actual
existing parking spaces in the Outside Area for the Sublease Premises. In
order to provided Sublessee with an additional thirteen (13) parking
spaces, as requested by Sublessee, Sublessor shall, at no cost to
Sublessee, remove the basketball area, the raised concrete slab and the
bike lockers, and shall
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restripe the motorcycle parking area for compact parking. In addition the
parking spaces in front of the Building shall marked as designated for use
by Sublessee's visitors.
14.9 Hazardous Materials. Attached hereto as Exhibit "E" is an environmental
-------------------
report prepared by Kennedy/Jenks Consultants with respect to the Sublease
Premises. Other than the information contained in such report, Sublessor
represents and warrants that it has not received any written notice of the
release or disposal of any Hazardous Materials on or about the Sublease
Premises in violation of any Hazardous Materials Laws. Sublessor
represents and warrants that it has not released or disposed of any
Hazardous Materials on or about the Sublease Premises in violation of
Hazardous Materials Laws. Except as otherwise provided herein and except
for the foregoing representation, Sublessor makes no representation or
warranty of any kind whatsoever with respect to any Hazardous Materials on
or about the Premises. Sublessor hereby agrees to indemnify and hold
harmless Sublessee from and against any and all claims, liabilities,
losses, damages, penalties and expenses (including reasonable attorneys'
fees) incurred by Sublessee arising out of, from or in connection with
Sublessor's breach of this provision and any release of hazardous
materials or toxic substances and wastes in the Sublease Premises
(including the land thereunder) attributable to the acts or omissions of
Sublessor.
14.10 Signage. Sublessee's signage rights shall be subject to the provisions
-------
of Section 20.12 of the Master Lease, as amended hereby. If requested by
Sublessee, Sublessor shall work with Sublessee to prepare a signage
program for submittal to Master Landlord, provided however that (i)
Sublessor shall have no responsibility or obligation whatsoever if Master
Landlord rejects all or any portion of any such signage program or
requires changes to any such program, and (ii) Sublessor shall bear no
expense or cost whatsoever with respect to any signage installed by
Sublessee in on or about the Premises and/or the Sublease Premises.
14.11 Subordination; Nondisturbance Agreement. Prior to the Commencement Date,
---------------------------------------
Sublessor shall request from Master Lessor a nondisturbance agreement from
Master Lessor's lender which is reasonably acceptable to Sublessee, and
Sublessor shall use reasonable efforts to obtain the same from Master
Lessor; provided, however, that Sublessee's receipt of a non-disturbance
agreement from Master Lessor's lender shall not be a condition to the
effectiveness of this Sublease.
14.12 Exhibits. Subject to the terms hereof, all exhibits attached hereto are
--------
incorporated herein and are as follows: Exhibit "A" (Master Lease);
Exhibit "B" (plat of Sublease Premises), Exhibit "C" (form of Confirmation
of Commencement Date Agreement), Exhibit "D" (plat of the Parking Area),
and Exhibit "E" (environmental report), Exhibit "F" (form of Letter of
Credit), and Exhibit "G" ( Sublessee's Improvements).
15. Effectiveness; Consent of Master Landlord. This Sublease shall be of no
-----------------------------------------
force or effect unless and until the Master Lessor has executed and
delivered to Sublessee and Sublessor a fully executed consent to this
Sublease, which the parties will pursue promptly and in good faith,
provided such consent shall be obtained no later than twenty-one (21) days
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<PAGE>
following execution of this Sublease or this Sublease shall be void and
have no further force or effect.
16. Counterparts. This Sublease may be executed in any number of counterparts,
------------
each of which shall be deemed an original, and when taken together they
shall constitute one and the same sublease.
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease on
the dates set forth below, to be effective as of the date first set forth above.
SUBLESSOR SUBLESSEE
- --------- ---------
APPLE COMPUTER, INC. EXTREME NETWORKS, INC.
By: /s/ Fred D. Anderson By: /s/ William Kelly
----------------------------------- --------------------------
Its: Executive Vice President and Chief Its: Vice President of
----------------------------------- --------------------------
Financial Officer Corporate Development
----------------------------------- --------------------------
Date: 2/4/99 Date: 2/2/99
--------------------------------- -------------------------
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 3, 1999 with respect to the consolidated financial statements of
Extreme Networks, Inc. included in the Registration Statement on Form S-1
(Amendment No.1), and related Prospectus of Extreme Networks, Inc. for the
registration of shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
March 9, 1999
