Other Operating Expenses. Other operating expenses for fiscal 2001 consists of a write-off of acquired in-process research and development of $30.2 million and a restructuring charge of $5.9 million. Extreme recorded in-process research and development charges of $13.4 million related to the purchase of Optranet on January 31, 2001 and $16.8 million related to the purchase of Webstacks on March 7, 2001. The value assigned to purchased in-process research and development was determined through valuation techniques generally used by appraisers in the high-technology industry and was immediately expensed in the period of acquisition because technological feasibility had not been established and no alternative use had been identified. The charges are discussed in more detail in Note 3. In March 2001, we implemented a restructuring plan in order to lower our overall cost structure. In connection with the restructuring, we reduced our headcount and consolidated facilities. The restructuring expense included $2.3 million for the write-off and write-down in carrying value of Summit based equipment, $1.8 million for severance and benefits for approximately 100 terminated employees and $1.8 million in facility closure expenses. The number of temporary employees and contractors used by us was also reduced. The following analysis sets forth the significant components of the restructuring reserve at June 30, 2001 (in thousands): Severance Facility Equipment and Benefits Closure Total ------------ -------- ------- Restructuring charge............ $ 2,321 $ 1,848 $1,772 $ 5,941 Cash charge..................... -- (1,848) (29) (1,877) Non-cash charge................. (2,321) (2,321) ------- ------ ------- 10) Subsequent Event Beginning on July 6, 2001, multiple purported securities fraud class action complaints were filed in the United States District Court for the Southern District of New York. We are aware of at least two such complaints, ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & Co., Inc., et al, No. 01 CV 6148 (S.D.N.Y. July 6, 2001) (which does not name us or our officers or directors as defendants) and ▇▇▇ ▇. Extreme Networks, Inc., et al., No. 01 CV 6700 (S.D.N.Y. July 23, 2001). The complaints are brought purportedly on behalf of all persons who purchased our common stock from November 17, 1999 through December 6, 2000. The Hui complaint names as defendants Extreme Networks and certain of our present and former officers; and several investment banking firms that served as underwriters of our initial public offering. It alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the offering did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offering in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at pre-determined prices. We are aware that similar allegations have been made in lawsuits challenging over 140 other initial public offerings conducted in 1999 and 2000. No specific damages are claimed. We believe that the allegations against us and the officers are without merit, and intend to contest them vigorously. We cannot assure you, however, that we will prevail in this litigation. Failure to prevail could have a material adverse effect on our consolidated financial position, results of operations and cash flows in the future. Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Extreme Networks, Inc. We have audited the accompanying consolidated balance sheets of Extreme Networks, Inc. as of June 30, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Extreme Networks, Inc. at June 30, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Palo Alto, California July 16, 2001 (In thousands, except share and per share amounts) (unaudited) June 30, 2001 -------- Mar. 31, 2001 -------- Dec. 31, 2000 -------- Sept. 30, 2000 --------- Net revenue...................................... $115,069 $112,106 $144,715 $119,342 Gross profit..................................... 59,565 14,242 74,941 61,252 Total operating expenses......................... 76,945 111,618 65,343 57,987 Operating income (loss).......................... (17,380) (97,376) 9,598 3,265 Net income (loss)................................ (11,363)(2) (70,115)(3) 8,062(4) 4,533(4) Net income (loss) per share--basic (1)........... $ (0.10)(2) $ (0.64)(3) $ 0.08(4) $ 0.04(4) Net income (loss) per share--diluted (1)......... $ (0.10)(2) $ (0.64)(3) $ 0.07(4) $ 0.04(4) Shares used in per share calculation--basic (1).. 111,114 109,028 107,283 105,990 Shares used in per share calculation--diluted (1) 111,114 109,028 118,745 118,892 June 30, 2000 -------- Mar. 31, 2000 -------- Dec. 31, 1999 -------- Sept. 30, 1999 --------- Net revenue...................................... $ 92,422 $ 67,310 $ 55,006 $ 47,218 Gross profit..................................... 46,254 35,339 28,846 24,601 Total operating expenses......................... 49,621 25,806 22,846 20,512 Operating income (loss).......................... (3,367) 9,533 6,000 4,089 Net income....................................... 589(5) 9,057 6,355 4,047 Net income per share--basic (1).................. $ 0.01(5) $ 0.09 $ 0.06 $ 0.04 Net income per share--diluted (1)................ $ 0.01(5) $ 0.08 $ 0.06 $ 0.04 Shares used in per share calculation--basic (1).. 104,590 103,060 100,362 94,052 Shares used in per share calculation--diluted (1) 112,532 113,584 111,726 107,166 -------- (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. (2) Net loss and net loss per share include amortization of goodwill, purchased intangible assets and deferred stock compensation of $15.4 million and restructuring charges of $2.1 million. (3) Net loss and net loss per share include certain inventory charges of $40.3 million, in-process research and development of $30.1 million, amortization of goodwill and purchased intangible assets of $8.2 million and restructuring charges of $3.8 million. (4) Net income and net income per share include amortization of goodwill and purchased intangible assets of $6.9
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