As filed with the Securities and Exchange Commission on October 7, 1999
Registration No. 333-88081
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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
incorporation or Classification No.)
organization) Number)
3585 Monroe Street
Santa Clara, California 95051-1450
(408) 579-2800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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Gordon L. Stitt
President and Chief Executive Officer
Extreme Networks, Inc.
3585 Monroe Street
Santa Clara, California 95051-1450
(408) 579-2800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
J. Howard Clowes, Esq. Jeffery D. Saper, Esq.
David A. Hubb, Esq. J. Robert Suffoletta, Esq.
Andrew M. Jacobson, 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
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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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. [_]
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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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EXPLANATORY NOTE
This registration statement contains two forms of prospectus. The first
follows immediately after this explanatory note and relates to a public
offering in the United States and Canada of an aggregate of 5,200,000 shares
of the common stock of Extreme Networks, Inc. (6,175,000 shares if the over-
allotment option described in such prospectus is exercised in full) being
offered by Extreme and certain of its stockholders. The second prospectus
relates to a concurrent offering outside the United States and Canada of an
aggregate of 1,300,000 shares of common stock. The prospectuses for each of
the U.S. offering and the international offering will be identical with the
exception of an alternative front cover page for the international offering.
This alternative page appears in this registration statement immediately
following the complete prospectus for the U.S. offering and is labeled
"Alternate Cover Page for International Prospectus."
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 October , 1999
6,500,000 Shares
[LOGO OF EXTREME NETWORKS APPEARS HERE]
COMMON STOCK
-----------
Extreme Networks, Inc. is offering 1,275,000 shares and the selling
stockholders are offering 5,225,000 shares.
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Our common stock is quoted on the Nasdaq National Market under the symbol
"EXTR." On October 6, 1999, the reported last sale price of our common stock on
the Nasdaq National Market was $71 7/8 per share.
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 6.
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PRICE $ A SHARE
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Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Extreme Stockholders
-------- ------------- ----------- ------------
Per
Share.... $ $ $ $
Total..... $ $ $ $
Extreme has granted the U.S. underwriters the right to purchase up to an
additional 975,000 shares to cover over-allotments.
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.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 1999.
-----------
MORGAN STANLEY DEAN WITTER
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
ROBERTSON STEPHENS
HAMBRECHT & QUIST
SG COWEN
THOMAS WEISEL PARTNERS LLC
October , 1999
TABLE OF CONTENTS
Page
----
Prospectus Summary.................. 3
Risk Factors........................ 6
Use of Proceeds..................... 18
Dividend Policy..................... 18
Price Range of Common Stock......... 18
Capitalization...................... 19
Dilution............................ 20
Selected Consolidated Financial
Data............................... 21
Management's Discussion and Analysis
of Financial Condition and
Operating Results.................. 22
Business............................ 30
Page
----
Management.......................... 44
Certain Transactions................ 52
Principal and Selling Stockholders.. 53
Description of Capital Stock........ 56
Shares Eligible for Future Sale..... 59
Certain United States Federal Tax
Considerations for Non-United
States Holders..................... 61
Underwriters........................ 63
Legal Matters....................... 65
Experts............................. 65
Where You Can Find More
Information........................ 65
Index to Consolidated Financial
Statements......................... F-1
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.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession
or distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to
inform yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus.
2
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 financial statements and notes thereto appearing elsewhere in
this prospectus.
Extreme Networks is a leading provider of a next generation of network
switching solutions that meet the increasing needs of enterprise local area
networks, or LANs, service providers and content providers. The key advantages
of our solutions are increased performance, the ability to easily grow, or
"scale," in size as customer needs change, flexible allocation of network
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 network 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, a characteristic known as "non-
blocking." The Dell'Oro Group, a research and consulting firm, estimates in an
independently prepared market report dated July 1999, that the market for Layer
3 switching totaled $637 million in 1998 and is expected to increase to
approximately $3.8 billion in 2001.
The increased use of data and multi-media intensive, mission-critical
applications, the widespread implementation of various kinds of enterprise-wide
networks, and the ubiquity of Internet technologies have burdened the network
infrastructure with unpredictable traffic patterns and traffic loads. To
address the need to improve network performance, new and faster technologies
employing multiple hardware and software protocols were developed. These
multiple protocols caused networks 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 microprocessors. 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 traffic is high. Our switches also meet the needs of
enterprises, service providers and content providers who are building Internet
Protocol based networks to provide their customers with applications such as
telephony, e-commerce and multimedia.
Our Summit stackable and BlackDiamond modular product families provide end-
to-end networking solutions that meet the requirements of today's enterprises,
service providers and content providers. 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 network 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 networks 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.
3
. Lower cost of ownership: Our products are less expensive than software-
based routers, yet offer higher routing performance.
We sell our products through domestic and international resellers and field
sales. We have entered into agreements with more than 130 resellers in 40
countries, and we have established key 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 Delaware. Our executive offices are
located at 3585 Monroe Street, Santa Clara, California 95051-1450 and our
telephone number is (408) 579-2800.
Recent Developments
On August 30, 1999, we signed a strategic agreement with F5 Networks, Inc.,
a leading provider of Internet traffic management products, which allows us to
integrate F5's BIG/ip Controller Layer 4 server load balancing source code into
our switching solutions. Under to the terms of this agreement, we have access
to F5's Layer 4 through Layer 7 products for resale. We believe that this
agreement will enable us to offer integrated wire-speed Layer 4 switching over
Gigabit Ethernet for high performance server connectivity. We anticipate
shipment of products incorporating this new technology to begin in the fourth
quarter of this calendar year.
On September 14, 1999, we introduced a new class of Gigabit switch, the
Summit7i Internet Data Center Switch, which we expect to begin shipping in the
fourth quarter of this calendar year. We believe the Summit7i, which is
currently in beta release, will address server co-location problems faced by
enterprise and service providers, including increasing server performance. The
Summit7i combines the integrated co-location services that businesses require
into a single switching system. The Summit7i simultaneously performs non-
blocking wire-speed gigabit Layer 4 server load balancing with policy-based
quality of service. We believe the Summit7i is the first switch to offer 32
Gigabit Ethernet ports and 48 million packets-per-second throughput in a seven
inch stackable format.
4
THE OFFERING
Common stock offered:
United States offering.. 5,200,000 shares
International offering.. 1,300,000 shares
Total................. 6,500,000 shares
Shares offered by us.... 1,275,000 shares
Shares offered by the
selling stockholders... 5,225,000 shares
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Total................. 6,500,000 shares
Common stock to be
outstanding after this
offering ................ 50,620,230 shares
Over-allotment option..... 975,000 shares
Use of proceeds........... We intend to use the proceeds for general corporate
purposes, including working capital and capital
expenditures.
Nasdaq National Market
symbol................... EXTR
The foregoing information is based upon shares outstanding as of June 30,
1999 and excludes shares which may be issued upon the exercise of options.
Unless otherwise indicated, all information in this prospectus (1) assumes no
exercise of the underwriters' over-allotment option and (2) assumes no exercise
of outstanding warrants to purchase 230,398 shares of our common stock.
SUMMARY CONSOLIDATED FINANCIAL DATA
The "as adjusted" column below reflects the issuance and sale of 1,275,000
shares of our common stock offered by us based on an assumed public offering
price of $71 7/8 per share and the application of the net proceeds which we
receive from the offering, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, as set forth under
"Use of Proceeds."
For the Period Year Ended June
from May 8, 1996 30,
(Date of Inception) -----------------
through June 30, 1997 1998 1999
--------------------- -------- -------
(in thousands, except per share data)
Consolidated Statement of Operations
Data:
Net revenue........................... $ 256 $ 23,579 $98,026
Gross profit (loss)................... (132) 8,682 49,506
Total operating expenses.............. 7,928 22,709 50,951
Operating loss........................ (8,060) (14,027) (1,445)
Net loss.............................. (7,923) (13,936) (1,617)
Basic and diluted net loss per share.. $ (4.51) $ (3.18) $ (.17)
Weighted average shares outstanding
used in computing basic
and diluted net loss per share....... 1,758 4,379 9,462
Pro forma basic and diluted net loss
per share (unaudited)................ $ (.44) $ (.04)
Shares used in computing pro forma
basic and diluted net loss per share
(unaudited).......................... 31,701 38,523
As of June 30,
1999
-----------------
As
Actual Adjusted
-------- --------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents.................................... $107,143 $193,991
Working capital.............................................. 119,039 205,887
Total assets................................................. 171,803 258,651
Total stockholders' equity................................... 141,876 228,724
5
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones facing
our company. Additional risks not presently known to us or that we currently
deem immaterial may also impair our business operations.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. The trading price of our
common stock could decline due to any of these risks, and you may lose all or
part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. 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.
Extreme Has a General History of Losses, and Limited History of Profitability
and Cannot Assure You that it Will Continue to Achieve Profitability
We have not achieved profitability on an annual basis and although our
revenue has grown in recent quarters, we cannot be certain that we will
realize sufficient revenue to achieve profitability on an annual basis.
Extreme has incurred net losses of $7.9 million from inception through June
30, 1997, $13.9 million for fiscal 1998 and $1.6 million for fiscal 1999. As
of June 30, 1999, we had an accumulated deficit of $23.5 million. 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 sustain profitability.
Although our revenues have grown in recent quarters and we have recently
achieved quarterly profitability, we cannot be certain that we will continue
to realize sufficient revenue to 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 these 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 and Europe;
. 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;
6
. our ability to develop and support customer relationships with service
providers and other potential large customers;
. 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.
Intense Competition in the Market for Networking Equipment Could Prevent
Extreme From Increasing Revenue and Prevent Extreme From Sustaining
Profitability
The market for network switches is intensely competitive. Our principal
competitors include Alcatel, Cabletron Systems, Cisco Systems, Foundry
Networks, Lucent Technologies, Nokia, Nortel Networks and 3Com. 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 network 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, including, for example, competitive products manufactured with
low cost merchant silicon, 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 network 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 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.
7
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 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 switching 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. For example,
this fiscal year we expect to ship new products that will incoporate a new
chipset we are currently developing. We cannot assure you that these new
products will be commercially successful. 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 and Will Require
Extreme to Incur Costs to Upgrade Its Infrastructure
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,
which may result in unanticipated fluctuations in our operating results. Our
net revenue increased significantly during the last year, and from June 30,
1998 to June 30, 1999, the number of our employees increased from 119 to 249.
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. To accommodate this anticipated growth, we will be required to:
. improve existing and implement new operational, information 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, which we plan to continue to modify and improve
to meet the increasing needs associated with our expected growth. 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, as 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.
8
Extreme Must Develop and Expand Its Indirect Distribution Channels to Increase
Revenues and Improve Its Operating Results
Our distribution strategy focuses primarily on developing and expanding
indirect distribution channels through resellers and, to a lesser extent,
original equipment manufacturers, or OEMs, as well as expanding our field
sales organization. If we fail to 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 in Europe and
the United States which has and will require us to enter into agreements with
a small number of stocking distributors. We have recently entered into three
two-tier distribution agreements; however, we cannot assure you that we will
continue to be able to enter into additional distribution agreements or that
we will be able to successfully manage the transition of resellers to a two-
tier distribution channel. 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.
In addition, we need to continue to develop our field sales and support staff
to expand our direct sales efforts to service providers and content providers.
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
ability to grow and increase revenue.
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; Future Performance will Depend on the Introduction and
Acceptance of New 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 switching products,
and Gigabit Ethernet and Layer 3 switching technologies in particular in the
enterprise, service provider and content provider markets, 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. We are
developing products which we expect to introduce this fiscal year which are
based on a new chip set under development. The introduction of new and
enhanced products may cause our 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 may significantly impair our
revenue growth.
If a Key Reseller, OEM or Other Significant Customer Cancels or Delays a Large
Purchase, Extreme's Revenues May Decline and the Price of Its Stock May Fall
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,
9
respectively, and for fiscal 1999, Compaq and Hitachi Cable accounted for 21%
and 13% of our net revenue, respectively. Compaq is both an OEM and an end-
user and a 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 harm 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.
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 ISP and enterprise network 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 negatively 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 harm our operating results.
Extreme Purchases Several Key Components for Products From Single or Limited
Sources and Could Lose Sales if These 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. Certain components such as gigabit interface
converter transceivers, or GBICs, have been and may in the future be in short
supply. While we have been able to meet our needs to date, we are likely to
encounter shortages and delays in obtaining these
10
or other 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.
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.
11
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 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 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 these
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 or Its Products May Not Be Widely Accepted, Which May
Prevent Extreme From Sustaining Its Revenues or Achieving Profitability
The market for network 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, which may prevent us from
sustaining our revenues or achieving profitability.
Extreme Needs to Expand Its Sales and Support Organizations to Increase Market
Acceptance of Its Products and If It Fails to Do So, Extreme Will Not Be Able
to Increase Revenues
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
12
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 particularly for large service providers and enterprise
network customers. 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 accounted
for approximately 61% and 53% of our net revenue in fiscal 1998 and 1999,
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;
. payment of operating expenses in local currencies, which subjects us to
risks of currency fluctuations;
. 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 which will subject us to fluctuations in exchange rates between the
U.S. dollar and the particular local currency. If we do so, we may determine
to engage in hedging transactions to minimize the risk of such fluctuations.
However, if we are not successful in managing such hedging transactions, we
could incur losses from hedging activities. 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 review acquisition and strategic
investment 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 are reviewing
investments in new businesses and we may acquire businesses, products or
technologies in the future. In the event of any future acquisitions, we could:
. issue equity securities which would dilute current stockholders'
percentage ownership;
. incur substantial debt; or
. assume contingent liabilities.
13
These actions by us could materially adversely affect our operating results
and/or the price of our common stock. Acquisitions and investment activities
also entail numerous risks, including:
. difficulties in the assimilation of acquired operations, technologies or
products;
. unanticipated costs associated with the acquisition or investment
transaction;
. 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.
Extreme May Need Additional Capital to Fund Its Future Operations Which, If It
Is Not Available When Needed, Extreme May Need to Reduce Its Planned
Development and Marketing Efforts, Which May Reduce Its Revenues and Prevent
Extreme From Achieving Profitability
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
our reseller and distribution channels and associated support personnel is
expected to require a significant commitment of resources. In addition, if the
market for Layer 3 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 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 may have 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 harm 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.
14
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.
If Extreme or Its Key Suppliers and Customers Fail to Be Year 2000 Compliant,
Extreme's Business May Be Severely Disrupted and Its Revenues May Decline
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 conducting an inventory and evaluation of the information systems
used to run our business. Systems which have been and may be identified as
non-compliant have been or 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 are checking the websites of our suppliers 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.
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.
15
Because Extreme's Management Has Broad Discretion Over How the Proceeds of
This Offering Are Used, Its Investment of the Net Proceeds May Not Yield a
Favorable Return
Our management may spend the net proceeds we receive 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 46.7% 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 46.7% 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.
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 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 6,500,000 shares sold in
this offering will be freely tradeable, and 27,822,000 of the remaining
44,120,230 shares outstanding, based on the number of shares outstanding as of
June 30, 1999, are subject to "lock-up" agreements. Substantially all of these
shares will be freely tradable under Rule 144 of the Securities Act 91 days
after the date of this prospectus. For more information, see "Shares Eligible
for Future Sale."
Extreme's Stock Price Has Been Extremely Volatile and You May Not Be Able to
Resell Your Shares at or Above the Offering Price
You may not be able to resell your shares at or above the 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;
16
. announcements of technological innovations; and
. the operating and stock price performance of other comparable companies.
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.
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 a number of 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
USE OF PROCEEDS
The net proceeds to Extreme from the sale of 1,275,000 shares of common
stock offered by us in this offering are estimated to be $86.8 million, or
$153.6 million if the underwriters exercise their over-allotment option in
full, based on an assumed public offering price of $71 7/8 per share and after
deducting estimated underwriting discounts and commissions, and estimated
offering expenses of $440,000 payable by Extreme. We will not receive any
proceeds from the sale of shares by the selling stockholders.
Extreme will use the net proceeds for general corporate purposes, including
capital expenditures and working capital. 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.
PRICE RANGE OF COMMON STOCK
Our common stock has traded on the Nasdaq National Market under the symbol
"EXTR" since April 9, 1999. The following table sets forth, for the periods
indicated, the high and low bid quotations for the common stock as reported by
the Nasdaq National Market.
Common
Stock Price
----------------
High Low
------- --------
Fiscal Year Ended June 30, 1999
Fourth Quarter......................................... $59 $35 1/16
Fiscal Year Ended June 30, 2000
First Quarter ......................................... 90 1/4 45 5/8
Second Quarter (through October 6, 1999)............... 71 7/8 59 3/4
On October 6, 1999, the reported last sale price on the Nasdaq National
Market for our common stock was $71 7/8 per share.
18
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis; and
. on an as adjusted basis to reflect the sale of the 1,275,000 shares
of common stock offered by us in this offering and the receipt of
the net proceeds from the sale of the common stock at an assumed
public offering price of $71 7/8, after deducting the estimated
expenses and estimated 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.
June 30, 1999
------------------------------------
Actual As Adjusted
---------------- ------------------
(in thousands except share data)
Stockholders' equity:
Preferred stock, $.001 par value,
2,000,000 shares authorized, none
issued and outstanding................. $ -- $ --
Common stock, $.001 par value:
150,000,000 shares authorized;
49,345,230 shares issued and
outstanding actual; 50,620,230 issued
and outstanding as adjusted(1)......... 49 51
Additional paid-in capital.............. 165,618 252,464
Deferred stock compensation............. (197) (197)
Accumulated other comprehensive loss.... (118) (118)
Accumulated deficit..................... (23,476) (23,476)
---------------- ----------------
Total stockholders' equity............ 141,876 228,724
---------------- ----------------
Total capitalization................ $ 141,876 $ 228,724
================ ================
- --------
(1) Excludes 4,878,767 shares of common stock issuable upon exercise of
outstanding options at June 30, 1999 at a weighted average exercise price
of $6.08 per share and 230,398 shares of common stock issuable upon
exercise of outstanding warrants at a weighted average exercise price of
$11.33 per share. See "Management--Amended 1996 Stock Option Plan."
19
DILUTION
Our net tangible book value as of June 30, 1999 was approximately $141.9
million or $2.88 per share. 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.
After giving effect to the sale by Extreme of the 1,275,000 shares of common
stock offered by this prospectus and receipt of the estimated net proceeds
from this offering, our adjusted net tangible book value as of June 30, 1999
would have been approximately $228.7 million or $4.52 per share. This
represents an immediate increase in such net tangible book value of $1.64 per
share to existing stockholders and an immediate dilution of $67.36 per share
to new investors. Dilution is determined by subtracting pro forma net tangible
book value per share after the offering from the assumed public offering price
per share. The following table illustrates this per share dilution.
Assumed public offering price per share........................... $71.88
Net tangible book value per share as of June 30, 1999........... $2.88
Increase in net tangible book value per share attributable to
new investors.................................................. 1.64
-----
Net tangible book value per share after this offering............. 4.52
------
Dilution per share to new investors............................... $67.36
======
The following table sets forth as of June 30, 1999, 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, before deducting estimated underwriting
discounts and commissions and offering expenses payable by Extreme:
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
Existing stockholders......... 49,345,230 97.5% $166,678,000 64.5% $ 3.38
New investors................. 1,275,000 2.5 91,640,625 35.5 71.88
---------- ----- ------------ -----
Total....................... 50,620,230 100.0% $258,318,625 100.0%
========== ===== ============ =====
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 June 30, 1999. As of June 30, 1999, there
were outstanding options to purchase 4,878,767 shares of common stock at a
weighted average exercise price of $6.08 per share and warrants to purchase
230,398 shares of common stock at a weighted average exercise price of $11.33
per share. See "Management--Amended 1996 Stock Option Plan" and note 6 of
Notes to Consolidated Financial Statements.
20
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 fiscal years in the three
year period ended June 30, 1999. The selected consolidated financial data for
fiscal 1997, 1998 and 1999, are derived from the consolidated financial
statements of Extreme included elsewhere in this prospectus which were audited
by Ernst & Young LLP, independent auditors.
For the Period from Year Ended June
May 8, 1996 (Date of 30,
Inception) through ------------------
June 30, 1997 1998 1999
-------------------- -------- --------
(in thousands, except per share data)
Consolidated Statement of Operations
Data:
Net revenue........................... $ 256 $ 23,579 $ 98,026
Cost of revenue....................... 388 14,897 48,520
------- -------- --------
Gross profit (loss)................... (132) 8,682 49,506
Operating expenses:
Research and development............ 5,351 10,668 17,036
Selling and marketing............... 1,554 9,601 27,056
General and administrative.......... 1,023 2,440 6,859
------- -------- --------
Total operating expenses.......... 7,928 22,709 50,951
------- -------- --------
Operating loss........................ (8,060) (14,027) (1,445)
Interest income....................... 234 613 1,855
Interest expense...................... (79) (326) (398)
Other income (loss), net.............. (18) (196) 21
------- -------- --------
Income (loss) before income taxes..... (7,923) (13,936) 33
Provision for income taxes............ -- -- 1,650
------- -------- --------
Net loss.............................. $(7,923) $(13,936) $ (1,617)
======= ======== ========
Basic and diluted net loss per common
share................................ $ (4.51) $ (3.18) $ (.17)
======= ======== ========
Weighted average shares outstanding
used in computing basic and diluted
net loss per share(1)................ 1,758 4,379 9,462
======= ======== ========
Pro forma basic and diluted net loss
per share (unaudited)(1)............. $ (.44) $ (.04)
======== ========
Shares used in computing pro forma
basic and diluted net loss per share
(unaudited)(1)....................... 31,701 38,523
======== ========
As of June 30,
---------------------------------------
1997 1998 1999
------ -------- --------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents............. $10,047 $ 9,510 $107,143
Working capital....................... 8,251 13,796 119,039
Total assets.......................... 11,942 33,731 171,803
Long-term debt and capital lease
obligations, net of current portion.. 502 2,634 --
Total stockholders' equity............ 9,305 15,869 141,876
- -------
(1) See note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used to compute
per share amounts.
21
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 Summit 1 and
Summit 2, 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
June 30, 1999, we had an accumulated deficit of $23.5 million.
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. 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--If a Key
Reseller, OEM or Other Significant Customer Cancels or Delays a Large
Purchase, Extreme's Revenues May Decline and the Price of Its Stock May Fall."
Significant customer concentration in fiscal 1999 and fiscal 1998 as a
percentage of net revenue is summarized below:
Year
Ended
June 30,
----------
Customer 1998 1999
-------- ---- ----
3Com............................................................ 25% --
Compaq.......................................................... 21% 21%
Hitachi Cable................................................... -- 13%
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 130 resellers in 40 countries. In fiscal 1999, sales to
customers outside of North America accounted for approximately 53% 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,
promotional pricing 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, new product
introductions may 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 Santa Clara, California.
Accordingly, a significant portion of our cost of revenue consists of payments
to our contract
22
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.
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 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, increase spending on our information systems and incur
additional costs related to the growth of our business and operation as a
public company.
During fiscal 1998, in connection with the grant of certain stock options
to employees, we recorded deferred stock compensation of $437,000 representing
the difference between the exercise price and the deemed fair value of our
common stock on the date such stock options were granted. Such amount is
included as a reduction of stockholders' equity and is being amortized by
charges to operations on a graded vesting method. We recorded amortization of
deferred stock compensation expense of approximately $68,000 and $172,000 for
fiscal 1998 and fiscal 1999, respectively. At June 30, 1999, we had a total of
approximately $197,000 remaining to be amortized over the corresponding
vesting period of each respective option, generally four years. The
amortization expense relates to options awarded to employees in all operating
expense categories.
Despite growing revenues, we have only been profitable for the quarters
ended March 31, 1999 and June 30, 1999. 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." 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
Results of Operations
The following table sets forth for the years indicated certain financial
data as a percentage of net revenue:
Years Ended June
30,
-----------------------
1997 1998 1999
------- ----- -----
Net revenue........................................... 100.0 % 100.0 % 100.0 %
Cost of revenue....................................... 151.6 63.2 49.5
------- ----- -----
Gross profit (loss)................................... (51.6) 36.8 50.5
Operating expenses:
Research and development............................ 2090.2 45.2 17.4
Selling and marketing............................... 607.0 40.7 27.6
General and administrative.......................... 399.6 10.4 7.0
------- ----- -----
Total operating expenses.......................... 3096.8 96.3 52.0
------- ----- -----
Operating loss........................................ (3148.4) (59.5) (1.5)
Interest income....................................... 91.4 2.6 1.9
Interest expense...................................... (30.9) (1.4) (.4)
Other income (loss), net.............................. (7.0) (.8) --
------- ----- -----
Income (loss) before income taxes..................... (3094.9) (59.1) --
Provision for income taxes............................ -- -- (1.7)
------- ----- -----
Net loss.............................................. (3094.9)% (59.1)% (1.7)%
======= ===== =====
Fiscal Years Ended June 30, 1997, 1998 and 1999
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 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.
Net revenue increased from $23.6 million for fiscal 1998 to $98.0 million
for fiscal 1999, an increase of $74.4 million. The increase in net revenue for
fiscal 1999 resulted primarily from increased sales of our Summit stackable
products and the introduction of our BlackDiamond modular product family in
September 1998.
Export sales accounted for 61% and 53% of net revenue in fiscal 1998 and
fiscal 1999, respectively. The overall increase in export sales 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. We expect
that export sales will continue to represent a significant portion of net
revenue, although we cannot assure you that export sales as a percentage of
net revenue will remain at current levels. All sales transactions are
denominated in U.S. dollars.
Gross Profit. 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 $8.8 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.
Gross profit increased from $8.7 million for fiscal 1998 to $49.5 million
for fiscal 1999, an increase of $40.8 million. Gross margins increased from
36.8% for fiscal 1998 to 50.5% for fiscal 1999. The increase in gross margin
resulted primarily from reductions in component costs, improved manufacturing
efficiencies and a shift in our channel mix from OEMs to resellers, which were
offset in part by lower average selling prices due to increased competition.
24
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 fiscal 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.
Research and development expenses increased from $10.7 million for fiscal
1998 to $17.0 million for fiscal 1999, an increase of $6.3 million. The
increase was primarily due to nonrecurring engineering and initial product
verification expenses, 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 fiscal 1998 and fiscal 1999,
research and development expenses decreased as a percentage of net revenue
from 45.2% to 17.4%. 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. For fiscal
1997 and fiscal 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.
Selling and marketing expenses increased from $9.6 million for fiscal 1998
to $27.1 million for fiscal 1999, an increase of $17.5 million. This increase
was primarily due to the hiring of additional sales and customer support
personnel, tradeshow and promotional expenses, increased commission expenses
resulting from higher sales, and the establishment of new sales offices. For
fiscal 1998 and fiscal 1999, selling and marketing expenses decreased as a
percentage of net revenue from 40.7% to 27.6%. 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,
recruiting expenses, professional fees and increased spending on our
information systems. For fiscal 1997 and fiscal 1998, general and
administrative expenses decreased as a percentage of net revenue from 399.6%
to 10.4%. This percentage decrease was primarily the result of an increase in
our net revenue.
General and administrative expenses increased from $2.4 million for fiscal
1998 to $6.9 million for fiscal 1999, an increase of $4.5 million. This
increase was due primarily to the hiring of additional finance, information
technology and legal and administrative personnel, recruiting expenses,
professional fees and increased spending on information systems. For fiscal
1998 and fiscal 1999, general and administrative expenses decreased as a
percentage of net revenue from 10.4% to 7.0%. This percentage decrease was
primarily the result of an increase in our net revenue.
Interest Income. Interest income increased from $.6 million for fiscal 1998
to $1.9 million for fiscal 1999, an increase of $1.3 million. The increase is
due to the increased amount of cash and cash equivalents, short-term
investments and long-term investments from the net proceeds we received from
our initial public offering in April 1999.
Income Taxes. We incurred significant operating losses for all fiscal years
from inception through June 30, 1999. We recorded a tax provision of
$1,650,000 for the year ended June 30, 1999. The provision for income taxes
consists primarily of foreign taxes, federal alternative minimum taxes and
state income 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 as the future realization of the tax benefit is not sufficiently
assured. We intend to evaluate the realizability of the deferred tax assets on
a quarterly basis.
25
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increased from $20.5
million at June 30, 1998 to $123.6 million at June 30, 1999, an increase of
$103.1 million. The increase is primarily a result of our initial public
offering of common stock in April 1999, which generated net proceeds of $125.3
million. Cash provided by operating activities was $2.8 million in fiscal
1999, as compared to cash used for operating activities of $8.3 million in
fiscal 1998. The decrease was primarily due to increases in accounts
receivable, inventories and other current and noncurrent assets, offset by our
operating loss, depreciation and increases in accounts payable and accrued
liabilities. We expect that accounts receivable will continue to increase to
the extent our revenues continue to rise. We expect our inventory levels to
increase in connection with our development of a two-tier distribution system.
Any such increase can be expected to reduce cash, cash equivalents and short-
term investments.
Investing activities used cash of $29.1 million in fiscal 1999 due to
capital expenditures of $7.5 million and net purchases of short-term
investments of $21.6 million. Our investing activities used cash of $13.5
million in fiscal 1998 for purchases of short-term investments of $11.0
million, and capital expenditures of $2.5 million. Our investing activities
used cash of $1.2 million in fiscal 1997 for capital expenditures. We expect
capital expenditures of up to $20.0 million in fiscal 2000.
Financing activities provided cash of $124.0 million in fiscal 1999,
arising primarily from proceeds from the issuance of common stock in
conjunction with our initial public offering, partially offset by principal
payments on notes payable and capital lease obligations. Financing activities
provided cash of $21.2 million in fiscal 1998, primarily from the issuance of
convertible preferred stock and proceeds from notes payable, partially offset
by principal payments on notes payable and capital lease obligations.
Financing activities provided cash of $17.8 million in fiscal 1997, primarily
from the issuance of convertible preferred stock and proceeds from notes
payable.
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 June 30, 1999, 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. We were in compliance with the financial statement covenants as of
June 30, 1999. As of June 30, 1999, there were no outstanding borrowings under
this capital equipment line. In addition, we have a $2.0 million capital
equipment line with Comdisco, Inc. As of June 30, 1999, there were no
outstanding borrowings under this capital equipment line.
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.
We require substantial capital to fund our business, particularly to
finance inventories and accounts receivable and for capital expenditures. We
are working toward a business model that will allow us to consistently
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, these securities would have 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.
26
We believe that our current cash and cash equivalents, short-term
investments 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 program team has assessed 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 have identified and evaluated 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 to determine if they must be modified,
upgraded or replaced to minimize the possibility of a material disruption to
our business. We have commenced 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
may be affected by the year 2000 problem. To date, we have been able to
correct any problems with our systems other than information technology
systems relating to year 2000. We currently do not expect any significant
problems to arise with our systems other than information technology systems
relating to the year 2000.
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.
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
27
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 have developed contingency plans to be implemented if
our efforts to identify and correct year 2000 problems affecting our internal
systems are not effective. 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.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we have
invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate
later rises, the principal amount of our investment will probably decline. To
minimize this risk, we maintain our portfolio of cash equivalents and short-
term investments in a variety of securities, including commercial paper, other
28
non-government debt securities and money market funds. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. The following table
presents the amounts of our cash equivalents and short-term investment that
are subject to market risk by range of expected maturity and weighted-average
interest rates as of June 30, 1999. This table does not include money market
funds because those funds are not subject to market risk.
Maturing in
------------------------------------------------------
Three Months Three Months Greater than Fair
or Less to One Year One Year Total Value
------------ ------------ ------------ ------- -------
(in thousands)
Included in cash and cash equivalents.. $93,819 $ -- $ -- $93,819 $93,819
Weighted average interest rate........ 5.12%
Included in short-term investments..... -- 16,422 -- 16,422 16,422
Weighted average interest rate........ 5.04%
Included in investments................ -- 300 15,797 16,097 16,097
Weighted average interest rate........ 6.02% 6.36%
Exchange Rate Sensitivity
Currently, the majority of our sales and expenses are denominated in U.S.
dollars and as a result, we have experienced no significant foreign exchange
gains and losses to date. While we have conducted some transactions in foreign
currencies during the year ended June 30, 1999 and expect to continue to do
so, we do not anticipate that foreign exchange gains or losses will be
significant. We have not engaged in foreign currency hedging activities to
date, however, we may do so in the future.
29
BUSINESS
Overview
Extreme Networks is a leading provider of a next generation of switching
solutions that meet the increasing needs of enterprise local area networks, or
LANs, service providers and content providers. The key advantages of our Layer
3 switching solutions are increased performance, the ability to easily grow,
or "scale," in size as customer needs change, flexible allocation of network
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 network 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 network from the core to the desktop. The
Dell'Oro Group, a research and consulting firm, estimates in an independently
prepared market report dated July 1999, that the market for Layer 3 switching
totaled $637 million in 1998 and is expected to increase to approximately $3.8
billion in 2001.
Industry Background
Businesses and other organizations have become increasingly dependent on
networks 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 network infrastructure.
Today's Networking Environments
Networks have traditionally been designed for client/server applications,
where 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 corporate backbones
and service provider networks. 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. In addition,
as users utilize the desktop browser and Internet technologies to access
information on servers located inside an enterprise and externally from
content providers and service providers, a much higher percentage of traffic
crosses corporate backbones and service provider networks. For example, an
employee can make a simple request that may require data to be downloaded and
analyzed from multiple data warehouses at the enterprise or located at service
provider co-location facilities, resulting in increased traffic across the
corporate backbone. Similarly, multiple users could request a multimedia
presentation from a company intranet or from a content provider on the
Internet consuming tremendous amounts of network capacity. Either of these
situations could result in users overwhelming a network unknowingly. As a
result, the increased traffic, bandwidth-intensive applications and
unpredictable traffic patterns are straining enterprise, content provider and
service provider networks and reducing the performance of mission-critical
enterprise applications and web-based computing environments.
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
30
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
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 corporate backbone that
interconnects segments.
An enterprise, content provider or service provider network must be
scalable in the following four dimensions:
Speed. Speed refers to the number of bits per second that can be
transmitted across a network. Today's network 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 switching
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 users on the network. With today's data-intensive
applications accessed in random patterns from within and outside of the
network, 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 network. Today's networks 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 specific
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 specified 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, service provider and content provider networks by accommodating
unpredictable traffic patterns, bandwidth-intensive, mission-critical
applications and web-based
31
computing environments. First, while many new and different technologies have
been deployed in existing LANs, Ethernet has become the predominant
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
network backbone protocol, enabling 100 Mbps Fast Ethernet connections to the
desktop to be aggregated for network 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.
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 estimates in an independently
prepared July 1999 market report, that the market for Layer 3 switching
totaled $637 million in 1998 and is expected to increase to approximately $3.8
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 network 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, service provider
and content provider networks, customers 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, service providers and
content providers need a Layer 3 solution that provides sufficient bandwidth
to support unpredictable traffic spikes without impacting all other users and
servers connected to the network. In addition, enterprises, service providers
and content providers 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 networks, 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.
The Extreme Networks Solution
Extreme provides end-to-end network switching solutions that meet the
requirements of enterprises, service providers and content providers 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 Layer 3 switching at
wire speed in each of the desktop, segment, server and core areas of the
network. In addition, these products are utilized by service providers and
content providers for their web-hosting and server co-location operations.
Because our products are based on industry standard routing and network
management protocols, they are interoperable with existing network
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-
32
based Layer 3 switching. Using our products, enterprises, service providers
and content providers 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 network. Our standard-based products can be integrated
into and installed within existing enterprise, content provider and service
provider networks. Customers can upgrade with Extreme products without needing
additional training. ExtremeWare software simplifies network management by
enabling customers to manage any of our products remotely through a browser
interface.
Scalability. Our solutions offer enterprises, service providers and content
providers the speed and bandwidth they need today with the capability to scale
their networks to support demanding applications and traffic growth in the
future without the burden of additional training or software or system
complexity. Customers who purchase our products can upgrade them to advanced
Layer 3 capability because this functionality 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. Because they share a
common hardware, software and management architecture, we believe our products
can substantially reduce the cost and complexity of network management and
administration. This uniform architecture creates a simpler network
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 network
solutions to enterprises, service providers and content providers. The key
elements of our strategy include:
Provide easy to use, high-performance, cost-effective switching
solutions. We offer customers easy to use, powerful, cost-effective switching
solutions that meet the specific demands of switching environments in
enterprises, service providers and content providers. 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
enterprises, service providers and content providers. These products will
offer higher performance with more advanced functionality and features while
continuing to reduce total cost of ownership for our customers.
Expand market penetration. We are focused on product sales to new customers
across all of our existing market segments, including enterprises, service
providers and content providers, as well as new segments such as metropolitan
area networks, or MANs, and on extending our product penetration within our
existing customers' networks. Once a customer buys our products for one area
of their network, 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.
33
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
130 resellers in 40 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. 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 switching solutions that meet the requirements
of enterprise LANs, ISPs and content providers 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 Policy 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 Policy Manager
is an application suite that enables remote configuration and management of
multiple switches from a single network station.
34
The following table identifies our principal hardware products:
Product name
and date of Forwarding speed Per port
first shipment Configuration (packets per second) list price range
- ----------------------------------------------------------------------------------
The Summit Stackable product family
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Summit1 8 Gigabit Ethernet ports 11.9 million $1,500 to $3,000
October
1997
- ----------------------------------------------------------------------------------
Summit4 16 10/100 Mbps 11.3 million Ethernet:
March 1998 Ethernet ports $250 to $550
Gigabit Ethernet:
6 Gigabit Ethernet ports $1,400 to $3,000
- ----------------------------------------------------------------------------------
Summit48 48 10/100 Mbps 10.1 million Ethernet:
April 1998 Ethernet ports $140 to $250
Gigabit Ethernet:
2 Gigabit Ethernet ports $570 to $1,000
- ----------------------------------------------------------------------------------
Summit24 24 10/100 Mbps 5.1 million Ethernet:
November Ethernet ports $195 to $375
1998 Gigabit Ethernet:
1 Gigabit Ethernet port $785 to $1,500
- ----------------------------------------------------------------------------------
Summit Up to 64 Gbps of up to 48.0 million $1,125
Virtual bandwidth
Chassis
July 1998 8 SummitLink Channels
- ----------------------------------------------------------------------------------
The BlackDiamond Modular Chassis
- ----------------------------------------------------------------------------------
BlackDiamond Up to 256 10/100 Mbps 48.0 million Ethernet:
Chassis Ethernet ports or 48 $400 to $1,400
September Gigabit Ethernet ports in Gigabit Ethernet:
1998 one chassis $2,475 to $11,250
10 slots to accommodate
a variety of up to 8
connectivity modules and
1 or 2 management modules
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 effective so long as
the majority of traffic remains within the workgroup. As applications have
become more
35
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,
36
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 network, 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 basic Layer 3 version of ExtremeWare can be upgraded to advanced
Layer 3 via software that may be downloaded from the web.
ExtremeWare Policy Manager
ExtremeWare Policy Manager simplifies the task of managing and configuring
groups of our switches. With ExtremeWare Policy 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 LAN.
ExtremeWare Policy Manager can also manage centralized and distributed stacks
of Summit switches and the Summit Virtual Chassis as aggregated entities.
ExtremeWare Policy Manager can be accessed using any Java-enabled browser. The
ExtremeWare Policy Manager application and database support both Microsoft
Windows NT and Sun Microsystems' Solaris. The ExtremeWare Policy Manager
client can be launched from within the HP OpenView Network Node Manager
application. In May 1999, we introduced our Enterprise Policy System, a multi-
vendor policy system providing layer independent policy enforcement, address
mapping capability and multi-vendor support.
37
Customers
The following table is a partial list of customers that have purchased in
excess of $100,000 of our products since January 1, 1998:
Amoco Harbor-UCLA Medical Center Playboy
AT&T Hewlett-Packard Company PSINet
Barnes and Noble Honeywell Qwest
British Telecom IXNet Raytheon
Cable & Wireless (UK) Knight Securities Real Networks
Chiba Kougyou University Lockheed Martin Reuters
Compaq Microsoft Saudi Aramco Oil Company
Danish Post Mindspring Schlumberger
Dell Computer MIT Lincoln Labs Shell Oil
Digital Domain MSNBC Sun Microsystems
eToys Navistar Tandem Computers
Enron Corporation NVIDIA UC Riverside
Excite@Home Osaka Prefecture University U.S. Air Force
First Technology Credit Union Pennzoil Worldvision
In fiscal 1999, Compaq and Hitachi Cable accounted for 21% and 13%,
respectively, of our net revenue. Compaq is both an OEM and an end-user
customer. End-user sales to Compaq include sales to its subsidiaries, Tandem
and Digital.
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 130 resellers in 40 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 vertical markets and support a two-tier
distribution channel.
OEMs. We have established four key OEM relationships with leaders in the
telecommunications, personal computer and computer networking industries. For
fiscal 1999, sales to our OEMs accounted for 20% of our net revenue. Compaq,
which is both an OEM and an end-user customer, accounted for 21% of our net
revenue in fiscal 1999. 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.
38
As of June 30, 1999, Extreme's worldwide sales and marketing organization
included 116 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 France, Germany,
Hong Kong, Italy, Japan, The Netherlands, Sweden and the United Kingdom.
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 53% of our net revenue in fiscal
1999.
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 Santa Clara, 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.
39
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 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. While we do not believe that the recent earthquakes in Taiwan will
disrupt our supply of our single- or limited-sourced components, we cannot
assure you that this natural disaster will not interrupt or delay our ability
to procure components. 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 These 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 enterprises, service providers and content providers. We
monitor changing customer needs and work closely with users, value-added
resellers and distributors, and market research organizations to
40
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.
We are undertaking development efforts for our family of products with
emphasis on increasing reliability, performance and scalability and reducing
the overall network operating costs to end users. We are developing a new
chipset which will be compatible with our existing architecture. We expect to
ship new products that incorporate the new chipset in this fiscal year. 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 network switches is part of the broader market for
networking equipment, which is dominated by a few large companies,
particularly Cabletron Systems, Cisco Systems, Nortel and 3Com. Each of these
companies has introduced, or has announced its intention to develop, 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, Lucent Technologies, Nokia and Nortel Networks, which have
entered the market for network equipment, particularly through acquisitions of
public and privately held companies. For example, in January 1998, Lucent
acquired Prominet, a private switching company. We expect to face increased
competition, particularly price competition, from these and other
telecommunications equipment providers. We also expect to compete with other
public and private companies that offer switching solutions, such as Alteon
WebSystems and Foundry Networks. 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 enterprise or service
provider in networks.
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 Cabletron Systems, 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 large competitors have offered significant price
discounts to secure such sales.
We believe the principal competitive factors in the network switching
market are:
. expertise and familiarity with network protocols, network switching and
network management;
. product performance, features, functionality and reliability;
41
. 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.
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 Networking Equipment Could Prevent Extreme From
Increasing Revenue and Prevent Extreme From 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 been issued one patent in the U.S. We have filed twelve patent
applications in the U.S. and selected countries abroad 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. In particular, leading companies in the
data communications and networking markets have extensive patent portfolios
with respect to networking technology. From time to time, third parties,
including these leading companies, have asserted and may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies and related standards
42
that are important to us. We expect that we may increasingly be subject to
infringement claims as the numbers of products and competitors in the market
for network switches grow and the functionality of products overlaps. In this
regard, in February 1999, we received verbal communications from one of our
OEM customers that one of these companies believes that our products may
infringe patents pertaining to a Gigabit Ethernet industry standard, which
standard was developed by committees and includes contributions from numerous
parties. As such, it is not currently known whether a license is necessary;
however, if it is determined to be necessary, we believe that a license would
be made available in a timely and non-discriminatory manner and on reasonable
terms.
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, we cannot
assure you 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 June 30, 1999, we employed 249 persons, including 116 in sales and
marketing, 62 in research and development, 33 in operations and 38 in finance
and administration. We have never had a work stoppage and no 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 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 an approximately 77,000 square feet facility located
in Santa Clara, California which we moved to in March 1999. The Company
believes that suitable additional space will be available as needed to
accommodate any further physical expansion of corporate operations and for any
additional sales offices. We also lease office space in Connecticut, Florida,
Georgia, Illinois, Massachusetts, New Jersey, Texas, Washington, Washington
D.C. and Wisconsin and in Germany, Hong Kong, Japan, The Netherlands and the
United Kingdom.
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.
43
MANAGEMENT
Directors and Executive Officers
The following table sets forth information regarding the executive officers
and directors of Extreme as of August 31, 1999:
Name Age Position
- ---- --- --------
Gordon L. Stitt....... 43 President, Chief Executive Officer and Chairman
Stephen Haddock....... 41 Vice President and Chief Technical Officer
Herb Schneider........ 40 Vice President of Engineering
June Hull............. 44 Vice President of Human Resources
William Kelly......... 48 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............ 50 Vice President of Operations
Harry Silverglide..... 53 Vice President of Sales
Charles Carinalli(1).. 51 Director
Promod Haque(2)....... 51 Director
Lawrence K. Orr(2).... 42 Director
Peter Wolken(1)....... 65 Director
- --------
(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.
June Hull. Ms. Hull has served as Vice President of Human Resources since
September 1999. From October 1996 to August 1999, she served as Regional
Director of Human Resources and Corporate Director of Human Resources at
Netscape Communications, an e-commerce company. From April 1989 to September
1996, she served in a variety of senior Human Resource management positions
for Apple Computer, Inc.
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
44
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.
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 July 1999, Mr. Carinalli has been Chief Executive officer
and director of Adaptive Silicon, a developer of semiconductors. From December
1996 to July 1999, Mr. Carinalli served as 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.
45
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.
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.
46
Executive Compensation
The following table sets forth information concerning the compensation paid
to Extreme's Chief Executive Officer and each of Extreme's four other most
highly compensated executive officers (collectively, the "Named Executive
Officers") during fiscal 1998 and fiscal 1999:
Summary Compensation Table
Long Term
Annual Compensation Compensation
--------------------------------- -------------
Other Annual Awards Option
Name and Principal Position Year Salary Bonus Compensation Shares (1)
- --------------------------- ---- -------- ------ ------------ -------------
Gordon L. Stitt................ 1999 $164,167 $ -- (2) 200,000
President, Chief Executive
Officer and 1998 129,167 -- (2) --
Chairman
Stephen Haddock................ 1999 140,626 -- (2) 135,000
Vice President and Chief
Technical Officer 1998 117,500 -- (2) --
Paul Romeo..................... 1999 142,084 -- (2) 50,000
Vice President of Operations 1998 135,000 -- (2) --
Herb Schneider................. 1999 140,626 -- (2) 135,000
Vice President of Engineering 1998 117,500 -- (2) --
Harry Silverglide(3)........... 1999 150,000 32,125 $130,417 80,000
Vice President of Sales 1998 100,000 20,000 72,600 --
- --------
(1) These options were granted pursuant to our 1996 Stock Option Plan.
(2) Total amount of personal benefits paid to this executive officer during
the fiscal year was less than the lesser of $50,000 or 10% of such
executive officer's total reported salary and bonus.
(3) Other annual compensation amount related to commissions paid to Mr.
Silverglide based on total sales and account wins during the fiscal year.
47
Option Grants
The following table provides the specified information concerning grants of
options to purchase our common stock made during the fiscal year ended June
30, 1999 to the persons named in the Summary Compensation Table.
Stock Option Grants In Last Fiscal Year
Individual Grants in Fiscal 1999 Potential Realizable
----------------------------------------------- Value at Assumed Annual
Number % of Total Rates of Stock Price
of Securities Options Exercise Appreciation for Option
Name Underlying Granted to or Base Term(3)
- ---- Options Employees in Price(2) Expiration ------------------------
Granted(1) Fiscal Year Per Share Date 5%($) 10%($)
------------- ------------ --------- ---------- ------------ -----------
Gordon L. Stitt......... 200,000 7.1% $5.75 10/16/08 $ 22,265,366 $36,135,042
Stephen Haddock......... 135,000 4.8 5.75 10/16/08 15,029,122 24,391,153
Paul Romeo.............. 50,000 1.8 5.75 10/16/08 5,566,342 9,033,761
Herb Schneider.......... 135,000 4.8 5.75 10/16/08 15,029,122 24,391,153
Harry Silverglide....... 80,000 2.8 5.75 10/16/08 8,906,146 14,454,017
- --------
(1) Options granted in fiscal 1999 under our 1996 Stock Option Plan 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. Under the option plan, the board of directors retains
discretion to modify the terms, including the price of outstanding
options. We have a right of repurchase as to any unvested shares upon
optionee's termination of employment at their original exercise price. See
"--Change of Control Arrangements."
(2) All options were granted at fair market value on the date of grant.
(3) Potential realizable values are calculated based on the assumption that
the fair market value of the common stock at the date of grant is the
public offering price of $71 7/8, and are net of exercise price, but
before taxes associated with exercise. These amounts represent certain
assumed rates of appreciation only, in accordance with the Securities and
Exchange Commission's rules. Actual gains, if any, on stock option
exercises are dependent on the future performance of the common stock,
overall market conditions and the option holders' continued employment
through the vesting period. The amounts reflected in this table may not
necessarily be achieved.
48
Option Exercises and Holdings
The following table provides the specified information concerning exercises
of options to purchase our common stock in the fiscal year ended June 30, 1999
and unexercised options held as of June 30, 1999 by the persons named in the
Summary Compensation Table. A portion of the shares subject to these options
may not yet be vested and may be subject to repurchase by us at a price equal
to the option exercise price, if the corresponding options were exercised
before such shares had vested.
Fiscal Year-End Options
Value in Dollars of
Number of Securities Unexercised In-The-
Underlying Unexercised Money Options at
Options at 6/30/99 6/30/99
---------------------- ---------------------
Shares Acquired Value Exercisable(1)(2) Exercisable(2)
Name on Exercise Realized ($) Unexercisable(3) Unexercisable(4)
- ---- --------------- ------------- ---------------------- ---------------------
Gordon L. Stitt......... -- $ -- 33,333 166,667 $1,743,733 $8,718,768
Stephen Haddock......... -- -- 22,500 112,500 1,177,032 5,885,157
Paul Romeo.............. -- -- 8,332 41,668 435,868 2,179,758
Herb Schneider.......... -- -- 22,500 112,500 1,177,032 5,885,157
Harry Silverglide....... -- -- 13,333 66,667 697,483 3,487,518
- --------
(1) Options granted in fiscal 1999 under our 1996 Stock Option Plan 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. Under the option plan, the board of directors retains
discretion to modify the terms, including the price of outstanding
options. We have a right of repurchase as to any unvested shares upon
optionee's termination of employment at their original exercise price. See
"--Change of Control Arrangements."
(2) Represents shares which are immediately exercisable and/or vested. Based
on the closing price of $58.0625, as reported on the Nasdaq National
Market on June 30, 1999, less the exercise price.
(3) Represents shares which are unvested and/or not immediately exercisable.
(4) Based on the closing price of $58.0625, as reported on the Nasdaq National
Market on June 30, 1999, less the exercise price.
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 June 30, 1999, 17,014,309 shares are reserved for issuance under the
Amended 1996 Stock Option Plan, of which 6,702,325 shares of common stock have
been issued upon the exercise of options, options to purchase a total of
4,878,767 shares at a weighted average exercise price of $6.08 per share were
outstanding, and 5,433,217 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;
49
. 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 had been issued as
of June 30, 1999. 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
commenced on April 9, 1999 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 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.
50
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 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
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:
Shares of
Common
Purchaser Stock
- --------- ---------
Gordon L. Stitt....................................................... 2,025,000
Stephen Haddock....................................................... 1,350,000
Herb Schneider........................................................ 1,350,000
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:
Shares of Shares of Shares of
Series A Series B Series C
Purchaser Preferred Stock Preferred Stock Preferred Stock
- --------- --------------- --------------- ---------------
Named Executive Officers and
Directors
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
See the notes to table of beneficial ownership in "Principal and Selling
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 if our
Chief Executive Officer determines, in his sole discretion, that we have
attained financial and administrative objectives. 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 have entered into indemnification agreements with each of our directors
and officers. These indemnification agreements require Extreme to indemnify
such individuals to the fullest extent permitted by Delaware law.
52
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of Extreme's common
stock as of June 30, 1999 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;
. all officers and directors as a group; and
. each selling stockholder.
Shares Shares
Beneficially Owned Beneficially Owned
Prior to Offering After Offering
------------------ Shares ------------------
Name and Address of Beneficial Being
Owner Number Percent Offered Number Percent
- ------------------------------ ---------- ------- --------- ---------- -------
Named Executive Officers and
Directors
Gordon L. Stitt(1)............ 2,476,250 5.0% 202,625 2,273,625 4.5%
Stephen Haddock(2)............ 1,568,250 3.2 96,302 1,471,948 2.9
Paul Romeo(3)................. 410,000 * 31,234 378,766 *
Herb Schneider(4)............. 1,556,250 3.1 61,404 1,494,846 2.9
Harry Silverglide(5).......... 650,750 1.3 5,075 645,675 1.3
Charles Carinalli(6).......... 296,923 * 28,692 268,231 *
Wavespan Corporation
500 N. Bernardo Avenue
Mountain View, CA 94043
Promod Haque(7)............... 7,777,351 15.8 970,209 6,807,142 13.4
245 Lytton Avenue, Suite 250
Palo Alto, CA 94025
Lawrence K. Orr(8)............ 6,040,595 12.2 754,948 5,285,647 10.4
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Peter Wolken(9)............... 6,040,594 12.2 754,948 5,285,646 10.4
One First Street, #12
Los Altos, CA 94022
5% Stockholders
AVI Capital Management(9)..... 6,040,594 12.2 754,948 5,285,646 10.4
One First Street, #12
Los Altos, CA 94022
Kleiner Perkins Caufield &
Byers(10).................... 2,491,311 5.0 -- 2,491,311 4.9
2750 Sand Hill Road
Menlo Park, CA 94025
Norwest Equity Partners V(7).. 7,777,351 15.8 910,209 6,807,142 13.4
245 Lytton Avenue, Suite 250
Palo Alto, CA 94025
Trinity Ventures(8)........... 6,040,595 12.2 754,948 5,285,647 10.4
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
All executive officers and
directors
as a group (12
persons)(11)............... 28,787,458 56.0 3,015,033 25,772,425 49.0
53
Other Selling
Stockholders
3Com Corporation.... 1,723,235 3.5 984,100 739,135 1.5
5400 Bay Front
Drive
Santa Clara, CA
95952
CPQ Holdings, Inc... 1,089,918 2.2 957,400 132,518 *
20555 S.H. 249
Houston, TX 77070
Pilgrim Baxter
Hybrid Partners I,
LP................. 544,958 1.1 98,000 446,958 *
1255 Drummers Lane
Wayne, PA 19087
Siemens
Aktiengesellschaft.. 817,438 1.7 111,900 705,538 1.4
Siemens AG-PN VS
AK
D-81359 Munchen
Germany
Sumitomo Corporation
of America......... 136,239 * 18,669 117,570 *
2900 Patrick Henry
Drive
Santa Clara, CA
95054
Sumitronics, Inc.... 54,495 * 19,148 35,347 *
2900 Patrick Henry
Drive
Santa Clara, CA
95054
GCW&F Partners II... 75,000 * 9,600 65,400 *
400 Hamilton
Avenue
Palo Alto, CA
94301
The Corrigan Trust.. 54,494 * 10,900 43,595 *
1551 McCarthy
Boulevard
Milpitas, CA 95035
William C.
Herrington and
Helen Mary Anstad.. 7,500 * 250 7,250 *
3611 Groesbeck
Hill Drive
San Jose, CA 95148
- --------
* Less than 1%
Unless otherwise indicated, the address of each of the named individuals
is: c/o Extreme Networks, 3585 Monroe Street, Santa Clara, California 95051-
1450. Percentage of ownership prior to the offering is based on 49,345,230
shares outstanding on June 30, 1999 and after the offering is based on
50,620,230 shares outstanding, and assumes 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 June 30, 1999 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 379,688 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 158,334 shares are subject to a right of repurchase in
favor of Extreme which lapses over time.
(2) Includes 253,125 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 106,876 shares are subject to a right
of repurchase in favor of Extreme which lapses over time.
(3) Includes 150,000 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 39,584 shares are subject to a right of
repurchase in favor of Extreme which lapses over time.
54
(6) 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 48,750 shares are subject to a right of repurchase in favor of
Extreme which lapses over time.
(7) Promod Haque is a partner of Norwest Equity Partners V. The shares listed
represent shares held by Norwest Equity Partners V.
(8) 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.
(9) 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.
(10) 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.
(11) Reflects beneficial ownership as of June 30, 1999. Between June 30, 1999
and August 31, 1999, executive officers and directors sold or transferred
an aggregate of 2,154,026 shares, which were released from lock-up
agreements originally entered into in connection with Extreme's initial
public offering in April 1999. As of August 31, 1999, all executive
officers and directors as a group owned an aggregate of 26,633,432
shares, or 54.0%, and after the offering they will own an aggregate of
23,618,399 shares, or 46.7%.
55
DESCRIPTION OF CAPITAL STOCK
Extreme's authorized capital stock consists of 150,000,000 shares of common
stock and 2,000,000 shares of preferred stock.
Common Stock
As of June 30, 1999, there were 49,345,230 shares of common stock
outstanding held of record by approximately 280 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 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.
Warrant
In June 1999, we issued a warrant to purchase 40,000 shares of our common
stock at an exercise price of $58.063 per share to one of our customers.
Registration Rights
Following the consummation of this offering, the holders of approximately
28,715,897 shares of common stock will have 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
56
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 Provisions of Extreme's Certificate of Incorporation and
Bylaws May Make An Acquisition of Extreme More Difficult
Provisions of Delaware law and our certificate of incorporation and bylaws
relating to, among other things, the removal of directors, amendment of our
certificate of incorporation and bylaws and stockholders' ability to take
action and call special meetings, 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
. 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.
57
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.
58
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our 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 50,620,230
shares of common stock, assuming the issuance of 1,275,000 shares of common
stock offered by Extreme and no exercise of options after June 30, 1999. Of
these shares, all of the 6,500,000 shares sold in this offering, and all of
the 8,050,000 shares sold in our initial public 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 36,070,230 shares of common stock were issued and sold by
Extreme in reliance on exemptions from the registration requirements of the
Securities Act. Of these shares, 27,822,000 shares will be subject to "lock-
up" agreements described below on the effective date of the offering.
3,687,230 of the shares not subject to the lock-up agreements described below
are currently eligible for sale pursuant to Rule 144(k), having been
previously released from lock-up agreements originally entered into in
connection with our initial public offering. On October 25, 1999, the date of
the expiration of Extreme's trading window, the remaining 4,561,000 shares not
subject to lock-up agreements will be eligible for sale. Upon expiration of
the lock-up agreements 90 days after the effective date of the offering,
27,822,000 shares will become eligible for sale, subject in most cases to the
limitations of Rule 144. In addition, holders of stock options could exercise
their options and sell the shares issued upon exercise as described below.
First Eligible Shares Eligible
Date for Sale Comment
-------------- --------------- --------------------------------------------------------------
Currently 3,687,230 Freely tradable shares salable under Rule 144(k)
that are not subject to lock-up agreements
Upon effectiveness 6,500,000 Shares sold in this offering
October 25, 1999 4,561,000 Freely tradable shares salable that are not subject to lock-up
agreements
91 days after the date
of this prospectus 27,822,000 Lock-up released; shares salable under Rules 144 and 701
As of June 30, 1999, there were a total of 4,878,767 shares of common stock
subject to outstanding options under our Amended 1996 Stock Option Plan,
4,684,017 of which were vested. However, all of these shares are subject to
lock-up agreements.
The officers, directors and certain other stockholders of Extreme have
agreed not to sell or otherwise dispose of an aggregate of 27,822,000 shares
for a period of 90 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 506,200 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.
59
Sales under Rule 144 are also subject to 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 our initial public offering is entitled to resell such
shares 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, 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.
60
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of some of the U.S. federal income
and estate tax consequences of the ownership and disposition of our common
stock applicable to Non-U.S. Holders.
A "Non-U.S. Holder" is generally a person other than:
. an individual who is a citizen or resident of the United States for U.S.
federal income tax purposes;
. a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any
subdivision thereof;
. an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of source; and
. a trust subject to the primary supervision of a court within the United
States and the control of one or more U.S. persons.
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, and
administrative and judicial interpretations as of the date of this prospectus,
all of which are subject to change, possibly with retroactive effect. The
following summary is for general information. If you are a Non-U.S. Holder,
you should consult a tax advisor on the U.S. federal tax consequences of
holding and disposing of our common stock with respect to your particular
circumstances, for example, if you are a former citizen or resident of the
United States, as well as any tax consequences under the laws of any U.S.
state or local or non-U.S. taxing jurisdiction.
Dividends
Dividends paid to a Non-U.S. Holder of common stock generally will be
subject to withholding of U.S. federal income tax at a 30% rate or a lower
rate that an applicable income tax treaty may specify. Non-U.S. Holders should
consult their tax advisors on their entitlement to benefits under a relevant
income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the U.S. are generally subject to U.S. federal
income tax on a net income basis at regular graduated rates, but are not
generally subject to the 30% withholding tax if the Non-U.S. Holder files the
appropriate IRS form with the withholding agent. Any U.S. trade or business
income received by a Non-U.S. Holder that is a corporation may, under specific
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or a lower rate that an applicable income tax treaty may specify.
Dividends paid prior to January 1, 2001 to an address in a foreign country
are presumed, absent actual knowledge to the contrary, to be paid to a
resident of that country for purposes of the withholding discussed above and
for purposes of determining the applicability of an income tax treaty rate.
For dividends paid after December 31, 2000:
. a Non-U.S. Holder of common stock that claims the benefit of an income
tax treaty rate generally will be required to satisfy applicable
certification and other requirements;
. in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of
the partnership, and the partnership will be required to provide a U.S.
taxpayer identification number and other information; and
. look-through rules will apply to tiered partnerships.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit
of any excess amounts withheld by filing an appropriate claim for a refund
with the IRS.
61
Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
. the gain is effectively connected with a U.S. trade or business, in
which case the branch profits tax may also apply to a corporate Non-U.S.
Holder;
. the Non-U.S. Holder is an individual who is present in the United States
for 183 or more days in the taxable year of the disposition and meets
other requirements; or
. we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the five-
year period ending on the date of disposition and the Non-U.S. Holder's
holding period for the common stock.
The tax relating to stock in a "U.S. real property holding corporation"
does not apply to a Non-U.S. Holder whose holdings, actual and constructive,
at all times during the applicable period, amount to 5% or less of the common
stock, provided that the common stock is regularly traded on an established
securities market. Generally, a corporation is a "U.S. real property holding
corporation" if the fair market value of its "U.S. real property interests"
equals or exceeds 50% of the sum of the fair market value of its worldwide
real property interests and its other assets used or held for use in a trade
or business. We believe that we have not been, are not, and do not anticipate
becoming, a "U.S. real property holding corporation" for U.S. federal income
tax purposes.
Federal Estates Taxes
Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes and may be subject to U.S. federal estate
tax, unless an applicable estate tax treaty provides otherwise.
Information Reporting Requirements and Backup Withholding Tax
We must report annually to the IRS and to each Non-U.S. Holder the amount
of the dividends paid to that holder and any tax withheld with respect to
those dividends. The information reporting requirements apply regardless of
whether withholding is required. Copies of the information returns reporting
those dividends and withholding may also be made available, under an
applicable income tax treaty or agreement, to the tax authorities in the Non-
U.S. Holder's country of residence.
Under specific circumstances, the IRS requires information reporting and
backup withholding at a rate of 31% on specific payments on common stock.
Under currently applicable law, Non-U.S. Holders of common stock generally
will be exempt from information reporting and backup withholding on dividends
paid prior to January 1, 2001 to an address outside the U.S. For dividends
paid after December 31, 2000, however, a Non-U.S. Holder of common stock that
fails to certify its Non-U.S. Holder status under applicable Treasury
regulations may be subject to backup withholding at a rate of 31% on payments
of dividends.
Non-U.S. Holders should consult their own tax advisors on the application
of information withholding and backup withholding to them in their particular
circumstances (including, upon their disposition of common stock).
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder will be refunded
or credited against the holder's U.S. federal income tax liability, if any, if
the holder provides the required information to the IRS.
62
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the U.S. underwriters named
below, for whom Morgan Stanley & Co. Incorporated, BancBoston Robertson
Stephens Inc., Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated, Hambrecht & Quist LLC, SG Cowen Securities Corporation and
Thomas Weisel Partners LLC are acting as U.S. representatives, and the
international underwriters named below, for whom Morgan Stanley & Co.
International Limited, BancBoston Robertson Stephens International Limited,
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, Hambrecht &
Quist LLC, Societe Generale and Thomas Weisel Partners LLC are acting as
international representatives, have severally agreed to purchase, and Extreme
and the selling stockholders have agreed to sell to them, severally, the
number of shares indicated below:
Number of
Name Shares
---- ---------
U.S. Underwriters:
Morgan Stanley & Co. Incorporated................................
BancBoston Robertson Stephens Inc................................
Dain Rauscher Wessels............................................
Hambrecht & Quist LLC............................................
SG Cowen Securities Corporation..................................
Thomas Weisel Partners LLC.......................................
---------
Subtotal....................................................... 5,200,000
=========
International Underwriters:
Morgan Stanley & Co. International Limited.......................
BancBoston Robertson Stephens International Limited..............
Dain Rauscher Wessels............................................
Hambrecht & Quist LLC............................................
Societe Generale.................................................
Thomas Weisel Partners LLC.......................................
---------
Subtotal....................................................... 1,300,000
Total.......................................................... 6,500,000
=========
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively
referred to as the "underwriters" and the "representatives," respectively. 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 U.S. underwriters' 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
63
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 U.S. underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to 975,000 additional
shares of common stock at the public offering price set forth on the cover
page hereof, less underwriting discounts and commissions. The U.S.
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 U.S. 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 U.S.
underwriters in the preceding table.
Our common stock is listed on the Nasdaq National Market under the symbol
"EXTR."
Each of Extreme and its officers, directors and all of the selling
stockholders have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the underwriters, or otherwise during
the period ending 90 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 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, (2) transactions
relating to shares previously released from lock-up agreements originally
entered into in connection with Extreme's initial public offering in April
1999 or (3) transactions relating to shares of common stock or other
securities acquired in open market transactions after the date of this
prospectus.
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.
The underwriting agreement provides that Extreme and the selling
stockholders will indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
Due to fact that one of the representatives of the underwriters was
organized within the last three years, we are providing you the following
information. Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December
1998. Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager of, or as a syndicate member in, numerous public offerings of
equity securities. Thomas Weisel Partners does not have any material
relationship with us or any of our officers, directors or other controlling
persons, except with respect to its contractual relationship with us pursuant
to the underwriting agreement entered into in connection with this offering.
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. Morgan Stanley & Co.
Incorporated, BancBoston Robertson Stephen, and Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated served as co-managing underwriters of
our initial public offering in April 1999, and received customary discounts
and commissions in connection therewith.
64
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
June 30, 1999, an investment partnership and certain individuals of Gray Cary
Ware & Freidenrich owned 80,000 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. Legal matters relating to
this offering will be passed upon for the underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at June 30, 1998 and 1999, for the period from May 8,
1996 (Date of Inception) through June 30, 1997 and for each of the two years
in the period ended June 30, 1999, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's 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 3585 Monroe Street, Santa
Clara, California 95051-1450 and our telephone number is (408) 579-2800. 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.
65
EXTREME NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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
F-1
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, 1998 and 1999, 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 each of the two years in
the period ended June 30, 1999. 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 1999, 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 each of the two years in the period ended June 30,
1999, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Palo Alto, California
July 20, 1999
F-2
EXTREME NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 30,
------------------
1998 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 9,510 $107,143
Short-term investments................................... 10,995 16,422
Accounts receivable, net of allowance for doubtful
accounts of $433 in 1998 and $1,374 in 1999)............ 7,808 20,797
Inventories.............................................. 123 2,626
Other current assets..................................... 588 1,978
-------- --------
Total current assets....................................... 29,024 148,966
Property and equipment, net................................ 4,469 6,506
Investments................................................ -- 16,097
Other assets............................................... 238 234
-------- --------
$ 33,731 $171,803
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 9,993 $ 13,418
Accrued compensation..................................... 462 2,500
Accrued commissions...................................... 473 1,600
Accrued warranty......................................... 1,073 1,400
Accrued purchase commitments............................. 893 1,111
Deferred revenue......................................... 283 1,717
Other accrued liabilities................................ 701 4,883
Income tax liability..................................... -- 1,650
Notes payable, current portion........................... 834 --
Capital lease obligations, current portion............... 516 1,648
-------- --------
Total current liabilities.................................. 15,228 29,927
Notes payable, net of current portion...................... 1,167 --
Capital lease obligations, net of current portion.......... 1,467 --
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value, issuable in
series: 2,000,000 shares authorized at June 30, 1999
(29,900,000 shares authorized at June 30, 1998);
29,061,315 shares and no shares issued and outstanding
at June 30, 1998 and 1999, respectively................. 29 --
Common stock, $.001 par value; 150,000,000 shares
authorized at June 30, 1999, (50,000,000 shares
authorized at June 30, 1998); 11,534,525, and 49,345,230
shares issued and outstanding at June 30, 1998 and 1999,
respectively............................................ 12 49
Additional paid-in capital............................... 38,056 165,618
Deferred stock compensation.............................. (369) (197)
Accumulated other comprehensive loss..................... -- (118)
Accumulated deficit...................................... (21,859) (23,476)
-------- --------
Total stockholders' equity................................. 15,869 141,876
-------- --------
$ 33,731 $171,803
======== ========
See accompanying notes to consolidated financial statements.
F-3
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Period
from May 8,
1996 (Date of Year Ended June
Inception) 30,
through -----------------
June 30, 1997 1998 1999
-------------- -------- -------
Net revenue.................................. $ 256 $ 23,579 $98,026
Cost of revenue.............................. 388 14,897 48,520
------- -------- -------
Gross profit (loss).......................... (132) 8,682 49,506
Operating expenses:
Research and development................... 5,351 10,668 17,036
Selling and marketing...................... 1,554 9,601 27,056
General and administrative................. 1,023 2,440 6,859
------- -------- -------
Total operating expenses................. 7,928 22,709 50,951
------- -------- -------
Operating loss............................... (8,060) (14,027) (1,445)
Interest income.............................. 234 613 1,855
Interest expense............................. (79) (326) (398)
Other income (loss), net..................... (18) (196) 21
------- -------- -------
Income (loss) before income taxes............ (7,923) (13,936) 33
Provision for income taxes................... -- -- 1,650
------- -------- -------
Net loss..................................... $(7,923) $(13,936) $(1,617)
======= ======== =======
Basic and diluted net loss per common share.. $ (4.51) $ (3.18) $ (.17)
======= ======== =======
Weighted average shares outstanding used in
computing basic and diluted net loss per
share....................................... 1,758 4,379 9,462
======= ======== =======
Pro forma basic and diluted net loss per
share (unaudited)........................... $ (.44) $ (.04)
======== =======
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)...... 31,701 38,523
======== =======
See accompanying notes to consolidated financial statements.
F-4
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Convertible Accumulated
Preferred Stock Common Stock Additional Deferred Other Total
------------------ ------------- Paid-In Stock Comprehensive Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Loss Deficit Equity
--------- ------- ------ ------ ---------- ------------ ------------- ----------- -------------
Issuance of common
stock to founders...... -- $ -- 4,725 $ 4 $ 12 $ -- $ -- $ -- $ 16
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 common
stock to the former
shareholders of Mammoth
Technology............. -- -- 675 1 12 -- -- -- 13
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
Deferred stock
compensation........... -- -- -- -- 437 (437) -- -- --
Amortization of
deferred stock
compensation........... -- -- -- -- -- 68 -- -- 68
Net loss............... -- -- -- -- -- -- -- (13,936) (13,936)
--------- ------ ------ --- -------- ----- ------ -------- --------
Balances at June 30,
1998................... 29,061 29 11,535 12 38,056 (369) -- (21,859) 15,869
Comprehensive loss:....
Net loss.............. -- -- -- -- -- -- -- (1,617) (1,617)
Other comprehensive
loss, net of tax:.....
Change in unrealized
loss on investments... -- -- -- -- -- -- (112) -- (112)
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (6) -- (6)
--------
Other comprehensive
loss.................. -- -- -- -- -- -- -- -- (118)
--------
Comprehensive loss..... -- -- -- -- -- -- -- -- (1,735)
Issuance of warrants to
purchase 40,000 shares
of common stock........ -- -- -- -- 948 -- -- -- 948
Issuance of common
stock in conjunction
with initial public
offering (less issuance
costs of $1,948)....... -- -- 8,050 8 125,314 -- -- -- 125,322
Conversion of preferred
stock to common stock
in conjunction with
initial public
offering............... (29,061) (29) 29,061 29 -- -- -- -- --
Exercise of warrants to
purchase common stock.. -- -- 132 -- -- -- -- -- --
Exercise of options to
purchase common stock.. -- -- 567 -- 1,300 -- -- -- 1,300
Amortization of
deferred stock
compensation........... -- -- -- -- -- 172 -- -- 172
--------- ------ ------ --- -------- ----- ------ -------- --------
Balances at June 30,
1999................... -- $ -- 49,345 $49 $165,618 $(197) $(118) $(23,476) $141,876
========= ====== ====== === ======== ===== ====== ======== ========
See accompanying notes to consolidated financial statements.
F-5
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Period
from May 8,
1996 (Date of Year Ended
Inception) June 30,
through ------------------
June 30, 1997 1998 1999
-------------- -------- --------
Operating activities
Net loss................................... $(7,923) $(13,936) $ (1,617)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization.............. 315 1,453 5,733
Warrants issued to customer................ -- -- 948
Amortization of deferred stock
compensation.............................. -- 68 172
Changes in operating assets and
liabilities:
Accounts receivable....................... (262) (7,545) (12,989)
Inventories............................... (37) (86) (2,503)
Other current and noncurrent assets....... (241) (585) (1,392)
Accounts payable.......................... 749 9,244 3,425
Accrued compensation...................... 189 272 2,038
Accrued commissions....................... -- 473 1,127
Accrued warranty.......................... -- 1,073 327
Accrued purchase commitments.............. -- 893 218
Deferred revenue.......................... -- 283 1,434
Other accrued liabilities................. 464 237 4,182
Income tax liability...................... -- -- 1,650
Due to shareholder........................ 109 (109) --
------- -------- --------
Net cash provided by (used in) operating
activities................................ (6,637) (8,265) 2,753
------- -------- --------
Investing activities
Capital expenditures....................... (1,151) (2,511) (7,492)
Purchases of short-term investments........ -- (10,996) (35,685)
Maturities of short-term investments....... -- -- 14,049
------- -------- --------
Net cash used in investing activities...... (1,151) (13,507) (29,128)
------- -------- --------
Financing activities
Proceeds from issuance of convertible
preferred stock........................... 17,091 20,285 --
Proceeds from issuance of common stock..... 124 147 126,622
Proceeds from notes payable................ 700 1,606 783
Principal payments on notes payable........ (64) (241) (2,784)
Principal payments of capital lease
obligations............................... (16) (562) (613)
------- -------- --------
Net cash provided by financing activities.. 17,835 21,235 124,008
------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................... 10,047 (537) 97,633
Cash and cash equivalents at beginning of
period..................................... -- 10,047 9,510
------- -------- --------
Cash and cash equivalents at end of period.. $10,047 $ 9,510 $107,143
======= ======== ========
Supplemental disclosure of cash flow
information
Interest paid.............................. $ 73 $ 326 $ 185
======= ======== ========
Supplemental schedule of noncash investing
and financing activities:
Property and equipment acquired under
capital lease obligations................. $ 505 $ 1,588 $ 278
======= ======== ========
Common stock issued for assets............. $ 14 $ -- $ --
======= ======== ========
Warrants issued in connection with capital
lease..................................... $ -- $ 168 $ --
======= ======== ========
Warrants issued to customer................ $ -- $ -- $ 948
======= ======== ========
Deferred stock compensation................ $ -- $ 437 $ --
======= ======== ========
Conversion of preferred stock to common
stock..................................... $ -- $ -- $ 29
======= ======== ========
See accompanying notes to consolidated financial statements.
F-6
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 was reincorporated in the state of
Delaware on January 7, 1999. The Company 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 $23.5 million at June 30, 1999.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Extreme and
its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated. Assets and liabilities of foreign
operations are translated to U.S. dollars at current rates of exchange, and
revenues and expenses are translated using weighted average rates. Foreign
currency transaction gains and losses have not been material. Gains and losses
from foreign currency translation are included as a separate component of
comprehensive income.
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the 1999 presentation.
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
comprehensive income. 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.
Fair Value of Financial Instruments
The estimated fair value amounts have been determined by Extreme using
available market information and valuation methodologies considered to be
appropriate. However, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that Extreme
could realize in a current market exchange.
F-7
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Concentration of Credit Risk, Product and Significant Customers and
Supplier Information
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, 1998
and 1999, Extreme added approximately $0, $470,000 and $1,364,000 to its bad
debt reserves. Total write-offs of uncollectible amounts were $0, $37,000 and
$423,000 in these periods, respectively. Extreme operates solely within one
business segment, the development and marketing of end-to-end LAN switching
solutions. Significant customer concentration in the years ended June 30, 1998
and 1999 is summarized below. No other customer accounts for more than 10% of
Extreme's net revenues.
Year Ended
June 30,
-------------
Customer 1998 1999
-------- ----- -----
3Com...................................................... 25% --
Compaq.................................................... 21% 21%
Hitachi Cable............................................. -- 13%
One supplier currently manufacturers all of Extreme's ASICs which are used
in all of Extreme's networking products. 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 Extreme's business, operating results
and financial condition. In addition, qualifying additional suppliers can be
time-consuming and expensive and may increase the likelihood of errors.
Extreme attempts to mitigate these risks by working closely with its ASIC
supplier regarding production planning and product introduction timing.
Extreme currently derives substantially all of its revenue from sales of
two product families. Extreme expects that revenue from these two product
families will account for a substantial portion of its revenue for the
foreseeable future. Accordingly, widespread market acceptance of Extreme's
product families is critical to their future success.
F-8
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 61% and 53% of net revenue in 1998 and
1999, respectively. 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:
Years
Ended
June 30,
---------
1998 1999
---- ----
United Kingdom.................................................... 30% 8%
Japan............................................................. 19% 29%
All other export sales to countries totaling less than 10% each... 12% 16%
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.
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 for the two years ended June 30, 1998 and 1999, as presented in
the consolidated statements of operations, has been computed as described
above and also gives effect to the conversion of the convertible preferred
stock (using the if-converted method) from the original date of issuance.
F-9
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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):
For the Period From
May 8, 1996 Years Ended
(Date of Inception) June 30,
through June 30, ------------------
1997 1998 1999
------------------- --------- -------
Net loss................................. $ (7,923) $ (13,936) $(1,617)
======== ========= =======
Basic and diluted:
Weighted-average shares of common stock
outstanding........................... 6,468 11,192 13,662
Less: Weighted-average shares subject
to repurchase......................... (4,710) (6,813) (4,200)
-------- --------- -------
Weighted-average shares used in computing
basic and diluted net loss per common
share................................... 1,758 4,379 9,462
======== ========= =======
Basic and diluted net loss per common
share................................... $ (4.51) $ (3.18) $ (.17)
======== ========= =======
Pro forma:
Net loss............................... $ (13,936) $(1,617)
========= =======
Shares used above...................... 4,379 9,462
Pro forma adjustment to reflect
weighted effect of assumed conversion
of convertible preferred stock........ 27,322 29,061
--------- -------
Shares used in computing pro forma
basic and diluted net loss per common
share (unaudited)..................... 31,701 38,523
========= =======
Pro forma basic and diluted net loss
per common share (unaudited)............ $ (.44) $ (.04)
========= =======
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 and 37,927,370 for the years ended June 30, 1997, 1998
and 1999. 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.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("FAS 131") effective for financial
statements for periods beginning after December 15, 1997. FAS 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. FAS
131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
F-10
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Enterprise," but retains the requirement to report information about major
customers. Extreme adopted FAS 131 effective for its fiscal year ending June
30, 1999. Extreme has determined that it has a single reportable segment.
Management uses one measurement of profitability and does not disaggregate its
business for internal reporting.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). Extreme is required to adopt
FAS 133 for the year ending June 30, 2002. FAS 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 FAS 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. Financial Instruments
The following is a summary of available-for-sale securities (in thousands)
at June 30, 1999. Amortized cost at June 30, 1998 approximated market value:
June 30, 1999
----------------------------------------
Unrealized Unrealized
Amortized Market Holding Holding
June 30, 1998 Cost Value Gains Losses
------------- --------- -------- ---------- ----------
Money market fund....... $ 99 $ 2 $ 2 $ -- $ --
Commercial paper........ -- 110,265 110,241 -- (24)
U.S. corporate debt
securities............. 12,410 15,885 15,797 -- (88)
U.S. government
agencies............... -- 300 300 -- --
Foreign corporate debt
securities............. 6,938 -- -- -- --
------- -------- -------- ----- -----
$19,447 $126,452 $126,340 $ -- $(112)
======= ======== ======== ===== =====
Classified as:
Cash equivalents...... $ 8,452 $ 93,840 $ 93,821 $ -- $ (19)
Short-term
investments.......... 10,995 16,427 16,422 -- (5)
Investments........... -- 16,185 16,097 -- (88)
------- -------- -------- ----- -----
$19,447 $126,452 $126,340 $ -- $(112)
======= ======== ======== ===== =====
F-11
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. 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. Property and equipment
consist of the following (in thousands):
June 30,
----------------
1998 1999
------- -------
Computer and other related equipment....................... $ 3,465 $ 8,661
Office equipment, furniture, and fixtures.................. 522 1,090
Software................................................... 2,106 3,146
Leasehold improvements..................................... 145 1,111
------- -------
6,238 14,008
Less accumulated depreciation and amortization............. (1,769) (7,502)
------- -------
Property and equipment, net................................ $ 4,469 $ 6,506
======= =======
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
$2,371,000 and $1,494,000, respectively, at June 30, 1999. The amortization
expense on assets recorded under capital leases is included within
depreciation expense.
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 was payable monthly
based on an annual rate of 11%. The note was secured by Extreme's assets. The
note was paid off during the fiscal year ended June 30, 1999.
In November 1996, Extreme entered into a $300,000 note payable agreement
with a leasing company. The note accrued interest monthly based on an annual
rate of 9%. The note was secured by all of Extreme's fixed assets. The note
was paid off during the fiscal year ended June 30, 1999.
In November 1997, Extreme entered into a $2,000,000 note payable with a
leasing company. The note accrued interest monthly based on an annual rate of
9.75%. The note was secured by all of Extreme's fixed assets. The note was
paid off during the fiscal year ended June 30, 1999.
5. Commitments
Extreme had outstanding purchase order commitments for materials of
approximately $4.4 million and $26.4 million at June 30, 1998 and 1999,
respectively. Extreme expects the 1999 purchase orders to be fulfilled and the
related invoices to be paid in fiscal year 2000. Of this amount, the Company
has accrued and expensed approximately $1.1 million of the outstanding
purchase order commitments for materials due to obligations to suppliers as of
June 30, 1999. This expense is included within cost of revenue in the year
ended June 30, 1999.
The Company has entered into capital equipment lease lines of credit for a
total of $6.0 million, of which approximately $4.0 million remains available
at June 30, 1999. These arrangements are secured by the 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.
F-12
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 June 30, 1999 there were no outstanding borrowings under this line of
credit.
In February 1999, Extreme agreed to lease 77,000 square feet to house 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
commenced occupancy in March 1999. Rent expense was approximately $220,000,
$712,000 and $759,000 for the years ended June 30, 1997, 1998 and 1999,
respectively.
Future payments under all noncancelable leases at June 30, 1999 are as
follows (in thousands):
Capital Operating
Leases Leases
------- ---------
Years ending June 30:
2000.................................................... $ 721 $1,241
2001.................................................... 709 1,456
2002.................................................... 387 1,641
2003.................................................... 8 859
------- ------
Total minimum payments.................................... 1,825 $5,197
======
Less amount representing interest......................... (177)
-------
Present value of minimum payments......................... 1,648
Less current portion...................................... (1,648)
-------
Long-term portion......................................... $ --
-------
The Company plans to pay off the capital lease obligations during the
fiscal year ending June 30, 2000 and has therefore classified the total
present value of the minimum payments of capital lease obligations as current
at June 30, 1999.
6. Stockholders' Equity
Common Stock Offering
In April 1999, the Company completed an initial public offering of
8,050,000 shares of common stock (including the underwriters over-allotment
provision) at a price of $17.00 per share. Concurrent with the initial public
offering, each of the 14,579,999 shares of Series A convertible preferred
stock outstanding, each of the 8,886,228 shares of Series B convertible
preferred stock outstanding and each of the 5,595,088 shares of Series C
convertible preferred stock outstanding were converted into one share of
common stock, resulting in an issuance of 29,061,315 shares of common stock.
Net proceeds from the offering were approximately $125.3 million net of
offering costs.
Convertible Preferred Stock
A summary of convertible stock is as follows (in thousands):
June 30, 1998
----------------------------------
Issued and Liquidation
Authorized Outstanding Preference
---------- ----------- -----------
Series A.................................. 15,000 14,580 $ 5,249
Series B.................................. 9,000 8,886 12,263
Series C.................................. 5,900 5,595 20,534
------ ------ -------
29,900 29,061 $38,046
====== ====== =======
F-13
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Each share of Series A, B, and C convertible preferred stock was
convertible, at the option of the holder, into one share of common stock,
subject to certain provisions. The outstanding shares of convertible preferred
stock would 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 were entitled to
annual noncumulative dividends of $.0267, $.1104, and $.2936, respectively,
per share if and when declared by the board of directors. No dividends were
declared. All outstanding shares of preferred stock were converted to common
shares in Extreme's Initial Public Offering in April, 1999. Concurrent with
the initial public offering, each of the 14,579,999 shares of Series A
convertible preferred stock outstanding, each of the 8,886,228 shares of
Series B convertible preferred stock outstanding and each of the 5,595,088
shares of Series C convertible preferred stock outstanding were converted into
one share of common stock, resulting in an issuance of 29,061,315 shares of
common stock.
Preferred Stock
The number of shares of preferred stock authorized to be issued is
2,000,000 with a par value of $.001 per share. The preferred stock may be
issued from time to time in one or more series. The board of directors is
authorized to provide for the rights, preferences and privileges of the shares
of each series and any qualifications, limitations or restrictions on these
shares. As of June 30, 1999, no shares of preferred stock had been issued.
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 1999, approximately 1,772,000 and
591,000 shares, respectively, were subject to repurchase at their original
issuance price.
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.
Concurrent with the initial public offering, these warrants converted into the
right to purchase equivalent number of shares of common stock at the same
exercise price per share. The warrants may be exercised at any time within a
period of (i) 10 years or (ii) 5 years from the effective date of the initial
public offering, whichever is longer. In May 1999, 147,000 of these warrants
were exercised.
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. Concurrent
F-14
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with the initial public offering, these warrants converted into the right to
purchase equivalent number of shares of 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 (i) 10 years or (ii) 3 years from the effective
date of the initial public offering.
In June 1999, Extreme issued fully vested and exercisable warrants to a
customer to purchase 40,000 shares of the Company's common stock with an
exercise price of $58.063 per share. The value of these warrants was
approximately $948,000. This value was expensed in fiscal 1999 as the warrants
were issued in exchange for services rendered.
Deferred Stock Compensation
During the year ended June 30, 1998, in connection with the grant of
certain stock options to employees, Extreme recorded deferred stock
compensation of $437,000 representing the difference between the exercise
price and the deemed fair value of Extreme's common stock on the date such
stock options were granted. Such amount is included as a reduction of
stockholders' equity and is being amortized by charges to operations on a
graded vesting method. Extreme recorded amortization of deferred stock
compensation expense of approximately $68,000 and $172,000 for the years ended
June 30, 1998 and 1999, respectively. At June 30, 1999, Extreme had a total of
approximately $197,000 remaining to be amortized over the corresponding
vesting period of each respective option, generally four years. The
amortization expense relates to options awarded to employees in all operating
expense categories.
Amended 1996 Stock Option Plan
In January 1999, the board of directors approved an amendment to the 1996
Stock Option Plan (the "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."
Under 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 17,014,309 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 ten years. Options to purchase
approximately 4,297,346 and 2,327,779 shares of common stock have been
exercised as of June 30, 1998 and 1999, respectively, but are subject to
repurchase until vested. As of June 30,1999, 5,433,217 shares were available
for future grant under the Plan.
F-15
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock options activity:
Weighted-
Average
Exercise
Number of Price Per
Shares Share
---------- ---------
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............................................. 2,937,758 $10.09
Exercised........................................... (567,800) $ 1.86
Canceled............................................ (95,126) $ 6.68
---------- ------
Options outstanding at June 30, 1999.................. 4,878,767 $ 6.08
========== ======
Options to purchase 1,575,750, 2,603,935 and 4,684,017 shares were
exercisable at June 30, 1997, 1998 and 1999, respectively, with a weighted-
average exercise price of $.05, $.84 and $4.44, respectively.
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"). 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 commenced on the effectiveness of
the initial public offering and will end on April 30, 2000.
Stock-Based Compensation
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 stock-based awards to employees 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.
F-16
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes significant ranges of outstanding and
exercisable options at June 30, 1999:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- --------- ----------- ---------
(In years)
$ .02 - 0.40 1,263,179 7.14 $ .07 1,263,179 $ .07
$ .60 - 5.75 1,883,799 8.90 $ 3.76 1,883,799 $ 3.76
$ 6.50 - 10.00 1,528,039 9.37 $ 8.79 1,521,039 $ 8.79
$14.00 - 58.06 203,750 9.93 $44.40 16,000 $15.50
--------- ---------
$ .02 - 58.06 4,878,767 8.63 $ 6.08 4,684,017 $ 4.44
========= =========
Prior to the Company's initial public offering, the fair value of each
option grant was determined on the date of grant using the minimum value
method. Subsequent to the offering, the fair value of the Company's stock-
based awards to employees was estimated using the Black-Scholes option pricing
model. Except for the volatility assumption which was only used under the
Black-Scholes model, the following weighted-average assumptions were used to
perform the calculations:
Stock Option Plan Employee Stock Option Plan
--------------------------------- -------------------------------
For the Period From For the Period
May 8, 1996 From May 8, 1996
(Date of Inception) Years Ended (Date of Inception) Years Ended
through June 30, through June 30,
------------------- ------------- ------------------- -----------
June 30, 1997 1998 1999 June 30, 1997 1998 1999
------------------- ----- ------- ------------------- ---- ------
Expected life........... 6 yrs 6 yrs 3.5 yrs -- -- .7 yrs
Volatility.............. 0% 0% 55% -- -- 55%
Risk-free interest
rate................... 6.7% 6.0% 5.1% -- -- 5.0%
Dividend yield.......... 0% 0% 0% -- -- 0%
The weighted-average estimated fair value of options granted in the years
ended June 30, 1997, 1998 and 1999 was $.01, $.37 and $4.41, respectively. The
weighted-average estimated fair value of shares granted under the 1999
Purchase Plan in the year ended June 30, 1999 was $5.61.
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 per share amounts):
For the Period From Years Ended June
May 8, 1996 30,
(Date of Inception) -----------------
through June 30, 1997 1998 1999
--------------------- -------- -------
Pro forma net loss under FAS 123..... $(7,935) $(14,053) $(4,066)
Net loss per common share--pro forma
under FAS 123:
Basic and diluted.................. $ (3.21) $ (.43)
F-17
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Income Taxes
The provision for income taxes consists of the following (in thousands):
June 30, 1999
-------------
Current provision:
Federal.................................................. $ 350
State.................................................... 200
Foreign.................................................. 1,100
------
Total current provision.................................... $1,650
======
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 (in thousands):
For the Period From
May 8, 1996 Years Ended
(Date of Inception) June 30,
through ---------------
June 30, 1997 1998 1999
------------------- ------- ------
Tax at federal statutory rate (benefit).. $(2,773) $(4,878) $ 11
State income tax......................... -- -- 200
Federal alternative minimum taxes........ -- -- 350
Foreign taxes............................ -- -- 1,100
Unutilized (utilized) net operating
losses.................................. 2,773 4,878 (11)
------- ------- ------
Total.................................. $ -- $ -- $1,650
======= ======= ======
Significant components of the Company's deferred tax assets are as follows
(in thousands):
June 30,
----------------
1998 1999
------- -------
Deferred tax assets:
Net operating loss carryforwards............................ $ 7,448 $ 1,647
Tax credit carryforwards.................................... 1,139 2,238
Bad debt reserve............................................ 177 801
Other reserves and accruals................................. 807 3,866
------- -------
Total deferred tax assets..................................... 9,571 8,552
Valuation allowance........................................... (9,571) (8,552)
------- -------
Net deferred tax assets....................................... $ -- $ --
======= =======
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 the Company's historical operating
performance and the reported cumulative net losses in all prior years, the
Company has provided a full valuation allowance against its net deferred tax
assets. The Company will continue to evaluate the realizability of the
deferred tax assets on a quarterly basis.
The net valuation allowance decreased by $6,242,000 during the year ended
June 30, 1998 and increased by $1,019,000 during the year ended June 30, 1999.
As of June 30, 1999, the Company had net operating loss carryforwards for
federal and state tax purposes of approximately $4,100,000 and $3,900,000,
respectively. The Company also had federal and state research and
F-18
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
development tax credit carryforwards of approximately $1,202,000 and $918,000,
respectively. The federal and state net operating loss carryforwards will
expire at various dates beginning in year 2004 through 2019, if not utilized.
Utilization of the net operating losses and tax credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and tax
credits before utilization.
8. Comprehensive Income (Loss)
Extreme adopted SFAS No. 130, "Reporting Comprehensive Income" at December
31, 1998. SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of the
Statement had no impact on the Company's net income (loss) or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments to
be included in other comprehensive income. Prior to adoption of SFAS 130, the
Company had no unrealized gains or losses on available-for-sale securities or
foreign currency translation adjustments.
The following are the components of accumulated other comprehensive loss,
net of tax (in thousands):
For the Period From
May 8, 1996 Years Ended
(Date of Inception) June 30,
through -----------
June 30, 1997 1998 1999
------------------- ----- -----
Unrealized gain (loss) on investments......... $ -- $ -- $(112)
Foreign currency translation adjustments...... -- -- (6)
----- ----- -----
Accumulated other comprehensive loss........ $ -- $ -- $(118)
===== ===== =====
The following schedule of other comprehensive income (loss) shows the gross
current-period gain (loss) and the reclassification adjustment (in thousands):
For the Period From
(Date of Inception)
through Years Ended
May 8, 1996 June 30,
through -----------
June 30, 1997 1998 1999
------------------- ----- -----
Unrealized gain (loss) on investments:
Unrealized gain (loss) on available-for-sale
securities.................................. $ -- $ -- $(112)
Less: reclassification adjustment for gain
(loss) realized in net loss................. -- -- --
----- ----- -----
Net unrealized gain (loss) on investments...... -- -- (112)
Foreign currency translation adjustments....... -- -- (6)
----- ----- -----
Other comprehensive income (loss).............. $ -- $ -- $(118)
===== ===== =====
9. 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.
F-19
[LOGO OF EXTREME NETWORKS APPEARS HERE]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE COVER PAGE FOR
PROSPECTUS (Subject to Completion) INTERNATIONAL PROSPECTUS]
Issued October , 1999
6,500,000 Shares
[LOGO OF EXTREME NETWORKS APPEARS HERE]
COMMON STOCK
-----------
Extreme Networks, Inc. is offering 1,275,000 shares and the selling
stockholders are offering 5,225,000 shares.
-----------
Our common stock is quoted on the Nasdaq National Market under the symbol
"EXTR." On October 6, 1999, the reported last sale price of our common stock on
the Nasdaq National Market was $71 7/8 per share.
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 6.
-----------
PRICE $ A SHARE
-----------
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Extreme Stockholders
-------- ------------- ----------- ------------
Per
Share.... $ $ $ $
Total..... $ $ $ $
Extreme has granted the U.S. underwriters the right to purchase up to an
additional 975,000 shares to cover over-allotments.
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.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 1999.
-----------
MORGAN STANLEY DEAN WITTER
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
ROBERTSON STEPHENS
INTERNATIONAL LIMITED
HAMBRECHT & QUIST
SG COWEN
THOMAS WEISEL PARTNERS LLC
October , 1999
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. Pursuant to the Second Amended and Restated Right Agreement dated
January 12, 1998, the Company is paying all the expenses incurred on behalf of
the selling stockholders (other than underwriting discounts and commissions).
All amounts shown are estimates except for the registration fee and the NASD
filing fee.
Amount
to be
Paid
--------
Registration fee................................................. $136,373
NASD filing fee.................................................. 30,500
Nasdaq National Market........................................... 17,500
Blue sky qualification fees and expenses......................... 10,000
Printing and engraving expenses.................................. 50,000
Legal fees and expenses.......................................... 75,000
Accounting fees and expenses..................................... 75,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous expenses........................................... 35,627
--------
Total.......................................................... $440,000
========
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
(2) From June 1996 to June 30, 1999, the Registrant granted options to
purchase 10,888,718 shares of common stock pursuant to its Amended 1996
Stock Option Plan at exercise prices ranging from $.02 per share to
$58.0625 per share for a total offering price of $32,497,554.80.
(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, in connection with its acquisition of all of the
outstanding capital stock of Mammoth Technology, Inc., the Registrant
entered into a Stock Purchase Agreement with Mammoth pursuant to which the
Registrant issued 675,000 shares of its common stock to the three former
shareholders of Mammoth Technology, Inc. at a price of $.02 per share for a
total offering price of $13,500.
(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.
(11) In June 1999, the Registrant issued a warrant to a customer to
purchase 40,000 shares of common stock at an exercise price of $58.063 per
share.
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)(11) 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
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit
Number Description of Document
------- -----------------------
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. (1)
3.1 Certificate of Incorporation of Extreme Networks, Inc., a Delaware
corporation. (1)
3.2 Form of Amended and Restated Bylaws of Extreme Networks, Inc., a
Delaware corporation. (1)
4.1 Second Amended and Restated Rights Agreement dated January 12, 1998
between Extreme Network and certain stockholders. (1)
5.1+ Opinion of Gray Cary Ware & Freidenrich, LLP.
10.1 Form of Indemnification Agreement for directors and officers. (1)
10.2 Amended 1996 Stock Option Plan and forms of agreements thereunder. (1)
10.3 1999 Employee Stock Purchase Plan. (1)
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. (1)
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. (1)
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).
- --------
(1) Incorporated by reference herein to Extreme's Registration Statement on
Form S-1 (File No. 333-71921)
+ 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
II-3
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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
he 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
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amended 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 6th day of October 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 Amended
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Gordon L. Stitt President, Chief Executive October 6, 1999
____________________________________ Officer and Chairman
Gordon L. Stitt (Principal Executive
Officer)
/s/ Vito E. Palermo Vice President and Chief October 6, 1999
____________________________________ Financial Officer (Principal
Vito E. Palermo Financial and Accounting
Officer)
Charles Carinalli* Director October 6, 1999
____________________________________
Charles Carinalli
Promod Haque* Director October 6, 1999
____________________________________
Promod Haque
Lawrence K. Orr* Director October 6, 1999
____________________________________
Lawrence K. Orr
Peter Wolken* Director October 6, 1999
____________________________________
Peter Wolken
/s/ Vito E. Palermo
*By:
---------------------------
Vito E. Palermo
(Attorney-in-fact)
II-5
EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
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. (1)
3.1 Certificate of Incorporation of Extreme Networks, Inc., a Delaware
corporation. (1)
3.2 Form of Amended and Restated Bylaws of Extreme Networks, Inc., a
Delaware corporation. (1)
4.1 Second Amended and Restated Rights Agreement dated January 12, 1998
between Extreme Network and certain stockholders. (1)
5.1+ Opinion of Gray Cary Ware & Freidenrich, LLP.
10.1 Form of Indemnification Agreement for directors and officers. (1)
10.2 Amended 1996 Stock Option Plan and forms of agreements thereunder. (1)
10.3 1999 Employee Stock Purchase Plan. (1)
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. (1)
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. (1)
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).
- --------
(1) Incorporated by reference herein to Extreme's Registration Statement on
Form S-1 (File No. 333-71921)
+ Previously filed.
Exhibit 1.1
[6,500,000] Shares
EXTREME NETWORKS, INC.
Common Stock, par value $0.001 per share
UNDERWRITING AGREEMENT
[October] ___, 1999
[October] ___, 1999
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated
Hambrecht & Quist LLC
SG Cowen Securities Corporation
Thomas Weisel Partners, LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
Extreme Networks, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to the several Underwriters named in Schedule II hereto (the
"U.S. Underwriters"), and certain stockholders of the Company (the "Selling
Stockholders") named in Schedule I hereto severally propose to sell to the
several U.S. Underwriters, an aggregate of [5,200,000] shares of the Company's
common stock, $0.001 par value per share (the "U.S. Firm Shares"), of which
_________ shares are to be issued and sold by the Company and ______ shares are
to be sold by the Selling Stockholders, in connection with the offering and sale
of such U.S. Firm Shares in the United States and Canada to United States and
Canadian Persons (as such terms are defined in the Agreement Between U.S. and
International Underwriters of even date herewith). In addition, the Company
proposes to issue and sell to the several International Underwriters named in
Schedule II hereto (the "International Underwriters") and the Selling
Stockholders severally propose to sell to the several International
Underwriters, an aggregate of [1,300,000] shares of the Company's common stock,
$0.001 par value per share (the "International Firm Shares"), of which _________
shares are to be issued and sold by the Company and ______ shares are to be sold
by the Selling Stockholders, in connection with the offering and sale of such
International Firm Shares outside the United States and Canada to persons other
than United States and Canadian Persons. Morgan Stanley & Co. Incorporated;
BancBoston Robertson Stephens Inc.; Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated; Hambrecht & Quist LLC; SG Cowen Securities Corporation
and Thomas Weisel Partners LLC shall act as representatives (the "U.S.
Representatives") of the several U.S. Underwriters, and Morgan Stanley & Co.
International Limited; BancBoston Robertson Stephens International Limited; Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated; Hambrecht & Quist
LLC, Societe Generale and Thomas Weisel
Partners LLC shall act as representatives (the "International Representatives")
of the several International Underwriters. The U.S. Underwriters and the
International Underwriters are hereinafter collectively referred to as the
"Underwriters." The U.S. Firm Shares and the International Firm Shares are
hereinafter collectively referred to as the "Firm Shares."
The Company also proposes to sell to the several U.S. Underwriters not more
than an additional [975,000] shares of its common stock, $0.001 par value per
share (the "Additional Shares"), if and to the extent that the U.S.
Representatives shall have determined to exercise, on behalf of the U.S.
Underwriters, the right to purchase such shares of common stock granted to the
U.S. Underwriters in Section 3 hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares." The shares of
the Company's common stock, $0.001 par value per share, to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "Common Stock." The Company and the Selling Stockholders are hereinafter
sometimes collectively referred to as the "Sellers."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of Shares in the United States and Canada to United States and
Canadian Persons, and the international prospectus, to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States and Canadian Persons. The international
prospectus is identical to the U.S. prospectus except for the outside front
cover page. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement;" the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "Prospectus." If the
Company has filed an abbreviated registration statement to register additional
shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the
"Rule 462 Registration Statement"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462 Registration
Statement.
1. Representations and Warranties. The Company represents and warrants
to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or, to the best knowledge of the
Company, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not
-2-
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph (b) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has the
corporate power and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not have
a material adverse effect on the Company and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole; all of the issued shares of
capital stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned directly
by the Company, free and clear of all liens, encumbrances, equities or claims.
No subsidiary of the Company is a "significant subsidiary" as defined in Rule 1-
02 of Regulation S-X under the Securities Act.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock (including the Shares to be sold by
the Selling Stockholders) outstanding prior to the issuance of the Shares have
been duly authorized and are validly issued, fully paid and non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene any
provision of applicable law or the certificate of incorporation or bylaws of the
Company or any agreement or other instrument binding upon the Company or any of
its subsidiaries that is material to the Company and
-3-
its subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or any
subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except such
as may be required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares by the U.S. Underwriters.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement).
(k) There are no legal or governmental proceedings pending or, to the
best knowledge of the Company threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or any
of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company and its
subsidiaries have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (2) the Company has not purchased (except for the repurchase of
shares of Common Stock from employees, officers, directors, consultants or other
persons providing services to the Company or any of its subsidiaries pursuant to
agreements under which the Company has the option to repurchase such shares at
cost upon the occurrence of certain events, such as termination of employment)
any of its outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than ordinary
and customary dividends; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
subsidiaries, except in each case as described in the Prospectus.
(n) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its subsidiaries; and
any real property and buildings
-4-
held under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries, in each case except
as described in the Prospectus.
(o) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all trademarks, service marks, trade names, copyrights,
license rights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, system or procedure) and
other similar intellectual property rights, and to the best of the Company's
knowledge, all patents and patent rights necessary to carry on their business in
all material respects as described in the Prospectus and currently employed by
them in connection with the business now operated by them, and, except as
described in the Prospectus, neither the Company nor any of its subsidiaries has
received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would have a
material adverse effect on the Company and its subsidiaries, taken as a whole.
(p) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in the Prospectus, or, to
the knowledge of the Company, is imminent; and the Company is not aware of any
existing, threatened or imminent labor disturbance by the employees of any of
its principal suppliers, manufacturers or contractors that could have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(q) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any of its subsidiaries has been refused any
insurance coverage sought or applied for; and neither the Company nor any of its
subsidiaries has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole, except as described in the Prospectus.
(r) The Company and its subsidiaries have complied and are in
material compliance with all federal, state, local and foreign statutes,
executive orders, proclamations, regulations, rules, directives, decrees,
ordinances and similar provisions having the force or effect of law and all
judicial and administrative orders, rulings, determinations and common law
concerning the importation of merchandise, the export or reexport of products,
services and technology, and the terms and conduct of international transactions
applicable to the Company and its subsidiaries in connection with the conduct of
the Company's or any subsidiary's business (including as the same relates to
record keeping requirements) ("International Trade Laws and Regulations");
neither the Company nor any of its subsidiaries has made or provided any
material false statement or material omission to any agency of any federal,
state or local government, purchasers of products, or foreign government or
foreign agency, in connection with the exportation of merchandise (including
with respect to export licenses, exceptions and other export authorizations and
any filings required for or
-5-
related to exportation of any item), the importation of merchandise or other
approvals required by a foreign government or agency or any other requirement
relating to any International Trade Laws and Regulations; neither the Company
nor any of its subsidiaries has made any payment, offer, gift, promise to give,
or authorized or otherwise participated in, assisted or facilitated any payment
or gift related to the Company's or any subsidiary's business that is prohibited
by the United States Foreign Corrupt Practices Act.
(s) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective business, and
neither the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse effect on
the Company and its subsidiaries, taken as a whole, except as described the
Prospectus.
(t) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(u) Ernst & Young LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Securities Act.
(v) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in financial
position of the Company and its subsidiaries on the basis stated therein at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; the supporting schedules, if any,
included in the Registration Statement present fairly in accordance with
generally accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data set forth
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company.
(w) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
-6-
(x) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and conditions
of any such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(y) To the best knowledge of the Company, there are no costs or
liabilities associated with Environmental Laws (including, without limitation,
any capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a whole.
(z) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such securities
with the Shares registered pursuant to the Registration Statement, except such
as have been validly waived.
(aa) The Company has reviewed its operations and the operations of its
subsidiaries to evaluate the extent to which the business or operations of the
Company or any of its subsidiaries will be affected by the Year 2000 Problem. As
a result of such review, the Company has no reason to believe, and does not
believe, that the Year 2000 Problem will have a material adverse effect on the
Company and its subsidiaries taken as a whole. The "Year 2000 Problem" as used
herein means any significant risk that the computer hardware or software used in
the receipt, transmission, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems of
any kind will not, in the case of dates or time periods occurring after December
31, 1999, function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000.
(bb) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
(cc) The Nasdaq Stock Market, Inc. has approved the Common Stock for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(dd) [Except for the Shares [and approximately [27,822,000] shares of
Common Stock currently outstanding], all outstanding shares of Common Stock, and
all securities convertible into or exercisable or exchangeable for Common Stock,
are subject to valid and binding agreements
-7-
(collectively, the "Lock-up Agreements") that restrict the holders thereof from
selling, making any short sale of, granting any option for the purchase of, or
otherwise transferring or disposing of, any of such shares of Common Stock, or
any such securities convertible into or exercisable or exchangeable for Common
Stock, for a period of 90 days after the date of the Prospectus without the
prior written consent of Morgan Stanley & Co. Incorporated or the Company.]
(ee) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such securities
with the Shares registered pursuant to the Registration Statement other than as
described in the Registration Statement and as have been waived in writing in
connection with the offering contemplated hereby.
2. Representations and Warranties of the Selling Stockholders.
(a) Each of the Selling Stockholders represents and warrants to and
agrees with each of the Underwriters that:
(i) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder.
(ii) The execution and delivery by such Selling Stockholder of,
and the performance by such Selling Stockholder of its obligations under, this
Agreement, the Custody Agreement signed by such Selling Stockholder and
ChaseMellon Shareholder Services, L.L.C., as Custodian, relating to the deposit
of the Shares to be sold by such Selling Stockholder (the "Custody Agreement")
and the Power of Attorney appointing certain individuals as such Selling
Stockholder's attorneys-in-fact to the extent set forth therein, relating to the
transactions contemplated hereby and by the Registration Statement (the "Power
of Attorney") will not contravene any provision of applicable law, or the
certificate of incorporation or by-laws of such Selling Stockholder (if such
Selling Stockholder is a corporation), or any agreement or other instrument
binding upon such Selling Stockholder or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over such Selling
Stockholder, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by such Selling Stockholder of its obligations under this Agreement
or the Custody Agreement or Power of Attorney of such Selling Stockholder,
except such as may be required by the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Shares by the U.S.
Underwriters.
(iii) Such Selling Stockholder has, and on the Closing Date will
have, valid title to the Shares to be sold by such Selling Stockholder and the
legal right and power, and all authorization and approval required by law, to
enter into this Agreement, the Custody Agreement and the Power of Attorney and
to sell, transfer and deliver the Shares to be sold by such Selling Stockholder.
-8-
(iv) The Custody Agreement and the Power of Attorney have been
duly authorized, executed and delivered by such Selling Stockholder and are
valid and binding agreements of such Selling Stockholder.
(v) Delivery of the Shares to be sold
(vi) Such Selling Stockholder has no knowledge of any material
fact, condition or information not disclosed in the Registration Statement which
has adversely affected or may adversely affect the business of the Company and
its subsidiaries, taken as a whole; and the sale of the Shares by such Selling
Stockholder pursuant hereto is not prompted by any material information
concerning the Company or any of its subsidiaries which is not set forth in the
Registration Statement or the documents incorporated by reference therein.
(b) In addition to the representations and warranties set forth in
Section 2(a) above, Gordon L. Stitt represents, warrants and agrees with each of
the Underwriters that (i) the Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement and the Prospectus comply and, as
amended or supplemented, if applicable, will comply in all material respects
with the Securities Act and the applicable rules and regulations of the
Commission thereunder and (iii) the Prospectus does not contain and, as amended
or supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in this
paragraph 2(b) do not apply to statements or omissions in the Registration
Statement or the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
3. Agreements to Sell and Purchase. Each Seller, severally and not
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller at U.S. $_____ a share (the
"Purchase Price") the number of Firm Shares (subject to such adjustments to
eliminate fractional shares as you may determine) that bears the same proportion
to the number of Firm Shares to be sold by such Seller as the number of Firm
Shares set forth in Schedules II and III hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, each Selling Stockholder,
severally and not jointly, hereby agrees to sell to the several U.S.
Underwriters the Additional Shares, and the U.S. Underwriters shall have a one-
time right to purchase, severally and not jointly, the Additional Shares at the
Purchase Price. If the U.S. Representatives, on behalf of the U.S.
Underwriters, elect to exercise such option, the U.S. Representatives shall so
notify each Selling Stockholder in writing not later than 30 days after the
-9-
date of this Agreement, which notice shall specify the number of Additional
Shares to be purchased from such Selling Stockholder by the U.S. Underwriters
and the date on which such Additional Shares are to be purchased. Such date may
be the same as the Closing Date (as defined below) but not earlier than the
Closing Date nor later than ten business days after the date of such notice.
Additional Shares may be purchased as provided in Section 5 hereof solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. If any Additional Shares are to be purchased, each U.S.
Underwriter agrees, severally and not jointly, to purchase the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
the U.S. Representatives may determine) that bears the same proportion to the
total number of Additional Shares to be purchased as the number of U.S. Firm
Shares set forth in Schedule II hereto opposite the name of such U.S.
Underwriter bears to the total number of U.S. Firm Shares.
Each Seller hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period ending 90
days after the date of the Prospectus, (i) 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 securities convertible into or exercisable or exchangeable for Common Stock
or (ii) 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 in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold
hereunder, (B) the issuance by the Company of shares of Common Stock upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof as described in the Registration Statement or of which the
Underwriters have been advised in writing, (C) the grant of options to purchase
Common Stock pursuant to the Option Plan, (D) the issuance by the Company of
shares of Common Stock pursuant to the Company's 1999 Employee Stock Purchase
Plan and (E) Shares not otherwise subject to lock-up agreements with other
Representatives or Morgan Stanley. In addition, each Selling Stockholder,
agrees that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not, during the period
ending 90 days after the date of the Prospectus, make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
4. Terms of Public Offering. The Sellers are advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at U.S.
$____ a share (the "Public Offering Price") and to certain dealers selected by
you at a price that represents a concession not in excess of U.S. $____ a share
under the Public Offering Price, and that any Underwriter may allow, and such
dealers may reallow, a concession, not in excess of U.S. $____ a share, to any
Underwriter or to certain other dealers.
5. Payment and Delivery. Payment for the Firm Shares to be sold by each
Seller shall be made to such Seller in Federal or other funds immediately
available in New York City against
-10-
delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on [ ] ___, 1999, or at such
other time on the same or such other date, not later than [ ] ___, 1999, as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "Closing Date."
Payment for any Additional Shares to be sold by a Selling Stockholder shall
be made to such Selling Stockholder in Federal or other funds immediately
available in New York City against delivery of such Additional Shares for the
respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on the date specified in the notice described in Section 3 or at such
other time on the same or such other date, in any event not later than ________
____, 1999, as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. Conditions to the Underwriters' Obligations. The obligations of the
Sellers to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than [ ] p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of any review
for a possible change that does not indicate the direction of the possible
change, in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization," as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or otherwise, or in
the earnings, business or operations of the Company and its subsidiaries, taken
as a whole, from that set forth in the Prospectus (exclusive of any amendments
or supplements thereto subsequent to the date of this Agreement) that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
-11-
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of the
Company, to the effect set forth in Section 5(a)(i) above and to the effect that
the representations and warranties of the Company contained in this Agreement
are true and correct as of the Closing Date and that the Company has complied in
all material respects with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before the
Closing Date.
The officer signing and delivering such certificate may rely upon the best
of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Gray Cary Ware & Freidenrich LLP, outside counsel to the Company,
dated the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(ii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iii) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly issued, fully
paid and non-assessable;
(iv) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will not
contravene any provision of applicable law or the certificate of incorporation
or bylaws of the Company or, to such counsel's knowledge, any agreement or other
instrument binding upon the Company or any of its subsidiaries that is material
to the Company and its subsidiaries, taken as a whole, or, to such counsel's
knowledge, any judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the
-12-
securities or Blue Sky laws of the various states in connection with the offer
and sale of the Shares by the U.S. Underwriters;
(vii) the statements (A) in the Prospectus under the captions
"Risk Factors--Provisions in Extreme's Charter or Agreements May Delay or
Prevent a Change of Control," "Risk Factors--Substantial Future Sales of
Extreme's Common Stock in the Public Market Could Cause Its Stock Price to
Fall," "Management--Change of Control Arrangements," "Management--Amended 1996
Stock Option Plan," "Management--1999 Employee Stock Purchase Plan,"
"Management--Limitation of Liability and Indemnification," "Certain
Transactions," "Description of Capital Stock," "Shares Eligible for Future Sale"
and "Underwriters" and (B) in the Registration Statement in Items 14 and 15, in
each case insofar as such statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and proceedings and
fairly summarize the matters referred to therein;
(viii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or, to such counsel's knowledge,
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described or of any statutes, regulations, contracts
or other documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(ix) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended;
(x) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and schedules included
therein and financial and statistical data included therein and derived
therefrom, as to which such counsel need not express any opinion) comply as to
form in all material respects with the Securities Act and the applicable rules
and regulations of the Commission thereunder, (B) has no reason to believe that
(except for financial statements and schedules included therein and financial
and statistical data included therein and derived therefrom, as to which such
counsel need not express any belief) the Registration Statement and the
prospectus included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading and (C) has no reason to believe that (except
for financial statements and schedules included therein and financial and
statistical data included therein and derived therefrom, as to which such
counsel need not express any belief) the Prospectus contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
-13-
(d) The Underwriters shall have received on the Closing Date an
opinion of Blakely, Sokoloff, Taylor and Zafman LLP, intellectual property
counsel to the Company, dated the Closing Date, with respect to certain
intellectual property matters, to the effect that:
(i) The Company owns all patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectus as being owned by it, and such counsel is not aware of any claim to
the contrary or any challenge by any other person to the rights of the Company
with respect to the foregoing other than those identified in the Prospectus;
(ii) Such counsel is not aware of any legal actions, claims or
proceedings pending or threatened against the Company its manufacturers,
suppliers or customers other than those identified in the Prospectus alleging
that the Company is infringing or otherwise violating any patents, trademarks,
trademark registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions or trade secrets owned by others;
(iii) Such counsel has reviewed the descriptions of patents and
patent applications under the captions "Risk Factors--We May Not Adequately
Protect Our Intellectual Property and Our Products May Infringe on the
Intellectual Property Rights of Third Parties" and "Business--Intellectual
Property" in the Registration Statement and Prospectus, and, to the extent they
constitute matters of law or legal conclusions, these descriptions are accurate
and fairly and completely present the patent situation of the Company;
(iv) For each copyrightable product described in the Prospectus,
the Company either (i) has registered all copyrights for such product and has
obtained and properly recorded written assignments of all rights and title
therein to the Company from all authors and owners of such copyrights other than
the Company, including without limitation any and all independent contractors;
or (ii) was vested with original title to all copyrights for such product and no
written assignments for such copyrights are required to perfect Company's rights
and title thereto; and
(v) With respect to the patent protection on the Company's
technology for each patent or patent application described in the Prospectus as
being owned by the Company, such counsel is aware of nothing that causes such
counsel to believe that, as of the date of the Registration Statement became
effective and as of the date of such opinion, the description of patents and
patent applications under the captions "Risk Factors--We May Not Adequately
Protect Our Intellectual Property and Our Products May Infringe on the
Intellectual Property Rights of Third Parties" and "Business--Intellectual
Property" in the Registration Statement and Prospectus contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made therein, in light of the circumstances under which they were
made, not misleading, including without limitation, any undisclosed material
issue with respect to the subsequent validity or enforceability of such patent
or patent issuing from any such pending patent application.
-14-
(e) The Underwriters shall have received on the Closing Date an
opinion of [Gray Cary Ware & Freidenrich LLP], counsel for the Selling
Stockholders, dated the Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Stockholders;
(ii) the execution and delivery by each Selling Stockholder of,
and the performance by such Selling Stockholder of its obligations under, this
Agreement and the Custody Agreement and Powers of Attorney of such Selling
Stockholder will not contravene any provision of applicable law, or the
certificate of incorporation or by-laws of such Selling Stockholder (if such
Selling Stockholder is a corporation), or, to the best of such counsel's
knowledge, any agreement or other instrument binding upon such Selling
Stockholder or, to the best of such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having jurisdiction over such
Selling Stockholder, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by such Selling Stockholder of its obligations under this Agreement
or the Custody Agreement or Power of Attorney of such Selling Stockholder,
except such as may be required by the securities or Blue Sky laws of the various
states in connection with offer and sale of the Shares by the U.S. Underwriters;
(iii) each of the Selling Stockholders has valid title to the
Shares to be sold by such Selling Stockholder and the legal right and power, and
all authorization and approval required by law, to enter into this Agreement and
the Custody Agreement and Power of Attorney of such Selling Stockholder and to
sell, transfer and deliver the Shares to be sold by such Selling Stockholder;
(iv) the Custody Agreement and the Power of Attorney of each
Selling Stockholder have been duly authorized, executed and delivered by such
Selling Stockholder and are valid and binding agreements of such Selling
Stockholder;
(v) delivery of the Shares to be sold by each Selling
Stockholder pursuant to this Agreement will pass title to such Shares free and
clear of any security interests, claims, liens, equities and other encumbrances;
and
(vi) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and schedules and
other financial and statistical data included therein as to which such counsel
need not express any opinion) comply as to form in all material respects with
the Securities Act and the applicable rules and regulations of the Commission
thereunder, (B) has no reason to believe that (except for financial statements
and schedules and other financial and statistical data as to which such counsel
need not express any belief) the Registration Statement and the prospectus
included therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading and (C) has no reason to believe that (except for financial
statements and schedules and other
-15-
financial and statistical data as to which such counsel need not express any
belief) the Prospectus contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(f) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel
for the Underwriters, dated the Closing Date, covering the matters referred to
in Sections 6(c)(iv), 6(c)(v), 6(c)(vii) (but only as to the statements in the
Prospectus under "Description of Capital Stock" and "Underwriters") and 6(c)(x)
above.
With respect to Section 6(c)(x) above, Gray Cary Ware & Freidenrich LLP and
Wilson Sonsini Goodrich & Rosati, Professional Corporation, and with respect to
Section 6(e)(vi) above, Gray Cary Ware & Freidenrich LLP, may state that their
opinion and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification, except as specified. With respect to Section 6(e) above,
Gray Cary Ware & Freidenrich LLP may rely upon an opinion or opinions of counsel
for any Selling Stockholders and, with respect to factual matters and to the
extent such counsel deems appropriate, upon the representations of each Selling
Stockholder contained herein and in the Custody Agreement and Power of Attorney
of such Selling Stockholder and in other documents and instruments; provided
that (A) each such counsel for the Selling Stockholders is satisfactory to your
counsel, (B) a copy of each opinion so relied upon is delivered to you and is in
form and substance satisfactory to your counsel, (C) copies of such Custody
Agreements and Powers of Attorney and of any such other documents and
instruments shall be delivered to you and shall be in form and substance
satisfactory to your counsel and (D) Gray Cary Ware & Freidenrich LLP shall
state in their opinion that they are justified in relying on each such other
opinion.
The opinions of Gray Cary Ware & Freidenrich LLP described in Sections 6(c)
and 6(e) above (and any opinions of counsel for any Selling Stockholder referred
to in the immediately preceding paragraph) shall be rendered to the Underwriters
at the request of the Company or one or more of the Selling Stockholders, as the
case may be, and shall so state therein.
(g) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to the Underwriters, from Ernst
& Young LLP, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus; provided
that the letter delivered on the Closing Date shall use a "cut-off date" not
earlier than the date hereof.
(h) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain securityholders, officers and
directors of the Company covering at least [ ]% of the outstanding shares of
Common Stock or securities convertible into Common Stock of the Company relating
to sales and certain other dispositions of shares of Common Stock or certain
-16-
other securities, delivered to you on or before the date hereof, shall be in
full force and effect on the Closing Date.
The several obligations of the U.S. Underwriters to purchase Additional
Shares hereunder are subject to the delivery to the U.S. Underwriters on the
Option Closing Date of such documents as the U.S. Underwriters may reasonably
request with respect to the good standing of the Company, the due authorization
and issuance of the Additional Shares and other matters related to the issuance
of the Additional Shares.
7. Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, [five (5)] signed copies of
the Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish to you in New York City, without charge, prior
to 10:00 a.m. New York City time on the business day next succeeding the date of
this Agreement and during the period mentioned in Section 7(c) below, as many
copies of the Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to which
you reasonably object, and to file with the Commission within the applicable
period specified in Rule 424(b) under the Securities Act any prospectus required
to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a result of
which it is necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if, in the opinion of counsel for
the Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers (whose names
and addresses you will furnish to the Company) to which Shares may have been
sold by you on behalf of the Underwriters and to any other dealers upon request,
either amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-month
period ending September 30,
-17-
2000 that satisfies the provisions of Section 11(a) of the Securities Act and
the rules and regulations of the Commission thereunder.
8. Expenses. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Company agrees to
pay or cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel, the Company's accountants and counsel for the
Selling Stockholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 7(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc. (the "NASD"), (v) all fees and expenses in connection
with the preparation and filing of the registration statement on Form 8-A
relating to the Common Stock and all costs and expenses incident to listing the
Shares on the Nasdaq National Market, (vi) the cost of printing certificates
representing the Shares, (vii) the costs and charges of any transfer agent,
registrar or depositary, (viii) the costs and expenses of the Company relating
to investor presentations on any "road show" undertaken in connection with the
marketing of the offering of the Shares, including, without limitation, expenses
associated with the production of road show slides and graphics, fees and
expenses of any consultants engaged in connection with the road show
presentations with the prior approval of the Company, travel and lodging
expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the road
show, and (ix) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise made
in this Section. It is understood, however, that except as provided in this
Section, Section 9 entitled "Indemnity and Contribution," and the last paragraph
of Section 11 below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes payable
on resale of any of the Shares by them and any advertising expenses connected
with any offers they may make.
The provisions of this Section shall not supersede or otherwise affect any
agreement that the Sellers may otherwise have for the allocation of such
expenses among themselves.
-18-
9. Indemnity and Contribution.
(a) The Company and Gordon L. Stitt, agree, jointly and severally, to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or omission or alleged untrue statement or omission based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein. Notwithstanding
anything herein to the contrary, the Underwriters agree that they shall not seek
indemnification under this Section 9(a) from Gordon L. Stitt unless the
Underwriters shall first have sought indemnity from the Company under Section
9(a) and the Company has not agreed to satisfy such request for indemnification
in full within 30 days; provided, however, that the Underwriters shall not be
-------- -------
required to effect such initial demand upon the Company and wait such 30-day
period if it would prejudice their right to indemnification from Gordon L.
Stitt; and provided, further, that liability to Gordon L. Stitt under this
-------- ------- ----
Section 9(a) shall be limited to an amount equal to the gross proceeds to such
Selling Stockholder from the sale of Offered Securities sold by such Selling
Stockholder under this agreement.
(b) Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, from and against any all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only with reference to information relating to such Selling Stockholder
furnished in writing by or on behalf of such Selling Stockholder expressly for
use in the Registration Statement, any preliminary prospectus, the Prospectus or
any amendments or supplements thereto.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Selling Stockholders, the directors of the
Company, the officers of the Company who sign the Registration Statement and
each person, if any, who controls the Company
-19-
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnity set forth in
paragraph (a) above from the Sellers to such Underwriter, but only with
reference to information relating to such Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendments or
supplements thereto.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 9(a) or 9(b), such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley, in the case of parties indemnified
pursuant to Section 9(a), and by the Company, in the case of parties indemnified
pursuant to Section 9(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in Section 9(a) or
9(b) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 9(e)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
9(e)(i) above but also the relative fault of the
-20-
Company on the one hand and of the Underwriters on the other hand in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Sellers on the one hand and the Underwriters
on the other hand in connection with the offering of the Shares shall be deemed
to be in the same respective proportions as the net proceeds from the offering
of the Shares (before deducting expenses) received by the Sellers and the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares. The relative fault of the Sellers
on the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Sellers or by the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Underwriters' respective
obligations to contribute pursuant to this Section 9 are several in proportion
to the respective number of Shares they have purchased hereunder, and not joint.
(f) The Sellers and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 9(e). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 9, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 9 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 9 and the representations, warranties and other statements of the
Company and the Selling Stockholders contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any termination of this
Agreement, (ii) any investigation made by or on behalf of any Underwriter or any
person controlling any Underwriter, any Selling Stockholder or any person
controlling any Selling Stockholder, or the Company, its officers or directors
or any person controlling the Company and (iii) acceptance of and payment for
any of the Shares.
10. Termination. This Agreement shall be subject to termination by notice
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date
-21-
(i) trading generally shall have been suspended or materially limited on or by,
as the case may be, any of the New York Stock Exchange, the American Stock
Exchange, the National Association of Securities Dealers, Inc., the Chicago
Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board
of Trade, (ii) trading of any securities of the Company shall have been
suspended on any exchange or in any over-the-counter market, (iii) a general
moratorium on commercial banking activities in New York shall have been declared
by either Federal or New York State authorities or (iv) there shall have
occurred any outbreak or escalation of hostilities or any change in financial
markets or any calamity or crisis that, in your judgment, is material and
adverse and (b) in the case of any of the events specified in clauses 10(a)(i)
through 10(a)(iv), such event, singly or together with any other such event,
makes it, in your judgment, impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus.
11. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedules II and III bears to the aggregate
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 11 by an amount in excess of one-ninth of
such number of Shares without the written consent of such Underwriter. If, on
the Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased, and arrangements satisfactory to you, the Company and
the Selling Stockholders for the purchase of such Firm Shares are not made
within 36 hours after such default, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Stockholders. In any such case either you or the Company shall have the
right to postpone the Closing Date, but in no event for longer than seven days,
in order that the required changes, if any, in the Registration Statement and in
the Prospectus or in any other documents or arrangements may be effected. If,
on the Option Closing Date, any Underwriter or Underwriters shall fail or refuse
to purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option (i) to terminate their obligation hereunder to purchase
Additional Shares or (ii) to purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase in the absence of such default. Any action taken under this paragraph
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
-22-
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of any Seller to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
12. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
14. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
EXTREME NETWORKS, INC.
By: _______________________________
Gordon L. Stitt
President and Chief Executive Officer
The Selling Stockholders
named in Schedule I hereto,
acting severally
By: _______________________________
Attorney-in-Fact
-23-
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated
Hambrecht & Quist LLC
SG Cowen Securities Corporation
Thomas Weisel Partners LLC
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By: __________________________
Name:
Title:
Morgan Stanley & Co. International Limited
BancBoston Robertson Stephens International Limited
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
Hambrecht & Quist LLC
Societe Generale
Thomas Weisel Partners LLC
Acting severally on behalf
of themselves and the
several International Underwriters
named in Schedule III hereto.
By: Morgan Stanley & Co. International Limited
By: __________________________
Name:
Title:
-24-
SCHEDULE I
SELLING STOCKHOLDERS
Selling Stockholder Number of Shares to be Sold
- ------------------------------------------------ -------------------------------------------------
--------------------
Total
====================
-25-
SCHEDULE II
U.S. UNDERWRITERS
Underwriter Number of U.S. Firm Shares to be Purchased
- ------------------------------------------------ -------------------------------------------------
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated
Hambrecht & Quist LLC
SG Cowen Securities Corporation
Thomas Weisel Partners LLC
-------------------
Total U.S. Firm Shares
===================
-26-
SCHEDULE III
INTERNATIONAL UNDERWRITERS
Number of International Firm Shares to be
Underwriter Purchased
- ------------------------------------------------ -------------------------------------------------
Morgan Stanley & Co. International Limited
BancBoston Robertson Stephens International
Limited
Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated
Hambrecht & Quist LLC
Societe Generale
Thomas Weisel Partners LLC
------------------
Total International Firm Shares
==================
-27-
Exhibit A
FORM OF LOCK-UP LETTER
______________ ___, 1999
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated
Hambrecht & Quist LLC
SG Cowen Securities Corporation
Thomas Weisel Partners LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("Morgan Stanley") and Morgan Stanley & Co. International Limited ("MSIL")
propose to enter into an Underwriting Agreement (the "Underwriting Agreement")
with Extreme Networks, a Delaware corporation (the "Company"), providing for the
public offering (the "Public Offering") by the several Underwriters, including
Morgan Stanley and MSIL (the "Underwriters"), of shares (the "Shares") of the
Common Stock, par value $0.001 per share, of the Company (the "Common Stock").
The undersigned further understands that in connection with the proposed Public
Offering, the Company intends to file with the Securities and Exchange
Commission a registration statement (the "Registration Statement") relating to
the Shares.
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 90 days after the date of the final prospectus relating
to the Public Offering (the "Prospectus"), (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 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 in clause (1) or (2) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (a) the sale of any Shares to the Underwriters
pursuant to the Underwriting Agreement, (b) transactions relating to shares of
Common Stock or other securities acquired in open market transactions after the
completion of the Public Offering or (c) the sale of any Shares previously
released from the Lock-up Agreement entered into by the undersigned in
connection with the Company's initial public offering on April 8, 1999. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 90 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
Notwithstanding the foregoing, if the undersigned is an individual, he or
she may transfer any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock either during his or her lifetime
or on death by will or intestacy to his or her immediate family or to a trust
the beneficiaries of which are exclusively the undersigned and/or a member or
members of his or her immediate family; provided further, if the undersigned is
a partnership, it may transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock to a partner of
such partnership or a retired partner of such partnership who retires after the
date hereof, or to the estate of any such partner or retired partner, and any
partner who is an individual may transfer such shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock
either during his or her lifetime or on death by will or intestacy to his or her
immediate family or to a trust the beneficiaries of which are exclusively the
undersigned and/or a member or members of his or her immediate family; provided,
however, that prior to any transfer pursuant to this paragraph, each transferee
shall execute an agreement, satisfactory to Morgan Stanley, pursuant to which
each transferee shall agree to receive and hold such shares of Common Stock, or
securities convertible into or exchangeable or exercisable for Common Stock,
subject to the provisions hereof, and there shall be no further transfer except
in accordance with the provisions hereof. For the purposes of this paragraph,
"immediate family" shall mean spouse, lineal descendant, father, mother, brother
or sister of the transferor.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
-2-
This letter shall expire and be of no further force or effect upon the
earliest to occur of (i) October 31, 1999, in the event that the Registration
Statement shall not have been declared effective on or before such date, (ii)
October 6, 1999, in the event that the Registration Statement shall not have
been filed on or before such date, and (iii) on such date as the Company and the
Underwriters have abandoned plans to have the Registration Statement declared
effective.
Very truly yours,
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(Name of Stockholder)
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(Signature of Authorized Signatory)
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(Address)
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
July 20, 1999, in the Registration Statement (Form S-1) and related Prospectus
of Extreme Networks, Inc. for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
October 6, 1999
