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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 2, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 333-71921
Extreme Networks, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 77-0430270
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3585 Monroe Street 95051
Santa Clara, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 579-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $9,892,125,000 as of September 15, 2000, based upon
the closing price on the Nasdaq National Market reported for such date. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purpose.
109,912,500 shares of the Registrant's Common stock, $.001 par value, were
outstanding September 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11,12 and 13 of Part III incorporate by
reference information from the Registrant's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Registrant's 2000 Annual Meeting of Stockholders.
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EXTREME NETWORKS, INC.
FORM 10-K
INDEX
Page
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PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security holders 14
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters 16
Item 6. Selected Consolidated Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 49
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and Management 50
Item 13. Certain Relationships and Related Transactions 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 50
SIGNATURES 53
PART I
Item 1. Business.
When used in this Report, the words "may," "should," "believes," "expects,"
"anticipates," "estimates" and similar expressions are intended to identify
forward-looking statements. Such statements, which include statements concerning
the availability and functionality of products under development, product mix,
pricing trends, the mix of export sales, sales to significant customers and the
availability and cost of products from the Company's suppliers, are subject to
risks and uncertainties, including those set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Factors That May Affect Our Results." Our actual results could differ materially
from those projected in these forward-looking statements which could have a
material adverse effect on our business, operating results and financial
condition. These forward-looking statements speak only as of the date hereof and
there may be events in the future that we are not able to predict accurately or
over which we have no control.
Overview
Extreme Networks, Inc. ("Extreme" or "the Company") is a leading provider
of broadband ethernet networking solutions for the Internet economy. The key
advantages of our ethernet 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 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.
Industry Background
Businesses and other organizations have become increasingly dependent on
the internet 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, mobile communications and
application service providers for example, are further burdening the network
infrastructure.
Today's Networking Environments
LANs. LANs 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 the high traffic portion of a LAN
which interconnects all or a large part of the LAN. The increased use of
data-intensive, mission-critical applications, the widespread implementations of
intranets and extranets, and the ubiquity of Internet technologies have created
unpredictable traffic patterns, and unpredictable traffic loads within the LAN.
In addition, as users utilize the desktop browser and Internet technologies to
access significant amounts of information from servers located inside and
outside of the organization, a much higher percentage of traffic crosses the
enterprise LAN backbone. For example, an employee can make a simple request that
may require data to be downloaded and analyzed from multiple data warehouses
outside his or her local workgroup, resulting in increased traffic across the
LAN. Similarly, multiple users could request a multimedia presentation from a
company intranet or from the Internet consuming tremendous amounts of network
capacity. Either of these situations could result in users overwhelming a
company's enterprise LAN unknowingly. As a result, the increased traffic,
bandwidth-intensive applications and unpredictable traffic patterns are
straining traditional LAN environments and reducing the performance of
mission-critical applications.
Early LANs supported limited numbers of users and used a variety of
protocols to organize the transmission of data, including Ethernet, Token Ring
or AppleTalk technologies. As the number of users and the amount of traffic on a
network grew, network performance began to decline. In this shared environment,
each desktop received and was burdened by the communication of every other
desktop. The need to improve network performance was initially addressed by
adding network devices known as bridges or hubs
3
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 enterprise network.
A network must be scalable in the following four dimensions:
Speed. Speed refers to the number of bits per second that can be
transmitted across the network. Today's 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 ISPs and metropolitan area networks by accommodating new
unpredictable traffic patterns and bandwidth-intensive, mission-critical
applications. First, while many new and different technologies have been
deployed in existing LANs, Ethernet has become the predominant LAN technology,
with over 97% of the market in 1999 and total shipments of over 490 million
ports from 1991 to 1999, 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. Today, Gigabit ethernet and 10 gigabit ethernet
represent a viable network backbone protocol, enabling broadband connections to
be aggregated for network backbone transport across the metropolitan core.
Second, growth of the Internet and the subsequent development of application
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,
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functions as a less expensive and significantly faster hardware-based router.
Layer 3 switches can operate at multi-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 ISPs and metro area
networks, customers need a solution that is easy to use and implement an 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, customers need a Layer 3 solution that provides sufficient bandwidth to
support unpredictable traffic spikes without impacting all other users connected
to the network. In addition, customers 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, customers 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 broadband ethernet networking solutions that meet the
requirements of enterprise,ISPs and Metropolitan Area Networks 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 major area of the network. In addition, these products can be utilized by
ISPs 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 allow the switch to be managed from
any browser-equipped desktop.
The key benefits of Extreme's solutions are:
High performance. Our products provide Broadband and IP services Ethernet
together with the non-blocking, wire-speed routing of our ASIC-based Layer 3
switching. Using our products, customers can achieve forwarding rates that are
up to 100 times faster than with software-based routers.
Ease of use and implementation. Our products share a common ASIC, software
and network management architecture and offer consistent features for each of
the key areas of the network. Our standard-based products can be integrated into
and installed within existing 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 customers the speed and bandwidth they
need today with the capability to scale their networks to support demanding
applications 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 and Layer 4-7 capability because this functionality is built
into our ASICs.
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.
5
The Extreme Networks Strategy
Extreme's objective is to be the leading supplier of end-to-end network
solutions. 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 enterprise LANs,
ISPs 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, Internet protocol ("IP") and switching technologies to develop new
products based on our common architecture that meet the future requirements of
enterprise LANs, ISPs 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 market segments, including ISPs, content providers and metropolitan area
networks, or MANs, and on extending our product penetration within 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.
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 other
development areas 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 250
resellers in 50 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 broadband networking solutions that meet the requirements
of enterprise, ISPs and IP carrier and Metropolitan Area Networks by providing
increased performance, scalability, policy-based quality of service, ease of use
and lower cost of ownership. Our Summit, BlackDiamond and Alpine 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 a broadband networking solution that has consistent
functionality, performance and management. The common architecture and
end-to-end functionality of our products also reduces the cost and complexity of
network administration and management.
The following table identifies our principal hardware and software
products:
6
Product name Product name
and date of and date of
first shipment Configuration / Description first shipment Configuration / Description
The Summit Stackable product family The BlackDiamond Modular Chassis
- ----------------------------------- --------------------------------
Summit-based products: BlackDiamond 6808 Up to 576 10/100 Mbps
Summit4 16 10/100 Mbps September 1998 Ethernet ports or 96
March 1998 Ethernet ports and Gigabit Ethernet ports in
6 Gigabit Ethernet ports one chassis
Summit24 24 10/100 Mbps 10 slots to accommodate
November 1998 Ethernet ports a variety of up to 8 connectivity
and modules and 1 or 2 management
1 Gigabit Ethernet ports modules
Summit48 48 10/100 Mbps The Alpine Chassis
April 1998 Ethernet ports and ------------------
2 Gigabit Ethernet ports Alpine 3808 Up to 256 10/100 Mbps
April 2000 Ethernet ports or 32
Gigabit Ethernet ports in
one chassis
Inferno-based products:
Summit1i 8 Gigabit Ethernet ports 9 slots to accommodate
September 2000 a variety of up to 8 connectivity
modules and 1 management
module
Summit5i 16 Gigabit Ethernet ports
September 2000
Summit7i 32 Gigabit Ethernet ports Software
December 1999 --------
ExtremeWare Software suite that has standard
September 1997 protocols, web-based
configuration and Policy-Based
Quality of Service
ExtremeWare Enterprise An integrated management
Manager application suite that protects
August 1998 the delivery of provisioned
services and applications
Summit Stackable Products
Products in the Summit family of switches are designed to meet the
demanding requirements emerging in intranet and Internet applications. All
Summit switches share a common non-blocking switch architecture that provides
scalability in four areas: speed, bandwidth, network size and quality of service
(QoS). The Summit product family supports a range of gigabit and 10/100 Mbps
aggregation for enterprise desktops and servers, large Internet data centers,
and broadband points of presence ("POP") in metropolitan area networks and
multi-tenant buildings.
The enterprise desktop is the portion of the network where individual
end-user workstations are connected to a hub or switch. In this shared
environment, each desktop in the workgroup receives and is burdened by the
communication of every other desktop in the workgroup. As applications have
become more bandwidth intensive and as user traffic has migrated outside the
workgroup via the Internet or an intranet or extranet, 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. Extreme 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.
Servers run the applications and store the data needed by all network
end-users. 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
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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. In server farms and data centers,
the Summit7i maximizes server availability and performance by combining server
load-balancing with wire-speed switching.
As metropolitan area networks evolve to handle more data rather than voice,
the POP must also progress from serving as a simple transport device to an
application services tool. Today's broadband POPs are moving closer to the
customer and need to offer services density and scalability without
re-engineering discreet narrowband technologies. There is a growing need for
consistent scalable services in the multi-tenant market, which according to
Cahner's InStat Group will reach $2 billion by 2004. The new Summit1i and
Summit5i Gigabit Ethernet switching systems eliminate the limitations associated
with multiple narrowband aggregation technologies traditionally used in
metropolitan POPs.
BlackDiamond Modular Chassis
The BlackDiamond modular chassis delivers scalability, redundancy and high
reliability for core switching in high-density Ethernet/IP enterprise and
service provider networks. 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 eight 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.
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, 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.
Alpine Chassis
The Alpine 3808 chassis switch provides a simpler, more resilient broadband
infrastructure for metropolitan area networks ("MANs"), service provider data
centers, multi-tenant buildings and enterprise wiring closets. The Alpine 3808
is the industry's first broadband provisioning switch based on Ethernet and IP
that enables MANs and carriers to deliver more infrastructure bandwidth, slice
and dice that bandwidth for optimal usage, and guarantee fixed latency for
delay-sensitive services such as video and voice.
ExtremeWare
The ExtremeWare software suite combines industry-standard protocols to
provide interoperability with legacy switches and routers, plus Policy-Based
Quality of Service (QoS) for bandwidth management and traffic prioritization in
today's networks. With ExtremeWare, QoS policies are easy to define and assign
to traffic groups. The range of QoS profiles includes minimum bandwidth, maximum
bandwidth and relative priority. These QoS profiles are key to optimizing
bandwidth management effectiveness. 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.
ExtremeWare Enterprise Manager
ExtremeWare Enterprise Manager is a value-added application suite that
makes it easier to perform configuration, troubleshooting and status monitoring,
and deploy multi-vendor policy-based management. ExtremeWare Enterprise Manager
offers a comprehensive
8
set of network management tools that are easy to use from a workstation with a
Java-enabled web browser. ExtremeWare Enterprise Manager simplifies the task of
managing and configuring groups of our switches. With ExtremeWare Enterprise
Manager, an entire network of our switches can be managed from a single
management console using a standard web browser.
ExtremeWare ServiceWatch
In August 2000 Extreme announced ExtremeWare ServiceWatch. This software is
designed to help businesses avoid costly downtime and help to ensure that
network services remain up and performing at peak levels. Just like the
telephone dial tone that indicates the availability and quality of voice
services, ServiceWatch delivers application dial tone to facilitate "always-on"
Layer 7 network services. It monitors and manages the response time of
mission-critical services such as e-mail, e-commerce and filer transfer
activities. If response time starts to degrade, ServiceWatch can be configured
to notify the network manager to take corrective action before a problem occurs.
ServiceWatch is also used as a bandwidth-capacity planning tool and can help
track ISP service level agreements (SLAs) using historical reporting and
graphing of service availability and response time.
Sales, Marketing and Distribution
Extreme's sales and marketing strategy is focused on domestic and
international resellers, distributors, OEMs and field sales.
Resellers. We have entered into agreements to sell our products through
more than 250 resellers in 50 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 several key OEM relationships with leaders in the
telecommunications, personal computer and computer networking industries. We
intend to maintain a limited number of relationships with key strategic OEMs who
may offer products or distribution channels that compliment ours. Each of our
OEMs resells our products under its own name. We believe that our OEM
relationships enhance our ability to sell and provide support to large
organizations because certain end-user organizations may prefer to do business
with very large suppliers. We anticipate that OEM sales will decline as a
percentage of net revenue as we expand our reseller and fields sales efforts.
Field sales. We have designed and established our field sales organization
to support and develop leads for our resellers and to establish and maintain a
limited number of key accounts and strategic customers. To support these
objectives, our field sales force:
. assists end-user customers in finding solutions to complex network system and
architecture problems;
. differentiates the features and capabilities of our products from competitive
offerings;
. continually monitors and understands the evolving networking needs of
enterprise customers;
. promotes our products and ensures direct contact with current and potential
customers; and
. monitors the changing requirements of our customers.
As of June 30, 2000, Extreme's worldwide sales and marketing organization
included 376 individuals, including managers, sales representatives, and
technical and administrative support personnel. We have domestic sales offices
located in major metropolitan areas in Arizona, California, Colorado,
Connecticut, District of Columbia, Florida, Georgia, Illinois, Kansas,
Massachusetts, Maryland, Michigan, North Carolina, New Jersey, New York, Ohio,
Oregon, Pennsylvania, Texas, Washington and Wisconsin. In addition, we have
international sales offices located in Argentina, Australia, Brazil, Chile,
Columbia, France, Germany, Hong Kong, Italy, Japan, Korea, The Netherlands,
Sweden and 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 45% of our net revenue in fiscal 2000.
9
Marketing
We have a number of marketing programs to support the sale and distribution
of our products and to inform existing and potential customers and our
resellers, distributors 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 Support and Service
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 ExtremeAssist Basic, ExtremeAssist1,
ExtremeAssist2, ExtremeAssist Premium and ExtremeAssist Elite.
ExtremeAssist Basic. This program is designed for customers who are
interested in keeping service and support costs to a minimum but want access to
basic support services. Basic service includes access to Extreme's
web-accessible knowledge database and software upgrades and bug fixes. The
ExtremeAssist program includes eight-hour, five-day technical assistance center
telephone support, e-mail inquiries and responses within 24 hours and
rapid-response emergency/network down telephone support 24 hours a day, 7 days a
week.
ExtremeAssist1. This program is designed for customers who 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 Extreme's technical assistance center provides advanced
second-level support on an essential need basis. The ExtremeAssist1 program
includes all the features in ExtremeAssist Basic plus 48-hour advanced
replacement of hardware.
ExtremeAssist2. This program is designed for network environments that
require a high degree of network availability, data integrity and end-user
productivity. The ExtremeAssist2 program includes all the features in
ExtremeAssist1 plus twelve-hour, five-day technical assistance center telephone
support and next business day replacement of hardware.
As switched broadband infrastructures become more vital to a company's
ability to compete, networks are doing much more than just sharing and
distributing information. Networks have become the brains of day-to-day business
operations and are the key to reducing time to market and sharpening a company's
competitive edge. Extreme recognizes the critical nature of the switched
broadband infrastructure in today's business environment and the ever-expanding
demands that will be put on networks in the future. To meet these needs, Extreme
has developed a series of comprehensive on-site support plans to fit the needs
of the most demanding network environments.
ExtremeAssist Premium. ExtremeAssist Premium is designed to meet and exceed
all the essential requirements of supporting and maintaining enterprise LANs.
Ideal for mission-critical network environments that require a high degree of
network availability, data integrity and end-user productivity. The
ExtremeAssist Premium plan includes faster on-site service and spares. The
ExtremeAssist Premium program includes all the features in ExtremeAssist2 plus
24 hours a day, 7 days a week on-site emergency network down assistance within 4
hours.
ExtremeAssist Elite. ExtremeAssist Elite is Extreme's most comprehensive
support plan for mission-critical switched broadband networks. Elite is limited
to the top 20% of Extreme's customer base to ensure a very individualized,
flexible and focused approach to providing Elite support services. ExtremeWorks
Elite adds dedicated level 3 technical support engineers and our fastest on-site
service and spares response time.
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.
10
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.
Currently, we use three contract manufacturers--Flextronics, located in San
Jose, California, to manufacture our Summit1, Summit4, Summit RPS and
BlackDiamond products, MCMS, located in Boise, Idaho, to manufacture our
Summit24, Summit48, Summit1i, Summit5i and Summit7i products and Solectron,
located in Milpitas, California, to manufacture our Alpine products. Each of
these manufacturing processes and procedures is ISO 9002 certified. We design
and develop the key components of our products, including ASICs and printed
circuit boards. 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 "Factors That May Affect Our Results--Extreme Needs to Expand Its
Manufacturing Operations and Depends on Contract Manufacturers for Substantially
All of Its Manufacturing Requirements."
Although we use standard parts and components for our products where
possible, we currently purchase several key components used in the manufacture
of our products from single or limited sources. Our principal single-sourced
components include:
. ASICs;
. microprocessors;
. programmable integrated circuits;
. selected other integrated circuits;
. cables; and
. custom-tooled sheet metal.
Our principal limited-source components include:
. flash memories;
. DRAMs;
. SRAMs; and
. printed circuit boards.
Generally, purchase commitments with our single or limited source suppliers
are on a purchase order basis. LSI Logic manufacturers all of our ASICs which
are used in all of our switches. Any interruption or delay in the supply of any
of these components, or the inability to procure these components from alternate
sources at acceptable prices and within a reasonable time, would materially
adversely affect our business, operating results and financial condition. In
addition, qualifying additional suppliers can be time-consuming and expensive
and may increase the likelihood of errors.
We use a rolling nine-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 "Factors That May
Affect Our 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" 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 enterprise, service providers and IP carrier and
Metropolitan Area Network markets. We monitor changing customer needs and work
closely with
11
users, value-added resellers and distributors, and market research organizations
to monitor changes in the marketplace. We design our products around current
industry standards and will continue to support emerging standards that are
consistent with our product strategy.
Our products have been designed to incorporate the same core ASICs and
software and system architecture, facilitating a relatively short product design
and development cycle and reducing the time to market for new products and
features. We have utilized this architectural design to develop and introduce
other product models and enhancements since the introduction of our first
products in 1997. We intend to continue to utilize this architectural design to
develop and introduce additional products and enhancements in the future.
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. This fiscal year we introduced a
new generation chipset which was incorporated in a new product family which
began shipping in the quarter ended December 31. 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
"Factors That May Affect Our Results--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 internet switches is part of the broader market for
networking equipment, which is dominated by a few large companies, particularly
Cabletron Systems, Cisco Systems, Lucent Technologies and Nortel Networks. 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, Ericsson, Nokia, and Siemens, which have entered
the market for network equipment, particularly through acquisitions of public
and privately held companies. 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 Web Systems 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 the enterprise or metropolitan
area 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
Cisco Systems and Nortel Networks. 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;
. price/performance characteristics;
. timeliness of new product introductions;
. adoption of emerging industry standards;
. customer service and support;
. size and scope of distribution network;
12
. 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 "Factors That May Affect Our Results--Intense Competition in
the Market for Networking Equipment Could Prevent Extreme From Increasing
Revenue and Prevent Extreme From Achieving or Sustaining Profitability."
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We have been issued six patents in the U.S. We have filed eight 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 five registered trademarks and four
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 against us. Indeed,
a number of third parties, including leading companies, have asserted patent
rights to technologies and related standards that are important to us. We expect
to increasingly be subject to infringement claims asserted by third parties as
the numbers of products and competitors in the market for network switches grow
and the functionality of products overlaps. In this regard, since April, 2000,
we have been in communication with one of these leading companies that believes
certain of our products require a license under a number of their patents. The
third party is willing to grant us a non-exclusive license under the identified
patents as well as other patents or technology that we may require. We currently
are reviewing the identified patents to examine whether we consider a license
necessary. However, there can be no assurance that this license would be
obtainable on commercially acceptable 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
13
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, 2000, we employed 680 persons, including 376 in sales and
marketing, 110 in research and development, 67 in operations, 65 in technical
support and 62 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 "Factors That May Affect Our 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."
Item 2. Properties.
Our principal administrative, sales, marketing and research development
facilities are located in an approximately 77,000 square feet facility located
in Santa Clara, California. In June 2000, we entered into a five-year operating
lease agreement to lease 275,000 square feet in Santa Clara, California to house
further physical expansion of our principal operations. We also lease office
space in various other geographic locations domestically and internationally for
sales and service personnel.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers
of Extreme as of August 31, 2000:
Name Age Position
---- --- --------
Gordon L. Stitt.......................................... 44 President, Chief Executive Officer and Chairman
Stephen Haddock.......................................... 42 Vice President and Chief Technical Officer
Herb Schneider........................................... 41 Vice President of Engineering
Sam Halabi............................................... 35 Vice President of IP Carrier Business Development
June Hull................................................ 45 Vice President of Human Resources
Allan G. Miller.......................................... 48 Vice President of Manufacturing Operations
Vito E. Palermo.......................................... 36 Vice President, Chief Financial Officer and Secretary
George Prodan............................................ 47 Vice President of Marketing
Harry Silverglide........................................ 54 Vice President of Sales
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
14
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.
Sam Halabi. Mr. Halabi has served as Vice President of IP Carrier business
development of Extreme since July 2000. Prior to joining Extreme Networks, Mr.
Halabi held various marketing positions with leading data communications
companies, including Cisco Systems. Mr. Halabi holds a MS in Computer Science
from San Jose State University and a BS in Computer Engineering from American
University-Beirut.
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.
Allan G. Miller. Mr. Miller has served as Vice President of Manufacturing
Operations of Extreme since July 2000. Prior to joining Extreme Networks, Mr.
Miller spent 22 years at Amdahl Corporation. He held several senior management
positions in manufacturing operations and quality assurance, the most recent was
Vice President of Operations. He holds a MS in Mechanical Engineering and a MBA
from the University of California at Berkeley and a BS in Mechanical Engineering
from California State University, Northridge.
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.
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.
15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock commenced trading on the Nasdaq National Market
on April 9, 1999 under the symbol "EXTR." The following table sets forth the
high and low closing prices as reported by Nasdaq. Such prices represent prices
between dealers, do not include retail mark-ups, mark-downs or commissions and
may not represent actual transactions. All prices have been adjusted to reflect
a 2-for-1 stock split effected in August 2000.
Stock Prices High Low
---- ---
1999
Fourth quarter (1)............................................$ 29.03 $ 19.16
2000
First quarter.................................................$ 42.25 $ 22.81
Second quarter................................................$ 49.03 $ 30.66
Third quarter.................................................$ 59.50 $ 38.00
Fourth quarter................................................$ 52.75 $ 21.44
--------------
(1) Commencing April 9, 1999
At September 14, 2000, there were approximately 284 stockholders of record
of the Company's common stock and approximately 36,000 beneficial stockholders.
The Company has never declared or paid cash dividends on its capital stock and
does not anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain future earnings for the development of its
business.
Item 6. Selected Consolidated Financial Data.
For the Period
from May 8,
1996
(Date of
Years Ended June 30, Inception)
--------------------
2000 1999 1998 June 30, 1997
---- ---- ---- -------------
(In thousands, except per share amounts)
----------------------------------------
Consolidated Statements of Operations Data:
Net revenue................................................... $ 261,956 $ 98,026 $ 23,579 $ 256
Gross profit (loss)........................................... 135,040 49,506 8,682 (132)
Total operating expenses...................................... 118,786 50,951 22,709 7,928
Operating income (loss)....................................... 16,254 (1,445) (14,027) (8,060)
Net income (loss)............................................. 20,048 (1,617) (13,936) (7,923)
Basic net income (loss) per share (1)......................... $ 0.20 $ (0.09) $ (1.59) $ (2.26)
Diluted net income (loss) per share (1)....................... $ 0.18 $ (0.09) $ (1.59) $ (2.26)
Weighted average shares outstanding used in
computing basic net income (loss) per share (1)........... 100,516 18,924 8,758 3,516
Weighted average shares outstanding used in
computing diluted net income (loss) per share (1)......... 111,168 18,924 8,758 3,516
16
As of June 30,
-----------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Consolidated Balance Sheets Data
Cash and cash equivalents..................................... $116,721 $107,143 $ 9,510
Short-term investments........................................ 66,640 16,422 10,995
Working capital............................................... 205,881 119,039 13,796
Total assets.................................................. 515,930 171,803 33,731
Long-term debt, deposit and capital lease
obligations, net of current portion.......................... 306 -- 2,634
Total stockholders' equity.................................... $419,021 $141,876 $ 15,869
------------------
(1) Share and per share data have been restated to give retroactive effect
to a two-for-one stock split in the form of a stock dividend effected in August
2000.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
When used in this discussion and elsewhere in this Form 10-K, the words
"may," "should," "believes," "expects," "anticipates," "estimates" and similar
expressions identify forward-looking statements. Such statements, which include
statements concerning the availability and functionality of products under
development, product mix, pricing trends, the mix of export sales, sales to
significant customers and the availability and cost of products from the
Company's suppliers, are subject to risks and uncertainties, including those set
forth below under "Factors That May Affect Our Results." Our actual results
could differ materially from those anticipated in these forward-looking
statements which could have a material adverse effect on our business, operating
results and financial condition. These forward-looking statements speak only as
of the date hereof and there may be events in the future that we are not able to
predict accurately or over which we have no control which would affect or alter
our expectations.
Overview
From our inception in May 1996 through September 1997, our operating
activities related primarily to developing a research and development
organization, testing prototype designs, building an ASIC design infrastructure,
commencing the staffing of our marketing, sales and field service and technical
support organizations, and establishing relationships with resellers and OEMs.
We commenced volume shipments of our Summit1 and Summit2, the initial products
in our Summit stackable product family, in October 1997, and we began shipping
our BlackDiamond modular product family in September 1998. We introduced our new
Alpine product family in fiscal 2000 which is based on a new generation chip
set. In addition, we also introduced new products within our existing product
lines that incorporate this new chip set.
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 "Factors That May Affect Our
Results--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." For fiscal 2000, there were no customers with sales greater than 10%. For
fiscal 1999, Compaq and Hitachi Cable accounted for 21% and 13% of our net
revenue, respectively.
We market and sell our products primarily through resellers, distributors
and, to a lesser extent, OEMs and our field sales organization. We sell our
products through more than 250 resellers in 50 countries. In fiscal 2000, sales
to customers outside of North America accounted for approximately 45% 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
17
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 and distributors than on sales through our
OEMs. Any significant decline in sales to our OEMs or resellers or distributors,
or the loss of any of our OEMs or resellers or distributors 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 manufacturers, Flextronics, MCMS and Solectron. 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 products. 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.
Sales 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
sales and marketing campaigns aggressively and therefore expect these expenses
to increase significantly in absolute dollars in the future. In addition, we
recently hired approximately 200 sales and marketing personnel. We expect to
continue to expand our field sales operations to support and develop leads for
our resellers and distributors, which will also result in an increase in sales
and marketing expenses.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and administrative personnel,
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 anticipated 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 $119,000, $172,000 and
$68,000 for the years ended June 30, 2000, 1999 and 1998, respectively. At June
30, 2000, we had a total of approximately $78,000 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 in all fiscal years since our inception, fiscal
2000 was the first year we have achieved profitability in each of the four
quarters. Our net income has not increased proportionately with the increase in
our revenue primarily because of increased expenses relating to our growth in
operations and in particular the recent accelerated hiring of sales and
marketing personnel. 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 any related revenue. See "Factors That May Affect Our Results--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 "Factors That May Affect Our
Results--A Number of Factors Could Cause Extreme's Quarterly Financial Results
to Be Worse Than Expected, Resulting in a Decline in Its Stock Price."
Due to the Company's issuance of warrants to a networking company as
discussed in Note 3, future operating income will be reduced by $7.1 million per
quarter for each quarter in fiscal 2001 and for three of the four fiscal
quarters in fiscal 2002. Notwithstanding this charge the Company still
anticipates being profitable in the first quarter of fiscal 2001.
Results of Operations
18
The following table sets forth for the years indicated certain financial
data as a percentage of net revenue:
Years ended June 30,
---------------------------------
2000 1999 1998
---- ---- ----
Net revenue............................ 100.0% 100.0% 100.0%
Cost of revenue........................ 48.5 49.5 63.2
----- ----- -----
Gross profit .......................... 51.5 50.5 36.8
Operating expenses:
Research and development............. 12.6 17.4 45.2
Sales and marketing.................. 25.6 27.6 40.7
General and administrative........... 4.5 7.0 10.4
Amortization of goodwill and
purchased intangibles 2.6 -- --
----- ----- ------
Total operating expenses..... 45.3 52.0 96.3
----- ----- ------
Operating income (loss)................ 6.2 (1.5) (59.5)
Interest income........................ 5.6 1.9 2.6
Interest expense....................... (.2) (.4) (1.4)
Other income (loss), net............... -- -- (.8)
----- ----- ------
Income (loss) before income taxes...... 11.6 .0 (59.1)
Provision for income taxes............. 3.9 1.7 --
----- ----- ------
Net income (loss)...................... 7.7% (1.7)% (59.1)%
===== ===== ======
Net Revenue
Net revenue increased from $98.0 million in fiscal 1999 to $262.0 million
in fiscal 2000, an increase of $164.0 million. The increase in net revenue for
fiscal 2000 resulted primarily from increased sales of our Summit stackable
products and our BlackDiamond modular product family, the market's growing
acceptance of Extreme's existing and new product offerings, and a significant
increase in our sales and marketing organizations.
Net revenue increased from $23.6 million in fiscal 1998 to $98.0 million in
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 45% and 53% of net revenue in fiscal 2000 and
fiscal 1999, respectively. 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 $49.5 million in fiscal 1999 to $135.0 million
in fiscal 2000, an increase of $85.5 million, primarily due to the related
increase in revenue. Gross margins increased from 50.5% in fiscal 1999 to 51.5%
in fiscal 2000. The increase in gross margin resulted primarily from a shift in
product mix, a shift in our channel mix from OEMs to resellers and distributors
and improved manufacturing efficiencies, offset in part by lower average selling
prices due primarily to increased competition.
Gross profit increased from $8.7 million in fiscal 1998 to $49.5 million in
fiscal 1999, an increase of $40.8 million. Gross margins increased from 36.8% in
fiscal 1998 to 50.5% in 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.
Research and Development Expenses
Research and development expenses increased from $17.0 million in fiscal
1999 to $33.0 million in fiscal 2000, an increase of $16.0 million. The increase
was primarily due to nonrecurring engineering and initial product verification
expenses and increased salaries and related personnel expenses due to the hiring
of additional engineers. For fiscal 1999 and fiscal 2000, research and
development expenses decreased as a percentage of net revenue from 17.4% to
12.6%. This percentage decrease was primarily the result of an increase in our
net revenue.
19
Research and development expenses increased from $10.7 million in fiscal
1998 to $17.0 million in 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.
Sales and Marketing Expenses
Sales and marketing expenses increased from $27.1 million in fiscal 1999 to
$67.1 million in fiscal 2000, an increase of $40.0 million. This increase was
primarily due to the hiring of additional sales, marketing and customer support
personnel, increased sales commission expenses resulting from increased
revenues, increased tradeshow and promotional expenses and the establishment of
new sales offices. For fiscal 1999 and fiscal 2000, sales and marketing expenses
decreased as a percentage of net revenue from 27.6% to 25.6%. This percentage
decrease was primarily the result of an increase in our net revenue.
We intend to pursue sales and marketing campaigns aggressively and
therefore expect these expenses to increase significantly in absolute dollars in
the future. In addition, we recently hired approximately 200 sales and marketing
personnel. We expect to continue to expand our field sales operations to support
and develop leads for our resellers and distributors, which will also result in
an increase in sales and marketing expenses.
Sales and marketing expenses increased from $9.6 million in fiscal 1998 to
$27.1 million in 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, sales 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 $6.9 million in fiscal
1999 to $11.9 million in fiscal 2000, an increase of $5.0 million. This increase
was due primarily to the hiring of additional finance, information technology,
legal and administrative personnel and increased professional fees and occupancy
costs. For fiscal 1999 and fiscal 2000, general and administrative expenses
decreased as a percentage of net revenue from 7.0% to 4.5%. This percentage
decrease was primarily the result of an increase in our net revenue.
General and administrative expenses increased from $2.4 million in fiscal
1998 to $6.9 million in 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.
Amortization of Goodwill and Purchased Intangibles
Amortization of goodwill and purchased intangibles was $7.1 million in
fiscal 2000. This amount was due to the Company's issuance of fully earned,
non-forfeitable, fully exercisable warrants with a two year life to purchase 3
million shares of the Company's common stock with an exercise price of $39.50
per share as discussed in Note 3 of notes to consolidated financial statements.
Future operating income will be reduced by approximately $7.1 million per
quarter for each quarter in fiscal 2001 and for three fiscal quarters in fiscal
2002.
Interest Income
Interest income increased from $1.9 million in fiscal 1999 to $14.6
million in fiscal 2000, an increase of $12.7 million. The increase is due to the
increased amount of cash and cash equivalents, short-term investments,
restricted investments and long-term investments from the proceeds we received
from our initial public offering in April 1999 and our secondary public offering
in October 1999.
Interest income increased from $.6 million in fiscal 1998 to $1.9 million
in fiscal 1999, an increase of $1.3 million. The increase
20
is due to the increased amount of cash and cash equivalents, short-term
investments and long-term investments from the proceeds we received from our
initial public offering in April 1999.
Income Taxes
We recorded a tax provision of $10.3 million for the year ended June 30,
2000. The provision for fiscal 2000 results in an effective tax rate of 34%
which consists primarily of federal taxes, state income taxes and foreign taxes,
offset by the recognition of 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. We intend to evaluate the realizability of the
deferred tax assets on a quarterly basis. We incurred significant operating
losses for all fiscal years from inception through June 30, 1999. We recorded a
tax provision of $1.7 million for the year ended June 30, 1999, which consisted
primarily of foreign taxes, federal taxes and state income taxes.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increased from $123.6
million at June 30, 1999 to $183.4 million at June 30, 2000, an increase of
$59.8 million. The increase is primarily a result of our secondary public
offering of common stock in October 1999, which generated net proceeds of $174.0
million, primarily offset by an increase in long-term investments and restricted
investments of $108.0 million. Cash provided by operating activities was $24.8
million in fiscal 2000, as compared to cash provided by operating activities of
$2.8 million in fiscal 1999. The increase was primarily due to net income,
depreciation, amortization and increases in accounts payable, deferred revenue
and accrued liabilities, offset by increases in accounts receivable, inventories
and other current and noncurrent assets. 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, new product introductions and the need to maintain shorter
lead times on certain products. Any such increase can be expected to reduce
cash, cash equivalents, short-term investments and long-term investments.
Investing activities used cash of $195.0 million in fiscal 2000 due to
capital expenditures of $27.2 million, net purchases of investments of $158.8
million and minority investments of $9.0 million. Our investing activities used
cash of $29.1 million in fiscal 1999 for net purchases of investments of $21.6
million and capital expenditures of $7.5 million. Our investing activities used
cash of $13.5 million in fiscal 1998 for capital expenditures of $2.5 million
and net purchases of investments of $11.0 million. We expect capital
expenditures of approximately $30.0 million in fiscal 2001. Under the terms of a
certain equity investment, upon the attainment of certain technological
milestones, we will be obligated to purchase all of the outstanding capital
stock in fiscal 2001, payable in any combination of cash or shares of Extreme
common stock.
Financing activities provided cash of $179.7 million in fiscal 2000,
arising primarily from proceeds from the issuance of common stock in conjunction
with our secondary public offering, partially offset by payments of capital
lease obligations. 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.
In June 2000, we entered into an operating lease agreement to lease 275,000
square feet to house our primary facility in Santa Clara, California. Our lease
payments will vary based on the LIBOR plus a spread which was 7.14% at June 30,
2000. Our lease payments are estimated to be approximately $5.7 million on an
annual basis over the lease term. The lease is for five years and can be renewed
for two five-year periods, subject to the approval of the lessor. At the
expiration or termination of the lease, we have the option to either purchase
the property for $80.0 million, or arrange for the sale of the property to a
third party for at least $80.0 million with a contingent liability for any
deficiency. If the property is not purchased or sold as described above, we will
be obligated for an additional lease payment of approximately $68.0 million.
As part of the above lease transaction, the Company restricted $80.0
million of its investment securities as collateral for specified obligations of
the lessee under the lease. These investment securities are restricted as to
withdrawal and are managed by a third party subject to certain limitations under
the Company's investment policy. The lease also requires us to maintain
specified financial covenants with which we were in compliance as of June 30,
2000.
We require substantial capital to fund our business, particularly to
finance inventories and accounts receivable and for capital expenditures. As a
result, we could be required to raise substantial additional capital. To the
extent that we raise additional capital
21
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 may
have rights, preferences and privileges senior to holders of common stock and
the terms of such debt could impose restrictions on our operations. We cannot
assure you that such additional capital, if required, will be available on
acceptable terms, or at all. If we are unable to obtain such additional capital,
we may be required to reduce the scope of our planned product development and
marketing efforts, which would materially adversely affect our business,
financial condition and operating results.
We believe that our current cash and cash equivalents, short-term
investments, long-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.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", which
extended the deferral of the application of FAS 133 to all fiscal quarters of
fiscal years beginning after June 15, 2000. In June 15, 2000 the FASB also
issued FAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities) an Amendment to FASB Statement No. 133". FAS 138 amends the
accounting and reporting standards of Statement 133 for certain derivative
instruments and certain hedging activities. The Company will be required to
adopt these pronouncements for the year ending June 30, 2001. Because the
Company currently holds no derivative financial instruments and does not
currently engage in hedging activities, adoption of FAS 133 and 138 are expected
to have no material impact on the Company's financial condition or results of
operations.
In December 1999, the Staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") No. 101. "Revenue Recognition
in Financial Statements", which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. The
implementation of SAB 101 has recently been deferred to no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The Company is
presently evaluating the potential impact of the adoption of SAB 101.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25" (Interpretation No. 44).
Interpretation No. 44 is effective July 1, 2000. The interpretation clarifies
the application of APB Opinion No. 25 for certain issues, specifically, (a) the
definition of an employee, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange or stock compensation awards in a business
combination. We do not anticipate that the adoption of Interpretation No. 44
will have a material impact on our financial position or the results of our
operations.
Factors That May Affect Our Results
Extreme Has a Limited History of Profitability and Cannot Assure You that it
Will Continue to Achieve Profitability
Although our revenue has grown in recent quarters, we cannot be certain
that we will realize sufficient revenue to achieve continued profitability on a
fiscal year basis. Fiscal 2000 was the first year in which Extreme achieved
profitability in each of the four quarters. 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. In particular, our recent hiring of
approximately 200 sales and marketing personnel has substantially increased
expenses. We expect that the hiring of such personnel will allow us to increase
sales, however, we can not assure you that this will occur and we cannot assure
you that operating margins will not be adversely affected by this or other
hiring. In addition, the amortization of purchased intangibles and goodwill is
estimated to be approximately $27.7 million and $21.0 million in fiscal 2001 and
2002, respectively.
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
22
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; . 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.
. the affect of amortization of goodwill and purchased intangibles
resulting from existing or new transactions.
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 Internet switches is intensely competitive. Our principal
competitors include Cabletron Systems, Cisco Systems, Foundry Networks, Lucent
Technologies and Nortel 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
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.
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
23
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.
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
introduced a new generation chipset which was incorporated in a new product
family which began shipping in the quarter ended March 31, 2000. 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 and release
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
We have experienced a period of rapid growth and expansion which has
placed, and continues to place, a significant strain on our resources. Even if
we manage this 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 fiscal year, and from June 30, 1999 to June 30, 2000, the number of our
employees increased from 249 to 680. 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 sales,
marketing personnel and research and development 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. In August 1998,
we installed a new management information system, which we may continue to
modify and improve to meet the increasing needs associated with our 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
24
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.
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, distributors 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 entered into 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.
To support and develop leads for our indirect distribution channels and to
expand our direct sales effort, to service providers and content providers, we
plan to continue to expand our field sales and support staff significantly. We
cannot assure you that this internal expansion will be successfully completed,
that the cost of this expansion will not exceed the revenues generated or that
our expanded sales and support staff will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of our current or potential competitors. Our inability to
effectively establish our distribution channels or manage the expansion of our
sales and support staff would materially adversely affect our 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
In fiscal 2000, we derived 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 metropolitan area network 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, distributors, 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 have in the past experienced delays in product development and such delays
may occur in the future. We introduced a new product family in fiscal 2000 which
is based on a new generation chip set. In addition, we also introduced new
products within our existing product lines that incorporate this new chip set.
The introduction of new and enhanced products may cause our customers to defer
or cancel orders for existing products. 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, Distributor, 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, distributors, 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 example, in fiscal 1999, Compaq and Hitachi Cable
accounted for 21% and 13% of our net revenue, respectively. 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, distributor, OEM or other
customer, or unexpected returns from
25
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, distributors, OEMs and other significant customers, we do not have
binding commitments from any of them. For example:
. our service provider and enterprise network customers can stop purchasing
and our resellers, distributors 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, distributor 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 tantalum capacitors, SRAM
and printed circuit boards have been and may in the future be in short supply.
While we have been able to meet our needs to date, we have in the past and are
likely in the future to encounter shortages and delays in obtaining these or
other components and this 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.
26
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.
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 continues to grow, 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 three
companies--Flextronics International, Ltd., located in San Jose, California,
MCMS, Inc., located in Boise, Idaho and Solectron, located in Milpitas,
California. We have experienced a delay in product shipments from contract
manufacturers in the past, which in turn delayed product shipments to our
customers. We may in the future experience similar or other problems, such as
inferior quality and insufficient quantity of product, any of which could
materially adversely affect our business and operating results. There can be no
assurance that we will effectively manage our contract manufacturers or that
these manufacturers will meet our future requirements for timely delivery of
products of sufficient quality and quantity. We intend to regularly introduce
new products and product enhancements, which will require that we rapidly
achieve volume production by coordinating our efforts with those of our
suppliers and contract manufacturers. The inability of our contract
manufacturers to provide us with adequate supplies of high-quality products or
the loss of either of our contract manufacturers would cause a delay in our
ability to fulfill orders while we obtain a replacement manufacturer and would
have a material adverse effect on our business, operating results and financial
condition.
As part of our cost-reduction efforts, we will need to realize lower per
unit product costs from our contract manufacturers as a result of volume
efficiencies. However, we cannot be certain when or if such price reductions
will occur. The failure to obtain such price reductions would adversely affect
our gross margins and operating results.
If Extreme Loses 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
27
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.
Failure to Successfully Integrate Extreme's Expanded Sales and Support
Organizations into Its Operation or Educate Them About Its Product Families Will
Hurt Its Operating Results.
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. In April 2000, a
significant number of former sales and system engineer employees of another
networking company joined our operation. We cannot assure you that we will be
able to educate these new employees about our product families or integrate
these new employees into our company. A failure to do so will hurt our revenue
growth and may hurt our operating results.
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 53% and 45% of our net revenue in fiscal 1999 and fiscal 2000,
respectively. Our international sales primarily depend on our resellers,
distributors and OEMs. The failure of our resellers, distributors 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.
28
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. We are reviewing investments in new
businesses and we expect to make investments in and 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
. assume contingent liabilities; or
. expend significant cash.
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
. potential loss of key employees of acquired organizations; and
. substantial charges for amortization of goodwill or purchased intangibles
or similar items.
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 And, 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 the initial
public offering in April 1999, proceeds from the secondary offering in October
1999 and cash available from credit facilities and future operations will enable
us to meet our working capital requirements for at least the next 12 months.
However, if cash from future operations is insufficient, or if cash is used for
acquisitions or other currently unanticipated uses, we may need additional
capital. The development and marketing of new products and the expansion of
reseller and distribution channels and associated support personnel is expected
to require a significant commitment of resources. In addition, if the market for
our products 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.
29
If Extreme's Products Contain Undetected Software or Hardware Errors, Extreme
Could Incur Significant Unexpected Expenses and Lost Sales
Network products frequently contain undetected software or hardware errors
when first introduced or as new versions are released. We have experienced such
errors in the past in connection with new products and product upgrades. We
expect that such errors will be found from time to time in new or enhanced
products after commencement of commercial shipments. These problems may
materially adversely affect our business by causing us to incur significant
warranty and repair costs, diverting the attention of our engineering personnel
from our product development efforts and causing significant customer relations
problems.
Our products must successfully interoperate with products from other
vendors. As a result, when problems occur in a network, it may be difficult to
identify the source of the problem. The occurrence of hardware and software
errors, whether caused by our products or another vendor's products, could
result in the delay or loss of market acceptance of our products and any
necessary revisions may result in the incurrence of significant expenses. The
occurrence of any such problems would likely have a material adverse effect on
our business, operating results and financial condition.
Extreme's Limited Ability to Protect Its Intellectual Property May Adversely
Affect Its Ability to Compete
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
However, we cannot assure you that the actions we have taken will adequately
protect our intellectual property rights.
We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
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; and
. the ability of the board of directors to alter our bylaws without getting
stockholder approval
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.
Item 7A. 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
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 investments that are subject to
market risk by range of expected maturity and weighted-average interest rates as
of June 30, 2000 and June 30, 1999. This table does not include money market
funds because those funds are not subject to market risk.
30
June 30, 2000: 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................. $ 100,696 $ 100,696 $ 100,696
Weighted average interest rate...................... 6.37%
Included in short-term investments.................... $ 66,640 $ 66,640 $ 66,640
Weighted average interest rate...................... 6.50%
Included in investments............................... $ 44,144 $ 44,144 $ 44,144
Weighted average interest rate...................... 7.29%
Maturing in
---------------------------------------------------------------
June 30, 1999: 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, all of our sales and the majority of our 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, 2000 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.
31
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF EXTREME NETWORKS, INC.
Page(s)
--------
Report of Ernst & Young LLP, Independent Auditors........................................................................ 33
Consolidated Balance Sheets.............................................................................................. 34
Consolidated Statements of Operations.................................................................................... 35
Consolidated Statement of Stockholders' Equity........................................................................... 36
Consolidated Statements of Cash Flows.................................................................................... 37
Notes to Consolidated Financial Statements............................................................................... 38
32
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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Extreme
Networks, Inc. at June 30, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Palo Alto, California
July 18, 2000, except for Note 9, as to which the date is August 24, 2000
33
EXTREME NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
June 30,
---------------------
2000 1999
--------- ---------
Current assets:
Cash and cash equivalents................................. $ 116,721 $ 107,143
Short-term investments.................................... 66,640 16,422
Accounts receivable, net of allowance for doubtful
accounts of $1,237 in 2000 and $1,374 in 1999........... 60,996 20,797
Inventories............................................... 23,801 2,626
Other current assets...................................... 34,326 1,978
--------- ---------
Total current assets.............................. 302,484 148,966
Property and equipment, net................................. 26,750 6,506
Restricted investments...................................... 80,000 --
Investments................................................. 44,144 16,097
Goodwill and purchased intangibles.......................... 49,782 --
Other assets................................................ 12,770 234
--------- ---------
$ 515,930 $ 171,803
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 39,023 $ 13,418
Accrued compensation...................................... 6,759 2,500
Accrued commissions....................................... 4,282 1,600
Leasehold improvements allowance.......................... 8,424 --
Deferred revenue.......................................... 22,042 1,717
Other accrued liabilities................................. 12,935 7,394
Income tax liability...................................... 3,138 1,650
Capital lease obligations, current portion................ -- 1,648
---------- ----------
Total current liabilities......................... 96,603 29,927
Long term deposit........................................... 306 --
Commitments (Note 4)
Stockholders' equity:
Convertible preferred stock, $.001 par value, issuable
in series: 2,000,000 shares authorized; no shares
issued and outstanding.................................. -- --
Common stock, $.001 par value; 150,000,000 shares
authorized; 106,670,964 and 98,690,460 shares
issued and June 30, 2000 and 1999, respectively........ 106 98
Additional paid-in capital................................ 423,044 165,569
Deferred stock compensation............................... (78) (197)
Accumulated other comprehensive loss...................... (623) (118)
Accumulated deficit....................................... (3,428) (23,476)
--------- ---------
Total stockholders' equity........................ 419,021 141,876
--------- ---------
$ 515,930 $ 171,803
========= =========
See accompanying notes to consolidated financial statements.
34
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended June 30,
-----------------------------------
2000 1999 1998
----------- --------- --------
Net revenue....................................... $261,956 $ 98,026 $ 23,579
Cost of revenue................................... 126,916 48,520 14,897
-------- --------- --------
Gross profit...................................... 135,040 49,506 8,682
Operating expenses:
Research and development........................ 32,737 17,036 10,668
Sales and marketing............................. 67,146 27,056 9,601
General and administrative...................... 11,852 6,859 2,440
Amortization of goodwill and purchased
intangibles.................................... 7,051 -- --
-------- -------- --------
Total operating expenses................... 118,786 50,951 22,709
-------- -------- --------
Operating income (loss)........................... 16,254 (1,445) (14,027)
Interest income................................... 14,638 1,855
Interest expense.................................. (490) (398) (326)
Other income (loss), net.......................... (33) 21 (196)
-------- -------- --------
Income (loss) before income taxes................. 30,369 33 (13,936)
Provision for income taxes........................ 10,321 1,650 --
-------- -------- --------
Net income (loss)................................. $ 20,048 $ (1,617) $(13,936)
======== ======== ========
Basic net income (loss) per share................. $ 0.20 $ (0.09) $ (1.59)
Diluted net income (loss) per share............... $ 0.18 $ (0.09) $ (1.59)
Weighted average shares outstanding
used in computing basic net income
(loss) per share................................. 100,516 18,924 8,758
Weighted average shares outstanding
used in computing diluted net
income (loss) per share.......................... 111,168 18,924 8,758
See accompanying notes to consolidated financial statements.
35
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Convertible Accumulated
Preferred Stock Common Stock Additional Deferred Other
--------------- ------------ Paid-In Stock Comprehensive
Shares Amount Shares Amount Capital Compensation Loss
------ ------ ------ ------ ------- ------------ ----
Balances at June 30, 1997 ................. 46,932 $ 46 21,620 $ 22 $ 17,160 $ -- $ --
Issuance of warrant for 96,694 shares of
Series B convertible preferred stock ..... -- -- -- -- 28 -- --
Issuance of Series C convertible preferred
stock to investors for cash (less
issuance costs of $416)................... 11,190 12 -- -- 20,105 -- --
Issuance of warrant for 140,352 shares of
Series C convertible preferred stock ..... -- -- -- -- 140 -- --
Exercise of options to purchase
common stock ............................. -- -- 1,450 2 145 -- --
Deferred stock compensation ............... -- -- -- -- 437 (437) --
Amortization of deferred stock
compensation ............................. -- -- -- -- -- 68 --
Net loss .................................. -- -- -- -- -- -- --
------ ---- ------- ---- ------ ----- ----
Balances at June 30, 1998 ................. 58,122 58 23,070 24 38,015 (369) --
Comprehensive loss:
Net loss ................................. -- -- -- -- -- -- --
Other comprehensive loss, net of tax:
Change in unrealized loss on
investments............................. -- -- -- -- -- -- (112)
Foreign currency translation adjustment.. -- -- -- -- -- -- (6)
Other comprehensive loss ................. -- -- -- -- -- -- --
Comprehensive loss ........................ -- -- -- -- -- -- --
Issuance of warrants to purchase 80,000
shares of common stock ................... -- -- -- -- 948 -- --
Issuance of common stock in conjunction
with initial public offering (less
issuance costs of $1,948)................. -- -- 16,100 16 125,306 -- --
Conversion of preferred stock to common
stock in conjunction with initial
public offering .......................... (58,122) (58) 58,122 58 -- -- --
Exercise of warrants to purchase
common stock ............................. -- -- 264 -- -- -- --
Exercise of options to purchase
common stock ............................. -- -- 1,134 -- 1,300 -- --
Amortization of deferred stock
compensation ............................. -- -- -- -- -- 172 --
------ ---- ------- ---- ------ ------ ----
Balances at June 30, 1999 ................. -- -- 98,690 98 165,569 (197) (118)
Comprehensive income:
Net income ............................... -- -- -- -- -- -- --
Other comprehensive loss, net of tax:
Change in unrealized loss on
investments............................. -- -- -- -- -- -- (503)
Foreign currency translation adjustment.. -- -- -- -- -- -- (2)
Other comprehensive loss ................. -- -- -- -- -- -- --
Comprehensive income ...................... -- -- -- -- -- -- --
Issuance of common stock in conjunction
with secondary public offering(less
issuance costs of $910) .................. -- -- 4,748 6 174,022 -- --
Exercise of warrants to purchase
common stock ............................. -- -- 370 -- -- -- --
Exercise of options to purchase
common stock ............................. -- -- 2,392 2 3,387 -- --
Issuance of common stock under employee
stock purchase plan ...................... -- -- 470 -- 3,966 -- --
Issuance of warrants for goodwill and
purchased intangibles .................... -- -- -- -- 54,324 -- --
Tax benefit from employee stock
transactions ............................. -- -- -- -- 21,600 -- --
Stock compensation for options granted to
consultants .............................. -- -- -- -- 176 -- --
Amortization of deferred stock
compensation ............................. -- -- -- -- -- 119 --
------ ---- -------- ---- -------- ----- -----
Balances at June 30, 2000 ................. -- $ -- $106,670 $106 $423,044 $ (78) $(623)
====== ==== ======== ==== ======== ===== =====
Total
Accumulated Stockholders'
Deficit Equity
------- ------
Balances at June 30, 1997 ................. $ (7,923) $ 9,305
Issuance of warrant for 96,694 shares of
Series B convertible preferred stock ..... -- 28
Issuance of Series C convertible preferred
stock to investors for cash (less
issuance costs of $416)................... -- 20,117
Issuance of warrant for 140,352 shares of
Series C convertible preferred stock ..... -- 140
Exercise of options to purchase
common stock ............................. -- 147
Deferred stock compensation ............... -- --
Amortization of deferred stock
compensation ............................. -- 68
Net loss .................................. (13,936) (13,936)
-------- --------
Balances at June 30, 1998 ................. (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)
Foreign currency translation adjustment.. -- (6)
--------
Other comprehensive loss ................. -- (118)
--------
Comprehensive loss ........................ -- (1,735)
Issuance of warrants to purchase 80,000
shares of common stock ................... -- 948
Issuance of common stock in conjunction
with initial public offering (less .......
issuance costs of $1,948)................. -- 125,322
Conversion of preferred stock to common
stock in conjunction with initial
public offering .......................... -- --
Exercise of warrants to purchase
common stock ............................. -- --
Exercise of options to purchase
common stock ............................. -- 1,300
Amortization of deferred stock
compensation ............................. -- 172
-------- -------
Balances at June 30, 1999 ................. (23,476) 141,876
Comprehensive income:
Net income ............................... 20,048 20,048
Other comprehensive loss, net of tax:
Change in unrealized loss on
investments............................. -- (503)
Foreign currency translation adjustment.. -- (2)
--------
Other comprehensive loss ................. -- (505)
--------
Comprehensive income ...................... -- 19,543
Issuance of common stock in conjunction
with secondary public offering(less
issuance costs of $910) .................. -- 174,028
Exercise of warrants to purchase
common stock ............................. -- --
Exercise of options to purchase
common stock ............................. -- 3,389
Issuance of common stock under employee
stock purchase plan....................... -- 3,966
Issuance of warrants for goodwill and
purchased intangibles..................... -- 54,324
Tax benefit from employee stock
transactions.............................. -- 21,600
Stock compensation for options granted to
consultants............................... -- 176
Amortization of deferred stock
compensation ............................. -- 119
-------- --------
Balances at June 30, 2000 ................. $ (3,428) $419,021
======== ========
See accompanying notes to consolidated financial statements.
36
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
--------------------
2000 1999 1998
-------- -------- --------
Operating activities
Net income (loss)............................................... $ 20,048 $ (1,617) $ (13,936)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation................................................... 6,992 5,733 1,453
Amortization................................................... 7,052 -- --
Warrants issued to a business partner.......................... -- 948 --
Amortization of deferred stock compensation.................... 119 172 68
Loss on equity investments..................................... 248 -- --
Compensation expense for options granted to consultants........ 176 -- --
Changes in operating assets and liabilities:
Accounts receivable........................................ (40,199) (12,989) (7,545)
Inventories................................................ (21,175) (2,503) (86)
Other current and noncurrent assets........................ (18,832) (1,392) (585)
Accounts payable........................................... 25,605 3,425 9,244
Accrued compensation....................................... 4,259 2,038 272
Accrued commissions........................................ 2,682 1,127 473
Leasehold improvements allowance........................... 8,424 -- --
Deferred revenue........................................... 20,325 1,434 283
Other accrued liabilities.................................. 4,101 4,727 2,203
Income tax liability....................................... 4,688 1,650 --
Long term deposit.......................................... 306 -- --
Due to shareholder......................................... -- -- (109)
---------- ---------- -----------
Net cash provided by (used in) operating activities............. 24,819 2,753 (8,265)
---------- ---------- -----------
Investing activities
Capital expenditures............................................ (27,236) (7,492) (2,511)
Purchases and maturities of investments......................... (158,770) (21,636) (10,996)
Minority investments............................................ (8,970) -- --
---------- ---------- -----------
Net cash used in investing activities........................... (194,976) (29,128) (13,507)
---------- ---------- -----------
Financing activities
Proceeds from issuance of convertible preferred stock........... -- -- 20,285
Proceeds from issuance of common stock.......................... 181,383 126,622 147
Proceeds from notes payable..................................... -- 783 1,606
Principal payments on notes payable............................. -- (2,784) (241)
Principal payments of capital lease obligations................. (1,648) (613) (562)
---------- ---------- -----------
Net cash provided by financing activities....................... 179,735 124,008 21,235
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents............ 9,578 97,633 (537)
Cash and cash equivalents at beginning of period.................. 107,143 9,510 10,047
---------- ---------- -----------
Cash and cash equivalents at end of period........................ $ 116,721 $ 107,143 $ 9,510
========== ========== ===========
Supplemental disclosure of cash flow information:
Interest paid................................................... $ 744 $ 185 $ 326
Cash paid for taxes............................................. $ 5,828 $ -- $ --
Supplemental schedule of noncash investing and
financing activities:
Property and equipment acquired under capital lease
obligations................................................... $ -- $ 278 $ 1,588
Warrants issued in connection with capital lease................ $ -- $ -- $ 168
Warrants issued for goodwill and purchased intangibles.......... $ 54,324 $ -- $ --
Warrants issued to a business partner........................... $ -- $ 948 $ --
Deferred stock compensation..................................... $ -- $ -- $ 437
Conversion of preferred stock to common stock................... $ -- $ 58 $ --
Tax benefit from disqualifying dispositions..................... $ 21,600 $ -- $ --
See accompanying notes to consolidated financial statements.
37
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
California on May 8, 1996 and was reincorporated in Delaware on March 31, 1999.
Extreme is a leading provider of broadband networking solutions for the Internet
economy.
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. Investments in which management intends to
maintain more than a temporary 20% to 50% interest, or otherwise has the ability
to exercise significant influence, are accounted for under the equity method.
Investments in which we have less than a 20% interest and/or do not have the
ability to exercise significant influence are carried at the lower of cost or
estimated realizable value.
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 other comprehensive income (loss).
Certain items previously reported in specific financial statement captions
have been reclassified to conform to the 2000 presentation. Such
reclassifications have not impacted previously reported operating income (loss).
Fiscal Year
Effective July 1, 1999, Extreme changed its fiscal year from June 30/th/ to
a 52/53-week fiscal accounting year. The June 30, 2000 year closed on July 2,
2000 and comprised 52 weeks of revenue and expense activity. All references
herein to "fiscal 2000" or "2000" represent the fiscal year ended July 2, 2000.
Quarterly results are based upon a 13-week reporting period.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Estimates are used for, but not limited
to, the accounting for doubtful accounts, inventory reserves, depreciation and
amortization, sales returns, warranty costs and income taxes. Actual results
could differ from these estimates.
Cash Equivalents and Short-Term Investments
Extreme considers cash and all highly liquid investment securities
purchased with an original or remaining maturity of less than three months at
the date of purchase to be cash equivalents. Extreme's investments comprise
U.S., state and municipal government obligations and corporate securities.
Investments with maturities of less than one year are considered short term and
investments with maturities greater than one year are considered long term.
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 other
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
38
The carrying amounts of certain of Extreme's financial instruments,
including cash and equivalents, approximate fair value because of their short
maturities. The fair values of investments are determined using quoted market
prices for those securities or similar financial instruments (see Note 2).
Transfer of Financial Assets
The Company from time to time transfers specifically identified accounts
receivable balances from customers to financing institutions, on a non-recourse
basis. The Company records such transfers as sales of the related accounts
receivable when it is considered to have surrendered control of such receivables
under the provisions of Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The impact of the above transaction reduced receivables and
increased cash flows from operating activities in the consolidated statements of
cash flows.
Inventories
Inventories consist of raw materials and finished goods and are stated at
the lower of cost or market (on a first-in, first-out basis).
Inventories consist of:
June 30, 2000 June 30, 1999
------------- -------------
Raw materials $ 9,501 $ 700
Finished goods 14,300 1,926
---------------- ----------------
Total $23,801 $2,626
================ ================
Restricted Investments
Extreme restricted $80.0 million of its investment securities as collateral
for specified obligations of the lessee under the operating lease. These
investment securities are restricted as to withdrawal and are managed by a third
party subject to certain limitations under the Company's investment policy. (See
Note 4)
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 places its investments only with high-credit quality
issuers. Extreme will not invest an amount exceeding 10% of the corporation's
combined cash, cash equivalent, short-term and long-term investments, in the
securities of any one obligor or maker, except for obligations of the United
States, obligations of United States agencies and money market accounts. Extreme
performs ongoing credit evaluations of its customers and generally does not
require collateral. To date, credit losses have been insignificant and within
management's expectations. Extreme operates solely within one business segment,
the development and marketing of switching solutions for the Internet economy.
For fiscal 2000, there were no customers with sales greater than 10%. For fiscal
1999, Compaq and Hitachi Cable accounted for 21% and 13% of our net revenue,
respectively.
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.
Property and Equipment
39
Property and Equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets of
approximately three years. Property and equipment consist of the following (in
thousands):
June 30,
-----------------------------
2000 1999
---- ----
Computer and other related equipment.................... $ 27,257 $ 8,661
Office equipment, furniture and fixtures................ 1,905 1,090
Software................................................ 4,956 3,146
Leasehold improvements.................................. 1,802 1,111
--------- --------
35,920 14,008
Less accumulated depreciation and amortization.......... (9,170) (7,502)
--------- --------
Property and equipment, net............................. $ 26,750 $ 6,506
========= ========
Goodwill and Purchased Intangible Assets
We record goodwill when the cost of net assets we acquire exceeds their
fair value. Goodwill is amortized on a straight-line basis over lives ranging
from 2 to 4 years. The cost of identified intangibles is generally amortized on
a straight-line basis over periods ranging from 2 to 4 years. We regularly
perform reviews to determine if the carrying value of assets is impaired. The
reviews look for the existence of facts or circumstances, either internal or
external, which indicate that the carrying value of the asset cannot be
recovered. No such impairment has been indicated to date. If, in the future,
management determines the existence of impairment indicators, we would use
undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform a subsequent calculation to measure
the amount of the impairment loss based on the excess of the carrying value over
the fair value of the impaired assets. If quoted market prices for the assets
are not available, the fair value would be calculated using the present value of
estimated expected future cash flows. The cash flow calculations would be based
on management's best estimates, using appropriate assumptions and projections at
the time.
The total purchase price of the goodwill and purchased intangible assets
was allocated based on an independent appraisal obtained by the Company, to the
tangible and intangible assets acquired based on their respective fair values on
the date of acquisition as follows (in thousands):
Customer list.............................. $ 4,169
Acquired workforce......................... 4,615
Goodwill................................... 48,050
-----------
$56,834
===========
Revenue Recognition
Extreme generally recognizes product revenue at the time of shipment,
unless Extreme has future obligations such as installation or has to obtain
customer acceptance. When significant obligations remain after products are
delivered, revenue is only recognized after such obligations are fulfilled.
Amounts billed in excess of revenue recognized are included as deferred
revenue in the accompanying consolidated balance sheets. Extreme has 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. Revenue from service obligations is
recognized ratably over the term of the contract period, which is typically 12
months. Extreme makes certain sales to partners in two-tier distribution
channels. These customers are generally given privileges to return a portion of
inventory and participate in various cooperative marketing programs. Extreme
defers recognition of revenue on such sales until the product is sold by the
distributors and also maintains appropriate accruals and allowances for all
other programs.
Upon shipment of products to its customers, Extreme provides for the
estimated cost to repair or replace products that may be returned under
warranty. Extreme's warranty period is typically 12 months from the date of
shipment to the end user.
Advertising
40
Advertising
We expense advertising costs as incurred. Advertising expenses for the
years ended June 30, 2000, 1999 and 1998 were approximately $2.2 million, $1.1
million and $0.4 million, respectively.
Foreign Operations
Extreme's foreign offices consist of sales, marketing and support
activities through its foreign subsidiaries and overseas resellers and
distributors. Operating income (loss) generated by Extreme's operating foreign
subsidiaries and their corresponding identifiable assets were not material in
any period presented.
Extreme's export sales represented 45% and 53% of net revenue in 2000 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,
--------------------
2000 1999
---- ----
Japan..................................................................... 19% 29%
All other export sales to countries totaling less than 10% each........... 26% 24%
Net Income (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the period,
less shares subject to repurchase, and excludes any dilutive effects of options,
warrants, and convertible securities. Dilutive earnings per common share is
calculated by dividing net income by the weighted average number of common
shares used in the basic earnings per common share calculation plus the dilutive
effect of options and warrants.
The following table presents the calculation of basic and diluted net
income (loss) per share (in thousands, except per share data):
Years Ended June 30,
--------------------
2000 1999 1998
---- ---- ----
Net income (loss).................................................. $ 20,048 $ (1,617) $ (13,936)
======== ======== ==========
Weighted-average shares of common stock outstanding........... 103,734 27,324 22,384
Less: Weighted-average shares subject to repurchase........... (3,218) (8,400) (13,626)
---------- ---------- ----------
Weighted-average shares used in computing basic
net income (loss) per common share.............................. 100,516 18,924 8,758
========== ========== ==========
Incremental shares using the treasury stock method 10,652 -- --
Weighted-average shares used in computing diluted
net income (loss) per common share.............................. 111,168 18,924 8,758
---------- ====== =====
Basic net income (loss) per common share........................... $ 0.20 $ (0.09) $ (1.59)
========== ========== ==========
Diluted net income (loss) per common share......................... $ 0.18 $ (0.09) $ (1.59)
========== ========== ==========
Share and per-share data presented reflect the two-for-one stock split
effective to stockholders of record on August 10, 2000.
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 Financial Accounting Standards Board ("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.
41
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 Enterprise," but retains the requirement to report information
about major customers. 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"). FAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", which
extended the deferral of the application of FAS 133 to all fiscal quarters of
fiscal years beginning after June 15, 2000. In June 15, 2000 the FASB also
issued FAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities) an Amendment to FASB Statement No. 133". FAS 138 amends the
accounting and reporting standards of Statement 133 for certain derivative
instruments and certain hedging activities. The Company will be required to
adopt these pronouncements for the year ending June 30, 2001. Because the
Company currently holds no derivative financial instruments and does not
currently engage in hedging activities, adoption of FAS 133 and 138 are expected
to have no material impact on the Company's financial condition or results of
operations.
In December 1999, the Staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") No.101, "Revenue Recognition in
Financial Statements", which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. The implementation of SAB 101
has recently been deferred to no later than the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. Extreme is presently evaluating the
potential impact of the adoption of SAB 101.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25" (Interpretation No. 44).
Interpretation No. 44 is effective July 1, 2000. The interpretation clarifies
the application of APB Opinion No. 25 for certain issues, specifically, (a) the
definition of an employee, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange or stock compensation awards in a business
combination. We do not anticipate that the adoption of Interpretation No. 44
will have a material impact on our financial position or the results of our
operations.
2) Financial Instruments
The following is a summary of available-for-sale securities (in thousands):
Unrealized Unrealized
Amortized Fair Holding Holding
Cost Value Gains Losses
---- ----- ----- ------
June 30, 2000:
Money market fund........................................ $ 12,372 $ 12,372 $ -- $ --
Commercial paper......................................... 71,929 71,889 -- (40)
U.S. corporate debt securities........................... 107,994 107,410 29 (613)
U.S. government agencies................................. 9,800 9,809 11 (2)
U.S. tax exempt securities............................... 10,000 10,000 -- --
--------- -------- ------- --------
$ 212,095 $211,480 $ 40 $ (655)
========= ======== ======= ========
Classified as:
Cash equivalents.................................... $ 100,736 $100,696 $ -- $ (40)
Short-term investments.............................. 66,976 66,640 26 (362)
Investments......................................... 44,383 44,144 14 (253)
--------- -------- ------- --------
$ 212,095 $211,480 $ 40 $ (655)
========= ======== ======= ========
Unrealized Unrealized
Amortized Fair Holding Holding
Cost Value Gains Losses
---- ----- ----- ------
June 30, 1999:
Money market fund...................................... $ 2 $ 2 $ - $ --
42
Commercial paper.......................... 110,265 110,241 -- (24)
U.S. corporate debt securities............ 15,885 15,797 -- (88)
U.S. government agencies.................. 300 300 -- --
-------- --------- ----- ------
$126,452 $126,340 $ -- $ (112)
======== ========= ===== ======
Classified as:
Cash equivalents..................... $ 93,840 $ 93,821 $ -- $ (19)
Short-term investments............... 16,427 16,422 -- (5)
Investments.......................... 16,185 16,097 -- (88)
-------- -------- ----- ------
$126,452 $126,340 $ -- $ (112)
======== ======== ===== ======
3) Business Combinations and Investments
During the fiscal year ended June 30, 2000, Extreme acquired certain
assets of a Company for a total cost of approximately $2.5 million of which $1.1
million has been paid. Extreme accounted for the acquisition using the purchase
method of accounting, and incurs charges of approximately $157,000 per quarter
related to the amortization of goodwill over the estimated useful life of four
years. The entire purchase price was allocated to goodwill and purchased
intangibles. Extreme recorded approximately $261,000 for amortization related to
this acquisition in the year ended June 30, 2000.
In April 2000, Extreme issued fully earned, non-forfeitable, fully
exercisable warrants with a two year life to purchase 3 million shares of
Extreme's common stock with an exercise price of $39.50 per share to a
networking company in consideration of the networking company's selection of
Extreme as the preferred vendor of next generation core backbone switching
products to a certain group of the networking company's customers. The fair
value of the warrants was approximately $54.3 million. The warrants were valued
under a Black-Scholes model, using a volatility assumption of 1.04% and a
two-year term. The value of the warrants is being amortized over approximately
two years, which is the estimated economic life of the acquired intangibles,
comprising of customer list, workforce and goodwill.
Extreme made several additional investments during the year ended June 30,
2000 totaling $7.7 million, which are reflected in "Other assets" in the
accompanying consolidated balance sheets. Two investments were made in entities
in which a related party of Extreme is also a significant investor. These
investments totaled $3.4 million, net of Extreme's share of these affiliates'
losses of $0.3 million. As these investments are being accounted for under the
equity-method, the revenue and operating costs of these entities have not been
included in Extreme's results from operations, however Extreme's share of these
affiliates' losses have been included in other expense from the closing date of
the related transactions forward. Pursuant to the terms of these two agreements,
Extreme has certain rights to acquire the remaining shares of these entities
under certain conditions for additional consideration. Under the terms of one of
these equity investments, Extreme has been granted the right at any time prior
to December 31, 2000 to purchase all of the outstanding capital stock and
options for shares of Extreme common stock. Upon the attainment of certain
technological milestones, the terms of one investment will obligate Extreme to
purchase all the outstanding capital stock in fiscal 2001, payable in any
combination of cash or shares of Extreme common stock. At June 30, 2000 the
possibility of attainment of any of the technical milestones was remote. The
remaining $4.3 million of investments at June 30, 2000 are being accounted for
under the cost method. We expect to continue to make additional investments in
the future.
4) Commitments
Extreme currently has outstanding fiscal year 2001 non-cancelable purchase
order commitments for materials of approximately $73.3 million. The fiscal year
2000 purchase orders have been fulfilled and the related invoices have been
accrued as of June 30, 2000. This expense is included within cost of revenue in
the year ended June 30, 2000.
In June 2000, we entered into an operating lease agreement to lease
275,000 square feet to house our primary facility in Santa Clara, California.
Our lease payments will vary based on the LIBOR plus a spread which was 7.14% at
June 30, 2000. Our lease payments are estimated to be approximately $5.7 million
on an annual basis over the lease term. The lease is for five years and can be
renewed for two five-year periods, subject to the approval of the lessor. At the
expiration or termination of the lease, we have the option to either purchase
the property for $80.0 million, or arrange for the sale of the property to a
third party for at least $80.0 million with a contingent liability for any
deficiency. If the property is not purchased or sold as described above, we will
be obligated for an additional lease payment of approximately $68.0 million.
43
As part of the above lease transaction, Extreme restricted $80.0 million of
its investment securities as collateral for specified obligations of the lessor
under the lease. These investment securities are restricted as to withdrawal and
are managed by a third party subject to certain limitations under Extreme's
investment policy. The lease also requires us to maintain specified financial
covenants with which we were in compliance as of June 30, 2000.
Future payments under all noncancelable leases (net of future committed
sublease proceeds of $9,161) at June 30, 2000 are as follows (in thousands):
Years ending June 30:
2001...................................... $ 2,691
2002...................................... 2,758
2003...................................... 5,200
2004...................................... 6,504
2005...................................... 6,242
-------
Total minimum payments......................... $23,395
=======
Rent expense was approximately $2.9 million, $0.7 million and $0.8 million
for 2000, 1999 and 1998, respectively. Sublease income for the years ended 2001,
2002 and 2003 was $3.9 million, $3.9 million and $1.4 million, respectively.
These amounts were netted from the amounts in the above schedule.
5) Stockholders' Equity
Common Stock Offering
In April 1999, Extreme completed an initial public offering of 16,100,000
shares of common stock (including the underwriters' over-allotment provision) at
a price of $8.50 per share. Concurrent with the initial public offering, all
outstanding shares of preferred stock were converted to a total of 58,122,630
shares of common stock. Net proceeds from the offering were approximately $125.3
million net of offering costs.
On October 20, 1999, Extreme announced the completion of a secondary public
offering of approximately 15 million shares (including the underwriters'
over-allotment provision) of its common stock at a price of $38.50 per share. Of
these shares, Extreme sold 4,745,416 shares and existing stockholders sold
10,204,584 shares. Extreme raised approximately $174.0 million net of offering
costs.
Preferred Stock
The number of shares of preferred stock authorized to be issued at June 30,
2000 is 2,000,000 with a par value of $0.001 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, 2000, no shares of preferred stock had been issued.
Common Stock
In May 1996, Extreme issued 9,450,000 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, 1999, approximately 1,182,000 shares were
subject to repurchase at their original issuance price (none at June 30, 2000).
Warrants
In November 1996, Extreme issued warrants to a lease financing company to
purchase 420,000 shares of Series A convertible preferred stock with an exercise
price of $.17 per share, in consideration for equipment leases and a loan. In
July 1997, Extreme issued warrants to the same lease financing company to
purchase 96,694 shares of Series B convertible preferred stock with an exercise
price of $.69 per share, in consideration for equipment leases. Concurrent with
the initial public offering, these warrants converted into the
44
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, 294,000 of these warrants
were exercised. In August 1999, 222,694 of these warrants were exercised.
In November 1997, Extreme issued warrants to a lease financing company to
purchase 158,102 shares of Series C convertible preferred stock with an exercise
price of $1.27, in consideration for a loan. 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 which expires the sooner of (i) 10
years or (ii) 3 years from the effective date of the initial public offering. In
August 1999, all of the 158,102 warrants were exercised.
In June 1999, Extreme issued fully vested, non-forfeitable and exercisable
warrants to a business partner to purchase 80,000 shares of Extreme's common
stock with an exercise price of $29.03 per share. The fair 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.
As discussed in Note 3, in April 2000, Extreme issued fully earned,
non-forfeitable, fully exercisable warrants with a two year life to purchase 3
million shares of Extreme's common stock with an exercise price of $39.50 per
share.
In June 2000, Extreme issued fully vested, non-forfeitable and exercisable
options to consultants to purchase 120,000 shares of Extreme's common stock with
an exercise price of $14.02 per share. The fair value of these options was
approximately $1.7 million. The options were valued under a Black-Scholes model,
using a volatility assumption of 1.04%. This amount will be amortized over two
years as the services are rendered. The compensation expense for the year ended
June 30, 2000 was $176,000.
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
$119,000, $172,000 and $68,000 for the years ended June 30, 2000, 1999 and 1998,
respectively. At June 30, 2000, Extreme had a total of approximately $78,000
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 10,000,000
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 originally 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 34,028,618 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 1,470,286 and 4,655,558 shares of common stock have been exercised
as of June 30, 2000 and 1999, respectively, but are subject to repurchase until
vested. As of June 30, 2000, 3,834,388 shares were available for future grant
under the Plan.
2000 Stock Option Plan
In March 2000, the board of directors adopted the 2000 Nonstatutory Stock
Option Plan (the "Plan"). Options may be granted for common stock, pursuant to
actions by the board of directors, to eligible participants. A total of
4,000,000 shares have been reserved under the Plan. 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.
The following table summarizes stock option activity under all plans:
45
Weighted-
Average
Number of Exercise Price
Shares Per Share
------ ---------
Options outstanding at June 30, 1997........................... 3,151,500 $ .03
Granted..................................................... 3,542,920 $ .65
Exercised................................................... (1,449,550) $ .11
Canceled.................................................... (37,000) $ .18
------------
Options outstanding at June 30, 1998........................... 5,207,870 $ .42
Granted..................................................... 5,875,516 $ 5.05
Exercised................................................... (1,135,600) $ .93
Canceled.................................................... (190,252) $ 3.34
------------
Options outstanding at June 30, 1999........................... 9,757,534 $ 3.04
Granted..................................................... 12,404,750 $ 33.99
Exercised................................................... (2,392,472) $ 1.23
Canceled.................................................... (1,374,704) $ 26.91
------------
Options outstanding at June 30, 2000........................... 18,395,108 $ 22.74
============
Options to purchase 6,721,582 and 9,368,034 shares were exercisable at June
30, 2000 and 1999, respectively, with a weighted-average exercise price of $3.75
and $2.22, respectively.
The following table summarizes significant ranges of outstanding and
exercisable options at June 30, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------- ----------------------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
------ ----------- ---------------- ----- ----------- -----
(In years)
$ 0.01 - 2.88 3,854,758 7.32 $ 1.43 3,854,758 $ 1.43
$ 3.25 - 28.00 3,869,580 8.63 $ 11.15 2,769,948 $ 5.96
$ 28.03 - 32.57 1,896,868 9.25 $ 29.97 8,126 $ 29.03
$ 32.72 - 33.32 4,051,500 9.39 $ 33.30 88,750 $ 33.32
$ 33.57 - 57.50 4,722,402 8.87 $ 37.66 -- $ --
----------- -----------
$ 0.01 - 57.50 18,395,108 8.65 $ 22.74 6,721,582 $ 3.75
=========== ===========
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
2,000,000 shares of common stock have 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 1,250 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 ended on April 30, 2000. Through June 30, 2000,
470,978 shares were purchased under the 1999 Purchase Plan.
Stock-Based Compensation
Extreme 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 has been recognized.
Pro forma information regarding net income (loss) 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
(loss) disclosed is not
46
likely to be representative of the effects on net income (loss) on a pro forma
basis in future years, due to subsequent years including additional grants and
years of vesting.
Prior to Extreme'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 Extreme's stock-based awards to
employees has been estimated using the Black-Scholes option pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. The Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because Extreme's
stock-based awards have characteristics significantly different from those in
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
Extreme's stock-based awards. The following weighted-average assumptions were
used to estimate fair value:
Stock Option Plan Employee Stock Purchase Plan
--------------------------------------- --------------------------------------
Years Ended June 30, Years Ended June 30,
--------------------------------------- --------------------------------------
2000 1999 1998 2000 1999 1998
--------- ---------- ----------- ---------- ----------- ---------
Expected life 3.4 yrs 3.5 yrs 6.0 yrs 0.6yrs 0.7 yrs. --
Volatility 1.12% 55% -- 1.12% 55% --
Risk-free interest rate 6.3% 5.1% 6.0% 5.4% 5.0% --
The weighted-average estimated fair value of options granted in the years
ended June 30, 2000, 1999 and 1998 was $24.23 $2.21 and $0.19, respectively. The
weighted-average estimated fair value of shares granted under the 1999 Purchase
Plan in the years ended June 30, 2000 and 1999 was $7.51 and $2.81,
respectively.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting period. Pro forma
information follows (in thousands, except per share amounts):
Years Ended June 30,
--------------------
2000 1999 1998
---- ---- ----
Pro forma net loss under FAS 123................................... $ (31,088) $ (4,066) $ (14,053)
Net loss per common share - pro forma under FAS 123:
Basic and diluted............................................... $ (0.32) $ (0.22) $ (1.61)
6) Income Taxes
Due to operating losses and the inability to recognize the benefits
therefrom, there was no tax provision for the year ended June 30, 1998.
The provision for income taxes for the years ended June 30, 2000 and 1999
consists of the following (in thousands):
Years Ended June 30,
--------------------
2000 1999
---- ----
Current:
Federal........................................ $ 24,811 $ 350
State.......................................... 2,026 200
Foreign........................................ 306 1,100
--------- --------
Total current ...................................... $ 27,143 $ 1,650
========= ========
Deferred:
Federal $(15,497) $ -
State (1,325) -
-------- --------
Total deferred $(16,822) $ -
======== ========
Provision for income taxes $ 10,321 $ 1,650
======== ========
47
The tax benefit resulting from the exercise of nonqualified stock options
and the disqualifying dispositions of shares acquired under Extreme's incentive
stock option plans was $21,600,000 for the year ended June 30, 2000. Such
benefit was credited to additional paid-in capital.
Pretax loss from foreign operations was $10,663,288 and $7,021,204 in the
years ended June 30, 2000 and 1999, respectively.
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):
Years Ended June 30,
--------------------
2000 1999 1998
---- ----- ----
Tax at federal statutory rate (benefit)........................ $ 10,666 $ 11 $(4,878)
State income tax............................................... 1,018 200 --
Federal alternative minimum taxes.............................. -- 350 --
Foreign taxes.................................................. 69 1,100 --
Unbenefited (utilized) net operating losses.................... (773) (11) 4,878
Tax credits.................................................... (1,576) -- --
Valuation allowance decrease................................... (5,148) -- --
Unbenefited foreign loss....................................... 3,974 -- --
Other.......................................................... 2,091 -- --
---------- -------- -------
Total..................................................... $ 10,321 $ 1,650 $ --
========== ======== =======
Significant components of Extreme's deferred tax assets are as follows (in
thousands):
Years Ended June 30,
--------------------
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards......................................... $ 431 $ 1,647
Tax credit carryforwards................................................. 2,358 2,238
Depreciation............................................................. 1,951 407
Deferred revenue......................................................... 3,545 373
Warrant amortization..................................................... 2,673 --
Other reserves and accruals ............................................. 7,500 3,887
-------- --------
Total deferred tax assets..................................................... 18,458 8,552
Valuation allowance........................................................... -- (8,552)
-------- --------
Net deferred tax assets....................................................... $ 18,458 $ --
======== ========
The net valuation allowance decreased by $8,522,000 and $1,019,000 during
the years ended June 30, 2000 and 1999, respectively.
As of June 30, 2000, Extreme had net operating loss carryforwards for state
tax purposes of approximately $7,500,000. Extreme also had federal and state
research and development tax credit carryforwards of approximately $1,000,000
and $1,800,000, respectively. The state net operating loss carryforwards will
expire in 2004, 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, as amended, and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
tax credits before utilization.
7) Comprehensive Income (Loss)
The following are the components of accumulated other comprehensive loss,
net of tax (in thousands):
Years Ended June 30,
--------------------
2000 1999 1998
---- ----- ----
48
Unrealized gain (loss) on investments...................................... $ (615) $ (112) $ --
Foreign currency translation adjustments................................... (8) (6) --
------- ------- ------
Accumulated other comprehensive loss.................................... $ (623) $ (118) $ --
======= ======= ======
The following schedule of other comprehensive income (loss) shows the gross
current-period gain (loss) and the reclassification adjustment (in thousands):
Years Ended June 30,
--------------------
2000 1999 1998
---- ----- ----
Unrealized gain (loss) on investments:
Unrealized gain (loss) on available-for-sale securities................. $ (508) $ (112) $ --
Less: reclassification adjustment for gain (loss) realized in
net income (loss)................................................ 5 -- --
------ ------ ------
Net unrealized gain (loss) on investments.................................. (503) (112) --
Foreign currency translation adjustments................................... (2) (6) --
------ ------ ------
Other comprehensive income (loss).......................................... $ (505) $ (118) $ --
====== ====== ======
8) 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 2000, and have the amount of the reduction
contributed to the 401(k) plan.
9) Subsequent Event
On July 19, 2000 Extreme announced a two-for-one stock split in the form of
a stock dividend to be paid on August 24, 2000 to stockholders of record on
August 10, 2000. All share and per share data have been restated to give
retroactive effect to this stock split.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Certain information required by Part III is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 2000 Annual Meeting of Stockholders (the "Proxy Statement").
Item 10. Directors and Executive Officers of the Registrant.
The information required by this section is incorporated by reference from
the information in the section entitled "Proposal 1-Election of Directors" in
the Proxy Statement. The required information concerning executive officers of
the Company is contained in the section entitled "Executive Officers of the
Registrant" in Part I of this Form 10-K.
Item 405 of Regulation S-K calls for disclosure of any known late filing or
failure by an insider to file a report required by Section 16 of the Exchange
Act. This disclosure is contained in the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this section is incorporated by reference from
the information in the sections entitled "Proposal 1-Election of Directors --
Directors' Compensation", "Executive Compensation" and "Stock Price Performance
Graph" in the Proxy Statement.
49
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this section is incorporated by reference from
the information in the section entitled "Proposal 1- Election of Directors-
Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this section is incorporated by reference from
the information in the section titled "Certain relationships and related
transactions" in the Proxy statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this Form 10-K:
(1) Financial Statements:
Reference is made to the Index to Consolidated Financial Statements of
Extreme Networks, Inc. under Item 8 in Part II of this Form 10-K.
(2) Financial Statement Schedules:
The following financial statement schedule of Extreme Networks, Inc.
for the years ended June 30, 2000, 1999 and 1998 is filed as part of this
Report and should be read in conjunction with the Consolidated Financial
Statements of Extreme Networks, Inc.
Reference
Page
Schedule II-- Valuation and Qualifying Accounts....................... 52
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(3) Exhibits:
The exhibits listed below are required by Item 601 of Regulation S-K.
Each management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K has been identified.
Exhibit
Number Notes Description of Document
--------- ----- -----------------------
2.1 (1) Form of Agreement and Plan of Merger between Extreme
Networks, a California corporation, and Extreme Networks,
Inc., a Delaware corporation.
3.1 (1) Certificate of Incorporation of Extreme Networks, Inc., a
Delaware Corporation.
3.2 (1) Form of Certificate of Amendment of Certificate of
Incorporation of Extreme Networks, Inc., a Delaware
Corporation.
3.3 (1) Form of Amended and Restated Bylaws of Extreme Networks,
Inc., a Delaware Corporation.
4.1 (1) Second Amended and Restated Rights Agreement dated January
12, 1998 between Extreme Network and certain stockholders.
10.1 (1) Form of Indemnification Agreement for directors and
officers.
10.2 (1) Amended 1996 Stock Option Plan and forms of agreements
thereunder.*
10.3 (1) 1999 Employee Stock Purchase Plan.*
10.4 (1) Sublease, dated June 5, 1997 between NetManage, Inc. and
Extreme Networks, Inc., a California corporation, to
Master Lease, dated September 30, 1994, between Cupertino
Industrial Associates and NetManage, Inc.
10.5 (1) Sublease, dated January 1, 1999 between Apple Computer,
Inc., a California corporation, and Extreme Networks,
Inc., a California corporation, to Lease Agreement, as
amended.
50
10.6 Form of Warrant to Purchase Common Stock between 3Com
Corporation and Extreme Networks, Inc.
10.7 Form of 2000 Nonstatutory Stock Option Plan.*
10.8 Form of Lease Agreement (Land) dated June 1, 2000 by and
between BNP Leasing Corporation, a Delaware corporation
("BNPLC") and Extreme Networks, Inc. a Delaware
corporation ("Extreme").
10.9 Form of Lease Agreement (Improvements) dated June 1, 2000,
executed by and between BNPLC and Extreme.
10.10 Form of Purchase Agreement (Land) dated to be effective as
of June 1, 2000, executed by and between BNPLC and
Extreme.
10.11 Form of Purchase Agreement (Improvements) dated to be
effective as of June 1, 2000, executed by and between
BNPLC and Extreme.
10.12 Form of Pledge Agreement (Land) dated to be effective as
of June 1, 2000, among BNPLC, BNP Paribas (as Agent), and
Extreme.
10.13 Form of Pledge Agreement (Improvements) dated to be
effective as of June 1, 2000, among BNPLC, BNP Paribas (as
Agent), and Extreme.
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst and Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 53 of this Form 10-K).
27.1 Financial Data Schedule (available in EDGAR format only).
_____________
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (File No. 333-71921).
(b) Reports on Form 8-K:
No reports on form 8-K were filed by the Company during the three months
ended June 30, 2000.
51
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(In thousands)
Reversals
Balance at Charged to to costs Balance at
beginning costs and and end of
Description of period expenses expenses (Deductions) period
----------- ------------ ------------ ---------- -------------- -----------
Allowance for doubtful accounts
2000......................... $1,374 $ -- $ -- $ (137) $ 1,237
1999......................... 433 1,364 -- (423) 1,374
1998......................... -- 470 -- (37) 433
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on September 28, 2000.
EXTREME NETWORKS, INC.
(Registrant)
By: /s/ GORDON L. STITT
-------------------------------------
Gordon L. Stitt
President
Chief Executive Officer
Chairman of the Board
September 28, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gordon L. Stitt and Vito E. Palermo, and
each of them, his or her true and lawful attorneys-in-fact, each with full power
of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
/s/ GORDON L. STITT /s/ PROMOD HAQUE
- ----------------------------------------------- -----------------------------------------------
Gordon L. Stitt Promod Haque
President, Chief Executive Officer Director
Chairman of the Board September 28, 2000
September 28, 2000
/s/ VITO E. PALERMO /s/ LAWRENCE K. ORR
- ----------------------------------------------- -----------------------------------------------
Vito E. Palermo Lawrence K. Orr
Vice President & Chief Financial Officer Director
(Principal Financial and Accounting Officer) September 28, 2000
September 28, 2000
/s/ CHARLES CARINALLI /s/ PETER WOLKEN
- ----------------------------------------------- -----------------------------------------------
Charles Carinalli Peter Wolken
Director Director
September 28, 2000 September 28, 2000
53
EXHIBIT INDEX
Exhibit
Number Notes Description of Document
--------- ----- -----------------------
2.1 (1) Form of Agreement and Plan of Merger between Extreme
Networks, a California corporation, and Extreme Networks,
Inc., a Delaware corporation.
3.1 (1) Certificate of Incorporation of Extreme Networks, Inc., a
Delaware Corporation.
3.2 Form of Certificate of Amendment of Certificate of
Incorporation of Extreme Networks, Inc., a Delaware
(1) Corporation.
3.3 (1) Form of Amended and Restated Bylaws of Extreme Networks,
Inc., a Delaware Corporation.
4.1 (1) Second Amended and Restated Rights Agreement dated January
12, 1998 between Extreme Network and certain stockholders.
10.1 (1) Form of Indemnification Agreement for directors and
officers.
10.2 (1) Amended 1996 Stock Option Plan and forms of agreements
thereunder.*
10.3 (1) 1999 Employee Stock Purchase Plan.*
10.4 (1) Sublease, dated June 5, 1997 between NetManage, Inc. and
Extreme Networks, Inc., a California corporation, to
Master Lease, dated September 30, 1994, between Cupertino
Industrial Associates and NetManage, Inc.
10.5 (1) Sublease, dated January 1, 1999 between Apple Computer,
Inc., a California corporation, and Extreme Networks,
Inc., a California corporation, to Lease Agreement, as
amended.
10.6 Form of Warrant to Purchase Common Stock between 3Com
Corporation and Extreme Networks, Inc.
10.7 Form of 2000 Nonstatutory Stock Option Plan.*
10.8 Form of Lease Agreement (Land) dated June 1, 2000 by and
between BNP Leasing Corporation, a Delaware corporation
("BNPLC") and Extreme Networks, Inc. a Delaware
corporation ("Extreme").
10.9 Form of Lease Agreement (Improvements) dated June 1, 2000,
executed by and between BNPLC and Extreme.
10.10 Form of Purchase Agreement (Land) dated to be effective as
of June 1, 2000, executed by and between BNPLC and
Extreme.
10.11 Form of Purchase Agreement (Improvements) dated to be
effective as of June 1, 2000, executed by and between
BNPLC and Extreme.
10.12 Form of Pledge Agreement (Land) dated to be effective as
of June 1, 2000, among BNPLC, BNP Paribas (as Agent), and
Extreme.
10.13 Form of Pledge Agreement (Improvements) dated to be
effective as of June 1, 2000, among BNPLC, BNP Paribas (as
Agent), and Extreme.
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst and Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 53 of this Form 10-K).
27.1 Financial Data Schedule (available in EDGAR format only).
____________
* Indicates management contract or compensatory plan or arrangement.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (File No. 333-71921).