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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
Form 10-K
----------------
(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, 20001, 2001
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 333-719210-25711
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Extreme Networks, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 77-0430270
(State or other jurisdiction of (I.R.S. Employer
jurisdiction Identification No.)
of 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$1,728,241,385 as of September 15, 2000,6, 2001, 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.
109,912,500113,924,943 shares of the Registrant's Common stock, $.001 par value, were
outstanding September 15, 2000.6, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11,12 and 13 ofThe information called for by Part III incorporateis incorporated by reference information fromto
specified portions of the Registrant's Definitive Proxy Statement to be filedissued
in conjunction with the Securities and Exchange Commission in connection with the solicitation of
proxies for the Registrant's 20002001 Annual Meeting of Stockholders.
================================================================================Stockholders, which
is expected to be filed not later than 120 days after the Registrant's fiscal
year ended July 1, 2001.
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EXTREME NETWORKS, INC.
FORM 10-K
INDEX
Page
----
PART I
Item 1. BusinessBusiness................................................................................ 3
Item 2. Properties 14Properties.............................................................................. 19
Item 3. Legal Proceedings 14Proceedings....................................................................... 19
Item 4. Submission of Matters to a Vote of Security holders 14Holders..................................... 20
PART II
Item 5. Market Forfor Registrant's Common Equity and Related Stockholder Matters 16Matters................... 22
Item 6. Selected Consolidated Financial Data 16Data.................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item7A.Operations... 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30Risk.............................. 40
Item 8. Financial Statements and Supplementary Data 32Data............................................. 42
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 49Disclosure.... 68
PART III
Item 10. Directors and Executive Officers of the Registrant 49Registrant...................................... 69
Item 11. Executive Compensation 49Compensation.................................................................. 69
Item 12. Security Ownership of Certain Beneficial Owners and Management 50Management.......................... 69
Item 13. Certain Relationships and Related Transactions 50Transactions.......................................... 69
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 50
SIGNATURES 538-K......................... 69
SIGNATURES....................................................................................... 74
2
PART I
Item 1. Business.
When used in thisFORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within
the words "may," "should," "believes," "expects,"
"anticipates," "estimates"meaning of Section 27A of the Securities Act of 1933 and similar expressions are intended to identifySection 21E of the
Securities Act of 1934. These include forward-looking statements. Such statements, which include statements concerning
expected changes in expense levels, 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 suppliers
and contract manufacturers, product costs and sales prices, liquidity and
similar language based on the Company's suppliers, are subject to
risks and uncertainties, including those set forth under "Management's
Discussion and Analysisexpectations 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 onlymanagement as of the date hereof andof
this filing. However, there may be events in the future that we are not able to
accurately predict accurately or over which we have no control. We caution investors that
actual results may differ materially from those projected in the
forward-looking statements as a result of certain risk factors identified in
this Form 10-K and other filings we have made with the Securities and Exchange
Commission. More information about potential factors that could affect our
business and financial results is set forth under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 1. Business
Overview
Extreme Networks, Inc. ("Extreme", together with its subsidiaries, (collectively
referred to as Extreme or "the Company")the Company and as we, us, and our) is a leading
provider of broadband ethernetnetwork infrastructure equipment for business applications and
services. We were established in 1996 to address the issues caused by slow and
expensive networks. We set out to change the industry by replacing complex
software-based routers with simple, fast, highly intelligent, hardware-based
switches. The acceptance of this innovative, simplified approach to networking
solutionshas enabled us to become an industry leader. Our goal is to realize our
corporate vision of Ethernet Everywhere - a unifying network strategy that uses
proven Ethernet technology to simplify each element of the network.
Accordingly, our strategy is to lay the foundation for the Internet economy. The key
advantagesa future of our etherneteasily
deployable, highly scalable, ubiquitous bandwidth for networks, applications
and users.
Our Ethernet Everywhere switching solutions are increasedproducts provide significant performance
the
abilityincreases compared to easily grow, or "scale," in size as customer needs change, flexible
allocation oflegacy infrastructures, while allowing greater network
resources,flexibility and scalability, ease of use and lower cost of ownership. Theseownership than
competitive products.
We have achieved these advantages are obtained through the use of custom semiconductors, known asprimarily by using application specific
integrated circuits, or ASICs, in our products and throughcreating designs that are
common and uniform across our product line. Thelines. In our products, the routing of
network traffic, a function referred to as Layer 3 switching, is done primarily
with ASICs. ASICs in our products, and
consequently, isgenerally provide faster processing of data than the software
implementations used in many competing products.products and are more cost-effective,
resulting in a higher return on investment.
Traditional Layer 3 products relyroute traffic primarily on software which canthrough the use of
software. This method is much slower than routing with ASICs, and is less
dependable in message packet delivery because slow traffic speeds below those which could otherwise be achieved andcan 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."switch. As a result, we are able to offer
our products are less expensiveat a lower cost than software-based routers, yet offer improvedalternatives while improving
performance throughout the network.
Industry Background
Businesses and other organizations have become increasingly dependent on the
internetInternet 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-lineonline connections with vendors, as well as the increased use of traditional
applications, such as e-mail and streaming
3
media, 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-lineonline transactions, such as mobile
communications and application service providers, for example, are further burdening thedemand a fast, flexible, and
scalable network infrastructure.
Today's Networking Environmentsenvironments can be segmented into Local Area Networks, or LANs,
Wide Area Networks, or WANs, and Metropolitan Area Networks, or MANs.
LANs. LANs have traditionally beenare traditional networks designed for client/server applications
wherewithin a confined geographical area, such as a building or a campus. The LAN
consists of servers, clients, a networking operating system, and a
communications link.
In the past, LAN traffic patterns were predictable and traffic loads arewere
relatively stable. In this environment, theThe majority of traffic remainedwould remain 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 ofLAN. With the LAN. The increased use of data-intensive, mission-critical
applications, the widespread implementationsimplementation of intranets and extranets, and the
ubiquitywidespread use of Internet technologies, have created
unpredictableLAN traffic patterns, and unpredictable traffic loads within the LAN.has become highly
unpredictable. In addition, as users utilizewithin a LAN have full access to the
desktop browser and Internet, technologies to
accessdownloading significant amounts of information from servers located
inside and outside of the organization with a much higher percentage of traffic
crossescrossing the
enterprise LAN backbone.
For example,The LAN market consists primarily of large and medium-sized enterprise
customers.
WANs. WANs are communication networks that span across large geographic
areas, such as counties, states or countries.
Recent technology developments such as very high-bit-rate digital subscriber
lines, or VDSL, extend the reach of Ethernet WANs beyond current optical-based
network infrastructures, into areas where only voice-grade wiring exists. The
addition of WAN support to ASIC-based network switches permits Ethernet
services to reach customers where only a limited fiber infrastructure is
available.
The WAN market includes building local exchange carriers, multiple
tenant/dwelling unit service providers, and Internet Service Providers, or
ISPs, as primary customers, though an employee can makeenterprise may also utilize a simple requestprivate
WAN.
MANs. MANs are networks that may require datalink metropolitan geographic areas such as a
city or an entire metropolitan area.
Owing to be downloadedthe availability and analyzed from multiple data warehouses
outside his or her local workgroup, resultingdeployment of Gigabit Ethernet, LANs have
achieved geometric growth in increased traffic acrossbandwidth. The bandwidth in WANs has also grown,
based on technology designed to accommodate the LAN. Similarly, multiple users could request a multimedia presentation from a
company intranet or fromrapid annual growth in Internet
traffic. The MAN is the Internet consuming tremendous amounts of network
capacity. Either of these situations could result in users overwhelming a
company's enterprisekey link between the 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 amountWAN.
Over the last couple of traffic onyears, MANs have emerged as a network grew, network performance began to decline. In this shared environment,
each desktop receivedcritical 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 remaineddynamically evolving arena 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.overall network infrastructure. In
addition to the evolutionrising traffic demands, the underlying network architectures,
protocols and technologies are also experiencing rapid change. The emergence of
new devices,wavelength division multiplexing, the rise of higher speed optical connections,
and the drive toward voice and data convergence are all combining to impose
limits on the ability of existing network architectures to meet the need for
increased backbone speeds led tocapacity. In addition, the developmentcompetitive landscape for MAN service
providers is shifting, with the influx of new and faster technologiesclasses of carriers who do not
necessarily depend upon existing infrastructure, such as FDDI, Fast EthernetSynchronous Optical
Network/Synchronous Digital Hierarchy, or SONET/SDH.
4
The MAN market includes metropolitan service providers, in addition to
municipalities that utilize the network to connect locations, such as City
Hall, the fire department, road and ATM. However, each of these technologies employs
different protocols, further complicating the LAN by requiring software-based
routers that use expensive CPUsvehicle maintenance facilities, hospitals
and software tables to route this multi-protocol
traffic. Today, it is not uncommon to find multiple protocolsemergency centers, social services, and devices across
the enterprise network.public libraries.
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,Therefore, the backbone and
server connections that aggregate traffic from desktops require speeds well in
excess of 100 Mbps. Wire speedWire-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
speedWire-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 ofrequired by
today's enterprise ISPsenterprises and metropolitan area networksservice providers by accommodating new unpredictable
traffic patterns and bandwidth-intensive, mission-critical applications.
First, whileWhile many new and different technologies have been deployed in existing LANs,
Ethernet has become the predominant LAN technology, with over 97%99% of the market
in 19992000 and total shipments of over 490700 million ports from 1991 to 1999,over the preceding
ten-year period, according to the Dell'Oro Group.Group, an independent research
organization. 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
ethernetEthernet and 10 gigabit ethernetGigabit 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 acceptancewidespread adoption of Ethernet and Internet Protocol-basedProtocol, or IP,
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,
4
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 offeringsother products fail to realize the
potential of this technology because of the use of inconsistent hardware,
software and management architectures.
5
To effectively address the needs of today's enterprise ISPsenterprises and metro area
networks, customers needservice
providers, the network industry needs a solution that ismust be easy to use and
implement an can
scaleand is scalable in terms of speed, bandwidth, network size and
quality of service. Layer 3 switching represents the next critical step in
addressing these requirements. However, customersCustomers need a Layer 3 solution that provides
sufficient speed and 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.architecture.
The Extreme Networks Solution
Extreme provides broadband ethernetWe provide Ethernet networking solutions that meet thethese requirements of the
enterpriseISPs networkers and Metropolitan Area Networksservice providers by providing increased performance,
scalability, policy-based quality of service, ease of use and lower cost of
ownership. Our products share a common ASIC,set of ASICs, software and network
management architecture, that enablesenabling Layer 3 switching at wire speedwire-speed in each major
area of the network. In addition, these products can be utilized by
ISPs and content providers can use these
products for their web-hosting and server co-location operations. Because ourOur products
are based on industry standard routing and network management protocols theythat
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 tocan be managed from any browser-equipped desktop.
The key benefits of Extreme'sour solutions are:
High performance. Our products provide BroadbandSimplicity. Networks typically consist of many different technologies 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
upequipment. This complexity often makes it expensive and difficult to
100 times faster than with software-based routers.
Ease of useeffectively manage and implementation.scale networks. We attempt to meet these challenges
by focusing on product consistency and simplicity. Our products share a
common ASIC, software and network management architecture and offer
consistent features for each of the key areas of the network. This allows
customers to build a consistent network that shares a common set of
features, performance and management capabilities.
Ease of use and implementation. Our standard-basedproducts are designed to make
networks easy to manage and administer, thereby reducing the overall cost of
network ownership. Through the use of a standards-based design approach, our
products can readily be integrated into
and installed within existing networks. Customers can
usually upgrade with Extremeour products without needingthe need for additional training.
Moreover, our proprietary ExtremeWare software simplifies network management
by enabling customers to manage any of our products remotely through a
browser interface.
High performance. Our products provide broadband Ethernet and IP services
together with the non-blocking, wire-speed routing of our ASIC-based Layer 3
switching. Using our products, customers may achieve forwarding rates that
are significantly faster than with software-based routers.
Scalability. Our solutions offer customers the speed and bandwidth they
needneeded
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 canmay
upgrade them to advanced Layer 3 and Layer 4-74 ~ Layer 7 capability because this
functionality is builtdesigned into our ASICs.
Quality of service. Extreme'sOur 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
6
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.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 shareWe believe
that by sharing 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 whichthat leverages the knowledge and resources businesses
have invested in Ethernet and the Internet Protocol, or IP-based networks,
thereby requiring fewer resources and less time to maintain.
5
The Extreme Networks Strategy
Extreme's objective is to be the leading supplierprovider of end-to-endthe most effective
network solutions.infrastructure for business applications and services. The key elements
of our strategy include:
Provide simple, 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,wire-speed, non-blocking routing
capabilities of ASIC-based Layer 3 switching. We intend to capitalize on our
expertise in Ethernet, Internet protocol ("IP")IP, and switching technologies to develop new
products based on our common architecture that meet the future requirements
of the enterprise LANs, ISPs and contentservice 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 buysdeploys our products forin one area of theirits network,
our strategy is then to then offer thatproducts to the customer products for other areas. As
additional products are purchased, a customer obtainscustomers obtain 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 edgeleading-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 the
Institute for Electrical and Electronics Engineers, or IEEE, and the
Internet Engineering Task Force, or IETF.
Leverage and expand multiple distribution channels. We distribute our
products primarily through resellersselected distributors and selected OEMs and through our field
sales team.a large number of
resellers. To quickly reach a broad, worldwide audience, we have more than
250 resellers in approximately 50 countries, including regional networking
system resellers, network integrators and wholesale distributors, and have established
relationships with select OEMs.distributors. 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 while continuing to develop and are developing two tierrefine our 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.channels.
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 offerThis includes a wide range of standard support programs
that include emergency telephone support 24are responsive to the level of service required by our customers, from
standard business 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.global 24x7x365 real-time response support. We
intend to continue to enhance the ease of
7
use of our products and invest in additional support services by increasing
staffing and adding new programs for our OEMsdistributors 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.end-user customers.
Products
Extreme provides broadband networking solutionsWe deliver high-performance application and services infrastructure for
enterprise, service provider and MANs based on award-winning technology that
meet the requirements
of enterprise, ISPscombines simplicity, high performance, intelligence and IP carrier and Metropolitan Area Networks by providing
increased performance, scalability, policy-based quality of service, ease of use
and lowera low cost of
ownership. Our family of Summit stackable, BlackDiamond and Alpine chassis
switches share a common ASIC,the same consistent hardware, software and management
architecture, enabling businesses to build a network infrastructure that facilitatesis
simple, easy to manage and scalable to meet the demands of growing businesses.
The Summit chipset is the original group of ASICs used in our products, whereas
the Inferno chipset is the second-generation. Our third-generation chipset,
known as Genesis, is currently under development.
Our product solutions enable the delivery of broadband Ethernet and IP over
current and legacy networks. Additionally, with fewer components and a
relatively short product design and development cycle,consistent management system, fewer dedicated network resources are required to
manage the network - 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 thetotal cost and complexity of network administration and management.
The following table identifies ourownership.
Our principal hardware and software products:
6
products are as follows:
Product name Product name
and date of and date of
first shipment Configuration / Products Configuration/Description
first shipment Configuration / Description
The------------------------------- -----------------------------------------------------------------------
Summit Stackable product family TheProduct Family
------------------------------- -----------------------------------------------------------------------
Inferno chip-based products:
Summit1i 8 Gigabit Ethernet ports
Summit5i 16 Gigabit Ethernet ports
Summit7i 32 Gigabit Ethernet ports
Summit48i 48 Ethernet ports and 2
Gigabit Ethernet ports
Summit chip-based products:
Summit24 24 10/100 Mbps Ethernet ports and 1 Gigabit Ethernet port
Summit48 48 10/100 Mbps Ethernet ports and 2 Gigabit Ethernet ports
------------------------------- -----------------------------------------------------------------------
BlackDiamond Modular Chassis
- ----------------------------------- --------------------------------------------------------------- -----------------------------------------------------------------------
Summit-based products:
BlackDiamond 6808 Up to 576672 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 Mbpschasis
10 slots to accommodate
November 1998 Ethernet ports a variety of up to 8 connectivity and modules and 1 or 2
management 1modules
--------------------------------------------------------------------------------------------------------
BlackDiamond 6816 Up to 1,440 Mbps Ethernet ports or 192 Gigabit Ethernet ports in one
chassis
20 slots to accommodate a variety of up to 16 connectivity modules Summit48 48 10/100 Mbps Theand
4 management modules
--------------------------------------------------------------------------------------------------------
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--------------------------------------------------------------------------------------------------------
Alpine 3804 Up to 128 Mbps Ethernet ports or 16 Gigabit Ethernet ports September 2000
Summit7i 32 Gigabit Ethernet portsin one
chassis
5 slots to accommodate a variety of up to 4 connectivity modules and 1
management module
8
Products Configuration/Description
--------------------------- ---------------------------------------------------------------------------
Software
December 1999 ----------------------------------- ---------------------------------------------------------------------------
ExtremeWare SoftwareEmbedded switch management software suite that hasfeaturing standard
September 1997 protocols,
web-based configuration and Policy-Based
Qualitypolicy-based quality of Service
ExtremeWare Enterprise Anservice
--------------------------------------------------------------------------------------------------------
Infrastructure and Services Next-generation network management software that manages Layer 2 ~ Layer
Management (ISM) Software, 7 application infrastructure
includes:
EPI Center Next-generation integrated management
Manager application suite that protects
August 1998 the deliverysimplifies configuration,
troubleshooting, and status monitoring of provisionedIP-based networks
Service Watch A monitoring and management software suite for mission-critical network
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 policy-based quality of service, (QoS).or
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")or POP, in metropolitan area networksMANs 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, Summit24 and Summit24Summit48i desktop switching products. The Summit48
switch addresses high-density enterprise desktop connections. This switch
features a non-blocking architecture to avoid the loss of data packets. The
Summit24 switch, with half the number of ports of the Summit48 switch, is
targeted at local wiring closets with moderately dense desktop connections. At
the network edge, the Summit48i switch delivers an aggregation switching
solution with physical and logical access, security and user mobility features.
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
7
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
9
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
switchingA number
of our products address 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 networksMANs 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
narrowbandnarrow-band technologies. There is a growing need for consistent scalable
services in the multi-tenant market, which, according to Cahner's InStat Group,
an independent research organization, will reach $2 billion by 2004. The
new Summit1i and Summit5i Gigabit Ethernet switching systems are designed to
eliminate the limitations associated with multiple narrowbandnarrow-band aggregation
technologies traditionally used in metropolitan POPs. To keep up with the
demands of the MAN provider, more sophisticated network features are required
to help them deliver revenue-generating services by ensuring latency,
reliability, and security. The Summit48i extends Ethernet service provisioning
to the network edge, enabling control and management over bandwidth, service
provisioning and usage-based billing.
BlackDiamond Modular Chassis6800 Series
The BlackDiamond modular chassis6800 series delivers carrier-class scalability, redundancy
and high reliability for core switching in high-density Ethernet/IP enterprise
and service provider networks. The BlackDiamond switch includesThese modular switches include the
fault-tolerant features associated with mission-critical enterprise-class Layer
3 core switching, including redundant system management and switch fabric
modules, hot-swappable modules and chassis components, load-sharing power
supplies and management modules, up to eightsixteen 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 ofOwing to the high-traffic nature of
the network core, the critical elements in core switching include wire-speed
Layer 3 switching, scalability, a non-blocking hardware architecture,
fault-tolerant mission-critical features, redundancy, and link aggregation, the abilityaggregation. The
abilities to support a variety of high-density "speedsspeeds and feeds"feeds and the ability to
accommodate an increasing number of high-capacity backbone connections are critical in core switching.also
important.
Alpine Chassis3800 Series
The Alpine 3808 chassis switch3800 series provides a simpler, moresimple, resilient broadband infrastructure
for metropolitan area networks ("MANs"),MANs, ISPs and mid-range enterprise networks. The Alpine 3800 series
provides total Ethernet coverage with support for both standard category 5 and
fiber optic media as well as first mile technologies that extend the reach of
Ethernet over VDSL and legacy WAN technologies. In addition, the Alpine
platform can be deployed throughout a network infrastructure consistently,
regardless of the building topology or type of cabling available.
The Alpine 3800 series switches can be configured to scale from 8 to 56
Ethernet-over-VDSL ports. Even higher density can be achieved with a
combination of Ethernet-over-VDSL and traditional copper or fiber Ethernet
ports. The FM-8Vi module provides Ethernet-over-VDSL at 10 Mbps full-duplex on
each port, up to 2500 feet.
The four-port T1/E1 WAN, or WM-4T1, module for the Alpine 3800 series
switches provides WAN connectivity for the Alpine chassis switch. The WM-4T1
module provides flexible WAN connectivity with T1 channel bonding that scales
from 1.5 Mbps to 6 Mbps of uplink capacity. Coupled with the sophisticated
bi-directional rate shaping and policy-based QoS capabilities of the Alpine
chassis switch, the T1 module ensures
10
delivery of real-time and mission-critical applications in the WAN. The WM-4T 1
module is ideal for supporting both switched Ethernet and IP-routed
configurations across T1 links.
ExtremeWare Software
ExtremeWare software is the embedded operating system software that is
provided on every one of our switches. It delivers the uncompromising switching
and routing protocol support, management, control and security needed on
today's most demanding enterprise, service provider data
centers, multi-tenant buildings and enterprise wiring closets.co-located networks.
Its standards-based, multi-layer switching and policy-based QoS give network
managers the tools they need to make the most of network capacity. The
Alpine 3808flexibility of ExtremeWare software is key in making network design decisions
for switching, independent from QoS and security policies.
Infrastructure and Services Management
Extreme Infrastructure and Services Management, or ISM, is the industry's first broadband provisioning switch based on Ethernet and IPnext
generation network management software platform that enables MANs and carriers to deliver more infrastructure bandwidth, slice
and dicemanages Layer 2 ~ Layer 7
application infrastructures. ISM is a total software portfolio that bandwidthincludes
EPICenter software, an integrated application suite 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 bandwidthnetwork management, and
traffic prioritization in
today's networks. With ExtremeWare, QoS policies are easy to define and assign
to traffic groups. TheServiceWatch software, a Layer 4 ~ Layer 7 application monitoring suite,
offering a unified management solution for a wide range of QoS profiles includes minimum bandwidth, maximum
bandwidthbusiness sizes 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
determinedemands. EPICenter software, the amount of bandwidth available to a group of users or network
devices at a given time.
ExtremeWare Enterprise Manager
ExtremeWare Enterprise Managerprimary application in the ISM portfolio, is
a value-addedan integrated application suite that makes it easier to performsimplifies configuration, troubleshooting,
inventorying and status monitoring and deploy multi-vendor policy-based management. ExtremeWare Enterprise Managerof IP-based networks. EPICenter software
offers a comprehensive
8
set of network management tools that are easy to useapplications, accessible 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.
ExtremeWareOur 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"a Layer 4 ~ Layer 7 network services. It monitorsmonitoring and manages the response time ofmanagement
software solution for mission-critical network services such as e-mail,
e-commerce, and filer transfer
activities.file transfer. The software is designed to give network
managers a user's perspective with respect to the performance of their network
services to ensure these are performing at peak levels. If service response
time starts to degrade, ServiceWatch can be configured
to notifythe software notifies the network manager to take
corrective action before a problem occurs. ServiceWatch is also usedThe software monitors web servers,
such as a bandwidth-capacity planning toolHTTP, FTP servers, host and can help
track ISP service level agreements (SLAs) using historical reportingname servers, including DHCP and graphing of serviceDNS, mail
servers, including POP3, IMAP4 and SMTP, news servers, such as NNTP, and other
protocols, and tests device availability and response time.time using ping, or ICMP,
telnet and other protocols.
Sales, Marketing and Distribution
Extreme'sWe conduct our sales and marketing strategyactivities on a worldwide basis through
distributors, resellers, and our field sales organization. A majority of our
sales are made to partners in two-tier distribution channels. The first tier
consists of a limited number of independent distributors that sell primarily to
resellers and end-user customers. Distributors are generally given privileges
to return a portion of inventory and participate in various cooperative
marketing programs to promote the sale of our products and services. The second
tier of the distribution channel is focusedcomprised of a large number of independent
resellers that sell directly to end-user customers. Resellers do not stock
inventory and therefore are not granted return privileges. We maintain a
limited number of relationships with strategic original equipment manufacturer,
or OEM accounts, but we anticipate that OEM sales will continue to decline as a
percentage of net revenue as we focus on domestic and
international resellers, distributors, OEMsour two-tier distribution and field
sales.sales strategy.
Distributors. We have established several key relationships with leading
distributors in the electronics and computer networking industries. We intend
to maintain these relationships with distributors who may offer products or
distribution channels that complement our own channels. Each of our
distributors resells our products to reseller and end-user customers. The
distributors enhance our ability to sell and provide support to end-user
customers, especially global accounts, who may benefit from the broad service
and product fulfillment capabilities offered by these distributors. We
anticipate that sales by distributors will increase as a percentage of net
revenue in the future. Tech Data Corporation, a major electronics distributor
and value-added services provider headquartered in Clearwater, Florida,
accounted for 16% of our sales in fiscal 2001. No other customer accounted for
greater than 10% of our revenue in fiscal 2001.
11
Value-Added Resellers. We have entered into agreements to sell our products
through more than 250 resellers in approximately 50 countries. Our value-added
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 OEMOur
relationships with leaders in the
telecommunications, personal computer and computer networking industries. We
intend to maintainresellers are generally on 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 sellnon-exclusive basis and provide
support to large
organizations because certain end-user organizations may prefer to do businessthe resellers with very large suppliers. We anticipate that OEM sales will decline as a
percentagediscounts based upon the volume of net revenue as we expand our reseller and fields sales efforts.their orders.
Field sales. We have designed and establishedtrained 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, 2000,2001, Extreme's worldwide sales and marketing organization
included 376464 individuals, including directors, managers, sales representatives,
and technical and administrative support personnel. We have domestic sales
offices located in major metropolitan areas inthe states of Arizona, California, Colorado, Connecticut,
District of Columbia, Florida, Georgia, Illinois, Kansas, Massachusetts,
Maryland, Michigan, North Carolina, New Jersey, New York, Ohio, Oklahoma,
Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington and
Wisconsin. In addition, we have international sales offices located in
Argentina, Australia, Brazil, Canada, Chile,
Columbia, France, Germany, Hong Kong, Italy,
Japan, Korea, TheMalaysia, Mexico, the Netherlands, Sweden and the United Kingdom.
We also maintain representative offices in the People's Republic of China
located in the cities of Beijing, Chengdu, Shanghai and Wuhan.
International sales
We believe that there is a strong international market for our switching
products. Our internationalInternational sales are conducted primarily throughan important and growing portion of our overseas
offices and foreign resellers. Salesbusiness. In
fiscal 2001, sales to customers outside of North America accounted for approximately 45%55% of
our consolidated net revenue, compared to 43% in fiscal 2000.
9
2000 and 52% in fiscal
1999. These sales are conducted primarily through foreign-based distributors
and resellers managed by our worldwide sales organization, in addition to
direct sales to end-user customers, including large global accounts. The
primary markets for sales outside of North America include the countries in
Western Europe and Japan. We have also achieved growing sales to customers in
the People's Republic of China and other countries throughout the Asia-Pacific
region.
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 OEMsresellers about the capabilitiesfeatures and benefitsperformance 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,a publicly available website, web-based training courses, advertising
and public relations. In addition, we have begun to develop an
e-commerceelectronic-commerce business directed at resellers. We also participate in third-party,submit our products
for independent product tests.testing and evaluation.
Our consolidated net revenue for fiscal 2001, 2000 and 1999 was $491
million, $262 million and $98 million respectively. Although our annual growth
rate has been substantial, we cannot assure you that we will be
12
able to achieve similar rates of growth in the future. For further detail, see
"Risk Factors--A Number of Factors Could Cause Our Quarterly Financial Results
to Be Worse Than Expected, Resulting in a Decline in Our Stock Price."
Backlog
Our products are often sold on the basis of standard purchase orders that
are cancelable prior to shipment without significant penalties. In addition,
purchase orders are subject to changes in quantities of products and delivery
schedules in order to reflect changes in customer requirements and
manufacturing capacity. Our business is characterized by seasonal variability
in demand and short lead-time orders and delivery schedules. Actual shipments
depend on the then-current capacity of our contract manufacturers and the
availability of materials and components from our vendors. We believe that only
a small portion of our order backlog is non-cancelable and that the dollar
amount associated with the non-cancelable portion is immaterial. Accordingly,
we do not believe that backlog at any given time is a meaningful indicator of
future sales.
Customer Support and Service
We offer modular and comprehensive ExtremeWorks service solutions to help
protect our customers' network investments and support their business goals.
The markets we address--including enterprises, service providers, and
e-businesses--all demand continuous uptime to maximize productivity. Our goal
is to serve as a knowledgeable and experienced service partner who can tailor
service solutions to meet the specific business needs of our customers.
Our service offerings are as follows:
. ExtremeWorks Professional Services
. ExtremeWorks Global Services Management
. ExtremeWorks Support Programs
. ExtremeWorks Education
ExtremeWorks Professional Services. We specialize in providing solutions and
consultative services to improve network productivity in all phases of the
network lifecycle--evaluation, planning, design, implementation and management.
The professional services include customized and packaged consulting services
that assist customers in an effort to optimize their networks by meeting their
objectives for applications support, uptime and cost control. Our network
architects develop and execute customized hardware deployment plans to meet
individualized network strategies. These activities include the management and
coordination of the design and network configuration, resource planning,
staging, logistics, migration and deployment. We also provide technical
documentation and training to assist customers in the transition to a new
network.
We offer our customers a variety of technical consulting services,
including:
. Analysis--detailed audit and analysis of customer networks
. Policy-Based QoS--analysis and recommendation for deploying advanced
traffic management and bandwidth prioritization features to match
actual traffic patterns
. Multicasting--strategy for deploying PIM-DM, PIM-SM, or DVMRP to best
suit streaming media requirements
. Voice over IP--consulting strategy and recommendation to deploy
voice-over-IP utilizing our technology
13
. Load Balancing--design and implementation of our integrated load
balancing features to help maximize server response while reducing
equipment costs
. Security--analysis of customer security needs and recommendations on
how to implement advanced security features to meet those needs
. Interoperability Lab--use of the lab to analyze deployment options,
resolve integration concerns, and assess performance and application
thresholds
ExtremeWorks Global Services Management. Post-sales customer services are
an integral component of our comprehensive service solution. Global Services
Management delivers customer service by means of a service account manager who
serves as single point of contact to manage account service needs including the
coordination of activities with the Global Service Management team--the
designated technical engineer, systems engineer and development engineer
sponsor. Service account managers facilitate communications with
cross-functional teams, escalate support organization maintainsissues to streamline issue resolution,
and supports
products soldmaintain documentation of customer network configurations and topology maps
for access by customer-authorized staff.
ExtremeWorks Support Programs. Our support programs are designed to support
a broad range of customer service requirements. From standard business hours to
24x7x365 global support, we attempt to meet the service requirements of all our
field sales forcecustomers through Technical Assistance Centers, or TACs, located in Santa
Clara, California, Utrecht, Holland, and Tokyo, Japan. Our technical engineers
assist in diagnosing and troubleshooting technical issues regarding customer
networks. This is part of our effort to end users,ensure maximum network uptime and
providesperformance. Regional systems engineers serve as on-site engineering resources
to provide consultative support and advice for network operation. Development
engineers work with the TACs to resolve product functionality issues specific
to each customer.
We utilize the Internet to distribute and obtain information from our
customer base as an integral part of our service solution. This allows us to
keep customers informed of the latest updates and developments at Extreme
Networks, and contains up-to-date information and technical supportdocumentation
enabling customers to our resellersresearch issues and OEMs. Generally, our resellersfind answers to technical questions.
Special features include a TAC database to obtain troubleshooting assistance
and OEMs provide
installation, maintenanceinformation for configuring software, diagnosing hardware, and researching
network issues. On-site support services to their customers and we assist
our resellers and OEMsare available 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 designedmost locations
worldwide for customers who are
interested in keepingrequire a more comprehensive level of service and
support costssupport.
ExtremeWorks Education. Our technical experts offer certified classes on
our products. The classes cover a wide range of topics such as switch
configuration, optimization, management and operation, so customers can acquire
the necessary knowledge and experience to successfully deploy and manage our
products in various networking environments. Class sizes are generally small
and lab-intensive to promote high retention in 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 skillshands-on learning environment,
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 networksoffered from time-to-time 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 meetUnited States, Europe 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
Asia.
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 flexibilityflexibly respond to
changes in
meeting market demand. Where cost-effective, we may begin to perform certain
of our non-manufacturing outsourced operations, in-house.such as product testing, at our own
facilities.
Currently, we use three contract manufacturers--Flextronics International,
Ltd., located in San Jose, California to manufacture our Summit1, Summit4,BlackDiamond and
Summit RPS and
BlackDiamond products, MCMS, located in Boise, Idaho, to manufacture our
Summit24, Summit48, Summit1i, Summit5i and Summit7i products andproducts; Solectron Corporation, located in Milpitas, California, to
manufacture our Alpine products; and MCMS, Inc., located in Nampa, Idaho, to
manufacture selected Summit products. Each of these manufacturing processes and
procedures is ISO 9002 certified. We
14
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. ProductOur contract manufacturers utilize automated testing equipment to
perform product testing and burn-in is performed by our contract manufacturers using tests we
specify and automated testing equipment.with specified tests. 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 whichthat will require that weus to rapidly achieve
volume production by coordinating our efforts with those of our suppliers and
contract manufacturers. See "Factors That"Risk Factors--We May Affect Our Results--Extreme NeedsNeed to Expand ItsOur
Manufacturing OperationsCapacity and DependsWe Depend on Contract Manufacturers for
Substantially All of ItsOur 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-sourcedsingle-source
components include:
. ASICs;
. microprocessors;
. programmable integrated circuits;
. selected other integrated circuits;
. cables;
. custom power supplies; and
. custom-tooled sheet metal.
Our principal limited-source components include:
. flash memories;
. DRAMs;
. SRAMs;dynamic and static random access memories, or DRAMS and SRAMS
respectively; and
. printed circuit boards.
Generally, purchasePurchase commitments with our singlesingle- or limited sourcelimited-source suppliers are
generally on a purchase order basis. LSI Logic manufacturers all of ourCorporation is the sole source
for the ASICs whichthat are used in all of our switches.switches, whereas a number of other
vendors supply standard product integrated circuits and microprocessors for our
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 affectmay have a material adverse
effect on 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-monthour forecast based on anticipated product ordersof expected demand 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"Risk Factors--We
Purchase Several Key Components for Products From Single or Limited Sources and
Could Lose Sales if These SourcesSuppliers Fail to Fill ItsMeet Our Needs" and "--Extreme Needs To"We May Need to
Expand ItsOur Manufacturing OperationsCapacity and DependsWe Depend on Contract Manufacturers for
Substantially All of ItsOur Manufacturing Requirements."
Research and Development
The success of our products to date owes in large part to our focus on
research and development. We believe that our futurecontinued success dependsin the marketplace
will depend on our ability to continue to
enhancedevelop new and enhanced products employing
leading-edge technology. Accordingly, we are undertaking development efforts
with an emphasis on increasing the reliability, performance and features of our
existingfamily of products, and designing innovative products to develop new products that maintain
technological competitiveness. We focus ourreduce the overall
network operating costs of customers.
15
Our product development activities focus on solving the needs of
enterprise,enterprises, service providers, telecommunications carriers, and IP carriermetropolitan
area network markets. Current activities include the continuing development of
a next-generation chipset aimed at extending the capabilities of our products.
Our ongoing research activities cover a broad range of areas, including, in
particular, 10 Gigabit Ethernet and Metropolitan Area Network markets. We monitor changing customer needsSONET routers, metropolitan network and
work
closelyInternet routing software, ASIC design, and network management software. The
scope of our research and development activities has expanded to include the
development of broadband access equipment and content networking devices in
connection with 11
users, value-added resellers and distributors, and market research organizations
to monitor changescorporate acquisitions that we completed 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.fiscal 2001.
Our products have been designed to incorporate the same core ASICs and
software andwith a consistent system architecture facilitatingacross
all product lines, enabling 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 approach to develop and introduce other product modelsnew products and
enhancements sincefollowing the introduction of our first
products in 1997.first- and second-generation
products. We intend to continue with a simplified approach to utilize this architectural
design to develop and introduce additional products and enhancements in the
future.
We are undertakingOur expenditures for research and development efforts for our family of products with
emphasis on increasing reliability, performancein fiscal 2001, 2000, and scalability1999
were $57.9 million, $33.0 million, 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$17.0 million respectively. These
amounts do not include in-process research and development charges in the
quarter ended December 31. We are also focusing on cost
reduction engineeringamount of $30.2 million related to reduce the costour acquisitions of our products.Optranet, Inc. and
Webstacks, Inc. in fiscal 2001.
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"Risk Factors--The Market in Which We Compete is Subject to
Rapid Technological Change and to Compete ExtremeWe Must Continually Introduce New
Products that Achieve Broad Market Acceptance."
Competition
The market for internetInternet 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 itsproducts, such as the Catalyst 6000 family of chassis-based
switches.switches offered by
Cisco Systems. 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 Systemsincluding Enterasys Networks, Foundry Networks
and FoundryRiverstone 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, suchthese 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.
16
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 affectand that may have a
material adverse effect on our business. See "Factors That May Affect Our Results--Intense"Risk Factors--Intense Competition
in the Market for Networking Equipment Could Prevent Extreme FromUs 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 sixseven patents in the U.S. WeUnited States and in addition
have filed eighttwenty-one patent applications in the U.S. andUnited States. Based on our
commitment to build a patent portfolio, we have in process a number of other
patent applications relating to our proprietary technology. We have filed
patents in selected countries abroad relating to the
architecture of our network switches and quality of service features.as deemed appropriate. There can be no
assurance that these applications will be approved, that any issued patents
will protect our intellectual property or that theythese patents or applications
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 we may be issued. We alsoobtain. With respect to trademarks, we
have five registered trademarks and fournine pending trademark applications and ten registered trademarks in the
U.S.United States. In addition, we have a significant number of pending trademark
applications and registered trademarks abroad.
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-usersend-user customers 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
17
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
rightsus
in regard to technologies and related standards that are importantwe consider to us.be
important. 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 product functionality overlaps.
As detailed below under "Legal Proceedings," we are currently engaged in
litigation with Nortel Networks. Nortel Networks is asserting claims that
allege infringement of certain patent rights, against which we are defending
vigorously, but we cannot assure you that we will prevail in this litigation.
See "Risk Factors--We Are Engaged in Litigation Regarding Intellectual Property
Rights, and an Adverse Outcome Could Harm Our Business and Require Us to Incur
Significant Costs."
In addition to the functionality of products overlaps. In this regard,litigation with Nortel Networks, since April 2000, we
have been in communication with one of these leadingtwo other companies that believesassert certain of our
products require a license under a number of their patents. The
third party isThese parties have
indicated in the past that they are willing to grant us a non-exclusive license
under the identified patents as well as other patents or technology that we may
require. We are currently
are reviewing the identified patents to examinedetermine whether
we consider a license necessary. However, there can be no assurance that this licensethese
licenses 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, weWe also cannot
assure you that we will not be a party to litigation in the future. In addition, we cannot
assure you thatthese parties or other 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 existingbased on the
technology in our current or future products.
WeIn the future, we may in the futuredetermine it is necessary to 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, withwhether asserted by us or without
merit,a third party against us, 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
licensingRoyalty-bearing license agreements,
if required, may not be available on acceptable terms, if at all. In the event
of a third party is successful in a claim of infringement, and our failure or
inability to develop non-infringing technology or license the proprietary
rights on a timely basis may have a material, adverse effect on our business,
operating results and financial condition couldcondition. See "Risk Factors--Our Ability to
Protect Our Intellectual Property and Defend Against Claims May be materially adversely affected.Limited and
May Adversely Affect Our Ability to Compete."
Employees
As of June 30, 2000,2001, we employed 680 persons,a total of 970 people, including 376464 in
sales and marketing, 110252 in research and development, 67engineering, 76 in operations, 6584 in technicalcustomer
support, and 6294 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. CompetitionThe market for qualified
personnel is intense,competitive, particularly in the San Francisco Bay Area, where our
headquarters is located. At times we have
18
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"Risk
Factors--If We Lose Key Personnel or isare Unable to Hire Additional Qualified
Personnel as Necessary, ItWe May Not Be Able to Successfully Manage ItsOur Business
or Achieve ItsOur Objectives."
Item 2. Properties.Properties
Our principal administrative, sales, marketing and research and 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
and executive suites in various other geographic locations domestically and
internationally for sales and service personnel.personnel and engineering operations. Our
aggregate lease expense for fiscal 2001 was approximately $11.7 million, net of
sublease income of approximately $3.6 million. We believe our current
facilities will adequately meet our growth needs for the foreseeable future.
Our principal facilities are as follows:
# of
Bldgs Location Leased/Owned Square Footage Purpose
----- -------- ------------ -------------- -------
6 Santa Clara, CA.......... 6 Leased Combined SF 6 bldgs. (leased) = Warehouse,
295,764 R&D, Sales, Headquarters
2 Pleasanton, CA........... Leased 84,428 Research & Development
1 Herndon, VA.............. Leased 14,451 Sales and Research &
Development
1 Durham, NC............... Leased 12,500 Research & Development
2 Maarssen, the Netherlands Leased 12,000 Sales Office
1 Dallas, TX............... Leased 11,574 Sales Office
1 Oakbrook Terrace, IL..... Leased 11,430 Sales Office
1 Westlake Village, CA..... Leased 10,027 Research & Development
1 New York, NY............. Leased 9,185 Sales Office
1 Tokyo, Japan............. Leased 7,755 Sales Office
1 Sunnyvale, CA............ Leased 7,500 Research & Development
1 Denver, CO............... Leased 7,277 Sales Office
1 Houston, TX.............. Leased 6,347 Sales Office
1 Westborough, MA.......... Leased 5,553 Sales Office
Item 3. Legal Proceedings.Proceedings
On March 14, 2001, Nortel Networks, Inc. and Nortel Networks Limited
(collectively, "Nortel") filed suit against us in the United States District
Court for the District of Massachusetts, Civil Action No. 01-10443EFH. The
complaint alleges willful infringement of U.S. Patent Nos. 5,790,554 (the "554
Patent"); 5,490,252; 5,408,469; 5,398,245; 5,159,595 and 4,736,363, and seeks a
judgment: (a) determining that the Company has infringed each of the six
patents; (b) permanently enjoining and restraining the Company from further
infringement of each of the six patents; and (c) awarding unspecified amounts
of trebled damages, together with interest, costs and attorneys' fees. We
answered Nortel's complaint on May 17, 2001, denying that we have infringed any
of the six patents and also asserting various affirmative defenses and
counterclaims that seek judgment: (a) that Nortel's complaint be dismissed; (b)
that each of the six patents be declared invalid; (c) declaring that we are not
infringing any of the six patents; and (d) that Nortel pay our attorneys' fees
and costs. On May 17, 2001, we also sought transfer of the action to the United
States District Court for the Northern District of California. On June 28,
2001, the court denied our motion to transfer, and the action will thus proceed
in Massachusetts. On July 9, 2001, the court granted a motion by F5 Networks,
Inc. ("F5") to intervene in the action. F5 contends that it is the designer,
developer, and manufacturer of the product accused of infringing the '554
Patent of Count VI of Nortel's complaint. F5 had also sought to sever and
transfer Count VI in favor of an action concerning the '554 Patent pending
between F5 and Nortel in the United States District Court for the Western
District of Washington, but that motion was denied on July 9, 2001 without
opinion. On July 13, 2001,
19
Nortel demanded $150 million in settlement of alleged past damages. Discovery
is proceeding. As set forth above, we have denied Nortel's allegations and
intend to defend the action vigorously. We cannot assure you, however, that we
will prevail in this litigation, which could have a material, adverse effect on
our business, financial condition and results of operations in the future.
Other than the stated above and the multiple purported securities fraud
class action complaints that were filed in the United States District Court for
the Southern District of New York beginning on July 6, 2001 (see Note 10 to
Consolidated Financial Statements), 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, 2000:2001:
Name Age Position
---- --- --------
Gordon L. Stitt.......................................... 44Stitt... 45 President, Chief Executive Officer and Chairman
Stephen Haddock.......................................... 42Haddock... 43 Vice President and Chief Technical Officer
Herb Schneider........................................... 41Schneider.... 42 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.......................................... 36Harold L. Covert.. 54 Vice President, Chief Financial Officer and Secretary
George Prodan............................................ 47Harry Silverglide. 55 Vice President of Marketing
Harry Silverglide........................................ 54Worldwide Sales
Darrell Scherbarth 45 Vice President of SalesPresident/General Manager--Access Business Unit
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.California--Davis.
Harold L. Covert. 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 recentCovert 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 servedappointed as Vice President, Chief
Financial Officer and Secretary of Extreme since January 1999. From January 1997Networks effective August 1, 2001.
Prior to January 1999,that Mr. Covert was with Silicon Graphics, Inc. from July 2000 until
July 2001 where he served as SeniorPresident and Chief Financial Officer. Before that
Mr. Covert was Vice
20
President and Chief Financial Officer and
Secretary of Metawave Communications, a wireless communications company. From
1992Red Hat, Inc. from March 2000 until
July 2000. Prior to 1996,that Mr. Palermo served in various financial management positions at
Bay Networks, a networking communications company, most recently serving asCovert was Executive Vice President and Corporate ControllerChief
Financial Officer of Adobe Systems from March 1998 until March 2000. From
December 1990 to March 1998, Mr. Covert was a partner in the firm of DHJ &
Associates, Inc., Consultants and previously servingCertified Public Accountants and Interim
Chief Financial Officer. During the last half of this period he acted in a full
time capacity as Director of
Technology Finance, Corporateinterim Chief Financial and Planning Manager, and Manufacturing
and Customer Service Controller.Officer for several companies. Mr.
PalermoCovert holds an MBA from St. Mary'sCleveland State University, a BSBA from Lake Erie
College and is 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.Certified Public Accountant.
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.
15Darrell Scherbarth. Mr. Scherbarth has served as Vice President/General
Manager of the Access Business Unit of Extreme since February 2001. Mr.
Scherbarth joined us as a result of our acquisition of Optranet, Inc., which he
founded and where he served as president and CEO from November 1999 to January
2001. From April 1997 to September 1998, he was the Vice President of
Engineering at Redback Networks, a leading developer and manufacturer of high
performance broadband access systems. Mr. Scherbarth was also a co-founder and
Vice President of R&D of Network Peripherals Inc., where he served from March
1989 to April 1996. Mr. Scherbarth holds a BSEE from California State
University.
21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company'sExtreme'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
2000Fiscal year ended June 30, 2000:
First quarter.................................................quarter................... $ 42.25 $ 22.81$22.81
Second quarter................................................quarter.................. $ 49.03 $ 30.66$30.66
Third quarter.................................................quarter................... $ 59.50 $ 38.00$38.00
Fourth quarter................................................quarter.................. $ 52.75 $21.44
Fiscal year ended June 30, 2001:
First quarter................... $120.69 $46.25
Second quarter.................. $123.56 $31.13
Third quarter................... $ 21.4450.38 $14.96
Fourth quarter.................. $ 39.50 $12.27
--------------
(1) Commencing April 9, 1999
At September 14, 2000,August 31, 2001, there were approximately 28475,000 stockholders of record
of the Company'sExtreme's common stock and approximately 36,000413 beneficial stockholders.
The CompanyExtreme has never declared or paid cash dividends on its capital stock and does
not anticipate paying any cash dividends in the foreseeable future. The
CompanyExtreme
currently intends to retain future earnings for the development of itsour
business.
Item 6. Selected Consolidated Financial Data.
For the Period
from May 8,
1996
(Date of
Years Ended June 30, Inception)
--------------------------------------------------------- through
2001 2000 1999 1998 June 30, 1997
---- ---- ---- ---------------------- -------- ------- -------- --------------
(In thousands, except per share amounts)
----------------------------------------
Consolidated Statements of Operations Data:
Net revenue...................................................revenue.................................. $ 261,956 $ 98,026491,232 $261,956 $98,026 $ 23,579 $ 256
Gross profit (loss)..................................................................... 210,000 135,040 49,506 8,682 (132)
Total operating expenses......................................expenses(1).................. 311,893 118,786 50,951 22,709 7,928
Operating income (loss)............................................................. (101,893) 16,254 (1,445) (14,027) (8,060)
Net income (loss)......................................................................... (68,883) 20,048 (1,617) (13,936) (7,923)
Basic netNet income (loss) per share (1).........................share--basic(2)........ $ (0.64) $ 0.20 $ (0.09) $ (1.59) $ (2.26)
Diluted netNet income (loss) per share (1).......................share--diluted(2)...... $ (0.64) $ 0.18 $ (0.09) $ (1.59) $ (2.26)
Weighted average shares outstandingShares used in computing basic net income (loss) per share (1)...........calculation--basic.. 108,353 100,516 18,924 8,758 3,516
Weighted average shares outstandingShares used in computing diluted net income (loss) per share (1).........calculation--diluted 108,353 111,168 18,924 8,758 3,516
1622
As of June 30,
-----------------------------------------------------------------------------
2001 2000 1999 1998 ---- ---- ----1997
-------- -------- -------- ------- -------
(In thousands)
Consolidated Balance Sheets DataData:
Cash and cash equivalents.....................................equivalents............................. $ 87,722 $116,721 $107,143 $ 9,510 $10,047
Short-term investments........................................investments................................ 69,374 66,640 16,422 10,995 --
Working capital...............................................capital....................................... 211,432 205,881 119,039 13,796 8,251
Total assets..................................................assets.......................................... 688,357 515,930 171,803 33,731 11,942
Long-term debt, deposit and capital lease obligations,
net of current portion..........................portion.............................. 266 306 -- 2,634 502
Total stockholders' equity....................................equity............................ $548,762 $419,021 $141,876 $15,869 $ 15,8699,305
--------------------------
(1)Fiscal 2001 amount includes $37.5 million in amortization of goodwill,
purchased intangible assets and deferred stock compensation, write-offs of
$30.2 million of acquired in-process research and development and $5.9
million in restructuring charges. Fiscal 2000 amount includes $6.8 million
in amortization of goodwill and purchased intangible assets.
(2)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 usedResults of Operations
Net Revenue
Net revenue increased from $262.0 million in this discussion and elsewherefiscal 2000 to $491.2 million
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 functionalityfiscal 2001, an increase of products under
development, product mix, pricing trends, the mix87.5%. The increase in net revenue for fiscal
2001 resulted primarily from higher volume 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, salesSummit, BlackDiamond
and field service and technical
support organizations, and establishing relationships with resellers and OEMs.
We commenced volume shipmentsAlpine products due to an increase in market acceptance of our Summit1 and Summit2, the initial products,
which was partially offset by some price reductions.
Net revenue increased from $98.0 million in fiscal 1999 to $262.0 million in
fiscal 2000, an increase of 167.2%. The increase in net revenue for fiscal 2000
resulted primarily from increased sales of our Summit stackable product family, in October 1997,products and we began shipping
our BlackDiamond modular products, the market's growing acceptance of Extreme's
existing and new product familyofferings, and a significant increase in September 1998. We introduced our new
Alpine product familysales and
marketing organizations.
Sales outside of North America accounted for 55%, 43% and 52% of net revenue
in fiscal 2001, fiscal 2000 and fiscal 1999, respectively. We expect that
export sales will continue to represent a significant portion of net revenue,
although we do not know whether export sales as a percentage of net revenue
will remain at current levels. All sales transactions are currently denominated
in U.S. dollars.
We generally recognize product revenue at the time of shipment, assuming
that collectibility is probable, unless we have future obligations such as
installation or are required to obtain customer acceptance, in which case
revenue and related costs are deferred until those obligations are met. We
defer recognition of revenue on sales to distributors until the distributors
sell the product. Revenue from service obligations under maintenance contracts,
is deferred and recognized on a straight-line basis over the contractual
period, which is typically 12 months. Amounts billed in excess of revenue
recognized are included as deferred revenue, accounts receivable and current
assets in the accompanying consolidated balance sheets of our financial
statements. On a prospective basis as of July 2, 2001 we will report deferred
revenue and accounts receivable on a net basis in the consolidated balance
sheets. The increase in deferred revenue from fiscal 2000 to fiscal 2001 of
$35.3 million was due to the increase in inventory held by distributors,
deferred service revenue and other allowances for customer acceptance.
Our products generally carry a one year warranty that includes factory
repair services as needed for replacement parts. Estimated expenses for
warranty obligations are accrued as revenue is recognized based on our best
estimate of warranty costs for delivered products.
23
We have experienced a new generation chip
set. In addition,rapid and increasingly severe downturn in the economy.
This has adversely affected our product demand and made it increasingly
difficult to accurately forecast future production requirements. We expect this
economic downturn to continue for at least the remainder of calendar year 2001
and we also introduced newdo not know the extent, severity or length of this economic downturn in
the United States or in the other geographic regions where we currently sell
our products.
We expect to experience some erosion of average selling prices of our
products within our existing product
lines that incorporate this new chip set.due to a number of factors, including competitive pricing pressures,
promotional pricing and rapid technological change. Our revenue is derived
primarily from sales of our Summit, BlackDiamond and BlackDiamond
product familiesAlpine products 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"Risk Factors--If a Key Reseller, OEMDistributor or Other
Significant Customer Cancels or Delays a Large Purchase, Extreme's RevenuesOur Net Revenue May
Decline and the Price of ItsOur Stock May Fall." ForOne customer accounted for 16% of
our net revenue in fiscal 2001; no customer accounted for more than 10% of our
net revenue in fiscal 2000 there were noand two customers with sales greater than 10%. For
fiscal 1999, Compaq and Hitachi Cable accounted for 21% and 13%13 % of our
net revenue respectively.
We marketin fiscal 1999.
Gross Profit
Gross profit increased from $135.0 million in fiscal 2000 to $210.0 million
in fiscal 2001, an increase of 55.5%, primarily due to the related increase in
revenue. Gross margins decreased from 51.6% in fiscal 2000 to 42.7% in fiscal
2001. The decrease in gross margin in fiscal 2001 was primarily due to a $40.3
million charge for excess and sellobsolete inventory and non-cancelable purchase
commitments.
Gross profit increased from $49.5 million in fiscal 1999 to $135.0 million
in fiscal 2000, an increase of 172.7%, primarily due to the related increase in
revenue. Gross margins increased from 50.5% in fiscal 1999 to 51.6% in fiscal
2000. The increase in gross margin resulted primarily from a shift in product
mix, a shift in our products primarily throughchannel mix from OEMs to resellers and distributors and
to a lesser extent, OEMs and our field sales organization. We sell our
products through more than 250 resellersimproved manufacturing efficiencies, this increase was offset 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 ofpart by lower
average selling prices due primarily to increased competition.
We recorded a provision for excess and obsolete inventory, including
non-cancelable purchase commitments, totaling $40.3 million in the third
quarter of fiscal 2001. Inventory purchases and commitments are based upon our
forecast of future sales. To mitigate the component supply constraints that
have existed in the past, we built inventory levels for certain components with
long lead times and entered into longer-term commitments for certain
components. Due to a sudden and significant decrease in demand for our products
that became apparent in the third quarter of fiscal 2001, inventory levels,
including non cancelable purchase commitments, exceeded our requirements based
on our forecast of expected demand. This additional excess inventory charge was
calculated based on the inventory levels in excess of our products dueforecast of expected
demand for each specific product. We do not currently anticipate that the
excess inventory subject to this provision will be used at a number of factors, including competitive
17
pricing pressures, promotional pricing and rapid technological change.later date based
on our future demand forecast. Furthermore, we may be required to take
additional write-downs in the future related to excess inventory.
Our gross margins will be affected by such declinesmargin is highly variable and by fluctuationsdependent on many factors, some of
which are outside of our control. Some of the primary factors affecting gross
margin include demand for our products, changes in manufacturing
volumes, component costsour pricing policies and
those of our competitors and the mix of product configurationsproducts sold. Our gross margins may be
adversely affected by increases in material or labor costs, heightened price
competition, obsolescence charges and higher inventory balances. 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 OEMsresellers, distributors or
resellers or distributors,end-user customers, or the loss of any of our OEMsresellers, distributors or
resellers or distributorsend-user customers, could materially
adversely affecthave a material adverse effect on our business,
operating results and financial condition. In addition, newincreasing third-party
and indirect distribution channels generally result in greater difficulty in
forecasting the mix of our products, and to a certain degree, the timing of
orders from our customers. New product introductions may result increate excess or
obsolete inventories. Any excess or obsolete inventories, which may also reduce our gross margins. Furthermore, if
product or related warranty costs associated with these new products are
greater than we have experienced, gross margin may be adversely affected.
24
Cost of revenue includes the cost of our manufacturing overhead. 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,manufacturers: Flextronics International, MCMS and Solectron.
See "Risk Factors--We May Need to Expand Our Manufacturing Capacity and We
Depend on Contract Manufacturers for Substantially All of Our Manufacturing
Requirements". As part of our business relationship with MCMS, we have entered
into a $9.0 million equipment lease for manufacturing equipment with a third
party financing company; we in turn sublease the equipment to MCMS. On
September 18, 2001 MCMS announced that it had reached an agreement to sell
substantially all of its operating assets to Manufacturers' Services Limited.
Simultaneously, MCMS announced that it, and its two U.S. subsidiaries, have
voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware in
Wilmington to implement the sale.
We expect to realize lower per unit product costs as a result of volume
efficiencies.efficiencies if and as volumes increase. However, we cannot assure youdo not know if or when or if
such price reductions will occur. The failure to obtain such price reductions
could materially adversely affecthave a material adverse effect upon our gross margins and operating
results.
Research and Development Expenses
Research and development expenses consist principallyincreased from $33.0 million in fiscal
2000 to $57.9 million in fiscal 2001, an increase of salaries75.4%. The increase was
primarily due to higher payroll and related personnel expenses consultant fees and prototype expenses relateddue to the
design,addition of new personnel, partly through acquisitions, to support our multiple
product development testingefforts as well as non-recurring engineering charges,
prototype costs and enhancementdepreciation expense. Research and development expenses, as
a percentage of net revenue, decreased to 11.8% in fiscal 2001, compared with
12.6% in fiscal 2000. The percentage decrease was primarily the result of an
increase in our products.net revenue. 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.93.7%. The increase was
primarily due to nonrecurring engineering and initial product verification
expenses and increased salarieshigher payroll and related personnel expenses due to the hiring of
additional engineers. ForFrom fiscal 1999 andto 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 to
$154.6 million in fiscal 2001, an increase of $40.0 million.130.2%. Sales and marketing
expenses, as a percentage of net revenue, increased to 31.5% in fiscal 2001,
compared with 25.6% in fiscal 2000. This increase was primarily due to the
hiring of additional sales, marketing and customer support personnel, increased
sales commission expenses resulting from increased revenues,net revenue and increased
promotional expenses. The rate of future spending increases, if any, will be
dependent on the speed with which the market recovers.
Sales and marketing expenses increased from $27.1 million in fiscal 1999 to
$67.1 million in fiscal 2000, an increase of 148.2%. This increase was
primarily due to the hiring of additional sales, marketing and customer support
personnel, increased sales commission expenses resulting from increased net
revenue, increased tradeshow and promotional expenses and the establishment of
new sales offices. ForFrom fiscal 1999 andto 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 sales25
General and marketing campaigns aggressivelyAdministrative Expenses
General 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 marketingadministrative expenses increased from $9.6$11.9 million in fiscal
19982000 to $27.1$25.8 million in fiscal 1999,2001, an increase of $17.5 million. This increase was
primarily due to the hiring of additional sales116.8%. General and
customer support personnel,
tradeshow and promotionaladministrative 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%increased to 27.6%.5.2% in
fiscal 2001, compared with 4.5% in fiscal 2000. This percentage decreaseincrease was due primarily
the result
ofto an increase in our net revenue.
Generalbad debt expense, the hiring of additional finance,
information technology, legal and Administrative Expensesadministrative personnel and increased
professional fees. The rate of any future spending increases if any will be
dependent on the speed with which the market recovers.
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.72.8%. This increase was
due primarily to the hiring of additional finance, information technology,
legal and administrative personnel and increased professional fees and
occupancy costs. ForFrom fiscal 1999 andto 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.
GeneralAmortization of Goodwill, Purchased Intangible Assets and administrative expensesDeferred Stock
Compensation
Amortization of goodwill, purchased intangible assets and deferred stock
compensation increased from $2.4$6.8 million in fiscal 19982000 to $6.9$37.5 million in
fiscal 1999,2001, an increase of $4.5$30.7 million. This increase
was due primarilyIn fiscal 2001, amortization of
goodwill arising from warrants issued in April 2000 increased by $20.4 million
to $27.2 million and amortization of goodwill, purchased intangible assets and
deferred stock compensation related to the hiringOptranet and Webstacks acquisitions
was $9.6 million (see Note 3 of additional finance, information technologyNotes to Consolidated Financial Statements).
Anticipated amortization of goodwill, intangibles and legal and administrative personnel, recruiting expenses, professional fees
and increased spending on information systems. Fordeferred compensation 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.2002, assuming no more acquisitions, will be $53.3 million. Amortization
of Goodwillpurchased intangible assets and Purchased Intangiblesdeferred stock compensation may continue to
increase if we acquire companies and technologies. Amortization of goodwill
will not increase in future periods because under Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," any
goodwill arising from business combinations closing after June 30, 2001 is not
amortized, but rather is periodically evaluated for impairment. See "New
Accounting Pronouncements."
Amortization of goodwill, purchased intangiblesintangible assets and deferred stock
compensation was $7.1$6.8 million in fiscal 2000. This amount was due to the Company'sour
issuance in April 2000 of fully earned, non-forfeitable, fully exercisable
warrants with a two year life to purchase 3
million3,000,000 shares of the Company'sour common stock
with an exercise price of $39.50 per share (see Note 3 of Notes to Consolidated
Financial Statements).
Other Operating Expense
In fiscal 2001, other operating expense included a write-off of acquired
in-process research and development of $30.2 million and a restructuring charge
of $5.9 million, as described below.
We recorded non-recurring charges of $13.4 million related to the purchase
of Optranet in January 2001, and $16.8 million related to the purchase of
Webstacks in March 2001. The value assigned to purchased in-process research
and development was determined through valuation techniques generally used by
appraisers in the high-technology industry and was immediately expensed in the
period of acquisition because technological feasibility had not been
established and no alternative use had been identified. The charges are
discussed in more detail in Note 3 of notesNotes to Consolidated Financial
Statements.
In March 2001, we implemented a restructuring plan in order to lower our
overall cost structure. In connection with the restructuring, we reduced our
headcount and consolidated financial statements.
Futurefacilities. Restructuring charges included in other
operating expenses were $3.8 million in the quarter ended March 31, 2001 and
$2.1 million in the quarter ended June 30, 2001. The restructuring expense
included $1.8 million for severance and benefits for terminated employees, $2.3
million for the write-off and write-down in carrying value of Summit based
equipment and $1.8 million in facility closure expenses.
26
Interest Income
Interest income will be reduced by approximately $7.1increased from $14.6 million per
quarter for each quarterin fiscal 2000 to $15.5 million
in fiscal 2001, and for three fiscal quarters in fiscal
2002.
Interest Incomean increase of $0.9 million. 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 isincreases were 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.
InterestOther Income (Expense), net
Other income (expense), net increased from $.6$33,000 in expense in fiscal 2000
to $4.7 million in fiscal 1998 to $1.9 millionexpense in fiscal 1999, an2001. This increase was primarily
attributable to Extreme's share of $1.3affiliates' losses accounted for under the
equity method of accounting of $2.9 million and write-downs of investments
accounted for under the cost method of accounting of $1.8 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 provisionbenefit of $10.3$22.7 million for the year ended June 30,
2000.fiscal 2001. The provisionbenefit for
fiscal 20002001 results in an effective tax benefit rate of 34%24.8% which consists
primarily of federal taxes,and state income taxes andtax benefits, offset by foreign taxes,
offset by the recognition of deferred tax assets.nondeductible in-process research and development and goodwill. 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
lossesrecorded a tax provision of $10.3
million for all fiscal years from inception through June 30, 1999.2000, which consisted primarily of federal taxes, state
income taxes and foreign taxes, offset by the recognition of deferred tax
assets. We recorded a tax provision of $1.7 million for the year ended June 30,fiscal 1999, which
consisted primarily of foreign taxes currently payable, federal alternative
minimum taxes and state incomeminimum and capital taxes.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increaseddecreased from $123.6
million at June 30, 1999 to $183.4
million at June 30, 2000 an increaseto $157.1 million at June 30, 2001, a decrease of
$59.8$26.3 million. The increaseThis decrease 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 bydue to an increase in long-term investmentsinventory,
purchases of property 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, amortizationequipment and increases in accounts payable, deferred revenue
and accrued liabilities, offset by increases in accounts receivable inventories and
other current and noncurrent assets.assets, partially offset by increases in deferred
revenue and proceeds from issuance of common stock.
Accounts receivable increased 24.2% from June 30, 2000 to June 30, 2001. The
increase in accounts receivable was due to growth in net revenue. We expect
that accounts receivable will continue to increase to the extent our revenues continuenet
revenue continues to rise. Inventory levels increased 154.3% from June 30, 2000
to June 30, 2001. We expect ourhave increased inventory levelsin order to increase in connection with our development of a two-tiersupport revenue
growth, develop distribution system, new product introductions and the need tochannels, maintain shorter lead times on certain
products. Any such increase can be expectedprojects and to reduce
cash, cash equivalents, short-term investments and long-term investments.
Investing activities used cash of $195.0 million in fiscal 2000 dueprovide assurance 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,our customers that we will be obligatedable to purchase allmeet
demand. Inventory management remains an area of focus as we balance the need to
maintain strategic inventory levels to ensure competitive lead times and avoid
stock-outs with the risk of inventory excess or obsolescence because of recent
declining demand, rapidly changing technology and customer requirements. As a
result of the outstanding capital
stockrapid change in fiscal 2001, payable in any combination of cash or shares of Extreme
common stock.
Financing activities provided cash of $179.7the market for networking products, we recorded
$40.3 million in fiscal 2000,
arising primarily from proceeds fromcharges for excess and obsolete inventory and non-cancelable
purchase commitments in 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.quarter ended March 31, 2001.
In June 2000, we entered into antwo operating lease agreement to leaseagreements for
approximately 16 acres of land and the accompanying 275,000 square feet of
buildings 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%4.3% at June 30, 2000.2001, plus a
spread. Our combined lease payments for this facility are estimated to be
approximately $5.7$3.4 million on an annual basis over the lease term.terms. The lease isleases
are 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,leases, we have
the option to either purchase the propertythese properties for $80.0$31.4 million and $48.6
million, respectively, or arrange for the sale of the propertyproperties to a third
party for at least $80.0$31.4 million and $48.6 million, respectively, with a
contingent liability for any deficiency. If the property isproperties under these leases
are not purchased or sold as described above, we will be obligated for
an additional lease paymentpayments of approximately $68.0 million.$30.5 million and $41.3 million,
respectively.
27
As part of the above lease transaction, the Companytransactions, we restricted $80.0 million of itsour
investment securities as collateral for specified obligations ofas the lessee under the lease.lessee.
These investment securities are restricted as to withdrawal and are managed by
a third party subject to certain limitations under the Company'sour investment policy. The
lease also requires us to maintain specified financial covenants with which we
were in compliance as of June 30, 2000.2001.
Under the terms of the Merger Agreement with Webstacks, Extreme is obligated
to pay $15.0 million of additional cash consideration on or before October 31,
2001 provided that certain technology milestones are met. At this time it is
our expectation that these milestones will be met and the payment made.
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. 101.101 "Revenue Recognition
in Financial Statements", which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. Extreme adopted
SAB 101 in the fourth quarter of fiscal 2001. The implementationadoption 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.did not
have a material effect on our operations or financial position.
In MarchSeptember 2000, the FASB issued Financial Accounting Standards Board Interpretationissued SFAS No.
44,140, "Accounting for Certain Transactions involving Stock
Compensation -Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a replacement of FASB Statement No. 125" ("SFAS
140"). SFAS 140 revises certain standards for accounting for securitization and
other transfers of financial assets and collateral. In addition, SFAS No. 140
requires certain additional disclosures that were not previously required. The
additional disclosure requirements were effective for financial statements for
fiscal years ending after December 15, 2000 and have been adopted for the year
ended June 30, 2001. The revised accounting standards of SFAS 140 are effective
for transactions occurring after March 31, 2001. The application of the revised
accounting standards of SFAS 140 has not had a material adverse effect on our
business, results of operations or financial condition.
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" ("FAS 141"). FAS 141 establishes new
standards for accounting and reporting for business combinations and requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. We will adopt this statement in fiscal 2002.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142"), which establishes new standards for goodwill and other
intangible assets. Under the new rules, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
interpretationindefinite life will continue to be amortized over their useful lives. The
amortization provisions of APB OpinionSFAS No. 25" (Interpretation No. 44).
Interpretation No. 44 is effective142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2000. The interpretation clarifies2001, we will apply the application of APB Opinionnew accounting
28
rules beginning fiscal year 2003. We are currently assessing the financial
impact SFAS 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
modifications142 will have on our Consolidated Financial Statements.
Goodwill and intangible assets from business combinations before July 1, 2001
will continue 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 thatbe amortized prior to the adoption of Interpretation No. 44FAS 142. Upon the
adoption of FAS 142, we are required to evaluate our existing goodwill and
intangible assets from business combinations completed before July 1, 2001 and
make any necessary reclassifications in order to comply with the new criteria
in FAS 141 for recognition of intangible assets.
At June 30, 2001, we had goodwill and intangible assets of $113.9 million.
Amortization expense for goodwill and intangible assets amounted to $33.4
million for fiscal 2001. Anticipated amortization of goodwill and intangible
assets for fiscal 2002 assuming no more acquisitions will have a material impact on our financial position or the results of our
operations.be $43.1 million.
Risk Factors
That May Affect Our Results
Extreme HasWe Have a Limited History of Profitability, We Are Not Currently Profitable and
We Cannot Assure You that itThat We Will ContinueReturn 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.the Future
Fiscal 2000 was the first year in which Extreme achieved profitability in
each of the four quarters. We reported a loss for each of the quarters ended
March 31, 2001 and June 30, 2001, and for the fiscal year ended June 30, 2001.
In the foreseeable future, 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 and sustain significantly higher revenue
to return to and 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 goodwill and intangibles, and goodwill is
estimated to be approximately $27.7 million and $21.0 milliondeferred compensation associated with
acquisitions, will result in fiscal 2001 and
2002, respectively.material charges that will reduce our
profitability. Further, the impact of the current economic slowdown could
result in additional one-time charges.
A Number of Factors Could Cause Extreme'sOur Quarterly Financial Results to Be Worse
Than Expected, Resulting in a Decline in ItsOur 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 buildexpand 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, as occurred
in the quarter ended March 31, 2001, could cause our quarterly operating
results to befall 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 offor 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 induring 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 significanta majority of our product shipments atto be scheduled for the end of a
quarter. Failure to ship these products by the end of a quarter may adversely
affect our operating results. Furthermore, ourOur customer agreements typically provide that the
customer maygenerally allow customers
to delay scheduled delivery dates andor to cancel orders within specified
time framestimeframes without significant penalty.charges to the customers. Furthermore, some of
our customer agreements include acceptance provisions that delay our ability to
recognize revenue upon shipment.
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:including, but not limited to, the following:
. changes in general and/or specific economic conditions in the networking
industry;
. seasonal fluctuations in demand for our products and services,
including
seasonality, particularly in Asia and Europe;
. our ability to accurately forecast demand for our products, which in the
case of lower-than-expected sales may result in excess and/or obsolete
inventory on hand or under non cancelable purchase commitments;
29
. 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 enterprise
customers, service providers and other potential large customers;
. our ability to achieve requiredtargeted cost reductions;
. our ability to obtain sufficient supplies of sole or limited sourcedlimited-source
components for our products;products on a timely basis;
. unfavorable changesincreases in the prices of the components that we purchase;
. decreases in the prices of the products that we sell;
. our ability to attainachieve and maintain desired production volumes and quality
levels for our products;
. the mix of products sold and the mix of distribution channels through
which theyproducts are sold; and
. costs relating to possible acquisitions and the integration of
technologies or businesses.businesses; and
. the affecteffect of amortization of goodwill, deferred compensation, 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.
As a result of the September 11, 2001 events in New York City and
Washington, D.C., U.S. and global economies may weaken, which may result in a
decrease in our revenues and cause our stock price to decline. In addition, it
is anticipated that in the wake of these events, U.S. and global capital
markets will experience a period of extreme volatility.
Intense Competition in the Market for Networking Equipment Could Prevent Extreme
FromUs
from Increasing Revenue and Prevent Extreme From Sustaining Profitability
The market for Internet switchesnetworking equipment is intensely competitive. Our principal
competitors include Cabletron Systems, Cisco Systems, Enterasys Networks, Foundry Networks, Lucent
TechnologiesNortel
Networks and NortelRiverstone Networks. ManyIn addition, a number of private companies
have announced plans for new products that may compete with our own products.
Some of our current and potential competitors have superior market leverage,
longer operating histories and substantially greater financial, technical,
sales, and marketing and other resources, as well as greaterin addition to wider name recognition and
larger installed customer bases, than we do.bases. These competitors may have developed, or couldmay
in the future develop, new competing products based on technologies that
compete with our own products or even render our products obsolete. Furthermore, a
number of these competitors may merge or form strategic partnerships that
enable them to offer or bring to market competitive products.
To remain competitive, we believe that we must, among other things, invest
significant resources in developing new products, and enhancingimprove our current products
and maintainingmaintain customer satisfaction. If we fail to do so, our
productswe may not compete
favorablysuccessfully with those of our competitors, andwhich could have a material adverse effect
on our revenue and future profitability could be materially adversely affected.
Extreme Expectsprofitability.
We Expect the Average Selling Prices of ItsOur 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, andpromotional pricing, rapid technological change.change and a
30
slowdown in the economy that has resulted in excess inventory and lower prices
as companies attempt to liquidate this inventory. We may experience substantial
period-to-period fluctuationsdecreases 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 and new product introductions by us or our competitors,
including, for example, competitive products manufactured with low costlow-cost
merchant silicon, or other
factors. Therefore,silicon. Competitive pressures are expected to increase as a result of
the industry slowdown that occurred in the first half of 2001 coupled with the
recent downturn in the broader economy. 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 affecthave a material adverse
effect on our operating results and cause the price of our common stock to
decline.
Extreme'sSome of Our Customers May Not Have the Resources to Pay for Our Products as a
Result of the Current Economic Environment
With the recent economic slowdown, some of our customers are forecasting
that their revenue for the foreseeable future will generally be lower than
anticipated. Some of these customers are experiencing, or are likely to
experience, serious cash flow problems and they are finding it increasingly
difficult to obtain financing on attractive terms, if at all. As a result, if
some of these customers are not successful in generating sufficient revenue or
securing alternate financing arrangements, they may not be able to pay, or may
delay payment for the amounts that they owe us. Furthermore, they may not order
as many products from us as originally forecast. The inability of some of our
potential customers to pay us for our products may adversely affect our cash
flow and the timing of our revenue recognition, which may cause our stock price
to decline.
The Market in Which We Compete is Subject to Rapid Technological Change and to
Compete ExtremeWe 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.products. Alternative technologies could achieve widespread market acceptance
and displace the Ethernet technology on which we have based our product
lines and architecture are
based.architecture. We cannot assure you that our technological approach will achieve
broad market acceptance or that other technologies or devices will not supplant
our approach.own products and technology.
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 affecthave
a material adverse effect on 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.emerging technologies. 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 andthat resulted in lower quarterly
revenue than anticipated. We may experience similar delays in product
development and releasereleases in the future, and any delay in product introduction
could adversely affect our ability to compete, and causecausing our operating results to
be below our expectations or the expectations of public market analysts or
investors.
Continued Rapid Growth Will Strain Extreme'sOur Operations and Will Require ExtremeUs to Incur
Costs to Upgrade ItsOur Infrastructure
We have experienced a period of rapid growth and expansion whichthat has placed,
and continues to place, a significant strain on our resources. Even if we
manage this growth effectively, we may make mistakes in
31
operating our business such as inaccurate sales forecasting, incorrect material
planning or inaccurate financial reporting, whichreporting. This may result inlead to unanticipated
fluctuations in our operating results. Our net revenue increased significantly
during the last fiscal year, and from June 30, 19992000 to June 30, 2000,2001, the
number of our employees increased from 249680 to 680.970. 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 newupdate operational, information and financial systems,
procedures and controls;
. hire, train and manage additional qualified personnel includingin the fields of
engineering, sales, marketing personnel and research and development personnel;networking technology; 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 weWe may continueneed to
modify and improve our management information system 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 haveneed 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.
ExtremeWe Must Develop and Expand ItsOur Indirect Distribution Channels to Increase RevenuesNet
Revenue and Improve ItsOur Operating Results
Our distribution strategy focuses primarily on developing and expanding
indirect distribution channels through resellers and distributors, and,in addition
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 whichthat has required, and will in the future
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 soany of these 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.
ToIn an effort to support and develop leads for our indirect distribution
channels and to attempt to expand our direct sales effort, to service providers and content providers,customers, we plan to
continue to expand our field sales and support staff significantly.staff. We cannot assure you that
this internal expansion will be successfully completed, that the cost of this
expansion will not exceed the revenuesnet revenue 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 affectmay have a material adverse effect on our ability to grow our
business and increase revenue.
Because Substantially AllMost of Extreme'sOur Revenue is Derived From Sales of TwoThree Product Families, Extreme isSo We are
Dependent on Widespread Market Acceptance of These Products; Future Performance will Depend on the Introduction and Acceptance of
New Products
In fiscal 2000,the year ended June 30, 2001, we derived substantially all of our revenue
from sales of our Summit, BlackDiamond and BlackDiamond product families.Alpine products. We expect that
revenue from these product families will account for a
32
substantial portion of our revenue for the foreseeable future. Accordingly,
widespread market acceptance of our product families is criticalvital to our future
success. Factors that may affect the market
acceptancesales of our products, include market acceptancesome of which are
beyond our control, include:
. the demand for switching products and
Gigabit(Gigabit Ethernet and Layer 3 switching
technologies in particularparticular) in the enterprise, service provider and metropolitan area network markets,MAN
markets;
. the performance, price and total cost of ownership of our products,products;
. the availability and price of competing products and technologies,technologies;
. our ability to match supply with demand for certain products; and
. the success and development of our resellers, distributors OEMs and field sales
channels.
ManyFuture Performance will Depend on the Introduction and Acceptance of these factors are beyond our control.New
Products
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 inIn the past, we have
experienced delays in product development and such delays may occur in the
future. We introduced a new product family in fiscal 2000 whichthat is based on a
new generation chip set. In addition, wesecond-generation chipset. We also introduced newother products incorporating this
chipset within our existing product lines that incorporate this new chip set.lines. 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,releases, any delay in the development or
introduction of new products could cause our operating results to suffer. Failure
of our existing or future productsThe
risk that we will be unable to maintainachieve and achievemaintain widespread levels of market
acceptance for our current and future products may significantly impair our
revenue growth.
If a Key Reseller, Distributor, OEM or Other Significant Customer Cancels or Delays
a Large Purchase, Extreme's RevenuesOur Net Revenue May Decline and the Price of ItsOur 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, infor the fiscal 1999, Compaq and Hitachi Cableyear ended June 30, 2001, Tech
Data Corporation accounted for 21% and 13%16% of our net revenue, respectively. Because ourrevenue. Our expense levels are
based on our expectations as to future revenue and to a large extent are fixed
in the short term, so a substantial reduction or delay in sales of our products
to or the loss of anya 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 relatively small number of customers, particularly in lightview
of the high per unit sales price per unit of our products and the length of our sales
cycles.
While our financial performance depends on large orders from a fewlimited
number of key resellers, distributors OEMs and other significant customers, we do
not have binding purchase commitments from any of them. For example:
. our service provider and enterprise network customers can stop purchasing and our
resellers distributors and OEMsdistributors can stop marketing our products at any time;
. our reseller agreements generally are not exclusivenon-exclusive and are for one yearone-year terms, with
no obligation ofupon 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 OEMend-user customer agreements generally do
not require minimum purchases.
We have established a program which, underUnder specified conditions, enables
some third party resellersthird-party distributors are allowed to
return products to us. The amountWe defer recognition of potential
product returns is estimated and provided for inrevenue on sales to distributors
until the period ofdistributors sell 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.product.
The Sales Cycle for Extreme'sOur Products is Long and ExtremeWe 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 per unit sales price, per unit, and the purchase
33
of our products often representconstitutes a significant and strategic decision by an
enterprise regarding its communications infrastructure. Accordingly, theThe decision by
customers to purchase of our products typically involves significantis often based on the results of a variety
of internal procedures associated with the evaluation, testing, implementation
and acceptance of new technologies. ThisAccordingly, the product evaluation process
frequently results in a lengthy sales process,cycle, typically ranging from three
months to longer than a year, and subjects the sales cycle
associated with the purchase ofas a result, our ability to sell products is
subject to a number of significant risks, includingincluding:
. the risk that budgetary constraints and internal acceptance reviews. Thereviews by
customers will result in the loss of potential sales;
. the risk of substantial variation in the length of ourthe 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,customer, making decisions on the expenditure of resources
difficult to assess;
. the risk that we may incur substantial sales and marketing expenses and
expend significant management effort. Consequently,time in an attempt to initiate or increase
the sale of products to customers, but not succeed; and
. the risk that, if a sales forecastedforecast from a specific customer for a
particular quarter areis not realizedachieved in that quarter, we may be unable to
compensate for the shortfall, which could harm our operating results.
Extreme PurchasesWe Purchase Several Key Components for Products From Single or Limited Sources
and Could Lose Sales if These SourcesSuppliers Fail to Fill ItsMeet Our 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, static random access memory, or SRAM, and printed circuit boards
have been, and may be 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 affecthave a material adverse effect on our ability to meet customer
orders. Our principal sole sourcedsole-source components include:
. ASICs;
. microprocessors;
. programmable integrated circuits;
. selected other integrated circuits;
. cables;
. custom power supplies; and
. custom-tooled sheet metal.
26
Our principal limited sourcedlimited-source components include:
. flash memories;
. dynamic and static random access memories, commonly known asor DRAMs and SRAMs,
respectively; and
. printed circuit boards.
We use a rolling six-monthour forecast based on anticipated product ordersof expected demand 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
matchexceed forecasts,
we may have excess or inadequate inventory of certain materials and components, which
could materially adversely affecthave a material adverse effect on our operating results and financial
condition. We do not have agreements fixing long-term prices or minimum volume
requirements from these suppliers. 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 DependsWe cannot assure you that such delays will not
occur in the future.
34
Our Dependence on Contract Manufacturers for Substantially All of ItsOur
Manufacturing Requirements Could Harm Our Operating Results
If the demand for our products continues to grow,grows, we will need to increase our material
purchases, contract manufacturing capacity, and internal test and quality
functions. Any disruptions in product flow could limit our revenue, adversely
affect our competitive position and reputation, and result in additional costs
or cancellation of orders under agreements with our customers.
We rely on third party manufacturing vendorsindependent contractors to manufacture our products. We do not
have long-term contracts with any of these manufacturers. We currently subcontract substantially all of our manufacturing toutilize
three companies--Flextronicscompanies - Flextronics International, Ltd., located in San Jose,
California, Solectron Corporation, located in Milpitas, California, and MCMS,
Inc., located in Boise, Idaho and Solectron, located in Milpitas,
California.Nampa, Idaho. We have experienced a delaydelays in product shipments
from contract manufacturers in the past, which in turn delayed product
shipments to our customers. WeSimilar or other problems may arise in the future, experience similar or other problems,
such as inferior quality, and insufficient quantity of product,products, or the
interruption or discontinuance of operations of any manufacturer, any of which
could materially adversely affecthave a material adverse effect on our business and operating results.
There canSpecifically, as stated in their Form 10-Q filed with the Securities and
Exchange Commission on July 16, 2001, MCMS faces severe near-term liquidity
problems. In the wake of a significant deterioration in demand from nearly all
of their customers, over-advances on a revolving credit facility and
non-compliance with a covenant requirement have created events of default under
the terms of the credit facility. It is not clear whether MCMS will be no
assuranceable to
successfully reorganize its operations. Accordingly, we are addressing this
situation by perfecting security interests in our personal property located on
the premises of MCMS, obtaining a written acknowledgement from MCMS in regard
to manufacturing equipment, products and materials owned and/or leased by us
that are located on the premises of MCMS, and managing the orderly transition
of production processes to other manufacturers. Our inability to execute this
plan may cause a delay in our ability to fulfill orders and may have a material
adverse effect on our business, operating results and financial condition. On
September 18, 2001 MCMS announced that it had reached an agreement to sell
substantially all of its operating assets to Manufacturers' Services Limited.
Simultaneously, MCMS announced that it, and its two U.S. subsidiaries, have
voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware in
Wilmington to implement the sale.
We do not know whether 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 a critical mass of 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 eitherany of our contract manufacturers wouldmay
cause a delay in our ability to fulfill orders while we obtain a replacement manufacturer and wouldmay 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 resultby means 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.
Our Limited Ability to Protect Our Intellectual Property and Defend Against
Claims May Adversely Affect Our 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 or that other parties will
not independently develop similar or competing products that do not infringe on
our patents. Our industry is characterized by the existence of a large number
of patents and frequent claims and related litigation regarding patent and
other intellectual
35
property rights. We are actively involved in disputes and licensing discussions
with others regarding their claimed proprietary rights. If we infringe the
proprietary rights of others, we could be compelled to either obtain a license
to those intellectual property rights or alter our products so that these no
longer infringe upon such proprietary rights. Any license could be very
expensive to obtain or may not be available at all. Similarly, changing our
products or processes to avoid infringing the rights of others may be costly or
impractical. Litigation resulting from claims that we are infringing the
propriety rights of others could result in substantial costs and a diversion of
resources, and could have a material adverse effect on our business, financial
condition and results of operations.
The networking industry in which we operate is prone to intellectual
property claims by and among competing parties. We cannot assure you that we
will always successfully defend ourselves against such claims.
We 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 misappropriate or use our products or technology.
We Are Engaged in Litigation Regarding Intellectual Property Rights, and an
Adverse Outcome Could Harm Our Business and Require Us to Incur Significant
Costs
We have received notice from three major companies alleging that we are
infringing their patents. One of these companies, Nortel Networks, filed a
claim against us alleging patent infringement and we are in litigation as of
the date of this filing. Following examination of this claim, we have denied
Nortel's allegations and intend to defend the action vigorously. Without regard
to the merits of this or any other claim, if judgments by a court of law on
this or any other claim received in the future were to be upheld, the
consequences to us may be severe and could require us to, among other actions:
. stop selling our products that incorporate the challenged intellectual
property;
. obtain a license to sell or use the relevant technology, which license may
not be available on reasonable terms or available at all;
. pay damages; or
. redesign those products that use the disputed technology.
If we are compelled to take any of the foregoing actions, our business could
be severely harmed.
We and Manufacturers of Our Products Rely on a Continuous Power Supply to
Conduct Operations, and California's Current Energy Crisis Could Disrupt Our
Business and Increase Our Expenses
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for California fall below 1.5%, electricity
providers have on some occasions implemented, and may in the future continue to
implement, rolling blackouts. Two of the three manufacturers of our products,
Flextronics and Solectron, are located in California. As a result of this
crisis, these contractors may be unable to manufacture sufficient quantities of
our products to meet our needs, or they may increase the fees charged for their
services. We do not have long-term contracts with either Flextronics or
Solectron. The inability of our contract manufacturers to provide us with
adequate supplies of products would cause a delay in our ability to fulfill our
orders, which could harm our business, and any increase in their fees could
adversely affect our financial condition.
In addition, the majority of our operations are located in California. We
currently do not have backup generators or alternate sources of power in the
event of a blackout. If blackouts interrupt our power supply, we would
temporarily be unable to continue operations at our facilities. Any such
interruption in our ability to continue operations at these facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operation.
36
Our Headquarters Are Located in Northern California Where Disasters May Occur
That Could Disrupt Our Operations and Harm Our Business
Our corporate headquarters are located in Silicon Valley in Northern
California. Northern California historically has been vulnerable to natural
disasters and other risks, such as earthquakes, fires and floods, which at
times have disrupted the local economy and posed physical risks to our and our
manufacturers' property.
In addition, terrorist acts or acts of war targeted at the U.S and
specifically Silicon Valley could cause damage or disruption to Extreme, Losesour
employees, facilities, partners, suppliers, distributors and resellers, and
customers which could have a material adverse effect on our operations and
financial results.
We currently do not have redundant, multiple site capacity in the event of a
natural disaster or catastrophic event. In the event of such an occurrence, our
business would suffer.
If We Lose Key Personnel or isare Unable to Hire Additional Qualified Personnel
as Necessary, ItWe May Not Be Able to Successfully Manage ItsOur Business or Achieve
ItsOur Objectives
Our success depends to a significant degree upon the continued contributions
of our key management, engineering, sales and marketing and manufacturingoperations
personnel, many of whom would be difficult to replace. In particular, we
believe that our future success is highly dependent on Gordon Stitt, Chairman, Presidentchairman,
president and Chief Executive Officer,chief executive officer; Stephen Haddock, Vice
Presidentvice president and
Chief Technical Officer,chief technical officer; and Herb Schneider, Vice Presidentvice president of Engineering.engineering. We
neitherdo not have employment contracts with these personnel nor key persondo we carry 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 manufacturingoperations personnel. CompetitionThe market for these personnel is
intense,competitive, especially in the San Francisco Bay Area, and we have had
difficulty hiring employees, particularly software engineers, in the timeframe
we desire, particularly software engineers.desire. In addition, retention has become more difficult for us and other
public technology companies as a result of the recent stock market decline,
which has caused many of our employees' options to be "under water." 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
requireddesired personnel, particularly engineers and sales personnel, could make it
difficult for us to manage our business and meet key objectives, such as new
product introductions, on time.introductions. 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 thatdo not know whether 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'sOur Products Must Comply With Evolving Industry Standards and Complex
Government Regulations or ItsElse Our Products May Not Be Widely Accepted, Which
May Prevent ExtremeUs From Sustaining Its RevenuesGrowing Our Net Revenue 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, ourOur products must comply
with various U.S. federal government regulations and standards defined by
agencies such as the Federal Communications Commission, and Underwriters Laboratories.
Internationally, products that we develop may be requiredin addition to comply with
standards established by telecommunicationsgovernmental authorities in various foreign countries
as
well as withand recommendations of the International Telecommunication Union. If we do not
comply with existing or evolving industry standards
37
or if we fail to obtain timely domestic or foreign regulatory approvals or
certificates we wouldwill not be able to sell our products where these standards or
regulations apply, which may prevent us from sustaining our revenuesnet revenue or
achieving profitability.
Failure to Successfully Integrate Extreme's ExpandedExpand Our Sales and Support Organizations into Its Operation or Educate
Them About ItsOur Product Families Will
Hurt ItsMay Harm Our Operating Results.
OurResults
The sale of our products and services requirerequires a sophisticated salesconcerted effort targeted
at several levels within a prospective customer's organization. Unless we expand
our sales force we willWe may not be
able to increase revenues. In April 2000, a
significant number of formernet revenue unless we expand our sales and system engineer employees of another
networking company joined our operation.force. We cannot assure
you that we will be able to educate these new employees about our product families orsuccessfully integrate
these new employees into our
company.company or to educate our employees about our rapidly evolving product
families. A failure to do so willmay hurt our revenue growth and mayconsequently hurt
our operating results.
Extreme DependsWe Depend Upon International Sales for Mucha Significant Portion of ItsOur Revenue and
Extreme'sOur Ability to Sustain and Increase ItsOur International Sales Depends on Successfully
Expanding ItsOur International Operations
International sales constitute a significant portion of our sales. Our
ability to grow will depend in part on the continued 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%55% and 45%43% of our net revenue in fiscal 19992001 and fiscal 2000, respectively.
Our international sales primarily depend on our resellers distributors and OEMs.distributors. The
failure of our resellers distributors and OEMsdistributors 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;
. the payment of operating expenses in local currencies, which subjectsexposes us to
risks of currency fluctuations;
. import or export licensing requirements;
. difficulty in safeguarding intellectual property;
. political and economic turbulence;
. potential adverse tax consequences; and
. unexpected changes in regulatory requirements.requirements, including export
restrictions.
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 subjectexpose us to fluctuations in exchange rates between the
U.S. dollar and the particular local currency. If we do so, we may determinedecide to
engage in hedging transactions to minimize the risk of such fluctuations. We
have entered into foreign exchange forward contracts to offset the impact of
payment of operating expenses in local currencies to some of our operating
foreign subsidiaries. However, if we are not successful in managing suchthese
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
ExtremeWe 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 to acquire, businesses,
products, or technologies in the future. In the event of any future
acquisitions, we could:
38
. issue equity securities which would dilute current stockholders'
percentage ownership;
. incur substantial debtdebt;
. assume contingent liabilities; or
. expend significant cash.
These actions by us could materially adversely affecthave a material adverse effect on our operating
results and/or the price of our common stock. In addition, with any
acquisition, we may be required to absorb the costs associated with the
acquisition long before we are able to realize any benefits from the
acquisition.
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;
. the 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 experienceexperience;
. the potential loss of key employees of acquired organizations;
and
. substantial charges for the amortization of goodwill orcertain purchased intangiblesintangible
assets, deferred stock compensation or similar items.items; and
. impairment charges taken in the future for goodwill amounts that cannot be
supported in future periods.
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 affecthave a material adverse effect on our
business, operating results and financial condition. ExtremeMoreover, even if we do
obtain benefits in the form of increased sales and earnings, there may be a lag
between the time when the expenses associated with an acquisition are incurred
and the time when we recognize such benefits. This is particularly relevant in
cases where it is necessary to integrate new types of technology into our
existing portfolio and new types of products may be targeted for potential
customers with which we do not have pre-existing relationships.
We May Need Additional Capital to Fund ItsOur Future Operations And,and, If It Is Not
Available When Needed, ExtremeWe May Need to Reduce ItsOur Planned Development and
Marketing Efforts, Which May Reduce Its RevenuesOur Net Revenue and Prevent ExtremeUs From
Achieving Profitability
We believe that our existing working capital, based on 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 requirerequires a significant commitment of resources. In addition, if the
marketmarkets 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,sufficient net revenue, we may
continue to utilizeconsume 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 toof the shares held by existing
stockholders. If additional funds are raised through the issuance of debt
securities, such securities may haveprovide the holders certain rights,
preferences, and privileges senior to holdersthose of common stockstockholders, and the
termterms 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
39
obtain suchsufficient amounts of additional capital, we may be required to reduce
the scope of our planned product development and marketing efforts, which wouldcould
harm our business, financial condition and operating results.
29
If Extreme'sOur Products Contain Undetected Software or Hardware Errors, ExtremeWe Could Incur
Significant Unexpected Expenses and LostLose Sales
Network products frequently contain undetected software or hardware errors
when first introduced or as new versions are released. Wefirst released to the marketplace. In the past, 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 the commencement of commercial shipments. These problems may
materially adversely affecthave a material adverse effect on our business by causing us to incur
significant warranty and repair costs, diverting the attention of our
engineering personnel from ournew 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 sourcesources of the problem.these problems. 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 ofcause us to incur 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'sOur 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 approvalapproval.
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. In
addition, we recently adopted a stockholders' rights agreement as described in
Note 6 of Notes to Consolidated Financial Statements.
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 maximizingmaximize 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
40
and weighted-average interest rates as of June 30, 20002001 and June 30, 1999.2000. This
table does not include money market funds because those funds are not subject
to market risk.
30
June 30, 2000: Maturing in
---------------------------------------------------------------------------------------------------- -------
Three Three Greater
months Threeor months Greaterto than one Fair
or less to one year one year Total Value
--------- --------- -------- ------- ----------- -------- ----- ------------
June 30, 2001: (In thousands)
Included in cash and cash equivalents................. $ 100,696 $ 100,696 $ 100,696equivalents.. $36,846 $36,846 $36,846
Weighted average interest rate...................... 6.37%rate..... 4.53%
Included in short-term investments.................... $ 66,640 $ 66,640 $ 66,640investments..... $69,374 $69,374 $69,374
Weighted average interest rate...................... 6.50%rate..... 6.94%
Included in investments............................... $ 44,144 $ 44,144 $ 44,144investments................ $34,406 $34,406 $34,406
Weighted average interest rate...................... 7.29%rate..... 4.72%
Maturing in
---------------------------------------------------------------
June 30, 1999:------------------------------------ -------
Three Three Greater
months Threeor months Greaterto than one Fair
or less to one year one year Total Value
--------- --------- -------- ------- ----------- -------- ----- ------------
June 30, 2000: (In thousands)
Included in cash and cash equivalents................ $ 93,819 $ 93,819 $ 93,819equivalents.. $88,324 $88,324 $88,324
Weighted average interest rate..................... 5.12%rate..... 6.37%
Included in short-term investments................... $ 16,422 $ 16,422 $ 16,422investments..... $66,640 $66,640 $66,640
Weighted average interest rate..................... 5.04%rate..... 6.50%
Included in investments.............................. 300 $ 15,797 $ 16,097 $ 16,097investments................ $44,144 $44,144 $44,144
Weighted average interest rate..................... 6.02% 6.36%rate..... 7.29%
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, 20002001 and expect to continue
to do so, we do not anticipate that foreign exchange gains or losses will be
significant.
Foreign Exchange Forward Contracts
We enter into foreign exchange forward contracts to offset the impact of
currency fluctuations on certain nonfunctional operating expenses, denominated
in Japanese Yen, the Euro, Swedish Krona and British pound. The foreign
exchange forward contracts we enter into have original maturities ranging from
one to three months. We do not engaged inenter into foreign currency hedging activitiesexchange forward contracts
for trading purposes. Extreme did not hold any foreign exchange forward
contracts as of June 30, 2001 (see Note 5 of Notes to date,
however, we may do so in the future.
31Consolidated Financial
Statements).
41
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF EXTREME NETWORKS, INC.
Page(s)
---------------
Consolidated Balance Sheets...................... 43
Consolidated Statements of Operations............ 44
Consolidated Statements of Cash Flows............ 45
Consolidated Statement of Stockholders' Equity... 46
Notes to Consolidated Financial Statements....... 47
Report of Ernst & Young LLP, Independent Auditors........................................................................Auditors 67
Quarterly Financial Data (unaudited)............. 68
42
EXTREME NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
June 30,
------------------
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 87,722 $116,721
Short-term investments............................................................. 69,374 66,640
Accounts receivable, net of allowance for doubtful accounts of $1,942
($1,237 in 2000)................................................................. 75,738 60,996
Inventories........................................................................ 60,529 23,801
Deferred taxes..................................................................... 35,855 13,800
Other current assets............................................................... 21,543 20,526
-------- --------
Total current assets........................................................... 350,761 302,484
Property and equipment, net........................................................... 57,251 26,750
Restricted investments................................................................ 80,000 80,000
Investments........................................................................... 34,406 44,144
Goodwill and purchased intangible assets, net......................................... 113,886 49,782
Deferred taxes........................................................................ 40,028 4,600
Other assets.......................................................................... 12,025 8,170
-------- --------
$688,357 $515,930
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 35,890 $ 39,023
Accrued compensation and benefits.................................................. 13,309 11,041
Accrued purchase commitments....................................................... 9,926 506
Leasehold improvements allowance................................................... 6,662 8,424
Deferred revenue................................................................... 57,372 22,042
Other accrued liabilities.......................................................... 16,170 15,567
-------- --------
Total current liabilities...................................................... 139,329 96,603
Long-term deposit..................................................................... 266 306
Commitments and contingencies (Note 4)
Stockholders' equity:
Convertible preferred stock, $.001 par value, issuable in series; 2,000,000 shares
authorized; none issued.......................................................... -- --
Common stock, $.001 par value; 750,000,000 shares authorized; 113,416,000 issued
and outstanding (106,670,000 in 2000) and capital in excess of par value......... 640,655 423,150
Deferred stock compensation........................................................ (20,351) (78)
Accumulated other comprehensive income (loss)...................................... 769 (623)
Accumulated deficit................................................................ (72,311) (3,428)
-------- --------
Total stockholders' equity..................................................... 548,762 419,021
-------- --------
$688,357 $515,930
======== ========
See accompanying notes to consolidated financial statements.
43
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Years Ended June 30,
----------------------------
2001 2000 1999
--------- -------- -------
Net revenue $ 491,232 $261,956 $98,026
Costs and expenses:
Cost of revenue.......................................................... 281,232 126,916 48,520
Research and development................................................. 57,876 32,998 17,036
Sales and marketing...................................................... 154,601 67,146 27,056
General and administrative............................................... 25,789 11,852 6,859
Amortization of goodwill, purchased intangible assets and deferred stock
compensation........................................................... 37,530 6,790 --
Other operating expenses................................................. 36,097 -- --
--------- -------- -------
Total costs and expenses............................................. 593,125 245,702 99,471
--------- -------- -------
Operating income (loss)..................................................... (101,893) 16,254 (1,445)
Interest income............................................................. 15,474 14,638 1,855
Interest expense............................................................ (387) (490) (398)
Other income (expense), net................................................. (4,745) (33) 21
--------- -------- -------
Income (loss) before income taxes........................................... (91,551) 30,369 33
Consolidated Balance Sheets.............................................................................................. 34
Consolidated StatementsProvision (benefit) for income taxes........................................ (22,668) 10,321 1,650
--------- -------- -------
Net income (loss)........................................................... $ (68,883) $ 20,048 $(1,617)
========= ======== =======
* Net income (loss) per share--basic........................................ $ (0.64) $ 0.20 $ (0.09)
* Net income (loss) per share--diluted...................................... $ (0.64) $ 0.18 $ (0.09)
* Shares used in per share calculation--basic............................... 108,353 100,516 18,924
* Shares used in per share calculation--diluted............................. 108,353 111,168 18,924
See accompanying notes to consolidated financial statements.
* Share and per-share data presented reflect the two-for-one stock split
effective August 24, 2000.
44
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
-----------------------------
2001 2000 1999
-------- --------- --------
Operating activities
Net income (loss).................................................. $(68,883) $ 20,048 $ (1,617)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation..................................................... 19,328 6,992 5,733
Amortization..................................................... 33,387 7,052 --
Provision for doubtful accounts.................................. 5,274 -- 1,364
Provision for inventory reserves................................. 32,753 1,144 1,087
Deferred income taxes............................................ (64,173) (18,400) --
In-process research and development.............................. 30,142 -- --
Tax benefits from employee stock transactions.................... 45,020 21,600 --
Warrants issued to a business partner............................ -- -- 948
Amortization of Operations.................................................................................... 35
Consolidated Statementdeferred stock compensation...................... 4,143 119 172
Equity share of affiliate losses and write-down of investments... 4,942 248 --
Loss on retirement of assets..................................... 2,886 -- --
Compensation expense for options granted to consultants.......... 841 176 --
Changes in operating assets and liabilities; excluding
impact of acquisitions:
Accounts receivable............................................. (20,016) (40,199) (14,353)
Inventories..................................................... (69,481) (22,319) (3,590)
Other current and noncurrent assets............................. (2,950) (18,832) (1,392)
Accounts payable................................................ (3,262) 25,605 3,425
Accrued compensation and benefits............................... 2,268 6,941 3,165
Accrued purchase commitments.................................... 9,420 -- --
Leasehold improvements allowance................................ (1,762) 8,424 --
Deferred revenue................................................ 35,330 20,325 1,434
Other accrued liabilities....................................... 180 5,589 6,377
Long term deposit............................................... (40) 306 --
-------- --------- --------
Net cash provided by (used in) operating activities................ (4,653) 24,819 2,753
-------- --------- --------
Investing activities
Capital expenditures............................................... (51,224) (27,236) (7,492)
Purchases and maturities of investments............................ 8,398 (158,770) (21,636)
Acquisition of business, net of cash assumed....................... 1,179 -- --
Minority investments............................................... (7,750) (8,970) --
-------- --------- --------
Net cash used in investing activities.............................. (49,397) (194,976) (29,128)
-------- --------- --------
Financing activities
Proceeds from issuance of common stock............................. 25,051 181,383 126,622
Proceeds from notes payable........................................ -- -- 783
Principal payments on notes payable................................ -- -- (2,784)
Principal payments of capital lease obligations.................... -- (1,648) (613)
-------- --------- --------
Net cash provided by financing activities.......................... 25,051 179,735 124,008
-------- --------- --------
Net increase (decrease) in cash and cash equivalents............... (28,999) 9,578 97,633
Cash and cash equivalents at beginning of year....................... 116,721 107,143 9,510
-------- --------- --------
Cash and cash equivalents at end of year............................. $ 87,722 $ 116,721 $107,143
======== ========= ========
Supplemental disclosure of cash flow information:
Interest paid...................................................... $ 387 $ 744 $ 185
Cash paid (refund received) for taxes.............................. $ (3,803) $ 5,828 --
Supplemental schedule of noncash investing and financing activities:
Property and equipment acquired under capital lease obligations.... $ -- $ -- $ 278
Warrants issued for goodwill and purchased intangibles............. $ -- $ 54,324 $ --
Warrants issued to a business partner.............................. $ -- $ -- $ 948
Conversion of preferred stock to common stock...................... $ -- $ -- $ 58
See accompanying notes to consolidated financial statements.
45
EXTREME NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock and
Convertible capital in excess of Accumulated
Preferred Stock par value Deferred Other
-------------- -------------------- Stock Comprehensive
Shares Amount Shares Amount Compensation Income (Loss)
------- ------ ------- -------- ------------ -------------
Balances at June 30, 1998............................... 58,122 $ 58 23,070 $ 38,039 $ (369) $ --
Components of comprehensive loss:
Net loss........................................... -- -- -- -- -- --
Change in unrealized loss on investments........... -- -- -- -- -- (112)
Foreign currency translation adjustment............ -- -- -- -- -- (6)
Total comprehensive loss........................... -- -- -- -- -- --
Issuance of warrants to purchase common stock........... -- -- -- 948 -- --
Issuance of common stock in conjunction with initial
public offering (less issuance costs of $1,948)........ -- -- 16,100 125,322 -- --
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,
net of repurchases..................................... -- -- 1,134 1,300 -- --
Amortization of deferred stock compensation............. -- -- -- -- 172 --
------- ---- ------- -------- -------- ------
Balances at June 30, 1999............................... -- -- 98,690 165,667 (197) (118)
Components of comprehensive income:
Net income......................................... -- -- -- -- -- --
Change in unrealized loss on investments........... -- -- -- -- -- (503)
Foreign currency translation adjustment............ -- -- -- -- -- (2)
Total comprehensive income......................... -- -- -- -- -- --
Issuance of common stock in conjunction with
secondary public offering (less issuance costs of $910) -- -- 4,748 174,028 -- --
Exercise of warrants to purchase common stock........... -- -- 370 -- -- --
Exercise of options to purchase common stock,
net of repurchases..................................... -- -- 2,392 3,389 -- --
Issuance of common stock under employee
stock purchase plan.................................... -- -- 470 3,966 -- --
Issuance of warrants for goodwill and purchased
intangible assets...................................... -- -- -- 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............................... -- -- 106,670 423,150 (78) (623)
Components of comprehensive loss:
Net loss........................................... -- -- -- -- -- --
Change in unrealized gain on investments........... -- -- -- -- -- 1,325
Foreign currency translation adjustment............ -- -- -- -- -- 67
Total comprehensive loss........................... -- -- -- -- -- --
Exercise of warrants to purchase common stock........... -- -- 58 -- -- --
Exercise of options to purchase common stock,
net of repurchases..................................... -- -- 2,128 16,251 -- --
Issuance of common stock under employee
stock purchase plan.................................... -- -- 318 8,800 -- --
Issuance of common stock and assumption of stock
options in connection with acquisitions................ -- -- 4,242 146,593 (24,416) --
Tax benefit from employee stock transactions............ -- -- -- 45,020 -- --
Stock compensation for options granted to consultants... -- -- -- 841 -- --
Amortization of deferred stock compensation............. -- -- -- -- 4,143 --
------- ---- ------- -------- -------- ------
Balances at June 30, 2001............................... -- $ -- 113,416 $640,655 $(20,351) $ 769
======= ==== ======= ======== ======== ======
Total
Accumulated Stockholders'
Equity........................................................................... 36
Consolidated StatementsDeficit Equity
----------- -------------
Balances at June 30, 1998............................... $(21,859) $ 15,869
Components of comprehensive loss:
Net loss........................................... (1,617) (1,617)
Change in unrealized loss on investments........... -- (112)
Foreign currency translation adjustment............ -- (6)
--------
Total comprehensive loss........................... -- (1,735)
--------
Issuance of warrants to purchase 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,
net of repurchases..................................... -- 1,300
Amortization of deferred stock compensation............. -- 172
-------- --------
Balances at June 30, 1999............................... (23,476) 141,876
Components of comprehensive income:
Net income......................................... 20,048 20,048
Change in unrealized loss on investments........... -- (503)
Foreign currency translation adjustment............ -- (2)
--------
Total 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,
net of repurchases..................................... -- 3,389
Issuance of common stock under employee
stock purchase plan.................................... -- 3,966
Issuance of warrants for goodwill and purchased
intangible assets...................................... -- 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
Components of comprehensive loss:
Net loss........................................... (68,883) (68,883)
Change in unrealized gain on investments........... -- 1,325
Foreign currency translation adjustment............ -- 67
--------
Total comprehensive loss........................... -- (67,491)
--------
Exercise of warrants to purchase common stock........... -- --
Exercise of options to purchase common stock,
net of repurchases..................................... -- 16,251
Issuance of common stock under employee
stock purchase plan.................................... -- 8,800
Issuance of common stock and assumption of stock
options in connection with acquisitions................ -- 122,177
Tax benefit from employee stock transactions............ -- 45,020
Stock compensation for options granted to consultants... -- 841
Amortization of deferred stock compensation............. -- 4,143
-------- --------
Balances at June 30, 2001............................... $(72,311) $548,762
======== ========
See accompanying notes to consolidated financial statements.
46
EXTREME NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
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 network infrastructure equipment for business
applications and services.
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 Extreme 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 significant. 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 2001 presentation. Such
reclassifications have not impacted previously reported operating income (loss)
or net 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, 2001 year closed on July 1,
2001 and comprised 52 weeks of revenue and expense activity. All references
herein to "fiscal 2001" or "2001" represent the fiscal year ended July 1, 2001.
Quarterly results are based upon a 13-week reporting period.
Accounting Estimates
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful
accounts, inventory reserves, depreciation and amortization, sales returns,
warranty costs and income taxes. Actual results could differ materially from
these estimates.
Cash Equivalents and Short-Term and Long 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
stockholders' equity. Realized gains and losses on available-for-sale
securities are included in interest income. The cost of securities sold is
based on specific identification. Premiums and discounts are amortized over the
period from acquisition to maturity and are included in investment income,
along with interest and dividends.
47
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Extreme also has certain other minority investments in privately held
companies. These investments are included in other assets on our balance sheet
and are generally carried at cost. We monitor these investments for other than
temporary impairment and make appropriate reductions in carrying values when
necessary. Extreme recorded write-downs of $1.8 million during the year ended
June 30, 2001 related to impairments of its privately held investments. No
impairment write-downs were recorded in fiscal 2000 or 1999. A total of $9.9
million of carrying value remained as of June 30, 2001.
Fair Value of Financial Instruments
The carrying amounts of certain of Extreme's financial instruments,
including cash and cash 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.
Derivatives
Extreme adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133")
for the year ending June 30, 2001. We enter into foreign exchange forward
contracts to offset the impact of currency fluctuations on certain
nonfunctional operating expenses, denominated in Japanese Yen, the Euro,
Swedish Krona and the British pound. The foreign exchange forward contracts we
enter into have original maturities ranging from one to three months. We do not
enter into foreign exchange forward contracts for trading purposes. We did not
hold any forward contracts upon adoption of FAS 133 and recorded no transition
adjustments. Extreme did not hold any foreign exchange forward contracts as of
June 30, 2001 (see Note 5).
Transfer of Financial Assets
From time to time, Extreme transfers specifically identified accounts
receivable balances from customers to financing institutions, on a non-recourse
basis. Extreme 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 SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The impact
of the above transactions reduced receivables and increased cash by
approximately $9.4 million during fiscal 2001.
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 (in thousands):
June 30, 2001 June 30, 2000
------------- -------------
Raw materials. $20,671 $ 9,501
Finished goods 39,858 14,300
------- -------
Total...... $60,529 $23,801
======= =======
Restricted Investments
Extreme restricted $80.0 million of its investment securities as collateral
for specified obligations of Extreme, as the lessee, under an operating lease
for its campus facility. These investment securities are restricted as to the
terms of withdrawal and are managed by a third party subject to certain
limitations under our investment policy (See Note 4).
48
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk, Product and Significant Customers and Supplier
Information
Extreme may be subject to concentration of credit risk as a result of
certain financial instruments consisting principally of marketable investments
and accounts receivable. Extreme has placed its investments with high-credit
quality issuers. Extreme will not invest an amount exceeding 10% of Extreme's
combined cash, cash equivalents, 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. One customer accounted for 16% of our net revenue in
2001, no customer accounted for more than 10% of our net revenue in 2000 and
two customers accounted for 21% and 13 % of our net revenue in 1999.
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 our
Summit, BlackDiamond and Alpine products. Extreme expects that revenue from
these products will account for a substantial portion of our revenue for the
foreseeable future. Accordingly, widespread market acceptance of Extreme's
products is critical to our future success.
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, 2001 June 30, 2000
------------- -------------
Computer and other related equipment.......... $ 54,318 $27,257
Office equipment, furniture and fixtures...... 4,291 1,905
Software...................................... 18,613 4,956
Leasehold improvements........................ 3,927 1,802
-------- -------
81,149 35,920
Less accumulated depreciation and amortization (23,898) (9,170)
-------- -------
Property and equipment, net................... $ 57,251 $26,750
======== =======
49
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 5 years. The cost of identified intangible assets is generally amortized on
a straight-line basis over periods ranging from 2 to 4 years. Goodwill and
purchased intangible assets consist of the following (in thousands):
June 30, 2001 June 30, 2000
------------- -------------
Goodwill...................... $143,325 $48,050
Purchased intangible assets... 11,158 8,784
-------- -------
154,483 56,834
Less: accumulated amortization (40,597) (7,052)
-------- -------
$113,886 $49,782
======== =======
Income Taxes
Income tax expense (benefit) is based on pre-tax financial accounting income
(loss). Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
Valuation of Long-Lived Assets, Certain Identifiable Intangibles and Goodwill
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," we regularly
perform reviews of the carrying value of long-lived assets and certain
identifiable intangibles for impairment. 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.
Revenue Recognition
Extreme generally recognizes product revenue at the time of shipment,
assuming that collectibility is probable, unless we have future obligations
such as installation or are required to obtain customer acceptance. When
significant obligations remain after products are delivered, revenue and
related costs are deferred until such obligations are fulfilled. Amounts billed
in excess of revenue recognized are included as deferred revenue and accounts
receivable in the accompanying consolidated balance sheets. On a prospective
basis as of July 2, 2001 we will report deferred revenue and accounts
receivable on a net basis in the consolidated balance sheets. Revenue from
service obligations under maintenance contracts, is deferred and recognized on
a straight-line basis over the contractual period, which is typically 12
months.
Extreme makes certain sales to partners in two-tier distribution channels.
The first tier consists of a limited number of third-party distributors that
sell primarily to resellers and on occasion to end-user customers. Distributors
are generally given privileges to return a portion of inventory. Under
specified conditions, we grant
50
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the right to distributors to return unsold products to us. The distributors are
contractually limited in terms of the value of products that can be returned to
Extreme (up to 15% of net purchases in the immediately preceding calendar
quarter to be credited against future purchases). We defer recognition of
revenue on sales to distributors until the distributors sell the product. The
second tier of the distribution channel consists of a large number of
third-party resellers that sell directly to end-users and are not granted
return privileges. Extreme generally records revenue to resellers upon shipment
net of returns allowances based on its experience.
In certain cases, Extreme has guaranteed financial obligations for its
customers for the purchase of Extreme equipment. In such cases, Extreme records
revenue as payments are received by the financing party. The related equipment
cost is amortized to cost of revenue over the financing term.
Warranty Reserves
Extreme's hardware warranty period is typically 12 months from the date of
shipment to the end user. Upon shipment of products to its customers, Extreme
estimates expenses for the cost to repair or replace products that may be
returned under warranty and accrues the amount as revenue is recognized.
Advertising
Cooperative advertising obligations are accrued and the costs expensed at
the same time the related revenue is recognized. All other advertising costs
are expensed as incurred. Advertising expenses for the years ended June 30,
2001, 2000 and 1999 were approximately $11.0 million, $5.5 million and $2.6
million, respectively.
Stock-Based Compensation
Extreme accounts for its stock options and equity awards in accordance with
the provisions of the Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and has elected to follow the "disclosure only"
alternative prescribed by SFAS No. 123, "Accounting of Stock-Based
Compensation" ("FAS 123"). For non-employees, Extreme computes the fair value
of stock-based compensation in accordance with FAS No. 123 and Emerging Issues
Task Force (EITF) 96-18, "Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services".
In March 2000, the FASB issued Interpretation No. 44 (FIN 44) "Accounting
for Certain Transactions involving Stock Compensation--an Interpretation of
Accounting Principles Board (APB) Opinion No. 25". FIN 44 clarifies the
application of APB Opinion No. 25 and was effective July 1, 2000. The
application of FIN 44 did not have a material effect on Extreme's financial
position or results of operations.
Disclosure about Segments of an Enterprise and Geographic Areas
Extreme adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," (FAS 131), in 1999. FAS 131 establishes standards for
reporting information about operating segments as well as geographic areas and
major customers. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
51
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Extreme operates in one segment, the development and marketing of network
infrastructure equipment. Extreme markets its products in the United States and
in foreign countries through its sales personnel and subsidiaries. Extreme's
foreign offices consist of sales, marketing and support activities. Operating
income (loss) generated by Extreme's operating foreign subsidiaries and their
corresponding identifiable assets were not material in any period presented.
Information regarding geographic areas is as follows (in thousands):
Years Ended June 30,
-------------------------
2001 2000 1999
-------- -------- -------
Net revenue:
Americas (including North and South).. $231,001 $145,663 $46,186
Europe, Middle East and Asia ("EMEA"). 120,878 51,092 17,880
Japan................................. 91,425 49,942 31,379
Other................................. 47,928 15,259 2,581
-------- -------- -------
$491,232 $261,956 $98,026
======== ======== =======
Revenue is attributed to regions based on the location of the customers.
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 share is
calculated by dividing net income (loss) by the weighted average number of
common shares used in the basic earnings per share calculation plus the
dilutive effect of options, warrants and convertible securities. Diluted net
loss per share is the same as basic net loss per share in fiscal 2001 and
fiscal 1999 because Extreme had net losses in those periods. Had Extreme been
profitable in these years, diluted earnings per share would have been impacted
by the calculated effect of outstanding stock options of 10,446,000 and
14,390,000, respectively and warrants of 3,000,000 and 0, respectively for
fiscal 2001 and fiscal 1999.
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,
---------------------------
2001 2000 1999
-------- -------- -------
Net income (loss)............................................. $(68,883) $ 20,048 $(1,617)
======== ======== =======
Weighted-average shares of common stock outstanding........ 109,655 103,734 27,324
Less: Weighted-average shares subject to repurchase........ (1,302) (3,218) (8,400)
-------- -------- -------
Weighted-average shares used in per share calculation--basic.. 108,353 100,516 18,924
Incremental shares using the treasury stock method............ -- 10,652 --
-------- -------- -------
Weighted-average shares used in per share calculation--diluted 108,353 111,168 18,924
======== ======== =======
Net income (loss) per share--basic............................ $ (0.64) $ 0.20 $ (0.09)
======== ======== =======
Net income (loss) per share--diluted.......................... $ (0.64) $ 0.18 $ (0.09)
======== ======== =======
52
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Share and per-share data presented reflect the two-for-one stock split
effective to stockholders of record on August 10, 2000.
Recently Issued Accounting Standards
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. Extreme adopted
SAB 101 in the fourth quarter of fiscal 2001. The application of SAB 101 has
not had a material impact on the business, results of operations or financial
condition of Extreme.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a replacement of FASB Statement No. 125" ("FAS
140"). FAS 140 revises certain standards for accounting for securitization and
other transfers of financial assets and collateral. In addition, FAS No. 140
requires certain additional disclosures that were not previously required. The
additional disclosure requirements were effective for financial statements for
fiscal years ending after December 15, 2000 and have been adopted for the year
ended June 30, 2001. The revised accounting standards of FAS 140 are effective
for transactions occurring after March 31, 2001. The application of the revised
accounting standards of FAS 140 has not had a material impact on the business,
results of operations or financial condition of Extreme.
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" ("FAS 141"). FAS 141 establishes new
standards for accounting and reporting for business combinations and requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. We will adopt this statement in fiscal 2002.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142"), which establishes new standards for goodwill and other
intangible assets. Under the new rules, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
amortization provisions of FAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company will apply the new accounting rules
beginning fiscal year 2003. We are currently assessing the financial impact FAS
No. 142 will have on our Consolidated Financial Statements. Goodwill and
intangible assets from business combinations before July 1, 2001 will continue
to be amortized prior to the adoption of FAS 142. Upon the adoption of FAS 142,
we are required to evaluate our existing goodwill and intangible assets from
business combinations completed before July 1, 2001 and make any necessary
reclassifications in order to comply with the new criteria in FAS 141 for
recognition of intangible assets.
53
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2) Available-for-Sale Securities
The following is a summary of available-for-sale securities (in thousands):
Unrealized Unrealized
Amortized Fair Holding Holding
Cost Value Gains Losses
--------- -------- ---------- ----------
June 30, 2001:
Money market fund.............. $ 387 $ 387 $ -- $ --
Commercial paper............... 20,964 20,952 2 (14)
U.S. corporate debt securities. 98,291 99,013 862 (140)
U.S. government agencies....... 8,624 8,624 -- --
Market auction preferreds...... 12,037 12,037 -- --
-------- -------- ---- -----
$140,303 $141,013 $864 $(154)
======== ======== ==== =====
Classified as:
Cash Flows.................................................................................... 37
Notes to Consolidated Financial Statements............................................................................... 38equivalents........... $ 37,233 $ 37,233 $ 14 $ (14)
Short-term investments..... 68,576 69,374 798 --
Investments................ 34,494 34,406 52 (140)
-------- -------- ---- -----
$140,303 $141,013 $864 $(154)
======== ======== ==== =====
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)
======== ======== ==== =====
323) 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. During the quarter
ended September 30, 2000, Extreme acquired certain assets of a company for a
total cost of $1.1 million. Extreme accounted for these acquisitions using the
purchase method of accounting. The entire amount of the purchase prices was
allocated to goodwill and purchased intangible assets. Extreme recorded
approximately $829,000 and $261,000 for amortization related to these
acquisitions in the years ended June 30, 2001 and 2000, respectively.
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
54
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
model, using a volatility assumption of 104% 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 recorded approximately $27.2 million and
$6.8 million for amortization related to this acquisition in the years ended
June 30, 2001 and 2000, respectively.
Optranet
On January 31, 2001 Extreme acquired privately-held Optranet, Inc.
("Optranet"), a developer of broadband access equipment in which Extreme
previously held a minority interest. In addition, a related party of Extreme
was a significant investor of Optranet at the time of Extreme's initial
investment. The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values on the
acquisition date. Since January 31, 2001, Optranet's results of operations have
been included in Extreme's Consolidated Statements of Operations. The fair
value of the intangible assets was determined based upon a valuation using a
combination of methods, including an income approach for the technology and a
cost approach for the assembled workforce.
The purchase price of approximately $73.2 million consisted of an exchange
of 1.4 million shares of Extreme's common stock with a fair value of $50.5
million, assumed stock options with a fair value of $22.3 million, $0.2 million
in acquisition related expenses and Extreme's net minority investment of $0.2
million. The purchase price was allocated, with the assistance of an
independent valuation, to assembled workforce of $1.5 million, in-process
research and development of $13.4 million, deferred compensation of $21.9
million and tangible net assets assumed of $2.6 million, net of deferred tax
liabilities of $7.4 million resulting in goodwill of $41.2 million.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis rate of 30% on the anticipated income stream of
the related product revenue. The discounted cash flow analysis was based on
management's forecast of future revenue, cost of revenue and operating expenses
related to the products and technologies purchased from Optranet. The
calculation of value was then adjusted to reflect only the value creation
efforts of Optranet prior to the close of the acquisition. The acquired
intangible assets and goodwill are being amortized using the straight-line
method over their estimated useful lives of five years. Amortization of
acquired intangibles and goodwill associated with this acquisition totaled $2.8
million for fiscal 2001. Extreme recognized deferred stock compensation
associated with unvested stock options issued to employees that were assumed in
conjunction with the acquisition. This amount is included as a component of
stockholders' equity and is being amortized ratably by charges to operations
over the vesting period of the options. Amortization of stock-based
compensation associated with this acquisition totaled $3.8 million in fiscal
2001 and relates to options awarded to employees in research and development.
As of January 31, 2001, Optranet had in-process research and development
efforts under way for the design and development of printed circuit boards
("PCB"). These PCBs will deliver networking solutions that allow for high speed
Ethernet Layer 3 switching and IP services over wide area T-1 and DS-3 network
technologies, and VDSL modules over voice grade cabling. The development
efforts for the products were at varying levels of completion estimated to be
between 20% and 85%, had a fair value of $13.4 million as of January 31, 2001
and are expected to be completed during the first six months of fiscal 2002.
Webstacks
On March 7, 2001 Extreme acquired privately-held Webstacks, Inc.
("Webstacks"), a developer of broadband access equipment in which Extreme
previously held a minority interest. In addition, a related party of Extreme
was a significant investor of Webstacks at the time of Extreme's initial
investment. The acquisition was
55
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accounted for using the purchase method of accounting and accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values on the acquisition date. Since March 7,
2001, Webstack's results of operations have been included in Extreme's
Consolidated Statements of Operations. The fair value of the intangible assets
was determined based upon a valuation using a combination of methods, including
an income approach for the technology and a cost approach for the assembled
workforce.
The purchase price of approximately $74.7 million consisted of an exchange
of 2.9 million shares of Extreme's common stock with a fair value of $71.2
million, assumed stock options with a fair value of $2.8 million, $0.3 million
in acquisition related expenses and Extreme's net minority investment of $0.4
million. The purchase price was allocated, with the assistance of an
independent valuation, to assembled workforce of $0.9 million, in-process
research and development of $16.8 million, deferred compensation of $2.5
million, tangible and other net assets assumed of $1.4 million, resulting in
goodwill of $53.1 million. Under the terms of the Merger Agreement with
Webstacks, Extreme is obligated to pay $15.0 million of additional cash
consideration on or before October 31, 2001 provided that certain technology
milestones are met.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis rate of 30% on the anticipated income stream of
the related product revenue. The discounted cash flow analysis was based on
management's forecast of future revenue, cost of revenue and operating expenses
related to the products and technologies purchased from Webstacks. The
calculation of value was then adjusted to reflect only the value creation
efforts of Webstacks prior to the close of the acquisition. The acquired
intangible assets and goodwill are being amortized using the straight-line
method over their estimated useful lives of five years. Amortization of
acquired intangibles and goodwill associated with this acquisition totaled $2.7
million for fiscal 2001. Extreme recognized deferred stock compensation
associated with unvested stock options issued to employees that were assumed in
conjunction with the acquisition. This amount is included as a component of
stockholders' equity and is being amortized ratably by charges to operations
over the vesting period of the options. Amortization of stock-based
compensation associated with this acquisition totaled $0.3 million in fiscal
2001 and relates to options awarded to employees in research and development.
As of March 7, 2001, Webstacks had in-process research and development
efforts under way for the design and development of both stand alone proxy
switches and PCBs. These switches and PCBs will extend Extreme's IP services to
provide robust Layer 4 - 7 switching solutions required for building today's
high-performance content aware networks. The development efforts for the
products were at varying levels of completion estimated to be between 45% and
60%, had a fair value of $16.8 million as of March 7, 2001 and are expected to
be completed by January 2002.
Pro forma results of operations have not been presented for Optranet or
Webstacks because the prior operating results of these entities were not
material on either an individual or an aggregate basis.
4) Commitments and contingencies
Leases
In June 2000, we entered into two operating lease agreements for
approximately 16 acres of land and the accompanying 275,000 square feet of
buildings to house our primary facility in Santa Clara, California. Our lease
payments will vary based on LIBOR which was 4.3% at June 30, 2001, plus a
spread. Our combined lease payments are estimated to be approximately $3.4
million on an annual basis over the lease terms. The leases are 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 leases, we have the option to
either purchase these properties for $31.4 million
56
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and $48.6 million, respectively, or arrange for the sale of the properties to a
third party for at least $31.4 million and $48.6 million, respectively, with a
contingent liability for any deficiency. If the properties under these leases
are not purchased or sold as described above, we will be obligated for
additional lease payments of approximately $30.5 million and $41.3 million
respectively.
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, 2001.
Extreme also leases office space for its various U.S. and international
sales offices. Future payments under all noncancelable operating leases (net of
future committed sublease proceeds of $6,869 under noncancelable subleases) at
June 30, 2001 are as follows (in thousands):
Years ending June 30:
2002............... $ 7,573
2003............... 8,943
2004............... 10,074
2005............... 10,182
2006............... 6,497
Thereafter......... 17,205
-------
Total minimum payments $60,474
=======
Rent expense was approximately $11.7 million, $2.9 million and $0.7 million
for 2001, 2000 and 1999, respectively, net of sublease income of $3.6 million,
$0.3 million and $ 0.0 in the respective periods. Sublease income netted from
the amounts in the above schedule for the fiscal years 2002, 2003, 2004 and
2005 is projected to be $3.6 million, $2.1million, $0.7 million and $0.5
million, respectively.
As part of our business relationship with MCMS, one of our contract
manufacturers, we have entered into a $9.0 million equipment lease for
manufacturing equipment with a third party financing company; we in turn
sublease the equipment to MCMS.
Legal Proceedings
On March 14, 2001, Nortel Networks, Inc. and Nortel Networks Limited
(collectively, "Nortel") filed suit against us in the United States District
Court for the District of Massachusetts, Civil Action No. 01-10443EFH. The
complaint alleges willful infringement of U.S. Patent Nos. 5,790,554 (the "554
Patent"); 5,490,252; 5,408,469; 5,398,245; 5,159,595 and 4,736,363, and seeks a
judgment: (a) determining that the Company has infringed each of the six
patents; (b) permanently enjoining and restraining the Company from further
infringement of each of the six patents; and (c) awarding unspecified amounts
of trebled damages, together with interest, costs and attorneys' fees. We
answered Nortel's complaint on May 17, 2001, denying that we have infringed any
of the six patents and also asserting various affirmative defenses and
counterclaims that seek judgment: (a) that Nortel's complaint be dismissed; (b)
that each of the six patents be declared invalid; (c) declaring that we are not
infringing any of the six patents; and (d) that Nortel pay our attorneys' fees
and costs. On May 17, 2001, we also sought transfer of the action to the United
States District Court for the Northern District of California. On June 28,
2001, the court denied our motion to transfer, and the action will thus proceed
57
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in Massachusetts. On July 9, 2001, the court granted a motion by F5 Networks,
Inc. ("F5") to intervene in the action. F5 contends that it is the designer,
developer, and manufacturer of the product accused of infringing the '554
Patent of Count VI of Nortel's complaint. F5 had also sought to sever and
transfer Count VI in favor of an action concerning the '554 Patent pending
between F5 and Nortel in the United States District Court for the Western
District of Washington, but that motion was denied on July 9, 2001 without
opinion. On July 13, 2001, Nortel demanded $150 million in settlement of
alleged past damages. Discovery is proceeding. As set forth above, we have
denied Nortel's allegations and intend to defend the action vigorously. We
cannot assure you, however, that we will prevail in this litigation, which
could have a material, adverse effect on our business, financial condition and
results of operations in the future.
Extreme is subject to other legal proceedings, claims and litigation arising
in the ordinary course of business. While the outcome of these matters is
currently not determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on our
consolidated financial position, results of operations or cash flows.
5) Foreign Exchange Forward Contracts
On July 2, 2000, Extreme adopted FAS 133, which requires that all
derivatives be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives that do not qualify, or are not effective as hedges must
be recognized currently in earnings. Upon adoption, we did not hold any
derivative instruments.
Extreme sells products around the globe in US dollars but has international
operations with expenses in foreign currencies which are paid from Extreme's US
dollar cash flows. Extreme has a foreign currency cash flow hedging program to
minimize the foreign currency risk associated with the forecasted cash flows
using forward contracts with a maximum term of 90 days. If the US dollar
weakens against the foreign currencies (primarily Japanese Yen, the Euro,
Swedish Krona and the British pound), the increase in the cost of the
forecasted foreign currency denominated expenses is offset by the increase in
value of the forward contracts designated as hedges. Conversely, when the US
dollar strengthens, the decline in cost of the forecasted foreign currency cash
flows offsets the losses in the value of the forward contracts. As the critical
terms of the forward contract and the underlying exposure are matched at
inception, forward contract effectiveness is calculated by comparing the change
in the fair value of the contract to the change in fair value of the
anticipated expense, with the effective portion of the hedge recorded in
accumulated other comprehensive income (loss). Any residual change in fair
value of the instruments is recognized immediately in other income (expense),
net. No ineffectiveness was recognized in fiscal 2001. We did not hold any
forward exchange forward contracts as of June 30, 2001.
6) Stockholders' Equity
Common Stock Offerings
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.
58
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Split
On July 19, 2000 Extreme announced a two-for-one stock split in the form of
a stock dividend 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.
Preferred Stock
The number of shares of preferred stock authorized to be issued at June 30,
2001 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, 2001, no shares of preferred stock were outstanding.
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 $0.17 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 $0.69 per share, in consideration for equipment leases.
Concurrent with the initial public offering, these warrants converted into the
right to purchase an equivalent number of shares of common stock at the same
exercise price per share. In May 1999, 294,000 of the shares under these
warrants were exercised. In August 1999, the remaining 222,694 of the shares
under 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 an
equivalent number of shares of common stock at the same exercise price per
share. 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. In fiscal 2001, all
of these warrants were exercised.
As discussed in Note 3, in April 2000 in connection with the acquisition of
purchased intangibles and goodwill, 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. At June 30, 2001 all of these warrants were outstanding. These warrants
will expire in April 2002 if unexercised at that date.
Deferred Stock Compensation
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 104%. This amount will be amortized
over two years as the services are rendered. The compensation expense for the
years ended June 30, 2001 and 2000 was $841,000 and $176,000, respectively.
59
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 2001, Extreme recognized stock-based compensation expense
associated with unvested stock options issued to employees assumed in the
acquisitions of Optranet and Webstacks of $21.9 million and $2.5 million,
respectively (see Note 3). These amounts are included as a reduction of
stockholders' equity and are being amortized ratably by charges to operations
over the vesting period of the options.
Extreme recorded amortization of deferred stock compensation expense of
approximately $4.1 million, $119,000 and $172,000 for the years ended June 30,
2001, 2000 and 1999, respectively. At June 30, 2001, Extreme had a total of
approximately $20.4 million remaining to be amortized over the corresponding
vesting period of each respective option, generally four years.
Stockholders' Rights Agreement
In April 2001, the board of directors approved a Stockholders' Rights
Agreement ("Rights Agreement"), declaring a dividend of one preferred share
purchase right for each outstanding share of common stock, par value $0.001 per
share, of Extreme common stock. The Rights Agreement is intended to protect
stockholders' rights in the event of an unsolicited takeover attempt. It is not
intended to prevent a takeover of Extreme on terms that are favorable and fair
to all stockholders and will not interfere with a merger approved by the board
of directors. In the event the rights become exercisable, each right entitles
stockholders to buy, at an exercise price of $150 per right owned, a unit equal
to a portion of a new share of Extreme Series A Preferred Stock. The rights
will be exercisable only if a person or a group acquires or announces a tender
or exchange offer to acquire 15% or more of the Extreme's common stock. The
rights, which expire in April 2011, are redeemable for $0.001 per right at the
approval of the board of directors.
Comprehensive Income (Loss)
The following are the components of accumulated other comprehensive income
(loss), net of tax (in thousands):
June 30, June 30,
2001 2000
-------- --------
Unrealized gain (loss) on investments......... $710 $(615)
Foreign currency translation adjustments...... 59 (8)
---- -----
Accumulated other comprehensive income (loss) $769 $(623)
==== =====
7) Employee Benefit Plans
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
4,000,000 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, 2001,
788,797 shares were purchased under the 1999 Purchase Plan.
60
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amended 1996 Stock Option Plan
In January 1999, the board of directors approved an amendment to the 1996
Stock Option Plan (the "1996 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 1996 Plan as the "Amended 1996 Stock Option Plan."
Under the 1996 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 39,322,098 shares have been reserved under
the 1996 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 1996 Plan is ten years.
Options to purchase approximately 153,402, 1,470,286 and 4,655,558 shares of
common stock have been exercised as of June 30, 2001, 2000 and 1999,
respectively, but are subject to repurchase until vested. As of June 30, 2001,
445,483 shares were available for future grant under the 1996 Plan.
2000 Stock Option Plan
In March 2000, the board of directors adopted the 2000 Nonstatutory Stock
Option Plan (the "2000 Plan"). Options may be granted for common stock,
pursuant to actions by the board of directors, to eligible participants.
Generally, only non-officer employees are eligible to participate in this stock
plan, except that options may be granted to officers under this plan in
connection with written offers of employment. A total of 4,000,000 shares have
been reserved under the 2000 Plan. Options vest over a period of time as
determined by the board of directors, generally four years. The term of the
2000 Plan is ten years. As of June 30, 2001, 453,414 shares were available for
future grant under the 2000 Plan.
2001 Stock Option Plan
In May 2001, the board of directors adopted the 2001 Nonstatutory Stock
Option Plan (the "2001 Plan"). Options may be granted for common stock,
pursuant to actions by the board of directors, to eligible participants.
Generally, only non-officer employees are eligible to participate in this stock
plan, except that options may be granted to officers under this plan in
connection with written offers of employment. A total of 4,000,000 shares have
been reserved under the 2001 Plan. Options vest over a period of time as
determined by the board of directors, generally four years. The term of the
2001 Plan is ten years. As of June 30, 2001, 4,000,000 shares were available
for future grant under the 2001 Plan.
61
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes stock option activity under all plans:
Weighted-
Average
Number of Exercise Price
Shares Per Share
---------- --------------
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
Granted.......................... 11,777,681 $33.27
Exercised........................ (2,128,206) $ 7.56
Canceled......................... (3,067,210) $33.35
----------
Options outstanding at June 30, 2001 24,977,373 $27.69
==========
In connection with the acquisitions of Optranet and Webstacks, Extreme has
assumed the stock option plans of each company. During fiscal 2001, a total of
approximately 608,401 and 115,676 shares of Extreme's common stock have been
reserved for issuance under the assumed plans of Optranet and Webstacks,
respectively, and the related options have been included as granted in fiscal
2001 in the preceding table. Options to purchase approximately 368,358 and
987,119 shares of common stock have been exercised under the Optranet and
Webstacks plans, respectively, as of June 30, 2001 but are subject to
repurchase until vested.
The following table summarizes significant ranges of outstanding and
exercisable options at June 30, 2001:
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price
------------------------ ----------- ---------------- --------- ----------- ---------
(In years)
$ 0.01 -- 5.00 4,686,188 7.10 $ 2.80 4,679,771 $ 2.80
$14.57 -- 14.57 5,942,046 9.44 $14.57 16,664 $14.57
$18.02 -- 33.31 6,529,627 8.37 $30.20 2,200,205 $30.85
$33.56 -- 47.47 5,258,162 8.80 $39.86 1,131,190 $36.15
$47.50 -- 100.69 2,561,350 9.02 $72.30 126,820 $52.85
---------- ---------
$ 0.01 -- 100.69 24,977,373 8.54 $27.69 8,154,650 $15.80
========== =========
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.
Stock-Based Compensation
Extreme has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") requires the
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB No. 25, 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 is recognized in Extreme's
financial statements.
62
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(Continued)
Pro forma information regarding net income and earnings per share is
required by FAS 123. This information is required to be determined as if
Extreme had accounted for its employee stock options and shares issued under
the 1999 Employee Stock Purchase Plan under the fair value method of that
statement. The fair value of options granted in 2001, 2000 and 1999 reported
below was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
Stock Option Plan Employee Stock Purchase Plan
----------------------- ----------------------------
Years Ended June 30, Years Ended June 30,
----------------------- ----------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------- ------- --------
Expected life.......... 3.1 yrs 3.4 yrs 3.5 yrs 0.6 yrs 0.6 yrs 0.7 yrs.
Risk-free interest rate 5.3% 6.3% 5.1% 4.1% 5.4% 5.0%
Volatility............. 134% 112% 55% 134% 112% 55%
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
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. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because Extreme's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of employee stock options. The weighted-average
estimated fair value of options granted in the years ended June 30, 2001, 2000
and 1999 was $25.82 $24.23 and $2.21, respectively. The weighted-average
estimated fair value of shares granted under the 1999 Purchase Plan in the
years ended June 30, 2001, 2000 and 1999 was $18.91, $7.51 and $2.81,
respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Pro forma
information follows (in thousands, except per share amounts):
Years Ended June 30,
----------------------------
2001 2000 1999
--------- -------- -------
Pro forma net loss under FAS 123............. $(216,018) $(31,088) $(4,066)
Net loss per share - pro forma under FAS 123:
Basic and diluted......................... $ (2.18) $ (0.32) $ (0.22)
The pro forma impact of options on the net loss for the years ended June 30,
2001, 2000 and 1999 is not representative of the effects on net income (loss)
for future years as future years will include the effects of additional years
of stock option grants.
401(k) Plan
Extreme provides a tax-qualified employee savings and retirement plan,
commonly known as a 401(k) plan (the "Plan"), which covers our eligible
employees. Pursuant to the Plan, employees may elect to reduce their current
compensation up to the lesser of 20% or the statutorily prescribed limit of
$10,500 for calendar years 2000 and 2001. The amount of the reduction is
contributed to the 401(k) plan on a pre-tax basis.
63
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Extreme provides for discretionary matching contributions as determined by
the board of directors for each calendar year. As of September 2000, the board
of directors set the match at $0.25 for every dollar contributed by the
employee up to the first 4% of pay. The same level of match was continued
during the 2001 calendar year. All matching contributions vest immediately
effective September 2000. In addition, the Plan provides for discretionary
contributions as determined by the board of directors each year. Extreme's
matching contributions to the Plan totaled $378,391 for the fiscal year ended
June 30, 2001. No discretionary contributions were made in fiscal 2001, 2000,
or 1999.
8) Income Taxes
The provision for (benefit from) income taxes for the years ended June 30,
2001, 2000 and 1999 consists of the following (in thousands):
Years Ended June 30,
--------------------------
2001 2000 1999
-------- -------- ------
Current:
Federal............................... $ 5,234 $ 24,811 $ 350
State................................. 823 2,026 200
Foreign............................... 1,560 306 1,100
-------- -------- ------
Total current............................ $ 7,617 $ 27,143 $1,650
======== ======== ======
Deferred:
Federal............................... $(25,477) $(15,497) $ --
State................................. (4,808) (1,325) --
-------- -------- ------
Total deferred........................... $(30,285) $(16,822) $ --
======== ======== ======
Provision for (benefit from) income taxes $(22,668) $ 10,321 $1,650
======== ======== ======
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 $45.0 million and $21.6 million for the fiscal years
ended June 30, 2001 and 2000, respectively. Such benefit was credited to
additional paid-in capital.
Pretax income (loss) from foreign operations was $649,000, $(10.7 million)
and $(7.0 million) in the fiscal years ended June 30, 2001, 2000 and 1999,
respectively.
64
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The difference between the provision (benefit) for income taxes and the
amount computed by applying the Federal statutory income tax rate (35 percent)
to income (loss) before taxes is explained below (in thousands):
Years Ended June 30,
-------------------------
2001 2000 1999
-------- ------- ------
Tax at federal statutory rate (benefit).... $(32,043) $10,666 $ 11
State income tax........................... (2,739) 1,018 200
Federal alternative minimum taxes.......... -- -- 350
Foreign taxes.............................. -- 69 1,100
Unbenefited (utilized) net operating losses -- (773) (11)
Tax credits................................ (1,209) (1,576) --
Valuation allowance decrease............... -- (5,148) --
Unbenefited foreign loss................... 1,187 3,974 --
Nondeductible goodwill..................... 1,894 -- --
Nondeductible in-process R&D............... 10,555 -- --
Other...................................... (313) 2,091 --
-------- ------- ------
Total................................... $(22,668) $10,321 $1,650
======== ======= ======
Significant components of Extreme's deferred tax assets are as follows (in
thousands):
As of June 30,
----------------
2001 2000
------- -------
Deferred tax assets:
Net operating loss carryforwards..................... $27,948 $ 431
Tax credit carryforwards............................. 10,183 2,358
Depreciation......................................... 1,085 1,951
Deferred revenue..................................... 8,859 3,545
Warrant amortization................................. 13,200 2,673
Inventory reserves................................... 9,799 734
Other reserves and accruals.......................... 13,484 6,708
------- -------
Total deferred tax assets............................... 84,558 18,400
Deferred tax liability - acquisition related intangibles (8,675) --
------- -------
Net deferred tax assets................................. $75,883 $18,400
======= =======
The net valuation allowance decreased by $8.5 million during the year ended
June 30, 2000.
As of June 30, 2001, Extreme had net operating loss carryforwards for
federal and state tax purposes of approximately $74.1 million and $38.0
million, respectively. Extreme also had federal and state tax credit
carryforwards of approximately $6.6 million and $5.4 million, respectively.
Unused net operating loss and tax credit carryforwards will expire at various
dates beginning in the years 2004 and 2012, respectively.
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.
65
EXTREME NETWORKS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9) Other Operating Expenses
Other operating expenses for fiscal 2001 consists of a write-off of acquired
in-process research and development of $30.2 million and a restructuring charge
of $5.9 million.
Extreme recorded in-process research and development charges of $13.4
million related to the purchase of Optranet on January 31, 2001 and $16.8
million related to the purchase of Webstacks on March 7, 2001. The value
assigned to purchased in-process research and development was determined
through valuation techniques generally used by appraisers in the
high-technology industry and was immediately expensed in the period of
acquisition because technological feasibility had not been established and no
alternative use had been identified. The charges are discussed in more detail
in Note 3.
In March 2001, we implemented a restructuring plan in order to lower our
overall cost structure. In connection with the restructuring, we reduced our
headcount and consolidated facilities. The restructuring expense included $2.3
million for the write-off and write-down in carrying value of Summit based
equipment, $1.8 million for severance and benefits for approximately 100
terminated employees and $1.8 million in facility closure expenses. The number
of temporary employees and contractors used by us was also reduced. The
following analysis sets forth the significant components of the restructuring
reserve at June 30, 2001 (in thousands):
Severance Facility
Equipment and Benefits Closure Total
--------- ------------ -------- -------
Restructuring charge............ $ 2,321 $ 1,848 $1,772 $ 5,941
Cash charge..................... -- (1,848) (29) (1,877)
Non-cash charge................. (2,321) -- -- (2,321)
------- ------- ------ -------
Reserve balance at June 30, 2001 $ -- $ -- $1,743 $ 1,743
======= ======= ====== =======
10) Subsequent Event
Beginning on July 6, 2001, multiple purported securities fraud class action
complaints were filed in the United States District Court for the Southern
District of New York. We are aware of at least two such complaints, Capuano v.
Morgan Stanley & Co., Inc., et al, No. 01 CV 6148 (S.D.N.Y. July 6, 2001)
(which does not name us or our officers or directors as defendants) and Hui v.
Extreme Networks, Inc., et al., No. 01 CV 6700 (S.D.N.Y. July 23, 2001). The
complaints are brought purportedly on behalf of all persons who purchased our
common stock from November 17, 1999 through December 6, 2000. The Hui complaint
names as defendants Extreme Networks and certain of our present and former
officers; and several investment banking firms that served as underwriters of
our initial public offering. It alleges liability under Sections 11 and 15 of
the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, on the grounds that the registration statement for the
offering did not disclose that: (1) the underwriters had agreed to allow
certain customers to purchase shares in the offering in exchange for excess
commissions paid to the underwriters; and (2) the underwriters had arranged for
certain customers to purchase additional shares in the aftermarket at
pre-determined prices. We are aware that similar allegations have been made in
lawsuits challenging over 140 other initial public offerings conducted in 1999
and 2000. No specific damages are claimed. We believe that the allegations
against us and the officers are without merit, and intend to contest them
vigorously. We cannot assure you, however, that we will prevail in this
litigation. Failure to prevail could have a material adverse effect on our
consolidated financial position, results of operations and cash flows in the
future.
66
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, 20002001 and 1999,2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2000.2001. 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, 20002001 and 1999,2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2000,2001, 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.
ErnstERNST & YoungYOUNG LLP
Palo Alto, California
July 18, 2000, except for Note 9, as to which the date is August 24, 2000
3316, 2001
67
EXTREME NETWORKS, INC.
CONSOLIDATED BALANCE SHEETSQUARTERLY FINANCIAL DATA
(In thousands, except share and per share amounts)
ASSETS(unaudited)
June 30, ---------------------Mar. 31, Dec. 31, Sept. 30,
2001 2001 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):
Net revenue...................................... $115,069 $112,106 $144,715 $119,342
Gross profit..................................... 59,565 14,242 74,941 61,252
Total operating expenses......................... 76,945 111,618 65,343 57,987
Operating income (loss).......................... (17,380) (97,376) 9,598 3,265
Net income (loss)................................ (11,363)(2) (70,115)(3) 8,062(4) 4,533(4)
Net income (loss) per share--basic (1)........... $ (0.10)(2) $ (0.64)(3) $ 0.08(4) $ 0.04(4)
Net income (loss) per share--diluted (1)......... $ (0.10)(2) $ (0.64)(3) $ 0.07(4) $ 0.04(4)
Shares used in per share calculation--basic (1).. 111,114 109,028 107,283 105,990
Shares used in per share calculation--diluted (1) 111,114 109,028 118,745 118,892
Years Ended
June 30, --------------------Mar. 31, Dec. 31, Sept. 30,
2000 2000 1999 1998
---- ---- ----1999
-------- -------- -------- ---------
Pro forma net loss under FAS 123...................................
Net revenue...................................... $ (31,088)92,422 $ (4,066)67,310 $ (14,053)55,006 $ 47,218
Gross profit..................................... 46,254 35,339 28,846 24,601
Total operating expenses......................... 49,621 25,806 22,846 20,512
Operating income (loss).......................... (3,367) 9,533 6,000 4,089
Net lossincome....................................... 589(5) 9,057 6,355 4,047
Net income per commonshare--basic (1).................. $ 0.01(5) $ 0.09 $ 0.06 $ 0.04
Net income per share--diluted (1)................ $ 0.01(5) $ 0.08 $ 0.06 $ 0.04
Shares used in per share - pro forma under FAS 123:
Basic and diluted............................................... $ (0.32) $ (0.22) $ (1.61)calculation--basic (1).. 104,590 103,060 100,362 94,052
Shares used in per share calculation--diluted (1) 112,532 113,584 111,726 107,166
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--------
(1)Share and per share data have been restated to give retroactive effect to thisa
two-for-one stock split.split in the form of a stock dividend effected in August
2000.
(2)Net loss and net loss per share include amortization of goodwill, purchased
intangible assets and deferred stock compensation of $15.4 million and
restructuring charges of $2.1 million.
(3)Net loss and net loss per share include certain inventory charges of $40.3
million, in-process research and development of $30.1 million, amortization
of goodwill and purchased intangible assets of $8.2 million and
restructuring charges of $3.8 million.
(4)Net income and net income per share include amortization of goodwill and
purchased intangible assets of $6.9 million.
(5)Net income and net income per share include amortization of goodwill and
purchased intangible assets of $6.8 million.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
68
PART III
Certain information required by Part III is incorporated by reference from
the Company'sExtreme's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for
the
Company's 2000Extreme's 2001 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-Election1--Election of Directors" in
the Proxy Statement. The required information concerning executive officers of
the CompanyExtreme 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-Election1--Election of
Directors --
Directors'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- Election1--Election of
Directors-
SecurityDirectors--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:
69
The following financial statement schedule of Extreme Networks, Inc. for the
years ended June 30, 2001, 2000 1999 and 19981999 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
Reference
Page
---------
Schedule II -- Valuation and Qualifying Accounts 73
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
70
(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
Incorporated by
Reference
Exhibit ----------------------- Filed
Number Description of Document Form Date Number Herewith
------ --------------------------------------------------------- ------- -------- ------ --------
2.1 Form of Agreement and Plan of Merger between
Extreme Networks, a California corporation, and
Extreme Networks, Inc., a Delaware corporation........... S -1/A 03/11/99 2.1
3.1 Certificate of Incorporation of Extreme Networks, Inc., a
Delaware Corporation..................................... S - 1 02/05/99 3.1
3.2 Form of Certificate of Amendment of Certificate of
Incorporation of Extreme Networks, Inc., a Delaware
Corporation.............................................. S - 1 02/05/99 3.2
3.4 Amended and Restated Bylaws of Extreme Networks,
Inc...................................................... 8 - K/A 06/07/01 3.4
3.5 Restated Certificate of Incorporation of Extreme
Networks, Inc............................................ X
3.6 Certificate of Amendment of Restated Certificate of
Incorporation of Extreme Networks, Inc................... X
3.7 Certificate of Designation, Preferences and Rights of the
Terms of the Series A Preferred Stock.................... X
4.1 Second Amended and Restated Rights Agreement dated
January 12, 1998 between Extreme Network and certain
stockholders............................................. S - 1 02/05/99 4.1
4.2 Registration Rights Agreement............................ S - 3 04/11/01 4.1
10.1 Form of Indemnification Agreement for directors and
officers................................................. S - 1 02/05/99 10.1
10.2* Amended 1996 Stock Option Plan and forms of
agreements thereunder.................................... S - 1 02/05/99 10.2
10.3* 1999 Employee Stock Purchase Plan........................ S - 1 02/05/99 10.3
10.4 Sublease, dated June 5, 1997 between NetManage, Inc.
and Extreme Networks, Inc., a California corporation, to
Master Lease, dated September 30, 1994, between
Cupertino Industrial Associates and NetManage, Inc....... S - 1 02/05/99 10.4
10.5 Sublease, dated January 1, 1999 between Apple
Computer, Inc., a California corporation, and Extreme
Networks, Inc., a California corporation, to Lease
Agreement, as amended.................................... S - 1/A 03/11/99 10.5
10.6 Form of Warrant to Purchase Common Stock between
3Com Corporation and Extreme Networks, Inc............... 10 - K 06/30/00 10.6
10.7* Form of 2000 Nonstatutory Stock Option Plan.............. 10 - K 06/30/00 10.7
71
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).
_____________
Incorporated by
Reference
Exhibit ---------------------- Filed
Number Description of Document Form Date Number Herewith
------ -------------------------------------------------------- ------ -------- ------ --------
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 - K 06/30/00 10.8
10.9 Form of Lease Agreement (Improvements) dated June
1,2000, executed by and between BNPLC and Extreme....... 10 - K 06/30/00 10.9
10.10 Form of Purchase Agreement (Land) dated to be effective
as of June 1, 2000, executed by and between BNPLC and
Extreme................................................. 10 - K 06/30/00 10.10
10.11 Form of Purchase Agreement (Improvements) dated to be
effective as of June 1, 2000, executed by and between
BNPLC and Extreme....................................... 10 - K 06/30/00 10.11
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 - K 06/30/00 10.12
10.13 Form of Pledge Agreement (Improvements) dated to be
effective as of June 1, 2000, among BNPLC, BNP Paribas
(as Agent), and Extreme................................. 10 - K 06/30/00 10.13
10.14 Exhibit 10.14 Lease agreement dated July 28, 2000
between San Tomas Properties LLC, a Delaware limited
liability company, as Landlord, and Extreme Networks,
Inc, a Delaware Corporation, as Tenant.................. 10 - Q 09/30/00 10.14
21.1 Subsidiaries of Registrant.............................. X
23.1 Consent of Ernst and Young LLP, Independent Auditors.... X
24.1 Power of Attorney (see page 74 of this Form 10-K)....... X
* Indicates managementmanagment 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:
NoExtreme filed the following reports on formForm 8-K were filed by the Company during the three months
ended June 30, 2000.
512001:
Date of Report: Item(s): Description:
--------------- -------- ------------
April 6, 2001 5,7 EXTREME announced financial results for its third quarter
ended March 31, 2001 and included the press release relating
thereto.
May 14, 2001 5,7 EXTREME announced the adoption of a Stockholder Rights
Plan pursuant to which rights will be distributed as a dividend
at the rate of one right for each share of the company's
common stock held by stockholders of record as of the close of
business on May 14, 2001.
May 15, 2001 5 EXTREME amended the Form 8-K filed on May 14, 2001 for
the purpose of filing certain exhibits to Exhibit 4.2.
June 7, 2001 5,7 EXTREME amended and restated the Form 8-K filed on
May 14, 2001 for the purpose of correcting certain exhibit
numbers.
72
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2001, 2000 1999 AND 19981999
(In thousands)
Reversals
Balance at Charged to to costs Balance at
beginning costs and and end of
Description of period expenses expenses (Deductions) period
----------- ---------------------- ---------- --------- ------------ ---------- -------------- -----------
Year Ended June 30, 1999:
Allowance for doubtful accounts
2000.........................accounts............. $ 433 $ 1,364 $-- $ (423) $ 1,374
Allowance for excess and obsolete inventory. $ 145 $ 1,087 $-- $ (292) $ 940
Year Ended June 30, 2000:
Allowance for doubtful accounts............. $1,374 $ -- $ --$-- $ (137) $ 1,237
1999......................... 433 1,364 -- (423) 1,374
1998......................... -- 470 -- (37) 433Allowance for excess and obsolete inventory. $ 940 $ 1,144 $-- $ (155) $ 1,929
Year Ended June 30, 2001:
Allowance for doubtful accounts............. $1,237 $ 5,274 $-- $(4,569) $ 1,942
Allowance for excess and obsolete inventory. $1,929 $32,753 $(9,771) $24,911
5273
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, 2000.26,
2001.
EXTREME NETWORKS, INC.
(Registrant)
By: /s/ GORDON/s/ HAROLD L. STITT
-------------------------------------
GordonCOVERT
Harold L. StittCovert
Vice President
Chief ExecutiveFinancial Officer
Chairman of the Board
September 28, 200026, 2001
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,Harold L. Covert, 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/s/ GORDON L. STITT /s/ PROMOD HAQUE
-------------------------------------------- -------------------
Gordon L. Stitt Promod Haque
President, Chief Executive Officer Director
Chairman of the Board September 26, 2001
September 26, 2001
/s/ HAROLD L. COVERT /s/ LAWRENCE K. ORR
-------------------------------------------- -------------------
Harold L. Covert Lawrence K. Orr
Vice President & Chief Financial Officer Director
(Principal Financial and Accounting Officer) September 26, 2001
September 26, 2001
/s/ CHARLES CARINALLI /s/ PETER WOLKEN
-------------------------------------------- -------------------
Charles Carinalli Peter Wolken
Director Director
September 26, 2001 September 26, 2001
74
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).
____________
Incorporated By
Reference
Exhibit --------------------- Filed
Number Description of Document Form Date Number Herewith
------- ----------------------- ----- -------- ------ --------
2.1 Form of Agreement and Plan of Merger between Extreme S-1/A 03/11/99 2.1
Networks, a California corporation, and Extreme Networks,
Inc., a Delaware corporation.
3.1 Certificate of Incorporation of Extreme Networks, Inc., a S-1 02/05/99 3.1
Delaware Corporation.
3.2 Form of Certificate of Amendment of Certificate of S-1 02/05/99 3.2
Incorporation of Extreme Networks, Inc., a Delaware
Corporation.
3.4 Amended and Restated Bylaws of Extreme Networks, Inc. 8-K/A 06/07/01 3.4
3.5 Restated Certificate of Incorporation of Extreme Networks, X
Inc.
3.6 Certificate of Amendment of Restated Certificate of X
Incorporation of Extreme Networks, Inc.
3.7 Certificate of Designation, Preferences and Rights of the X
Terms of the Series A Preferred Stock
4.1 Second Amended and Restated Rights Agreement dated S-1 02/05/99 4.1
January 12, 1998 between Extreme Network and certain
stockholders.
4.2 Registration Rights Agreement S-3 04/11/01 4.1
10.1 Form of Indemnification Agreement for directors and officers. S-1 02/05/99 10.1
10.2* Amended 1996 Stock Option Plan and forms of agreements S-1 02/05/99 10.2
thereunder.
10.3* 1999 Employee Stock Purchase Plan. S-1 02/05/99 10.3
10.4 Sublease, dated June 5, 1997 between NetManage, Inc. and S-1 02/05/99 10.4
Extreme Networks, Inc., a California corporation, to Master
Lease, dated September 30, 1994, between Cupertino
Industrial Associates and NetManage, Inc.
10.5 Sublease, dated January 1, 1999 between Apple Computer, S-1/A 03/11/99 10.5
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 10-K 06/30/00 10.6
Corporation and Extreme Networks, Inc.
10.7* Form of 2000 Nonstatutory Stock Option Plan. 10-K 06/30/00 10.7
10.8 Form of Lease Agreement (Land) dated June 1, 2000 by and 10-K 06/30/00 10.8
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, 10-K 06/30/00 10.9
executed by and between BNPLC and Extreme.
10.10 Form of Purchase Agreement (Land) dated to be effective as of 10-K 06/30/00 10.10
June 1, 2000, executed by and between BNPLC and Extreme.
10.11 Form of Purchase Agreement (Improvements) dated to be 10-K 06/30/00 10.11
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 10-K 06/30/00 10.12
June 1, 2000, among BNPLC, BNP Paribas (as Agent), and
Extreme.
10.13 Form of Pledge Agreement (Improvements) dated to be 10-K 06/30/00 10.13
effective as of June 1, 2000, among BNPLC, BNP Paribas (as
Agent), and Extreme.
10.14 Exhibit 10.14 Lease agreement dated July 28, 2000 between 10-Q 09/30/00 10.14
San Tomas Properties LLC, a Delaware limited liability
company, as Landlord, and Extreme Networks, Inc, a
Delaware Corporation, as Tenant.
21.1 Subsidiaries of Registrant. X
23.1 Consent of Ernst and Young LLP, Independent Auditors. X
24.1 Power of Attorney (see page 74 of this Form 10-K). X
--------
* 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).75