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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 2, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 333-71921
Extreme Networks, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 77-0430270
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3585 Monroe Street 95051
Santa Clara, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 579-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $9,892,125,000 as of September 15, 2000, based upon
the closing price on the Nasdaq National Market reported for such date. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purpose.
109,912,500 shares of the Registrant's Common stock, $.001 par value, were
outstanding September 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11,12 and 13 of Part III incorporate by
reference information from the Registrant's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Registrant's 2000 Annual Meeting of Stockholders.
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EXTREME NETWORKS, INC.
FORM 10-K
INDEX
Page
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PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security holders 14
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters 16
Item 6. Selected Consolidated Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 49
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and Management 50
Item 13. Certain Relationships and Related Transactions 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 50
SIGNATURES 53
PART I
Item 1. Business.
When used in this Report, the words "may," "should," "believes," "expects,"
"anticipates," "estimates" and similar expressions are intended to identify
forward-looking statements. Such statements, which include statements concerning
the availability and functionality of products under development, product mix,
pricing trends, the mix of export sales, sales to significant customers and the
availability and cost of products from the Company's suppliers, are subject to
risks and uncertainties, including those set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Factors That May Affect Our Results." Our actual results could differ materially
from those projected in these forward-looking statements which could have a
material adverse effect on our business, operating results and financial
condition. These forward-looking statements speak only as of the date hereof and
there may be events in the future that we are not able to predict accurately or
over which we have no control.
Overview
Extreme Networks, Inc. ("Extreme" or "the Company") is a leading provider
of broadband ethernet networking solutions for the Internet economy. The key
advantages of our ethernet switching solutions are increased performance, the
ability to easily grow, or "scale," in size as customer needs change, flexible
allocation of network resources, ease of use and lower cost of ownership. These
advantages are obtained through the use of custom semiconductors, known as
ASICs, in our products and through designs that are common and uniform across
our product line. The routing of network traffic, a function referred to as
Layer 3 switching, is done primarily with ASICs in our products, and
consequently, is faster than the software implementations used in many competing
products. Traditional Layer 3 products rely primarily on software which can slow
traffic speeds below those which could otherwise be achieved and result in
message packets being lost when network traffic is high. Our products
incorporate an ASIC-based, wire-speed architecture and are designed to avoid the
loss of message packets in the switch, or "non-blocking." As a result, our
products are less expensive than software-based routers, yet offer improved
performance throughout the network.
Industry Background
Businesses and other organizations have become increasingly dependent on
the internet as their central communications infrastructure to provide
connectivity for internal and external communications. New mission-critical
computing applications, such as enterprise resource planning, large enterprise
databases and sophisticated on-line connections with vendors, as well as the
increased use of traditional applications, such as e-mail, require significant
information technology resources. The emergence of the desktop browser as a user
interface has enabled bandwidth-intensive applications that contain voice, video
and graphics to be used extensively through intranets and externally through
extranets. These new applications, combined with the growth in business-to-
business e-commerce and other on-line transactions, mobile communications and
application service providers for example, are further burdening the network
infrastructure.
Today's Networking Environments
LANs. LANs have traditionally been designed for client/server applications,
where traffic patterns were predictable and traffic loads are relatively stable.
In this environment, the majority of traffic remained within a given workgroup,
with only a small percentage traveling across the high traffic portion of a LAN
which interconnects all or a large part of the LAN. The increased use of
data-intensive, mission-critical applications, the widespread implementations of
intranets and extranets, and the ubiquity of Internet technologies have created
unpredictable traffic patterns, and unpredictable traffic loads within the LAN.
In addition, as users utilize the desktop browser and Internet technologies to
access significant amounts of information from servers located inside and
outside of the organization, a much higher percentage of traffic crosses the
enterprise LAN backbone. For example, an employee can make a simple request that
may require data to be downloaded and analyzed from multiple data warehouses
outside his or her local workgroup, resulting in increased traffic across the
LAN. Similarly, multiple users could request a multimedia presentation from a
company intranet or from the Internet consuming tremendous amounts of network
capacity. Either of these situations could result in users overwhelming a
company's enterprise LAN unknowingly. As a result, the increased traffic,
bandwidth-intensive applications and unpredictable traffic patterns are
straining traditional LAN environments and reducing the performance of
mission-critical applications.
Early LANs supported limited numbers of users and used a variety of
protocols to organize the transmission of data, including Ethernet, Token Ring
or AppleTalk technologies. As the number of users and the amount of traffic on a
network grew, network performance began to decline. In this shared environment,
each desktop received and was burdened by the communication of every other
desktop. The need to improve network performance was initially addressed by
adding network devices known as bridges or hubs
3
that separated the entire LAN into smaller workgroups. This arrangement was
effective in supporting the traditional client/server environment where the
majority of traffic remained within the workgroup. As applications became more
bandwidth-intensive and users increasingly communicated outside of their
workgroup, bridges and hubs were unable to process this traffic effectively. To
mitigate this problem, Layer 2 switches were developed to provide a dedicated
link for each desktop and eliminate the unnecessary flow of information to every
desktop. In addition to the evolution of new devices, the need for increased
backbone speeds led to the development of new and faster technologies such as
FDDI, Fast Ethernet and ATM. However, each of these technologies employs
different protocols, further complicating the LAN by requiring software-based
routers that use expensive CPUs and software tables to route this multi-protocol
traffic. Today, it is not uncommon to find multiple protocols and devices across
the enterprise network.
A network must be scalable in the following four dimensions:
Speed. Speed refers to the number of bits per second that can be
transmitted across the network. Today's network applications increasingly
require speeds of up to 100 Mbps to the desktop. Hence, the backbone and server
connections that aggregate traffic from desktops require speeds well in excess
of 100 Mbps. Wire speed refers to the ability of a network device to process an
incoming data stream at the highest possible rate without loss of packets. Wire
speed routing refers to the ability to perform Layer 3 switching at the maximum
possible rate.
Bandwidth. Bandwidth refers to the volume of traffic that a network or a
network device can handle before traffic is "blocked," or unable to get through
without interruption. When traffic was more predictable, the amount of traffic
across a network link or through a network device grew basically in line with
the number of users on the network. With today's data-intensive applications
accessed in random patterns from within and outside of the network, users can
spike traffic unpredictably, consuming significant bandwidth to the detriment of
other users.
Network size. Network size refers to the number of users and servers that
are connected to a network. Today's networks must be capable of connecting and
supporting up to thousands, and even tens of thousands, of users and servers
while providing performance and reliable connectivity.
Quality of service. Quality of service refers to the ability to control the
delivery of traffic based upon its level of importance. Mission-critical
enterprise and delay-sensitive multimedia applications require specific
performance minimums, while traffic such as general e-mail and Internet surfing
may not be as critical. In addition to basic standards-based prioritization of
traffic according to importance, true end-to-end quality of service would
allocate bandwidth to specified applications.
Opportunity for Next Generation Switching Solutions
The emergence of several technology trends is enabling a new generation of
networking equipment that can meet the four scalability dimensions of today's
enterprise ISPs and metropolitan area networks by accommodating new
unpredictable traffic patterns and bandwidth-intensive, mission-critical
applications. First, while many new and different technologies have been
deployed in existing LANs, Ethernet has become the predominant LAN technology,
with over 97% of the market in 1999 and total shipments of over 490 million
ports from 1991 to 1999, according to the Dell'Oro Group. Ethernet has evolved
from the original 10 Mbps Ethernet to 100 Mbps Fast Ethernet and, in 1998, to
1,000 Mbps Gigabit Ethernet. Today, Gigabit ethernet and 10 gigabit ethernet
represent a viable network backbone protocol, enabling broadband connections to
be aggregated for network backbone transport across the metropolitan core.
Second, growth of the Internet and the subsequent development of application
based on Internet technologies have increased the use of the Internet Protocol.
With the wide acceptance of Ethernet and Internet Protocol-based
technologies, the need to support a multi-protocol environment is diminished. As
a result, the simplified routing functionality can be embedded in application
specific integrated circuits, or ASICs, instead of in the software and CPUs used
in multi-protocol software-based routers. The resulting device, called a Layer 3
switch,
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functions as a less expensive and significantly faster hardware-based router.
Layer 3 switches can operate at multi-gigabit speeds and, as hardware routers,
can support large networks. However, most Layer 3 switches still block traffic
in high utilization scenarios and can only support standards-based traffic
prioritization quality of service. While Layer 3 switching dramatically
increases network performance, many of today's offerings fail to realize the
potential of this technology because of the use of inconsistent hardware,
software and management architectures.
To effectively address the needs of today's enterprise ISPs and metro area
networks, customers need a solution that is easy to use and implement an can
scale in terms of speed, bandwidth, network size and quality of service. Layer 3
switching represents the next critical step in addressing these requirements.
However, customers need a Layer 3 solution that provides sufficient bandwidth to
support unpredictable traffic spikes without impacting all other users connected
to the network. In addition, customers require a quality of service solution
that supports industry-standard prioritization and enables network
administrators to offer quality of service that maps business processes and
network policies. Finally, to simplify their networks, customers need a family
of interoperable devices that utilize a consistent hardware, software and
management architecture. Through an integrated family of products, network
managers can effectively deploy the solution at any point in the network and
follow a migration path to a network implemented with a consistent architecture
from end-to-end.
The Extreme Networks Solution
Extreme provides broadband ethernet networking solutions that meet the
requirements of enterprise,ISPs and Metropolitan Area Networks by providing
increased performance, scalability, policy-based quality of service, ease of use
and lower cost of ownership. Our products share a common ASIC, software and
network management architecture that enables Layer 3 switching at wire speed in
each major area of the network. In addition, these products can be utilized by
ISPs and content providers for their web-hosting and server co-location
operations. Because our products are based on industry standard routing and
network management protocols, they are interoperable with existing network
infrastructures. We offer policy-based quality of service that controls the
delivery of network traffic according to pre-set policies that specify priority
and bandwidth limits. All of our switches allow the switch to be managed from
any browser-equipped desktop.
The key benefits of Extreme's solutions are:
High performance. Our products provide Broadband and IP services Ethernet
together with the non-blocking, wire-speed routing of our ASIC-based Layer 3
switching. Using our products, customers can achieve forwarding rates that are
up to 100 times faster than with software-based routers.
Ease of use and implementation. Our products share a common ASIC, software
and network management architecture and offer consistent features for each of
the key areas of the network. Our standard-based products can be integrated into
and installed within existing networks. Customers can upgrade with Extreme
products without needing additional training. ExtremeWare software simplifies
network management by enabling customers to manage any of our products remotely
through a browser interface.
Scalability. Our solutions offer customers the speed and bandwidth they
need today with the capability to scale their networks to support demanding
applications in the future without the burden of additional training or software
or system complexity. Customers who purchase our products can upgrade them to
advanced Layer 3 and Layer 4-7 capability because this functionality is built
into our ASICs.
Quality of service. Extreme's policy-based quality of service enables
customers to prioritize mission-critical applications by providing
industry-leading tools for allocating network resources to specific
applications. With our policy-based quality of service, customers can use a
web-based interface to identify and control the delivery of traffic from
specific applications in accordance with specific policies that are set by the
customer. The quality of service functionality of our ASICs allows our
policy-based quality of service to be performed at wire speed. In addition to
providing priority, customers can allocate specified amounts of bandwidth to
specific applications or users.
Lower cost of ownership. Our products are less expensive than
software-based routers, yet offer higher routing performance. Because they share
a common hardware, software and management architecture, we believe our products
can substantially reduce the cost and complexity of network management and
administration. This uniform architecture creates a simpler network
infrastructure which leverages the knowledge and resources businesses have
invested in Ethernet and the Internet Protocol, thereby requiring fewer
resources and less time to maintain.
5
The Extreme Networks Strategy
Extreme's objective is to be the leading supplier of end-to-end network
solutions. The key elements of our strategy include:
Provide easy to use, high-performance, cost-effective switching solutions.
We offer customers easy to use, powerful, cost-effective switching solutions
that meet the specific demands of switching environments in enterprise LANs,
ISPs and content providers. Our products provide customers with 1,000 Mbps
Gigabit Ethernet and the wire speed, non-blocking routing capabilities of
ASIC-based Layer 3 switching. We intend to capitalize on our expertise in
Ethernet, Internet protocol ("IP") and switching technologies to develop new
products based on our common architecture that meet the future requirements of
enterprise LANs, ISPs and content providers. These products will offer higher
performance with more advanced functionality and features while continuing to
reduce total cost of ownership for our customers.
Expand market penetration. We are focused on product sales to new customers
across market segments, including ISPs, content providers and metropolitan area
networks, or MANs, and on extending our product penetration within existing
customers' networks. Once a customer buys our products for one area of their
network, our strategy is to then offer that customer products for other areas.
As additional products are purchased, a customer obtains the increased benefits
of our end-to-end solution by simplifying their networks, extending policy-based
quality of service and reducing costs of ownership while increasing performance.
Extend switching technology leadership. Our technological leadership is
based on our custom ASICs and software and includes our wire-speed, Layer 3
switching, policy-based quality of service, routing protocols and ExtremeWare
software. We intend to invest our engineering resources in ASIC and other
development areas and provide leading edge technologies to increase the
performance and functionality of our products. We also intend to maintain our
active role in industry standards committees such as IEEE and IETF.
Leverage and expand multiple distribution channels. We distribute our
products primarily through resellers and selected OEMs and through our field
sales team. To quickly reach a broad, worldwide audience, we have more than 250
resellers in 50 countries, including regional networking system resellers,
network integrators and wholesale distributors, and have established
relationships with select OEMs. We maintain a field sales force primarily to
support our resellers and to focus on select strategic and large accounts. We
intend to increase the size of our reseller programs and are developing two tier
distribution channels in some regions. To complement and support our domestic
and international reseller and OEM channels, we expect to increase our worldwide
field sales force.
Provide high-quality customer service and support. We seek to enhance
customer satisfaction and build customer loyalty through the quality of our
service and support. We offer a wide range of standard support programs that
include emergency telephone support 24 hours a day, seven days a week and
advanced replacement of products. In addition, we have designed our products to
allow easy service and administration. For example, we can access all of our
switches remotely through a standard web browser to configure, troubleshoot and
help maintain our products. We intend to continue to enhance the ease of use of
our products and invest in additional support services by increasing staffing
and adding new programs for our OEMs and resellers. In addition, we also are
committed to providing customer-driven product functionality through feedback
from key prospects, consultants, channel and OEM partners and customer surveys.
Products
Extreme provides broadband networking solutions that meet the requirements
of enterprise, ISPs and IP carrier and Metropolitan Area Networks by providing
increased performance, scalability, policy-based quality of service, ease of use
and lower cost of ownership. Our Summit, BlackDiamond and Alpine switches share
a common ASIC, software and management architecture that facilitates a
relatively short product design and development cycle, thereby reducing the
time-to-market for new products and features. This common architecture enables
customers to build a broadband networking solution that has consistent
functionality, performance and management. The common architecture and
end-to-end functionality of our products also reduces the cost and complexity of
network administration and management.
The following table identifies our principal hardware and software
products:
6
Product name Product name
and date of and date of
first shipment Configuration / Description first shipment Configuration / Description
The Summit Stackable product family The BlackDiamond Modular Chassis
- ----------------------------------- --------------------------------
Summit-based products: BlackDiamond 6808 Up to 576 10/100 Mbps
Summit4 16 10/100 Mbps September 1998 Ethernet ports or 96
March 1998 Ethernet ports and Gigabit Ethernet ports in
6 Gigabit Ethernet ports one chassis
Summit24 24 10/100 Mbps 10 slots to accommodate
November 1998 Ethernet ports a variety of up to 8 connectivity
and modules and 1 or 2 management
1 Gigabit Ethernet ports modules
Summit48 48 10/100 Mbps The Alpine Chassis
April 1998 Ethernet ports and ------------------
2 Gigabit Ethernet ports Alpine 3808 Up to 256 10/100 Mbps
April 2000 Ethernet ports or 32
Gigabit Ethernet ports in
one chassis
Inferno-based products:
Summit1i 8 Gigabit Ethernet ports 9 slots to accommodate
September 2000 a variety of up to 8 connectivity
modules and 1 management
module
Summit5i 16 Gigabit Ethernet ports
September 2000
Summit7i 32 Gigabit Ethernet ports Software
December 1999 --------
ExtremeWare Software suite that has standard
September 1997 protocols, web-based
configuration and Policy-Based
Quality of Service
ExtremeWare Enterprise An integrated management
Manager application suite that protects
August 1998 the delivery of provisioned
services and applications
Summit Stackable Products
Products in the Summit family of switches are designed to meet the
demanding requirements emerging in intranet and Internet applications. All
Summit switches share a common non-blocking switch architecture that provides
scalability in four areas: speed, bandwidth, network size and quality of service
(QoS). The Summit product family supports a range of gigabit and 10/100 Mbps
aggregation for enterprise desktops and servers, large Internet data centers,
and broadband points of presence ("POP") in metropolitan area networks and
multi-tenant buildings.
The enterprise desktop is the portion of the network where individual
end-user workstations are connected to a hub or switch. In this shared
environment, each desktop in the workgroup receives and is burdened by the
communication of every other desktop in the workgroup. As applications have
become more bandwidth intensive and as user traffic has migrated outside the
workgroup via the Internet or an intranet or extranet, the hubs are unable to
effectively process this traffic, resulting in diminished desktop performance.
Replacing the hub with a Layer 3 switch alleviates this problem by providing a
dedicated link for each desktop and eliminating unnecessary broadcasts of
information to every desktop in the workgroup. Enterprise desktop switching
provides the desktop with features typically found only at the network core,
such as redundancy, greater speed and the ability to aggregate multiple switch
ports into a single high-bandwidth connection. Extreme became an industry leader
in Layer 3 switching for the desktop with the introduction of our Summit48 and
Summit24 desktop switching products. The Summit48 addresses high-density
enterprise desktop connections. This switch features a non-blocking architecture
to avoid the loss of data packets. The Summit24, with half the number of ports
of the Summit48, is targeted at local wiring closets with moderately dense
desktop connections.
Servers run the applications and store the data needed by all network
end-users. The traditional network architecture has been shifting toward more
centralized server clusters, or server farms, which require the physical
deployment of multiple servers in a single central data center. This new
architecture is easier to manage and can be configured in a redundant fashion,
thereby reducing the risk of
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system failure. Additionally, remote offices and telecommuters can access the
same server-based data as desktop users, increasing the flexibility of the
network to support users wherever they may be located. As more people access the
network and as server requests increasingly involve more bandwidth-intensive
applications, network traffic to and from servers has increased dramatically,
causing bandwidth to be consumed by traffic. Servers also communicate with each
other, creating a high volume of server-to-server traffic within the server
farm. Recent technology developments allow enterprises to install network
interface cards that enable connections using Gigabit Ethernet or the
aggregation of multiple 100 Mbps ports on a single card. This development
increases the communication speed of the servers. In turn, these servers have
created the need for switches that can support their higher server-to-server and
server-to-end-user communications speeds. Our Summit4 product addresses server
switching constraints by providing switched Gigabit Ethernet and multiple 100
Mbps links to the servers, thereby delivering sufficient bandwidth between
servers and to clients on attached segments. In server farms and data centers,
the Summit7i maximizes server availability and performance by combining server
load-balancing with wire-speed switching.
As metropolitan area networks evolve to handle more data rather than voice,
the POP must also progress from serving as a simple transport device to an
application services tool. Today's broadband POPs are moving closer to the
customer and need to offer services density and scalability without
re-engineering discreet narrowband technologies. There is a growing need for
consistent scalable services in the multi-tenant market, which according to
Cahner's InStat Group will reach $2 billion by 2004. The new Summit1i and
Summit5i Gigabit Ethernet switching systems eliminate the limitations associated
with multiple narrowband aggregation technologies traditionally used in
metropolitan POPs.
BlackDiamond Modular Chassis
The BlackDiamond modular chassis delivers scalability, redundancy and high
reliability for core switching in high-density Ethernet/IP enterprise and
service provider networks. The BlackDiamond switch includes the fault-tolerant
features associated with mission-critical enterprise-class Layer 3 switching,
including redundant system management and switch fabric modules, hot-swappable
modules and chassis components, load-sharing power supplies and management
modules, up to eight 10 Mbps, 100 Mbps, or 1,000 Mbps aggregated links, dual
software images and system configurations, spanning tree and multipath routing,
and redundant router protocols for enhanced system reliability.
The network core is the most critical point in the network, as it is where
the majority of network traffic, including desktop, segment and server traffic,
converges. Network core switching involves switching traffic from the desktops,
segments and servers within the network. Because of the high-traffic nature of
the network core, wire-speed Layer 3 switching, scalability, a non-blocking
hardware architecture, fault-tolerant mission-critical features, redundancy,
link aggregation, the ability to support a variety of high-density "speeds and
feeds" and the ability to accommodate an increasing number of high-capacity
backbone connections are critical in core switching.
Alpine Chassis
The Alpine 3808 chassis switch provides a simpler, more resilient broadband
infrastructure for metropolitan area networks ("MANs"), service provider data
centers, multi-tenant buildings and enterprise wiring closets. The Alpine 3808
is the industry's first broadband provisioning switch based on Ethernet and IP
that enables MANs and carriers to deliver more infrastructure bandwidth, slice
and dice that bandwidth for optimal usage, and guarantee fixed latency for
delay-sensitive services such as video and voice.
ExtremeWare
The ExtremeWare software suite combines industry-standard protocols to
provide interoperability with legacy switches and routers, plus Policy-Based
Quality of Service (QoS) for bandwidth management and traffic prioritization in
today's networks. With ExtremeWare, QoS policies are easy to define and assign
to traffic groups. The range of QoS profiles includes minimum bandwidth, maximum
bandwidth and relative priority. These QoS profiles are key to optimizing
bandwidth management effectiveness. Our policy-based quality of service also
enables network managers to define numerous levels of control, or policies, that
determine the amount of bandwidth available to a group of users or network
devices at a given time.
ExtremeWare Enterprise Manager
ExtremeWare Enterprise Manager is a value-added application suite that
makes it easier to perform configuration, troubleshooting and status monitoring,
and deploy multi-vendor policy-based management. ExtremeWare Enterprise Manager
offers a comprehensive
8
set of network management tools that are easy to use from a workstation with a
Java-enabled web browser. ExtremeWare Enterprise Manager simplifies the task of
managing and configuring groups of our switches. With ExtremeWare Enterprise
Manager, an entire network of our switches can be managed from a single
management console using a standard web browser.
ExtremeWare ServiceWatch
In August 2000 Extreme announced ExtremeWare ServiceWatch. This software is
designed to help businesses avoid costly downtime and help to ensure that
network services remain up and performing at peak levels. Just like the
telephone dial tone that indicates the availability and quality of voice
services, ServiceWatch delivers application dial tone to facilitate "always-on"
Layer 7 network services. It monitors and manages the response time of
mission-critical services such as e-mail, e-commerce and filer transfer
activities. If response time starts to degrade, ServiceWatch can be configured
to notify the network manager to take corrective action before a problem occurs.
ServiceWatch is also used as a bandwidth-capacity planning tool and can help
track ISP service level agreements (SLAs) using historical reporting and
graphing of service availability and response time.
Sales, Marketing and Distribution
Extreme's sales and marketing strategy is focused on domestic and
international resellers, distributors, OEMs and field sales.
Resellers. We have entered into agreements to sell our products through
more than 250 resellers in 50 countries. Our resellers include regional
networking system resellers, resellers who focus on specific vertical markets,
network integrators and wholesale distributors. We provide training and support
to our resellers and our resellers generally provide the first level of support
to end users of our products. We intend to increase the number of our reseller
relationships, to target vertical markets and support a two-tier distribution
channel.
OEMs. We have established several key OEM relationships with leaders in the
telecommunications, personal computer and computer networking industries. We
intend to maintain a limited number of relationships with key strategic OEMs who
may offer products or distribution channels that compliment ours. Each of our
OEMs resells our products under its own name. We believe that our OEM
relationships enhance our ability to sell and provide support to large
organizations because certain end-user organizations may prefer to do business
with very large suppliers. We anticipate that OEM sales will decline as a
percentage of net revenue as we expand our reseller and fields sales efforts.
Field sales. We have designed and established our field sales organization
to support and develop leads for our resellers and to establish and maintain a
limited number of key accounts and strategic customers. To support these
objectives, our field sales force:
. assists end-user customers in finding solutions to complex network system and
architecture problems;
. differentiates the features and capabilities of our products from competitive
offerings;
. continually monitors and understands the evolving networking needs of
enterprise customers;
. promotes our products and ensures direct contact with current and potential
customers; and
. monitors the changing requirements of our customers.
As of June 30, 2000, Extreme's worldwide sales and marketing organization
included 376 individuals, including managers, sales representatives, and
technical and administrative support personnel. We have domestic sales offices
located in major metropolitan areas in Arizona, California, Colorado,
Connecticut, District of Columbia, Florida, Georgia, Illinois, Kansas,
Massachusetts, Maryland, Michigan, North Carolina, New Jersey, New York, Ohio,
Oregon, Pennsylvania, Texas, Washington and Wisconsin. In addition, we have
international sales offices located in Argentina, Australia, Brazil, Chile,
Columbia, France, Germany, Hong Kong, Italy, Japan, Korea, The Netherlands,
Sweden and United Kingdom.
International sales
We believe that there is a strong international market for our switching
products. Our international sales are conducted primarily through our overseas
offices and foreign resellers. Sales to customers outside of North America
accounted for approximately 45% of our net revenue in fiscal 2000.
9
Marketing
We have a number of marketing programs to support the sale and distribution
of our products and to inform existing and potential customers and our
resellers, distributors and OEMs about the capabilities and benefits of our
products. Our marketing efforts include participation in industry tradeshows,
technical conferences and technology seminars, preparation of competitive
analyses, sales training, publication of technical and educational articles in
industry journals, maintenance of our web site, advertising and public
relations. In addition, we have begun to develop an e-commerce business directed
at resellers. We also participate in third-party, independent product tests.
Customer Support and Service
Our customer service and support organization maintains and supports
products sold by our field sales force to end users, and provides technical
support to our resellers and OEMs. Generally, our resellers and OEMs provide
installation, maintenance and support services to their customers and we assist
our resellers and OEMs in providing such support.
In addition to designing custom maintenance programs to satisfy specific
customer requirements, we also offer several standard maintenance programs to
our resellers and customers, including ExtremeAssist Basic, ExtremeAssist1,
ExtremeAssist2, ExtremeAssist Premium and ExtremeAssist Elite.
ExtremeAssist Basic. This program is designed for customers who are
interested in keeping service and support costs to a minimum but want access to
basic support services. Basic service includes access to Extreme's
web-accessible knowledge database and software upgrades and bug fixes. The
ExtremeAssist program includes eight-hour, five-day technical assistance center
telephone support, e-mail inquiries and responses within 24 hours and
rapid-response emergency/network down telephone support 24 hours a day, 7 days a
week.
ExtremeAssist1. This program is designed for customers who have strong
technical networking skills and are interested in keeping service and support
costs to a minimum. With ExtremeAssist1, the customers' information technology
organizations provide first-level support for configuration, hardware and
trouble shooting, while Extreme's technical assistance center provides advanced
second-level support on an essential need basis. The ExtremeAssist1 program
includes all the features in ExtremeAssist Basic plus 48-hour advanced
replacement of hardware.
ExtremeAssist2. This program is designed for network environments that
require a high degree of network availability, data integrity and end-user
productivity. The ExtremeAssist2 program includes all the features in
ExtremeAssist1 plus twelve-hour, five-day technical assistance center telephone
support and next business day replacement of hardware.
As switched broadband infrastructures become more vital to a company's
ability to compete, networks are doing much more than just sharing and
distributing information. Networks have become the brains of day-to-day business
operations and are the key to reducing time to market and sharpening a company's
competitive edge. Extreme recognizes the critical nature of the switched
broadband infrastructure in today's business environment and the ever-expanding
demands that will be put on networks in the future. To meet these needs, Extreme
has developed a series of comprehensive on-site support plans to fit the needs
of the most demanding network environments.
ExtremeAssist Premium. ExtremeAssist Premium is designed to meet and exceed
all the essential requirements of supporting and maintaining enterprise LANs.
Ideal for mission-critical network environments that require a high degree of
network availability, data integrity and end-user productivity. The
ExtremeAssist Premium plan includes faster on-site service and spares. The
ExtremeAssist Premium program includes all the features in ExtremeAssist2 plus
24 hours a day, 7 days a week on-site emergency network down assistance within 4
hours.
ExtremeAssist Elite. ExtremeAssist Elite is Extreme's most comprehensive
support plan for mission-critical switched broadband networks. Elite is limited
to the top 20% of Extreme's customer base to ensure a very individualized,
flexible and focused approach to providing Elite support services. ExtremeWorks
Elite adds dedicated level 3 technical support engineers and our fastest on-site
service and spares response time.
We typically provide end users with a one-year hardware and 90-day software
warranty. We also offer various training courses for their third-party resellers
or end-user customers.
10
Manufacturing
We outsource the majority of our manufacturing and supply chain management
operations, and we conduct quality assurance, manufacturing engineering,
documentation control and repairs at our facility in Santa Clara, California.
This approach enables us to reduce fixed costs and to provide flexibility in
meeting market demand. Where cost-effective, we may begin to perform certain of
our non-manufacturing outsourced operations in-house.
Currently, we use three contract manufacturers--Flextronics, located in San
Jose, California, to manufacture our Summit1, Summit4, Summit RPS and
BlackDiamond products, MCMS, located in Boise, Idaho, to manufacture our
Summit24, Summit48, Summit1i, Summit5i and Summit7i products and Solectron,
located in Milpitas, California, to manufacture our Alpine products. Each of
these manufacturing processes and procedures is ISO 9002 certified. We design
and develop the key components of our products, including ASICs and printed
circuit boards. In addition, we determine the components that are incorporated
in our products and select the appropriate suppliers of such components. Product
testing and burn-in is performed by our contract manufacturers using tests we
specify and automated testing equipment. We also use comprehensive inspection
testing and statistical process controls to assure the quality and reliability
of our products. We intend to regularly introduce new products and product
enhancements, which will require that we rapidly achieve volume production by
coordinating our efforts with those of our suppliers and contract manufacturers.
See "Factors That May Affect Our Results--Extreme Needs to Expand Its
Manufacturing Operations and Depends on Contract Manufacturers for Substantially
All of Its Manufacturing Requirements."
Although we use standard parts and components for our products where
possible, we currently purchase several key components used in the manufacture
of our products from single or limited sources. Our principal single-sourced
components include:
. ASICs;
. microprocessors;
. programmable integrated circuits;
. selected other integrated circuits;
. cables; and
. custom-tooled sheet metal.
Our principal limited-source components include:
. flash memories;
. DRAMs;
. SRAMs; and
. printed circuit boards.
Generally, purchase commitments with our single or limited source suppliers
are on a purchase order basis. LSI Logic manufacturers all of our ASICs which
are used in all of our switches. Any interruption or delay in the supply of any
of these components, or the inability to procure these components from alternate
sources at acceptable prices and within a reasonable time, would materially
adversely affect our business, operating results and financial condition. In
addition, qualifying additional suppliers can be time-consuming and expensive
and may increase the likelihood of errors.
We use a rolling nine-month forecast based on anticipated product orders to
determine our material requirements. Lead times for materials and components we
order vary significantly, and depend on factors such as the specific supplier,
contract terms and demand for a component at a given time. See "Factors That May
Affect Our Results--Extreme Purchases Several Key Components for Products From
Single or Limited Sources and Could Lose Sales if These Sources Fail to Fill Its
Needs" and "--Extreme Needs To Expand Its Manufacturing Operations and Depends
on Contract Manufacturers for Substantially All of Its Manufacturing
Requirements."
Research and Development
We believe that our future success depends on our ability to continue to
enhance our existing products and to develop new products that maintain
technological competitiveness. We focus our product development activities on
solving the needs of enterprise, service providers and IP carrier and
Metropolitan Area Network markets. We monitor changing customer needs and work
closely with
11
users, value-added resellers and distributors, and market research organizations
to monitor changes in the marketplace. We design our products around current
industry standards and will continue to support emerging standards that are
consistent with our product strategy.
Our products have been designed to incorporate the same core ASICs and
software and system architecture, facilitating a relatively short product design
and development cycle and reducing the time to market for new products and
features. We have utilized this architectural design to develop and introduce
other product models and enhancements since the introduction of our first
products in 1997. We intend to continue to utilize this architectural design to
develop and introduce additional products and enhancements in the future.
We are undertaking development efforts for our family of products with
emphasis on increasing reliability, performance and scalability and reducing the
overall network operating costs to end users. This fiscal year we introduced a
new generation chipset which was incorporated in a new product family which
began shipping in the quarter ended December 31. We are also focusing on cost
reduction engineering to reduce the cost of our products. There can be no
assurance that our product development efforts will result in commercially
successful products, or that our products will not be rendered obsolete by
changing technology or new product announcements by other companies. See
"Factors That May Affect Our Results--Extreme's Market is Subject to Rapid
Technological Change and to Compete, Extreme Must Continually Introduce New
Products that Achieve Broad Market Acceptance."
Competition
The market for internet switches is part of the broader market for
networking equipment, which is dominated by a few large companies, particularly
Cabletron Systems, Cisco Systems, Lucent Technologies and Nortel Networks. Each
of these companies has introduced, or has announced its intention to develop,
switches that are or may be competitive with our products. For example, in
January 1999, Cisco announced its Catalyst 6000 family of chassis-based
switches. In addition, there are a number of large telecommunications equipment
providers, including Alcatel, Ericsson, Nokia, and Siemens, which have entered
the market for network equipment, particularly through acquisitions of public
and privately held companies. We expect to face increased competition,
particularly price competition, from these and other telecommunications
equipment providers. We also expect to compete with other public and private
companies that offer switching solutions, such as Alteon Web Systems and Foundry
Networks. These vendors may develop products with functionality similar to our
products or provide alternative network solutions. Our OEMs may compete with us
with their current products or products they may develop, and with the products
they purchase from us. Current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
develop and offer competitive products. Furthermore, we compete with numerous
companies that offer routers and other technologies and devices that
traditionally have managed the flow of traffic on the enterprise or metropolitan
area networks.
Many of our current and potential competitors have longer operating
histories and substantially greater financial, technical, sales, marketing and
other resources, as well as greater name recognition and a larger installed
customer base, than we do. As a result, these competitors are able to devote
greater resources to the development, promotion, sale and support of their
products. In addition, competitors with a large installed customer base may have
a significant competitive advantage over us. We have encountered, and expect to
continue to encounter, many potential customers who are extremely confident in
and committed to the product offerings of our principal competitors, including
Cisco Systems and Nortel Networks. Accordingly, such potential customers may not
consider or evaluate our products. When such potential customers have considered
or evaluated our products, we have in the past lost, and expect in the future to
lose, sales to some of these customers as large competitors have offered
significant price discounts to secure such sales.
We believe the principal competitive factors in the network switching
market are:
. expertise and familiarity with network protocols, network switching and
network management;
. product performance, features, functionality and reliability;
. price/performance characteristics;
. timeliness of new product introductions;
. adoption of emerging industry standards;
. customer service and support;
. size and scope of distribution network;
12
. brand name;
. access to customers; and
. size of installed customer base.
We believe we compete favorably with our competitors with respect to each
of the foregoing factors. However, because many of our existing and potential
competitors have longer operating histories, greater name recognition, larger
customer bases and substantially greater financial, technical, sales, marketing
and other resources, they may have larger distribution channels, stronger brand
names, access to more customers and a larger installed customer base than we do.
Such competitors may, among other things, be able to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies and make more
attractive offers to distribution partners than we can. To remain competitive,
we believe we must, among other things, invest significant resources in
developing new products and enhancing our current products and maintain customer
satisfaction worldwide. If we fail to do so, our products will not compete
favorably with those of our competitors which will materially adversely affect
our business. See "Factors That May Affect Our Results--Intense Competition in
the Market for Networking Equipment Could Prevent Extreme From Increasing
Revenue and Prevent Extreme From Achieving or Sustaining Profitability."
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We have been issued six patents in the U.S. We have filed eight patent
applications in the U.S. and selected countries abroad relating to the
architecture of our network switches and quality of service features. There can
be no assurance that these applications will be approved, that any issued
patents will protect our intellectual property or that they will not be
challenged by third parties. Furthermore, there can be no assurance that others
will not independently develop similar or competing technology or design around
any patents that may be issued. We also have five registered trademarks and four
pending trademark applications in the U.S.
We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
In addition, we provide our software products to end-users primarily under
"shrink-wrap" license agreements included within the packaged software. These
agreements are not negotiated with or signed by the licensee, and thus these
agreements may not be enforceable in some jurisdictions. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. There can be no assurance
that these precautions will prevent misappropriation or infringement of our
intellectual property. Monitoring unauthorized use of our products is difficult,
and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.
The networking industry is characterized by the existence of a large number
of patents and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, leading companies in the data
communications and networking markets have extensive patent portfolios with
respect to networking technology. From time to time, third parties, including
these leading companies, have asserted and may assert exclusive patent,
copyright, trademark and other intellectual property rights against us. Indeed,
a number of third parties, including leading companies, have asserted patent
rights to technologies and related standards that are important to us. We expect
to increasingly be subject to infringement claims asserted by third parties as
the numbers of products and competitors in the market for network switches grow
and the functionality of products overlaps. In this regard, since April, 2000,
we have been in communication with one of these leading companies that believes
certain of our products require a license under a number of their patents. The
third party is willing to grant us a non-exclusive license under the identified
patents as well as other patents or technology that we may require. We currently
are reviewing the identified patents to examine whether we consider a license
necessary. However, there can be no assurance that this license would be
obtainable on commercially acceptable terms.
Although we have not been a party to any litigation asserting claims that
allege infringement of intellectual property rights, we cannot assure you that
we will not be a party to litigation in the future. In addition, we cannot
assure you that third parties will not assert additional claims or initiate
litigation against us or our manufacturers, suppliers or customers alleging
infringement of their proprietary rights with respect to existing or future
products.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights to determine the
13
scope and validity of our proprietary rights. Any such claims, with or without
merit, could be time-consuming, result in costly litigation and diversion of
technical and management personnel or require us to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on acceptable terms, if
at all. In the event of a successful claim of infringement and our failure or
inability to develop non-infringing technology or license the proprietary rights
on a timely basis, our business, operating results and financial condition could
be materially adversely affected.
Employees
As of June 30, 2000, we employed 680 persons, including 376 in sales and
marketing, 110 in research and development, 67 in operations, 65 in technical
support and 62 in finance and administration. We have never had a work stoppage
and no personnel are represented under collective bargaining agreements. We
consider our employee relations to be good.
We believe that our future success will depend on our continued ability to
attract, integrate, retain, train and motivate highly qualified personnel, and
upon the continued service of our senior management and key personnel. None of
our personnel is bound by an employment agreement. Competition for qualified
personnel is intense, particularly in the San Francisco Bay Area, where our
headquarters is located. At times we have experienced difficulties in attracting
new personnel. There can be no assurance that we will successfully attract,
integrate, retain and motivate a sufficient number of qualified personnel to
conduct our business in the future. See "Factors That May Affect Our Results--If
Extreme Loses Key Personnel or is Unable to Hire Additional Qualified Personnel
as Necessary, It May Not Be Able to Successfully Manage Its Business or Achieve
Its Objectives."
Item 2. Properties.
Our principal administrative, sales, marketing and research development
facilities are located in an approximately 77,000 square feet facility located
in Santa Clara, California. In June 2000, we entered into a five-year operating
lease agreement to lease 275,000 square feet in Santa Clara, California to house
further physical expansion of our principal operations. We also lease office
space in various other geographic locations domestically and internationally for
sales and service personnel.
Item 3. Legal Proceedings.
We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, operating results or financial condition. We may in the future be
party to litigation arising in the course of our business, including claims that
we allegedly infringe third-party trademarks and other intellectual property
rights. Such claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers
of Extreme as of August 31, 2000:
Name Age Position
---- --- --------
Gordon L. Stitt.......................................... 44 President, Chief Executive Officer and Chairman
Stephen Haddock.......................................... 42 Vice President and Chief Technical Officer
Herb Schneider........................................... 41 Vice President of Engineering
Sam Halabi............................................... 35 Vice President of IP Carrier Business Development
June Hull................................................ 45 Vice President of Human Resources
Allan G. Miller.......................................... 48 Vice President of Manufacturing Operations
Vito E. Palermo.......................................... 36 Vice President, Chief Financial Officer and Secretary
George Prodan............................................ 47 Vice President of Marketing
Harry Silverglide........................................ 54 Vice President of Sales
Gordon L. Stitt. Mr. Stitt co-founded Extreme in May 1996 and has served as
President, Chief Executive Officer and a director of Extreme since its
inception. From 1989 to 1996, Mr. Stitt worked at another company he co-founded,
Network Peripherals, a designer and manufacturer of high-speed networking
technology. He served first as its Vice President of Marketing, then as Vice
President and General Manager of the OEM Business Unit. Mr. Stitt holds an MBA
from the Haas School of Business of the University of
14
California, Berkeley and a BSEE/CS from Santa Clara University.
Stephen Haddock. Mr. Haddock co-founded Extreme in May 1996 and has served
as Vice President and Chief Technical Officer of Extreme since its inception.
From 1989 to 1996, Mr. Haddock worked as Chief Engineer at Network Peripherals.
Mr. Haddock is a member of IEEE, an editor of the Gigabit Ethernet Standard and
Chairman of the IEEE 802.3ad link aggregation committee. Mr. Haddock holds an
MSEE and a BSME from Stanford University.
Herb Schneider. Mr. Schneider co-founded Extreme in May 1996 and has served
as Vice President of Engineering of Extreme since its inception. From 1990 to
1996, Mr. Schneider worked as Engineering Manager at Network Peripherals and was
responsible for the development of LAN switches. From 1981 to 1990, Mr.
Schneider held various positions at National Semiconductor, a developer and
manufacturer of semiconductor products, where he was involved in the development
of early Ethernet chipsets and FDDI chipsets. Mr. Schneider holds a BSEE from
the University of California, Davis.
Sam Halabi. Mr. Halabi has served as Vice President of IP Carrier business
development of Extreme since July 2000. Prior to joining Extreme Networks, Mr.
Halabi held various marketing positions with leading data communications
companies, including Cisco Systems. Mr. Halabi holds a MS in Computer Science
from San Jose State University and a BS in Computer Engineering from American
University-Beirut.
June Hull. Ms. Hull has served as Vice President of Human Resources since
September 1999. From October 1996 to August 1999, she served as Regional
Director of Human Resources and Corporate Director of Human Resources at
Netscape Communications, an e-commerce company. From April 1989 to September
1996, she served in a variety of senior Human Resource management positions for
Apple Computer, Inc.
Allan G. Miller. Mr. Miller has served as Vice President of Manufacturing
Operations of Extreme since July 2000. Prior to joining Extreme Networks, Mr.
Miller spent 22 years at Amdahl Corporation. He held several senior management
positions in manufacturing operations and quality assurance, the most recent was
Vice President of Operations. He holds a MS in Mechanical Engineering and a MBA
from the University of California at Berkeley and a BS in Mechanical Engineering
from California State University, Northridge.
Vito E. Palermo. Mr. Palermo has served as Vice President, Chief Financial
Officer and Secretary of Extreme since January 1999. From January 1997 to
January 1999, he served as Senior Vice President, Chief Financial Officer and
Secretary of Metawave Communications, a wireless communications company. From
1992 to 1996, Mr. Palermo served in various financial management positions at
Bay Networks, a networking communications company, most recently serving as Vice
President and Corporate Controller and previously serving as Director of
Technology Finance, Corporate Financial and Planning Manager, and Manufacturing
and Customer Service Controller. Mr. Palermo holds an MBA from St. Mary's
College and a BS in Business Administration from California State University.
George Prodan. Mr. Prodan has served as Vice President of Marketing of
Extreme since February 1997. From January 1994 to January 1997, he served as
Director of Marketing and Senior Director of Worldwide Channels at FORE Systems,
a networking equipment company. From April 1991 to December 1993, he served as a
product line manager for a division of 3Com, a networking company. He holds an
MS in Instructional Communications from Shippensburg State University and a BS
in Industrial Arts Education from California State University.
Harry Silverglide. Mr. Silverglide has served as Vice President of Sales of
Extreme since January 1997. From May 1995 to January 1997, he served as Vice
President of Western Region Sales for Bay Networks. From July 1994 to May 1995,
he served as Vice President of Sales for Centillion Networks, a provider of LAN
switching products which was acquired by Bay Networks in 1995. From April 1984
to July 1994, he worked in sales and senior sales management positions at
Ungermann Bass, a network communications company.
15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock commenced trading on the Nasdaq National Market
on April 9, 1999 under the symbol "EXTR." The following table sets forth the
high and low closing prices as reported by Nasdaq. Such prices represent prices
between dealers, do not include retail mark-ups, mark-downs or commissions and
may not represent actual transactions. All prices have been adjusted to reflect
a 2-for-1 stock split effected in August 2000.
Stock Prices High Low
---- ---
1999
Fourth quarter (1)............................................$ 29.03 $ 19.16
2000
First quarter.................................................$ 42.25 $ 22.81
Second quarter................................................$ 49.03 $ 30.66
Third quarter.................................................$ 59.50 $ 38.00
Fourth quarter................................................$ 52.75 $ 21.44
--------------
(1) Commencing April 9, 1999
At September 14, 2000, there were approximately 284 stockholders of record
of the Company's common stock and approximately 36,000 beneficial stockholders.
The Company has never declared or paid cash dividends on its capital stock and
does not anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain future earnings for the development of its
business.
Item 6. Selected Consolidated Financial Data.
For the Period
from May 8,
1996
(Date of
Years Ended June 30, Inception)
--------------------
2000 1999 1998 June 30, 1997
---- ---- ---- -------------
(In thousands, except per share amounts)
----------------------------------------
Consolidated Statements of Operations Data:
Net revenue................................................... $ 261,956 $ 98,026 $ 23,579 $ 256
Gross profit (loss)........................................... 135,040 49,506 8,682 (132)
Total operating expenses...................................... 118,786 50,951 22,709 7,928
Operating income (loss)....................................... 16,254 (1,445) (14,027) (8,060)
Net income (loss)............................................. 20,048 (1,617) (13,936) (7,923)
Basic net income (loss) per share (1)......................... $ 0.20 $ (0.09) $ (1.59) $ (2.26)
Diluted net income (loss) per share (1)....................... $ 0.18 $ (0.09) $ (1.59) $ (2.26)
Weighted average shares outstanding used in
computing basic net income (loss) per share (1)........... 100,516 18,924 8,758 3,516
Weighted average shares outstanding used in
computing diluted net income (loss) per share (1)......... 111,168 18,924 8,758 3,516
16
As of June 30,
-----------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Consolidated Balance Sheets Data
Cash and cash equivalents..................................... $116,721 $107,143 $ 9,510
Short-term investments........................................ 66,640 16,422 10,995
Working capital............................................... 205,881 119,039 13,796
Total assets.................................................. 515,930 171,803 33,731
Long-term debt, deposit and capital lease
obligations, net of current portion.......................... 306 -- 2,634
Total stockholders' equity.................................... $419,021 $141,876 $ 15,869
------------------
(1) Share and per share data have been restated to give retroactive effect
to a two-for-one stock split in the form of a stock dividend effected in August
2000.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
When used in this discussion and elsewhere in this Form 10-K, the words
"may," "should," "believes," "expects," "anticipates," "estimates" and similar
expressions identify forward-looking statements. Such statements, which include
statements concerning the availability and functionality of products under
development, product mix, pricing trends, the mix of export sales, sales to
significant customers and the availability and cost of products from the
Company's suppliers, are subject to risks and uncertainties, including those set
forth below under "Factors That May Affect Our Results." Our actual results
could differ materially from those anticipated in these forward-looking
statements which could have a material adverse effect on our business, operating
results and financial condition. These forward-looking statements speak only as
of the date hereof and there may be events in the future that we are not able to
predict accurately or over which we have no control which would affect or alter
our expectations.
Overview
From our inception in May 1996 through September 1997, our operating
activities related primarily to developing a research and development
organization, testing prototype designs, building an ASIC design infrastructure,
commencing the staffing of our marketing, sales and field service and technical
support organizations, and establishing relationships with resellers and OEMs.
We commenced volume shipments of our Summit1 and Summit2, the initial products
in our Summit stackable product family, in October 1997, and we began shipping
our BlackDiamond modular product family in September 1998. We introduced our new
Alpine product family in fiscal 2000 which is based on a new generation chip
set. In addition, we also introduced new products within our existing product
lines that incorporate this new chip set.
Our revenue is derived primarily from sales of our Summit and BlackDiamond
product families and fees for services relating to our products, including
maintenance and training. The level of sales to any customer may vary from
period to period; however, we expect that significant customer concentration
will continue for the foreseeable future. See "Factors That May Affect Our
Results--If a Key Reseller, OEM or Other Significant Customer Cancels or Delays
a Large Purchase, Extreme's Revenues May Decline and the Price of Its Stock May
Fall." For fiscal 2000, there were no customers with sales greater than 10%. For
fiscal 1999, Compaq and Hitachi Cable accounted for 21% and 13% of our net
revenue, respectively.
We market and sell our products primarily through resellers, distributors
and, to a lesser extent, OEMs and our field sales organization. We sell our
products through more than 250 resellers in 50 countries. In fiscal 2000, sales
to customers outside of North America accounted for approximately 45% of our net
revenue. Currently, all of our international sales are denominated in U.S.
dollars. We generally recognize product revenue at the time of shipment, unless
we have future obligations for installation or have to obtain customer
acceptance, in which case revenue is deferred until such obligations have been
satisfied. We have established a program which, under specified conditions,
enables third party resellers to return products to us. The amount of potential
product returns is estimated and provided for in the period of the sale. Service
revenue is recognized ratably over the term of the contract period, which is
typically 12 months.
We expect to experience rapid erosion of average selling prices of our
products due to a number of factors, including competitive
17
pricing pressures, promotional pricing and rapid technological change. Our gross
margins will be affected by such declines and by fluctuations in manufacturing
volumes, component costs and the mix of product configurations sold. In
addition, our gross margins may fluctuate due to the mix of distribution
channels through which our products are sold, including the potential effects of
our development of a two-tier distribution channel. We generally realize higher
gross margins on sales to resellers and distributors than on sales through our
OEMs. Any significant decline in sales to our OEMs or resellers or distributors,
or the loss of any of our OEMs or resellers or distributors could materially
adversely affect our business, operating results and financial condition. In
addition, new product introductions may result in excess or obsolete
inventories. Any excess or obsolete inventories may also reduce our gross
margins.
We outsource the majority of our manufacturing and supply chain management
operations, and we conduct quality assurance, manufacturing engineering,
documentation control and repairs at our facility in Santa Clara, California.
Accordingly, a significant portion of our cost of revenue consists of payments
to our contract manufacturers, Flextronics, MCMS and Solectron. We expect to
realize lower per unit product costs as a result of volume efficiencies.
However, we cannot assure you when or if such price reductions will occur. The
failure to obtain such price reductions could materially adversely affect our
gross margins and operating results.
Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development, testing and enhancement of our products. We expense all
research and development expenses as incurred. We believe that continued
investment in research and development is critical to attaining our strategic
objectives and, as a result, we expect these expenses to increase in absolute
dollars in the future.
Sales and marketing expenses consist of salaries, commissions and related
expenses for personnel engaged in marketing, sales and field service support
functions, as well as trade shows and promotional expenses. We intend to pursue
sales and marketing campaigns aggressively and therefore expect these expenses
to increase significantly in absolute dollars in the future. In addition, we
recently hired approximately 200 sales and marketing personnel. We expect to
continue to expand our field sales operations to support and develop leads for
our resellers and distributors, which will also result in an increase in sales
and marketing expenses.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and administrative personnel,
professional fees and other general corporate expenses. We expect general and
administrative expenses to increase in absolute dollars as we add personnel,
increase spending on our information systems and incur additional costs related
to the anticipated growth of our business and operation as a public company.
During fiscal 1998, in connection with the grant of certain stock options
to employees, we recorded deferred stock compensation of $437,000 representing
the difference between the exercise price and the deemed fair value of our
common stock on the date such stock options were granted. Such amount is
included as a reduction of stockholders' equity and is being amortized by
charges to operations on a graded vesting method. We recorded amortization of
deferred stock compensation expense of approximately $119,000, $172,000 and
$68,000 for the years ended June 30, 2000, 1999 and 1998, respectively. At June
30, 2000, we had a total of approximately $78,000 remaining to be amortized over
the corresponding vesting period of each respective option, generally four
years. The amortization expense relates to options awarded to employees in all
operating expense categories.
Despite growing revenues in all fiscal years since our inception, fiscal
2000 was the first year we have achieved profitability in each of the four
quarters. Our net income has not increased proportionately with the increase in
our revenue primarily because of increased expenses relating to our growth in
operations and in particular the recent accelerated hiring of sales and
marketing personnel. Because of the lengthy sales cycle of our products, there
is often a significant delay between the time we incur expenses and the time we
realize any related revenue. See "Factors That May Affect Our Results--The Sales
Cycle for Extreme's Products is Long and Extreme May Incur Substantial
Non-Recoverable Expenses or Devote Significant Resources to Sales that Do Not
Occur When Anticipated." To the extent that future revenues do not increase
significantly in the same periods in which operating expenses increase, our
operating results would be adversely affected. See "Factors That May Affect Our
Results--A Number of Factors Could Cause Extreme's Quarterly Financial Results
to Be Worse Than Expected, Resulting in a Decline in Its Stock Price."
Due to the Company's issuance of warrants to a networking company as
discussed in Note 3, future operating income will be reduced by $7.1 million per
quarter for each quarter in fiscal 2001 and for three of the four fiscal
quarters in fiscal 2002. Notwithstanding this charge the Company still
anticipates being profitable in the first quarter of fiscal 2001.
Results of Operations
18
The following table sets forth for the years indicated certain financial
data as a percentage of net revenue:
Years ended June 30,
---------------------------------
2000 1999 1998
---- ---- ----
Net revenue............................ 100.0% 100.0% 100.0%
Cost of revenue........................ 48.5 49.5 63.2
----- ----- -----
Gross profit .......................... 51.5 50.5 36.8
Operating expenses:
Research and development............. 12.6 17.4 45.2
Sales and marketing.................. 25.6 27.6 40.7
General and administrative........... 4.5 7.0 10.4
Amortization of goodwill and
purchased intangibles 2.6 -- --
----- ----- ------
Total operating expenses..... 45.3 52.0 96.3
----- ----- ------
Operating income (loss)................ 6.2 (1.5) (59.5)
Interest income........................ 5.6 1.9 2.6
Interest expense....................... (.2) (.4) (1.4)
Other income (loss), net............... -- -- (.8)
----- ----- ------
Income (loss) before income taxes...... 11.6 .0 (59.1)
Provision for income taxes............. 3.9 1.7 --
----- ----- ------
Net income (loss)...................... 7.7% (1.7)% (59.1)%
===== ===== ======
Net Revenue
Net revenue increased from $98.0 million in fiscal 1999 to $262.0 million
in fiscal 2000, an increase of $164.0 million. The increase in net revenue for
fiscal 2000 resulted primarily from increased sales of our Summit stackable
products and our BlackDiamond modular product family, the market's growing
acceptance of Extreme's existing and new product offerings, and a significant
increase in our sales and marketing organizations.
Net revenue increased from $23.6 million in fiscal 1998 to $98.0 million in
fiscal 1999, an increase of $74.4 million. The increase in net revenue for
fiscal 1999 resulted primarily from increased sales of our Summit stackable
products and the introduction of our BlackDiamond modular product family in
September 1998.
Export sales accounted for 45% and 53% of net revenue in fiscal 2000 and
fiscal 1999, respectively. We expect that export sales will continue to
represent a significant portion of net revenue, although we cannot assure you
that export sales as a percentage of net revenue will remain at current levels.
All sales transactions are denominated in U.S. dollars.
Gross Profit
Gross profit increased from $49.5 million in fiscal 1999 to $135.0 million
in fiscal 2000, an increase of $85.5 million, primarily due to the related
increase in revenue. Gross margins increased from 50.5% in fiscal 1999 to 51.5%
in fiscal 2000. The increase in gross margin resulted primarily from a shift in
product mix, a shift in our channel mix from OEMs to resellers and distributors
and improved manufacturing efficiencies, offset in part by lower average selling
prices due primarily to increased competition.
Gross profit increased from $8.7 million in fiscal 1998 to $49.5 million in
fiscal 1999, an increase of $40.8 million. Gross margins increased from 36.8% in
fiscal 1998 to 50.5% in fiscal 1999. The increase in gross margin resulted
primarily from reductions in component costs, improved manufacturing
efficiencies and a shift in our channel mix from OEMs to resellers, which were
offset in part by lower average selling prices due to increased competition.
Research and Development Expenses
Research and development expenses increased from $17.0 million in fiscal
1999 to $33.0 million in fiscal 2000, an increase of $16.0 million. The increase
was primarily due to nonrecurring engineering and initial product verification
expenses and increased salaries and related personnel expenses due to the hiring
of additional engineers. For fiscal 1999 and fiscal 2000, research and
development expenses decreased as a percentage of net revenue from 17.4% to
12.6%. This percentage decrease was primarily the result of an increase in our
net revenue.
19
Research and development expenses increased from $10.7 million in fiscal
1998 to $17.0 million in fiscal 1999, an increase of $6.3 million. The increase
was primarily due to nonrecurring engineering and initial product verification
expenses, the hiring of additional engineers and an increase in depreciation
charges due to increases in capital spending on design and simulation software
and test equipment. For fiscal 1998 and fiscal 1999, research and development
expenses decreased as a percentage of net revenue from 45.2% to 17.4%. This
percentage decrease was primarily the result of an increase in our net revenue.
Sales and Marketing Expenses
Sales and marketing expenses increased from $27.1 million in fiscal 1999 to
$67.1 million in fiscal 2000, an increase of $40.0 million. This increase was
primarily due to the hiring of additional sales, marketing and customer support
personnel, increased sales commission expenses resulting from increased
revenues, increased tradeshow and promotional expenses and the establishment of
new sales offices. For fiscal 1999 and fiscal 2000, sales and marketing expenses
decreased as a percentage of net revenue from 27.6% to 25.6%. This percentage
decrease was primarily the result of an increase in our net revenue.
We intend to pursue sales and marketing campaigns aggressively and
therefore expect these expenses to increase significantly in absolute dollars in
the future. In addition, we recently hired approximately 200 sales and marketing
personnel. We expect to continue to expand our field sales operations to support
and develop leads for our resellers and distributors, which will also result in
an increase in sales and marketing expenses.
Sales and marketing expenses increased from $9.6 million in fiscal 1998 to
$27.1 million in fiscal 1999, an increase of $17.5 million. This increase was
primarily due to the hiring of additional sales and customer support personnel,
tradeshow and promotional expenses, increased commission expenses resulting from
higher sales, and the establishment of new sales offices. For fiscal 1998 and
fiscal 1999, sales and marketing expenses decreased as a percentage of net
revenue from 40.7% to 27.6%. This percentage decrease was primarily the result
of an increase in our net revenue.
General and Administrative Expenses
General and administrative expenses increased from $6.9 million in fiscal
1999 to $11.9 million in fiscal 2000, an increase of $5.0 million. This increase
was due primarily to the hiring of additional finance, information technology,
legal and administrative personnel and increased professional fees and occupancy
costs. For fiscal 1999 and fiscal 2000, general and administrative expenses
decreased as a percentage of net revenue from 7.0% to 4.5%. This percentage
decrease was primarily the result of an increase in our net revenue.
General and administrative expenses increased from $2.4 million in fiscal
1998 to $6.9 million in fiscal 1999, an increase of $4.5 million. This increase
was due primarily to the hiring of additional finance, information technology
and legal and administrative personnel, recruiting expenses, professional fees
and increased spending on information systems. For fiscal 1998 and fiscal 1999,
general and administrative expenses decreased as a percentage of net revenue
from 10.4% to 7.0%. This percentage decrease was primarily the result of an
increase in our net revenue.
Amortization of Goodwill and Purchased Intangibles
Amortization of goodwill and purchased intangibles was $7.1 million in
fiscal 2000. This amount was due to the Company's issuance of fully earned,
non-forfeitable, fully exercisable warrants with a two year life to purchase 3
million shares of the Company's common stock with an exercise price of $39.50
per share as discussed in Note 3 of notes to consolidated financial statements.
Future operating income will be reduced by approximately $7.1 million per
quarter for each quarter in fiscal 2001 and for three fiscal quarters in fiscal
2002.
Interest Income
Interest income increased from $1.9 million in fiscal 1999 to $14.6
million in fiscal 2000, an increase of $12.7 million. The increase is due to the
increased amount of cash and cash equivalents, short-term investments,
restricted investments and long-term investments from the proceeds we received
from our initial public offering in April 1999 and our secondary public offering
in October 1999.
Interest income increased from $.6 million in fiscal 1998 to $1.9 million
in fiscal 1999, an increase of $1.3 million. The increase
20
is due to the increased amount of cash and cash equivalents, short-term
investments and long-term investments from the proceeds we received from our
initial public offering in April 1999.
Income Taxes
We recorded a tax provision of $10.3 million for the year ended June 30,
2000. The provision for fiscal 2000 results in an effective tax rate of 34%
which consists primarily of federal taxes, state income taxes and foreign taxes,
offset by the recognition of deferred tax assets. FASB Statement No. 109
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. We intend to evaluate the realizability of the
deferred tax assets on a quarterly basis. We incurred significant operating
losses for all fiscal years from inception through June 30, 1999. We recorded a
tax provision of $1.7 million for the year ended June 30, 1999, which consisted
primarily of foreign taxes, federal taxes and state income taxes.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increased from $123.6
million at June 30, 1999 to $183.4 million at June 30, 2000, an increase of
$59.8 million. The increase is primarily a result of our secondary public
offering of common stock in October 1999, which generated net proceeds of $174.0
million, primarily offset by an increase in long-term investments and restricted
investments of $108.0 million. Cash provided by operating activities was $24.8
million in fiscal 2000, as compared to cash provided by operating activities of
$2.8 million in fiscal 1999. The increase was primarily due to net income,
depreciation, amortization and increases in accounts payable, deferred revenue
and accrued liabilities, offset by increases in accounts receivable, inventories
and other current and noncurrent assets. We expect that accounts receivable will
continue to increase to the extent our revenues continue to rise. We expect our
inventory levels to increase in connection with our development of a two-tier
distribution system, new product introductions and the need to maintain shorter
lead times on certain products. Any such increase can be expected to reduce
cash, cash equivalents, short-term investments and long-term investments.
Investing activities used cash of $195.0 million in fiscal 2000 due to
capital expenditures of $27.2 million, net purchases of investments of $158.8
million and minority investments of $9.0 million. Our investing activities used
cash of $29.1 million in fiscal 1999 for net purchases of investments of $21.6
million and capital expenditures of $7.5 million. Our investing activities used
cash of $13.5 million in fiscal 1998 for capital expenditures of $2.5 million
and net purchases of investments of $11.0 million. We expect capital
expenditures of approximately $30.0 million in fiscal 2001. Under the terms of a
certain equity investment, upon the attainment of certain technological
milestones, we will be obligated to purchase all of the outstanding capital
stock in fiscal 2001, payable in any combination of cash or shares of Extreme
common stock.
Financing activities provided cash of $179.7 million in fiscal 2000,
arising primarily from proceeds from the issuance of common stock in conjunction
with our secondary public offering, partially offset by payments of capital
lease obligations. Financing activities provided cash of $124.0 million in
fiscal 1999, arising primarily from proceeds from the issuance of common stock
in conjunction with our initial public offering, partially offset by principal
payments on notes payable and capital lease obligations. Financing activities
provided cash of $21.2 million in fiscal 1998, primarily from the issuance of
convertible preferred stock and proceeds from notes payable, partially offset by
principal payments on notes payable and capital lease obligations.
In June 2000, we entered into an operating lease agreement to lease 275,000
square feet to house our primary facility in Santa Clara, California. Our lease
payments will vary based on the LIBOR plus a spread which was 7.14% at June 30,
2000. Our lease payments are estimated to be approximately $5.7 million on an
annual basis over the lease term. The lease is for five years and can be renewed
for two five-year periods, subject to the approval of the lessor. At the
expiration or termination of the lease, we have the option to either purchase
the property for $80.0 million, or arrange for the sale of the property to a
third party for at least $80.0 million with a contingent liability for any
deficiency. If the property is not purchased or sold as described above, we will
be obligated for an additional lease payment of approximately $68.0 million.
As part of the above lease transaction, the Company restricted $80.0
million of its investment securities as collateral for specified obligations of
the lessee under the lease. These investment securities are restricted as to
withdrawal and are managed by a third party subject to certain limitations under
the Company's investment policy. The lease also requires us to maintain
specified financial covenants with which we were in compliance as of June 30,
2000.
We require substantial capital to fund our business, particularly to
finance inventories and accounts receivable and for capital expenditures. As a
result, we could be required to raise substantial additional capital. To the
extent that we raise additional capital
21
through the sale of equity or convertible debt securities, the issuance of such
securities could result in dilution to existing stockholders. If additional
funds are raised through the issuance of debt securities, these securities may
have rights, preferences and privileges senior to holders of common stock and
the terms of such debt could impose restrictions on our operations. We cannot
assure you that such additional capital, if required, will be available on
acceptable terms, or at all. If we are unable to obtain such additional capital,
we may be required to reduce the scope of our planned product development and
marketing efforts, which would materially adversely affect our business,
financial condition and operating results.
We believe that our current cash and cash equivalents, short-term
investments, long-term investments and cash available from credit facilities and
future operations will enable us to meet our working capital requirements for at
least the next 12 months.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", which
extended the deferral of the application of FAS 133 to all fiscal quarters of
fiscal years beginning after June 15, 2000. In June 15, 2000 the FASB also
issued FAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities) an Amendment to FASB Statement No. 133". FAS 138 amends the
accounting and reporting standards of Statement 133 for certain derivative
instruments and certain hedging activities. The Company will be required to
adopt these pronouncements for the year ending June 30, 2001. Because the
Company currently holds no derivative financial instruments and does not
currently engage in hedging activities, adoption of FAS 133 and 138 are expected
to have no material impact on the Company's financial condition or results of
operations.
In December 1999, the Staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin ("SAB") No. 101. "Revenue Recognition
in Financial Statements", which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. The
implementation of SAB 101 has recently been deferred to no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The Company is
presently evaluating the potential impact of the adoption of SAB 101.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25" (Interpretation No. 44).
Interpretation No. 44 is effective July 1, 2000. The interpretation clarifies
the application of APB Opinion No. 25 for certain issues, specifically, (a) the
definition of an employee, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange or stock compensation awards in a business
combination. We do not anticipate that the adoption of Interpretation No. 44
will have a material impact on our financial position or the results of our
operations.
Factors That May Affect Our Results
Extreme Has a Limited History of Profitability and Cannot Assure You that it
Will Continue to Achieve Profitability
Although our revenue has grown in recent quarters, we cannot be certain
that we will realize sufficient revenue to achieve continued profitability on a
fiscal year basis. Fiscal 2000 was the first year in which Extreme achieved
profitability in each of the four quarters. We anticipate continuing to incur
significant sales and marketing, product development and general and
administrative expenses and, as a result, we will need to generate significantly
higher revenue to sustain profitability. In particular, our recent hiring of
approximately 200 sales and marketing personnel has substantially increased
expenses. We expect that the hiring of such personnel will allow us to increase
sales, however, we can not assure you that this will occur and we cannot assure
you that operating margins will not be adversely affected by this or other
hiring. In addition, the amortization of purchased intangibles and goodwill is
estimated to be approximately $27.7 million and $21.0 million in fiscal 2001 and
2002, respectively.
A Number of Factors Could Cause Extreme's Quarterly Financial Results to Be
Worse Than Expected, Resulting in a Decline in Its Stock Price
We plan to significantly increase our operating expenses to expand our
sales and marketing activities, broaden our customer
22
support capabilities, develop new distribution channels, fund increased levels
of research and development and build our operational infrastructure. We base
our operating expenses on anticipated revenue trends and a high percentage of
our expenses are fixed in the short term. As a result, any delay in generating
or recognizing revenue could cause our quarterly operating results to be below
the expectations of public market analysts or investors, which could cause the
price of our common stock to fall.
We may experience a delay in generating or recognizing revenue because of a
number of reasons. Orders at the beginning of each quarter typically do not
equal expected revenue for that quarter and are generally cancelable at any
time. Accordingly, we are dependent upon obtaining orders in a quarter for
shipment in that quarter to achieve our revenue objectives. In addition, the
timing of product releases, purchase orders and product availability could
result in significant product shipments at the end of a quarter. Failure to ship
these products by the end of a quarter may adversely affect our operating
results. Furthermore, our customer agreements typically provide that the
customer may delay scheduled delivery dates and cancel orders within specified
time frames without significant penalty.
Our quarterly revenue and operating results have varied significantly in
the past and may vary significantly in the future due to a number of factors,
including:
. fluctuations in demand for our products and services, including
seasonality, particularly in Asia and Europe;
. unexpected product returns or the cancellation or rescheduling of
significant orders;
. our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
. announcements and new product introductions by our competitors; . our
ability to develop and support customer relationships with service
providers and other potential large customers;
. our ability to achieve required cost reductions;
. our ability to obtain sufficient supplies of sole or limited sourced
components for our products;
. unfavorable changes in the prices of the components we purchase;
. our ability to attain and maintain production volumes and quality levels
for our products;
. the mix of products sold and the mix of distribution channels through
which they are sold; and
. costs relating to possible acquisitions and integration of technologies
or businesses.
. the affect of amortization of goodwill and purchased intangibles
resulting from existing or new transactions.
Due to the foregoing factors, we believe that period-to-period comparisons
of our operating results should not be relied upon as an indicator of our future
performance.
Intense Competition in the Market for Networking Equipment Could Prevent Extreme
From Increasing Revenue and Prevent Extreme From Sustaining Profitability
The market for Internet switches is intensely competitive. Our principal
competitors include Cabletron Systems, Cisco Systems, Foundry Networks, Lucent
Technologies and Nortel Networks. Many of our current and potential competitors
have longer operating histories and substantially greater financial, technical,
sales, marketing and other resources, as well as greater name recognition and
larger installed customer bases, than we do. These competitors may have
developed, or could in the future, develop new technologies that compete with
our products or even render our products obsolete.
To remain competitive, we believe we must, among other things, invest
significant resources in developing new products and enhancing our current
products and maintaining customer satisfaction. If we fail to do so, our
products may not compete favorably with those of our competitors and our revenue
and future profitability could be materially adversely affected.
Extreme Expects the Average Selling Prices of Its Products to Decrease Rapidly
Which May Reduce Gross Margins or Revenue
The network equipment industry has experienced rapid erosion of average
selling prices due to a number of factors, including competitive pricing
pressures and rapid technological change. We may experience substantial
period-to-period fluctuations in future
23
operating results due to the erosion of our average selling prices. We
anticipate that the average selling prices of our products will decrease in the
future in response to competitive pricing pressures, increased sales discounts,
new product introductions by us or our competitors, including, for example,
competitive products manufactured with low cost merchant silicon, or other
factors. Therefore, to maintain our gross margins, we must develop and introduce
on a timely basis new products and product enhancements and continually reduce
our product costs. Our failure to do so would cause our revenue and gross
margins to decline, which could materially adversely affect our operating
results and cause the price of our common stock to decline.
Extreme's Market is Subject to Rapid Technological Change and to Compete,
Extreme Must Continually Introduce New Products that Achieve Broad Market
Acceptance
The network equipment market is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. If we do not address these changes by regularly
introducing new products, our product line will become obsolete. Developments in
routers and routing software could also significantly reduce demand for our
product. Alternative technologies could achieve widespread market acceptance and
displace Ethernet technology on which our product lines and architecture are
based. We cannot assure you that our technological approach will achieve broad
market acceptance or that other technologies or devices will not supplant our
approach.
When we announce new products or product enhancements that have the
potential to replace or shorten the life cycle of our existing products,
customers may defer purchasing our existing products. These actions could
materially adversely affect our operating results by unexpectedly decreasing
sales, increasing our inventory levels of older products and exposing us to
greater risk of product obsolescence. The market for switching products is
evolving and we believe our ability to compete successfully in this market is
dependent upon the continued compatibility and interoperability of our products
with products and architectures offered by other vendors. In particular, the
networking industry has been characterized by the successive introduction of new
technologies or standards that have dramatically reduced the price and increased
the performance of switching equipment. To remain competitive we need to
introduce products in a timely manner that incorporate or are compatible with
these new technologies as they emerge. For example, this fiscal year we
introduced a new generation chipset which was incorporated in a new product
family which began shipping in the quarter ended March 31, 2000. We cannot
assure you that these new products will be commercially successful. We have
experienced delays in releasing new products and product enhancements in the
past which delayed sales and resulted in lower quarterly revenue than
anticipated. We may experience similar delays in product development and release
in the future and any delay in product introduction could adversely affect our
ability to compete and cause our operating results to be below our expectations
or the expectations of public market analysts or investors.
Continued Rapid Growth Will Strain Extreme's Operations and Will Require Extreme
to Incur Costs to Upgrade Its Infrastructure
We have experienced a period of rapid growth and expansion which has
placed, and continues to place, a significant strain on our resources. Even if
we manage this growth effectively, we may make mistakes in operating our
business such as inaccurate sales forecasting, incorrect material planning or
inaccurate financial reporting, which may result in unanticipated fluctuations
in our operating results. Our net revenue increased significantly during the
last fiscal year, and from June 30, 1999 to June 30, 2000, the number of our
employees increased from 249 to 680. We expect our anticipated growth and
expansion to strain our management, operational and financial resources. Our
management team has had limited experience managing such rapidly growing
companies on a public or private basis. To accommodate this anticipated growth,
we will be required to:
. improve existing and implement new operational, information and financial
systems, procedures and controls;
. hire, train and manage additional qualified personnel, including sales,
marketing personnel and research and development personnel; and
. effectively manage multiple relationships with our customers, suppliers and
other third parties.
We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned personnel systems, procedures and
controls may not be adequate to support our future operations. In August 1998,
we installed a new management information system, which we may continue to
modify and improve to meet the increasing needs associated with our growth. The
difficulties associated with installing and implementing these new systems,
procedures and controls may place a significant burden on our management and our
internal resources. In addition, as we grow internationally, we will have to
expand our
24
worldwide operations and enhance our communications infrastructure. Any delay in
the implementation of such new or enhanced systems, procedures or controls, or
any disruption in the transition to such new or enhanced systems, procedures or
controls, could adversely affect our ability to accurately forecast sales
demand, manage our supply chain and record and report financial and management
information on a timely and accurate basis.
Extreme Must Develop and Expand Its Indirect Distribution Channels to Increase
Revenues and Improve Its Operating Results
Our distribution strategy focuses primarily on developing and expanding
indirect distribution channels through resellers, distributors and, to a lesser
extent, original equipment manufacturers, or OEMs, as well as expanding our
field sales organization. If we fail to develop and cultivate relationships with
significant resellers, or if these resellers are not successful in their sales
efforts, sales of our products may decrease and our operating results would
suffer. Many of our resellers also sell products that compete with our products.
We are developing a two-tier distribution structure in Europe and the United
States which has and will require us to enter into agreements with a small
number of stocking distributors. We have entered into two-tier distribution
agreements; however, we cannot assure you that we will continue to be able to
enter into additional distribution agreements or that we will be able to
successfully manage the transition of resellers to a two-tier distribution
channel. Our failure to do so could limit our ability to grow or sustain
revenue. In addition, our operating results will likely fluctuate significantly
depending on the timing and amount of orders from our resellers. We cannot
assure you that our resellers will market our products effectively or continue
to devote the resources necessary to provide us with effective sales, marketing
and technical support.
To support and develop leads for our indirect distribution channels and to
expand our direct sales effort, to service providers and content providers, we
plan to continue to expand our field sales and support staff significantly. We
cannot assure you that this internal expansion will be successfully completed,
that the cost of this expansion will not exceed the revenues generated or that
our expanded sales and support staff will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of our current or potential competitors. Our inability to
effectively establish our distribution channels or manage the expansion of our
sales and support staff would materially adversely affect our ability to grow
and increase revenue.
Because Substantially All of Extreme's Revenue is Derived From Sales of Two
Product Families, Extreme is Dependent on Widespread Market Acceptance of These
Products; Future Performance will Depend on the Introduction and Acceptance of
New Products
In fiscal 2000, we derived substantially all of our revenue from sales of
our Summit and BlackDiamond product families. We expect that revenue from these
product families will account for a substantial portion of our revenue for the
foreseeable future. Accordingly, widespread market acceptance of our product
families is critical to our future success. Factors that may affect the market
acceptance of our products include market acceptance of switching products, and
Gigabit Ethernet and Layer 3 switching technologies in particular in the
enterprise, service provider and metropolitan area network markets, the
performance, price and total cost of ownership of our products, the availability
and price of competing products and technologies, and the success and
development of our resellers, distributors, OEMs and field sales channels. Many
of these factors are beyond our control. Our future performance will also depend
on the successful development, introduction and market acceptance of new and
enhanced products that address customer requirements in a cost-effective manner.
We have in the past experienced delays in product development and such delays
may occur in the future. We introduced a new product family in fiscal 2000 which
is based on a new generation chip set. In addition, we also introduced new
products within our existing product lines that incorporate this new chip set.
The introduction of new and e