Extreme Networks
Annual Report 2014

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549____________________________________________________Form 10-K____________________________________________________(Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2014ORoTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 For the transition period from to .Commission file number 000-25711____________________________________________________Extreme Networks, Inc.(Exact name of Registrant as specified in its charter)____________________________________________________ Delaware 77-0430270(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 145 Rio RoblesSan Jose, California 95134(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (408) 579-2800____________________________________________________Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act:Common stock, $.001 par value____________________________________________________Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No xIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes x No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes x No oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):Large Accelerated Filer o Accelerated Filer xNon-Accelerated Filer o Smaller reporting company oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No xThe aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $652.6 million as of December 31, 2013, the lastbusiness day of the Registrant’s most recently completed second fiscal quarter, based upon the per share closing price of the Registrant’s common stock asreported on The NASDAQ Global Market reported on such date. For purposes of this disclosure, shares of common stock held or controlled by executiveofficers and directors of the registrant and by persons who hold more than 5% of the outstanding shares of common stock have been treated as shares held byaffiliates. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose.97,391,901 shares of the Registrant’s Common stock, $.001 par value, were outstanding as of August 5, 2014.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant's definitive proxy statement for the 2014 Annual Meeting of Stockholders to be filed with the Commission pursuant toRegulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated herein by reference inPart III of this Annual Report on Form 10-K. Table of ContentsEXTREME NETWORKS, INC.FORM 10-KINDEX PageForward Looking Statements 3 PART I 3 Item 1.Business 3 Item 1A.Risk Factors 13 Item 1B.Unresolved Staff Comments 25 Item 2.Properties 25 Item 3.Legal Proceedings 26 Item 4.Mine Safety Disclosures 26 PART II 27 Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27 Item 6.Selected Financial Data 29 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations 31 Item 7A.Quantitative and Qualitative Disclosures About Market Risk 44 Item 8.Financial Statements and Supplementary Data 46 Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 81 Item 9A.Controls and Procedures 82 Item 9B.Other Information 83 PART III 84 Item 10.Directors, Executive Officers and Corporate Governance 84 Item 11.Executive Compensation 84 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 84 Item 13.Certain Relationships and Related Transactions, and Director Independence 84 Item 14.Principal Accountant Fees and Services 84 PART IV 85 Item 15.Exhibits and Financial Statement Schedules 85 SIGNATURES 862Table of ContentsFORWARD LOOKING STATEMENTSThis annual report on Form 10-K, including the following sections, contains forward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995, including in particular, our expectations regarding results of operations, our ability to expand our market penetration, ourability to expand our distribution channels, customer acceptance of our products, our ability to meet the expectations of our customers, product demand andrevenue, cash flows, product gross margins, our expectations to continue to develop new products and enhance existing products, our expectations regardingthe amount of our research and development expenses, our expectations relating to our selling, general and administrative expenses, our efforts to achieveadditional operating efficiencies and to review and improve our business systems and cost structure, our expectations to continue investing in technology,resources and infrastructure, our expectations concerning the availability of products from suppliers and contract manufacturers, anticipated product costsand sales prices, our expectations that we have sufficient capital to meet our requirements for at least the next twelve months, our expectations regardingmaterials and inventory management and our expectations of our ability to receive the anticipated benefits of the acquisition of Enterasys. These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below and those contained in the section entitled “Risk Factors”identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. We cautioninvestors that actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors identified in thisForm 10-K and other filings we have made with the Securities and Exchange Commission. More information about potential factors that could affect ourbusiness and financial results is set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”PART IItem1. BusinessOverviewExtreme Networks, Inc., together with its subsidiaries, (collectively referred to as Extreme and as we, us and our) is a leading provider of wired andwireless network infrastructure equipment, software and services for enterprises, data centers, and service providers. Our customers include businesses,hospitals, hotels, universities, sports venues, telecommunications companies and government agencies around the world. We are driven by our guidingprinciples to build the very best products, to deliver world-class customer service and to be the easiest company with which to do business. As networksinternal to businesses, between businesses and the Internet itself become more pervasive and critical to a wide variety of business and social communications,the volume and the demands of applications, data, users and devices on networks continue to increase. Our vision focuses on the design and delivery ofsimple, fast and smart networking solutions to deliver better connections, providing superior experiences for everyone. We primarily sell our productsthrough an ecosystem of our channel partners who combine our Ethernet products with their offerings to create compelling information technology solutionsfor end user customers.On October 31, 2013, we completed the acquisition of Enterasys Networks, Inc. (“Enterasys”), a privately held provider of wired and wireless networkinfrastructure and security solutions, whereby Enterasys became our wholly-owned subsidiary. The combined entity immediately became a networkingindustry leader with more than 12,000 customers. As network switching leaders in enterprise, data center and cloud, Extreme and Enterasys together combineand extend their world-class products and technologies to provide customers with some of the most advanced, high performance, and open solutions in themarket as well as a superb overall customer experience. The combination of Extreme and Enterasys is significant in that it brings together two companieswith distinct strengths addressing the key areas of the network, from unified wired and wireless edge, to the enterprise core, to the data center and cloud. Withan open software approach, we can drive product innovations and customers will benefit from the increased resources and larger scale.Industry BackgroundThe networking industry has undergone significant changes in the last few years. With the mobilization of the workforce, the virtualization of the datacenter, and the demand for anywhere, anytime connectivity, across any device, Ethernet is a common technology across both enterprises and serviceproviders. Extreme Networks' strategy, product portfolio, and research and development are aligned with the following trends:•Ethernet (Wired and Wireless). Through its scalability, adaptability, and cost-effectiveness, Ethernet has solidified its role in both public andprivate networks. At the same time, the enterprises and service providers expect the technology to follow a price-performance curve thatmandates continued innovation by Ethernet vendors.•Mobile Workforce. Employees expect high-quality and secure access to corporate resources in a Bring Your Own Device ("BYOD") world across adiversity of endpoints such as laptops, tablets, smart phones and wearables, whether they are within the corporate firewall or on-the-go.Information technology ("IT") departments focus their investment3Table of Contentsdecisions on this mobile workforce, taking a unified view of wireless access, the campus core, and the data center. Networking vendors offer end-to-end solutions that permit IT managers to meet employee expectations and to maximize IT return on investment.•The Cloud. Data center architectures are influenced by the cloud and by the deployment of server virtualization. Enterprises have migratedincreasing numbers of applications and services to either private clouds, or public clouds offered by third parties. In either case, the networkinfrastructure must adapt to this new dynamic environment. Intelligence and automation are key if enterprises are to derive maximum benefitfrom their cloud deployments. Ethernet speeds, scaling from 10 Gigabits per second ("G") to 40G and even 100G, provides the infrastructure forboth private and public clouds. In addition, there is growing interest in Software Defined Network ("SDN") approaches that may includetechnologies such as OpenFlow, OpenStack, and CloudStack for increased network agility.•Public Network Evolution. 3G and 4G mobile networks now provide the necessary capacity and reach to enable employees to be productiveaway from the office and away from fixed networks in a BYOD world. Mobile operators continue to invest in their next-generation networks, andEthernet is the technology often used for their access networks, referred to as mobile backhaul. •Vendor Consolidation. We believe consolidation of vendors within the Ethernet networking market and between adjacent markets (storage,security, wireless & voice software and applications) continues to gain momentum. We believe that the underpinning technology for all of theseadjacent markets is Ethernet. As a result, we believe that there will be continued mergers between adjacent market vendors to enable them todeliver complete and broad solutions to customers.The Extreme Networks StrategyWith the proliferation of mobile users and their devices, within a campus or across continents, the challenges of operating and managing a network havechanged in the BYOD world of today. IT has rapidly evolved from a fixed world to a new world of mobility where everything - people, devices, machines,and applications - is in motion. IT now has to support end-users with smart phones, tablets, laptops and other wireless peripherals as well as their wiredworkstations. Users are beginning to define the services that IT must offer as they adopt smart phones, tablets and their applications, and as they work on-the-go. Users know what they need to be productive, and they expect the network to help them achieve productivity. The blurring of work and personalapplications that must be supported on the network places increasing security demands on IT.Extreme Networks delivers mission critical networks designed for this new BYOD world, spanning high-performance data centers, the campus, and themobile infrastructure. Customers deploying our technology can know what resources are using the network, what they are requesting and where they arelocated, and can provide customized access to approved resources and content. Our networks help enable granular visibility and control, higher performanceand resource security.Our strategy is to offer open, scalable, secure and cost effective connectivity solutions as an alternative to single-sourced, highly proprietarynetworking equipment from other companies. Our commitment to open standards is manifested by demonstrated interoperability within both enterprise andservice provider networks, and the active participation in key industry and standards associations.Key elements of our strategy include:•Provide simple, fast, smart and cost-effective wired and wireless network infrastructure solutions as well as deliver network-based business andapplication analytics designed to optimize application delivery while reducing capital expenditure and operating expenditure to meet thespecific demands of the following customers:•Enterprises and cloud data centers use our products to deploy automated next generation virtualized and high-density serverinfrastructure solutions.•Enterprises, universities, sports venues, hospitals, hotels and government agencies, use our products for their mobile campus access andbackbone networks.•Enterprises, universities and sports venues use our products to enable Big Data and High Performance Computing supporting large dataprocessing and analytics requirements.•Service Providers use our products to deliver high performance, high capacity and low latency connections to their customers.•Mobile Operators deploy our products for mobile backhaul in support of mobile broadband.4Table of Contents•Extend switching and routing technology leadership. Our technological leadership is based on innovative switching, routing and wirelessproducts, the depth and focus of our market experience and the ExtremeXOS® operating system - the software that runs on all of our Ethernetswitches. Our standardization on a single network operating system, a primary merchant silicon vendor, and few select manufacturing partners forour core products permit us to derive leverage from our engineering investment. We intend to invest our engineering resources to continue tocreate leading-edge technologies that will increase the performance and functionality of our products and as a direct result, the value of oursolution to our current and future customers. In addition, we look for maximum synergies from our engineering investment in our targetedverticals and when targeting new vertical market segments.•Expand WiFi technology leadership. Wireless is today’s access method of choice and every business must deal with scale, density and BYODchallenges. The dramatic increase and demand being seen everywhere today, fueled by more users, with multiple devices increases theexpectation that everything will just work. The network edge landscape is changing as the explosion of mobile devices increases the demand formobile, transparent and always on wired to wireless edge services. This new “unified access layer” requires intelligent distributed components toensure that access control and resiliency of business services are available across the entire infrastructure and manageable from a single console.Our unified access layer portfolio provides intelligence for the wired/wireless edge.•Deliver unified management across the wired, wireless environment from the data center to the mobile edge. Our rich set of integratedmanagement capabilities provides centralized visibility and highly efficient anytime, anywhere control of enterprise wired and wireless networkresources.•Offer network-powered business and application analytics. Our network-powered application analytics and optimization solution captures andanalyzes context-based data about application traffic to deliver meaningful intelligence - about applications, users, locations and devices. Thisenables the network to become a strategic business asset - by enabling the mining of network- based business events and strategic informationthat help business leaders make faster and more effective decisions.Data can now be mined to show how applications are being used; enabling a better understanding of customer behavior on the network,identifying the level of user engagement, and assuring business application delivery to optimize the user experience. Additionally applicationadoption can be tracked to determine the return on investment associated with new application deployments.In addition visibility into network and application performance enables IT to pinpoint and resolve performance bottlenecks in the infrastructurewhether they are caused by the network, application, or server. This saves both time and money for the business and ensures critical applicationsare running at the best possible performance.•Support Software Defined Network ("SDN"). Networks are built using switches, routers, and other devices in a distributed fashion to scale andprovide reliability. In this distributed environment, it has become more complex to provide new end-to-end services and applications in aseamless and cost effective manner. As the business demands more agile and flexible IT services this has become a focal point for innovation andalso for differentiation by vendors that have solved that challenge. To address the simultaneous needs for security, virtualization, manageability,mobility and agility in today´s networks the concept of SDNs are gaining attention as a viable solution.The value of SDN in the enterprise lies specifically in the ability to provide network virtualization and automation of configuration across theentire network/fabric so new services and end systems can be deployed rapidly and operational cost can be minimized.•Expand market penetration by targeting high-growth verticals. Within the campus, we focus on the mobile user, leveraging our automationcapabilities and tracking wireless Local Area Network ("LAN") growth. Our data center approach leverages our product portfolio to address theneeds of managed hosting and cloud data center providers, while we deliver key components of mobile backhaul solutions to our networkequipment partners. Within the campus we also target the high-growth physical security market, converging technologies such as InternetProtocol ("IP") video across a common Ethernet infrastructure in conjunction with our technology partners.•Leverage and expand multiple distribution channels. We distribute our products through select distributors, a large number of resellers andsystem-integrators worldwide and several large strategic partners. We maintain a field sales force to support our channel partners and to selldirectly to certain strategic accounts. As an independent Ethernet switch vendor, we seek to provide products that, when combined with theofferings of our channel partners, create compelling solutions for end-user customers.5Table of Contents•Maintain and extend our strategic relationships. We have established strategic relationships with a number of industry-leading vendors to bothprovide increased and enhanced routes to market, but also to collaboratively develop unique solutions.•Provide high-quality customer service and support. We seek to enhance customer satisfaction and build customer loyalty through high-qualityservice and support. This includes a wide range of standard support programs that provide the level of service our customers require, fromstandard business hours to global 24-hour-a-day, 365-day-a-year real-time response support.ProductsOur products offer resilient high performance networking, intelligence and operational simplicity for IT. We build our products into vertical marketssolutions for converged campus networks with user and device mobility, data center and cloud administrators to virtualize their server and storage over ahigh-performance Ethernet infrastructure, service providers to provide bandwidth and service level agreements for Carrier Ethernet, 3G and 4G services, andmanagement software that provide visibility, security and intelligent control - all through a single pane of glass.•Resilient high performance networking. Customers can choose to deploy redundant management and fabric modules, hot swappable line cards,multi-speed stacking across 100 Megabits ("M")/1G/10G/40G/100G systems, redundant power supplies and fan trays delivering high hardwareavailability. These deployments are supported by ExtremeXOS, our modular and fault-tolerant network operating system that spans our completeswitching portfolio, unique in the industry. Technologies supported include a variety of layer-2 resiliency protocols including multi-switch LinkAggregation ("M-LAG"), Ethernet Automatic Protection Switching ("EAPS"), Multiprotocol Label Switching ("MPLS") / Virtual Private LANService ("VPLS") for high service availability, and layer-3 IPv4 and IPv6 routing protocols for high network availability. EAPS is an example ofour innovation and allows network managers to configure their network infrastructure so that critical network communications can be rapidlyrerouted in the event of a network outage in most topologies. This level of high-speed communications 'reroute' is targeted for mission criticaland demanding applications, including voice and video and maintains service delivery in the event of network outage. We further offer aversatile and flexible Quality of Service ("QoS") solution that allows network operators to configure bandwidth for mission critical applicationsand in doing so control the overall experience and the service-level of the communication flows. We have deep experience with communicationquality controls, starting with our introduction to the market of the first broad QoS controls for Ethernet to the recent Data Center Bridgingprotocols for 'lossless' Ethernet that enables traditional storage networks to converge over a common Ethernet infrastructure. We provide Layer 2("L2") extension for data centers through multiple supported technologies that include Virtual Extensible LAN, VPLS, and Pseudo-WireEmulation as well as Layer 2 extension with Generic Routing Encapsulation ("GRE/L2") and SPB (on the S-Series). In addition to GRE/L2 andShortest Path Bridging ("SPB") on our S-Series, we offer innovative traffic optimization for east/west and north/south traffic using Fabric routingand Host routing, respectively. This means we can enable Virtual Machine ("VM") mobility using Layer 3 Data Center Interconnect, even withoutL2 stretch. Our mobile backhaul products also support sophisticated timing functionality including Synchronous Ethernet and RFC1588, as wellas Time Division Multiplexing interfaces for the transport of T1/E1 traffic across an Ethernet infrastructure. Our unique CoreFlow2 architecturedelivers tens of millions of flows for deep visibility and control over users, services, and applications to meet the demands of today’s businessesapplications.•Intelligence. Based on a unified, pervasive and intelligent software foundation, our customers can take advantage of user, machine andapplication visibility and control for the whole network infrastructure, from data center to edge. Universal Port automatically detects new devicessuch as IP phones that plug-in to the network and can assign appropriate power, server and other configurations. The Identity Managementengine allows tracking of users based on their login id and host machine, and assigning them to roles based on guest, contractor, or employeeprivilege. In the data center and cloud, ExtremeXOS Network Virtualization ("XNV") allows network administrators visibility into VM movementand having virtual port-profiles follow VMs as they move within and across network switches. CLEAR-Flow, our wire-speed security rulesengine, helps detect and mitigate traffic anomalies, including denial of service attacks. NetSight provides centralized visibility and granularcontrol of enterprise network resources end to end, to manage, automate and report on the entire network through a single interface. NetworkAccess Control ("NAC")/ MobileIAM and Purview provide comprehensive visibility and policy for multi-vendor environments, providingdetailed context that correlates users with their devices, applications, locations and other attributes. These products provide deep network insightand analytics, which can be used for better network optimization, improved security and smarter business decisions. This enables businessinnovation powered by the network infrastructure and empowers6Table of ContentsIT to turn the network into a strategic business asset that can now provide value to other lines of business. Our new Audio-Video Bridging("AVB") capabilities add intelligence within the network to support the convergence of professional audio and video across Ethernet, while ourSDN investments provide a foundation for enhanced automation, control and innovation.•Operational simplicity. We provide a unified management system for the entire network providing consistent management across all networksegments and devices, making IT operations more efficient and simpler. No matter how many moves, adds, or changes occur in your environment,NetSight keeps everything in view and under control through role-based access controls. NetSight can even manage beyond Extreme Networksswitching, routing, and wireless hardware to deliver standards-based control of other vendors’ network equipment. This means fasterprovisioning, quicker problem resolution, tighter security and reduced IT administration time.•Vertical Market Solutions. Our hardware and software offerings can be combined into complete solutions targeted at specific high-growthvertical markets. These include Open Fabric, our architecture for open and scalable next-generation data center deployments that offer investmentprotection and provide a path to SDN. Extreme Networks' All Ethernet Open Fabric is anchored by our BlackDiamond BDX switch, our Summittop-of-rack data center switches, NetSight management, and where required, products from technology partners. In the campus, our IntelligentMobile Edge offering combines our Summit edge virtual chassis switches, our WLAN access point and controller portfolio, and our NetSightmanagement platform offering user and device identity awareness.Our product categories include:•Modular Ethernet switching systems. Our Black Diamond® products deliver modular or chassis-based Ethernet connectivity solutions forenterprises, data centers and service providers. These products have a range of management and line cards that allow our customers to flexiblyconfigure and re-purpose the systems to meet specific needs. Our Black Diamond products in conjunction with our ExtremeXOS operatingsystem and our centralized management software product provide the density, performance and reliability required to serve in environments withdemanding applications. During the last year we announced the industry's highest capacity 100G interfaces for the BlackDiamond BDX. OurS-Series and K-Series switching deliver flow-based architecture via our CoreFlow2 technology that enable granular visibility and policy controlwithout impacting performance or user experience. These products scale up to 576 ports with Quad Small Form-factor Pluggable, 10GBase-T andSFP+ connectivity options, with built-in hardware support for 10/100/1000, 1GE, 10GE, 40GE, emerging protocols (IPv6) and large-scaledeployment protocols (MPLS).•Stackable Ethernet switching systems. Our Summit® product family delivers Ethernet connectivity for the network edge, aggregation and core.Within the Summit family are products that offer a range of connection speeds (from 100 Megabit to 40 Gigabit), various physical presentations(copper and fiber) and options to deliver PoE or unpowered standard Ethernet ports. As with the our Black Diamond products, the Summitproducts in conjunction with our ExtremeXOS operating system provide the features, performance and reliability required by our customers todeploy, operate and manage converged networking infrastructures. We have recently announced the Summit X430, which we believe is the mostcost-effective enterprise-grade switching platform in the industry. •High density WiFi. In addition to our wired Ethernet switch portfolio, we offer our IdentiFi™ family of wireless access points, centralizedmanagement and appliance to enable the deployment of wired-like performance, at scale for high-density in every environment. Our wirelessAccess Point products offer both indoor and outdoor 802.11a/b/g/n/ac access points. Proven in the most demanding environments, IdentiFidelivers an exceptional experience for BYOD/Mobile users wherever they may roam. During the last year we announced multiple high-densityvenue deployments including multiple NFL stadiums including the Philadelphia Eagles Lincoln Financial Field, New England Patriots GilletteStadium and Tennessee Titans LP Field.•Centralized management software. To provide a central network-wide visibility and control capability we offer our NetSight managementsoftware system. This system provides the ability to manage and automate the entire network through a single interface. This means deploy,configure, monitor and support the complete range of WiFi and switching infrastructure and also set network-wide policy to enable our customersto reduce the overall cost of network administration and operations, protect corporate resources and provide consistent high quality userexperience.•NAC and BYOD management. Extreme Networks’ NAC and MobileIAM products provide a complete standards-based, multi-vendorinteroperable pre-connect and post-connect Network Access Control solution for wired and wireless LAN and VPN users. Automated BYODregistration allowing users to register their own devices using their credentials with no IT intervention. Guest registration access control featuresto assure secure guest networking7Table of Contentswithout burdening IT staff. Also allows easy integration with other third party network management tools for Mobile Device Managementintegration, threat response (Next Generation Firewall (NGFW), Security Information and Event Management (SIEM), Intrusion PreventionSystem (IPS) and more.•Application Analytics. We recently announced Purview, a network-powered application analytics and optimization solution that capturesnetwork data, aggregates, analyzes, correlates, and reports on it to enable better decision making and improved business performance. Purviewallows IT operations to optimize the network for each and every application, enhance security for those applications and provide data forbusiness analytics. This empowers IT to turn the network into a strategic business asset that can now provide value to other lines of business, andit enables business innovation powered by the network infrastructure. As an example, Extreme was selected as the Official Wifi AnalyticsProvider for the NFL including Super Bowl XLVIII.•SDN. We recently announced our Open, Standards-Based and Comprehensive SDN solution. Extreme Networks’ SDN platform is based on acomprehensive, hardened OpenDaylight (ODL) controller and includes: network management, network access control, application analytics andwireless controller technology. Extreme Networks' SDN platform drives innovation and investment protection through backward compatibility,efficiency through comprehensive Application Programming Interfaces ("APIs") and protocol support of OpenStack, OpenFlow and otherprotocols.​Sales, Marketing and DistributionWe conduct our sales and marketing activities on a worldwide basis through a distribution channel utilizing distributors, resellers and our field salesorganization. We primarily sell our products through an ecosystem of channel partners who combine our Ethernet, wireless and software analytics productswith their offerings to create compelling information technology solutions for end-user customers. We utilize our field sales organization to support ourchannel partners and to sell direct to end-user customers, including some large global accounts.Alliance, Original Equipment Manufacturers ("OEM") and Strategic Relationships. We have active Alliance, OEM & Strategic relationships withBarco NV, Ericsson Enterprise AB, SGI, Lenovo, PC HK Ltd., Motorola Inc., Nokia Siemens Networks, and Aviat Networks, Inc. as well as other globalindustry technology leaders in which our products are qualified to be included into an overall solution or reference architectures. These tested and validatedsolutions are then marketed and sold by the Alliance, OEM or Strategic partner into their specific verticals, market segments and customers as turnkeyofferings. Distributors. We have established several key relationships with leading distributors in the electronics and computer networking industries. Each ofour distributors primarily resells our products to resellers. The distributors enhance our ability to sell and provide support to resellers, who may benefit fromthe broad service and product fulfillment capabilities offered by these distributors. Distributor, Westcon Group, Inc., accounted for 11%, 16%, and 19% of ournet revenue in fiscal years 2014, 2013 and 2012, respectively. Distributor, Tech Data Corporation, accounted for 11% and 10% of our net revenue in fiscalyears 2014 and 2013, respectively. Distributors are generally given the right to return a portion of inventory to us for the purpose of stock rotation, to claimrebates for competitive discounts and participate in various cooperative marketing programs to promote the sale of our products and services. We deferrecognition of revenue on all sales to distributors who maintain inventory of our products until the distributors sell the product, as evidenced by monthly“sales-out” reports that the distributors provide to us, provided other revenue recognition criteria are met. (See “Revenue Recognition” in Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.)Resellers. We rely on many resellers worldwide that sell directly to end-user customer. Our resellers include regional networking system resellers,resellers who focus on specific vertical markets, value added resellers, network integrators and wholesale resellers. We provide training and support to ourresellers and our resellers generally provide the first level of contact to end-users of our products. Our relationships with resellers are on a non-exclusive basis.Our resellers are not given rights to return inventory and do not automatically participate in any cooperative marketing programs. We generally recognizeproduct revenue from our reseller and end-user customers at the time of shipment, provided other revenue recognition criteria are met. When significantobligations or contingencies remain after products are delivered, such as installation or customer acceptance, revenue and related costs are deferred until suchobligations or contingencies are satisfied. (See “Revenue Recognition” in Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations.)Field Sales. We have trained our field sales organization to support and develop leads for our resellers and to establish and maintain key accounts andstrategic end-user 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;8Table of Contents•continually monitors and understands the evolving networking needs of enterprise and service provider customers;•promotes our products and ensures direct contact with current and potential customers; and•assists our resellers to drive to closure business opportunities.As of June 30, 2014, our worldwide sales and marketing organization consisted of approximately 540 employees, including vice presidents, directors,managers, sales representatives, and technical and administrative support personnel. We have domestic sales offices located in 5 states and international salesoffices located in 29 countries.Customers with 10% of net revenue or greaterThe following table sets forth major customers accounting for 10% or more of our net revenue: Fiscal Year Ended June 30, 2014 June 30, 2013 June 30, 2012Tech Data Corporation 11% 10% *Westcon Group Inc. 11% 16% 19%Scansource, Inc. * 12% 13%Ericsson AB * * 12% * Less than 10% of revenue International salesInternational sales are an important portion of our business. In fiscal 2014, sales to customers outside of the United States accounted for 59% of ourconsolidated net revenue, compared to 66% in fiscal 2013 and 67% in fiscal 2012. These sales are conducted primarily through foreign-based distributorsand resellers managed by our worldwide sales organization. In addition, we have direct sales to end-user customers, including large global accounts. Theprimary markets for sales outside of the United States are countries in Europe and Asia, as well as Canada, Mexico, Central America and South America. (See“Net Revenue” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.)MarketingWe continue to develop and execute on a number of marketing programs to support the sale and distribution of our products by communicating thevalue of our solutions to our existing and potential customers, our distribution channels, our resellers and our technology alliance partners. Our marketingefforts include participation in industry tradeshows, conferences and seminars, publication of technical and educational articles in industry journals,communication across social media channels, frequent updates to our publicly available website, promotions, web-based training courses, advertising andpublic relations. We also submit our products for independent product testing and evaluation.BacklogOur products are often sold on the basis of standard purchase orders that are cancelable prior to shipment without significant penalties. In addition,purchase orders are subject to changes in quantities of products and delivery schedules in order to reflect changes in customer requirements andmanufacturing capacity. Our business is characterized by seasonal variability in demand and short lead-time orders and delivery schedules. Actual shipmentsdepend on the then-current capacity of our contract manufacturers and the availability of materials and components from our vendors. Although we believethat the orders included in the backlog are firm, all orders are subject to possible rescheduling by customers, cancellations by customers which we may electto allow without penalty to customer, and further pricing adjustments on orders from distributors. Therefore, we do not believe that our backlog, as of anyparticular date is necessarily indicative of actual revenue for any future period.Our product backlog at June 30, 2014, net of anticipated back end rebates for distributor sales, was approximately $10.7 million, compared withproduct backlog of approximately $16.4 million at June 30, 2013.SeasonalityLike many of our competitors, we historically have experienced seasonal fluctuations in customer spending patterns, which generally adversely affectour first and third fiscal quarters. This pattern should not be relied upon or be considered indicative of our future performance, however, as it has varied in thepast.9Table of ContentsCustomer Service and SupportOur customers seek high reliability and maximum uptime for their networks. To that extent, we provide the following service offerings:•Support services for end-users, resellers and distributors. We meet the service requirements of our customers and channel partners through ourTechnical Assistance Centers, or TACs, located in Research Triangle Park ("RTP"), North Carolina; Salem, New Hampshire and Chennai, India.Our TAC engineers and technicians assist in diagnosing and troubleshooting technical issues regarding customer networks. Developmentengineers work with the TACs to resolve product functionality issues specific to each customer.•Professional services. We provide consultative services to improve customer productivity in all phases of the network lifecycle – planning,design, implementation, operations and optimization management. Our network architects develop and execute customized hardwaredeployment plans to meet individualized network strategies. These activities may include the management and coordination of the design andnetwork configuration, resource planning, staging, logistics, migration and deployment. We also provide customized training and operationalbest practices manuals to assist customers in the transition and sustenance of their networks.•Education. We offer classes covering a wide range of topics such as installation, configuration, operation, management and optimization –providing customers with the necessary knowledge and experience to successfully deploy and manage our products in various networkingenvironments. Classes may be scheduled and available at numerous locations worldwide. We deliver training using our staff, on-line trainingclasses and authorized training partners. In addition, we make much of our training materials accessible free-of-charge on our internet site forcustomers and partners to use in self-education. We believe this approach enhances the market’s ability to learn and understand the broad arrayof advantages of our products.Long-Lived AssetsSee Note 3 of our Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for more information regarding our long-livedassets.ManufacturingWe outsource the majority of our manufacturing and supply chain management operations as part of our strategy to maintain global manufacturingcapabilities and to reduce our costs. We conduct quality assurance, manufacturing engineering, document control and test development at engineeringfacilities in San Jose, California, RTP, North Carolina, Salem, New Hampshire, Toronto, Canada and Chennai, India. This approach enables us to reduce fixedcosts and to flexibly respond to changes in market demand. Our end-to-end supply chain, including our three engineering facilities at San Jose, RTP andChennai are all ISO 9001 certified.We use Alpha Networks, Inc. headquartered in Hsinchu, Taiwan to design and manufacture our Summit, A-Series, B-Series, C-Series, Stackableproducts, G-Series, D-Series, I-Series and 800-Series Standalone products and Black Diamond Chassis products. Alpha Networks is a global networkingOriginal/Joint Design Manufacturer ("ODM/JDM") leader with core competencies in areas such as Ethernet, LAN/MAN, Wireless, Broadband and VoIP.Alpha Networks manufacturing processes and procedures are ISO 9001 certified.We use Benchmark Electronics, Inc. headquartered in Huntsville, Alabama and Flextronics Int’l headquartered in Singapore, to manufacture our S-Series and K-Series Chassis products; 7100-Series Stackable products and SSA Standalone products. Benchmark and Flextronics have a significantinvestment in capital to ensure they have the latest in manufacturing and test technologies and both companies are ISO 9001 certified.Our wireless Access Point products are supplied by Senao Electronics, headquartered in Taipei, Taiwan. Senao’s manufacturing processes andprocedures are ISO 9001 certified.Additional Altitude wireless products are supplied under an OEM supply agreement with Symbol Technologies, Inc., a subsidiary of Motorola, Inc.Motorola rebrands and customizes the wireless products for us to resell to customers. Motorola’s manufacturing processes and procedures are ISO 9001certified. Motorola has made ongoing supply and support commitments during the term of the agreement and is required to provide support for a definedperiod of time after any termination of the agreement.All of our manufacturers utilize automated testing equipment to perform product testing and burn-in with specified tests. Together we rely uponcomprehensive inspection testing and statistical process controls to assure the quality and reliability of our products.10Table of ContentsWe use a collaborative sales and operations planning forecast of expected demand to determine our material requirements. Lead times for materials andcomponents vary significantly, and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. We ordermost of our materials and components on an indirect basis through our ODM/JDM, OEMs and CMs. Purchase commitments with our manufacturersODM/JDM CMs and OEMs are generally on a purchase order basis.Research and DevelopmentThe success of our products to date is due in large part to our focus on research and development. We believe that continued success in the marketplacewill depend on our ability to develop new and enhanced products employing leading-edge technology. Accordingly, we are undertaking development effortswith an emphasis on increasing the reliability, performance and features of our family of products, and designing innovative products to reduce the overallnetwork operating costs of customers.Our product development activities focus on solving the needs of enterprises, data centers, and service providers. Current activities include thecontinuing development of our innovative switching technology aimed at extending the capabilities of our products. Our ongoing research activities cover abroad range of areas, including, in particular, 40G and 100G Ethernet, routing, timing and resiliency protocols, open standards interfaces, software definednetworks, network security, identity management, data center fabrics, and wireless networking.We continue to enhance the functionality of our ExtremeXOS modular operating system which has been designed to provide high reliability andavailability. This allows us to leverage a common operating system across different hardware and network chipsets.As of June 30, 2014, our research and development organization consisted of 516 employees. Research and development efforts are conducted inseveral locations, including San Jose, California; RTP, North Carolina; Salem, New Hampshire, Toronto, Canada and Chennai, India. Our research anddevelopment expenses in fiscal years 2014, 2013 and 2012 were $77.1 million, $40.5 million and $45.6 million, respectively.Intellectual PropertyWe rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights.As of June 30, 2014, we have 379 issued patents in the United States and 172 patents outside of the United States. The expiration dates of our issued patentsin the United States range from 2014 to approximately 2032. Although we have patent applications pending, there can be no assurance that patents will beissued from pending applications or that claims allowed on any future patents will be sufficiently broad to protect our technology. With respect totrademarks, we have a number of pending and registered trademarks in the United States and abroad.We enter into confidentiality, inventions assignment or license agreements with our employees, consultants and other third parties with whom we dobusiness, and control access to, and distribution of, our software, documentation and other proprietary information. In addition, we provide our softwareproducts to end-user customers primarily under “shrink-wrap” or "click-through" license agreements. These agreements are not negotiated with or signed bythe licensee, and thus these agreements may not be enforceable in some jurisdictions. Despite our efforts to protect our proprietary rights, unauthorizedparties may attempt to copy or otherwise obtain and use our products or technology, particularly in foreign countries where the laws may not protect ourproprietary rights as fully as in the United States.CompetitionThe market for network switches, routers and software (including analytics) which is part of the broader market for networking equipment is extremelycompetitive and characterized by rapid technological progress, frequent new product introductions, changes in customer requirements and evolving industrystandards. We believe the principal competitive factors in this market are:•expertise and familiarity with network protocols, network switching/routing/wireless and network management;•expertise and familiarity with application analytics software;•expertise with network operations and management software;•product performance, features, functionality and reliability;•price/performance characteristics;•timeliness of new product introductions;•adoption of emerging industry standards;11Table of Contents•customer service and support;•size and scope of distribution network;•brand name;•breadth of product offering;•access to customers; and•size of installed customer base.We believe that we compete with our competitors with respect to many of the foregoing factors. However, the market for network switching solutions isdominated by a few large companies, particularly Brocade Communications Systems, Inc., Cisco Systems, Inc., Dell, Hewlett-Packard Company, HuaweiTechnologies Co. Ltd., and Juniper Networks Inc. Most of these competitors have longer operating histories, greater name recognition, larger customer bases,broader product lines and substantially greater financial, technical, sales, marketing and other resources.Environmental MattersWe are subject to various environmental and other regulations governing product safety, materials usage, packaging and other environmental impactsin the United States and in various countries where our products are manufactured and sold. We are also subject to regulatory developments, including recentSEC disclosure regulations relating to so-called "conflict minerals," relating to ethically responsible sourcing of the components and materials used in ourproducts. To date, compliance with federal, state, local, and foreign laws enacted for the protection of the environment has had no material effect on ourcapital expenditures, earnings, or competitive position.We are committed to energy efficiency in our product lines. Accordingly, we believe this is an area that affords us a competitive advantage for ourproducts in the marketplace. We maintain compliance with various regulations related to the environment, including the Waste Electrical and ElectronicEquipment and Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment regulations adopted by the EuropeanUnion. To date, our compliance efforts with various U.S. and foreign regulations related to the environment has not had a material effect on our operatingresults.EmployeesAs of June 30, 2014, we employed 1,563 people, including 540 in sales and marketing, 516 in research and development, 218 in operations, 178 incustomer support and service, and 111 in finance and administration. We have never had a work stoppage and no U.S. employees are represented undercollective bargaining agreements. We consider our employee relations to be good.We believe that our future success depends on our continued ability to attract, integrate, retain, train and motivate highly qualified employees, andupon the continued service of our senior management and key employees. None of our executive officers or key employees is bound by an employmentagreement which mandates that the employee render services for any specific term. The market for qualified personnel is highly competitive.OrganizationWe were incorporated in California in May 1996 and reincorporated in Delaware in March 1999. Our corporate headquarters are located at 145 RioRobles, San Jose, CA 95134 and our telephone number is (408) 579-2800. We electronically file our SEC disclosure reports with the Securities ExchangeCommission and they are available free of charge at both www.sec.gov and www.extremenetworks.com. The public may also read or copy any materials wefile with the Securities Exchange Commission at the Securities Exchange Commission’s Public Reference Room at Station Place, 100 F Street, N.E.,Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities Exchange Commissionat 1-800-SEC-0330.Our corporate governance guidelines, the charters of our audit committee, our compensation committee, our nominating and corporate governancecommittee and our strategy committee and our code of conduct policy (including code of ethics provisions that apply to our principal executive officer,principal financial officer, controller and senior financial officers) are available on our website at www.extremenetworks.com under “Corporate Governance.”These items are also available to any stockholder who requests them by calling (408) 579-2800.12Table of ContentsExecutive Officers of the RegistrantThe following table sets forth information regarding our executive officers as of September 15, 2014:NameAge PositionCharles W. Berger60 President and Chief Executive OfficerKenneth Arola58 Senior Vice President and Chief Financial OfficerEdward Carney60 Executive Vice President, Products and Customer SuccessFrank E. Blohm55 Executive Vice President of Operations and ITAllison Amadia47 Vice President, General Counsel, and Corporate SecretaryCharles W. Berger. Mr. Berger has served as our President and Chief Executive Officer since April 2013. Prior to Extreme Networks, Mr. Berger servedas President and Chief Executive Officer and as Chairman of ParAccel, Inc. from August 2010 until its sale to Actian Corporation in April 2013. From June2010 through August 2010, Mr. Berger served as the Interim Chief Executive Officer of Official Payments Holdings, Inc. (NASDAQ: OPAY), for which he hasserved as a director since 2002. From April 2006 through December 2009, Mr. Berger served as Chief Executive Officer, and from December 2001, theChairman of the board of directors, of DVDPlay, Inc. prior to its acquisition by NCR Corporation. From March 2003 through September 2005, when it mergedwith Scansoft, Inc., Mr. Berger served as President, Chief Executive Officer, and as a director of Nuance Communications, Inc. Mr. Berger also serves on theboard of directors and as trustee for the United States Naval Memorial and is a trustee and member of the investment committee for Bucknell University. Mr.Berger received his B.S. in Business Administration from Bucknell University and his M.B.A., cum laude, from Santa Clara University.Kenneth Arola. Mr. Arola has served as our Senior Vice President, Chief Financial Officer, since June 2014. Prior to Extreme Networks, from 2005 to2013, Mr. Arola served as Vice President, Finance and Chief Financial Officer of Align Technology. Prior to Align Technology, Mr. Arola spent 14 years asVice President Finance, Corporate Controller at Adaptec. Mr. Arola holds a M.B.A. from Santa Clara University and a B.A. from the University of the Pacific.Edward Carney. Mr. Carney has served as our Executive Vice President, Products and Customer Success since July 2013. Prior to Extreme Networks,Mr. Carney spent 15 years in general management at Cisco Systems, including as Vice President of Cisco's Networked Solutions Integration Test Engineering(NSITE) laboratory and was the senior executive for its RTP site. Prior to Cisco, Mr. Carney spent 15 years at IBM where he directed engineering for the IBMGlobal Network. Mr. Carney serves on the board of directors and is past chairman for the Food Bank of Central and Eastern North Carolina. Mr. Carney holdsa B.S. in General Engineering from the United States Military Academy at West Point, NY.Frank E. Blohm. Mr. Blohm has served as our Executive Vice President of Operations since October 2002. Prior to Extreme Networks, Mr. Blohm wasVice President of Operations at Sanmina-SCI, where he was responsible for the custom integration division. Mr. Blohm brings more than 20 years ofexperience in supply chain and operations for high-technology companies.Allison Amadia. Ms. Amadia has served as our Vice President, General Counsel and Secretary since July 2013. Prior to Extreme Networks, from 2002until 2013, Ms. Amadia represented numerous public and private technology companies as an independent legal consultant. In addition, from 1995 through2002, Ms. Amadia held executive and director legal positions while with Voxeo Corporation, Crystal Decisions (formerly Seagate Software), VeriFone Inc. (awholly owned subsidiary of HP), and Novell Inc. Prior to that, Ms. Amadia represented Silicon Valley companies as business counsel with Morrison &Foerster from 1993 until 1995. Ms. Amadia received a JD from the University of Pennsylvania, where she graduated cum laude. Ms. Amadia received her B.A.in Political Science from the University of California at Davis. She also completed elective courses in Corporate Finance and Management at the WhartonSchool of Business.Item 1A.Risk FactorsThe following is a list of risks and uncertainties which may have a material and adverse effect on our business, financial condition or results ofoperations. The risks and uncertainties set out below are not the only risks and uncertainties we face, and some are endemic to the networking industry.We cannot assure you that we will be profitable in the future because a number of factors could negatively affect our financial results.We have a limited history of profitability and have reported losses in some of our prior fiscal years. In addition, in years when we reported profits, wewere not profitable in each quarter during those years. We anticipate continuing to incur significant13Table of Contentssales and marketing, product development and general and administrative expenses. Any delay in generating or recognizing revenue could result in a loss fora quarter or full year. Even if we are profitable, our operating results may fall below our expectations and those of our investors, which could cause the priceof our stock to fall.We may experience challenges or delays in generating or recognizing revenue for a number of reasons and our revenue and operating results havevaried significantly in the past and may vary significantly in the future due to a number of factors, including, but not limited to, the following:•we are dependent upon obtaining orders during a quarter and shipping those orders in the same quarter to achieve our revenue objectives;•decreases in the prices of the products that we sell;•the mix of products sold and the mix of distribution channels through which products are sold;•acceptance provisions in customer contracts;•our ability to deliver installation or inspection services by the end of the quarter;•changes in general and/or specific economic conditions in the networking industry;•seasonal fluctuations in demand for our products and services;•a disproportionate percentage of our sales occurring in the last month of the quarter;•our ability to ship products by the end of a quarter;•reduced visibility into the implementation cycles for our products and our customers’ spending plans;•our ability to forecast demand for our products, which in the case of lower-than-expected sales, may result in excess or obsolete inventory inaddition to non-cancelable purchase commitments for component parts;•sales to the telecommunications service provider market, which represent a significant source of large product orders, are especially volatile anddifficult to forecast;•product returns or the cancellation or rescheduling of orders;•announcements and new product introductions by our competitors;•our ability to develop and support relationships with enterprise customers, service providers and other potential large customers;•our ability to achieve targeted cost reductions;•fluctuations in warranty or other service expenses actually incurred;•our ability to obtain sufficient supplies of sole- or limited-source components for our products on a timely basis;•increases in the price of the components that we purchase.Due to the foregoing factors, period-to-period comparisons of our operating results should not be relied upon as an indicator of our future performance.We may fail to realize the anticipated benefits of the acquisition of Enterasys.The success of the acquisition of Enterasys Networks Inc., which we acquired on October 31, 2013, will depend on, among other things, our ability tocombine the businesses of Extreme and Enterasys in a manner that does not materially disrupt existing relationships and that allows us to achieve anticipatedoperational synergies. We have faced and will continue to face significant challenges in combining the two operations into one in a timely and efficientmanner. The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in us not achievingthe anticipated benefits of the acquisition.We have made certain assumptions relating to the acquisition in our forecasts but the actual results could differ materially. We have made certain assumptions relating to the forecast level of cost savings, synergies and associated costs of the acquisition of Enterasys. Ourassumptions relating to the forecast level of cost savings, synergies and associated costs of the acquisition may be inaccurate based on the informationavailable to us, including as the result of the failure to realize the expected benefits of the acquisition, higher than expected transaction and integration costs,including our ability to service new debt, as well as general economic and business conditions that may adversely affect the combined company followingthe completion of the acquisition.The combination of our business with the Enterasys' business will continue to require significant management attention, and we expect to incursignificant additional costs due to integration. The combined company requires us to devote significant management attention and other resources to integrating the two businesses. We may notsuccessfully complete the integration of our operations in a timely manner and may experience disruptions in relationships with customers, suppliers andemployees as a result. 14Table of ContentsThrough June 30, 2014, we have incurred transaction and integration costs in connection with the Enterasys acquisition of approximately $25.7million. We expect to incur additional costs integrating the companies’ operations, product offerings, and personnel, which cannot be estimated accurately atthis time. Although we expect that the realization of efficiencies related to the integration of the business will offset incremental transaction, integration andrestructuring costs over time, we cannot give any assurance that this net benefit will be achieved. If the total costs of the integration exceed the anticipatedbenefits of the acquisition, our results of operations could be adversely affected.We expect the average selling prices of our products to decrease, which may reduce gross margin and/or revenue.The network equipment industry has traditionally experienced an erosion of average selling prices due to a number of factors, including competitivepricing pressures, promotional pricing and technological progress. We anticipate that the average selling prices of our products will decrease in the future inresponse to competitive pricing pressures, excess inventories, increased sales discounts and new product introductions by us or our competitors. We mayexperience decreases in future operating results due to the erosion of our average selling prices. To maintain our gross margin, we must develop and introduceon a timely basis new products and product enhancements and continually reduce our product costs. Our failure to do so would likely cause our revenue andgross margin to decline.We may engage in future acquisitions that dilute the ownership interests of our stockholders, cause us to incur debt or assume contingent liabilities.As part of our business strategy, we review acquisition and strategic investment prospects that we believe would complement our current productofferings, augment our market coverage or enhance our technical capabilities, or otherwise offer growth opportunities. In the event of any future acquisitions,we could:•issue equity securities which would dilute current stockholders' percentage ownership;•incur substantial debt;•assume contingent liabilities; or•expend significant cash.These actions could have a material adverse effect on our operating results or the price of our common stock. Moreover, even if we do obtain benefitsin the form of increased sales and earnings, these benefits may be recognized much later than the time when the expenses associated with an acquisition areincurred. This is particularly relevant in cases where it would be necessary to integrate new types of technology into our existing portfolio and new types ofproducts may be targeted for potential customers with which we do not have pre-existing relationships. Acquisitions and investment activities also entailnumerous risks, including:•difficulties in the assimilation of acquired operations, technologies and/or products;•unanticipated costs associated with the acquisition or investment transaction;•the diversion of management's attention from other business concerns;•adverse effects on existing business relationships with suppliers and customers;•risks associated with entering markets in which we have no or limited prior experience;•the potential loss of key employees of acquired organizations; and•substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items.We may not be able to successfully integrate any businesses, products, technologies, or personnel that we might acquire in the future, and our failure todo so could have a material adverse effect on our business, operating results and financial condition.Our credit facilities impose financial and operating restrictions on us.Our debt instruments impose, and the terms of any future debt may impose, operating and other restrictions on us. These restrictions could affect, andin many respects limit or prohibit, among other items, our ability to:•incur additional indebtedness;•create liens;•make investments;•enter into transactions with affiliates;•sell assets;•guarantee indebtedness;•declare or pay dividends or other distributions to stockholders;•repurchase equity interests;•change the nature of our business;•enter into swap agreements;15Table of Contents•issue or sell capital stock of certain of our subsidiaries; and•consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.The agreements governing our credit facilities also require us to achieve and maintain compliance with specified financial ratios.A breach of any of these restrictive covenants or the inability to comply with the required financial ratios could result in a default under our debtinstruments. If any such default occurs, the lenders under our credit agreement may elect to declare all outstanding borrowings, together with accrued interestand other fees, to be immediately due and payable. The lenders under our credit agreement also have the right in these circumstances to terminate anycommitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our credit agreementwill have the right to proceed against the collateral granted to them to secure the debt. If the debt under our credit agreement were to be accelerated, wecannot give assurance that this collateral would be sufficient to repay our debt.If we fail to meet our payment or other obligations under our credit agreement, the lenders under such credit agreement could foreclose on, and acquirecontrol of, substantially all of our assets.Our credit agreement is jointly and severally guaranteed by us and certain of our subsidiaries. Borrowings under our credit facilities are secured byliens on substantially all our assets, including the capital stock of certain of our subsidiaries, and the assets of our subsidiaries that are loan party guarantors.If we are unable to repay outstanding borrowings when due, the lenders under our credit agreement will have the right to proceed against this pledged capitalstock and take control of substantially all of our assets.We purchase several key components for products from single or limited sources and could lose sales if these suppliers fail to meet our needs.We currently purchase several key components used in the manufacture of our products from single or limited sources and are dependent upon supplyfrom these sources to meet our needs. Certain components such as tantalum capacitors, SRAM, DRAM, and printed circuit boards, have been in the past, andmay in the future be, in short supply. We have encountered, and are likely in the future to encounter, shortages and delays in obtaining these or othercomponents, and this could have a material adverse effect on our ability to meet customer orders. Our principal sole-source components include:•ASICs;•Merchant silicon;•microprocessors;•programmable integrated circuits;•selected other integrated circuits;•custom power supplies; and•custom-tooled sheet metal. Our principal limited-source components include:•flash memory;•DRAMs and SRAMs;•printed circuit boards; and•CAMs•Connectors•Timing circuits (crystals & clocks). We use our forecast of expected demand to determine our material requirements. Lead times for materials and components we order vary significantly,and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. If forecasts exceed orders, we may haveexcess and/or obsolete inventory, which could have a material adverse effect on our operating results and financial condition. If orders exceed forecasts, wemay have inadequate supplies of certain materials and components, which could have a material adverse effect on our ability to meet customer deliveryrequirements and to recognize revenue.Generally, we do not have agreements fixing long-term prices or minimum volume requirements from suppliers. From time to time we have experiencedshortages and allocations of certain components, resulting in delays in filling orders. Qualifying new suppliers to compensate for such shortages may be time-consuming and costly, and may increase the likelihood of errors in design or production. In addition, during the development of our products, we haveexperienced delays in the prototyping of our chipsets,16Table of Contentswhich in turn has led to delays in product introductions. Similar delays may occur in the future. Furthermore, the performance of the components asincorporated in our products may not meet the quality requirements of our customers.Intense competition in the market for networking equipment could prevent us from increasing revenue and maintaining profitability.The market for network switching solutions is intensely competitive and dominated primarily by Brocade Communications Systems, Inc., CiscoSystems Inc., Dell, Hewlett-Packard Company, Huawei Technologies Co. Ltd., and Juniper Networks, Inc. Most of our competitors have longer operatinghistories, greater name recognition, larger customer bases, broader product lines and substantially greater financial, technical, sales, marketing and otherresources. As a result, these competitors are able to devote greater resources to the development, promotion, sale and support of their products. In addition,they have larger distribution channels, stronger brand names, access to more customers, a larger installed customer base and a greater ability to makeattractive offers to channel partners and customers than we do. For example, we have encountered, and expect to continue to encounter, many potentialcustomers who are confident in and committed to the product offerings of our principal competitors. Accordingly, these potential customers may not consideror 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 these sales.The pricing policies of our competitors impact the overall demand for our products and services. Some of our competitors are capable of operating atsignificant losses for extended periods of time, increasing pricing pressure on our products and services. If we do not maintain competitive pricing, thedemand for our products and services, as well as our market share, may decline. From time to time, we may lower the prices of our products and services inresponse to competitive pressure. When this happens, if we are unable to reduce our component costs or improve operating efficiencies, our revenue andmargins will be adversely affected.We may not fully realize the anticipated positive impacts to future financial results from our restructuring efforts.We have undertaken restructuring efforts in the past to streamline operations and reduce operating expenses. Our ability to achieve the anticipated costsavings and other benefits from our restructuring efforts within expected time frames is subject to many estimates and assumptions, and may vary materiallybased on factors such as market conditions and the effect of our restructuring efforts on our work force. These estimates and assumptions are subject tosignificant economic, competitive and other uncertainties, some of which are beyond our control. There can be no assurance that we will fully realize theanticipated positive impacts to future financial results from our current or future restructuring efforts. If our estimates and assumptions are incorrect or if otherunforeseen events occur, we may not achieve the cost savings expected from such restructurings, and our business and results of operations could beadversely affected.Industry consolidation may lead to stronger competition and may harm our operating results.There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt tostrengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. For example, some ofour current and potential competitors for enterprise data center business have made acquisitions, or announced new strategic alliances, designed to positionthem with the ability to provide end-to-end technology solutions for the enterprise data center. Companies that are strategic alliance partners in some areas ofour business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may resultin stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results andcould have a material adverse effect on our business, operating results, and financial condition. Furthermore, particularly in the service provider market, rapidconsolidation will lead to fewer customers, with the effect that loss of a major customer could have a material impact on results not anticipated in a customermarketplace composed of more numerous participants.Our dependence on an OEM for a portion of our wireless products could harm our operating results.We historically relied exclusively on Motorola for our wireless product offering. With the integration of Extreme Networks with Enterasys Networks,we have two lines of wireless products. We have issued our last purchase order for manufacturing for the line of wireless products manufactured by Motorola.However, we will continue to rely on Motorola for several years for hardware and software support for projected new sales and our existing customer base.Should Motorola cease to timely or effectively honor these supply and support obligations, it may create financial liabilities for us that could have a materialadverse effect on our business and operating results.17Table of ContentsWe intend to invest in engineering, sales, service, marketing and manufacturing on a long term basis, and delays or inability to attain the expectedbenefits may result in unfavorable operating results.While we intend to focus on managing our costs and expenses, over the long term, we also intend to invest in personnel and other resources related toour engineering, sales, service, marketing and manufacturing functions as we focus on our foundational priorities, such as leadership in our core products andsolutions and architectures for business transformation. We are likely to recognize the costs associated with these investments earlier than some of theanticipated benefits and the return on these investments may be lower, or may develop more slowly, than we expect. If we do not achieve the benefitsanticipated from these investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected.Our success is dependent on our ability to continually introduce new products and features that achieve broad market acceptance.The network equipment market is characterized by rapid technological progress, frequent new product introductions, changes in customerrequirements and evolving industry standards. If we do not regularly introduce new products in this dynamic environment, our product lines will becomeobsolete. These new products must be compatible and inter-operate with products and architectures offered by other vendors. We have and may in the futureexperience delays in product development and releases, and such delays have and could in the future adversely affect our ability to compete and ouroperating results.When we announce new products or product enhancements or end of sale existing products that have the potential to replace or shorten the life cycleof our existing products, customers may defer or cancel orders for our existing products. These actions could have a material adverse effect on our operatingresults by unexpectedly decreasing sales, increasing inventory levels of older products and exposing us to greater risk of product obsolescence.Even if we introduce new switching products, alternative technologies could achieve widespread market acceptance and displace the Ethernettechnology on which we have based our product architecture. For example, developments in routers and routing software could significantly reduce demandfor our products. As a result, we may not be able to achieve widespread market acceptance of our current or future products.If we do not successfully anticipate technological shifts, market needs and opportunities, and develop products and product enhancements that meetthose technological shifts, needs and opportunities, or if those products are not made available in a timely manner or do not gain market acceptance, wemay not be able to compete effectively and our ability to generate revenues will suffer. We cannot guarantee that we will be able to anticipate future technological shifts, market needs and opportunities or be able to develop new productsor product enhancements to meet such technological shifts, needs or opportunities in a timely manner or at all. For example, the move from traditionalnetwork infrastructures towards SDN has been receiving considerable attention. In our view, it will take several years to see the full impact of SDN, and webelieve the successful products and solutions in this market will combine hardware and software elements together. If we fail to anticipate marketrequirements or fail to develop and introduce new products or product enhancements to meet those needs in a timely manner, it could cause us to losecustomers, and such failure could substantially decrease or delay market acceptance and sales of our present and future products, which would significantlyharm our business, financial condition, and results of operations. Even if we are able to anticipate, develop, and commercially introduce new products andenhancements, there can be no assurance that new products or enhancements will achieve widespread market acceptance.The global economic environment has and may continue to negatively impact our business and operating results.The challenges and uncertainty currently affecting global economic conditions may negatively impact our business and operating results in thefollowing ways:•customers may delay or cancel plans to purchase our products and services;•customers may not be able to pay, or may delay payment of, the amounts that they owe us which may adversely affect our cash flow, the timingof our revenue recognition and the amount of revenue;•increased pricing pressure may result from our competitors aggressively discounting their products;•accurate budgeting and planning will be difficult due to low visibility into future sales;•forecasting customer demand will be more difficult, increasing the risk of either excess and obsolete inventory if our forecast is too high orinsufficient inventory to meet customer demand if our forecast is too low; and•our component suppliers and contract manufacturers have been negatively affected by the economy which may result in product delays andchanges in pricing and service levels.If global economic conditions do not show continued improvement, we believe that we could experience material adverse impacts to our business andoperating results.18Table of ContentsClaims of infringement by others may increase and the resolution of such claims may adversely affect our operating results.Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents, copyrights(including rights to “open source” software), and other intellectual property rights. Because of the existence of a large number of patents in the networkingfield, the secrecy of some pending patents and the issuance of new patents at a rapid pace, it is not possible to determine in advance if a product orcomponent might infringe the patent rights of others. Because of the potential for courts awarding substantial damages, the lack of predictability of suchawards, and the high legal costs associated with the defense of such patent infringement matters that would be expended to prove lack of infringement, it isnot uncommon for companies in our industry to settle even potentially unmeritorious claims for very substantial amounts. Further, the entities with whom wehave or could have disputes or discussions include entities with extensive patent portfolios and substantial financial assets. These entities are activelyengaged in programs to generate substantial revenue from their patent portfolios and are seeking or may seek significant payments or royalties from us andothers in our industry.Litigation resulting from claims that we are infringing the proprietary rights of others has resulted and could in the future result in substantial costs anda diversion of resources, and could have a material adverse effect on our business, financial condition and results of operations. We have received noticesfrom entities alleging that we may be infringing their patents, and we are currently parties to patent litigation as described under Part I, Item 3, LegalProceedings. Without regard to the merits of these or any other claims, an adverse court order or a settlement could require us, among other actions, to:•stop selling our products that incorporate the challenged intellectual property;•obtain a royalty bearing license to sell or use the relevant technology, and that license may not be available on reasonable terms or available atall;•pay damages; or•redesign those products that use the disputed technology.In addition, our products include so-called “open source” software. Open source software is typically licensed for use at no initial charge, but imposeson the user of the open source software certain requirements to license to others both the open source software as well as modifications to the open sourcesoftware under certain circumstances. Our use of open source software subjects us to certain additional risks for the following reasons:•open source license terms may be ambiguous and may result in unanticipated obligations regarding the licensing of our products andintellectual property;•open source software cannot be protected under trade secret law;•suppliers of open-source software do not provide the warranty, support and liability protections typically provided by vendors who offerproprietary software; and•it may be difficult for us to accurately determine the developers of the open source code and whether the acquired software infringes third-partyintellectual property rights.We believe that even if we do not infringe the rights of others, we will incur significant expenses in the future due to defense of legal claims, disputesor licensing negotiations, though the amounts cannot be determined. These expenses may be material or otherwise adversely affect our operating results.Our operating results may be negatively affected by defending or pursuing claims or lawsuits.We have and may in the future pursue or be subject to claims or lawsuits in the normal course of our business. In addition to the intellectual propertylawsuits described above, we are currently parties to other litigation as described in Part I, Item 3. Legal Proceedings. Regardless of the result, litigation canbe expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. Anunfavorable resolution of a lawsuit in which we are a defendant could result in a court order against us or payments to other parties that would have anadverse effect on our business, results of operations, or financial condition. Even if we are successful in prosecuting claims and lawsuits, we may not recoverdamages sufficient to cover our expenses incurred to manage, investigate and pursue the litigation. In addition, subject to certain limitations, we may beobligated to indemnify our current and former directors, officers and employees in certain lawsuits. We do not maintain adequate insurance coverage to coverall of our litigation costs and liabilities.If we fail to protect our intellectual property, our business could suffer.We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights.However, we cannot ensure that the actions we have taken will adequately protect our intellectual property rights or that other parties will not independentlydevelop similar or competing products that do not infringe on our patents. We generally enter into confidentiality, invention assignment or licenseagreements with our employees, consultants and other third parties with whom we do business, and control access to and distribution of our intellectualproperty and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwisemisappropriate or use our products or technology, which would adversely affect our business.19Table of ContentsWhen our products contain undetected errors, we may incur significant unexpected expenses and could lose sales.Network products frequently contain undetected errors when new products or new versions or updates of existing products are released to themarketplace. In the past, we have experienced such errors in connection with new products and product updates. We have experienced component problemsin prior years that caused us to incur higher than expected warranty, service costs and expenses, and other related operating expenses. In the future, we expectthat, from time to time, such errors or component failures will be found in new or existing products after the commencement of commercial shipments. Theseproblems may have a material adverse effect on our business by causing us to incur significant warranty, repair and replacement costs, diverting the attentionof our engineering personnel from new product development efforts, delaying the recognition of revenue and causing significant customer relationsproblems. Further, if products are not accepted by customers due to such defects, and such returns exceed the amount we accrued for defective returns basedon our historical experience, our operating results would be adversely affected.Our products must successfully interoperate with products from other vendors. As a result, when problems occur in a network, it may be difficult toidentify the sources of these problems. The occurrence of system errors, whether or not caused by our products, could result in the delay or loss of marketacceptance of our products and any necessary revisions may cause us to incur significant expenses. The occurrence of any such problems would likely have amaterial adverse effect on our business, operating results and financial condition.Our dependence on few manufacturers for our manufacturing requirements could harm our operating results.We primarily rely on our manufacturing partners; Alpha Networks, Inc. headquartered in Hsinchu, Taiwan, Flextronics, Inc. headquartered inSingapore, and select other partners to manufacture our products. We have experienced delays in product shipments from our manufacturing partners in thepast, which in turn delayed product shipments to our customers. These or similar problems may arise in the future, such as delivery of products of inferiorquality, delivery of insufficient quantity of products, or the interruption or discontinuance of operations of a manufacturer, any of which could have amaterial adverse effect on our business and operating results. In addition, any natural disaster or business interruption to our manufacturing partners couldsignificantly disrupt our business. While we maintain strong relationships with our manufacturing partners, our agreements with these manufacturers aregenerally of limited duration and pricing, quality and volume commitments are negotiated on a recurring basis. The failure to maintain continuingagreements with our manufacturing partners could adversely affect our business. We intend to introduce new products and product enhancements, which willrequire that we rapidly achieve volume production by coordinating our efforts with those of our suppliers and contract manufacturers.As part of our cost-reduction efforts, we will need to realize lower per unit product costs from our manufacturing partner by means of volumeefficiencies and the utilization of manufacturing sites in lower-cost geographies. However, we cannot be certain when or if such price reductions will occur.The failure to obtain such price reductions would adversely affect our operating results.Regulations related to disclosure requirements regarding conflict minerals may force us to incur additional compliance expenses, may make oursupply chain more complex.On August 22, 2012, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new disclosureregulations for public companies that manufacture products that contain certain minerals and their derivatives, namely tin, tantalum, tungsten or gold, knownas conflict minerals, if these minerals are necessary to the functionality or production of the company’s products. These regulations require issuers to reportannually whether or not such minerals originate from the Democratic Republic of Congo (“DRC”) and adjoining countries and in some cases to performextensive due diligence on their supply chains for such minerals. The implementation of these new requirements could adversely affect the sourcing,availability and pricing of conflict minerals used in the manufacture of networking equipment, including our products. In addition, we may incur additionalcosts to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals used in our products. Sinceour supply chain is complex, the due diligence procedures that we implement may not enable us to ascertain the origins for these minerals or determine thatthese minerals are DRC conflict free, which may harm our reputation. We may also face difficulties in satisfying customers who may require that our productsbe certified as DRC conflict free, which could harm our relationships with these customers and lead to a loss of revenue. These new requirements also couldhave the effect of limiting the pool of suppliers from which we source these minerals, and we may be unable to obtain conflict-free minerals at competitiveprices, which could increase our costs and adversely affect our manufacturing operations and our profitability.20Table of ContentsWe depend upon international sales for a significant portion of our revenue which imposes a number of risks on our business.International sales constitute a significant portion of our net revenue. Our ability to grow will depend in part on the expansion of international sales.Our international sales primarily depend on the success of our resellers and distributors. The failure of these resellers and distributors to sell our productsinternationally would limit our ability to sustain and grow our revenue. There are a number of risks arising from our international business, including:•longer accounts receivable collection cycles;•difficulties in managing operations across disparate geographic areas;•difficulties associated with enforcing agreements through foreign legal systems;•higher credit risks requiring cash in advance or letters of credit;•difficulties in safeguarding intellectual property;•political and economic turbulence;•terrorism, war or other armed conflict;•natural disasters and epidemics;•potential adverse tax consequences;•compliance with regulatory requirements of foreign countries, including compliance with rapidly evolving environmental regulations;•compliance with U.S. laws and regulations pertaining to the sale and distribution of products to customers in foreign countries, including exportcontrols and the Foreign Corrupt Practices Act; and•the payment of operating expenses in local currencies, which exposes us to risks of currency fluctuations.Substantially all of our international sales are U.S. dollar-denominated. Future increases in the value of the U.S. dollar relative to foreign currenciescould make our products less competitive in international markets. In the future, we may elect to invoice some of our international customers in localcurrency, which would expose us to fluctuations in exchange rates between the U.S. dollar and the particular local currency. If we do so, we may decide toengage in hedging transactions to minimize the risk of such fluctuations.We have entered into foreign exchange forward contracts to offset the impact of payment of operating expenses in local currencies to some of ouroperating foreign subsidiaries. However, if we are not successful in managing these foreign currency transactions, we could incur losses from these activities.We must continue to develop and increase the productivity of our indirect distribution channels to increase net revenue and improve our operatingresults.Our distribution strategy focuses primarily on developing and increasing the productivity of our indirect distribution channels. If we fail to developand cultivate relationships with significant channel partners, or if these channel partners are not successful in their sales efforts, sales of our products maydecrease and our operating results could suffer. Many of our channel partners also sell products from other vendors that compete with our products. Ourchannel partners may not continue to market or sell our products effectively or to devote the resources necessary to provide us with effective sales, marketingand technical support. We may not be able to successfully manage our sales channels or enter into additional reseller and/or distribution agreements. Ourfailure to do any of these could limit our ability to grow or sustain revenue.Our operating results for any given period have and will continue to depend to a significant extent on large orders from a relatively small number ofchannel partners and other customers. However, we do not have binding purchase commitments from any of them. A substantial reduction or delay in sales ofour products to a significant reseller, distributor or other customer could harm our business, operating results and financial condition because our expenselevels are based on our expectations as to future revenue and to a large extent are fixed in the short term. Under specified conditions, some third-partydistributors are allowed to return products to us and unexpected returns could adversely affect our results.The sales cycle for our products is long and we may incur substantial non-recoverable expenses or devote significant resources to sales that do notoccur when anticipated.Our products represent a significant strategic decision by a customer regarding its communications infrastructure. The decision by customers topurchase our products is often based on the results of a variety of internal procedures associated with the evaluation, testing, implementation and acceptanceof new technologies. Accordingly, the product evaluation process frequently results in a lengthy sales cycle, typically ranging from three months to longerthan a year, and as a result, our ability to sell products is subject to a number of significant risks, including risks that:•budgetary constraints and internal acceptance reviews by customers will result in the loss of potential sales;•there may be substantial variation in the length of the sales cycle from customer to customer, making decisions on the expenditure of resourcesdifficult to assess;21Table of Contents•we may incur substantial sales and marketing expenses and expend significant management time in an attempt to initiate or increase the sale ofproducts to customers, but not succeed;•if a sales forecast from a specific customer for a particular quarter is not achieved in that quarter, we may be unable to compensate for theshortfall, which could harm our operating results; and•downward pricing pressures could occur during the lengthy sales cycle for our products.Our revenues may decline as a result of changes in public funding of educational institutions. A portion of our revenues comes from sales to both public and private K-12 educational institutions. Public schools receive funding from local taxrevenue, and from state and federal governments through a variety of programs, many of which seek to assist schools located in underprivileged or rural areas.The funding for a portion of our sales to educational institutions comes from a federal funding program known as the E-Rate program. E-Rate is a program ofthe Federal Communications Commission that subsidizes the purchase of approved telecommunications, Internet access, and internal connection costs foreligible public educational institutions. The E-Rate program, its eligibility criteria, the timing and specific amount of federal funding actually available andwhich Wi-Fi infrastructure and product sectors will benefit, are uncertain and subject to final federal program approval and funding appropriation continuesto be under review by the Federal Communications Commission and there can be no assurance that this program or its equivalent will continue, and as aresult, our business may be harmed. Furthermore, if state or local funding of public education is significantly reduced because of legislative or policy changesor by reductions in tax revenues due to changing economic conditions, our sales to educational institutions may be negatively impacted by these changedconditions. Any reduction in spending on information technology systems by educational institutions would likely materially and adversely affect ourbusiness and results of operations. This is a specific example of the many factors which add additional uncertainty to our future revenue from our educationend-customers.To successfully manage our business or achieve our goals, we must attract, retain, train, motivate, develop and promote key employees, and failure todo so can harm us.Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, service andoperations personnel, many of whom would be difficult to replace. We do not have employment contracts with these individuals that mandate that theyrender services for any specific term, nor do we carry life insurance on any of our key personnel. We have experienced and may in the future experiencesignificant turnover in our executive personnel. In addition, retention has generally become more difficult for us, in part because the exercise price of most ofthe stock options granted to many of our employees is above the market price. As a result, we experienced high levels of attrition. We believe our futuresuccess will also depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing, service, finance andoperations personnel. The market for these personnel is competitive, and we have had difficulty in hiring employees, particularly engineers, in the time-framewe desire.Companies in the networking industry whose employees accept positions with competitors frequently claim that competitors have engaged in unfairhiring practices. We have from time to time been involved in claims like this with other companies and, although to date they have not resulted in materiallitigation, we do not know whether we will be involved in additional claims in the future. We could incur substantial costs in litigating any such claims,regardless of the merits.Failure to successfully expand our sales and support teams or educate them in regard to technologies and our product families may harm our operatingresults.The sale of our products and services requires a concerted effort that is frequently targeted at several levels within a prospective customer'sorganization. We may not be able to increase net revenue unless we expand our sales and support teams in order to address all of the customer requirementsnecessary to sell our products.We cannot assure you that we will be able to successfully integrate employees into our company or to educate and train current and future employeesin regard to rapidly evolving technologies and our product families. A failure to do so may hurt our revenue growth and operating results.Failure of our products to comply with evolving industry standards and complex government regulations may adversely impact our business.If we do not comply with existing or evolving industry standards and government regulations, we may not be able to sell our products where thesestandards or regulations apply. The network equipment industry in which we compete is characterized by rapid changes in technology and customers'requirements and evolving industry standards. As a result, our success depends on:22Table of Contents•the timely adoption and market acceptance of industry standards, and timely resolution of conflicting U.S. and international industry standards;and•our ability to influence the development of emerging industry standards and to introduce new and enhanced products that are compatible withsuch standards.In the past, we have introduced new products that were not compatible with certain technological standards, and in the future, we may not be able toeffectively address the compatibility and interoperability issues that arise as a result of technological changes and evolving industry standards.Our products must also comply with various U.S. federal government regulations and standards defined by agencies such as the FederalCommunications Commission, standards established by governmental authorities in various foreign countries and recommendations of the InternationalTelecommunication Union. In some circumstances, we must obtain regulatory approvals or certificates of compliance before we can offer or distribute ourproducts in certain jurisdictions or to certain customers. Complying with new regulations or obtaining certifications can be costly and disruptive to ourbusiness.If we do not comply with existing or evolving industry standards or government regulations, we will not be able to sell our products where thesestandards or regulations apply, which may prevent us from sustaining our net revenue or achieving profitability.If we do not adequately manage and evolve our financial reporting and managerial systems and processes, our ability to manage and grow our businessmay be harmed.Our ability to successfully implement our business plan and comply with regulations requires an effective planning and management process. We needto continue improving our existing, and implement new, operational and financial systems, procedures and controls. We need to ensure that the businessesacquired are appropriately integrated in our financial systems. We integrated the financial and other key managerial systems of Enterasys with Extremeeffective July 1, 2014, the first day of our fiscal 2015. Any delay in the implementation of, or disruption in the integration of acquired businesses, or delayand disruption in the transition to, new or enhanced systems, procedures or controls, could harm our ability to record and report financial and managementinformation on a timely and accurate basis, or to forecast future results.Changes in the effective tax rate including from the release of the valuation allowance recorded against our net U.S. deferred tax assets, or adverseoutcomes resulting from examination of our income or other tax returns or change in ownership, could adversely affect our results.Our future effective tax rates may be volatile or adversely affected by changes in our business or U.S. or foreign tax laws, including: the partial or fullrelease of the valuation allowance recorded against our net U.S. deferred tax assets; expiration of or lapses in the research and development tax credit laws;transfer pricing adjustments; tax effects of stock-based compensation; or costs related to restructurings. In addition, we are subject to the examination of ourincome tax returns by the Internal Revenue Service and other tax authorities. Although we regularly assess the likelihood of adverse outcomes resulting fromthese examinations to determine the adequacy of our provision for income taxes, there is no assurance that such determinations by us are in fact adequate.Changes in our effective tax rates or amounts assessed upon examination of our tax returns may have a material, adverse impact on our cash flows and ourfinancial condition.Our future effective tax rate in particular could be adversely affected by a change in ownership pursuant to U.S. Internal Revenue Code Section 382. Ifa change in ownership occurs, it may limit our ability to utilize our net operating losses to offset our U.S. taxable income. If U.S. taxable income is greaterthan the change in ownership limitation, we will pay a higher rate of tax with respect to the amount of taxable income that exceeds the limitation. This couldhave a material adverse impact on our results of operations. On April 26, 2012, we adopted an Amended and Restated Rights Agreement to help protect ourassets (the “Rights Agreement”). In general, this does not allow a stockholder to acquire more than 4.95% of our outstanding common stock without a waiverfrom our board of directors, who must take into account the relevant tax analysis relating to potential limitation of our net operating losses. The RightsAgreement is effective through May 31, 2015, subject to ratification by a majority of stockholders at our next annual stockholder meeting on November 12,2014.Compliance with laws, rules and regulations relating to corporate governance and public disclosure may result in additional expenses.Federal securities laws, rules and regulations, as well as NASDAQ Stock Market rules and regulations, require companies to maintain extensivecorporate governance measures, impose comprehensive reporting and disclosure requirements, set strict independence and financial expertise standards foraudit and other committee members and impose civil and criminal penalties for companies and their Chief Executive Officers, Chief Financial Officers anddirectors for securities law violations. These laws, rules and regulations and the interpretation of these requirements are evolving, and we are makinginvestments to evaluate current practices and to continue to achieve compliance, which investments may have a material impact on the Company’s financialcondition.23Table of ContentsOur headquarters and some significant supporting businesses are located in northern California and other areas subject to natural disasters that coulddisrupt our operations and harm our business.Our corporate headquarters are located in Silicon Valley in Northern California. Historically, this region as well as our R&D centers in North Carolinaand New Hampshire have been vulnerable to natural disasters and other risks, such as earthquakes, fires, floods and tropical storms, which at times havedisrupted the local economy and posed physical risks to our property. We have contract manufacturers located in Taiwan where similar natural disasters andother risks may disrupt the local economy and pose physical risks to our property and the property of our contract manufacturer.In addition, the continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, maycause further disruptions to the economies of the U.S. and other countries. If such disruptions result in delays or cancellations of customer orders for ourproducts, our business and operating results will suffer.We currently do not have redundant, multiple site capacity in the event of a natural disaster, terrorist act or other catastrophic event. In the event ofsuch an occurrence, our business would suffer.Our stock price has been volatile in the past and our stock price may significantly fluctuate in the future.In the past, our common stock price has fluctuated significantly. This could continue as we or our competitors announce new products, our results orthose of our customers or competition fluctuate, conditions in the networking or semiconductor industry change, or when investors, change their sentimenttoward stocks in the networking technology sector.In addition, fluctuations in our stock price and our price-to-earnings multiple may make our stock attractive to momentum, hedge or day-tradinginvestors who often shift funds into and out of stock rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterlybasis.Provisions in our charter documents and Delaware law and our adoption of a stockholder rights plan may delay or prevent an acquisition of Extreme,which could decrease the value of our Common Stock.Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire uswithout the consent of our Board of Directors. Delaware law also imposes some restrictions on mergers and other business combinations between us and anyholder of 15% or more of our outstanding common stock. In addition, our Board of Directors has the right to issue preferred stock without stockholderapproval, which could be used to dilute the stock ownership of a potential hostile acquirer. Although we believe these provisions of our certificate ofincorporation and bylaws and Delaware law will provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with ourBoard of Directors, these provisions apply even if the offer may be considered beneficial by some of our stockholders.Our Rights Agreement provides that if a single stockholder (or group) acquires more than 4.95% of our outstanding common stock without a waiverfrom our Board of Directors, each holder of one share of our common stock (other than the stockholder or group who acquired in excess of 4.95% of ourcommon stock) may purchase a fractional share of our preferred stock that would result in substantial dilution to the triggering stockholder or group.Accordingly, although this plan is designed to prevent any limitation on the utilization of our net operating losses by avoiding issues raised under Section382 of the U.S. Internal Revenue Code, the Rights Agreement could also serve as a deterrent to stockholders wishing to effect a change of control.We rely on the availability of third-party licensesSome of our products are designed to include software or other intellectual property, including open source software, licensed from third parties. It maybe necessary in the future to seek or renew licenses relating to various aspects of these products. There can be no assurance that the necessary licenses wouldbe available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or theneed to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results, and financial condition.Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability toprotect our proprietary rights in our products. Further, the failure to comply with the terms of any license, including free open source software, may result inour inability to continue to use such license. Our inability to maintain or re-license any third-party licenses required in our products or our inability to obtainthird-party licenses necessary to develop new products and product enhancements, could require us, if possible, to develop substitute technology or obtainsubstitute technology of lower quality or performance standards or at a greater cost, any of which could delay or prevent product shipment and harm ourbusiness, financial condition, and results of operations.System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information, disrupt our internal operations andharm public perception of our products, which could adversely affect our business.24Table of ContentsIn the ordinary course of business, we store sensitive data, including intellectual property, our proprietary business information and that of ourcustomers, suppliers and business partners on our networks. The secure maintenance of this information is critical to our operations and business strategy.Increasingly, companies, including Extreme Networks, are subject to a wide variety of attacks on their networks on an ongoing basis. Despite our securitymeasures, Extreme Networks' information technology and infrastructure may be vulnerable to penetration or attacks by computer programmers and hackers,or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks, creating system disruptions orslowdowns and exploiting security vulnerabilities of our products, and the information stored on our networks could be accessed, publicly disclosed, lost orstolen, which could subject us to liability to our customers, suppliers, business partners and others, and cause us reputational and financial harm. In addition,sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design ormanufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of our networks.If an actual or perceived breach of network security occurs in our network or in the network of a customer of our networking products, regardless ofwhether the breach is attributable to our products, the market perception of the effectiveness of our products could be harmed. In addition, the economic coststo us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software systems and security vulnerabilities could besignificant and may be difficult to anticipate or measure. Because the techniques used by computer programmers and hackers, many of whom are highlysophisticated and well-funded, to access or sabotage networks change frequently and generally are not recognized until after they are used, we may be unableto anticipate or immediately detect these techniques. This could impede our sales, manufacturing, distribution or other critical functions, which couldadversely affect our business.Market conditions and changes in the industry could lead to discontinuation of our products or businesses resulting in asset impairmentsIn response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of,or otherwise exiting businesses. Any decision to limit investment in or dispose of or otherwise exit businesses may result in the recording of special charges,such as inventory and technology-related write-offs, workforce reduction costs, charges relating to consolidation of excess facilities, or claims from thirdparties who were resellers or users of discontinued products. Our estimates with respect to the useful life or ultimate recoverability of our carrying basis ofassets, including purchased intangible assets, could change as a result of such assessments and decisions. Although in certain instances, our supplyagreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed, our losscontingencies may include liabilities for contracts that we cannot cancel with contract manufacturers and suppliers. Further, our estimates relating to theliabilities for excess facilities are affected by changes in real estate market conditions.If our products do not effectively inter-operate with our customers’ networks and result in cancellations and delays of installations our business could beharmed.Our products are designed to interface with our customers’ existing networks, each of which have different specifications and utilize multiple protocolstandards and products from other vendors. Many of our customers’ networks contain multiple generations of products that have been added over time asthese networks have grown and evolved. Our products must inter-operate with many or all of the products within these networks as well as future products inorder to meet our customers’ requirements. If we find errors in the existing software or defects in the hardware used in our customers’ networks, we may needto modify our software or hardware to fix or overcome these errors so that our products will inter-operate and scale with the existing software and hardware,which could be costly and could negatively affect our business, financial condition, and results of operations. In addition, if our products do not inter-operatewith those of our customers’ networks, demand for our products could be adversely affected or orders for our products could be cancelled. This could hurt ouroperating results, damage our reputation, and seriously harm our business and prospects.Item 1B. Unresolved Staff CommentsNone.Item 2. PropertiesOur principal administrative, sales, and marketing facilities are located in San Jose, California. We started leasing our current headquarters in June2013. We also lease office space and executive suites in various other geographic locations domestically and internationally for research & development,sales and service personnel and administration. Our aggregate lease expense for fiscal 2014 was approximately $10.2 million.25Table of ContentsAt June 30, 2014, the significant facilities that we leased were as follows:LocationUseSize (in square feet) San Jose, CaliforniaPrincipal administrative, sales and marketing facilities57,600Research Triangle Park, North CarolinaResearch and development, sales and administrative offices85,400Salem, New HampshireResearch and development, sales and marketing and administrative offices197,300Item 3. Legal ProceedingsThe information set forth under the heading “Legal Proceedings” in Note 5, Commitments and Contingencies and Leases, in Notes to ConsolidatedFinancial Statements in Item 8 of Part II of this Annual Report on Form 10-K, is incorporated herein by reference.Item 4. Mine Safety DisclosuresNot Applicable26Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesCommon Stock Market Prices and DividendsOur common stock trades on the NASDAQ Global Market and commenced trading on NASDAQ on April 9, 1999 under the symbol “EXTR.” Thefollowing table sets forth the high and low sales 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.Stock PricesHigh LowFiscal year ended June 30, 2014: First quarter$5.22 $3.51Second quarter$7.18 $5.11Third quarter$7.82 $5.39Fourth quarter$6.10 $3.55Fiscal year ended June 30, 2013: First quarter$3.63 $2.95Second quarter$3.78 $3.22Third quarter$3.80 $3.37Fourth quarter$3.62 $3.00As of August 5, 2014, there were 227 stockholders of record of our common stock. Because many of our shares of common stock are held by brokersand other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. We havenever declared or paid cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future.We currently have authority granted by our Board of Directors to repurchase up to $75 million in common stock over a three year period startingOctober 1, 2012. As of June 30, 2014, we have repurchased 4.1 million shares of common stock at a total cost of $14.5 million.Certain information regarding our equity compensation plan(s) as required by Part II is incorporated by reference from our definitive Proxy Statementto be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2014 Annual Meeting of Stockholders notlater than 120 days after the end of the fiscal year covered by this report.STOCK PRICE PERFORMANCE GRAPHSet forth below is a stock price performance graph comparing the annual percentage change in the cumulative total return on our common stock withthe cumulative total returns of the CRSP Total Return Index for The NASDAQ Stock Market (U.S. companies) and the NASDAQ Computer ManufacturersSecurities for the period commencing June 28, 2009 and ending on June 30, 2014. The comparisons in the graph below are based on historical data and arenot intended to forecast the possible future performance of our common stock.27Table of ContentsComparison of Five-Year Cumulative Total ReturnsPerformance Graph for Extreme Networks, Inc.Prepared by CRSP (www.crsp.uchicago.edu), Center for Research in Security Prices, Booth School of Business, The University of Chicago. Used withpermission. All rights reserved.28Table of ContentsItem 6. Selected Financial DataThe following table sets forth selected consolidated financial data for each of the fiscal years ended June 30, 2014, June 30, 2013, June 30,2012, July 3, 2011 and June 27, 2010 derived from audited financial statements. These tables should be reviewed in conjunction with the ConsolidatedFinancial Statements in Item 8 and related Notes, as well as Item 7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations.” Historical results may not be indicative of future results. Year Ended June 30,2014(1) June 30,2013(2) June 30,2012(3) July 3,2011(4) June 27,2010(5) (In thousands, except per share amounts)Consolidated Statements of Operations Data: Net revenues$519,554 $299,343 $322,722 $334,428 $309,354Operating income (loss)$(50,232) $10,852 $13,909 $3,114 $(1,424)Net income$(57,310) $9,673 $15,872 $2,713 $227Net income per share – basic$(0.60) $0.10 $0.17 $0.03 $—Net income per share – diluted$(0.60) $0.10 $0.17 $0.03 $—Shares used in per share calculation – basic95,515 93,954 93,451 91,423 89,281Shares used in per share calculation – diluted95,515 95,044 94,490 92,795 89,477 As of June 30, 2014 June 30, 2013 June 30, 2012 July 3, 2011 June 27, 2010 (In thousands)Consolidated Balance Sheets Data: Cash and cash equivalents, short-term investments and marketable securities$105,882 $205,613 $153,515 $146,977 $135,359Inventories$57,109 $16,167 $26,609 $21,583 $21,842Total assets$526,432 $311,424 $284,590 $270,973 $262,885Deferred revenue, net$97,677 $41,454 $39,328 $36,973 $37,185Total debt$121,563 $— $— $— $—Other long-term liabilities$8,595 $1,507 $643 $2,474 $3,665Common stock and capital in excess of par value$845,364 $821,425 $970,743 $963,697 $956,922Accumulated deficit$(688,213) $(630,903) $(640,576) $(656,448) $(659,161)(1)Fiscal 2014 net income includes acquisition and integration costs of $25.7 million, amortization of intangibles of $16.7 million and a restructuringcharge, net of reversal of $0.5 million.(2)Fiscal 2013 net income includes gain on sale of facilities of $11.5 million, restructuring charge, net of reversal of $6.8 million and a charge forlitigation settlement, net of $2.0 million.(3)Fiscal 2012 net income includes restructuring charge, net of reversal of $1.6 million and litigation settlement gain of $0.1 million and $1.9 millioncumulative translation adjustments gain from Japan subsidiary liquidation.(4)Fiscal 2011 net income includes restructuring charge of $3.8 million and litigation settlement gain of $4.2 million.(5)Fiscal 2010 net income includes restructuring charge of $4.2 million and litigation settlement charge of $1.0 million.29Table of ContentsQuarterly Financial Data (Unaudited)Quarterly results for the years ended June 30, 2014 and 2013 follow: June 30,2014(1) March 31,2014(2) December 31,2013(3) September 30,2013(4) (In thousands, except per share amounts)Net revenues$155,293 $141,762 $146,583 $75,916Gross profit$82,922 $70,855 $69,845 $43,707Net income (loss)$(16,231) $(25,058) $(15,986) $(35)Net income (loss) per share – basic$(0.17) $(0.26) $(0.17) $—Net income (loss) per share – diluted$(0.17) $(0.26) $(0.17) $— June 30,2013(5) March 31,2013(6) December 31,2012(7) September 30,2012(8) (In thousands, except per share amounts)Net revenues$79,462 $68,203 $75,551 $76,127Gross profit$43,975 $37,937 $40,739 $39,975Net income (loss)$3,184 $(2,220) $(4,206) $12,915Net income (loss) per share – basic$0.03 $(0.02) $(0.04) $0.14Net income (loss) per share – diluted$0.03 $(0.02) $(0.04) $0.14____________________(1)Net loss and net loss per share include the effect of acquisition and integration costs of $6.9 million and amortization of intangibles of $5.3 million.(2)Net loss and net loss per share include the effect of acquisition and integration costs of $6.4 million, amortization of intangibles of $7.7 million andlitigation settlement income of $0.1 million.(3)Net loss and net loss per share include the effect of acquisition and integration costs of $8.7 million, amortization of intangibles of $3.8 million and arestructuring charge of $0.4 million.(4)Net loss and net loss per share include the effect of acquisition costs of $3.7 million and a restructuring charge of $75,000.(5)Net income and net income per share include the effect of restructuring charge of $0.6 million.(6)Net loss and net loss per share include the effect of restructuring charge of $1.1 million, litigation settlement of $2.5 million.(7)Net loss and net loss per share include the effect of restructuring charge of $5.2 million and litigation settlement received of $0.4 million.(8)Net income and net income per share include the effect of restructuring reversal of $10,000 and gain on sale of facilities of $11.5 million.Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters maynot agree with per share amounts for the year.30Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsBusiness OverviewWe develop and sell network infrastructure equipment and offer related services contracts for extended warranty and maintenance to our enterprise,data center and service provider customers. Substantially all of our revenue is derived from the sale of our networking equipment and related servicecontracts.We believe that understanding the following key developments is helpful to an understanding of our operating results for the fiscal year ended June30, 2014.We are a leading provider of network infrastructure equipment and services for enterprises, data centers, and serviceproviders. We were incorporated in California in May 1996 and reincorporated in Delaware in March 1999. Our corporateheadquarters are located in San Jose, California. We develop and sell network infrastructure equipment to our enterprise, datacenter and telecommunications service provider customers.On October 31, 2013 (the “Acquisition Date”), we completed the acquisition of Enterasys Networks, Inc. (“Enterasys”), a privately held provider ofwired and wireless network infrastructure and security solutions, for $180.0 million, net of cash acquired, whereby Enterasys became our wholly-ownedsubsidiary. The combined entity immediately became a networking industry leader with more than 12,000 customers. As a combined Company, we believewe will set the standard for the networking industry with a strategic focus on three principles:Highly scaled and differentiated products and solutions: Our combined product portfolio spans data centernetworking, switching and routing, Software-Defined Networking (SDN), wired and wireless LAN access, networkmanagement with analytics and integrated security features. This broader solutions portfolio can be leveraged to better serve existing and newcustomers. We will continue to enhance and support the product roadmaps of both companies going forward to protect the investments of customersand avoid any disruption to their businesses. We intend to increase research and development to accelerate our vision for high-performance,modular, open networking.Leading customer service and support: We are working to augment our current outsourced support model byintegrating Enterasys' in-sourced expertise, building on Enterasys' award-winning heritage and strong commitmentto exceptional customer experience. The Company's expanded global network of channel partners and distributorswill benefit from expanded services and support capabilities.Strong Channels and Strategic Partners: Our focus is to leverage the capabilities of the combinedCompany and expand existing partnerships with Ericsson and the developing partnership with Lenovo as well ascontinue to add new strategic partnerships in the future. Additionally, we will increase our focus on partnering withdistributors and channel partners globally. The goal is to develop and enhance relationships that grow revenueand profits for the Company and our alliance and channel partners. At the same time, we are investing ininfrastructure to make doing business with the Company easier and more efficient.Also, on October 31, 2013, the Company entered into a $125 million senior secured credit facilities agreement consisting of a $65 million term loanfacility (“Term Loan”) and a revolving credit facility of $60 million (“Revolving Facility”). Both facilities mature on October 31, 2018. The Company drew$35 million of the $60 million Revolving Facility on the acquisition date and used the proceeds from the Term Loan to pay a portion of the purchase price inthe acquisition of all of the issued and outstanding capital stock of Enterasys.Impact of the Global Economic DevelopmentsWe believe that the slow economic recovery in the United States, Asia and Europe, and other challenges affecting global economic conditions placedsignificant limitations on our financial performance. We operate in three regions: Americas, which includes the United States, Canada, Mexico, CentralAmerica and South America; EMEA, which includes Europe, Middle East, and Africa; and APAC which includes Asia Pacific, South Asia, Japan andAustralia. Sales in APAC and some European countries were most impacted as a result of the soft global economy. We believe that conservative purchasingpatterns and delays or cancellation of IT infrastructure plans in the face of continued uncertainty regarding the global economy, may continue to negativelyimpact overall demand for networking solutions, including Ethernet equipment.We have taken, and plan to continue to take, other steps to manage our business in the current economic environment. For example, we have managedfrom time to time our contingent work force, consolidation of office locations, reduced travel and other discretionary spending, realigned our productportfolio and organization to grow revenue and operating income, and controlled all hiring activities.31Table of ContentsIncreasing Demand for BandwidthWe believe that the continued increase in demand for bandwidth will over time drive future demand for high performance Ethernet solutions. Wide-spread adoption of electronic communications in all aspects of our lives, proliferation of next generation converged mobile devices and deployment of triple-play services to residences and businesses alike, continues to generate demand for greater network performance across broader geographic locations. Inparallel to these transformational forces within society and the community at large, the accelerating adoption of internet and intranet “cloud” solutionswithin business enterprises is enabling organizations to offer greater business scalability to improve efficiency and through more effective operations,improve profitability. In order to realize the benefits of these developments, customers require additional bandwidth and high performance from their networkinfrastructure at affordable prices. We are seeing the initial indications that the Ethernet segment of the networking equipment market will return to growth asenterprise, data center and carrier customers continue to recognize the performance and operating cost benefits of Ethernet technology.Expanding Product PortfolioWe believe that continued success in our marketplace is dependent upon a variety of factors that includes, but is not limited to, our ability to design,develop and distribute new and enhanced products employing leading-edge technology. Over the past few years, we further extended our product portfoliothrough continued evolutions of our BlackDiamond BDX8, a highly-scalable core switch for IT and cloud data centers, the Summit family of stackableswitches for the intelligent edge, the S-series flow-based switching for campus and data center, the identiFi Wi-Fi product portfolio with both indoor andoutdoor 802.11a/b/g/n/ac access points, the E4G Cell Site Router family for mobile backhaul, and a revamp of our software and network managementsolutions that include: NetSight for centralized network management and NAC/Mobile-IAM that provides BYOD management and network access controlsolution for wired and wireless LAN and VPN users. During fiscal 2014, we also introduced key software functionality that will drive differentiation. Newsoftware and hardware introductions during the current year included a Summit X770 switch supporting industry's highest density performing top of rackswitching, Purview - a network-powered application analytics and optimization solution, identiFi 38xx WiFi Access Points supporting 802.11ac, SDN 2.0 -an open, standards-based (based on OpenDaylight) and comprehensive SDN solution, 100GbE support for the BDX8 and NetSight 6.0 a consolidatedmanagement across the expanded portfolio.​Industry DevelopmentsThe market for network infrastructure equipment is highly competitive and dominated by a few large companies. The current economic climate hasfurther driven consolidation of vendors within the Ethernet networking market and with vendors from adjacent markets, including storage, security, wirelessand voice applications. We believe that the underpinning technology for all of these adjacent markets is Ethernet. As a result, independent Ethernet switchvendors are being acquired or merged with larger, adjacent market vendors to enable them to deliver complete and broad solutions. As an independentEthernet switch vendor, we must provide products that, when combined with the products of our large strategic partners, create compelling solutions for end-user customers. Our acquisition of Enterasys gives us a larger market share and presence and an opportunity to create complementary solutions for ourcustomers. Our approach is to focus on the intelligence and automation layer that spans our hardware products and that facilitates end-to-end solutions, asopposed to positioning Extreme Networks as a low-cost-vendor with point products. Lower overall market growth has also created an environment ofdeclining margins due to increased competition between the remaining vendors in this space. During the last year, overall Ethernet port counts have grown,while industry revenues have decreased, signaling a decline in average selling price per port. Our product life cycle and operational cost reduction efforts aretherefore even more critical for margin preservation.Amendment to Rights Agreement On November 27, 2012, our Board of Directors adopted an Amended and Restated Rights Agreement between the Company and ComputershareShareholder Services LLC as the rights agent (the “Restated Rights Plan”). The Restated Rights Plan governs the terms of each right (“Right”) that has beenissued with respect to each share of Common Stock of Extreme Networks. Each Right initially represents the right to purchase one one-thousandth of a shareof our Series A Preferred Stock. The Restated Rights Plan replaces in its entirety the Rights Agreement, dated as of April 27, 2001, as amended on June 30,2010; April 26, 2011, between us and Mellon Investor services LLC (the “Prior Rights Plan”).The Board reviewed the necessity of the provisions of the Prior Rights Plan. The Prior Rights Plan was adopted to preserve the value of our deferred taxassets, including our net operating loss carry forwards, with respect to our ability to fully use its tax benefits to offset future income which may be limited ifwe experience an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986 as a result of ordinary buying and selling of ourcommon stock. Following its review, the Board decided it was necessary and in the best interests of us and our stockholders to enter into the Restated RightsPlan. The Restated Rights Plan incorporates the Prior Rights Plan and the amendments thereto into a single agreement and extended the term of the PriorRights Plan to April 30, 2013. Our stockholders voted to extend the term of the Restated Rights Plan from April 30, 201332Table of Contentsto April 30, 2014 at our 2012 Annual Meeting of Stockholders, and the Restated Rights Plan was amended effective April 30, 2013 to reflect the extension ofthe term. The Board of Directors unanimously approved an amendment to the Rights Plan effective April 30, 2014 to extend the Rights Plan through May 31,2015, subject to ratification by a majority of the stockholders at the next annual meeting, expected to be held on November 12, 2014.Results of OperationsOur operations and financial performance have been affected by the economic factors described above and our acquisition of Enterasys, and duringfiscal 2014, we achieved the following results:•Net revenue of $519.6 million, an increase of 73.6% from fiscal 2013 net revenue of $299.3 million.•Product revenue of $411.8 million, an increase of 71.6% from fiscal 2013 product revenue of $240.0 million.•Service revenue of $107.8 million, an increase of 81.5% from fiscal 2013 service revenue of $59.4 million.•Total gross margin of 51.5% of net revenue in fiscal 2014, compared to 54.3% in fiscal 2013.•Operating loss of $50.2 million (including acquisition and integration costs of $25.7 million, amortization of intangibles of $16.7 million,restructuring charges of $0.5 million, and $0.1 million of litigation settlement income), a decrease from operating income of $10.9 million infiscal 2013.•Net loss was $57.3 million in fiscal 2014, a decrease from net income of $9.7 million in fiscal 2013.•Cash flow used in operating activities was $26.8 million, compared to cash flow provided by operating activities of $32.2 million in fiscal 2013, adecrease of $59.1 million. Cash and cash equivalents, short-term investments and marketable securities were $105.9 million as of June 30, 2014, adecrease of $99.7 million from fiscal 2013.Net RevenueThe following table presents net product and service revenue for the fiscal years 2014, 2013 and 2012 (dollars in thousands): Year Ended Year Ended June 30, 2014 June 30, 2013 $Change %Change June 30, 2013 June 30, 2012 $Change %ChangeNet Revenue: Product$411,761 $239,955 $171,806 71.6% $239,955 $261,873 $(21,918) (8.4)%Percentage of netrevenue79.3% 80.2% 80.2% 81.2% Service107,793 59,388 48,405 81.5% 59,388 60,849 (1,461) (2.4)%Percentage of netrevenue20.7% 19.8% 19.8% 18.9% Total net revenue$519,554 $299,343 $220,211 73.6% $299,343 $322,722 $(23,379) (7.2)%Product revenue increased in fiscal 2014 as compared to fiscal 2013 primarily due to significant increase in the number of customers and products solddue to our acquisition of Enterasys in the second quarter of fiscal 2014. This resulted in a significant increase in our product revenue in all regions.Product revenue decreased in fiscal 2013 as compared to fiscal 2012 primarily due to weaker than expected demand from our public sector andenterprise customers in the United States and we continued to experience weak demand from our public sector and strategic customers and distributors in theEMEA region attributable to the persistent macroeconomic challenges in Western Europe.Service revenue increased in fiscal 2014 as compared to fiscal 2013 primarily due to an increase in service maintenance contracts and professionalservice and training revenues due to our acquisition of Enterasys in the second quarter of fiscal 2014.Service revenue decreased in fiscal 2013 as compared to fiscal 2012 reflecting slight decrease in the levels of service contract renewals.33Table of ContentsAs noted previously, we operate in three regions: Americas, which includes the United States, Canada, Mexico, Central America and South America;EMEA, which includes Europe, Russia, Middle East, and Africa; and APAC which includes Asia Pacific, South Asia, Japan and Australia. The following tablepresents the total net revenue geographically for the fiscal years 2014, 2013 and 2012 (dollars in thousands): Year Ended Year EndedNet RevenueJune 30, 2014 June 30, 2013 $Change %Change June 30, 2013 June 30, 2012 $Change %ChangeAmericas: United States$211,734 $101,790 $109,944 108.0% $101,790 $106,110 $(4,320) (4.1)%Other45,790 33,584 12,206 36.3% 33,584 34,970 (1,386) (4.0)%Total Americas257,524 135,374 122,150 90.2% 135,374 141,080 (5,706) (4.0)%Percentage of netrevenue49.6% 45.2% 45.2% 43.7% EMEA202,555 112,812 89,743 79.6% 112,812 128,093 (15,281) (11.9)%Percentage of netrevenue39.0% 37.7% 37.7% 39.7% APAC59,475 51,157 8,318 16.3% 51,157 53,549 (2,392) (4.5)%Percentage of netrevenue11.4% 17.1% 17.1% 16.6% Total net revenues$519,554 $299,343 $220,211 73.6% $299,343 $322,722 $(23,379) (7.2)%Revenue increased in all regions in 2014 as compared to fiscal 2013 primarily due increased customers and service contracts from the acquisition ofEnterasys in the second quarter of fiscal 2014.Revenue in the EMEA decreased in 2013 as compared to fiscal 2012 primarily due to macroeconomic challenges which affected the demand fromcustomers in those regions. Revenue in the Americas and APAC decreased slightly as compared to fiscal 2012.We rely upon multiple channels of distribution, including distributors, direct resellers, OEM, and direct sales. Revenue through our distributorchannel was 44% of total product revenue in fiscal 2014, 43% of total product revenue in fiscal 2013, and 42% in fiscal 2012.The level of sales to any one customer, including a distributor, may vary from period to period.Cost of Revenue and Gross ProfitThe following table presents the gross profit on product and service revenue and the gross profit percentage of net revenue for the fiscal years 2014,2013 and 2012 (dollars in thousands): Year Ended Year Ended June 30, 2014 June 30, 2013 $Change %Change June 30, 2013 June 30, 2012 $Change %ChangeGross profit: Product$198,088 $124,093 $73,995 59.6% $124,093 $141,646 $(17,553) (12.4)%Percentage of productrevenue48.1% 51.7% 51.7% 54.1% Service69,241 38,533 30,708 79.7% 38,533 38,201 332 0.9 %Percentage of servicerevenue64.2% 64.9% 64.9% 62.8% Total gross profit$267,329 $162,626 $104,703 64.4% $162,626 $179,847 $(17,221) (9.6)%Percentage of netrevenue51.5% 54.3% 54.3% 55.7% Cost of product revenue includes costs of materials, amounts paid to third-party contract manufacturers, costs related to warranty obligations, charges forexcess and obsolete inventory, amortization of developed technology intangibles, royalties under34Table of Contentstechnology license agreements, and internal costs associated with manufacturing overhead, including management, manufacturing engineering, qualityassurance, development of test plans, and document control. We outsource substantially all of our manufacturing and supply chain management operations,and we conduct quality assurance, manufacturing engineering, document control and distribution at our facilities in San Jose, California, Salem, NewHampshire, China, and Taiwan.Product gross margin in fiscal 2014 decreased as compared to fiscal 2013 primarily due to a $11.1 million charge related to the utilization of the netincrease in cost basis of the inventory acquired in connection with the purchase of Enterasys, $11.0 million for the amortization of developed technologyintangibles from the acquisition of Enterasys during the second quarter of fiscal 2014 and increased stock compensation expenses offset by higher economicbenefits realized in our manufacturing costs as compared to fiscal 2013.Product gross margin in fiscal 2013 decreased as compared to fiscal 2012 due to lower product revenue and an increase in charges for excess andobsolete inventory offset by economic benefits realized in our manufacturing costs.Our cost of service revenue consists primarily of labor, overhead, repair and freight costs and the cost of spares used in providing support undercustomer service contracts.Service gross margin in fiscal 2014 increased as compared to fiscal 2013 primarily due to increased service revenue as a result of acquisition ofEnterasys and cost reduction initiatives offset by higher personnel, overhead and travel cost as a result of our acquisition of Enterasys during the secondquarter of fiscal 2014.Service gross profit in fiscal 2013 increased as compared to fiscal 2012 primarily due to lower labor costs from our cost reduction initiatives.Operating ExpensesThe following table presents operating expenses and operating income (dollars in thousands): Year Ended Year Ended June 30, 2014 June 30, 2013 $Change %Change June 30, 2013 June 30, 2012 $Change %ChangeResearch anddevelopment$77,146 $40,521 $36,625 90.4 % $40,521 $45,640 $(5,119) (11.2)%Sales and marketing156,666 87,202 69,464 79.7 % 87,202 90,167 (2,965) (3.3)%General andadministrative40,912 26,725 14,187 53.1 % 26,725 28,658 (1,933) (6.7)%Acquisition andintegration costs25,716 — 25,716 100.0 % — — — — %Restructuring charge, netof reversals510 6,836 (6,326) (92.5)% 6,836 1,594 5,242 328.9 %Amortization ofintangibles16,711 — 16,711 100.0 % — — — — %Litigation settlement(income)/loss(100) 2,029 (2,129) (104.9)% 2,029 (121) 2,150 (1,776.9)%Gain on sale of campus— (11,539) 11,539 (100.0)% (11,539) — (11,539) 100.0 %Total operating expenses$317,561 $151,774 $165,787 109.2 % $151,774 $165,938 $(14,164) (8.5)%Operating (loss) income$(50,232) $10,852 $(61,084) (562.9)% $10,852 $13,909 $(3,057) (22.0)%35Table of ContentsThe following table highlights our operating expenses and operating income as a percentage of net revenues: Year Ended June 30, 2014 June 30, 2013 June 30, 2012Research and development14.8 % 13.5 % 14.1 %Sales and marketing30.2 % 29.1 % 27.9 %General and administrative7.9 % 8.9 % 8.9 %Acquisition and integration costs5.0 % — % — %Restructuring charge, net of reversals0.1 % 2.3 % 0.5 %Amortization of intangibles3.2 % — % — %Litigation settlement (income)/loss— % 0.7 % — %Gain on sale of campus— % (3.9)% — %Total operating expenses61.1 % 50.6 % 51.4 %Operating (loss) income(9.7)% 3.6 % 4.3 %Research and Development ExpensesResearch and development expenses consist primarily of salaries and related personnel expenses, consultant fees and prototype expenses related to thedesign, development, and testing of our products. Research and development expenses increased in fiscal 2014 as compared to fiscal 2013 primarily due toincreased personnel and occupancy costs as a result of our acquisition of Enterasys in the second quarter of fiscal 2014.Research and development expenses decreased in fiscal 2013 as compared to fiscal 2012 primarily due to lower spending on engineering projects dueto differences in timing and pattern of planned engineering project spending as compared to fiscal 2012.Sales and Marketing ExpensesSales and marketing expenses consist of salaries, commissions and related expenses for personnel engaged in marketing and sales functions, as well astrade shows and promotional expenses. Sales and marketing expenses increased in fiscal 2014 as compared to fiscal 2013 primarily due to increasedpersonnel costs as well as additional spending on additional sales and marketing programs, as a result of our acquisition of Enterasys in the second quarter offiscal 2014.Sales and marketing expenses decreased in fiscal 2013 as compared to fiscal 2012 primarily due to lower commissions and reduced personnel costsresulting from lower revenue levels and a reduction in headcount during the year.General and Administrative ExpensesGeneral and administrative expenses increased in fiscal 2014 as compared to fiscal 2013 primarily due to higher personnel and travel costs and higheroccupancy costs as a result of our acquisition of Enterasys in the second quarter of fiscal 2014.General and administrative expenses decreased in fiscal 2013 as compared to fiscal 2012 primarily due to cost reduction initiatives realized as part ofthe restructuring plan offset by CEO transition expenses of $2.1 million.Acquisition and Integration CostsAs a result of our acquisition of Enterasys, we incurred $25.7 million of acquisition and integration costs in fiscal 2014. Of the total $25.7 millionexpense for fiscal 2014, $19.7 million expense related to integration costs and the remaining $6.0 million expense related to acquisition costs. The Companyexpects to incur integration costs for the next two years at a lower rate.Amortization of IntangiblesDuring fiscal 2014, we recorded $16.7 million of amortization expenses primarily for certain intangibles related to the acquisition of Enterasys.Restructuring Charge, Net of ReversalDuring fiscal 2014, 2013 and 2012, we recorded restructuring charges, net of reversals, of $0.5 million, $6.8 million, and $1.6 million, respectively.36Table of ContentsFiscal 2013 RestructuringDuring the second quarter of fiscal 2013, we reduced costs through targeted restructuring activities intended to reduce operating costs and realign ourorganization in the current competitive environment. As part of our restructuring efforts in the second quarter of fiscal 2013, we initiated a plan to reduce ourworldwide headcount by 13%, consolidate specific global administrative functions, and shift certain operating costs to lower cost regions, among otheractions. We have substantially expensed all costs associated with this initiative. As of June 30, 2014, we had restructuring liabilities of $0.3 million related tothe fiscal 2013 restructuring, which we anticipate paying by the end of fiscal 2015.Fiscal 2012 RestructuringDuring fiscal 2012, we incurred total charges of $2.2 million, including $1.8 million related to severance, $0.1 million of contract termination fees,and $0.2 million other charges. A portion of this restructuring activity was related to the liquidation of our Japan subsidiary with a cost of $0.5 million atJune 30, 2012. We substantially liquidated the subsidiary in Japan in the fourth quarter or fiscal 2012, as part of our broad restructuring effort. We disposedof the remaining immaterial assets and liabilities and completed the liquidation process during fiscal 2013. There were no outstanding liabilities related tothe fiscal 2012 restructuring as of June 30, 2014.Fiscal 2011 RestructuringDuring fiscal 2011, we commenced a strategy to focus on growing revenue in specific market verticals and on improving operational effectiveness. Asof June 30, 2013, we had restructuring liabilities of $0.4 million remaining related to the fiscal 2011 restructuring, which we paid during fiscal 2014.Litigation Settlement (Income) ExpenseDuring the third quarter of fiscal 2014, the Company received $0.1 million from the settlement of a property lease litigation matter.During the third quarter of fiscal 2013, we recognized a litigation charge of $2.5 million related to a settlement agreement entered into with EnterasysNetworks prior to the acquisition.During the fourth quarter of fiscal 2012, from a judgment related to our lawsuit with Enterasys Networks for patent infringement, we received $0.6million from Enterasys including a first trial damage award of $0.2 million, reimbursement of legal costs from the first trial of $0.4 million, and interest.Gain on Sale of CampusDuring fiscal 2013, we completed the sale of our corporate campus and accompanying 16 acres of land in Santa Clara, California for net cash proceedsof approximately $44.7 million of which approximately $2.0 million was received in fiscal 2012. We realized a gain of approximately $11.5 million inconnection with this transaction, yet recorded a tax loss of approximately $24.6 million.Interest IncomeInterest income was $0.8 million in fiscal 2014, $1.1 million in fiscal 2013 and $1.2 million in fiscal 2012, representing a decrease of $0.3 million infiscal 2014 from fiscal 2013, and a decrease of $0.1 million in fiscal 2013 from fiscal 2012. The decrease in interest income in fiscal 2014 from fiscal 2013was due to a decrease in the investment balance to fund a portion of the acquisition of Enterasys. The decrease in interest income in fiscal 2013 from fiscal2012 was due to a decrease in the average interest yield from 0.95% in fiscal 2012 to 0.54% in fiscal 2013.Interest ExpenseWe had $2.1 million interest expense for fiscal 2014. Interest expense was immaterial for both fiscal years 2013 and 2012. Interest expense in fiscal2014 primarily related to the Credit Facility that the Company entered into on October 31, 2013 to fund the acquisition of Enterasys.Interest expense in fiscal 2013 and fiscal 2012 were primarily related to interest amortization of technology agreements.Other (Expense) Income, netOther (expense) income net was expense of $1.6 million in fiscal 2014, expense of $0.6 million in fiscal 2013 and income of $2.0 million in fiscal2012. Other expense in fiscal 2014 was primarily due to the revaluation of certain assets and liabilities denominated in foreign currencies into U.S. dollars.37Table of ContentsOther expense in fiscal 2013 was primarily due to the revaluation of certain assets and liabilities denominated in foreign currencies into U.S. dollars.Other income in fiscal 2012 was primarily comprised of $1.9 million in foreign currency translation gains that were reclassified from othercomprehensive income (loss) due to the substantial liquidation of our Japan subsidiary.Provision for Income TaxesWe are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective tax rate differs from the U.S. federal statutory rateof 35% primarily due to the impact of state taxes, foreign operations which are generally taxed at lower statutory rates and the full valuation of our deferredtax assets in the U.S. and certain foreign jurisdictions. For the fiscal years ended June 30, 2014, 2013 and 2012, we recorded income tax provisions of $4.2million, $1.7 million and $1.2 million respectively. The effective tax rates for fiscal years ended June 30, 2014, 2013 and 2012 were 7.9%, 14.8% and 7.0%respectively.For the fiscal years ended June 30, 2014, 2013 and 2012 the vast majority of our tax provision relates to taxes on our foreign operations as well as statetaxes due to the full valuation allowance on our U.S. and certain foreign deferred tax assets. In the fiscal year ended June 30, 2014, a portion of our provisionresulted from the establishment of a U.S. deferred tax liability for amortizable goodwill resulting from the acquisition of Enterasys Networks, Inc.For a full reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and for further explanation of our provision for income taxes,see Note 9 to the consolidated financial statements.Critical Accounting Policies and EstimatesOur significant accounting policies are more fully described in Note 3 of Notes to Consolidated Financial Statements included in Item 8 of this AnnualReport on Form 10-K. The preparation of consolidated financial statements in accordance with generally accepted accounting principles requiresmanagement to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assetsand liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the period reported. By theirnature, these estimates, assumptions and judgments are subject to an inherent degree of uncertainty. We base our estimates, assumptions and judgments onhistorical experience, market trends and other factors that are believed to be reasonable under the circumstances. Estimates, assumptions and judgments arereviewed on an ongoing basis and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to benecessary. Actual results may differ from these estimates under different assumptions or conditions. We believe the critical accounting policies stated below,among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.Revenue RecognitionWe derive the majority of our revenue from sales of our networking equipment, with the remaining revenue generated from service fees relating tomaintenance service contracts, professional services, and training for our products. We recognize revenue when persuasive evidence of an arrangement exists,delivery has occurred, the price of the product is fixed or determinable, and the collection of the sales proceeds is reasonably assured. In instances where anyof the criteria for revenue recognition are not met, we defer revenue until all criteria have been met.Product revenue from our value-added resellers, non-stocking distributors and end-user customers is recognized at the time of shipment, provided thatall of the foregoing revenue recognition requirements have been satisfied. We generally do not grant return privileges, except for defective products duringthe warranty period, nor do we grant pricing credits. Accordingly, we recognize revenue upon transfer of title and risk of loss to the customer, which isgenerally upon shipment. We maintain estimated accruals and allowances for sales incentives and other programs that we may make available to our partners,based on historical experience or applicable contractual terms. Shipping costs are included in cost of product revenues. Sales taxes collected from customersare excluded from revenues.We also sell our products to distributors that stock inventory and sell to resellers. We defer recognition of revenue on all sales to our stockingdistributors until the distributors have sold the products, as evidenced by sales data that the distributors provide to us. We grant stocking distributors certainprice protection rights and the right to return a portion of unsold inventory for the purpose of stock rotation. The distributor-related deferred revenue andreceivables are adjusted at the time of the stock rotation return or price reduction. We also provide stocking distributors with credits for changes in sellingprices based on competitive conditions, and provide funding for our distributors and their resellers to perform marketing development activities. We maintainestimated accruals and allowances for these exposures based upon our contractual obligations. Our marketing development channel programs do not meet thecriteria for recognizing the costs as marketing expenses and therefore these costs are accrued as a reduction to revenue in the same period that the products aresold.38Table of ContentsRevenue from service contracts is deferred and recognized ratably over the contractual service period, which is typically from one to two years.Professional service revenue is recognized upon delivery or completion of performance.Our networking products are tangible products that contain software and non-software components that function together to deliver the tangibleproduct's essential functionality. Our sales arrangements may contain multiple deliverables comprised of our tangible products, standalone software licenses,and service offerings depending on the distribution sales channel through which the products are sold and the requirements of our customers. We recognizerevenue for our multiple deliverable arrangements in accordance with the accounting standard for multiple deliverable revenue arrangements, which providesguidance on whether multiple deliverables exist, how deliverables in an arrangement should be separated, and how consideration should be allocated. Theindustry-specific software revenue recognition guidance does not apply to the sales of our tangible products. Software revenue guidance is applied to sales ofour standalone software products, including software upgrades and software that is not essential to the functionality of the hardware with which it is sold.Pursuant to the guidance of the accounting standard for multiple-deliverable revenue arrangements, we allocate the total arrangement consideration toeach separable element of an arrangement based on the relative selling price of each element. We determine the standalone selling price for each elementbased on a selling price hierarchy. Under the selling price hierarchy, the selling price for each deliverable is based on our vendor-specific objective evidenceof selling price (“VSOE”), which is determined by a substantial majority of our historical standalone sales transactions for a product or service falling within areasonable range. If VSOE is not available due to a lack of standalone sales transactions or lack of pricing within a narrow range, then third party evidence(“TPE”), as determined by the standalone pricing of competitive vendor products in similar markets, is used. TPE typically is difficult to establish due to theproprietary differences of competitive products and difficulty in obtaining reliable competitive standalone pricing information. When neither VSOE nor TPEis available, we determine the best estimate of standalone selling price (“ESP”) for a product or service by considering several factors including, but notlimited to, the 12-month historical median sales price, sales channels, geography, gross margin consistency, competitive product pricing, and product lifecycle. In consideration of all relevant pricing factors, we apply management judgment to determine the best estimate of selling price through consultationwith and formal approval by our management for all products and services for which neither VSOE nor TPE is available. Generally, the standalone sellingprice of services is determined using VSOE and the standalone selling price of all other deliverables is determined by using ESP. We regularly review VSOE,TPE and ESP for all of our products and services and maintain internal controls over the establishment and updates of these estimates.Pursuant to the software revenue recognition accounting standard, we continue to recognize revenue for software using the residual method for our salesof standalone software products and other software that is not essential to the functionality of the hardware with which it is sold. After allocation of therelative selling price to each element of the multiple deliverable arrangement, we recognize revenue in accordance with our policies for product, software,and service revenue recognition.Our total deferred product revenue from customers other than distributors was $4.1 million and $3.1 million as of June 30, 2014 and June 30, 2013,respectively. Our total deferred revenue for services, primarily from service contracts, was $97.7 million as of June 30, 2014 and $38.7 million as of June 30,2013. Service contracts typically range from one to two years. Shipping costs are included in cost of product revenues.We provide an allowance for sales returns based on our historical returns, analysis of credit memo data and our return policies. The allowance for salesreturns was $2.7 million and $0.8 million as of June 30, 2014 and June 30, 2013, respectively, for estimated future returns that were recorded as a reduction ofour accounts receivable. If the historical data that we use to calculate the estimated sales returns and allowances does not properly reflect future levels ofproduct returns, these estimates will be revised, thus resulting in an impact on future net revenue. We estimate and adjust this allowance at each balance sheetdate.Business Combinations We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, assumed equity awards, aswell as to in-process research and development based upon their estimated fair values at the acquisition date. The purchase price allocation process requiresmanagement’s judgment and often involves the use of significant estimates and assumptions, especially at the acquisition date with respect to intangibleassets, deferred revenue obligations and equity assumed.Although we believe the assumptions and estimates we have made are reasonable and appropriate, they are based in part on historical experience andinformation obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain ofintangible assets we have acquired or may acquire in future include but are not limited to assumptions with respect to future cash inflows and outflows,discount rates, intangibles and other asset lives, expected costs to develop the in-process research and development into commercially viable products,among other items.39Table of ContentsIn connection with the purchase price allocations for our acquisitions, we estimate the fair value of inventory using the comparative sales method. Thefair value of the inventory utilizing the comparative sales method is estimated using the selling price, less sales costs, marketing costs and profit on thesecosts. The operating profit margins are based on the historical margins.In connection with the purchase price allocations for our acquisitions, we estimate the fair value of deferred revenue using the cost build-up approach.The cost build-up approach determines the fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The estimatedcosts to fulfill the obligations are based on historical costs and benchmarking analysis.Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. As a result,during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilitiesassumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired orliabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.GoodwillGoodwill is assessed for impairment annually during the fourth quarter of the fiscal year (April 1) or more frequently when an event occurs orcircumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value. We havedetermined that we have one reporting unit. To test goodwill for impairment, we first perform a qualitative assessment to determine whether it is more likelythan not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, we then perform the two-step goodwillimpairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, we in the first step, comparethe estimated fair value of a reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value, no impairment loss isrecognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the unit may be impaired. The amount, if any, of theimpairment is then measured in the second step in which we determine the implied value of goodwill based on the allocation of the estimated fair valuedetermined in the initial step to all assets and liabilities of the reporting unit.We completed our annual goodwill impairment test in the fourth quarter of fiscal 2014 and determined there was no impairment as the fair value of thereporting unit exceeded its carrying value.Share-based PaymentsWe use the Black-Scholes option-pricing model to determine the fair value of option awards other than performance-based option awards, optionsassumed as part of the Enterasys acquisition, and share purchase options under our Employee Stock Purchase Plan (“ESPP”) on the date of grant with theweighted average assumptions. We use the Monte-Carlo simulation model to determine the fair value and the derived service period of performance-basedoption awards, with market conditions, on the date of grant. The expected term of options granted is derived from historical data on employee exercise andpost-vesting employment termination behavior. The expected term of purchase options under our ESPP represents the contractual life of the ESPP purchaseperiod. The risk-free rate based upon the estimated life of the option and ESPP award is based on the U.S. Treasury yield curve in effect at the time of grant.Expected volatility is based on both the implied volatilities from traded options on our stock and historical volatility on our stock. We do not currently paycash dividends on our common stock and do not anticipate doing so in the foreseeable future. Accordingly, our expected dividend yield is zero. We arerequired to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. In fiscal2014, our estimated forfeiture rates based on historical forfeiture experiences are 14% for executives and 12% for non-executive employees. We use thestraight-line method for expense attribution, and we only recognize expense for those shares expected to vest.Income TaxesDeferred Tax Asset Valuation AllowanceWe use the asset and liability method of accounting for income taxes provided under the authoritative guidance for income taxes. Under this method,deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along withnet operating loss carryforwards and credit carryforwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax assetcannot be recognized under the preceding criteria, valuation allowances are established. Significant management judgment is required in determining anyvaluation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available positive and negativeevidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies.40Table of ContentsIn the fiscal year ended June 30, 2014, the global valuation allowance increased by $30.5 million to $172.5 million and in the fiscal year ended June30, 2013, the global valuation allowance increased by $1.4 million to $142.0 million. The global valuation allowance is comprised primarily of a U.S.allowance, however, valuation allowances have also been provided against deferred tax assets in Australia, Brazil, Japan and Singapore. Our assessment ofthe available evidence in determining the need for valuation allowances placed greater weight on historical operating results rather than our expectations offuture profitability, which is inherently uncertain. Our inconsistent history of earnings during those periods coupled with difficulties in forecasting more thanone quarter in advance as well as the cyclical nature of our industry represent sufficient negative evidence to require a full valuation allowance against ourU.S. federal and state net deferred tax assets. This valuation allowance will be evaluated periodically and can be reversed partially or totally if businessresults sufficiently improved to support realization of the deferred tax assets.Accounting for Uncertainty in Income TaxesSignificant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe ourreserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historicalincome tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinementof an estimate. To the extent the final tax outcome of these matters is different than the amount recorded, such differences will impact the provision forincome taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes toreserves that are considered appropriate as well as the related interest and penalties.We had unrecognized tax benefits of $11.6 million as of June 30, 2014. If fully recognized in the future, $0.2 million would impact our effective taxrate, and $11.0 million would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance. It is reasonably possiblethat the amount of unrecognized tax benefit could decrease by approximately $0.2 million during the next twelve months due to the expiration of the statuteof limitations in certain foreign jurisdictions. During the fiscal year ended June 30, 2013, we performed a study of our U.S. research and development creditsdocumenting the historic credits as prescribed by Internal Revenue Service rules. As a result of this study we adjusted our available federal and state researchcredits as well as the amount of these credits that representing uncertain tax positions. The credits classified as uncertain tax positions decreased byapproximately $15.0 million as a result of this study.Impact of Recently Issued Accounting StandardsIn July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-11, Income Taxes (Topic 740)-Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). This ASU provides guidance regarding the presentation in the statement of financial position of an unrecognized tax benefit when a net operating losscarryforward or a tax credit carryforward exists. The ASU generally provides that an entity's unrecognized tax benefit, or a portion of its unrecognized taxbenefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a taxcredit carryforward. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 31, 2013. The Companyintends to adopt this standard prospectively in the first quarter of its fiscal year ending June 30, 2015. The Company does not believe this updated standardwill have a material impact on its consolidated financial statements.In May 2014, the FASB, jointly with the International Accounting Standards Board, issued Accounting Standard Update No. 2014-09 (Topic 606) -Revenue from Contracts with Customers ("ASU 2014-09"). This ASU's core principle is that a reporting entity will recognize revenue when it transferspromised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods orservices. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performanceobligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5)recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance will require significantly expanded disclosuresabout revenue recognition. ASU 2014-09 is effective for annual reporting periods (including interim reporting periods within those annual periods)beginning after December 15, 2016. Early application is not permitted. Entities have the option of using either a full retrospective or a modified retrospectiveapproach to adopt this ASU. The Company is currently evaluating the potential effect on its consolidated financial position, results of operations and cashflows from adoption of this standard.41Table of ContentsLiquidity and Capital ResourcesThe following summarizes information regarding our cash, investments, and working capital (in thousands): June 30, 2014 June 30, 2013Cash and cash equivalent$73,190 $95,803Short-term investments32,692 43,034Marketable securities— 66,776Total cash and investments$105,882 $205,613Working capital$56,548 $96,279As of June 30, 2014, our principal sources of liquidity consisted of cash, cash equivalents and investments of $105.9 million, net accounts receivableof $124.7 million and $0.9 million of letters of credit and borrowings from the Revolving Facility under which the Company had $0.1 million of availabilityat June 30, 2014. Our principal uses of cash will include repayments of debt and related interest, purchase of finished goods inventory from our contractmanufacturers, payroll, restructuring expenses and other operating expenses related to the development, marketing of our products, purchases of property andequipment and repurchases of our common stock. We believe that our $105.9 million of cash and cash equivalents and investments at June 30, 2014 alongwith the availability of borrowings from the Revolving Facility will be sufficient to fund our principal uses of cash for at least the next 12 months includingthe repayment of the additional borrowings of $24 million from the Revolving Facility as of the filing date of this report.Our Credit Agreement contains financial covenants that require us to maintain a minimum Consolidated Fixed Charge Coverage Ratio andConsolidated Quick Ratio and a maximum a Consolidated Leverage Ratio and several other covenants and restrictions that limit our ability to incuradditional indebtedness, create liens upon any of our property, merge, consolidate or sell all or substantially all of our assets, etc. The Credit Agreement also includes customary events of default, including failure to pay principal, interest or fees when due, failure to comply withcovenants, if any representation or warranty made by us is false or misleading in any material respect, certain insolvency or receivership events affectingExtreme and its subsidiaries, the occurrence of certain material judgments, the occurrence of certain ERISA events, the invalidity of the loan documents or achange in control of our Company. The amounts outstanding under the Credit Agreement may be accelerated upon certain events of default. We believe weare in compliance and expect to remain in compliance with our Credit Agreement covenants and they are not expected to impact our liquidity or capitalresources.Key Components of Cash Flows and LiquidityA summary of the sources and uses of cash and cash equivalents is as follows (in thousands): Year Ended June 30, 2014 June 30, 2013 June 30, 2012Net cash (used in) provided by operating activities$(26,843) $32,237 $13,813Net cash (used in ) provided by investing activities$(126,189) $16,480 $(10,410)Net cash provided by (used in) financing activities$129,580 $(7,391) $2,393Foreign currency effect on cash$839 $(119) $(1,172)Net (decrease) increase in cash and cash equivalents$(22,613) $41,207 $4,624Cash and cash equivalents, short-term investments and marketable securities were $105.9 million at June 30, 2014, representing a decrease of $99.7million from $205.6 million at June 30, 2013. Cash and cash equivalents primarily decreased due to cash used in operations of $26.8 million and cash usedin investing activities of $126.2 million offset by cash provided by financing activities of $129.6 million and foreign currency impact of $0.8 million.Cash used in operating activities was $26.8 million compared to cash provided by operating activities of $32.2 million in fiscal 2013, a decrease of$59.1 million during the year ended June 30, 2014. The current year's net loss of 57.3 million was primarily offset by non-cash expenses such as amortizationof intangibles, stock-based compensation, and depreciation. Post-42Table of Contentsacquisition increases in accounts receivables, inventory, accounts payable and deferred revenue were the primary factors contributing to the cash used inoperating activities for the year ended June 30, 2014.Cash flow used in investing activities was $126.2 million primarily from $180.0 million proceeds used for acquisition of Enterasys, capitalexpenditures of $22.4 million and purchases of investments of $9.0 million. Such decreases were offset by proceeds from maturities of investments andmarketable securities of $28.7 million and sales of investments and marketable securities of $56.6 million.Cash flow provided by financing activities was $129.6 million resulting from issuance of Term Loan of $65 million and a draw on the RevolvingFacility of $35 million used for the acquisition of Enterasys, an additional draw of $24 million on the Revolving Facility for working capital requirements,and $8.0 million proceeds from the exercise of stock options and purchases of shares of our common stock under the ESPP, net of taxes paid on vested andreleased stock awards.Contractual ObligationsThe following summarizes our contractual obligations at June 30, 2014, and the effect such obligations are expected to have on our liquidity and cashflow in future periods (in thousands): Total Less Than1 Year 1 – 3 Years 3 – 5 Years More ThanFive YearsContractual Obligations: Debt obligations$121,563 $29,688 $29,250 $62,625 $—Interest on debt obligations8,813 2,588 4,377 1,848 —Non-cancelable inventory purchase commitments64,651 64,651 — — —Non-cancelable operating lease obligations58,109 9,093 14,456 13,805 20,755Other liabilities5,470 2,818 2,491 161 —Total contractual cash obligations$258,606 $108,838 $50,574 $78,439 $20,755Non-cancelable inventory purchase commitments represent the purchase of long lead-time component inventory that our contract manufacturersprocure in accordance with our forecast. Inventory purchase commitments were $64.7 million as of June 30, 2014, an increase of $14.6 million from $50.1million as of June 30, 2013.Non-cancelable operating lease obligations represent base rents and operating expense obligations to landlords for facilities we occupy at variouslocations.Other liabilities include the Company's commitments towards debt related fees and specific arrangements other than inventory.The amounts in the table above exclude $0.2 million of income tax liabilities related to uncertain tax positions as we are unable to reasonably estimatethe timing of settlement.We did not have any material commitments for capital expenditures as of June 30, 2014.Off-Balance Sheet ArrangementsWe did not have any off-balance sheet arrangements as of June 30, 2014.Capital Resources and Financial ConditionAs of June 30, 2014, in addition to $73.2 million in cash and cash equivalents, we had $32.7 million invested in short-term investments for total cashand cash equivalents and short-term investments of $105.9 million.We believe that our current cash and cash equivalents and short-term investments and cash available from future operations will enable us to meet ourworking capital requirements for at least the next 12 months.43Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market RiskInterest Rate SensitivityThe primary objective of our investment activities is to preserve principal while at the same time maximize the income we receive from ourinvestments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change inprevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interestrate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk,we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, other non-government debtsecurities and money market funds.The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changesto credit ratings of the securities, discount rates and ongoing strength and quality of market credit and liquidity.If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to recordimpairment charges in future quarters.The following table presents the amounts of our cash equivalents, short-term investments and marketable securities that are subject to market risk byrange of expected maturity and weighted-average interest rates as of June 30, 2014 and June 30, 2013. This table does not include money market fundsbecause those funds are generally not subject to market risk. Maturing in Three monthsor less Three months toone year Greater than oneyear Total FairValue (In thousands)June 30, 2014 Included in short-term investments$567 $23,598 $9,094 $33,259 $33,259Weighted average interest rate0.01% 0.91% 0.72% Maturing in Three monthsor less Three months toone year Greater than oneyear Total FairValue (In thousands)June 30, 2013 Included in short-term investments$13,190 $29,844 — $43,034 $43,034Weighted average interest rate0.91% 0.59% — Included in marketable securities— — $66,776 $66,776 $66,776Weighted average interest rate— — 0.77% The following tables present hypothetical changes in fair value of the financial instruments held at June 30, 2014 that are sensitive to changes ininterest rates:Unrealized gain given a decrease in interest rate of X bps Fair value as of Unrealized loss given an increase in interest rate of X bps(100 bps) (50 bps) June 30, 2014 100 bps 50 bps(In thousands)$282 $140 $33,259 $(277) $(139) 44Table of ContentsDebtAt certain points in time we are exposed to the impact of interest rate fluctuations, primarily in the form of variable rate borrowings from our CreditFacility that we entered into on October 31, 2013. Our debt and credit facility is fully described in the Note 3 of our Notes to the Consolidated FinancialStatements. At June 30, 2014 we had $121,563 of debt outstanding all of which was from the company’s credit facility. Since the initial draw and through theend of our fiscal year, the average daily outstanding amount was $100,463 with a low of $98,375 and a high of $122,375. The fair value of the debtoutstanding at June 30, 2014 was $121,259. If there were an increase in the interest rates of 0.5% and 1.0% the annualized increase in interest expense on theJune 30, 2014 outstanding balance would be $608 and $1,215 respectively. Conversely if there was a decrease in interest rates of 0.5% and 1.0% theannualized interest rate on the outstanding balance at June 30, 2014 would decrease by $608 and $1,215 respectively.Exchange Rate SensitivityCurrently, majority of all of our sales and our expenses are denominated in United States dollars and, as a result, we have experienced no significantforeign exchange gains and losses to date. While we conduct sales transactions and incur certain operating expenses in foreign currencies and expect tocontinue to do so, we do not anticipate that foreign exchange gains or losses will be significant, in part because of our foreign exchange risk managementprocess discussed below.Foreign Exchange Forward ContractsWe record all derivatives on the balance sheet at fair value. Changes in the fair value of derivatives are recognized in earnings as Other Income(Expense). We enter into foreign exchange forward contracts to mitigate the effect of gains and losses generated by the foreign currency forecastedtransactions related to certain operating expenses and re-measurement of certain assets and liabilities denominated in foreign currencies. These derivatives donot qualify as hedges. At June 30, 2014, these forward foreign currency contracts had a notional principal amount of $7.6 million and an immaterialunrealized gain on foreign exchange contracts. These contracts have maturities of less than 60 days. Changes in the fair value of these foreign exchangeforward contracts are offset largely by re-measurement of the underlying assets and liabilities.Foreign currency transaction gains and losses from operations were a loss of $1.5 million in fiscal 2014, a loss of $0.9 million in fiscal 2013 and a gainof $2.5 million in fiscal 2012.45Table of ContentsItem 8. Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF EXTREME NETWORKS, INC. PageReport of Independent Registered Public Accounting Firm 47 Consolidated Balance Sheets 48 Consolidated Statements of Operations 49 Consolidated Statements of Comprehensive (Loss) Income 50 Consolidated Statements of Stockholders' Equity 51 Consolidated Statements of Cash Flows 52 Notes to Consolidated Financial Statements 5446Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersExtreme Networks, Incorporated:We have audited the accompanying consolidated balance sheets of Extreme Networks, Inc. and subsidiaries (the Company) as of June 30, 2014 and 2013,and the related consolidated statements of operations, comprehensive (loss) / income, stockholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2014. We also have audited the Company’s internal control over financial reporting as of June 30, 2014, based on criteriaestablished in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on InternalControl over Financial Reporting under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on theCompany’s internal control over financial reporting based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtainingan understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessaryin the circumstances. We believe that our audits provide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.The Company acquired Enterasys Networks, Inc. on October 31, 2013, and management excluded from its assessment of the effectiveness of the Company’sinternal control over financial reporting as of June 30, 2014, Enterasys Networks, Inc.’s internal control over financial reporting associated with total assets of$143.9 million and net revenues of $227.7 million included in the consolidated financial statements of the Company as of and for the year ended June 30,2014. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting ofEnterasys Networks Inc.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Extreme Networks, Inc.and subsidiaries as of June 30, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30,2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Extreme Networks, Incorporated maintained, in all materialrespects, effective internal control over financial reporting as of June 30, 2014, based on criteria established in Internal Control - Integrated Framework(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)./s/KPMG LLPSanta Clara, CaliforniaSeptember 15, 201447Table of ContentsEXTREME NETWORKS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts) June 30, 2014 June 30, 2013ASSETS Current assets: Cash and cash equivalents$73,190 $95,803Short-term investments32,692 43,034Accounts receivable, net of allowances of $3,618 at June 30, 2014 and $1,252 at June 30, 2013124,664 47,642Inventories57,109 16,167Deferred income taxes1,058 386Prepaid expenses and other current assets14,143 5,749Total current assets302,856 208,781Property and equipment, net46,554 23,644Marketable securities— 66,776Intangible assets, net87,459 4,243Goodwill70,877 —Other assets, net18,686 7,980Total assets$526,432 $311,424LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt$29,688 $—Accounts payable37,308 27,163Accrued compensation and benefits26,677 13,503Restructuring liabilities322 1,466Accrued warranty7,551 3,296Deferred revenue, net74,735 33,184Deferred distributors revenue, net of cost of sales to distributors31,992 17,388Other accrued liabilities38,035 16,502Total current liabilities246,308 112,502Deferred revenue, less current portion22,942 8,270Long-term debt, less current portion91,875 —Other long-term liabilities8,595 1,507Commitments and contingencies (Note 5) Stockholders’ equity: Convertible preferred stock, $.001 par value, issuable in series, 2,000,000 shares authorized; none issued— —Common stock, $.001 par value, 750,000,000 shares authorized; 96,980,214 shares issued and outstanding at June30, 2014 and 93,626,150 shares issued and outstanding at June 30, 201397 94Additional paid-in-capital845,267 821,331Accumulated other comprehensive income(439) (1,377)Accumulated deficit(688,213) (630,903)Total stockholders’ equity156,712 189,145Total liabilities and stockholders’ equity$526,432 $311,424See accompanying notes to consolidated financial statements.48Table of ContentsEXTREME NETWORKS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share amounts) Fiscal Year Ended June 30, 2014 June 30, 2013 June 30, 2012Net revenues: Product$411,761 $239,955 $261,873Service107,793 59,388 60,849Total net revenues519,554 299,343 322,722Cost of revenues: Product213,673 115,862 120,227Service38,552 20,855 22,648Total cost of revenues252,225 136,717 142,875Gross profit: Product198,088 124,093 141,646Service69,241 38,533 38,201Total gross profit267,329 162,626 179,847Operating expenses: Research and development77,146 40,521 45,640Sales and marketing156,666 87,202 90,167General and administrative40,912 26,725 28,658Acquisition and integration costs25,716 — —Restructuring charge, net of reversals510 6,836 1,594Amortization of intangibles16,711 — —Litigation settlement (income) expense(100) 2,029 (121)Gain on sale of facilities— (11,539) —Total operating expenses317,561 151,774 165,938Operating (loss) income(50,232) 10,852 13,909Interest income751 1,070 1,239Interest expense(2,085) — (75)Other (expense) income, net(1,555) (571) 1,995(Loss) Income before income taxes(53,121) 11,351 17,068Provision for income taxes4,189 1,678 1,196Net (loss) income$(57,310) $9,673 $15,872Basic and diluted net (loss) income per share: Net (loss) income per share – basic$(0.60) $0.10 $0.17Net (loss) income per share – diluted$(0.60) $0.10 $0.17Shares used in per share calculation – basic95,515 93,954 93,451Shares used in per share calculation – diluted95,515 95,044 94,490 See accompanying notes to consolidated financial statements.49Table of ContentsEXTREME NETWORKS, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/ INCOME(In thousands) Year Ended June 30, 2014 June 30, 2013 June 30, 2012Net (loss) income:$(57,310) $9,673 $15,872Other comprehensive income, net of tax: Available for sale securities: Change in unrealized gain (loss) on available for sale securities, net of taxes136 (327) (196)Reclassification of adjustment for realized net gains on available for sale securitiesincluded in net income (loss)158 — —Net change in unrealized gain (loss) on available for sale securities, net of taxes294 (327) (196)Net change in net foreign currency translation adjustment644 (189) (4,368)Other comprehensive income (loss)938 (516) (4,564)Total comprehensive (loss) income$(56,372) $9,157 $11,308See accompanying notes to consolidated financial statements.50Table of ContentsEXTREME NETWORKS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands) Common Stock Treasury Stock AdditionalPaid-in-Capital AccumulatedOtherComprehensiveIncome (Loss) AccumulatedDeficit TotalStockholders’Equity Shares Amount Shares Amount Balances at July 3, 2011132,147 $132 (39,625) $(149,666) $963,565 $3,703 $(656,448) $161,286Net income— — — — — — 15,872 15,872Other comprehensive loss, net— — — — — (4,564) — (4,564)Exercise of options to purchase common stock437 — — — 978 — — 978Issuance of common stock under employeestock purchase plan570 — — — 1,632 — — 1,632Issuance of restricted stock, net of repurchases811 2 — — (1,219) — — (1,217)Repurchase of common stock— — (7) — (1) — — (1)Share-based payments— — — — 5,654 — — 5,654Balances at June 30, 2012133,965 $134 (39,632) $(149,666) $970,609 $(861) $(640,576) $179,640Net income— — — — — — 9,673 9,673Other comprehensive loss, net— — — — — (516) — (516)Exercise of options to purchase common stock2,045 2 — — 6,137 — — 6,139Issuance of common stock under employeestock purchase plan605 1 — — 1,699 — — 1,700Issuance of restricted stock, net of repurchases712 1 — — (751) — — (750)Repurchase of common stock(4,069) (4) — — (14,475) — — (14,479)Share-based payments— — — — 7,738 — — 7,738Retirement of treasury shares(39,632) (40) 39,632 149,666 (149,626) — — —Balances at June 30, 201393,626 $94 — $— $821,331 $(1,377) $(630,903) 189,145Net loss— — — — — — (57,310) (57,310)Other comprehensive income, net— — — — — 938 — 938Exercise of options to purchase common stock1,791 2 — — 6,436 — — 6,438Issuance of common stock under employeestock purchase plan762 — — — 3,166 — — 3,166Issuance of restricted stock, net of repurchases801 1 — — (1,588) — — (1,587)Share-based payments — — 15,922 — — 15,922Balances at June 30, 201496,980 $97 — $— $845,267 $(439) $(688,213) $156,712See accompanying notes to consolidated financial statements.51Table of ContentsEXTREME NETWORKS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended June 30, 2014 June 30, 2013 June 30, 2012Cash flows from operating activities: Net (loss) income$(57,310) $9,673 $15,872Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Decrease in accrued investment income923 1,600 2,786Depreciation10,628 4,543 5,348Amortization of intangible assets28,771 1,488 1,818Provision for (recovery of) doubtful accounts and allowance for sales returns2,366 (173) 127Deferred income taxes(61) (35) 37Loss on retirement of assets2,226 — 103Stock-based compensation15,922 7,353 6,189Gain on disposition of long lived assets, net— (11,285) —Foreign exchange gain on dissolution of entity— — (1,887)Non-cash interest expense173 — —Unrealized gain/(loss) on foreign exchange transactions405 291 (904)Changes in operating assets and liabilities, net Accounts receivable(56,116) (6,304) (7,603)Inventories(7,280) 10,442 (5,026)Prepaid expenses and other assets2,288 1,877 5,289Accounts payable(4,234) 7,726 3,918Accrued compensation and benefits(570) 95 (850)Restructuring liabilities(1,144) 1,003 (2,696)Accrued warranty3,385 425 231Deferred revenue, net18,689 2,127 2,355Deferred revenue, net of cost of sales to distributors13,537 2,069 (1,233)Other accrued liabilities1,146 (1,542) (9,232)Other long-term liabilities(587) 864 (829)Net cash (used in) provided by operating activities(26,843) 32,237 13,813Cash flows (used in) provided by investing activities: Capital expenditures(22,373) (12,737) (5,237)Acquisition, net of cash acquired(180,000) — —Purchases of investments(9,045) (57,712) (75,851)Proceeds from maturities of investments and marketable securities28,722 16,367 30,295Proceeds from sales of investments and marketable securities56,594 28,528 40,658Purchases of intangible assets(87) (625) (275)Proceeds from sales of facilities— 42,659 —Net cash (used in) provided by investing activities(126,189) 16,480 (10,410)Cash flows provided by (used in) financing activities: Borrowings under Revolving Facility83,000 — —Borrowings under Term Loan65,000 — —Repayment of debt(26,437) — —Proceeds from issuance of common stock8,017 7,084 1,392Repurchase of common stock— (14,475) —Deposit received from sale of building— — 1,00152Table of ContentsNet cash provided by (used in) financing activities129,580 (7,391) 2,393 Foreign currency effect on cash839 (119) (1,172) Net (decrease) increase in cash and cash equivalents(22,613) 41,207 4,624 Cash and cash equivalents at beginning of period95,803 54,596 49,972Cash and cash equivalents at end of period$73,190 $95,803 $54,596Supplemental disclosure of cash flow information: Interest paid$1,852 $— $75Cash paid for taxes, net$2,864 $1,534 $2,615 Non-cash investing activities: Unpaid capital expenditures$310 $7,001 $562See accompanying notes to the consolidated financial statements.53Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Description of Business and Basis of PresentationExtreme Networks, Inc. (“Extreme Networks” or “the Company”) is a leading provider of network infrastructure equipment and markets its productsprimarily to business, governmental, health care, service provider, and educational customers with a focus on large corporate enterprises and metropolitanservice providers on a global basis. The Company conducts its sales and marketing activities on a worldwide basis through distributors, resellers and theCompany’s field sales organization. Extreme Networks was incorporated in California in 1996 and reincorporated in Delaware in 1999.Fiscal YearEffective June 30, 2012, the Company changed their fiscal period to coincide with calendar month-end. Previously, the Company used a fiscal 52/53week manufacturing calendar year. All references herein to “fiscal 2014” or “2014” represent the fiscal year ended June 30, 2014.Principles of ConsolidationThe consolidated financial statements include the accounts of Extreme Networks and its wholly-owned subsidiaries. All inter-company accounts andtransactions have been eliminated.The Company uses the U.S. dollar predominantly as its functional currency. The functional currency for certain of its foreign subsidiaries is the localcurrency. For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated to United States dollars atcurrent rates of exchange; and revenue and expenses are translated using average rates.Accounting EstimatesThe preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates areused for, but are not limited to, the accounting for the allowances for doubtful accounts and sales returns, determining the fair value of acquired assets andassumed liabilities, estimated selling prices, inventory valuation and purchase commitments, depreciation and amortization, impairment of long-lived assetsincluding goodwill, warranty accruals, restructuring liabilities, measurement of share-based compensation costs and income taxes. Actual results could differmaterially from these estimates.2. Business CombinationsOn October 31, 2013 (the “Acquisition Date”), the Company completed the acquisition of Enterasys, a privately held provider of wired and wirelessnetwork infrastructure and security solutions, for $180.0 million, net of cash acquired. The Company also assumed outstanding options and restricted stockunits of Enterasys at the Acquisition Date, all of which were unvested.The acquisition has been accounted for using the acquisition method of accounting. The preliminary purchase price allocation as of the date of theacquisition is set forth in the table below and reflects various fair value estimates. These estimates were determined through established and generallyaccepted valuation techniques, including preliminary work performed by third-party valuation specialists, and are subject to change during the purchaseprice allocation period (generally one year from the acquisition date) as valuations are finalized. The final purchase price allocation is pending thefinalization of valuations for certain prepaid expenses and other current assets, accrued liabilities for certain tax liabilities in foreign jurisdictions anddeferred taxes which may ultimately impact the overall level of goodwill associated with the acquisition. Finally, the Company will consider any additionalinformation which existed as of the acquisition date but was unknown to the Company at that time, that may become known to the Company during theremainder of the measurement period, a period not to exceed 12 months from the acquisition date, and may result in a change in the purchase priceallocation. While management believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates andassumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill.54Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The following table below summarizes the preliminary allocation as of June 30, 2014 of the tangible and identifiable intangible assets acquired andliabilities assumed as compared to the allocation as of December 31, 2013, the quarter in which the transaction was completed: Preliminary Allocationas of December 31, 2013 Change during six monthsended June 30, 2014 Preliminary Allocationas of June 30, 2014Cash $4,969 $2,428a$7,397Receivables 25,699 (2,428)a23,271Inventory 33,662 — 33,662Other current assets 8,888 (1,514)b7,374Property and equipment 23,122 (1,829)c21,293Identifiable intangible assets 108,900 —d108,900In-process research and development 3,000 — 3,000Deferred tax assets 9 — 9Other assets 7,343 — 7,343Goodwill 57,922 12,955 70,877Current liabilities (75,394) (6,141)c,e,f(81,535)Other long-term liabilities (13,151) (1,043)c(14,194)Total purchase price allocation $184,969 $2,428 $187,397Less: Cash acquired from acquisition (4,969) (2,428)a(7,397)Total purchase price consideration, net of cash acquired $180,000 $— $180,000a.The Company finalized the working capital adjustment during the six months ended June 30, 2014, which led to a decrease of $2.4million in receivables and a corresponding increase in cash. As a result of this adjustment, the total cash acquired from the acquisition also increasedby the same amount. The net effect of this adjustment is an increase in goodwill of $2.4 million.b.The Company obtained new information regarding the existence of prepaids as of the acquisition date which led to a decrease in the fairvalue of current assets of $1.5 million, and a corresponding increase in goodwill. The change in the amortization of prepaids due to the change infair value of current assets was immaterial.c.The Company updated its preliminary estimate of the fair value of property and equipment which led to a decrease of $3.0 million inproperty and equipment with a corresponding increase in goodwill. The Company also updated the fair values of the asset retirement obligationsand the related asset retirement assets which led to an increase in the fair value of property and equipment of $1.2 million and a correspondingincrease in current liabilities and other long-term liabilities of $0.2 million and $1.0 million, respectively. The decrease in depreciation expense dueto the change in fair value of property and equipment was immaterial.d.During the six months ended June 30, 2014, there were no changes to the fair value of the identifiable intangible assets acquired.However, the Company revised the estimated useful life of Order backlog from 1.5 years to 1 year.e.The Company obtained new information regarding accruals for litigation and statutory tax assessment as of the acquisition date which ledto an increase in the fair value of current liabilities of $5.4 million and a corresponding increase in goodwill.f.The Company obtained new information regarding the existence of accrued liabilities as of the acquisition date which led to a net increasein the fair value of accrued liabilities by $0.5 million with a corresponding increase in goodwill.The Company does not believe that the measurement period adjustments to date have had a significant impact on the condensed consolidatedstatement of operations, balance sheet or cash flows in any period previously reported and, therefore, no retrospective adjustments were made to theCompany's financial statements.The fair value of the acquired intangible assets were estimated using an income approach. Under this method, an intangible asset's fair value is equal tothe present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculatefair value, the Company used cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Companybelieves that the level and timing of cash flows appropriately reflect market participant assumptions. Cash flows were assumed to extend through theremaining economic useful life of each class of intangible asset.55Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The fair value of the acquired deferred revenue was estimated using the cost build-up approach. The cost build-up approach determines fair valueusing estimates of the costs required to provide the contracted deliverables plus an assumed profit. The total costs including the assumed profit were adjustedto present value using a discount rate considered appropriate. The resulting fair value approximates the amount that the Company would be required to pay athird party to assume the obligation. The fair value of the deferred revenue obligation is affected most significantly by the estimated costs required to supportthe obligation, but is also affected by the assumed profit and the discount rate.The following table presents details of the identifiable intangible assets acquired as part of the acquisition (in thousands):Intangible Assets Estimated Useful Life (inyears) AmountDeveloped technology 3 $45,000Customer relationships 3 37,000Maintenance contracts 5 17,000Trademarks 3 2,500Order backlog 1 7,400Total identifiable intangible assets 3 $108,900 The amortization for the developed technology is recorded in “Cost of revenues” for product and the amortization for the remaining intangibles isrecorded in “Amortization of intangibles” on the consolidated statement of operations. The goodwill recognized is attributable primarily to expectedsynergies and the assembled workforce of Enterasys. The Company anticipates both the goodwill and intangible assets to be fully deductible for taxpurposes.The Company had an indefinite-lived asset of $3.0 million as of the acquisition-date which represents the fair value of in-process research anddevelopment activities. The Company completed the research and development efforts in the fourth quarter of fiscal 2014 and has determined that the assetis an identifiable intangible asset with an estimated useful life of 3 years.The results of operations of Enterasys are included in the consolidated results of operations beginning October 31, 2013. For the year ended June 30,2014, $227.7 million of revenue and $13.5 million of operating income from Enterasys are included in the consolidated statement of operations. TheCompany incurred $6.0 million of acquisition-related expenses for the year ended June 30, 2014. Such acquisition-related costs are included in "Acquisition-integration costs" on the consolidated statement of operations. The costs, which the Company expensed as incurred, consist primarily of professional feespayable to financial and legal advisors.Pro forma financial informationThe following unaudited pro forma results of operations are presented as though the acquisition of Enterasys had occurred as of the beginning of theearliest period presented after giving effect to purchase accounting adjustments relating to inventories, deferred revenue, stock-based compensation for theoptions and restricted stock units assumed, depreciation and amortization on acquired property and equipment and intangibles, interest income and expenseand related tax effects. The pro forma results of operations do not reflect the impact of non-recurring charges that have resulted from or in connection with theacquisition including acquisition and integration expenses incurred in connection with the acquisition. The pro forma results of operations are notnecessarily indicative of the combined results that would have occurred had the acquisition been consummated as of the earliest period presented, nor arethey necessarily indicative of future operating results.56Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The unaudited pro forma financial information for the year ended June 30, 2014 combines the results for Extreme for the year ended June 30, 2014,which includes the results of Enterasys subsequent to the acquisition date, and the historical results for Enterasys for the three months ended September 30,2013 and the month ended October 31, 2013. The unaudited pro forma financial information for the year ended June 30, 2013 combines the historical resultsfor Extreme for that period, with the historical results for Enterasys for the year ended June 30, 2013. The following table summarizes the pro forma financialinformation (in thousands, except per share amounts): Year Ended June 30, 2014 June 30, 2013Net revenues $618,893 $633,736Net loss $(71,770) $(37,752)Net loss per share – basic and diluted $(0.74) $(0.40)3. Summary of Significant Accounting PoliciesRevenue RecognitionThe Company's revenue is primarily derived from sales of networking products, which are tangible products containing software and non-softwarecomponents that function together to deliver the tangible product's essential functionality. In addition to tangible products, the Company's salesarrangements may include other deliverables such as standalone software licenses, or service offerings. For multiple deliverable arrangements, the Companyrecognizes revenue in accordance with the accounting standard for multiple deliverable revenue arrangements, which provides guidance on whether multipledeliverables exist, how deliverables in an arrangement should be separated, and how consideration should be allocated. Software revenue recognitionguidance is applied to the sales of the Company's standalone software products, including software upgrades and software that is not essential to thefunctionality of the hardware with which it is sold.Pursuant to the guidance of the accounting standard for multiple deliverable revenue arrangements, when the Company's sales arrangements containmultiple elements, such as products, software licenses, maintenance agreements, or professional services, the Company determines the standalone sellingprice for each element based on a selling price hierarchy. The application of the multiple deliverable revenue accounting standard does not change the unitsof accounting for the Company's multiple element arrangements. Under the selling price hierarchy, the selling price for each deliverable is based on theCompany's vendor-specific objective evidence (“VSOE”), which is determined by a substantial majority of the Company's historical standalone salestransactions for a product or service falling within a narrow range. If VSOE is not available due to a lack of standalone sales transactions or lack of pricingwithin a narrow range, then third party evidence (“TPE”), as determined by the standalone pricing of competitive vendor products in similar markets, is used,if available. TPE typically is difficult to establish due to the proprietary differences of competitive products and difficulty in obtaining reliable competitivestandalone pricing information. When neither VSOE nor TPE is available, the Company determines its best estimate of standalone selling price (“ESP”) for aproduct or service and does so by considering several factors including, but not limited to, the 12-month historical median sales price, sales channel,geography, gross margin objective, competitive product pricing, and product life cycle. In consideration of all relevant pricing factors, the Company appliesmanagement judgment to determine the Company's best estimate of selling price through consultation with and formal approval by the Company'smanagement for all products and services for which neither VSOE nor TPE is available. Generally the standalone selling price of services is determined usingVSOE and the standalone selling price of other deliverables is determined by using ESP. The Company regularly reviews VSOE, TPE and ESP for all of itsproducts and services and maintains internal controls over the establishment and updates of these estimates.Pursuant to the software revenue recognition accounting standard, the Company continues to recognize revenue for software using the residual methodfor its sale of standalone software products, including optional software upgrades and other software that is not essential to the functionality of the hardwarewith which it is sold. After allocation of the relative selling price to each element of the arrangement, the Company recognizes revenue in accordance withthe Company's policies for product, software, and service revenue recognition.The Company derives the majority of its revenue from sales of its networking equipment, with the remaining revenue generated from service feesrelating to maintenance service contracts, professional services, and training for its products. The Company generally recognizes product revenue from itsvalue-added resellers, non-stocking distributors and end-user customers at the time of shipment, provided that persuasive evidence of an arrangement exists,delivery has occurred, the price of the product is fixed or determinable, and collection of the sales proceeds is reasonably assured. In instances where thecriteria for revenue recognition are not met, revenue is deferred until all criteria have been met. The Company’s total deferred product revenue from57Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)customers other than distributors was $4.1 million and $3.1 million as of June 30, 2014 and June 30, 2013, respectively. The Company’s total deferredrevenue for services, primarily from service contracts, was $97.7 million as of June 30, 2014 and $38.7 million as of June 30, 2013. Shipping costs areincluded in cost of product revenues. Sales taxes collected from customers are excluded from revenues.The Company sells its products and maintenance service contracts to partners in two distribution channels, or tiers. The first tier consists of a limitednumber of independent distributors that stock its products and sell primarily to resellers. The Company defers recognition of revenue on all sales to itsstocking distributors until the distributors sell the product, as evidenced by “sales-out” reports that the distributors provide. The Company grants thesedistributors the right to return a portion of unsold inventory for the purpose of stock rotation and certain price protection rights. The distributor-relateddeferred revenue and receivables are adjusted at the time of the stock rotation return or price reduction. The Company also provides distributors with creditsfor changes in selling prices based on competitive conditions, and allows distributors to participate in cooperative marketing programs. The Companymaintains estimated accruals and allowances for these exposures based upon the Company's historical experience. In connection with cooperative advertisingprograms, the Company does not meet the criteria for recognizing the expenses as marketing expenses and accordingly, the costs are recorded as a reductionto revenue in the same period that the related revenue is recorded.The second tier of the distribution channel consists of a non-stocking distributors and value-added resellers that sell directly to end-users. For productsales to non-stocking distributors and value-added resellers, the Company does not grant return privileges, except for defective products during the warrantyperiod, nor does the Company grant pricing credits. Accordingly, the Company recognizes revenue upon transfer of title and risk of loss or damage, generallyupon shipment. The Company reduces product revenue for cooperative marketing activities and certain price protection rights that may occur undercontractual arrangements with its resellers.The Company provides an allowance for sales returns based on its historical returns, analysis of credit memo data and its return policies. The allowancefor sales returns is as a reduction of our accounts receivable. If the historical data that the Company uses to calculate the estimated sales returns andallowances does not properly reflect future levels of product returns, these estimates will be revised, thus resulting in an impact on future net revenue. TheCompany estimates and adjusts this allowance at each balance sheet date.DescriptionBalance atbeginningof period Charges tocosts andexpenses (Deductions) Balance atend ofperiodYear Ended July 3, 2012: Allowance for sales returns$645 $1,013 $(396) $1,262Year Ended June 30, 2013: Allowance for sales returns$1,262 $130 $(615) $777Year Ended June 30, 2014: Allowance for sales returns$777 $3,063 $(1,140) $2,700Allowance for Doubtful AccountsThe Company maintains an allowance for doubtful accounts which reflects its best estimate of potentially uncollectible trade receivables. Theallowance is based on both specific and general reserves. The Company continually monitors and evaluates the collectability of its trade receivables basedon a combination of factors. It records specific allowances for bad debts in general and administrative expense when it becomes aware of a specific customer’sinability to meet its financial obligation to the Company, such as in the case of bankruptcy filings or deterioration of financial position. Estimates are used indetermining the allowances for all other customers based on factors such as current trends in the length of time the receivables are past due and historicalcollection experience. The Company mitigates some collection risk by requiring most of its customers in the Asia-Pacific region, excluding Japan andAustralia, to pay cash in advance or secure letters of credit when placing an order with the Company.58Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)DescriptionBalance atbeginningof period Charges tocosts andexpenses (Deductions) (1) Balance atend ofperiodYear Ended July 3, 2012: Allowance for doubtful accounts$767 $127 $(510) $384Year Ended June 30, 2013: Allowance for doubtful accounts$384 $312 $(221) $475Year Ended June 30, 2014: Allowance for doubtful accounts$475 $468 $(25) $918 (1) Uncollectible accounts written off, net of recoveries ConcentrationsThe Company may be subject to concentration of credit risk as a result of certain financial instruments consisting principally of marketableinvestments and accounts receivable. The Company has placed its investments with high-credit quality issuers. The Company does not invest an amountexceeding 10% of its combined cash, cash equivalents, short-term investments and marketable securities in the securities of any one obligor or maker, exceptfor obligations of the United States government, obligations of United States government agencies and money market accounts.The Company performs ongoing credit evaluations of its customers and generally does not require collateral in exchange for credit.The following table sets forth major customers accounting for 10% or more of our net revenue: Fiscal Year Ended June 30, 2014 June 30, 2013 June 30, 2012Tech Data Corporation 11% 10% *Westcon Group Inc. 11% 16% 19%Scansource, Inc. * 12% 13%Ericsson AB * * 12% * Less than 10% of revenue The following table sets forth major customers accounting for 10% or more of our accounts receivable balance. June 30, 2014 June 30, 2013Westcon Group Inc. 19% 25%Tech Data Corporation 13% * * Less than 10% of accounts receivable Inventory ValuationThe Company's inventory balance was $57.1 million as of June 30, 2014, compared with $16.2 million as of June 30, 2013. The Company values itsinventory at lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Companyprovides inventory allowances based on excess and obsolete inventories determined primarily by the age of inventory. At the point of the loss recognition, anew, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in thatnewly established cost basis. Any written down or obsolete inventory subsequently sold has not had a material impact on gross margin for any of the periodsdisclosed. Inventory write-downs charged to cost of product revenue were immaterial in fiscal 2014, $0.8 million in fiscal 2013 and $1.1 million in fiscal2012.59Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Cash Equivalents, Short-Term Investments and Marketable SecuritiesSummary of Cash and Available-for-Sale Securities (in thousands) June 30 2014 2013Cash$72,623 $41,518 Cash equivalents$567 $54,285Short-term investments32,692 43,034Marketable securities— 66,776Total available-for-sale$33,259 $164,095 Total cash and available for sale securities$105,882 $205,613Available-for-Sale SecuritiesThe following is a summary of available-for-sale securities (in thousands): AmortizedCost Fair Value UnrealizedHoldingGains UnrealizedHoldingLossesJune 30, 2014 Money market funds$567 $567 $— $—U.S. corporate debt securities32,578 32,692 114 — $33,145 $33,259 $114 $—Classified as: Cash equivalents$567 $567 $— $—Short-term investments32,578 32,692 114 —Marketable securities— — — — $33,145 $33,259 $114 $—June 30, 2013 Money market funds$54,285 $54,285 $— $—U.S. corporate debt securities110,078 109,810 126 (394)U.S. government agency securities— — — —U.S. municipal bonds— — — — $164,363 $164,095 $126 $(394)Classified as: Cash equivalents$54,285 $54,285 $— $—Short-term investments42,994 43,034 44 (4)Marketable securities67,084 66,776 82 (390) $164,363 $164,095 $126 $(394) 60Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The amortized cost and estimated fair value of available-for-sale investments in debt securities at June 30, 2014, by contractual maturity, were asfollows (in thousands): AmortizedCost FairValueDue in 1 year or less$23,512 $23,598Due in 1-2 years6,049 6,070Due in 2-5 years3,017 3,024Total investments in available for sale debt securities$32,578 $32,692The Company considers highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Investmentswith maturities of greater than three months, but less than one year at the balance sheet date are classified as Short Term Investments. Investments withmaturities of greater than one year at balance sheet date are classified as Marketable Securities. Except for direct obligations of the United States government,securities issued by agencies of the United States government, and money market funds, the Company diversifies its investments by limiting its holdingswith any individual issuer.Investments include available-for-sale investment-grade debt securities that the Company carries at fair value. The Company accumulates unrealizedgains and losses on the Company's available-for-sale debt securities, net of tax, in accumulated other comprehensive income in the stockholders' equitysection of its balance sheets. Such an unrealized gain or loss does not reduce net income for the applicable accounting period. If the fair value of an available-for-sale debt instrument is less than its amortized cost basis, an other-than-temporary impairment is triggered in circumstances where (1) the Company intendsto sell the instrument, (2) it is more likely than not that the Company will be required to sell the instrument before recovery of its amortized cost basis, or(3) the Company does not expect to recover the entire amortized cost basis of the instrument (that is, a credit loss exists). If the Company intends to sell or itis more likely than not that the Company will be required to sell the available-for-sale debt instrument before recovery of its amortized cost basis, theCompany recognizes an other-than-temporary impairment in earnings equal to the entire difference between the debt instruments' amortized cost basis and itsfair value. For available-for-sale debt instruments that are considered other-than-temporarily impaired due to the existence of a credit loss, if the Companydoes not intend to sell and it is not more likely than not that the Company will be required to sell the instrument before recovery of its remaining amortizedcost basis (amortized cost basis less any current-period credit loss), the Company separates the amount of the impairment into the amount that is credit relatedand the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the debt instrument's amortizedcost basis and the present value of its expected future cash flows. The remaining difference between the debt instrument's fair value and the present value offuture expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.The Company determines the basis of the cost of a security sold or the amount reclassified out of accumulated other comprehensive income intoearnings using the specific identification method. Realized gains or losses recognized on the sale of investments were not significant for fiscal 2014, 2013 orfiscal 2012. As of June 30, 2014, there were two out of 18 investment securities that had unrealized losses for less than 12 months. For investments that werein an unrealized loss position as of June 30, 2014, the Company recorded an other-than-temporary impairment loss of $158,000 during the year endedJune 30, 2014.Fair Value of Financial InstrumentsThe Company did not hold any financial liabilities that required measurement at fair value on a recurring basis. The following table presents theCompany’s fair value hierarchy for its financial assets measured at fair value on a recurring basis: June 30, 2014Level 1 Level 2 Level 3 Total (In thousands)Assets Investments: Money market funds$567 $— $— $567Corporate notes/bonds— 32,692 — 32,692Foreign currency forward contracts— 21 — 21Total$567 $32,713 $— $33,28061Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)June 30, 2013Level 1 Level 2 Level 3 Total (In thousands)Assets Investments: Municipal bonds$— $— $— $—Federal agency notes— — — —Money market funds54,285 — — 54,285Corporate notes/bonds— 109,810 — 109,810Foreign currency forward contracts— 21 — 21Total$54,285 $109,831 $— $164,116Level 2 investment valuations are based on inputs such as quoted market prices of similar instruments, dealer quotations or valuations provided byalternative pricing sources supported by observable inputs. These generally include U.S. government and sovereign obligations, most government agencysecurities, investment-grade corporate bonds, and state, municipal and provincial obligations. As of June 30, 2014 and June 30, 2013, the Company had noassets or liabilities classified within Level 3. There were no transfers of assets or liabilities between Level 1 and Level 2 during the fiscal 2014.Certain of the Company's assets, including intangible assets and goodwill are measured at fair value on a non-recurring basis if impairment isindicated. There were no impairments recorded for the fiscal year 2014.The fair value of the borrowings under the credit facility is estimated based valuations provided by alternative pricing sources supported byobservable inputs which is considered Level 2. The carrying amount and estimated fair value of the Company’s total long-term indebtedness, includingcurrent portion was $121.6 million and $121.3 million, respectively, as of June 30, 2014. The Company did not have such debt as of June 30, 2013.Long-Lived AssetsLong-lived assets include (a) property and equipment, (b) goodwill and intangible assets, and (c) other assets. Property and equipment, goodwill andintangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or asset groupsmay not be recoverable. If such facts and circumstances exist, the Company assesses the recoverability of these assets by comparing the projectedundiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts.Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. The Company reduces the carrying value of serviceinventory to net realizable value based on expected quantities needed to satisfy contractual service requirements of customers.(a) Property and Equipment, NetProperty and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using thestraight-line method over the estimated useful lives of the assets. Estimated useful lives of one to four years are used for computer equipment and software.Estimated useful lives of three to seven years are used for office equipment, furniture and fixtures. Depreciation and amortization of leasehold improvementsis computed using the lesser of the useful life or lease terms (ranging from two to ten years). Property and equipment consist of the following (in thousands): June 30, 2014 June 30, 2013Computer equipment$27,319 $29,400Purchased software10,859 3,699Office equipment, furniture and fixtures28,813 1,506Leasehold improvements29,029 11,344 96,020 45,949Less: accumulated depreciation and amortization(49,466) (22,305)Property and equipment, net$46,554 $23,644During the year ended June 30, 2014, there was an increase in property and equipment of $1.2 million for asset retirement obligations recorded fromthe acquisition of Enterasys.62Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(b) Goodwill and IntangiblesAs part of the acquisition of Enterasys, the Company acquired $70.9 million in goodwill which has been allocated to the Company's only reportablesegment, the development and marketing of network infrastructure equipment.The following table reflects the changes in the carrying amount of goodwill (in thousands): TotalBalance as of June 30, 2013 $—Addition due to acquisition of Enterasys (Note 2) 70,877Balance as of June 30, 2014 $70,877The following tables summarize the components of gross and net intangible asset balances (in thousands): Weighted AverageRemaining AmortizationPeriod Gross Carrying Amount Accumulated Amortization Net Carrying AmountJune 30, 2014 Developed technology2.2 years $48,000 $11,028 $36,972Customer relationships2.3 years 37,000 8,222 28,778Maintenance contracts4.3 years 17,000 2,267 14,733Trademarks2.3 years 2,500 555 1,945Order backlog1.3 years 7,400 5,667 1,733License Agreements11.2 years 10,447 8,141 2,306Other Intangibles4.8 years 2,547 1,555 992 $124,894 $37,435 $87,459 Weighted AverageRemaining AmortizationPeriod Gross Carrying Amount Accumulated Amortization Net Carrying AmountJune 30, 2013 License Agreements10.3 years $10,447 $7,407 $3,040Other Intangibles5.8 years 2,459 1,256 1,203Total assets with finite lives $12,906 $8,663 $4,243Amortization expense was $28.8 million, $1.5 million, and $1.8 million in fiscal 2014, 2013, and 2012, respectively. Of the total amount recognized,$11.9 million, $1.5 million, and $1.8 million is included in "Cost of revenues for products" on the consolidated statements of operations in fiscal 2014, 2013,and 2012, respectively, while the remainder of the amortization expense is included in "Amortization of intangibles" on the consolidated statement ofoperations. The amortization expense for developed technology, patents, license agreements and other intangibles is recognized in "Cost of revenues forproducts" on the consolidated statement of operations. The estimated future amortization expense to be recorded for each of the next five years is as follows(in thousands):For the fiscal year ending: 2015$35,699201632,281201713,12920183,68220191,415Thereafter1,253Total$87,45963Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)(c) Other AssetsOther assets primarily consists of service inventory and long term deposits. The Company holds service inventory to support customers who havepurchased long term service contracts with a hardware replacement element. The Company held service inventory of $11.4 million and $6.3 million as ofJune 30, 2014 and June 30, 2013, respectively.Deferred Revenue, NetDeferred revenue, net represents amounts for (i) deferred services revenue (support arrangements, professional services and training), and (ii) deferredproduct revenue net of the related cost of revenue when the revenue recognition criteria have not been met. The following table summarizes deferred revenue,net at June 30, 2014 and June 30, 2013, respectively (in thousands): June 30, 2014 June 30, 2013Deferred services$89,657 $38,003Deferred product and other revenue8,020 3,451Total deferred revenue97,677 41,454Less: current portion74,735 33,184Non-current deferred revenue, net$22,942 $8,270The Company offers for sale to its customers, renewable support arrangements, including extended warranty contracts, to its customers that rangegenerally from one to five years. Deferred support revenue is included within deferred revenue, net within the services category above. The change in theCompany’s deferred support revenue balance in relation to these arrangements was as follows (in thousands): Year Ended June 30, 2014 June 30, 2013Balance beginning of period$38,003 $37,461Assumed from acquisition35,879 —New support arrangements113,412 57,342Recognition of support revenue(97,637) (56,800)Balance end of period89,657 38,003Less: current portion66,715 29,733Non-current deferred revenue$22,942 $8,270Deferred Distributors Revenue, Net of Cost of Sales to DistributorsAt the time of shipment to distributors, the Company records a trade receivable at the contractual discount to list selling price since there is a legallyenforceable obligation from the distributor to pay on a current basis for product delivered, the Company relieves inventory for the carrying value of goodsshipped since legal title has passed to the distributor, and the Company records deferred revenue and deferred cost of sales in “Deferred distributors revenue,net of cost of sales to distributors” in the liability section of its consolidated balance sheets. Deferred distributors revenue, net of cost of sales to distributorseffectively represents the gross margin on the sale to the distributor; however, the amount of gross margin the Company recognizes in future periods willfrequently be less than the originally recorded deferred distributors revenue, net of cost of sales to distributors as a result of price concessions negotiated attime of sell-through to end customers. The Company sells each item in its product catalog to all of its distributors worldwide at contractually discountedprices. However, distributors resell the Company’s products to end customers at a very broad range of individually negotiated price points based on customer,product, quantity, geography, and other competitive conditions which results in the Company remitting back to the distributors a portion of their originalpurchase price after the resale transaction is completed. Thus, a portion of the deferred revenue balance represents a portion of distributors’ original purchaseprice that will be remitted back to the distributors in the future. The wide range and variability of negotiated price credits granted to distributors does notallow the Company to accurately estimate the portion of the balance in the deferred revenue that will be remitted to the distributors. Therefore, the Companydoes not reduce deferred revenue by anticipated future price credits; instead, price credits are recorded against revenue when incurred, which is generally atthe time the distributor sells the product.64Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The following table summarizes deferred distributors revenue, net of cost of sales to distributors at the end of fiscal 2014 and 2013, respectively (inthousands): Year Ended June 30, 2014 June 30, 2013Deferred distributors revenue$40,715 $22,411Deferred cost of sales to distributors(8,723) (5,023)Total deferred distributors revenue, net of cost of sales to distributors$31,992 $17,388DebtThe Company's debt is comprised of the following: June 30, 2014Current portion of long-term debt: Term Loan $5,688Revolving Facility 24,000Current portion of long-term debt $29,688 Long-term debt, less current portion: Term Loan $56,875Revolving Facility 35,000Total long-term debt, less current portion $91,875Total debt $121,563On October 31, 2013, the Company entered into a Credit Agreement which provides for a $60 million five-year Revolving Facility and a $65 millionfive-year Term Loan and together with the Revolving Facility (the “Senior Secured Credit Facilities”). The proceeds from the Term Loan were used to pay aportion of the purchase price in the acquisition of all of the issued and outstanding capital stock of Enterasys. The company also drew $35 million of theRevolving Facility to pay a portion of the purchase price and subsequently drew $48 million to fund working capital requirements. The Company repaid $24million of such draw during the year ended June 30, 2014 and the remaining draw of $24 million was repaid as of the filing date of this Form 10-K.Borrowings under the Senior Secured Credit Facilities bear interest, at the Company's election, at a rate per annum equal to an agreed to applicablemargin plus (a) the higher of (x) the prime rate in effect on such day or (y) the federal funds effective rate in effect on such day plus 0.50%, or (b) an adjustedLibor rate. In addition, the Company is required to pay a commitment fee of between 0.375% and 0.50% quarterly (currently 0.50%) on the unused portion ofthe Revolving Facility, also based on the Company’s Consolidated Leverage Ratio. Principal installments are payable on the Term Loan in varyingpercentages quarterly starting December 31, 2013 and to the extent not previously paid, all outstanding balance to be paid at maturity. If not repaid beforematurity, the draws on the Revolving Facility shall be repaid on the maturity date. The Senior Secured Credit Facilities are secured by substantially all of theCompany’s assets and are jointly and severally guaranteed by the Company and certain of its subsidiaries.The Credit Agreement contains financial covenants that require the Company to maintain a minimum Consolidated Fixed Charge Coverage Ratio anda Consolidated Quick Ratio and a maximum Consolidated Leverage Ratio as well as several other covenants and restrictions that limit the Company’s abilityto incur additional indebtedness, create liens upon any of its property, merge, consolidate or sell all or substantially all of its assets, etc. These covenants,which are described more fully in the Credit Agreement, to which reference is made for a complete statement of the covenants, are subject to certainexceptions. The Company currently is in compliance with its covenants.The Credit Agreement also includes customary events of default, including failure to pay principal, interest or fees when due, failure to comply withcovenants, if any representation or warranty made by the Company is false or misleading in any material respect, certain insolvency or receivership eventsaffecting the Company and its subsidiaries, the occurrence of certain65Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)material judgments, the occurrence of certain ERISA events, the invalidity of the loan documents or a change in control of the Company. The amountsoutstanding under the Senior Secured Credit Facilities may be accelerated upon certain events of default.Deferred financing costs are costs incurred in connection with obtaining long-term financing. The Company incurred $1.3 million deferred financingcosts related to Senior Secured Credit Facilities during the year ended June 30, 2014. Deferred financing costs are amortized over the term of the relatedindebtedness or credit agreement. Amortization of deferred financing costs, included in "Interest expense" in the Consolidated Statements of Operations,totaled $0.2 million in 2014.The Company had $0.9 million of outstanding letters of credit as of June 30, 2014.Guarantees and Product WarrantiesNetworking products may contain undetected hardware or software errors when new products or new versions or updates of existing products arereleased to the marketplace. In the past, we had experienced such errors in connection with products and product updates. The Company’s standard hardwarewarranty period is typically 12 months from the date of shipment to end-users and 90 days for software. For certain access products, the Company offers alimited lifetime hardware warranty commencing on the date of shipment from the Company and ending five (5) years following the Company’sannouncement of the end of sale of such product. Upon shipment of products to its customers, the Company estimates expenses for the cost to repair orreplace products that may be returned under warranty and accrue a liability in cost of product revenue for this amount. The determination of the Company’swarranty requirements is based on actual historical experience with the product or product family, estimates of repair and replacement costs and any productwarranty problems that are identified after shipment. The Company estimates and adjusts these accruals at each balance sheet date in accordance withchanges in these factors.Upon issuance of a standard product warranty, the Company discloses and recognizes a liability for the obligation it assumes under the warranty. Thefollowing table summarizes the activity related to the Company’s product warranty liability during fiscal 2014 and fiscal 2013: Year ended June 30, 2014 June 30, 2013Balance beginning of period$3,296 $2,871Assumed from acquisition3,702 —New warranties issued6,225 4,299Warranty expenditures(5,672) (3,874)Balance end of period$7,551 $3,296In the normal course of business to facilitate sales of its products, the Company indemnifies its resellers and end-user customers with respect to certainmatters. The Company has agreed to hold the customer harmless against losses arising from a breach of intellectual property infringement or other claimsmade against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. It is notpossible to estimate the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims andthe unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have nothad a material impact on its operating results or financial position.Other Accrued LiabilitiesThe following are the components of other accrued liabilities (in thousands): June 30, 2014 June 30, 2013Accrued general and administrative costs$4,018 $2,959Other accrued liabilities34,017 13,543Total$38,035 $16,502AdvertisingCooperative advertising obligations with customers are accrued and the costs expensed at the time the related revenue is recognized. All otheradvertising costs are expensed as incurred. Cooperative advertising expenses are recorded as marketing expenses to the extent that an advertising benefitseparate from the revenue transaction can be identified and the cash paid does not exceed the fair value of that advertising benefit received. Otherwise, suchcooperative advertising obligations with customers66Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)are recorded as a reduction of revenue. Advertising expenses were $0.5 million, $0.2 million, and $0.5 million, respectively, in fiscal 2014, fiscal 2013, andfiscal 2012.4. Recently Issued Accounting PronouncementsIn July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-11, Income Taxes (Topic 740)-Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). This ASU provides guidance regarding the presentation in the statement of financial position of an unrecognized tax benefit when a net operating losscarryforward or a tax credit carryforward exists. The ASU generally provides that an entity's unrecognized tax benefit, or a portion of its unrecognized taxbenefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a taxcredit carryforward. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 31, 2013. The Companyintends to adopt this standard prospectively in the first quarter of its fiscal year ending June 30, 2015. The Company does not believe this updated standardwill have a material impact on its consolidated financial statements.In May 2014, the FASB, jointly with the International Accounting Standards Board, issued Accounting Standard Update No. 2014-09 (Topic 606) -Revenue from Contracts with Customers ("ASU 2014-09"). This ASU's core principle is that a reporting entity will recognize revenue when it transferspromised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods orservices. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performanceobligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5)recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance will require significantly expanded disclosuresabout revenue recognition. ASU 2014-09 is effective for annual reporting periods (including interim reporting periods within those annual periods)beginning after December 15, 2016. Early application is not permitted. Entities have the option of using either a full retrospective or a modified retrospectiveapproach to adopt this ASU. The Company is currently evaluating the potential effect on its consolidated financial position, results of operations and cashflows from adoption of this standard.5. Commitments, Contingencies and LeasesLeasesThe Company currently leases its current headquarters, research and development facilities and office spaces for its various United States andinternational operations. Certain leases contain rent escalation clauses and renewal options. As part of the Company’s existing leased facilities, the Companyhas received lease incentives which take the form of a fixed allowance towards lease improvements on the respective facility. The Company used theallowance to make leasehold improvements which are being depreciated over the useful life of the assets or the lease term, whichever is shorter. The offsettinglease incentives liability is being amortized on a straight-line basis over the term of the lease as an offset to rent expense.Future annual minimum lease payments under all non-cancelable operating leases having initial or remaining lease terms in excess of one year atJune 30, 2014 were as follows (in thousands): Future LeasePaymentsFiscal 2015$9,093Fiscal 20167,482Fiscal 20176,974Fiscal 20186,887Fiscal 20196,918Thereafter20,755Total minimum payments$58,109Rent expense was approximately $10.2 million in fiscal 2014, $5.9 million in fiscal 2013, and $4.3 million in fiscal 2012.Purchase Commitments67Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The Company currently has arrangements with contract manufacturers and suppliers for the manufacture of its products. The arrangements allow themto procure long lead-time component inventory based upon a rolling production forecast provided by the Company. The Company is obligated to thepurchase of long lead-time component inventory that its contract manufacturer procures in accordance with the forecast, unless the Company gives notice oforder cancellation outside of applicable component lead-times. As of June 30, 2014, the Company had non-cancelable commitments to purchaseapproximately $64.7 million of such inventory during the first quarter of fiscal 2015.Legal ProceedingsThe Company may from time to time be party to litigation arising in the course of its business, including, without limitation, allegations relating tocommercial transactions, business relationships or intellectual property rights. Such claims, even if not meritorious, could result in the expenditure ofsignificant financial and managerial resources. Litigation in general and intellectual property and securities litigation in particular, can be expensive anddisruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict.In accordance with applicable accounting guidance, the Company records accruals for certain of its outstanding legal proceedings, investigations orclaims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. The Company evaluates, at least on a quarterlybasis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would resultin a loss contingency to become both probable and reasonably estimable. When a loss contingency is not both probable and reasonably estimable, theCompany does not record a loss accrual. However, if the loss (or an additional loss in excess of any prior accrual) is at least a reasonable possibility andmaterial, then the Company would disclose an estimate of the possible loss or range of loss, if such estimate can be made, or disclose that an estimate cannotbe made. The assessment whether a loss is probable or a reasonable possibility, and whether the loss or a range of loss is estimable, involves a series ofcomplex judgments about future events. Even if a loss is reasonably possible, the Company may not be able to estimate a range of possible loss, particularlywhere (i) the damages sought are substantial or indeterminate, (ii) the proceedings are in the early stages, or (iii) the matters involve novel or unsettled legaltheories or a large number of parties. In such cases, there is considerable uncertainty regarding the ultimate resolution of such matters, including the amountof any possible loss, fine or penalty. Accordingly, for current proceedings, except as noted below, the Company is currently unable to estimate anyreasonably possible loss or range of possible loss. However, an adverse resolution of one or more of such matters could have a material adverse effect on theCompany's results of operations in a particular quarter or fiscal year.Intellectual Property LitigationEnterasys NetworksOn June 21, 2005, Enterasys Networks ("Enterasys") filed suit against Extreme and Foundry Networks, Inc. (“Foundry”) in the United States DistrictCourt for the District of Massachusetts, Civil Action No. 05-11298 DPW. The complaint alleged willful infringement of U.S. Patent Nos. 5,251,205;5,390,173; 6,128,665; 6,147,995; 6,539,022; and 6,560,236, and sought: a) a judgment that the Company willfully infringes each of the patents; (b) apermanent injunction from infringement, inducement of infringement and contributory infringement of each of the six patents; (c) damages and a “reasonableroyalty” to be determined at trial; (d) treble damages; (e) attorneys' fees, costs and interest; and (f) equitable relief at the Court's discretion. Petitions forreexamination were filed challenging five of the patents at issue to the U.S. Patent and Trademark Office, and a stay of the case was entered. Following thereexamination proceedings, Enterasys withdrew its allegations of infringement as to two of the patents, U.S. Patent Nos. 6,539,022 and 6,560,236. The staywas lifted on May 21, 2010, and the Court held claim construction hearings in December 2010. Fact discovery was ongoing. No trial date was set.On April 20, 2007, the Company filed suit against Enterasys in the United States District Court for the Western District of Wisconsin, Civil ActionNo. 07-C-0229-C. The complaint alleged willful infringement of U.S. Patents Nos. 6,104,700, 6,678,248, and 6,859,438, and sought injunctive relief againstEnterasys' continuing sale of infringing goods and monetary damages. Enterasys responded to the complaint on May 30, 2007, and also filed counterclaimsalleging infringement of three U.S. patents owned by Enterasys. On April 9, 2008, the Court dismissed Enterasys' counterclaims on one of its patents withprejudice. On May 5, 2008, the Court granted the Company's motion for summary judgment, finding that it does not infringe Enterasys' two remainingpatents and dismissing all of Enterasys' remaining counterclaims with prejudice. On May 30, 2008, a jury found that Enterasys infringed all three of theCompany's patents and awarded the Company damages in the amount of $0.2 million. The Court also ruled in the Company's favor on Enterasys' challenge tothe validity of the Company's patents. On October 29, 2008, the Court denied Enterasys' post-trial motion for judgment as a matter of law, and grantedExtreme Network's motion for a permanent injunction against Enterasys. The injunction order permanently enjoins Enterasys from manufacturing, using,offering to sell, selling in the U.S. and importing into the U.S. the Enterasys products accused of infringing Extreme Network's three patents. On March 16,2009, the Court also denied Enterasys' motion for a new trial, but granted Enterasys' motion for a stay of the injunction pending appeal. On April 17, 2009,Enterasys filed its notice of appeal and on May 1, 2009, the Company filed its cross appeal. On September 30, 2010, the U.S. Court of Appeals for the FederalCircuit upheld the jury verdict of infringement by Enterasys of the Company's68Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)patents and the Districts Court's summary judgment of non-infringement by the Company of Enterasys' '727 patent. The Federal Circuit reversed thejudgment of non-infringement by the Company of Enterasys '181 patent, holding that the District Court Judge applied an incorrect claim construction andreversed the District Court's denial of the Company's request for attorneys' fees as premature. On November 4, 2011, a jury returned a verdict of non-infringement by the Company of the '181 patent and found the patent to be valid. Both partiesfiled post-trial motions, including motions for a new trial, for judgment as a matter of law and for attorneys' fees, all of which the Court denied on July 11,2012. Enterasys did not file a notice of appeal by the August 10, 2012 deadline. Consequently, the judgment of non-infringement in favor of the Companyin the second trial is final. During the fourth quarter of fiscal 2012, Enterasys paid the Company $0.6 million related to the judgment. During the quarterended December 31, 2012, the Company received payments from Enterasys totaling approximately $0.4 million for the Court's award for damages,supplemental damages, pre and post judgment interests, costs from the first trial and second trial, plus the amount Enterasys agreed to release for damagesheld in escrow that accrued during the stay of the injunction post-trial and on appeal.On March 29, 2013, the parties entered into a confidential settlement agreement (“Agreement”). The Agreement required a dismissal with prejudice ofthe Wisconsin and Massachusetts litigation, as well as cross covenants not to sue and survival of settlement rights for any acquiring party of the parties. Jointmotions to dismiss were granted on April 13, 2013, and April 15, 2013 respectively. All matters between the parties have now been resolved.Chrimar SystemsOn October 31, 2011, Chrimar Systems, Inc. DBA CMS Technologies, and Chrimar Holding Company filed suit against the Company, Cisco Systems,Inc., and Cisco Consumer Products LLC. Cisco-Linksys LLC, Hewlett-Packard Company, 3Com Corporation and Avaya, Inc. in the United States DistrictCourt for the District of Delaware, Civil Action No. 11-1050 (the "Delaware action"). The complaint alleges infringement of U.S. Patent No. 7,457,250. TheDelaware action has been stayed pursuant to 28 USC Section 1659(a) pending final determination of the International Trade Commission action describedbelow, based on the fact that the allegations in both cases relate to the same patent. During the fourth quarter of the fiscal 2012, the Company engaged in settlement discussions with Chrimar Systems Inc. As part of the negotiations theCompany determined that it is reasonably possible that a range of loss could be between $0.3 million and $1.4 million which was dependent on a number offactors including whether mutually acceptable settlement terms can be reached. During the quarter ended June 30, 2012 the Company capitalized $1.2million related to such patents as intangibles based on a probable estimated value and recorded a charge of $0.3 million based on its best estimate of theprobable loss. In addition, during the quarter ending March 31, 2013, venue for the Delaware action was transferred to the United States District Court for theDistrict of Northern California.On July 16, 2013, the parties entered into a confidential patent license and settlement agreement (“Agreement”). Pursuant to that Agreement, theCompany paid $1.4 million on July 25, 2013 and Chrimar filed for dismissal of the Delaware Action with prejudice on July 29, 2013. All matters between theparties have now been resolved.Reefedge NetworksOn September 17, 2012, Reefedge Networks, LLC ("ReefEdge) filed suit against the Company in the United States District Court for the District ofDelaware, Civil Action No. 12-1148. The complaint alleged wrongful use, making, selling, and/or offering to sell products that infringe U.S. Patent Nos.6,633.761; 6,975,864; and 7,197,308 and sought unspecified monetary damages and a permanent injunction for products originating from a single supplierto which the Company had submitted an indemnification request. An answer was filed on December 10, 2012. The Company was dismissed from the suit onMay 6, 2013. All matters between the parties have now been resolved.On September 17, 2012, ReefEdge also filed suit against Enterasys in the United States District Court for the District of Delaware alleging certain ofthe company's products (wireless controllers and wireless access points), infringe three ReefEdge U.S. patents (6633761, 6975864, 7197308). ReefEdgesought injunctive relief as well as monetary damages, costs, expenses and attorney fees, although there was no quantified amount sought. Extreme assumedthis litigation as part of the acquisition of Enterasys. The parties reached a settlement in April 2014, which required the Company to pay an immaterialamount.69Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Relay IP Inc.On May 3, 2013, Relay IP, Inc. filed suit against the Company in the United States District Court for the District of Delaware, Civil Action case number13-775 (Extreme Case). Further on May 6, 2013 they also filed a similar suit against Enterasys in the same court, Civil Action case number 13-774. Thecomplaint alleges infringement based on the Company's testing of its own equipment and inducing its customers to infringe U.S. Patent No. 5,331,637 andseeks unspecified monetary damages. An answer was filed on both cases in July, 2013. The suit is one of approximately 40 nearly simultaneous suits filed byRelay IP against numerous networking equipment manufacturers, suppliers, operators, and users including Cisco Systems, Hewlett-Packard, JuniperNetworks, Avaya, Extreme and Enterasys. An answer was filed on both cases in July, 2013. This matter was dismissed against Extreme and Enterasys on allclaims by an Order of the District Court on April 28, 2014. It is our understanding that the suit was dismissed due to a settlement by RPX with the Plaintiff onbehalf of all RPX members named as Defendants in this action.Net Navigation Systems, LLC.On April 23, 2014, Net Navigation Systems, LLC (“Net Navigation”) filed a complaint against Extreme Networks, Inc. in the Eastern District of Texas.In the Complaint, the plaintiff asserts infringement of U.S. Patent No. 6,625,122 (“the ’122 Patent”), entitled “Selection of Data for Network Transmission,”which issued on September 23, 2003. Although somewhat vague, the Complaint identifies the following products as accused of infringing the ‘122 Patent:“Networking products capable of providing priority to different data flows based on bandwidth.” The Complaint also states that Extreme has infringed by“making, selling, and causing its customers to use networking products capable of providing priority to different data flows based on bandwidth, such as,without limitation, the Black Diamond X8 and the Black Diamond 8000 Series of switches and routers.” The Complaint also asserts infringement of U.S.Patent No. 6,434,145 (“the ’145 Patent”), entitled “Processing of Network Data by Parallel Processing Channels,” which issued on August 13, 2002. Again,although somewhat vague, the Complaint states that Extreme has infringed by “making, using, importing, selling, and/or offering for sale in the UnitedStates, including within this judicial district, networking products that use parallel processing channels, such as, without limitation, the Black Diamond X8and the Black Diamond 8000 Series of switches and routers.” Net Navigation, a non-practicing entity, seeks injunctive relief as well as monetary damages,cost, expenses and attorney fees, although the complaint seeks no quantified amount. The Company denies the claims and is preparing to vigorously defendour technology. Given the preliminary nature of the claims, it is premature to assess the likelihood of a particular outcome.Selene Communication Technologies, LLC.On April 7, 2014, Selene Communication Technologies, LLC (“Selene”), filed a complaint in the US District Court for the District of Delaware againstExtreme and Enterasys asserting a cause of action for infringement of United States Patent No. 7,143,444 (the “444 Patent”). Selene has also recently sued anumber of other technology companies including Cisco for infringement of the 444 Patent. Selene, a non-practicing entity, seeks injunctive relief as well asmonetary damages, costs, expenses and attorney fees, although the complaint seeks no quantified amount. The Company denies the claims and is preparingto vigorously defend our technology. Given the preliminary nature of the claims, it is premature to assess the likelihood of a particular outcome.Commonwealth of KentuckyOn or about February 3, 2014, a class action lawsuit was filed in the Commonwealth of Kentucky against Enterasys Networks, Inc. and two otherdefendants. The complaint alleges that Enterasys and its subcontractor, TJL Information Technologies, Inc., d.b.a. Unbridled Information Technologies(“Subcontractor”), violated Kentucky’s wage and hour laws and failed to pay the prevailing wage in violation of the Kentucky State Prevailing Wage Act(the “Act”) on various public works projects for a number of Kentucky government agencies since January 2010. Plaintiffs also allege common law actionsfor quantum merit and unjust enrichment and they seek monetary damages, costs, expenses and attorney fees, although there was no quantified amountidentified. One of the defendants, Integrated Facility Systems, LLC (“IFS”), has filed a cross-claim against Enterasys. The Company denies the claims and hasfiled answers to both the complaint and cross-claim on April 16, 2014. In addition, Company filed a cross-claim for indemnity against IFS and theSubcontractor. This litigation is in the early stages of discovery. Furthermore, the Company has made a claim for indemnification to Unify U.S. Holdings, Inc.(formerly known as Enterprise Networks Holdings, Inc.) (“Seller”), which claim arises pursuant to the stock purchase agreement between Seller and Extremein connection with Extreme’s purchase of Enterasys (the “Purchase Agreement”). Given the preliminary nature of the lawsuit, it is premature to assess thelikelihood of a particular outcome.70Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)ICMS Tax Assessment MattersThe State of Sao Paolo (Brazil) denied Enterasys Networks do Brazil Ltda. the use of certain credits derived from the State of Espirito Santo under theterms of the FUNDAP scheme for the tax years of 2002 through 2009. Enterasys’ application to resolve the ICMS Tax Assessments at the administrative levelof the Sao Paolo Tax Department under the amnesty relief program (Reference No 3.056.963-1) was denied in March, 2014 by the Sao Paolo TaxAdministration. The value of the ICMS tax credits that were disallowed by the Sao Paolo Tax Administration is approximately BR 3,443,914 (orapproximately US$1.5 million), plus interest and penalties (that are currently estimated to be approximately US$9 million). Given the preliminary nature ofthe lawsuit and the uncertainty of the legal environment in Brazil, it is premature to assess the likelihood of a particular final outcome. Based on the currentlyavailable information, the Company believes the ultimate outcome of this audit will not have material adverse effect on the Company's financial position,cash flows or overall trends in results of operations. The range of the potential total tax liability related to these matters is estimated to be from $0 million to$9 million, of which the Company believes $4.3 million is the best estimate within the range and has recorded an accrual as of the acquisition date ofEnterasys as such matter relates to the period before the acquisition.Indemnification ObligationsSubject to certain limitations, the Company may be obligated to indemnify its current and former directors, officers and employees. These obligationsarise under the terms of its certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify, whereapplicable, generally means that the Company is required to pay or reimburse, and in certain circumstances the Company has paid or reimbursed, theindividuals' reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. It is not possible to estimate themaximum potential amount under these indemnification agreements due to the limited history of these claims. The cost to defend the Company and thenamed individuals could have a material adverse effect on its consolidated financial position, results of operations and cash flows in the future. Recovery ofsuch costs under its directors and officers insurance coverage is uncertain. As of June 30, 2014, the Company had no outstanding indemnification claims.6. Stockholders’ EquityPreferred StockIn April 2001, in connection with the entering into of the Company's Rights Agreement, the Company authorized the issuance of preferred stock. Thepreferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to provide for the rights, preferences and privilegesof the shares of each series and any qualifications, limitations or restrictions on these shares. As of June 30, 2014, no shares of preferred stock wereoutstanding.Stockholders’ Rights AgreementOn November 27, 2012, the Company's Board of Directors adopted an Amended and Restated Rights Agreement (the “Restated Rights Plan”), betweenExtreme Networks and Computershare Inc. (Successor-in-interest to Computershare Shareholder Services LLC) as the rights agent (the “Rights Agent”). TheRestated Rights Plan governs the terms of each right (“Right”) that has been issued with respect to each share of Common Stock of Extreme Networks. EachRight initially represents the right to purchase one one-thousandth of a share of Series A Preferred Stock of Extreme Networks. The Restated Rights Planreplaces in its entirety the Rights Agreement, dated as of April 27, 2001, as amended on June 30, 2010 and April 26, 2011 between Extreme Networks andMellon Investor Services LLC (the “Prior Rights Plan”). The Board reviewed the necessity of the provision of the Prior Rights Plan adopted to preserve thevalue of Extreme Networks' deferred tax assets, including its net operating loss carry forwards, with respect to its ability to fully use its tax benefits to offsetfuture income may be limited if it experiences an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986 as a result ofordinary buying and selling of Extreme Networks' common stock. Following its review, the Board decided it was necessary and in the best interests ofExtreme Networks and its stockholders to enter into the Restated Rights Plan. The Restated Rights Plan incorporates the Prior Rights Plan and theamendments thereto into a single agreement and extended the term of the Prior Rights Plan to April 30, 2013. The Company's stockholders voted to extendthe term of the Restated Rights Plan from April 30, 2013 to April 30, 2014 at our 2012 Annual Meeting of Stockholders, and the Restated Rights Plan wasamended effective April 30, 2013 to reflect the extension of the term. The Board of Directors have unanimously approved an amendment to the Rights Planeffective April 30, 2014 to extend the Rights Plan through May 31, 2015, subject to ratification by a majority of the stockholders at the next annual meetingof the stockholders on November 12, 2014.71Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Shares Reserved for IssuanceThe following are shares reserved for issuance (in thousands): June 30, 2014Employee stock purchase plan1,205Employee stock options23,692Total shares reserved for issuance24,8977. Employee Benefit Plans (including Share-based Compensation)As of June 30, 2014, the Company has the following share-based compensation plans:2013 Equity Incentive PlanThe 2013 Equity Incentive Plan (the “2013 Plan”) was approved by stockholders on November 20, 2013. The 2013 Plan replaces the 2005 EquityIncentive Plan (the "2005 Plan").Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares,performance units, and other share-based or cash-based awards to employees and consultants. The 2013 Plan also authorizes the grant of awards of stockoptions, stock appreciation rights, restricted stock and restricted stock units to non-employee members of the Board of Directors and deferred compensationawards to officers, directors and certain management or highly compensated employees. The 2013 Plan authorizes the issuance of up to 9,000,000 shares ofthe Company’s common stock. In addition, up to 9,500,000 shares subject to stock options and awards outstanding under the 2005 Plan that expired and6,900,000 shares subject to stock options outstanding and awards outstanding under the Enterasys Networks Inc. 2013 Stock Plan have been added to thenumber of shares available for future grant under the 2013 Plan. As of June 30, 2014, total options and awards to acquire 2,149,398 shares were outstandingunder the 2013 Plan and 6,350,048 shares are available for grant under the 2013 Plan. Options granted under this plan have a contractual term of seven years.72Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Enterasys Inc. 2013 Stock PlanEnterasys Networks Inc. 2013 Stock Plan (the "Enterasys Plan") was assumed by the Company on October 31, 2013 pursuant to the Stock PurchaseAgreement, dated September 12, 2013, by and between the Company and Enterprise Networks Holdings, Inc. As of June 30, 2014, total options and awards toacquire 5,700,360 shares were outstanding under the Enterasys Plan. Options granted under this plan have a contractual term of seven years.2005 Equity Incentive PlanThe 2005 Plan was adopted by the Company’s Board of Directors on October 20, 2005, and approved by stockholders on December 2, 2005. The 2005Plan replaced the 1996 Stock Option Plan (the “1996 Plan”), 2000 Non-statutory Stock Option Plan (the “2000 Plan”) and 2001 Non-statutory Stock OptionPlan (the “2001 Plan”). Effective November 20, 2013, the 2005 Plan was terminated, and, as of June 30, 2014, options to acquire 9,183,034 shares wereoutstanding under the 2005 Plan.Amended 1996 Stock Option PlanThe 1996 Plan was originally adopted in September 1996, and provided for the grant of options for common stock to eligible participants. A total of56,382,867 shares were reserved under the 1996 Plan. Options granted under this plan have a contractual term of ten years. Effective December 2, 2005, the1996 Plan was terminated, and, as of June 30, 2014, options to acquire 303,763 shares were outstanding under the 1996 Plan.2000 PlanIn March 2000, the Board of Directors adopted the 2000 Plan which provided for the grant of options for common stock to eligible participants. A totalof 4,000,000 shares were reserved under the 2000 Plan. Options granted under this plan have a contractual term of ten years. Effective December 2, 2005, the2000 Plan was terminated, and, as of June 30, 2014, options to acquire 5,000 shares were outstanding under the 2000 Plan.2001 PlanIn May 2001, the Board of Directors adopted the 2001 Plan which provided for the grant of options for common stock to eligible participants. A totalof 4,000,000 shares were reserved under the 2001 Plan. Options granted under this plan have a contractual term of ten years. Effective December 2, 2005, the2001 Plan was terminated, and, as of June 30, 2014, there were no shares outstanding under the 2001 Plan.The following table summarizes stock option activity under all plans: Number ofShares(000’s) Weighted-AverageExercise PricePer Share Weighted-AverageRemainingContractualTerm (years) AggregateIntrinsic Value($ 000’s)Options outstanding at July 3, 20119,132 $4.01 Granted2,593 $3.30 Exercised(437) $2.24 Canceled(2,282) $4.85 Options outstanding at June 30, 20129,006 $3.68 Granted4,163 $3.35 Exercised(2,045) $3.00 Canceled(1,979) $3.77 Options outstanding at June 30, 20139,145 $3.66 Granted6,347 $5.15 Exercised(1,792) $3.59 Canceled(1,968) $5.01 Options outstanding at June 30, 201411,732 $4.26 5.13 6,846Exercisable at June 30, 20144,846 $3.88 3.77 3,825Vested and expected to vest at June 30, 201410,563 $4.21 5.01 6,39773Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Included in the options granted above for the year ended June 30, 2014 are 4.2 million options, assumed in connection with the acquisition ofEnterasys on October 31, 2013, with an exercise price of $5.30.The following table summarizes significant ranges of outstanding and exercisable options at June 30, 2014:Options Outstanding Options ExercisableRange of Exercise Prices NumberOutstanding (000’s) Weighted-AverageRemaining Contractual Life Weighted-AverageExercise Price NumberExercisable (000’s) Weighted-AverageExercise Price (In years) $1.69 – $3.03784 3.62 $2.42 756 $2.40$3.17 – $3.17 1,954 5.80 $3.17 597 $3.17$3.25 – $3.531,313 4.25 $3.37 834 $3.38$3.54 – $3.871,224 4.91 $3.63 629 $3.69$4.03 – $4.251,588 4.59 $4.20 776 $4.22$4.26 – $5.26242 1.36 $4.70 242 $4.70$5.30 – $5.303,466 5.73 $5.30 897 $5.30$5.36 – $6.44 1,061 6.49 $5.75 15 $6.02$6.48 – $6.4810 0.35 $6.48 10 $6.48$6.96 – $6.9690 0.42 $6.96 90 $6.96$1.69 – $6.9611,732 5.13 $4.26 4,846 $3.88The total intrinsic value of options exercised in fiscal 2014, fiscal 2013 and fiscal 2012 was $4.1 million, $1.1 million, and $0.5 million, respectively.The fair value of options vested in fiscal 2014, fiscal 2013 and fiscal 2012 was $2.9 million, $1.5 million, and $2.3 million, respectively.Stock AwardsStock awards may be granted under the 2005 Plan on terms approved by the Board of Directors. Stock awards generally provide for the issuance ofrestricted stock which vests over a fixed period.The following table summarizes stock award activity: Number ofShares(000’s) Weighted-Average Grant-Date Fair ValueNon-vested stock outstanding at July 3, 20111,870 $2.79Granted739 $3.11Vested(1,233) $3.28Cancelled(298) $3.17Non-vested stock outstanding at June 30, 20121,078 $2.35Granted3,220 $3.49Vested(939) $3.38Cancelled(673) $3.44Non-vested stock outstanding at June 30, 20132,686 $3.09Granted5,193 $5.50Vested(1,062) $3.77Cancelled(817) $3.65Non-vested stock outstanding at June 30, 20146,000 $4.98Included in the restricted stock units granted above for the year ended June 30, 2014 are 2.7 million restricted stock units assumed in connection withthe acquisition of Enterasys on October 31, 2013, with an acquisition-date fair value of $5.30.74Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The non-vested shares were placed in an escrow account and will be released to the recipients as the shares vest over periods of up to twenty-fourmonths. If a participant terminates employment prior to the vesting dates, the non-vested shares will be canceled and returned to the 2013 Plan. TheCompany recognizes compensation expense on the awards over the vesting period based on an intrinsic value as of the date of grant.1999 Employee Stock Purchase PlanIn January 1999, the Board of Directors approved the adoption of Extreme Network’s 1999 Employee Stock Purchase Plan (the “ESPP”). OnDecember 2, 2005, the stockholders approved an amendment to the ESPP to increase the maximum number of shares of common stock that may be issuedunder the plan by 5,000,000 to a total of 12,000,000 shares. The ESPP permits eligible employees to acquire shares of the Company’s common stock throughperiodic payroll deductions of up to 15% of total compensation. No more than 625 shares may be purchased on any purchase date per employee. Eachoffering period has a maximum duration of 3 months. The price at which the common stock may be purchased is 85% of the lesser of the fair market value ofthe Company’s common stock on the first day of the applicable offering period or on the last day of the respective purchase period. On January 26, 2010, theBoard of Directors approved an amendment to the ESPP to increase the maximum number of shares that may be purchased on any purchase date per employeefrom 625 shares to 1,000 shares. Through June 30, 2014, 10,795,209 shares had been purchased under the ESPP.Share Based CompensationShare-based compensation expense recognized in the financial statements by line item caption is as follows (dollars in thousands): Year Ended June 30, 2014 June 30, 2013 June 30, 2012Cost of product revenue$836 $428 $463Cost of service revenue895 292 257Research and development4,111 2,461 1,363Sales and marketing6,430 1,032 1,765General and administrative3,650 3,140 2,341Total share-based compensation expense$15,922 $7,353 $6,189The amount of stock based compensation expense capitalized in inventory has been immaterial for each of the periods presented. As of June 30, 2014,there was $12.6 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 2.8 years. As of June 30, 2014, there were approximately $20.4 million in unrecognized compensation costs related to non-vested stock awards. This cost is expected to be recognized over a weighted-average period of approximately 1.9 years.The weighted-average grant-date per share fair value of options granted in fiscal 2014, fiscal 2013, and fiscal 2012 was $2.36, $1.74, and $1.67,respectively. The weighted-average estimated per share fair value of shares purchased under the ESPP in fiscal 2014, fiscal 2013, and fiscal 2012 was $1.64,$0.88, and $0.98, respectively. The average fair-value and the average derived service period on the grant-date for the performance-based option awards withmarket conditions, granted in fiscal 2013, was $1.53 and 2.5 years respectively.The Company uses the straight-line method for expense attribution, and the Company estimates forfeitures and only recognizes expense for thoseshares expected to vest. The Company’s estimated forfeiture rate in fiscal 2014 based on the Company’s historical forfeiture experience is approximately12% for non-executives and 14% for executives.The fair value of each option award and share purchase option under the Company's ESPP is estimated on the date of grant using the Black-Scholes-Merton option valuation model with the weighted average assumptions noted in the following table. The Company uses the Monte-Carlo simulation modelto determine the fair value and the derived service period of performance-based option awards, with market conditions, on the date of the grant. The expectedterm of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The expected term of ESPPrepresents the contractual life of the ESPP purchase period. The risk-free rate based upon the estimated life of the option and ESPP is based on the U.S.Treasury yield curve in effect at the time of grant. Expected volatility is based on both the implied volatilities from traded options on the Company’s stockand historical volatility on the Company’s stock. 75Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Stock Option Plan Employee Stock Purchase Plan Year Ended Year Ended June 30, 2014 June 30, 2013 June 30, 2012 June 30, 2014 June 30, 2013 June 30, 2012Expected life4.40 years 4.58 years 5.06 years 0.25 years 0.25 years 0.25 yearsRisk-free interest rate1.24% 0.74% 1.05% 0.08% 0.07% 0.07%Volatility56% 64% 60% 58% 49% 61%Dividend yield0% 0% 0% 0% 0% 0%401(k) PlanThe Company provides a tax-qualified employee savings and retirement plan, commonly known as a 401(k) plan (the “Plan”), which covers theCompany’s eligible employees. Pursuant to the Plan, employees may elect to reduce their current compensation up to the IRS annual contribution limit of$17,500 for calendar year 2014. Effective January 1, 2005, employees age 50 or over may elect to contribute an additional $5,500. The amount contributedto the Plan is on a pre-tax basis.The Company provides for discretionary matching contributions as determined by the Board of Directors for each calendar year. All matchingcontributions vest immediately. In addition, the Plan provides for discretionary contributions as determined by the Board of Directors each year. During theyear ended June 30, 2014, eligible employees from Enterasys were also added to the Plan as of the acquisition date. The program is to match $0.50 for everydollar contributed by the employee up to the first 2.5% of pay. The Company’s matching contributions to the Plan totaled $0.8 million, $0.5 million, and$0.5 million, for fiscal 2014, fiscal 2013 and fiscal 2012, respectively. No discretionary contributions were made in fiscal 2014, fiscal 2013 and fiscal 2012.8. Common Stock Repurchases and RetirementRetirement of Treasury StockOn September 5, 2012, the Company retired 39,631,836 shares of treasury stock. The retired shares had a carrying value of approximately $149.7million, and the Company reduced additional paid-in capital by approximately $149.7 million upon the formal retirement of the shares. The retired shares arenow included in the Company's authorized but unissued shares. Common Stock RepurchasesOn September 28, 2012, the Company's Board of Directors approved a share repurchase program for a maximum of $75 million which may bepurchased over a three year period in the open market or in privately negotiated transactions. All repurchased shares will be retired and included in theCompany's authorized but unissued shares. During the year ended June 30, 2013, the Company repurchased 4.1 million shares of common stock at a totalcost of $14.5 million. No shares were repurchased during the year ended June 30, 2014.9. Income TaxesIncome before income taxes is as follows (in thousands): Year Ended June 30, 2014 June 30, 2013 June 30, 2012Domestic$(70,321) $14,692 $20,839Foreign17,200 (3,341) (3,771)Total$(53,121) $11,351 $17,068The provision for income taxes for fiscal 2014, 2013 and fiscal 2012 consisted of the following (in thousands): Year Ended June 30, 2014 June 30, 2013 June 30, 2012Current: Federal$22 $225 $114State329 140 79Foreign2,987 1,163 916Total current3,338 1,528 1,109Deferred: Federal1,632 15 30State76 — —Foreign(857) 135 57Total deferred851 150 87Provision for income taxes$4,189 $1,678 $1,196 76Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)The difference between the provision for income taxes and the amount computed by applying the federal statutory income tax rate (35 percent) toincome before taxes is explained below (in thousands): Year Ended June 30, 2014 June 30, 2013 June 30, 2012Tax at federal statutory rate$(18,592) $3,973 $5,974State income tax, net of federal benefit329 105 51Change in valuation allowance20,729 (3,687) (8,035)Foreign earnings taxed at other than U.S. rates(346) 498 3,607Deferred compensation348 845 170Goodwill amortization1,097 — —Other624 (56) (571)Provision for income taxes$4,189 $1,678 $1,196Significant components of the Company’s deferred tax assets are as follows (in thousands): June 30, 2014 June 30, 2013Deferred tax assets: Net operating loss carry-forwards$97,630 $85,276Tax credit carry-forwards30,019 28,882Depreciation129 —Intangible amortization6,061 —Deferred revenue (net)10,540 9,710Warrant amortization2,723 3,991Inventory write-downs3,265 2,759Other allowances and accruals6,380 3,658Stock based compensation6,257 2,973Other10,772 5,741Total deferred tax assets173,776 142,990Valuation allowance(172,475) (142,023)Total net deferred tax assets1,301 967Deferred tax liabilities: Depreciation— (388)Goodwill amortization(1,097) —Brazilian foreign exchange gain(2,670) —Deferred tax liability on foreign withholdings(167) (134)Total deferred tax liabilities(3,934) (522)Net deferred tax assets (liabilities)$(2,633) $445Recorded as: Net current deferred tax assets$1,058 $386Net non-current deferred tax assets230 294Net current deferred tax liabilities(2,657) (235)Net non-current deferred tax liabilities(1,264) —Net deferred tax assets (liabilities)$(2,633) $445 The Company's global valuation allowance increased by $30.5 million in the fiscal year ended June 30, 2014 and increased by $1.4 million in thefiscal year ended June 30, 2013. The Company has provided a full valuation allowance against all of its U.S. federal and state deferred tax assets, as well asvaluation allowances against non-U.S. deferred tax assets in Australia, Brazil, Japan and Singapore. The valuation allowance is determined by assessing bothnegative and positive available evidence to assess77Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)whether it is more likely than not that the deferred tax assets will be recoverable; The Company's inconsistent earnings in recent periods coupled with theinability to forecast greater than one quarter in advance as well as the cyclical nature of the Company's business provides sufficient negative evidence torequire a full valuation allowance against its U.S. federal and state net deferred tax assets. The valuation allowance is evaluated periodically and can bereversed partially or in full if business results and the economic environment have sufficiently improved to support realization of the Company's deferred taxassets.As of June 30, 2014, the Company had net operating loss carry-forwards for U.S. federal and state tax purposes of $290.2 million and $97.4 million,respectively, of which $38.6 million and $36.0 million, respectively, represent deductions from share-based compensation for which a benefit would berecorded in additional paid-in capital when realized. The Company also had foreign net operating loss carry-forwards in Ireland, Australia, Japan andSingapore of $67.5 million, $12.5 million, $0.1 million, and $1.9 million, respectively, as of June 30, 2014. The Company also had federal and state taxcredit carry-forwards of $19.1 million and $16.8 million, respectively, as of June 30, 2014. These credit carryforwards consist of research and developmenttax credits as well as foreign tax credits with a small portion representing Alternative Minimum Tax Credits. The U.S. federal net operating loss carry-forwardsof $290.2 million will begin to expire in the fiscal year ending June 30, 2021 and state net operating losses of $97.4 million will begin to expire in the fiscalyear ending June 30, 2015, if not utilized. The foreign net operating losses can generally be carried forward indefinitely. Federal research and developmenttax credits of $19.1 million will expire beginning in the fiscal year ending June 30, 2018, if not utilized and North Carolina state research and developmenttax credits of $1.2 million will expire beginning in the fiscal year ending June 30, 2015, if not utilized. California state research and development tax creditsof $15.6 million do not expire and can be carried forward indefinitely.As of June 30, 2014, the Company performed an Internal Revenue Code section 382 analysis with respect to its net operating loss and credit carry-forwards to determine whether a potential ownership change had occurred that would place a limitation on the annual utilization of tax attributes. It wasdetermined that no ownership change had occurred during the fiscal year ended June 30, 2014, however, it is possible a subsequent ownership change couldlimit the utilization of the Company's tax attributes.As of June 30, 2014, the Company intends to indefinitely reinvest the earnings of approximately $78.2 million of certain foreign corporations. If suchearnings were distributed, the Company would accrue an additional income tax expense of approximately $1.5 million.The Company conducts business globally and as a result, most of its subsidiaries file income tax returns in various domestic and foreign jurisdictions.In the normal course of business the Company is subject to examination by taxing authorities throughout the world. Its major tax jurisdictions are the U.S.,Ireland, Brazil, India, California, New Hampshire and North Carolina. The Company is not currently under examination by any federal, state or foreign taxauthority with respect to income taxes. The Company recently settled an income tax examination of one of its subsidiaries with the Italian tax authorities.The tax reserves were adjusted appropriately to reflect this settlement.In general, the Company's U.S. federal income tax returns are subject to examination by tax authorities for fiscal years 2001 forward due to netoperating losses and the Company's state income tax returns are subject to examination for fiscal years 2000 forward due to net operating losses.During the fiscal year ended June 30, 2014, the Company acquired the stock of Enterasys Networks, Inc. and as such they became a wholly ownedsubsidiary of Extreme Networks. With respect to this acquisition, the Company made an election under Internal Revenue Code section 338(h)(10) to treat theacquisition as an asset purchase from a tax perspective. Under this election the tax basis of all assets is effectively reset to that of fair market value andtherefore the transaction did not result in the recording of an opening net deferred tax position as the Company's tax basis in the acquired assets equaled itsbook basis.As of June 30, 2014, the Company had $11.6 million of unrecognized tax benefits. If fully recognized in the future, $0.2 million would impact theeffective tax rate, and $11.0 million would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance. It isreasonably possible that the amount of unrealized tax benefit could decrease by approximately $0.2 million during the next twelve months due to theexpiration of the statute of limitations in certain foreign jurisdictions.78Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)A reconciliation of the beginning and ending amount of total unrecognized tax benefits is as follows (in thousands): Balance at July 3, 2011$26,010Increases related to prior year tax positions(444)Increases related to current year tax positions729Lapse of statute of limitations(549)Balance at June 30, 2012$25,746Decrease related to prior year tax positions(14,966)Increase related to prior year tax positions45Increase related to current year tax positions270Lapse of statute of limitations(197)Balance at June 30, 2013$10,898Decrease related to prior year tax positions—Increase related to prior year tax positions415Increase related to current year tax positions464Lapse of statute of limitations(177)Balance at June 30, 2014$11,600Estimated interest and penalties related to the underpayment of income taxes are classified as a component of tax expense in the ConsolidatedStatement of Operations and totaled approximately $14,000, $14,000, and $28,000 for the years ended June 30, 2014, June 30, 2013, and June 30, 2012,respectively. Accrued interest and penalties were approximately $22,000 and $40,000 as of June 30, 2014 and June 30, 2013, respectively.10. Disclosure about Segments of an Enterprise and Geographic AreasOperating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly bythe chief operating decision makers with respect to the allocation of resources and performance.The Company operates in one segment, the development and marketing of network infrastructure equipment. The Company conducts businessglobally and is managed geographically. Revenue is attributed to a geographical area based on the location of the customers. The Company operates in threegeographical areas: Americas, which includes the United States, Canada, Mexico, Central America and South America; EMEA, which includes Europe,Russia, Middle East and Africa; and APAC which includes Asia Pacific, South Asia and Japan.The Company attributes revenues to geographic regions based on the customer's ship-to location. Information regarding geographic areas is as follows(in thousands): Year EndedNet Revenues:June 30, 2014 June 30, 2013 June 30, 2012Americas: United States$211,734 $101,790 $106,110Other45,790 33,584 34,970Total Americas257,524 135,374 141,080EMEA202,555 112,812 128,093APAC59,475 51,157 53,549Total net revenues$519,554 $299,343 $322,722 Of the Company's total long-lived assets as of June 30, 2014, $104.4 million were attributable to Americas, $45.2 million were attributable to theEMEA region and the remaining to APAC. As of June 30, 2013, substantially all of the Company's long-lived assets were attributable to Americas.11. Net (Loss) Income Per Share79Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period, lessshares subject to repurchase, and excludes any dilutive effects of options, warrants and unvested restricted stock. Dilutive earnings per share is calculated bydividing net income by the weighted average number of common shares used in the basic earnings per share calculation plus the dilutive effect of sharessubject to repurchase, options, warrants and unvested restricted stock. The following table presents the calculation of basic and diluted net (loss) income pershare (in thousands, except per share data): Year Ended June 30, 2014 June 30, 2013 June 30, 2012Net (loss) income$(57,310) $9,673 $15,872Weighted-average shares used in per share calculation – basic95,515 93,954 93,451Incremental shares using the treasury stock method: Stock options— 385 372Unvested restricted awards— 600 554Employee Stock Purchase Plan— 105 113Weighted -average share used in per share calculation – diluted95,515 95,044 94,490Net (loss) income per share – basic$(0.60) $0.10 $0.17Net (loss) income per share – diluted$(0.60) $0.10 $0.17Potentially dilutive common shares from employee incentive plans are determined by applying the treasury stock method to the assumed exercise ofoutstanding stock options, the assumed vesting of outstanding restricted stock units, and the assumed issuance of common stock under the ESPP. Weightedstock options outstanding with an exercise price higher than the Company's average stock price for the periods presented are excluded from the calculation ofdiluted net income per share since the effect of including them would have been anti-dilutive due to the net income position of the Company during theperiods presented. For fiscal 2014, 2013, and 2012, the Company excluded 4.1 million, 6.7 million, and 8.3 million outstanding weighted average stockoptions, respectively, from the calculation of diluted earnings per common share because they would have been anti-dilutive. 12. Foreign Exchange Forward ContractsThe Company uses derivative financial instruments to manage exposures to foreign currency. The Company’s objective for holding derivatives is touse the most effective methods to minimize the impact of these exposures. The Company does not enter into derivatives for speculative or trading purposes.The Company records all derivatives on the balance sheet as Other Assets, Net at fair value. Changes in the fair value of derivatives are recognized inearnings as Other Income (Expense). The Company enters into foreign exchange forward contracts to mitigate the effect of gains and losses generated by theforeign currency forecasted transactions related to certain operating expenses and re-measurement of certain assets and liabilities denominated in foreigncurrencies. These derivatives do not qualify as hedges. At June 30, 2014, these forward foreign currency contracts had a notional principal amount of $7.6million and an immaterial unrealized gain. These contracts have maturities of less than 60 days. Changes in the fair value of these foreign exchange forwardcontracts are offset largely by re-measurement of the underlying assets and liabilities.Foreign currency transaction gains and losses from operations were a loss of $1.5 million in fiscal 2014, a loss of $0.9 million in fiscal 2013 and a gainof $2.5 million in fiscal 2012. Included in the 2012 gain is a $1.9 million adjustment resulting from Japan subsidiary liquidation.13. Restructuring ChargesAs of June 30, 2014, restructuring liabilities were $0.3 million and consisted of obligations for termination benefits. During fiscal 2014, 2013 and 2012,the Company recorded a restructuring charge, net of $0.5 million, $6.8 million, and $1.6 million, respectively. A portion of the 2012 restructuring activity isrelated to the liquidation of the Company's Japan subsidiary with a charge of $0.5 million during fiscal 2012. The Company substantially liquidated thesubsidiary in Japan in the fourth quarter of fiscal 2012, as part of the Company's broad restructuring effort. The Company disposed the remaining immaterialassets and liabilities and completed the liquidation process during fiscal 2013.80Table of ContentsEXTREME NETWORKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)Fiscal 2013 RestructuringDuring the second quarter of fiscal 2013, the Company further reduced costs through targeted restructuring activities intended to reduce operatingcosts and realign its organization in the current competitive environment. As part of its restructuring efforts in the second quarter, the Company initiated aplan to reduce its worldwide headcount by 13%, consolidate specific global administrative functions, and shift certain operating costs to lower cost regions,among other actions. As of June 30, 2014, the Company had restructuring liabilities of $0.3 million related to the fiscal 2013 restructuring, which itanticipates paying by the end of fiscal 2015.Fiscal 2012 RestructuringDuring fiscal 2012, the Company incurred total charges of $2.2 million, including $6.3 million of related severance, $0.1 million of contracttermination fees, and $0.2 million other charges. The Company also made payments of $4.3 million. The associated restructuring costs were primarilytermination benefits and contract termination costs. Termination benefits primarily consist of outplacement services, health insurance coverage, and legalcosts. Contract termination costs primarily consist of costs to terminate operating leases and other contracts, including rent expense (less expected subleaseincome) on facilities under operating leases. There are no outstanding liabilities as of June 30, 2014.Restructuring liabilities consist of (in thousands): ContractTermination TerminationBenefits Other TotalBalance at July 3, 2011$— $3,103 $80 $3,183Period charges124 1,832 206 2,162Period reversals(18) (499) (51) (568)Period payments(13) (4,077) (224) (4,314)Balance at June 30, 2012$93 $359 $11 $463Period charges113 6,293 719 7,125Period reversals(2) (287) — (289)Period payments(204) (5,148) (481) (5,833)Balance at June 30, 2013$— $1,217 $249 $1,466Period charges628 119 86 833Period reversals(11) (309) (4) (324)Addition from acquisition(20) — — (20)Period payments(275) (1,027) (331) (1,633)Restructuring liabilities at June 30, 2014$322 $— $— $32214. Technology AgreementsOn July 16, 2013, the Company entered into a confidential Patent License and Settlement Agreement (“License Agreement”) with Chrimar SystemsInc. The agreement provides for a non-exclusive, irrevocable, perpetual, non-transferable, and non-assignable, fully-paid-up worldwide royalty-bearinglicense to certain patents and a release of claims based on any prior infringement of such patents. Total fees for the grant of the license under the LicenseAgreement was $1.4 million. The Company had capitalized $1.2 million related to such patents in fiscal 2012 based on a probable estimated value andrecorded a charge of $0.3 million based on the estimated probable loss. The $1.2 million was recorded as intangible assets, net and continues to be amortizedover the remaining life of the patents.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNot applicable.81Table of ContentsItem 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresDisclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reportsfiled under the Securities Exchange Act of 1934 as amended, such as this Report, is recorded, processed, summarized and reported within the time periodsspecified in the SEC's rules and forms and to reasonably assure that such information is accumulated and communicated to our management, including theChief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluatedthe effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2014.Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over our financial reporting. There are inherent limitationsin the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly,even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further because of changes inconditions, the effectiveness of internal control may vary over time.We assessed the effectiveness of our internal control over financial reporting as of June 30, 2014. In making this assessment, we used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992).Under guidelines established by the SEC, companies are allowed to exclude acquisitions from their assessment of internal control over financialreporting during the first year of an acquisition while integrating the acquired company. Accordingly, our assessment of the internal controls excludedEnterasys Networks Inc. (“Enterasys”) which was acquired on October 31, 2013. Enterasys had net revenues of $227.7 million and total assets of $143.9million, which are included in the consolidated financial statements of the Company as of and for the year ended June 30, 2014. The total assets of $143.9million exclude the Company’s goodwill and intangible assets related to the Enterasys acquisition which were allocated to the Company's one reportablesegment as they are within the scope of the Company’s assessment. We are currently assessing the control environment of this acquired business. Enterasys’sales constitute approximately 44% of our sales for the year ended June 30, 2014, and Enterasys' assets constitute approximately 27% of our total assets as ofJune 30, 2014.Based on our assessment using those criteria, we concluded that, as of June 30, 2014 our internal control over financial reporting is effective.Our independent registered public accounting firm, KPMG LLP, has audited the financial statements included in this Annual Report on Form 10-K andhas issued its report on our internal control over financial reporting as of June 30, 2014.Changes in Internal Control over Financial ReportingAs noted above, our assessment of the internal controls excluded Enterasys which was acquired on October 31, 2013. Under guidelines established bythe SEC, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of anacquisition while integrating the acquired company. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2014 that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting.Inherent Limitations on Effectiveness of ControlsOur management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will preventor detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that thecontrol system’s objectives will be met. Our controls and procedures are designed to provide reasonable assurance that our control system’s objective will bemet and our CEO and CFO have concluded that our disclosure controls and procedures are effective at the reasonable assurance level. The design of a controlsystem must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of theinherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur orthat all control issues and instances of fraud, if any, within Extreme Networks have been detected. These inherent limitations include the realities thatjudgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by theindividual acts of some persons, by collusion82Table of Contentsof two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about thelikelihood of future events. Projections of any evaluation of the effectiveness of controls in future periods are subject to risks. Over time, controls maybecome inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Notwithstanding theselimitations, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Our CEO and CFO haveconcluded that our disclosure controls and procedures are, in fact, effective at the “reasonable assurance” level.Item 9B. Other InformationNone.83Table of ContentsPART IIICertain information required by Part III is incorporated by reference from our definitive Proxy Statement to be filed with the Securities and ExchangeCommission in connection with the solicitation of proxies for our 2014 Annual Meeting of Stockholders (the “Proxy Statement”) not later than 120 daysafter the end of the fiscal year covered by this report, and certain information therein is incorporated in this report by reference.Item 10. Directors, Executive Officers and Corporate GovernanceThe information required by this section is incorporated by reference from the information in the section entitled “Proposal 1 – Election of Directors”in the Proxy Statement. The required information concerning our executive officers is contained in the section entitled “Executive Officers of the Registrant”in Part I, Item 1 of this Form 10-K.Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the ExchangeAct. This disclosure is contained in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and isincorporated herein by reference.Information with respect to Item 406 of Regulation S-K is incorporated by reference to the information contained in the section captioned “Code ofEthics and Corporate Governance Materials” in the Proxy Statement.Item 11. Executive CompensationThe information required by this section is incorporated by reference from the information in the sections entitled “Directors’ Compensation”,“Executive Compensation and Other Matters” and “Report of the Compensation Committee” in the Proxy Statement.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this section is incorporated by reference from the information in the section entitled “Security Ownership of CertainBeneficial Owners and Management” in the Proxy Statement.The information required by this section regarding securities authorized for issuance under equity compensation plans is incorporated by referencefrom the information in the section entitled “Equity Compensation Plan Information” in the Proxy Statement.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this section is incorporated by reference from the information in the section titled “Certain Relationships and RelatedTransactions” in the Proxy Statement.Item 14. Principal Accounting Fees and ServicesThe information required by this section is incorporated by reference from the information in the section titled “Principal Accountant Fees andServices” in the Proxy Statement.84Table of ContentsPART IVItem 15. Exhibits and Financial Statement Schedules(a)The following documents are filed as a part of this Form 10-K:(1)Financial Statements:Reference is made to the Index to Consolidated Financial Statements of Extreme Networks, Inc. under Item 8 in Part II of this Form 10-K.(2)Financial Statement Schedules:All required schedules are omitted because either they are not applicable or the required information is shown in the financial statements or notesthereto.(3)Exhibits:Incorporated herein by reference is a list of the Exhibits contained in the Exhibit Index.85Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized, on September 15, 2014. EXTREME NETWORKS, INC.(Registrant) By:/s/ Kenneth Arola Kenneth Arola Senior Vice President, Chief Financial Officer, and Chief Accounting Officer September 15, 2014POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kenneth Arola, his true andlawful attorneys-in-fact, with full power of substitution, for him in any and all capacities, to sign any amendments to this report on Form 10-K and to file thesame, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming allthat each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the date indicated: /s/ ED MEYERCORD /s/ CHARLES W. BERGER Ed Meyercord Charles W. BergerChairman of the Board President and Chief Executive Officer, DirectorAugust 27, 2014 (Principal Executive Officer) August 27, 2014 /s/ MAURY AUSTIN /s/ CHARLES CARINALLI Maury Austin Charles CarinalliDirector DirectorAugust 27, 2014 August 27, 2014 /s/ RANDI PAIKOFF FEIGIN /s/ ED KENNEDY Randi Paikoff Feigin Ed KennedyDirector DirectorAugust 27, 2014 August 27, 2014 /s/ JOHN KISPERT /s/ JOHN C. SHOEMAKER John Kispert John C. ShoemakerDirector DirectorAugust 28, 2014 August 27, 2014 86Table of ContentsEXHIBIT INDEXThe exhibits listed below are required by Item 601 of Regulation S-K. Each management contract or compensatory plan or arrangement required to befiled as an exhibit to this Form 10-K has been identified.ExhibitNumber Incorporated by Reference FiledHerewithDescription of Document Form FilingDate Number 2.1 Stock Purchase Agreement, dated September 12, 2013 betweenEnterprise Network Holdings, Inc. and Extreme Networks, Inc. 8-K 9/13/2013 2.1 3.1 Amended and Restated Certificate of Incorporation of ExtremeNetworks, Inc. 8-K 12/17/2010 3.2 3.2 Amended and Restated Bylaws of Extreme Networks, Inc. 8-K 3/31/2011 3.1 3.3 Certificate of Designation, Preferences and Rights of the Terms of theSeries A Preferred Stock 10-K 9/26/2001 3.7 4.1 Amended and Restated Rights Agreement dated April 26, 2012between Extreme Networks, Inc. and Computershare ShareownerServices LLC. 8-K 4/30/2012 4.1 4.2 Amendment No. 2 to the Amended and Restated Rights Agreementeffective April 30, 2014. 8-K 5/20/2014 4.1 10.1 Form of Indemnification Agreement for directors and officers. 8-K 10/24/2011 99.1 10.2* Amended 1996 Stock Option Plan and forms of agreementsthereunder. S-1 2/5/1999 10.2 10.3* 1999 Employee Stock Purchase Plan. S-1 2/5/1999 10.3 10.4* 2000 Nonstatutory Stock Option Plan. 10-K 9/24/2000 10.7 10.5* 2001 Nonstatutory Stock Option Plan. Schedule TO 10/31/2001 (d)(9) 10.6* Extreme Networks, Inc. 2005 Equity Incentive Plan. 8-K 10/23/2009 99.3 10.7* Form of Restricted Stock Units Agreement Under the 2005 EquityIncentive Plan. 10-Q 11/7/2008 10.22 10.8* Offer of Employment Letter Dated July 29, 2010 from ExtremeNetworks, Inc. to Oscar Rodriguez. 10-K 8/20/2010 10.32 10.9* Offer Letter Agreement, dated September 13, 2011, between ExtremeNetworks, Inc. and Margaret Echerd. 8-K 9/15/2011 10.3 10.10* Offer Letter Agreement, executed May 18, 2012, between ExtremeNetworks, Inc. and John Kurtzweil. 8-K 5/22/2012 10.2 10.11 Lease, dated September 11, 2012, between Extreme Networks, Inc.,and 3515-3585 Monroe Street, LLC. 8-K 9/18/2012 10.1 10.12* Amendment to Offer of Employment, dated September 13, 2012,between Extreme Networks, Inc., and Oscar Rodriguez. 8-K 9/18/2012 10.2 10.13* Consulting Agreement, dated September 20, 2012, between ExtremeNetworks, Inc. and Diane Honda. 8-K 9/21/2012 10.1 10.14* Offer Letter Agreement, executed September 7, 2012, betweenExtreme Networks, Inc. and Nancy Shemwell. 8-K 9/24/2012 10.1 10.15 Lease Agreement by and between RDU Center III LLC and ExtremeNetworks, Inc. dated October 15, 2012. 8-K 10/19/2012 10.1 10.16 First Amendment to Lease Agreement by and between RDU Center IIILLC and Extreme Networks, Inc. dated December 31, 2012. 8-K 1/7/2013 10.1 10.17 Office Space Lease Agreement by and between W3 Ridge Rio RoblesProperty LLC and Extreme Networks, Inc., dated December 31, 2012. 8-K 1/7/2013 10.2 87Table of ContentsExhibitNumber Incorporated by Reference FiledHerewithDescription of Document Form FilingDate Number 10.18* Offer Letter, dated April 25, 2013, between Extreme Networks, Inc.and Charles Berger. 8-K 5/1/2013 10.1 10.19* Release of Claims, dated April 28, 2013, between Extreme Networks,Inc. and Oscar Rodriguez. 8-K 5/1/2013 10.2 10.20* Offer Letter, dated July 19, 2013, between Extreme Networks, Inc. andEd Carney. 8-K 7/29/2013 10.1 10.21* Release of Claims, dated August 20, 2013, between ExtremeNetworks, Inc. and David Ginsburg. 8-K 8/23/2013 10.1 10.22 Credit Agreement, dated as of October 31, 2013, among ExtremeNetworks Inc., as borrower, Silicon Valley Bank, as administrativeagent and collateral agent, Bank of America, N.A. and PNC Bank,National Association as co-syndication agents and the lenders partythereto. 8-K 11/1/2013 10.1 10.23* Offer Letter executed November 1, 2013, between Extreme Networks,Inc. and Chris Crowell. 8-K 11/7/2013 10.1 10.24* Separation Agreement and General Release of Claims executedNovember 1, 2013 between Extreme Networks, Inc. and NancyShemwell. 8-K 11/7/2013 10.2 10.25 Enterasys Networks, Inc. 2013 Stock Plan. S-8 11/22/2013 99.1 10.26 Extreme Networks, Inc. 2013 Stock Plan. S-8 11/22/2013 99.2 10.27 Extreme Networks, Inc. Executive Change in Control Severance PlanAmended and Restated February 12, 2014. 10-Q 5/7/2014 10.1 10.28 Agreement to Participate in the Extreme Networks, Inc. ExecutiveChange in Control Severance Plan as Amended and Restated February12, 2014. 10-Q 5/7/2014 10.2 10.29* Offer Letter executed May 2, 2014, between Extreme Networks, Inc.and Ken Arola. 8-K 5/8/2014 10.1 10.30* Separation and Transition Agreement and General Release of Claims,dated May 19, 2014, by and between Extreme Networks, Inc. and JohnKurtzweil. 8-K 5/23/2014 10.1 10.31* Separation Agreement and General Release of Claims, dated May 21,2014, by and between Extreme Networks, Inc. and ChristopherCrowell. 8-K 5/23/2014 10.2 21.1 Subsidiaries of Registrant. X23.1 Consent of KPMG LLP, Independent Registered Public AccountingFirm. X24.1 Power of Attorney (see the signature page of this Form 10-K). X31.1 Section 302 Certification of Chief Executive Officer. X31.2 Section 302 Certification of Chief Financial Officer. X32.1 Section 906 Certification of Chief Executive Officer. X32.2 Section 906 Certification of Chief Financial Officer. X101.INS XBRL Instance Document.** X101.SCH XBRL Taxonomy Extension Schema Document.** X101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.** X101.LAB XBRL Taxonomy Extension Label Linkbase Document.** X101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.** X88Table of ContentsExhibitNumber Incorporated by Reference FiledHerewithDescription of Document Form FilingDate Number 101.DEF XBRL Taxonomy Extension Definition Linkbase Document** X___________________ *Indicates management or board of directors contract or compensatory plan or arrangement.**Pursuant to Rule 406T of Regulation S-T, these interactive data files are furnished and not filed or a part of a registration statement or prospectus forpurposes of sections 11 or 12 of the Securities Act of 1933, as amended; are deemed not filed for purposes of section 18 of the Securities ExchangeAct of 1934, as amended; and otherwise are not subject to liability under these sections.89EXHIBIT 21.1SUBSIDIARIES OF REGISTRANT NAME LOCATIONExtreme Networks International Cayman IslandsExtreme Networks Hong Kong Limited Hong KongExtreme Networks IHC, Inc. DelawareExtreme Networks UK Limited United KingdomExtreme Networks B.V. The NetherlandsExtreme Networks GmbH GermanyExtreme Networks Sarl FranceExtreme Networks Srl ItalyExtreme Networks Canada, Inc. CanadaExtreme Networks Korea, Ltd. KoreaIHC Networks AB SwedenExtreme Networks Australia PTY, Ltd. AustraliaExtreme Networks EMEA Cayman IslandsExtreme Networks Brasil, Ltda. BrazilExtreme Networks Mexico, Ltda. MexicoExtreme Networks Chile, Ltda. ChileExtreme Networks Singapore PTE, Ltd. SingaporeExtreme Networks China Ltd. ChinaExtreme Networks Spain, SL SpainExtreme Networks Switzerland GmbH SwitzerlandExtreme Networks India Private Limited IndiaExtreme Networks Mauritius MauritiusExtreme Networks Russia, LLC. RussiaExtreme Networks Delaware LLC DelawareSummit CV NetherlandsEnterasys Networks de Argentina S.A. ArgentinaEnterasys Networks do Brasil Ltda BrazilEnterasys Networks Distribution Limited IrelandEnterasys Networks, Inc. DelawareEnterasys Networks K.K. TokyoEnterasys Networks (M) Sdn. Bhd MalaysiaEnterasys Networks Netherlands B.V. NetherlandsEnterasys Networks Germany GmbH GermanyEnterasys Networks Pty. Ltd. AustraliaEnterasys Networks S.A. FranceEnterasys Networks UK Limited United KingdomEXHIBIT 23.1Consent of Independent Registered Public Accounting FirmThe Board of DirectorsExtreme Networks, Inc.:We consent to the incorporation by reference in the registration statement (Nos. 333-192507, 333-165268, 333-112831, 333-105767,333-76798, 333-65636, 333-58634, 333-55644, 333-54278, 333-131705, and 333-83729) on Form S-8 of Extreme Networks, Inc. ofour report dated September 15, 2014, with respect to the consolidated balance sheets of Extreme Networks, Inc. and subsidiaries as ofJune 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income, stockholders' equity, andcash flows for each of the years in the three-year period ended June 30, 2014 and the effectiveness of internal control over financialreporting as of June 30, 2014, which report appears in the June 30, 2014 annual report on Form 10-K of Extreme Networks, Inc.Our report dated September 15, 2014, on the effectiveness of internal control over financial reporting as of June 30, 2014, contains anexplanatory paragraph that states the Company acquired Enterasys Networks, Inc. on October 31, 2013, and management excludedfrom its assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2014, EnterasysNetworks, Inc.’s internal control over financial reporting associated with total assets of $143.9 million and net revenues of $227.7million included in the consolidated financial statements of the Company as of and for the year ended June 30, 2014. Our audit ofinternal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting ofEnterasys Networks Inc./s/ KPMG LLPSeptember 15, 2014Santa Clara, CaliforniaEXHIBIT 31.1I, Charles W. Berger, certify that:1.I have reviewed this annual report on Form 10-K of Extreme Networks, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date:September 15, 2014/s/ CHARLES W. BERGER Charles W. Berger President and Chief Executive Officer EXHIBIT 31.2I, Kenneth Arola, certify that:1.I have reviewed this annual report on Form 10-K of Extreme Networks, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date:September 15, 2014/s/ KENNETH AROLA Kenneth Arola Senior Vice President and Chief Financial Officer EXHIBIT 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Extreme Networks, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2014, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, each herebycertify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ CHARLES W. BERGER Charles W. Berger President and Chief Executive Officer September 15, 2014A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signaturethat appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will beretained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.EXHIBIT 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Extreme Networks, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2014, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, each herebycertify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ KENNETH AROLA Kenneth Arola Senior Vice President and Chief Financial Officer September 15, 2014A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signaturethat appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will beretained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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